DiamondRock Hospitality Company — Q2 2013 Form 10-Q
Business context and reporting period
DiamondRock is a lodging REIT that owns, but does not operate, premium hotels and resorts. At June 30, 2013, it owned 27 hotels with 11,590 rooms, held a mortgage loan secured by a Chicago hotel, and had the right to acquire a hotel under development in New York City.
The quarter ended June 30, 2013 and the six-month period ended June 30, 2013 are compared with 2012 periods ending June 15, 2012. DiamondRock changed to calendar-quarter reporting in 2013; prior-year results are not directly comparable. Management provides adjusted comparisons for selected operating measures.
Financial and operating metrics
| Metric | Q2 2013 | Prior-period context |
|---|---|---|
| Total revenue | $224.2 million | $183.0 million on management’s adjusted comparison; up 22.5%. Excluding five 2012 hotel acquisitions, revenue rose 7.0%. |
| Comparable portfolio operating statistics | Occupancy 79.2%; ADR $185.29; RevPAR $146.84 | Adjusted comparison: occupancy down 0.7 percentage points, ADR up 2.8%, and RevPAR up 1.9%. |
| Net income | $15.1 million; diluted EPS $0.08 | Reported Q2 2012 net income was $8.9 million; the periods differ in length and reporting calendar. |
| Operating profit | $32.5 million | Reported Q2 2012: $22.6 million; not a calendar-matched comparison. |
| Adjusted EBITDA | $62.4 million | Reported comparative amount: $48.1 million; the filing’s reconciliation uses the reported 2012 period, not management’s adjusted operating-period comparison. |
| Six-month revenue and net income | Revenue $405.5 million; net income $10.9 million | Reported 2012 comparison: revenue $299.4 million and net income $11.6 million; the periods are not directly comparable. |
| Operating cash flow | $53.0 million for the six months | Prior reported period: $18.8 million. |
| Investing and financing cash flow | Investing: $(49.0) million; financing: $40.6 million | Investing outflows primarily reflected $42.6 million of hotel capital expenditures. |
| Cash and restricted cash | Unrestricted cash $54.3 million; restricted cash $88.1 million | Unrestricted cash was $9.6 million at December 31, 2012. |
| Debt and liquidity | Total debt $1.064 billion; weighted-average rate 5.24%; $200 million credit facility undrawn | Debt was $988.7 million at December 31, 2012. The filing reports $170.4 million of variable-rate debt and approximately 3.9 years’ weighted-average debt maturity. |
Stockholders’ equity was $1.674 billion at June 30, 2013. The company reported a 40.8% leverage ratio, 2.71x fixed-charge coverage, and $2.248 billion tangible net worth against credit-facility limits of 60%, 1.50x minimum, and $1.857 billion minimum, respectively.
Material changes and notable items
- Management’s adjusted Q2 comparison showed RevPAR growth despite lower occupancy. Excluding rooms displaced by renovations, occupancy increased 2.5 percentage points in the quarter and 1.9 points year to date.
- Five hotels acquired during 2012 contributed $28.4 million of Q2 revenue and $17.7 million of Q2 hotel operating expenses. At comparable hotels, Q2 revenue increased 7.0%, while operating expenses rose 8.1%; management cited higher wages, benefits, support costs, and property taxes.
- New York renovations displaced approximately 31,400 room nights in Q2 and 55,300 year to date. The Lexington Hotel also closed for six days after an electrical incident.
- Six-month corporate expenses included approximately $3.1 million of severance costs associated with the COO’s retirement. The Allerton mortgage loan was restructured in January 2013: DiamondRock received $5.0 million principal repayment and a new $66.0 million, 5.5% fixed-rate loan. The loan returned to accrual status.
- DiamondRock raised $102 million through two non-recourse, property-specific 10-year mortgages at fixed rates of 3.96% and 3.94%, secured by the Sonoma resort and Westin San Diego.
- The board authorized up to $100 million of common-stock repurchases on August 5, 2013. The program may be suspended or terminated and does not commit the company to repurchase shares.
Outlook, risks, and contingencies
- Management said expected operating cash flow, existing cash, and, if needed, credit-facility borrowings should meet short-term liquidity needs. It identified 2013 capital improvements, debt service, dividends, a development-hotel deposit, and corporate expenses as anticipated cash uses.
- The company expected approximately $140 million of capital improvements during 2013 and early 2014; $42.6 million had been spent in the first six months. Major projects include the Lexington renovation (estimated at approximately $46 million) and planned renovations at several other hotels.
- The Lexington mortgage’s cash-trap provision was triggered during renovations. Management reported compliance with debt covenants and no credit-facility borrowings at quarter-end.
- A 25-basis-point change in rates on variable-rate debt would change annual interest expense by approximately $0.4 million. Management uses an interest-rate cap for the Lexington variable-rate loan.
- Management identifies economic conditions, local hotel demand, competition, new supply, and hotel-brand performance as risks to hotel operating results, cash generation, distributions, and debt service. Hotel operations are seasonal. No material litigation or material off-balance-sheet arrangements were reported; routine litigation was expected to be insured. The filing states there were no risk-factor changes.
- No specific full-year earnings or operating guidance was provided in the filing.
Most important facts for investors to verify
- Use calendar-matched or management-adjusted comparisons where available; the reported 2012 periods are not directly comparable with 2013.
- Track renovation completion, room-night displacement, and the Lexington hotel’s recovery after its electrical closure and cash-trap trigger.
- Compare hotel-level revenue growth with expense growth, especially wages, maintenance, sales and marketing, and property taxes.
- Monitor the $140 million capital program, unrestricted liquidity, debt maturities, variable-rate exposure, and covenant headroom.
- Assess the Allerton loan’s collections and interest income, and distinguish recurring results from the COO severance and other adjustments in non-GAAP measures.
- Consider the discretionary nature of the $100 million repurchase authorization and the company’s continuing dividend and REIT distribution requirements.