Diamondrock Hospitality Company — Q1 2011 Form 10-Q
Business context and period. DiamondRock owns 23 branded hotels and resorts with 10,743 rooms, plus a senior mortgage loan secured by another hotel. The unaudited fiscal quarter ended March 25, 2011, compared with the quarter ended March 26, 2010. Results for certain hotels reported monthly include only January and February, which limits quarter-to-quarter comparability.
Financial and operating performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $122.3 million | $112.8 million |
| Operating loss | $(4.3) million | $(1.9) million |
| Net loss | $(11.0) million | $(8.3) million |
| Basic and diluted loss per share | $(0.07) | $(0.07) |
| EBITDA (non-GAAP) | $17.4 million | $17.1 million |
| FFO (non-GAAP) | $10.3 million | $10.6 million |
| Cash from operations | $7.7 million | $0.6 million |
| Cash used in investing | $(49.2) million | $(11.4) million |
| Cash from financing | $143.8 million | $14.8 million |
Portfolio occupancy was 65.5%, unchanged year over year; ADR rose 3.4% to $148.01 and RevPAR rose 3.3% to $96.94. At March 25, cash and cash equivalents were $186.4 million, restricted cash was $78.6 million, total assets were $2.55 billion, and total debt was $779.1 million. The weighted-average debt interest rate was 5.86%; no credit-facility borrowings were outstanding. The company reported compliance with mortgage and credit-facility covenants.
Material changes and drivers
- Revenue increased 8.4%, including contributions from three 2010 acquisitions: Hilton Minneapolis, Renaissance Charleston, and Hilton Garden Inn Chelsea/New York City. Comparable-property occupancy was flat, while ADR and RevPAR improved.
- Hotel operating expenses increased 9.1% to $100.9 million. Management attributed most of the increase to acquired hotels; comparable-property costs also rose, particularly rooms, repairs and maintenance, and sales and marketing. Property taxes declined following successful appeals and lower assessments.
- Net loss widened despite higher revenue. The prior-year comparison benefited from a $3.1 million reversal of Frenchman’s Reef penalty-interest accruals; 2011 also had higher depreciation and interest expense.
- The company raised approximately $149.8 million net through a follow-on offering of 12.4 million shares at $12.07 each. Shares outstanding rose to 167.4 million at quarter-end from 154.6 million at year-end 2010.
- Investing cash use included a $20 million escrow deposit for a planned Times Square hotel and funding for the Frenchman’s Reef renovation escrow. The company reported $7.9 million of hotel capital expenditures in the quarter.
Outlook, risks, and unusual items
- Management planned approximately $65 million of 2011 capital improvements, including about $37 million for Frenchman’s Reef. Renovation-related partial closures in summer 2011 were expected to reduce revenue by approximately $14 million and EBITDA by approximately $5.5 million versus the comparable 2010 period.
- A purchase agreement covers a Times Square hotel expected to have about 285 rooms for approximately $128 million, potentially increasing to about 400 rooms and $178 million if approvals are obtained. Completion and opening were expected in 2013. The company made a $20 million deposit, which could be forfeited if it does not close in specified circumstances.
- On April 15, 2011, after quarter-end, the company closed a $100 million, 10-year fixed-rate mortgage loan on Hilton Minneapolis at 5.464%. Management reported that, following this financing, mortgage debt was $875.6 million, unrestricted corporate cash exceeded $250 million, and 12 hotels were unencumbered.
- The $69 million Allerton Hotel mortgage loan is in default and on non-accrual status. The company carried the note at $57.9 million, estimated fair value at $40.5 million, and reported no impairment based on collateral analysis. Foreclosure timing and outcome are uncertain; a junior lender has also filed a counterclaim, with potential loss not estimable.
- Employees at Los Angeles-area hotels brought a claim concerning compliance with a city service-charge ordinance; outcome and potential loss were not estimable. The company also disclosed performance-termination rights relating to Orlando Airport Marriott and Oak Brook Hills Marriott Resort; Hilton may cure the Conrad Chicago’s performance failure, otherwise DiamondRock may terminate the agreement and repay $1 million of key money.
- Management cited hotel demand and operating performance as sensitive to economic conditions, local employment, travel, new supply, and competition. The business is seasonal; the filing says historically about two-thirds of annual income occurs in the second and fourth fiscal quarters. All debt was fixed-rate at quarter-end.
- The board declared a quarterly dividend of $0.08 per share, paid April 7, 2011. The company intends to distribute sufficient taxable income to maintain REIT status, subject to financial, legal, and debt-agreement constraints.
Important facts for investors to verify
- Whether comparable-hotel revenue, margins, and RevPAR trends sustain improvement after accounting for acquisitions and the differing hotel reporting calendars.
- Expected timing, cost, disruption, and funding of the Frenchman’s Reef renovation, including the projected revenue and EBITDA impact.
- Progress and deposit exposure under the Times Square purchase agreement, and the status of the separately referenced JW Marriott Denver acquisition, which was expected in Q2 subject to closing conditions.
- Allerton loan collateral value, foreclosure progress, interest recovery, and developments in the junior lender’s counterclaim.
- Liquidity and covenant headroom after the Hilton Minneapolis mortgage, planned capital spending, dividends, and any acquisitions.
- Manager cure or termination decisions at the underperforming hotels and the outcome of the Los Angeles service-charge litigation.