DiamondRock Hospitality Company — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. DiamondRock is a lodging REIT and hotel owner, not operator. At year-end it owned 26 premium hotels and resorts with 11,828 rooms, concentrated in major U.S. cities and destination resorts; third-party managers operate the properties.
Financial and operating performance
- Revenue: $638.2 million, up 18.3% from $539.3 million in 2010. Growth included contributions from acquisitions in 2010 and 2011; Frenchman’s Reef revenue was lower during its renovation.
- Profitability: Operating income was $40.7 million versus $25.8 million. Net loss narrowed to $7.7 million ($0.05 per share) from $9.2 million ($0.06 per share). Continuing-operations loss was $7.7 million. Interest expense rose to $45.4 million from $35.4 million.
- Supplemental measures: EBITDA was $149.7 million, up from $127.5 million; FFO was $91.5 million, up from $79.3 million. Both are non-GAAP measures and are not substitutes for cash flow or GAAP results.
- Hotel trends: On a pro forma comparable-property basis for continuing operations, occupancy rose to 75.4% from 73.8%, ADR to $165.86 from $160.77, and RevPAR to $125.06 from $118.59, an increase of 5.5%. The broader portfolio table reports weighted-average occupancy of 73.9% and RevPAR growth of 4.7%; these figures use a different presentation basis.
- Cash flow and capital spending: Operating cash flow was $104.2 million, investing cash outflow was $456.1 million, and financing cash inflow was $294.0 million. Capital improvements were approximately $54.8 million. Year-end cash was $26.3 million unrestricted and $53.9 million restricted.
- Debt and liquidity: Balance-sheet total debt was $1.043 billion, with a weighted-average rate of 5.61%; $100 million was drawn on the $200 million unsecured facility at year-end. Facility covenants were met: leverage ratio 44.7% against a 60% maximum and fixed-charge coverage 2.07x against a 1.50x minimum. The company subsequently drew another $40 million. The maturity schedule is concentrated in 2015–2016.
- Dividends: Declared $0.32 per share for 2011. No dividend was paid for 2010 because the company had no REIT taxable income for that year.
Material changes versus 2010
- Comparable continuing-operations RevPAR increased 5.5%, reflecting both higher occupancy and ADR. Business-transient room revenue rose 6.7%; group room revenue rose 3.3%.
- Revenue and expenses increased partly because of acquisitions, including the JW Marriott Denver, Radisson Lexington, and Courtyard Denver Downtown. The company completed a $149.6 million net common-stock offering and obtained a $100 million Hilton Minneapolis mortgage loan.
- Hotel operating expenses increased 16.0% to $486.5 million, including acquisition-related costs and higher comparable-property costs. Property taxes rose, in part due to the end of a Boston PILOT program. Corporate expenses included Allerton legal fees and an accrued litigation settlement.
- Frenchman’s Reef underwent a major renovation and repositioning; portions of the resort were closed during 2011, and all guest rooms and public areas reopened in the fourth quarter.
- Three hotels—Griffin Gate, Renaissance Waverly, and Renaissance Austin—were classified as held for sale. Their $262.5 million portfolio sale was expected to close in Q1 2012, subject to conditions and lender consents.
Outlook, risks, and unusual items
- Management described lodging as being in the early stages of a sustainable recovery, citing anticipated demand growth and historically low expected new supply. It expected to evaluate acquisition opportunities. The filing provides no specific 2012 earnings or RevPAR guidance.
- Expected 2012 capital improvements were approximately $45 million, with about $16 million funded from corporate cash. Planned projects include work at Conrad Chicago, Courtyard Midtown East, Renaissance Worthington, and Marriott Atlanta Alpharetta; major Chicago Marriott and Radisson Lexington renovations were being evaluated for 2013.
- The company agreed to acquire a 282-room Times Square hotel upon completion, expected in 2014, for approximately $128 million. It had deposited $20 million, with additional deposits required; deposits may be forfeited if the company does not close, subject to contractual protections.
- The Radisson Lexington rebranding to Marriott’s Autograph Collection and proposed $30 million renovation were not final: the franchise arrangement was covered by a non-binding term sheet and depended on Marriott approval and completion of a satisfactory property-improvement plan. A proposed $170 million floating-rate mortgage remained subject to closing conditions.
- The Allerton Hotel mortgage loan was in default and the borrower’s bankruptcy stayed foreclosure. The $69 million principal loan was on non-accrual status; the company reported no impairment at year-end, but recovery and control of the hotel remained uncertain. The company had incurred approximately $2.3 million in legal fees and agreed to fund up to $800,000 of first-quarter 2012 cash shortfalls.
- Other notable exposures include substantial reliance on a small number of markets and hotel brands/managers, new Manhattan hotel supply, cyclicality and seasonality, refinancing and covenant risks, ground leases, and catastrophe exposure. Frenchman’s Reef has a $5 million named-windstorm deductible and a U.S. Virgin Islands tax agreement that expires in February 2015.
- The Los Angeles Airport Marriott employee-litigation settlement was tentatively agreed, with $1.7 million accrued, pending court approval. The Allerton guarantor-related summary judgment for legal fees could be appealed, and collection was not assured.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Key facts for investors to verify
- Whether the three-hotel sale closed on the expected terms and how proceeds and debt assumption affected liquidity and leverage.
- Final terms and closing status of the Radisson Lexington financing, Autograph branding, and renovation budget.
- Allerton bankruptcy and foreclosure outcomes, loan recoverability, legal-cost recovery, and any additional support required.
- 2012 comparable-property operating trends and whether expense growth and planned capital spending support stronger cash generation.
- Debt maturities, post-year-end credit-facility borrowings, covenant headroom, and the ability to refinance the 2015–2016 maturities.
- Frenchman’s Reef recovery after renovation, insurance exposure, and tax treatment after the tax agreement expires.