DiamondRock Hospitality Company — Form 10-Q Summary
Reporting period: Fiscal quarter and year-to-date period ended June 15, 2012, compared with periods ended June 17, 2011. The filing is unaudited. Certain hotels report on different calendars, so quarterly periods are not fully aligned; interim results are seasonal and not necessarily indicative of full-year performance.
Business context and reporting period
DiamondRock is a lodging-focused REIT that owns hotels and resorts operated by third-party managers. As of June 15, 2012, it reported 23 hotels with 10,406 rooms and a senior mortgage loan secured by Chicago’s Allerton Hotel. On July 12, after quarter-end, it acquired four hotels with 1,462 rooms for a contractual price of $495 million.
Key financial metrics
| Metric | Quarter ended June 15, 2012 | Comparable 2011 quarter | Jan. 1–June 15, 2012 | Comparable 2011 period |
|---|---|---|---|---|
| Revenue | $185.5 million | $150.2 million | $307.0 million | $253.9 million |
| Operating profit | $23.1 million | $12.3 million | $18.7 million | $6.2 million |
| Net income (loss) | $8.9 million | $(0.6) million | $11.6 million | $(11.6) million |
| Adjusted EBITDA | $48.1 million | $41.1 million | $71.4 million | $59.9 million |
| Adjusted FFO | $34.2 million | $25.6 million | $49.3 million | $37.4 million |
| Operating cash flow | — | $18.8 million | $18.3 million |
Quarterly room revenue was about 68% of total revenue. Comparable-hotel operating statistics showed second-quarter occupancy of 78.7% versus 77.3%, ADR of $177.90 versus $170.00, and RevPAR of $139.98 versus $131.45. For the year-to-date period, comparable occupancy was 75.5% versus 72.7%, ADR $167.06 versus $161.15, and RevPAR $126.10 versus $117.21.
At June 15, cash and cash equivalents were $104.8 million, restricted cash $61.0 million, total assets $2.62 billion, and stockholders’ equity $1.49 billion. Debt was $900.6 million, all mortgage debt, with a weighted-average interest rate of 5.49%; the unsecured credit facility had no balance outstanding. Operating cash flow was $18.8 million; investing cash flow was positive $70.3 million, primarily reflecting hotel-sale proceeds; financing cash flow was negative $10.6 million. The company paid $0.08 per share in each of three 2012 dividend payments reported.
Material changes versus the prior comparable periods
- Second-quarter revenue rose 23.5%; management reported comparable-hotel RevPAR growth of 6.5%. Revenue growth also reflected hotels acquired in 2011, so reported revenue growth is not wholly comparable.
- Quarterly operating expenses increased 19.3% to $134.4 million. Comparable-property cost increases included labor and sales and marketing costs; property taxes rose, partly due to expiration of a Boston PILOT program and higher assessed value at the Chicago Marriott Downtown.
- Year-to-date net income included a $10.0 million after-tax gain on the March sale of three hotels. Continuing operations still recorded a $1.0 million loss for the period.
- In March, the company sold the three-hotel portfolio for a contractual $262.5 million, receiving about $93 million net cash and transferring $180 million of associated mortgage debt to the buyer. It prepaid $27.0 million of Courtyard Denver Downtown mortgage debt and obtained a $170.4 million floating-rate mortgage on the Lexington Hotel New York.
- Debt declined from $1.04 billion at December 31, 2011 to $900.6 million at June 15, 2012, alongside the property sale and debt refinancing. Cash increased to $104.8 million from $26.3 million.
Outlook, management commentary, risks and unusual items
- No specific full-year earnings or operating guidance is provided. Management expected available cash flows, existing cash, and, if needed, credit-facility borrowings to meet short-term liquidity needs.
- The July acquisition was funded with approximately $120 million of credit-facility borrowings, $100 million of corporate cash, proceeds from a 20-million-share public offering that generated about $200.1 million net, and 7,211,538 shares issued privately to the seller for $75 million. The company had also increased authorized common shares to 400 million. These post-quarter transactions add debt and equity dilution.
- Management expected approximately $50 million of hotel capital improvements during 2012, about $20 million funded from corporate cash. The Lexington renovation is expected to cost approximately $32 million and finish in the first half of 2013. For the acquired portfolio, planned capital spending is approximately $56 million over 60 months, including $30–$35 million in the first two years.
- Interest-rate risk is concentrated in variable-rate debt: the filing reports $170.4 million variable-rate principal and estimates a 25-basis-point rate change would affect annual interest expense by about $0.4 million. A rate cap covers the Lexington loan, subject to its terms.
- The $69 million Allerton senior mortgage loan matured in 2010 and remains in default; the borrower is in bankruptcy. Approximately $5.5 million of accrued interest was unrecorded, and the outcome of bankruptcy proceedings was uncertain. The loan’s carrying value was $54.5 million; management reported no impairment based on collateral value.
- Oak Brook Hills Marriott was at risk of failing its management-agreement performance test at year-end 2012. Orlando Airport Marriott had failed its 2011 test; a July 2012 amendment reduced its base management fee conditionally, with potential repayment of fee reductions if termination rights are exercised.
- The filing identifies execution and franchise-compliance risks for the acquired hotels, including required improvement plans, possible disruption from renovation, and potential franchise termination damages. It also warns that resale of seller-issued shares could pressure the stock price. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Reconcile reported revenue and profit growth with acquisitions, hotel dispositions, the $10.0 million sale gain, and differences in hotel reporting calendars.
- Confirm actual financing, post-acquisition debt and liquidity, and share dilution following the July acquisition and equity transactions.
- Track capital spending, renovation timelines, and operating impacts at the acquired hotels and Lexington Hotel New York.
- Monitor Allerton bankruptcy and recovery prospects, plus hotel management performance tests and franchise requirements.
- Assess cash generation and dividend coverage: year-to-date operating cash flow was $18.8 million, while cash dividends paid were $40.4 million.
Adjusted EBITDA and adjusted FFO are non-GAAP measures; the company cautions that they should not be considered substitutes for GAAP results or cash flow.