Business context and reporting period
DiamondRock Hospitality Company is a lodging REIT that owns, but does not operate, premium hotels and resorts. This unaudited Form 10-Q covers the three and six months ended June 30, 2018. At quarter-end, it owned 30 hotels with 9,949 rooms; Frenchman’s Reef remained closed following 2017 hurricane damage.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $237.9m | $243.3m | $419.5m | $439.5m |
| Operating profit | $37.9m | $50.7m | $51.5m | $69.9m |
| Net income | $28.0m | $36.6m | $32.3m | $45.5m |
| Diluted EPS | $0.14 | $0.18 | $0.16 | $0.23 |
| Adjusted EBITDA | $75.8m | $77.6m | $119.3m | $124.9m |
| Adjusted FFO | $65.6m | $63.6m | $99.3m | $100.2m |
Q2 GAAP operating margin was approximately 15.9%, versus 20.8% a year earlier; net margin was approximately 11.8%, versus 15.0%. For the first half, operating margin was approximately 12.3%, versus 15.9%, and net margin was approximately 7.7%, versus 10.4%. These margins are calculated from reported figures.
Comparable hotel operating statistics improved: Q2 occupancy was 83.0% versus 84.6%, ADR was $246.67 versus $237.36, and RevPAR was $204.79 versus $200.85. For the first half, occupancy was 78.5% versus 79.0%, ADR was $230.88 versus $225.11, and RevPAR was $181.29 versus $177.82. Comparisons exclude or adjust for specified closed and acquired hotels.
Six-month operating cash flow was $68.1m, compared with $83.4m. Investing used $151.2m, including $119.5m for acquisitions and $62.4m of hotel capital expenditures, partly offset by $30.7m of insurance proceeds. Financing provided $35.4m, including $92.9m net ATM equity proceeds and $50.6m of dividends paid. Cash, cash equivalents and restricted cash totaled $176.1m at June 30, including $134.6m unrestricted cash.
Total debt, net of issuance costs, was $934.5m, down from $937.8m at year-end 2017; weighted-average interest rate was 3.99% and weighted-average maturity approximately 5.2 years. The $300m unsecured credit facility was undrawn. Leverage ratio was 25.1%, against a 60% maximum covenant; fixed-charge coverage was 4.12x against a 1.50x minimum. The filing reports $940.6m face amount of debt, of which $300m was variable-rate. A 25-basis-point rate move would change annual interest expense by approximately $0.8m. Common shares outstanding were 207.8m at June 30; the company sold 7.47m shares through its ATM program for $92.9m net proceeds in the first half.
Material changes versus prior period
- Reported revenue fell 2.2% in Q2 and 4.6% in the first half. Management attributed the declines primarily to Frenchman’s Reef being closed and Havana Cabana Key West’s hurricane-related closure and phased reopening. Excluding identified non-comparable items, revenue increased 2.3% in Q2 and 1.8% in the first half.
- GAAP net income declined in both periods. Results included $8.1m of Q2 hotel severance costs, principally a voluntary employee buyout at the Lexington Hotel New York; first-half hotel severance costs were $10.9m. First-half corporate expenses also included approximately $3.0m of severance associated with the former CFO’s departure.
- Business interruption insurance gains were $2.0m in Q2 and $8.0m in the first half, in addition to insurance expense reimbursements. Q2 Adjusted EBITDA and Adjusted FFO moved in opposite directions: Adjusted EBITDA declined, while Adjusted FFO increased.
- The company acquired the 77-room Landing Resort & Spa and 242-room Hotel Palomar Phoenix on March 1, 2018, for contractual purchase prices of $42m and $80m, respectively.
Outlook, risks and unusual items
- No full-year earnings or revenue guidance is provided. Management expects approximately $135m of hotel capital improvements in 2018; $62.4m had been spent by June 30. Planned projects include renovations at Vail, Westin Fort Lauderdale, Hotel Rex and JW Marriott Denver.
- Frenchman’s Reef was expected to remain closed through 2019. Havana Cabana Key West reopened in April 2018 after renovation; its property-damage and business-interruption insurance claim was settled in July. The Lodge at Sonoma’s smoke-damage and business-interruption claim was also settled in July.
- Management says available operating cash flow, cash balances, equity and debt financing, insurance proceeds and potential asset sales are expected to meet short-term liquidity needs. The company also reported no near-term debt maturities and 22 of 30 hotels unencumbered by mortgage debt.
- Key risks include lodging demand and competition, higher interest rates and financing availability, renovation execution and costs, natural disasters and uncertain insurance recoveries, REIT qualification, and dependence on hotel brands and key personnel. A previously reported franchise-default issue was no longer in default after guest-satisfaction scores improved, but a renewed default could lead to termination and damages. Routine litigation is disclosed; management does not expect uninsured liabilities to have a material adverse effect, while noting outcomes remain uncertain.
- The company pays a common dividend of $0.125 per share quarterly; the July 12, 2018 payment followed the quarter-end record date. It adopted new revenue-recognition and other accounting standards in 2018 without material reported impact on net income. The forthcoming lease standard is being evaluated, with ground leases expected to be the primary area affected.
Most important facts for investors to verify
- Progress, remaining costs and timing for Frenchman’s Reef restoration, its expected reopening, and the amount and timing of outstanding insurance recoveries.
- Whether comparable RevPAR and hotel-level cost trends persist, particularly given lower occupancy and increased operating expenses excluding closures and acquisitions.
- Actual 2018 capital spending versus the approximately $135m plan, and the operational effects of planned renovations and Hotel Rex’s expected closure.
- Cash generation after dividends, acquisitions and capital spending; continued ATM issuance and resulting share dilution; and the sustainability of the quarterly dividend.
- Debt covenant headroom and exposure to variable rates, including the stated $0.8m annual sensitivity to a 25-basis-point rate change.
- Insurance settlements, hurricane-related contingencies, and any renewed franchise-compliance or litigation developments.