Business context and reporting period
DiamondRock Hospitality Company (NYSE: DRH) is a lodging REIT and hotel owner, not an operator. This Form 10-K covers the fiscal year ended December 31, 2014; the filing also reports unaudited quarterly results. At year-end, the company owned 27 premium hotels with 10,552 rooms, managed by third parties. It acquired a 157-room California hotel in February 2015, after year-end.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $872.9 million | $799.7 million |
| Operating income | $137.5 million | $75.2 million |
| Net income | $163.4 million | $49.1 million |
| Diluted EPS | $0.83 | $0.25 |
| Operating cash flow | $179.8 million | $143.7 million |
| FFO | $212.1 million | $132.0 million |
| Adjusted FFO | $171.5 million | $139.3 million |
| Adjusted EBITDA | $235.8 million | $196.9 million |
Total revenue grew 9.2%; on the company’s pro forma comparable basis, occupancy rose to 78.7% from 75.0%, ADR increased 6.3% to $205.09, and RevPAR grew 11.6% to $161.44. Reported operating margin was approximately 15.7%, compared with 9.4% in 2013. Results included material gains from hotel sales, the Hilton Garden Inn Times Square acquisition, the Allerton loan repayment, a litigation settlement, and insurance proceeds; GAAP net income therefore rose much more than adjusted operating measures.
For the fourth quarter, revenue was $223.6 million versus $201.5 million in fourth-quarter 2013; net income was $63.6 million versus $29.6 million, and diluted EPS was $0.32 versus $0.15. The filing does not clearly allocate the major annual unusual gains among quarters.
Balance sheet, cash flow and shareholder returns
At December 31, 2014, total debt was $1.038 billion, down from $1.092 billion a year earlier; cash and cash equivalents were $144.4 million, restricted cash was $74.7 million, and the $200 million unsecured credit facility was undrawn. Debt carried a 4.95% weighted-average interest rate and had a 3.8-year weighted-average maturity. Fourteen of 27 hotels were unencumbered. The filing describes no corporate-level debt; outstanding debt was principally property-specific mortgages.
Cash from operations was $179.8 million. Investing activities used $105.6 million, reflecting acquisitions, capital spending, dispositions, and repayment of the Allerton loan; financing activities used $74.5 million. Hotel capital expenditures were $62.6 million in 2014, and management expected approximately $85 million in 2015. The common dividend declared increased to $0.41 per share for 2014 from $0.34 in 2013; the quarterly rate rose from $0.085 to $0.1025 during 2014.
Material changes and unusual items
- Acquired the Inn at Key West, Hilton Garden Inn Times Square Central, and Westin Fort Lauderdale Beach Resort for contractual prices totaling approximately $323.7 million; sold Oak Brook Hills Resort and Los Angeles Airport Marriott.
- Completed a $140 million renovation program across several hotels. Comparable pro forma RevPAR growth was driven by both occupancy and room rates; management cited particularly strong business-transient demand and improvements at the rebranded Lexington Hotel.
- Recognized a $49.7 million gain on the Los Angeles Airport Marriott sale, a $23.9 million bargain-purchase gain on the Times Square hotel, a $13.6 million gain on repayment of the Allerton loan, and an $11.0 million net litigation-settlement gain. The filing also reports $1.8 million of insurance proceeds.
- Refinanced the Courtyard Manhattan/Midtown East mortgage with an $86 million, fixed-rate loan at 4.40%, replacing a loan at 8.81%; amended and extended the Lexington Hotel loan.
- Raised $63.1 million net through an at-the-market share offering in 2014, with further proceeds received after year-end.
Outlook, risks and contingencies
Management expected continued U.S. lodging demand growth in 2015, supported by a favorable supply-demand balance, and planned to pursue selective urban and resort acquisitions, particularly on the West Coast and in South Florida, while continuing to consider non-core asset sales. Management expected 2015 capital expenditures of approximately $85 million. These are expectations, not assurances; the filing provides no numerical company-wide 2015 earnings or RevPAR guidance.
Mortgage principal maturities were approximately $145 million in 2015 and $305 million in 2016, excluding scheduled principal payments. Management expected to address them through refinancing, new secured borrowing, asset sales, cash, the credit facility, and operating cash flow. Hotel operations are cyclical and exposed to economic weakness, new supply (including in Manhattan and Chicago), group-business variability, labor, third-party manager and brand concentration, renovation needs, and natural disasters. Certain mortgage agreements include cash traps and financial covenants.
The Frenchman’s Reef tax holiday expired in February 2015. If not extended retroactively, the applicable U.S. Virgin Islands income tax rate could rise from approximately 7% to 37.4%, materially reducing income from that hotel. The company also disclosed a $6.5 million named-windstorm deductible at Frenchman’s Reef. Routine litigation was not expected by management to have a material adverse effect; the Westin Boston construction-related claim was settled for $14.0 million gross.
Most important facts for investors to verify
- How much of the 2014 net-income increase reflects recurring hotel performance versus asset-sale, acquisition, loan-repayment, litigation, and insurance gains; review adjusted FFO and EBITDA reconciliations.
- Progress and final terms for refinancing the 2015 and 2016 mortgage maturities, and the impact on interest expense and liquidity.
- Whether the Frenchman’s Reef tax holiday was extended and the resulting tax cost.
- Realized returns from recent acquisitions and renovations, including whether comparable RevPAR and operating margins persist.
- Dividend sustainability relative to recurring cash flow, debt service, capital spending, and any cash-trap restrictions.