DiamondRock Hospitality Company — Q3 2012 Form 10-Q
Business context and reporting period. DiamondRock is a lodging-focused REIT and hotel owner. At September 7, 2012, it reported 27 hotels with 11,868 rooms, plus a senior mortgage loan secured by a Chicago hotel and a right to acquire a hotel under development. The fiscal quarter ended September 7, 2012; comparisons are to the quarter ended September 9, 2011. Year-to-date figures cover January 1 through September 7, 2012, versus January 1 through September 9, 2011. Hotel managers use differing reporting calendars, and certain hotels’ quarterly figures include June through August.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | 2012 year to date | 2011 year to date |
|---|---|---|---|---|
| Total revenue | $183.9 million | $156.8 million | $483.2 million | $404.0 million |
| Operating profit (loss) | $(18.9) million | $12.7 million | $(1.0) million | $18.8 million |
| Net income (loss) | $(44.8) million | $(1.0) million | $(33.2) million | $(12.6) million |
| Adjusted EBITDA | $46.0 million | $41.7 million | $117.4 million | $101.7 million |
| Adjusted FFO | $34.4 million | $26.2 million | $83.7 million | $63.6 million |
Revenue and hotel trends. Reported revenue rose 17.3% in Q3 and 19.6% year to date, with acquisitions contributing materially. On a pro forma comparable basis, Q3 RevPAR grew 3.5% to $139.94, with ADR up 4.5% and occupancy down 0.8 percentage points to 81.8%. Year-to-date RevPAR increased 5.9% to $132.10, as occupancy rose 1.3 percentage points to 77.7% and ADR grew 4.1%. Management cited stronger leisure and group results, while business transient performance was weaker or mixed.
Profit, costs, and unusual items. The quarterly net loss included $30.4 million of continuing-operations impairment charges, primarily for Oak Brook Hills Marriott Resort, $8.3 million of hotel acquisition costs, and a $14.7 million impairment charge in discontinued operations for Atlanta Westin North. Q3 hotel operating expenses increased 16.0% to $135.3 million; management attributed the increase to acquisitions and higher costs at comparable hotels, particularly departmental and food-and-beverage costs. Q3 interest expense was $12.7 million versus $11.3 million. The company reported basic and diluted loss per share of $0.24 for Q3 and $0.19 year to date. Adjusted EBITDA and Adjusted FFO are non-GAAP measures and should be read with GAAP results.
Cash flow and capital spending. Year-to-date operating cash flow was $44.7 million, versus $43.3 million. Investing activities used $356.5 million, reflecting acquisitions and $26.4 million of hotel capital expenditures, partly offset by sale proceeds. Financing activities provided $307.1 million, including equity and mortgage proceeds, offset in part by dividends and debt repayments. Cash and cash equivalents were $21.6 million at September 7, 2012, compared with $26.3 million at year-end 2011. Restricted cash was $60.3 million, including $50.0 million set aside for property improvement funds.
Balance sheet, debt, and liquidity
Total debt was $1.018 billion at September 7, 2012, versus $1.043 billion at December 31, 2011; weighted-average interest rate was 5.17%, and weighted-average maturity was approximately 3.3 years. Debt included $898.5 million of mortgage debt and $120.0 million drawn on a $200 million unsecured credit facility, leaving $80 million of capacity. The company reported $2.973 billion of total assets and $1.701 billion of stockholders’ equity. Fifteen of 26 currently owned hotels were described as unencumbered by mortgage debt.
Management said existing cash flows, cash balances, and available credit were expected to meet short-term needs. It expected to fund longer-term needs through operations, borrowing, equity or debt issuance, and dispositions. The company paid common dividends of $0.08 per share on each of four 2012 payment dates. Debt covenants were reported in compliance: leverage ratio 49.6% against a 60% maximum, fixed-charge coverage 2.23x against a 1.50x minimum, and tangible net worth $2.2 billion against a $2.0 billion minimum. Of approximately $1.0 billion of debt, $290.4 million was variable rate; a 25-basis-point rate change was estimated to affect annual interest expense by approximately $0.7 million.
Material changes, outlook, and risks
- Portfolio changes: On July 12, the company acquired four hotels for a contractual $495 million, funded with equity proceeds, a $75 million stock issuance to the sellers, corporate cash, and credit-facility borrowings. It completed a follow-on offering of 20 million shares for net proceeds of approximately $199.8 million.
- Dispositions: In March, it sold three hotels for a contractual $262.5 million, received approximately $92 million net cash, and recorded a $9.5 million gain. Atlanta Westin North was sold October 3 for a contractual $39.6 million; after quarter-end, the company used net proceeds to repay $35 million of credit-facility borrowings.
- Capital plans: Management expected approximately $50 million of 2012 capital improvements, about $20 million funded from corporate cash. It planned approximately $35 million of improvements to the acquired portfolio over two years. A $32–$34 million Lexington Hotel New York renovation was planned for completion by mid-2013. These are project expectations, not earnings guidance.
- Property and operating risks: Management identified Oak Brook Hills as at risk of failing its management-agreement performance test at year-end 2012. Orlando Airport Marriott failed its 2011 test; its management fee arrangement was amended, with potential repayment of waived fees if termination rights are exercised after future test failures. Hotel demand and results remain exposed to economic conditions, local markets, competition, new supply, and seasonality.
- Contingencies: The $69 million Allerton Hotel senior loan was in default and the borrower was in Chapter 11; its $54.2 million carrying value was not impaired, but approximately $6.4 million of accrued interest was unrecorded and the bankruptcy outcome remained uncertain. The Los Angeles Airport Marriott settlement contribution of $1.7 million was paid into escrow, pending court approval.
- Reporting and guidance: The filing provides no formal full-year earnings or operating guidance. Management cautioned that interim results are seasonal and not necessarily indicative of full-year performance. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether comparable-property RevPAR and cost trends continue, separating acquired-property contributions from organic performance.
- The assumptions and valuation inputs behind the $30.4 million Oak Brook Hills impairment and the $14.7 million Atlanta Westin North impairment.
- Completion, cost, and expected returns of the Lexington renovation and other planned capital projects.
- Debt covenant headroom, variable-rate exposure, remaining facility availability, and post-sale debt repayment.
- Resolution and recoveries, if any, from the Allerton bankruptcy and related guaranty claim; also final approval of the Los Angeles Airport settlement.
- Dividend sustainability relative to operating cash flow, capital needs, debt service, and REIT distribution requirements.