DiamondRock Hospitality Company — FY2010 Form 10-K
Business context and reporting period. This filing reports the fiscal year ended December 31, 2010; it is an annual report, not a standalone fourth-quarter filing. DiamondRock is a lodging REIT and hotel owner, with 23 branded hotels totaling 10,743 rooms and a senior mortgage loan secured by Chicago’s 443-room Allerton Hotel. Hotels are operated by third-party managers, predominantly Marriott.
Financial and operating performance
- Revenue: $624.4 million, up 8.5% from $575.7 million in 2009. The three 2010 hotel acquisitions contributed substantially; comparable-property RevPAR rose 4.5%.
- Hotel metrics: Occupancy was 70.5%, up 2.4 percentage points; ADR was $155.29, up 1.0%; RevPAR was $109.40. The filing’s comparable statistics adjust for the ownership periods of 2010 acquisitions.
- Profitability: Operating income was $38.2 million versus $19.1 million; net loss narrowed to $9.2 million from $11.1 million, or $(0.06) per share versus $(0.10). Approximate operating margin was 6.1% versus 3.3%; net margin was (1.5)% versus (1.9)%. EBITDA, a non-GAAP measure, was $127.5 million versus $102.2 million; FFO was $79.3 million versus $71.6 million.
- Cash flow and investment: Cash from operations was $85.1 million, compared with $80.5 million in 2009. Investing activities used $370.5 million, including hotel acquisitions and the Allerton loan purchase; hotel capital expenditures were $31.5 million. Financing activities provided $192.3 million, primarily reflecting $209.7 million of net common-stock proceeds.
- Liquidity and debt: Year-end unrestricted cash was $84.2 million and restricted cash was $51.9 million. Debt totaled $780.9 million, all outstanding mortgage debt at a weighted-average rate of 5.86%; 13 hotels were unencumbered and there was no corporate-level debt. The $200 million unsecured revolving facility had no borrowings at year-end and matures in August 2013, with a possible one-year extension. The company reported compliance with debt covenants; its facility leverage ratio was 38.6% against a 60% maximum.
- Fourth quarter: Revenue was $209.3 million versus $175.7 million in Q4 2009; net income was $1.9 million versus a net loss of $9.0 million. Quarterly results are unaudited.
Changes, outlook, and material items
- Management described 2010 as the beginning of a lodging recovery, citing better demand, business mix, occupancy and RevPAR, while cost-control efforts supported margins. Revenue growth also reflects acquisitions, so it should not be read as purely organic.
- DiamondRock acquired the Hilton Minneapolis, Renaissance Charleston and Hilton Garden Inn Chelsea/New York City for approximately $265 million in aggregate. It also bought the defaulted $69 million Allerton senior loan for approximately $60.6 million; the loan was on non-accrual status at year-end. The company had received about $2.7 million in default-interest payments, recorded as a reduction of the loan’s basis, and continued foreclosure proceedings.
- Management expected a continued lodging recovery in 2011, with higher-rated business travel and group demand supporting rate increases and stable occupancy, and revenue growth outpacing operating cost growth. No quantified company-wide earnings or RevPAR guidance is provided in the supplied filing text.
- A $45 million renovation and repositioning of Frenchman’s Reef is underway. The resort was damaged by Hurricane Earl, with $1.6 million of remediation costs below the named-windstorm deductible. The planned summer 2011 partial closure was expected to reduce revenue by about $14 million and EBITDA by about $5.5 million versus the comparable 2010 period. Expected company cash expenditure over two years was about $35 million; Marriott’s contribution was under a non-binding term sheet.
- In January 2011, the company agreed to acquire a Times Square hotel upon completion, expected in 2013, for approximately $112.5 million to $135 million for 250–300 rooms, potentially rising to about $178 million for up to 400 rooms subject to approvals. DiamondRock committed a $20 million deposit, with additional milestone deposits; deposits may be forfeited if the company does not close in specified circumstances. A January 2011 stock offering generated approximately $149.6 million net proceeds.
- Dividend: no dividend was paid for 2010 because the company reported no REIT taxable income. The board declared a $0.08-per-share quarterly dividend for payment in April 2011. Management stated an intent beginning in 2011 to distribute 90% of cash available for distribution, subject to board discretion and other constraints.
- Key risks include lodging cyclicality and concentrated exposure to gateway cities and resorts; new hotel supply affecting Chicago, Austin and New York; hurricane and seismic exposure; renovation execution and cost risk; reliance on Marriott and third-party managers; debt covenants and refinancing; and the Allerton foreclosure and related litigation. Separate employee claims concerning Los Angeles service-charge practices are in discovery. Management did not expect the identified litigation losses to materially affect results, but outcomes and potential losses were not determinable.
Important facts for investors to verify
- How much of 2010’s revenue, EBITDA and FFO improvement came from comparable hotels versus acquisitions, and how sustainable are the operating gains?
- Whether the Frenchman’s Reef project meets its budget and schedule, Marriott provides the anticipated support, and the expected savings and returns are realized.
- Progress and recovery prospects for the defaulted Allerton loan, including foreclosure timing, collateral value and any litigation exposure.
- Liquidity after acquisitions, capital spending, deposits and dividends; covenant headroom; and funding plans for the Times Square purchase and future debt maturities.
- Whether the 2011 recovery and dividend intentions translate into sustainable operating cash flow, particularly given seasonal results and manager-controlled hotel operations.