DiamondRock Hospitality Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 7, 2020. DiamondRock is a lodging REIT that owned 31 hotels with 10,102 rooms at quarter-end. Frenchman’s Reef remained closed following 2017 hurricane damage.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $20.4 million | $257.9 million | $190.4 million | $460.3 million |
| Net income (loss) | $(73.4) million | $29.1 million | $(108.1) million | $38.1 million |
| Net income (loss) attributable to common stockholders | $(72.8) million | $29.0 million | $(107.3) million | $37.9 million |
| Basic and diluted EPS | $(0.36) | $0.14 | $(0.53) | $0.19 |
| Adjusted EBITDA | $(37.0) million | $81.1 million | $(25.2) million | $130.2 million |
| Adjusted FFO | $(41.0) million | $65.1 million | $(32.6) million | $107.1 million |
- Q2 hotel operating measures: occupancy 8.5% versus 83.1%; ADR $175.74 versus $250.23; RevPAR $14.99 versus $208.02. Six-month occupancy was 33.8% versus 78.2%, and RevPAR was $71.48 versus $183.30.
- Six-month operating cash flow was negative $20.1 million, versus positive $80.9 million in 2019. Investing cash outflow was $60.4 million; financing cash inflow was $25.0 million. Cash, cash equivalents and restricted cash totaled $124.2 million at June 30.
- At quarter-end, unrestricted cash was $87.8 million and revolver availability was $251.0 million. Net carrying debt was $1.152 billion, up from $1.090 billion at December 31, 2019; weighted-average interest rate was 3.80%. Debt fair value was $1.214 billion.
- Six-month interest expense was $32.8 million versus $24.1 million, including a $12.3 million non-cash interest-rate-swap fair-value adjustment. No impairment charge was recorded for hotel properties at June 30.
Material changes and management commentary
- COVID-19 drove a sharp decline in lodging demand. The company suspended operations at 20 hotels during March and April; 12 had reopened by June 30. As of August 7, 25 of the 30 previously operating hotels were open. Leisure-focused hotel demand recovered faster than urban demand.
- Management reduced hotel costs, cut corporate expenses and executive compensation, reduced staffing, suspended the quarterly dividend, and canceled or deferred more than 65% of planned remaining-2020 capital expenditures. The Frenchman’s Reef rebuild was paused; construction was expected to resume in 2021.
- Management stated it did not anticipate meaningful net cash flow from hotel operations for the remainder of 2020, but expected available cash and revolver capacity to meet short-term liquidity needs. It expected approximately $50 million of 2020 capital improvements at operating hotels.
- The June credit amendments waived quarterly financial covenant testing from Q2 2020 through Q1 2021 and impose a minimum-liquidity requirement of $100 million, restrictions on dividends, share repurchases, additional debt and other activities, and subsidiary equity pledges. Covenant ratio adjustments apply after the waiver period through 2021.
- Six property mortgage cash traps had been triggered at quarter-end; management expected another at Westin San Diego in Q3 and did not expect the traps to impair short-term liquidity. The company refinanced its Salt Lake City Marriott mortgage: a $48 million loan replaced a $52.5 million loan due in November 2020, with the balance funded from cash.
- The board suspended the quarterly dividend beginning with the payment that would have been made in April. The company expected to pay a January 2021 dividend sufficient to distribute 100% of 2020 taxable income, if any, subject to applicable requirements.
- There was no 2020 business-interruption insurance income; the comparable 2019 six-month period included $8.8 million related to Frenchman’s Reef. Management warned that continued deterioration in projected hotel cash flows could lead to future property impairment charges.
Risks, contingencies and unusual items
- The duration and severity of the pandemic, travel restrictions, hotel closures or reopenings, demand recovery, and related economic and financing conditions remain uncertain and could materially affect results, liquidity and dividend capacity.
- Variable-rate debt exposure was reported at $372 million; a 100-basis-point rate change was estimated to affect annual interest expense by approximately $3.7 million. LIBOR transition could also affect borrowing and swap costs.
- The company was seeking relief on certain CMBS loan conditions; except for the Westin Boston Waterfront loan amendment, relief had not been obtained as of the filing. That amendment permitted use of reserve funds for three months of debt service, with replenishment required.
- Routine litigation was disclosed; management did not expect uninsured liabilities to materially affect financial condition or results, while noting litigation outcomes remain uncertain.
Key facts for investors to verify
- Hotel reopening status, occupancy and RevPAR trends, especially urban versus leisure properties, and whether demand recovery supports operating cash flow.
- Compliance with the amended credit agreements, the $100 million minimum-liquidity covenant, revolver availability, covenant relief expiration and any lender relief on mortgage loans.
- Cash burn and required funding for debt service, hotel working capital and capital expenditures; progress and revised cost and timing for the Frenchman’s Reef project.
- Whether property cash traps expand, impairment indicators emerge, or management changes its assessment of short-term liquidity and the 2020 taxable-income distribution.