DiamondRock Hospitality Company — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The unaudited filing covers a lodging-focused REIT that owned 25 hotels with 10,735 guest rooms at quarter-end.
Financial and operating performance
- Revenue: Q2 revenue was $229.9 million, versus $218.0 million a year earlier. For the first half, reported revenue was $420.0 million versus $393.9 million. Management’s comparable-property analysis reported revenue growth of 8.2% for both periods, using adjusted prior-year comparisons.
- Hotel performance: Comparable Q2 occupancy rose 4.0 percentage points to 83.4%, ADR increased 6.3% to $201.91, and RevPAR increased 11.7% to $168.49. For the first half, occupancy was 77.8%, ADR $191.62, and RevPAR $149.00; comparable RevPAR growth was 9.8%.
- Profit: Q2 net income was $51.9 million ($0.27 basic and $0.26 diluted per share), versus $15.1 million ($0.08 per share) in Q2 2013. First-half net income was $56.0 million ($0.29 basic and diluted per share), versus $10.9 million ($0.06 per share). Results included material gains from the Allerton loan prepayment and Westin Boston litigation settlement, among other items.
- Adjusted measures: Adjusted EBITDA was $70.9 million in Q2 versus $62.4 million, and $108.2 million for the first half versus $96.7 million. Adjusted FFO was $51.9 million in Q2 versus $43.2 million, and $81.4 million for the first half versus $70.0 million. These are non-GAAP measures and are not substitutes for GAAP results.
- Cash flow and capital spending: First-half operating cash flow was $65.8 million. Investing activities provided $50.3 million, principally reflecting Allerton loan repayments and hotel-sale proceeds, partly offset by $40.4 million of hotel capital expenditures. Financing activities used $6.8 million, including $36.9 million of dividends. Cash and cash equivalents were $253.9 million at June 30, up from $144.6 million at year-end; restricted cash was $95.7 million.
- Debt and liquidity: Total debt was $1.126 billion at June 30, compared with $1.092 billion at year-end; the weighted-average interest rate was 5.05%. Of the debt, $211.7 million was variable-rate. The company reported $41.3 million drawn on its $200 million unsecured facility at quarter-end; that balance was repaid July 18. Credit-facility covenant measures were within stated limits.
- Margins and expenses: Q2 operating profit was $55.0 million, compared with $31.4 million. First-half operating profit was $65.1 million versus $32.7 million. Reported results include unusual gains; hotel operating expenses increased 4.5% in Q2 and 5.8% in the first half on management’s comparable basis.
Material changes versus prior periods
- Comparable RevPAR growth reflected both higher occupancy and ADR; New York hotels recovering from renovations were a significant contributor. Q2 business-transient room nights rose 27.5%, while group room nights declined 2.4%.
- The company sold Oak Brook Hills Resort on April 14 for $30.1 million, including $4.0 million of seller financing, and recorded a $1.3 million gain. Under newly adopted discontinued-operations guidance, its 2014 results are included in continuing operations.
- The Allerton Hotel borrower prepaid the $58.5 million outstanding senior loan in May, generating a $13.6 million gain and reducing recurring interest income thereafter.
- A $14.0 million Westin Boston construction-litigation settlement produced an $11.0 million net gain. Q2 also included $0.6 million of insurance proceeds gains.
- Debt increased from year-end, while cash rose substantially, largely due to the Allerton repayment and asset-sale proceeds. The company stated that the July refinancing replaced the $41.3 million Courtyard Manhattan/Midtown East mortgage with an $86 million, ten-year fixed-rate loan at 4.40%.
Outlook, risks, and contingencies
- Management expected the lodging industry to exceed prior peak occupancy in 2014, with new hotel supply below historical averages. It cited benefits expected from the 2013 capital program, the Lexington Hotel’s Autograph Collection rebranding, group-booking pace, and a planned New York City hotel opening.
- The company expected approximately $95 million of 2014 hotel capital improvements. It was under contract to acquire a 282-room Times Square hotel for approximately $127 million, expected to open in the third quarter; $26.9 million had been deposited in escrow and could be forfeited if the company failed to close, subject to contractual conditions.
- Management said available cash, operating cash flow, and credit-facility capacity were expected to meet short-term needs. It identified mortgage maturities of approximately $230 million in 2015 (assuming extension of the Lexington loan) and $305 million in 2016, to be addressed through refinancing, borrowing capacity, dispositions, facility capacity, and operating cash flow.
- The Lexington Hotel loan’s DSCR was back above its 1.1x minimum at June 30, but its cash-trap provision remained in effect; $2.8 million was held in lender reserve pending release conditions.
- Hotel performance is exposed to economic and travel demand, local competition and new supply, and brand performance. A 25-basis-point move in variable rates was estimated to change annual interest expense by approximately $0.5 million. Routine litigation remained outstanding; management did not expect aggregate uninsured liabilities to materially affect results, while acknowledging uncertainty.
- No material changes to the risk factors in the 2013 Form 10-K were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring hotel operating performance from the $13.6 million Allerton gain, $11.0 million litigation gain, property-sale gain, and insurance proceeds.
- Review the July 2014 $86 million refinancing, repayment of the credit-facility draw, and the terms and execution of the planned Times Square acquisition.
- Assess the 2015–2016 mortgage maturity schedule, refinancing assumptions, and continued status of the Lexington loan cash trap and reserve.
- Reconcile reported GAAP comparisons with management’s comparable-property figures, including the Oak Brook Hills sale and discontinued-operations presentation.
- Evaluate projected capital spending, dividend requirements, restricted cash, and hotel operating trends against seasonality and the company’s market and interest-rate exposures.