Business Context and Reporting Period
Company: DiamondRock Hospitality Company (DiamondRock)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Fiscal quarter ended March 27, 2009
Business Overview: DiamondRock is a lodging-focused REIT owning 20 premium hotels and resorts (9,586 rooms) in key gateway cities and destination resorts. Properties are operated under brands owned by Marriott, Starwood, or Hilton. The company acts as an owner, receiving operating profits after paying management fees and reimbursing costs.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $118.5 million | $132.9 million |
| Operating Profit | $0.1 million | $11.7 million |
| Net (Loss) Income | $(5.3) million | $5.2 million |
| EBITDA | $18.9 million | $28.8 million |
| Funds From Operations (FFO) | $13.4 million | $21.9 million |
| Net Cash Provided by Operating Activities | $13.8 million | $19.6 million |
| Total Debt | $872.4 million | $878.4 million |
| Cash and Cash Equivalents | $14.3 million | $19.1 million |
| Stockholders' Equity | $1.01 billion | $1.02 billion |
Operational Statistics (Q1 2009 vs Q1 2008):
- Occupancy: 63.7% (down 4.8 percentage points)
- Average Daily Rate (ADR): $155.00 (down 10.4%)
- Revenue per Available Room (RevPAR): $98.80 (down 16.5%)
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 10.8% to $118.5 million, driven by a 16.5% decline in RevPAR. Room revenue fell 12.6%, and food and beverage revenue fell 8.0%.
- Profitability Shift: The company reported a net loss of $5.3 million compared to net income of $5.2 million in the prior year. Operating profit collapsed from $11.7 million to $0.1 million.
- Expense Management: Total hotel operating expenses decreased 5.5% to $95.9 million due to cost-containment measures (labor reductions, staff eliminations) and lower occupancy. Management fees dropped significantly, with incentive fees falling 85.7% due to lower operating profits.
- Depreciation: Depreciation and amortization increased 12.2% to $18.7 million due to additional assets in service.
- Capital Expenditures: Hotel capital expenditures were significantly curtailed to $7.3 million (down from $21.5 million in Q1 2008) as most properties were recently renovated.
Outlook, Guidance, and Risks
Management Commentary & Outlook:
Management expects the economic recession to continue negatively impacting lodging demand in 2009, with further declines in revenues and profits anticipated. Group and transient business are both expected to suffer from reduced corporate travel budgets and consumer spending. No specific numerical guidance for the full year was provided, but the company expects to fund approximately $10 million in capital expenditures for 2009.
Liquidity and Capital Actions:
- Equity Offering: On April 17, 2009 (post-period), the company completed a follow-on public offering of 17.8 million shares at $4.85 per share, raising approximately $82.1 million in net proceeds.
- Debt Repayment: Proceeds from the offering were used to repay the $52 million outstanding balance on the senior unsecured credit facility.
- Dividends: The company chose not to pay a Q4 2008 dividend. The next dividend is expected for stockholders of record as of December 31, 2009, intended to equal 100% of 2009 taxable income. A portion may be paid in stock.
Risks and Contingencies:
- Refinancing Risk: Two near-term mortgage maturities totaling $68 million are due in late 2009 and early 2010. While terms have been agreed upon for one property (Courtyard Manhattan/Midtown East), final funding is not guaranteed.
- Market Conditions: The credit market remains tight, making refinancing difficult. The company has eight unencumbered hotels (historic cost $790 million) available as collateral or for sale, though no attractive bids have been received to date.
Investor Verification Checklist
- Refinancing Status: Verify the final closing of the $43 million mortgage for the Courtyard Manhattan/Midtown East and the refinancing plan for the Griffin Gate Marriott ($27.7 million due Jan 2010).
- Dividend Policy: Confirm the timing and form (cash vs. stock) of the 2009 dividend distribution.
- Asset Sales: Monitor progress on the potential sale of one or more hotels to raise liquidity, as no attractive bids were received as of the filing date.
- Covenant Compliance: Review the impact of continued revenue declines on the credit facility covenants (Maximum leverage ratio currently 42.8% vs 65% limit; Fixed charge coverage 2.7x vs 1.6x minimum).
- Occupancy Trends: Track if the 16.5% RevPAR decline stabilizes or worsens in subsequent quarters given the recessionary outlook.