DiamondRock Hospitality Company (NYSE: DRH) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Unless noted, dollar amounts are U.S. dollars.
Business context and reporting period
DiamondRock is a lodging REIT that owns hotels and resorts operated by third parties. At year-end it owned 31 properties with 10,102 rooms across 21 markets; Frenchman’s Reef in the U.S. Virgin Islands remained closed after 2017 hurricane damage. The company’s strategy emphasizes premium urban and resort hotels, asset management, capital investment, and prudent leverage. More than 90% of 2019 portfolio EBITDA came from core urban and resort destination hotels.
Financial and operating performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Total revenue | $938.1 million | $863.7 million | Up 8.6%; excluding identified non-comparable property and ownership-period effects, up 2.9%. |
| Comparable occupancy | 79.0% | 78.9% | Up 0.1 percentage point. |
| Comparable ADR | $238.52 | $236.71 | Up 0.8%. |
| Comparable RevPAR | $188.51 | $186.75 | Up 0.9%. |
| Net income attributable to common stockholders | $183.5 million | $87.8 million | 2019 includes a $144.2 million property insurance settlement gain. |
| Diluted earnings per share | $0.90 | $0.43 | Materially affected by the insurance settlement gain. |
| Adjusted EBITDA | $260.4 million | $254.1 million | Up about 2.5%. |
| FFO / Adjusted FFO | $302.3 million / $217.0 million | $192.3 million / $210.0 million | Reported FFO reflects the settlement; Adjusted FFO increased about 3.3%. |
Revenue growth reflected higher room, food-and-beverage, and other revenue, as well as properties acquired or reopened during 2018–2019. Comparable RevPAR increased modestly. Hotel operating expenses rose 11.1% to $690.8 million, including higher costs at acquired/reopened properties, $17.8 million of uninsured natural-disaster costs, and a $2.5 million accrual for terminating the Sheraton Suites Key West franchise. Excluding stated non-comparable amounts, hotel operating expenses rose 4.0%. Adjusted EBITDA margin was approximately 27.8%, versus 29.4% in 2018; this is a derived ratio of adjusted EBITDA to revenue.
Interest expense was $46.6 million, up from $41.0 million, reflecting refinancing, higher borrowings and swap mark-to-market effects, partly offset by capitalized interest. Income tax expense was $22.0 million versus $3.1 million, primarily including $20.8 million of foreign tax expense related to the Frenchman’s Reef taxable REIT subsidiary.
Cash flow, debt, and liquidity
- Cash provided by operations was $193.3 million, compared with $217.6 million in 2018.
- Investing cash outflow was $65.7 million: $102.7 million for operating-hotel capital improvements and $96.6 million for Frenchman’s Reef reconstruction, offset in part by $133.5 million of insurance proceeds.
- Financing cash outflow was $39.4 million. Uses included $102.1 million of distributions, $42.8 million of share repurchases, scheduled mortgage principal, and debt repayments; proceeds included a new $350 million term loan and revolver draws.
- Year-end unrestricted cash was $122.5 million and restricted cash was $57.3 million. Debt was $1.09 billion, with a 3.81% weighted-average interest rate and approximately 4.5-year weighted-average maturity. Eight hotels had mortgage debt; 23 of 31 hotels were unencumbered.
- The amended unsecured revolving facility has $400 million capacity and matures July 2023, with a one-year extension option. $75 million was drawn at year-end, leaving $325 million available; the company said it repaid the $75 million after year-end. Term loans outstanding were $50 million due October 2023 and $350 million due July 2024.
- Debt maturities were concentrated in 2023–2024, including $194.7 million in 2023 and $432.4 million in 2024. The company reported compliance with debt covenants at year-end.
- The company repurchased 4.43 million shares for $42.8 million at an average $9.65 per share in 2019. It declared $0.50 per common share for the year, or $0.125 quarterly.
Material changes and unusual items
- In December 2019, the company settled its hurricane insurance claims for total payments of $246.8 million: $238.5 million related to Frenchman’s Reef and $8.3 million to Havana Cabana Key West. The total includes $95.0 million received in 2017–2018; the company recognized a $144.2 million gain on the Frenchman’s Reef property-damage settlement and $8.8 million of business-interruption income in 2019. All settlement proceeds had been received by February 28, 2020.
- Frenchman’s Reef reconstruction spending was $96.6 million in 2019. Management expected reopening at the end of 2020 as two hotels, subject to construction, cost, labor, infrastructure, and tourism-recovery risks.
- The company refinanced in July 2019, expanding its revolver from $300 million to $400 million and replacing $300 million of prior term loans with a new $350 million term loan. It recorded a $2.4 million early-extinguishment loss.
- ASC 842 lease accounting was adopted January 1, 2019; it added lease liabilities and right-of-use assets but management said adoption did not materially affect results, cash flows, or liquidity.
- The company repurchased shares while maintaining the annual $0.50 dividend. The board retains discretion over future distributions and repurchases.
Outlook, management commentary, and principal risks
Management anticipated modestly slower RevPAR growth in 2020, citing increased competing supply, the expanding Coronavirus outbreak, and the U.S. presidential election. It reported group booking pace 14.1% ahead of the prior-year pace at the start of 2020; group revenues were about one-third of room revenue. Management expected destination resorts to outperform the broader market, noted favorable Boston and Chicago conditions and urban event calendars, and anticipated lower renovation disruption. No clear numerical full-year RevPAR forecast is provided in the filing text.
Management expected $90–$100 million of 2020 capital improvements at operating hotels, in addition to ongoing Frenchman’s Reef redevelopment. It identified rising labor costs as a pressure on industry profit growth and said it was pursuing operating efficiencies. Its 2020 liquidity outlook cited $123 million of unrestricted cash and $325 million of revolver capacity at year-end, alongside operating cash flow and possible property dispositions.
Key risks include the lodging cycle and economic weakness; new supply, particularly in New York and Boston; alternative lodging and online booking intermediaries; labor and operating-cost inflation; reliance on third-party hotel managers and concentrated Marriott/Hilton brands; renovation and redevelopment overruns or delays; hurricanes, earthquakes, wildfire, climate effects and potentially inadequate insurance; refinancing, interest-rate, LIBOR transition, covenant and cash-trap risks; ground-lease constraints; and maintaining REIT qualification and required distributions. Management identified no material cyber incident and stated that routine litigation was not expected to have a material adverse effect; the settled hurricane-insurance litigation was dismissed. The filing was signed February 28, 2020, so its Coronavirus outlook reflects information available at that time.
Most important facts for investors to verify
- Separate recurring hotel earnings from the $144.2 million insurance gain and related business-interruption income; review Adjusted EBITDA and Adjusted FFO reconciliations and definitions.
- Track Frenchman’s Reef rebuild costs, insurance-funded amounts, opening timing, and the expected operating contribution from the two planned hotels.
- Confirm debt repayment and current revolver availability after year-end, covenant headroom, maturity/refinancing plans, and exposure to variable rates and LIBOR transition.
- Assess whether modest comparable RevPAR growth and rising hotel expenses support sustainable operating margins and the $0.50 annual dividend.
- Review the $90–$100 million operating-hotel capital plan, outstanding renovation commitments, and the company’s market-supply assumptions, especially for New York and Boston.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2019.