DiamondRock Hospitality Company — Form 10-Q Summary
Business context and reporting period. DiamondRock is a lodging REIT that owns premium hotels and resorts and a senior mortgage loan secured by another hotel. At September 9, 2011, it owned 26 hotels with 11,828 rooms. The quarter ended September 9, 2011; year-to-date results cover January 1 through September 9, 2011. Hotel managers use differing reporting calendars, so reported quarter comparisons may not align perfectly by hotel.
Financial performance
| Metric | Fiscal quarter | Year to date |
|---|---|---|
| Revenue | $179.0 million, up 18.5% from $151.1 million | $470.8 million, up 13.4% from $415.1 million |
| Operating profit | $14.4 million, versus $6.8 million | $24.7 million, versus $19.6 million |
| Net loss | $1.0 million, versus $3.5 million; loss per share $0.01 versus $0.02 | $12.6 million, versus $11.0 million; loss per share $0.08 in both periods |
| EBITDA (non-GAAP) | $38.2 million, versus $28.3 million | $92.1 million, versus $79.5 million |
| FFO (non-GAAP) | $22.8 million, versus $17.8 million | $54.2 million, versus $48.2 million |
| Operating cash flow | Not separately provided for the quarter | $43.3 million, versus $42.5 million |
Quarterly operating margin was approximately 8.0%, versus 4.5% a year earlier; year-to-date operating margin was approximately 5.2%, versus 4.7%. The company remained loss-making under GAAP. Quarterly income tax expense of $1.8 million contributed to the net loss despite positive pretax income.
On a pro forma comparable hotel basis, quarterly RevPAR rose 6.3% to $126.40, with occupancy up 3.0 percentage points to 80.0% and ADR up 2.3% to $157.93. Year-to-date RevPAR increased 4.8% to $115.95, with occupancy of 73.9% and ADR of $156.98. Management attributed growth primarily to improved pricing and a greater mix of higher-rated business transient guests.
Financial position, liquidity and capital allocation
At September 9, 2011, total assets were $2.84 billion and stockholders’ equity was $1.51 billion. Total debt was $1.076 billion, up from $780.9 million at December 31, 2010. Debt comprised $945.9 million of mortgage debt and $130.0 million drawn on the unsecured credit facility. The weighted-average interest rate was 5.54%, and weighted-average debt maturity was approximately 4.6 years. Most mortgage debt is fixed-rate; the credit facility is floating-rate at 3.22% on the reporting date. A 1 percentage-point change in rates on variable-rate debt would change annual interest expense by approximately $1.3 million.
Unrestricted cash was $28.8 million, compared with $84.2 million at year-end; restricted cash was $65.6 million. Year-to-date investing cash outflow was $438.9 million, principally for hotel acquisitions and capital spending. Financing cash inflow was $340.2 million, including $149.7 million net proceeds from a share offering, a $100 million Hilton Minneapolis mortgage loan and $130 million of credit-facility borrowings. Cash dividends paid were $26.9 million. The company declared dividends of $0.08 per share in each of the first three quarters.
The amended $200 million credit facility matures in August 2014, with a possible one-year extension and potential increase to $400 million subject to lender approval. The company reported covenant compliance: leverage ratio 45.9% against a 60% maximum; fixed-charge coverage 2.1x against a 1.50x minimum; and tangible net worth $1.97 billion against a $1.8 billion minimum. Its net indebtedness-to-EBITDA ratio was 5.9x. Twelve hotels were unencumbered by debt.
Material changes and unusual items
- Revenue growth included contributions from prior-period and 2011 acquisitions, notably the Radisson Lexington ($336.8 million purchase price), JW Marriott Denver at Cherry Creek ($74.2 million), and Courtyard Denver Downtown ($46.2 million). The company completed a $149.7 million net-proceeds equity offering during the first quarter.
- Frenchman’s Reef was partially closed for an extensive renovation, materially reducing its reported revenue. The resort reopened substantially all guestrooms and public areas in October 2011. The company said it had substantially completed the 2011 portion of a $45 million renovation program.
- Quarterly results included a $1.7 million accrual for a tentative settlement of employee litigation at the Los Angeles Airport Marriott, subject to court approval. Corporate expenses also included approximately $1.2 million of Allerton Hotel bankruptcy-related legal fees year to date.
- The Allerton senior mortgage loan is in default and non-accrual; the borrower filed for bankruptcy in May 2011. The loan’s principal balance was $69.0 million, with $3.2 million of unrecorded accrued interest. Its carrying value was $56.2 million and disclosed fair value was $40.5 million; management reported no impairment. Subsequent to quarter-end, the borrower agreed to pay default interest through December 2011, and DiamondRock agreed to fund first-quarter 2012 cash shortfalls up to $800,000, treated as additional principal.
- DiamondRock agreed to sell three hotels for $262.5 million, with expected net cash proceeds of approximately $80 million and transfer of $180 million of mortgage debt. Closing was expected in the fourth quarter, subject to conditions including lender consents; management estimated a gain of $5 million to $6 million. The sale had not closed at the reporting date.
- After the Conrad Chicago failed its management-agreement performance test, DiamondRock amended the agreement in October 2011 to include a performance guarantee through 2015; the previously accrued $1.0 million key-money repayment was reversed. Management also expected to invest $3.5 million in meeting space, food-and-beverage outlets and the lobby.
Outlook, risks and contingencies
Management said available operating cash flow, cash balances and, if needed, credit-facility borrowings were expected to meet short-term liquidity needs. It estimated approximately $65 million of 2011 capital improvements, with about $40 million funded from corporate cash and the remainder from property reserves; $35.4 million had been spent through September 9. No specific earnings or revenue guidance was provided.
Key risks include hotel demand and operating performance, seasonality, competitive limits on room-rate increases, renovation disruption, floating-rate exposure, debt covenants and restricted or lender-trapped cash. Management noted that Orlando Airport Marriott and Oak Brook Hills Marriott Resort were likely to fail management-agreement performance termination tests, subject to managers’ rights to cure. The Courtyard Denver Downtown mortgage matures August 5, 2012. Management reported no material change to the risk factors in its 2010 Form 10-K and stated disclosure controls were effective.
Key facts investors should verify
- Whether the three-hotel portfolio sale closed, its realized proceeds and gain, and the resulting debt reduction.
- Progress and final costs of the Frenchman’s Reef renovation, and the pace of operational recovery after reopening.
- Developments in the Allerton bankruptcy, collateral recovery prospects, and any additional funding required under the post-quarter-end agreement.
- Credit-facility headroom and covenant compliance as leverage, hotel valuations and operating results change; also the 2012 Courtyard Denver Downtown mortgage maturity and refinancing plan.
- Whether comparable-hotel RevPAR and margins continue to improve after separating acquisition effects and renovation disruption.