DiamondRock Hospitality Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. DiamondRock is a lodging REIT and hotel owner; at quarter-end it owned 27 hotels with 11,123 rooms. Financial statements are unaudited.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $229.2 million | $204.3 million | $649.2 million | $598.2 million |
| Operating profit | $38.2 million | $20.9 million | $103.3 million | $53.7 million |
| Net income | $43.8 million | $8.6 million | $99.8 million | $19.5 million |
| Diluted EPS | $0.22 | $0.04 | $0.51 | $0.10 |
| Adjusted EBITDA (non-GAAP) | $66.8 million | $51.0 million | $175.0 million | $147.6 million |
| Adjusted FFO (non-GAAP) | $48.3 million | $35.9 million | $129.7 million | $105.8 million |
- Revenue increased 12.2% in Q3 and 8.5% year to date. Room revenue was the main growth driver; comparable-property RevPAR rose 18.6% in Q3 and 13.2% year to date, supported by higher occupancy and ADR.
- Reported earnings include substantial unusual gains, notably a $23.9 million acquisition gain on Hilton Garden Inn Times Square Central, a $13.6 million gain from the Allerton loan prepayment, and an $11.0 million net litigation-settlement gain in the nine-month period. The Q3 acquisition gain was a major contributor to reported net income.
- For the nine months, cash provided by operations was $115.6 million; investing activities used $112.7 million and financing activities used $28.5 million. Cash and cash equivalents fell $25.5 million from year-end to $119.1 million.
- At September 30, total debt was $1.125 billion, primarily mortgage debt, with a 4.97% weighted-average interest rate. The company had $170.4 million of variable-rate debt and no borrowings on its $200 million unsecured credit facility. Restricted cash was $98.4 million.
- Credit-facility covenant measures were within stated limits: leverage ratio 39.5% versus a 60% maximum and fixed-charge coverage 2.7x versus a 1.50x minimum. The company reported compliance with mortgage covenants.
Material changes and transactions
- Acquired the 106-room Inn at Key West for $47.5 million and the 282-room Hilton Garden Inn Times Square Central for a contractual $127.2 million; both acquisitions were funded with corporate cash.
- Sold Oak Brook Hills Resort for $30.1 million, including $4.0 million of seller financing, recording a net gain of approximately $1.3 million. Management recorded a full $4.0 million valuation allowance on the unsecured, subordinated seller note because full collection was considered remote.
- Received $58.5 million on prepayment of the Allerton Hotel mortgage loan and recognized a $13.6 million gain.
- Refinanced the Courtyard Manhattan/Midtown East mortgage: a new $86 million fixed-rate loan at 4.40%, maturing in 2024, replaced a $41.3 million loan bearing 8.81%.
- After quarter-end, amended the Lexington Hotel New York loan, reducing its initial spread to LIBOR plus 275 basis points and extending maturity to October 2017. The loan had a cash trap still in effect; the lender held approximately $16.1 million at quarter-end.
- After quarter-end, a hotel with a carrying value of approximately $97.1 million met held-for-sale criteria under a sale agreement expected to close in Q4 2014, subject to closing conditions. The property has $82.6 million of mortgage debt; management did not expect a sale loss.
Outlook, risks, and other items
- The filing provides no specific company earnings or RevPAR guidance. Management said industry occupancy was expected to exceed prior peak levels in 2014 and new supply to remain below historical averages. It cited renovation investments, the Lexington’s Autograph Collection branding, group booking pace, the new Times Square hotel, and asset-management initiatives as expected contributors to performance.
- Management expected available cash flows, existing cash, and, if needed, credit-facility borrowings to cover short-term needs. Planned 2014 capital improvements were approximately $95 million; $56.1 million had been spent in the first nine months.
- Mortgage maturities were approximately $230 million in 2015 and $305 million in 2016. Management expected to address them through refinancing, unencumbered-property borrowing capacity, asset sales, the credit facility, and operating cash flow.
- Key exposures include cyclical hotel demand, operating-cost pressures, seasonality, and interest rates. Management estimated that a 25-basis-point change in rates on variable-rate debt would change annual interest expense by approximately $0.4 million. The filing reported no material change to previously disclosed risk factors.
- The company reported routine litigation and said it did not expect aggregate liabilities beyond insurance coverage to materially harm financial condition or results, while noting litigation outcomes remain uncertain. Disclosure controls were reported effective.
Important facts for investors to verify
- How much reported earnings growth reflects recurring hotel operations versus the acquisition, loan-prepayment, and settlement gains; review the company’s non-GAAP reconciliations and definitions.
- Comparable-property operating trends, including RevPAR growth, and the contribution from newly acquired/opened hotels versus portfolio-wide improvement.
- Refinancing plans and terms for the 2015–2016 maturities, and whether the Lexington cash trap is released.
- Cash generation and funding needs relative to planned capital spending, dividends, and acquisitions; distinguish unrestricted from restricted cash.
- Closing and final economics of the announced hotel sale, and collectability of the Oak Brook Hills seller-financing note.