DiamondRock Hospitality Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. Financial statements are unaudited. DiamondRock is a lodging REIT and hotel owner; it reported owning 29 hotels with 10,928 rooms.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $213.0 million | $208.9 million | +2.0% |
| Operating profit | $24.3 million | $21.4 million | +13.6% |
| Net income | $16.8 million | $10.6 million | +57.7% |
| Diluted EPS | $0.08 | $0.05 | +$0.03 |
| Operating cash flow | $29.7 million | $34.4 million | −13.7% |
| Adjusted EBITDA | $50.3 million | $48.5 million | +3.8% |
| Adjusted FFO | $42.8 million | $37.7 million | +13.4% |
Operating margin was approximately 11.4%, versus 10.2% a year earlier; net margin was approximately 7.9%, versus 5.1%. The income-tax benefit was $4.1 million, compared with $2.3 million, contributing to net-income growth.
Comparable portfolio occupancy was 73.4%, down 3.0 percentage points; ADR was $205.08, up 1.8%; and RevPAR was $150.61, down 2.1%. Management attributed weaker room revenue principally to Chicago and New York City, with business-transient and group revenue declines partly offset by leisure-transient growth. Total reported revenue rose partly because of hotel acquisitions; excluding non-comparable ownership periods, revenue declined 1.5%.
Cash, debt and liquidity
- Cash and cash equivalents fell to $48.9 million from $213.6 million at year-end; restricted cash was $57.0 million.
- Total debt was $1.026 billion, down from $1.170 billion at December 31, 2015. Weighted-average interest rate was 4.09%, and weighted-average maturity was approximately six years. Debt fair value was $982.4 million.
- Q1 investing cash use was $23.7 million, including $27.4 million of hotel capital expenditures. Financing cash use was $170.7 million, chiefly reflecting repayment of the $201.7 million Chicago Marriott mortgage, partly offset by a $60.0 million credit-facility draw.
- At March 31, the $200 million credit facility had $60 million drawn and matured in January 2017. On May 3, 2016, the company amended it to $300 million, extended maturity to May 2020, and reduced pricing. It also closed a five-year $100 million term loan; $50 million was funded at closing and used with cash to repay $55 million of facility borrowings.
- Variable-rate debt was $230.4 million. Management estimated a 25-basis-point rate move would change annual interest expense by approximately $0.6 million.
- Dividends paid during the quarter totaled $25.3 million. The disclosed common dividend was $0.125 per share for each of the January and April 2016 payments.
Changes, outlook and risks
- Hotel operating expenses rose 0.6% as reported, but fell 1.9% excluding acquired hotels’ non-comparable periods. Interest expense decreased to $11.7 million from $13.2 million, mainly following mortgage repayments.
- Management expected approximately $150 million of 2016 hotel capital expenditures. Q1 spending was $27.4 million, primarily for renovations at the Chicago Marriott Downtown and The Gwen. The filing identifies planned renovations at several other hotels but provides no earnings or RevPAR guidance.
- Management said expected 2016 cash sources included hotel operations, proceeds from the new term loan and possible non-core hotel dispositions. Anticipated uses included the Courtyard Manhattan/Fifth Avenue mortgage repayment, capital spending, debt service, dividends and possible share repurchases.
- A franchisor notified the company that one hotel was in default under its franchise agreement because of low guest-satisfaction scores. The franchisor reserved termination rights; the mortgage lender reserved rights to declare a loan default but had not done so. Failure to resolve the issue could materially adversely affect the company.
- The company disclosed routine litigation, with management not expecting aggregate uninsured liabilities to have a material adverse impact, while noting outcomes are uncertain. No material changes to the prior annual report’s risk factors were reported.
- Hotel demand is seasonal and exposed to economic conditions, travel demand, competition, new supply, brand performance and interest-rate changes. The filing states interim results are not necessarily indicative of full-year performance.
Key facts for investors to verify
- Progress in resolving the franchise and lender issues at the hotel in default, including any cure plan or termination/default action.
- Repayment or refinancing of the $48.1 million Courtyard Manhattan/Fifth Avenue mortgage due in June 2016, and the impact of the post-quarter credit facility and term loan on liquidity and debt costs.
- Actual RevPAR and hotel-level performance trends, particularly in Chicago and New York, relative to the reported portfolio decline.
- Execution and funding of the approximately $150 million 2016 capital plan, alongside dividends and other cash needs.
- Underlying earnings and cash generation: Q1 operating cash flow declined despite higher net income; review non-GAAP reconciliations and their stated limitations alongside GAAP results.