DiamondRock Hospitality Company — Q1 2012 Form 10-Q
Reporting period: Fiscal quarter ended March 23, 2012, compared with the fiscal quarter ended March 25, 2011. DiamondRock is a lodging REIT that owns branded hotels and resorts; hotel managers operate the properties. Quarterly results may be affected by differing hotel-manager reporting calendars and seasonality.
Financial and operating performance
| Metric | Q1 2012 | Prior comparable quarter |
|---|---|---|
| Revenue from continuing operations | $121.4 million | $103.8 million |
| Operating loss | $(4.5) million | $(6.1) million |
| Loss from continuing operations | $(10.0) million | $(10.9) million |
| Net income (loss) | $2.6 million | $(11.0) million |
| EBITDA | $31.3 million | $17.4 million |
| FFO | $13.1 million | $10.3 million |
| Net cash from operating activities | $1.7 million | $7.7 million |
Revenue increased 17%, including contributions from hotels acquired in 2011. For continuing hotels on a comparable pro forma basis, RevPAR increased 9.1% to $109.56, with occupancy up 4.4 percentage points to 71.7% and ADR up 2.5% to $152.88. Management attributed growth mainly to leisure and contract demand. Higher hotel operating costs, including labor, sales and marketing, and property taxes, partly offset revenue gains.
Positive net income primarily reflects the approximately $10.0 million after-tax gain on the sale of a three-hotel portfolio; continuing operations remained loss-making. The company declared dividends of $0.08 per common share.
Balance sheet, cash flow and financing
- At March 23, 2012, cash and cash equivalents were $128.6 million, restricted cash was $56.1 million, and total assets were $2.63 billion.
- Total debt was $903.3 million, down from $1.04 billion at December 31, 2011. The weighted-average interest rate was 5.42%, and management reported an average debt maturity of approximately 4.1 years. The filing states that $170.4 million of debt was variable-rate; an interest-rate cap limits LIBOR on the Lexington loan to 1.25%.
- The company had no borrowings outstanding under its $200 million unsecured credit facility, leaving $200 million of stated borrowing capacity. Reported covenant measures included a 41.8% leverage ratio against a 60% maximum, 2.0x fixed-charge coverage against a 1.50x minimum, and $1.94 billion tangible net worth against a $1.8 billion minimum.
- Operating cash flow was $1.7 million. Investing cash flow was $81.6 million, principally reflecting approximately $93 million of net proceeds from hotel sales. Financing cash flow was $19.0 million, including Lexington mortgage proceeds and repayments of credit-facility and mortgage debt. Cash rose by $102.3 million during the quarter.
Material changes and unusual items
- On March 23, DiamondRock sold the Griffin Gate Marriott Resort and Spa, Renaissance Waverly, and Renaissance Austin for a contractual price of $262.5 million. The buyer assumed $180 million of mortgage debt; DiamondRock received approximately $93 million in net cash proceeds. The gain was reported in discontinued operations.
- DiamondRock closed a $170.4 million, three-year floating-rate mortgage on the Lexington Hotel New York, with two potential one-year extensions subject to conditions. The financing included $25 million of corporate recourse until specified requirements are met. Proceeds helped repay the credit facility.
- The company prepaid the $27 million Courtyard Denver Downtown mortgage without a penalty and recognized a $0.1 million gain on early extinguishment of debt.
- DiamondRock agreed to affiliate the Lexington with Marriott’s Autograph Collection following a planned approximately $30 million renovation, expected to be completed in the first half of 2013. It paid a $750,000 fee to terminate the Radisson franchise; the hotel was expected to operate independently for an interim period.
Outlook, risks and contingencies
Management gave no specific full-year earnings or operating-statistic guidance. It stated that available cash flows, cash balances and, if needed, the credit facility were expected to cover short-term liquidity needs. Planned 2012 capital improvements were approximately $45 million, about $16 million of which was expected to come from corporate cash. Management also noted seasonality, with historically about two-thirds of annual income earned in the second and fourth fiscal quarters.
- The Allerton Hotel senior mortgage loan, with a $69 million principal balance, matured in 2010 and is in default. The borrower is in bankruptcy; a creditor vote and possible confirmation hearing were pending, and recovery timing and outcome remained uncertain. The company reported no impairment based on collateral value exceeding the loan’s carrying value, but had placed the loan on non-accrual status.
- The Orlando Airport Marriott failed its management-agreement performance test at year-end 2011; the company was evaluating whether to exercise termination rights. Oak Brook Hills Marriott was considered at risk of failing its test at year-end 2012.
- Interest-rate exposure remains: management estimated that a 25-basis-point change in rates on variable-rate debt could change annual interest expense by approximately $0.4 million.
- The Los Angeles Airport Marriott employee-litigation settlement was pending court approval. The Allerton-related guarantee claim had resulted in summary judgment on liability for legal fees, but collection and the amount remained unresolved.
Key facts for investors to verify
- Whether the hotel-sale proceeds and assumed debt, and the reported after-tax gain, reconcile to final closing statements.
- Operating trends at comparable hotels, including whether RevPAR gains persisted after the quarter and whether cost growth moderated.
- Allerton bankruptcy developments, collateral value, and the likelihood and timing of loan recovery.
- Progress, cost and financing of the Lexington renovation and Marriott rebranding, and achievement of the mortgage’s conditions for eliminating corporate recourse.
- Liquidity and covenant headroom after planned capital spending, dividends, and any changes in hotel performance or interest rates.
- Outcome of the Orlando management-performance decision and the Oak Brook Hills performance test.