DiamondRock Hospitality Company — Q1 2020 Form 10-Q
Business context and reporting period. DiamondRock is a lodging-focused REIT and hotel owner, reporting for the three months ended March 31, 2020, compared with Q1 2019. It owned 31 hotels with 10,102 rooms; Frenchman’s Reef remained closed following Hurricane Irma. COVID-19 materially disrupted hotel demand during the quarter.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $170.0 million | $202.4 million; down 16.0% |
| Occupancy | 59.1% | 73.2%; down 14.1 percentage points |
| ADR | $216.42 | $216.38; essentially unchanged |
| RevPAR | $127.98 | $158.30; down 19.2% |
| Net income (loss) attributable to common stockholders | $(34.6) million; $(0.17) per diluted share | $8.9 million; $0.04 per diluted share |
| Net cash from operating activities | $10.3 million | $21.9 million |
| Cash and cash equivalents at quarter-end | $387.8 million unrestricted; $434.9 million including restricted cash | Unrestricted cash was $122.5 million at December 31, 2019 |
| Total debt | $1.412 billion | $1.090 billion at December 31, 2019 |
| Adjusted EBITDA (non-GAAP) | $11.9 million | $49.2 million |
| Adjusted FFO (non-GAAP) | $8.4 million | $41.9 million |
Operating expenses were $189.5 million, exceeding revenue; the resulting loss before income taxes was $41.1 million. Interest expense rose to $21.2 million from $11.7 million, primarily because of an $11.3 million mark-to-market adjustment on interest rate swaps. The company recorded a $6.4 million income tax benefit. Q1 2019 included $8.8 million of Frenchman’s Reef business-interruption insurance income, which was not repeated.
Investing cash outflow was $39.7 million, including $19.6 million for operating-hotel capital expenditures and $29.2 million for the Frenchman’s Reef rebuild, partly offset by $10.7 million in property-insurance proceeds. Financing cash inflow was $284.5 million, principally reflecting net draws of $325 million on the senior credit facility. Debt had a 3.24% weighted-average interest rate and approximately four-year weighted-average maturity. The company had $575 million of variable-rate debt exposure; a 100-basis-point rate change was estimated to affect annual interest expense by $5.8 million.
Material changes and management outlook
- COVID-19 drove a sharp deterioration in lodging demand. Portfolio occupancy for March 2020 was 30.7%; management expected occupancy and RevPAR to fall further in Q2.
- Operations were suspended at 18 hotels in March and two more in April; all 20 remained suspended as of May 11. Management anticipated phased reopenings beginning in summer, with leisure demand recovering before business-transient and group demand. These were expectations, not assured outcomes.
- The company drew the full $400 million revolving credit facility, suspended the quarterly dividend otherwise payable in April, suspended share repurchases, reduced corporate costs, and canceled or deferred more than 70% of planned 2020 capital expenditures. Frenchman’s Reef reconstruction was paused, with construction expected to resume in 2021.
- Management reported compliance with debt covenants at March 31 but considered it probable that COVID-19’s effects would cause covenant breaches beginning in the quarter ending June 30, 2020. As of May 11, it had a lender term sheet for waivers through March 31, 2021, but no executed amendment or assurance of approval. The filing stated there was substantial doubt about the company’s ability to continue as a going concern within one year absent waivers or additional financing or property sales.
- Two property mortgage cash-trap provisions had been triggered by quarter-end; management expected additional triggers during 2020. No cash was held in those reserves at March 31.
- No hotel impairments were recorded after the March 31 review, but management warned that further deterioration in projected cash flows could result in impairment charges. Litigation was described as routine, with no expected material adverse impact, although outcomes remain uncertain.
Most important facts for investors to verify
- Whether the lender amendment and covenant waivers were executed, their final terms, and the company’s subsequent covenant compliance.
- Subsequent hotel reopening progress, occupancy, RevPAR, operating costs, and the pace of lodging-demand recovery.
- Cash use, liquidity runway, debt service, and any need for additional borrowing, equity issuance, or property sales.
- Whether the dividend remains suspended and the actual 2020 capital-spending and Frenchman’s Reef construction plans.
- Potential hotel impairment charges, mortgage cash traps, and the effects of swap valuations and variable interest rates.