DiamondRock Hospitality Company — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. DiamondRock is a lodging-focused REIT and hotel owner. At quarter-end it owned 28 hotels with 10,709 rooms. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $208.9 million | $190.1 million | +9.9% |
| Operating profit | $21.4 million | $10.1 million | +112.8% |
| Net income | $10.6 million | $4.0 million | +163.6% |
| Diluted EPS | $0.05 | $0.02 | — |
| Net cash from operations | $34.4 million | $10.8 million | — |
| Adjusted EBITDA | $48.5 million | $37.3 million | +30.1% |
| Adjusted FFO | $37.7 million | $29.5 million | +27.7% |
Operating margin was approximately 10.2%, versus 5.3% in Q1 2014; net margin was approximately 5.1%, versus 2.1%. These are calculated from reported revenue and profit. GAAP results included a $2.3 million income tax benefit in 2015 and a $6.8 million benefit in 2014.
- Reported room revenue increased 11.5%; food and beverage revenue increased 7.6%. Excluding specified acquisitions, dispositions and the newly opened Times Square hotel, total revenue grew 7.7%.
- Comparable pro forma hotel statistics showed occupancy of 75.6%, up 2.5 percentage points; ADR of $199.45, up 4.3%; and RevPAR of $150.78, up 7.9%. Company-wide reported weighted-average RevPAR was $151.29, up 8.2% for the listed portfolio comparison.
- Hotel operating expenses rose 4.2% as reported; management cited a $7.7 million increase excluding non-comparable properties. Higher franchise, sales and marketing, management, and property-tax costs contributed to expense growth.
- Cash used in investing was $70.0 million, primarily for the Shorebreak acquisition and hotel capital expenditures. Cash used in financing was $21.6 million, including $20.7 million of dividend payments. Cash and cash equivalents declined $57.2 million to $87.2 million.
Balance sheet and liquidity
At March 31, 2015, total assets were $3.15 billion, total debt was $1.03 billion, and stockholders’ equity was $1.82 billion. Debt was all mortgage debt; the $200 million unsecured credit facility had no borrowings outstanding at quarter-end. Weighted-average debt interest was 4.82%; approximately $170.4 million of debt was variable-rate. Management estimated a 25-basis-point rate change would affect annual interest expense by about $0.4 million.
Cash and cash equivalents were $87.2 million and restricted cash was $61.8 million. The company reported full availability under its $200 million credit facility at quarter-end, subject to facility terms. It was in compliance with mortgage covenants; credit-facility covenant measures also showed headroom, including a 34.0% actual leverage ratio versus a 60% maximum and 3.1x fixed-charge coverage versus a 1.50x minimum.
Material changes, outlook and risks
- Acquisition: Acquired the 157-room Shorebreak Hotel in Huntington Beach on February 6 for a contractual $58.5 million, funded with corporate cash. It contributed $2.0 million of revenue and $0.1 million of net income in the reported period.
- Debt transactions after quarter-end: Repaid the $52.6 million Renaissance Worthington mortgage on April 10 and entered an $85 million, 3.66% fixed-rate mortgage on April 14, maturing May 2025. The company also intended to prepay the $56.3 million Frenchman’s Reef loan in May and expected to refinance the $38.4 million JW Marriott Denver loan during Q2. These developments address near-term maturities, but execution and resulting debt levels warrant monitoring.
- Debt maturities: Management cited approximately $95 million remaining in 2015 and approximately $305 million in 2016, excluding scheduled principal payments, and expected to use refinancing, unencumbered assets, the credit facility, dispositions and operating cash flow to meet obligations.
- Capital spending: Management expected approximately $85 million of hotel capital improvements in 2015. Q1 spending was $20.2 million. Projects included renovations at the Chicago Marriott Downtown and planned work at the Lodge at Sonoma and the hotel being rebranded as the Luxury Collection Hotel Chicago.
- Tax contingency: The tax agreement reducing the U.S. Virgin Islands tax rate on Frenchman’s Reef to approximately 7% expired in February 2015. Without an extension, the applicable rate is 37.4%; the company recorded Q1 expense using that statutory rate and said it was seeking an extension.
- Other items: Recorded a $0.8 million impairment of a favorable Lexington Hotel New York tenant lease asset after expecting the tenant lease to terminate early. The company expected to rebrand Conrad Chicago under Starwood’s Luxury Collection, with conversion anticipated in Q3 2015. Management reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
- Dividends: The company paid $0.1025 per share in January and $0.1250 per share in April. Dividend timing and amounts remain subject to board authorization, REIT requirements, financial results and debt restrictions.
Management described lodging fundamentals as improving, with room-revenue growth across leisure transient, business transient and group segments. It also cautioned that hotel performance is exposed to economic conditions, local supply and competition, travel demand, brand performance, seasonality and financing conditions. No specific full-year revenue or earnings guidance was provided in the filing text.
Important facts for investors to verify
- Progress and final terms for the announced 2015 and 2016 mortgage refinancings, maturities and any associated credit-facility borrowings.
- Status of the Frenchman’s Reef tax agreement and the resulting tax expense if it is not renewed.
- Whether operating and RevPAR growth persists on a comparable-property basis, separately from acquisitions, dispositions and new openings.
- Actual 2015 capital spending and its effect on cash, debt, hotel operations and dividend capacity.
- Future cash generation and liquidity after acquisition spending, debt service, refinancing and shareholder distributions.