Business Context and Reporting Period
Company: DiamondRock Hospitality Company (DRH)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: DRH is a lodging-focused Real Estate Investment Trust (REIT) owning a portfolio of 20 premium hotels and resorts with approximately 9,600 guestrooms. The portfolio is concentrated in key gateway cities (New York, Los Angeles, Chicago, Boston, Atlanta) and destination resorts (U.S. Virgin Islands, Vail). The company acts as an owner, not an operator, leasing properties to taxable REIT subsidiaries (TRS) which engage third-party managers (primarily Marriott, Starwood, and Hilton).
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $575.7 million | $693.2 million |
| Net (Loss) Income | $(11.1) million | $52.9 million |
| Funds From Operations (FFO) | $71.6 million | $131.1 million |
| EBITDA | $102.2 million | $172.1 million |
| Operating Cash Flow | $80.5 million | $129.5 million |
| Total Debt Outstanding | $786.8 million | $878.4 million |
| Cash and Cash Equivalents | $177.4 million | $13.8 million |
| Weighted Average Interest Rate | 5.86% | 5.44% |
| Dividends Declared Per Share | $0.33 | $0.75 |
Note: 90% of the 2009 dividend was paid in shares of common stock to preserve cash.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 17.0% to $575.7 million, driven by a 17.6% decline in RevPAR (Revenue Per Available Room). This was caused by a 12.6% decrease in Average Daily Rate (ADR) and a 4.1 percentage point decrease in occupancy.
- Operating Performance: Operating income fell from $92.3 million in 2008 to $19.1 million in 2009. The company reported a net loss of $11.1 million in 2009 compared to net income of $52.9 million in 2008.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $13.8 million to $177.4 million. This was achieved through equity offerings (raising ~$205 million), repaying the entire $57 million senior unsecured credit facility, and paying down $32.9 million in mortgage debt.
- Capital Expenditures: Capital spending was reduced to $24.7 million in 2009 (down from $65.1 million in 2008), with only $4.6 million funded from corporate cash.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management anticipates a challenging operating environment in 2010. While occupancy may have stabilized, ADRs are expected to continue declining due to a shift from high-rated business travelers to leisure customers. The company expects RevPAR to decline in 2010. New hotel supply in Chicago and Austin is expected to impact specific properties in 2010.
Risks and Contingencies
- Frenchman's Reef Default: The company is in a non-monetary Event of Default regarding the mortgage on Frenchman's Reef & Morning Star Marriott Beach Resort due to incomplete capital projects. This resulted in $3.1 million of default interest in 2009. The lender has the right to accelerate the $61.4 million loan. Management is negotiating a waiver and extension.
- Tax Holiday Expiration: The tax holiday for Frenchman's Reef (reducing tax rate to ~4%) expired in February 2010. Failure to extend it would subject the property to a 37.4% tax rate, substantially reducing income.
- Dividend Dilution: To maintain liquidity and REIT status, the company paid 90% of the 2009 dividend in stock. It may continue this practice in 2010, which could cause stockholder dilution and tax liabilities for shareholders receiving stock dividends.
- Covenant Compliance: The company's credit facility contains financial covenants (leverage and fixed charge coverage). A 5-10% decline in hotel profits could trigger a default, potentially forcing asset sales or unfavorable debt terms.
Investor Verification Checklist
- Frenchman's Reef Status: Verify the outcome of negotiations regarding the Event of Default and the extension of the tax holiday, as these directly impact the viability of the $61.4 million debt and the property's profitability.
- Dividend Policy: Confirm the composition (cash vs. stock) of the 2010 dividend and the potential for further dilution.
- Covenant Headroom: Monitor the Fixed Charge Coverage Ratio and Leverage Ratio to ensure compliance with the $200 million credit facility covenants, especially given the sensitivity to EBITDA declines.
- Market Fundamentals: Track RevPAR trends in key gateway cities (NYC, Chicago, Boston) and the impact of new supply in Chicago and Austin on specific asset performance.
- Capital Expenditure Needs: Assess the funding requirements for the major capital improvement program at Frenchman's Reef (estimated >$50 million) and whether it will require additional debt or equity.