DiamondRock Hospitality Company — 2013 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2013. DiamondRock is a lodging REIT and hotel owner, not a hotel operator. At year-end it owned 26 premium hotels and resorts with 11,121 rooms, principally in urban markets and destination resorts; third-party managers operate the properties. It also held a senior mortgage loan secured by Chicago’s Allerton Hotel and had a contract to acquire a 282-room Times Square hotel upon completion.
Key financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $799.7 million | $726.9 million |
| Operating income | $75.2 million | $28.5 million |
| Operating margin | 9.4% | 3.9% |
| Net income (loss) | $49.1 million | ($16.6 million) |
| Basic and diluted EPS | $0.25 | ($0.09) |
| FFO / Adjusted FFO | $132.0 million / $139.3 million | $121.0 million / $140.2 million |
| Adjusted EBITDA | $196.9 million | $189.7 million |
| Net cash provided by operating activities | $143.7 million | $93.1 million |
| Hotel capital expenditures | $107.3 million | $49.3 million |
| Cash and cash equivalents at year-end | $144.6 million | $9.6 million |
| Total debt at year-end | $1.092 billion | $988.7 million |
FFO and Adjusted FFO are non-GAAP measures; the company cautions that they are not substitutes for GAAP results and may not be comparable across companies. Net income included $25.2 million from discontinued operations, including a $22.7 million gain on the sale of Torrance Marriott South Bay.
Material changes versus the prior comparable period
- Revenue rose 10.0%; the five hotels acquired in 2012 contributed $55.7 million. Excluding those acquisitions, revenue increased 2.4%.
- Comparable portfolio RevPAR increased 1.4% to $138.11, as ADR rose 3.0% while occupancy declined 1.2 percentage points to 75.1%. Renovations, particularly at the Lexington Hotel New York, displaced more than 95,000 room nights.
- Operating income improved substantially, and the company recorded no impairment losses in 2013 versus $30.8 million in operating expenses in 2012. Net income also benefited from the hotel-sale gain.
- Adjusted FFO declined to $139.3 million from $140.2 million, despite higher revenue; Adjusted EBITDA increased to $196.9 million from $189.7 million.
- Operating cash flow increased to $143.7 million. Investing cash use was $42.0 million, while financing activities provided $33.2 million. Debt increased by approximately $103 million year over year.
- Quarterly dividends increased from $0.08 per share to $0.085 during 2013; declared dividends totaled $0.34 per share for the year.
Debt, liquidity and capital allocation
- Year-end debt was $1.092 billion, with a 5.17% weighted-average interest rate and approximately 3.7-year weighted-average maturity. Of the debt, $170.4 million was variable-rate; a 25-basis-point rate change would affect annual interest expense by approximately $0.4 million.
- The $200 million senior unsecured credit facility had no borrowings outstanding at year-end. The company reported $144.6 million of unrestricted cash, $89.1 million of restricted cash and $200 million of available facility capacity.
- Debt maturities reported in the debt note were $56.7 million in 2014, $243.8 million in 2015 and $312.9 million in 2016. The company expects to address maturities through refinancing, borrowing against unencumbered hotels, dispositions, its credit facility and operating cash flow.
- Management reported compliance with applicable credit-facility covenants at year-end. The facility’s actual leverage ratio was 42.9% against a 60% maximum; fixed-charge coverage was 2.43x against a 1.50x minimum.
- The company spent approximately $107.3 million on capital improvements in 2013 as part of a program of approximately $140 million. It expected remaining work to continue into early 2014.
- A $100 million share repurchase authorization was approved in August 2013; no shares had been repurchased under the program by year-end.
Outlook, commentary, risks and unusual items
- Management described the lodging industry as being in a multi-year recovery, citing 2013 industry demand growth of 2.2%, supply growth of 0.7% and RevPAR growth of 5.4%. For 2014, it expected continued room-rate-led RevPAR gains and anticipated renovated hotels would outperform their markets. These are forward-looking expectations, not guarantees.
- The company expected to acquire the Times Square hotel during 2014 for approximately $128 million. It had deposited $26.9 million by year-end; deposits could be forfeited if the company does not close, subject to contractual conditions. Management expected the purchase to be funded from available liquidity sources.
- The Lexington Hotel’s debt-service coverage ratio fell below its 1.1x minimum during the third and fourth quarters of 2013 amid renovation-related disruption. The company deposited $2.0 million to cure the September shortfall and funded another $2.2 million in the first quarter of 2014. It expected release of the reserve when the ratio recovered, then anticipated in the second quarter of 2014; the loan’s cash-trap provision was also triggered.
- Notable items included the $22.7 million gain on the Torrance sale, approximately $3.1 million in severance costs following the COO’s departure, and a $1.5 million cost to defease the Salt Lake City Marriott mortgage. The Allerton loan settlement returned it to accrual status; the company recorded $6.1 million of 2013 interest income on that loan, including $2.6 million of discount amortization.
- Key risks include hotel demand and earnings volatility, concentrated exposure to major markets, competition and new supply (including expected Manhattan and Chicago room additions), refinancing and balloon-payment risk, renovation costs and disruption, dependence on third-party managers, and severe-weather or other uninsured losses.
- Frenchman’s Reef has a $6.4 million named-windstorm deductible and relies on oil-fired on-site electricity generation. Its U.S. Virgin Islands tax agreement was due to expire in February 2015; the filing states there is no assurance of extension and that the tax rate could rise if it expires.
Most important facts for investors to verify
- Confirm the 2014 Times Square hotel acquisition closed, its final cost, funding and operating contribution.
- Track Lexington Hotel performance, covenant compliance and release of the lender-held reserve after renovation.
- Review refinancing plans and outcomes for the 2015–2016 mortgage maturities, alongside debt costs and covenant headroom.
- Assess whether RevPAR and hotel-level margins improved after renovation-related room displacement, especially in New York.
- Verify the Allerton loan’s collections and the extension or expiration of Frenchman’s Reef’s tax agreement.
- Evaluate recurring cash generation, capital spending and dividend coverage using GAAP cash flows as well as the company’s non-GAAP FFO measures.