DiamondRock Hospitality Company — Q2 2023 Form 10-Q
Business context and reporting period
DiamondRock is a lodging-focused REIT that owns, but does not operate, premium hotels and resorts. At June 30, 2023, it reported 35 hotels with 9,617 rooms. This unaudited filing covers the quarter and six months ended June 30, 2023; interim results may be affected by seasonality.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $291.2m | $281.4m | $534.8m | $478.2m |
| Net income | $39.1m | $52.7m | $48.3m | $62.8m |
| Net income attributable to common stockholders | $36.5m | $50.1m | $43.2m | $57.6m |
| Diluted EPS | $0.17 | $0.23 | $0.20 | $0.27 |
| Adjusted EBITDA | $85.8m | $92.0m | $141.1m | $136.9m |
| Operating cash flow | Not separately stated | Not separately stated | $114.4m | $75.5m |
Q2 revenue increased 3.5%, but net income attributable to common stockholders fell 27%. For the first half, revenue rose 11.8%, while net income attributable to common stockholders declined 25%. Adjusted EBITDA is a company-defined non-GAAP measure.
Q2 occupancy was 76.7% versus 74.8%; ADR was $293.87 versus $300.12; RevPAR increased 0.4% to $225.47. For the first half, occupancy rose to 71.8% from 65.5%, ADR declined 2.3% to $286.47, and RevPAR increased 7.2% to $205.73.
First-half capital expenditures were $47.9m. Investing cash outflow was $51.3m and financing cash outflow was $34.3m. At June 30, cash and cash equivalents were $98.6m, with a further $37.5m in restricted cash. Total debt, net of issuance costs, was $1.181bn, versus $1.186bn at year-end 2022. The reported weighted-average interest rate was 4.88%.
Material changes versus the prior comparable period
- First-half revenue growth reflected stronger urban hotel occupancy, group and corporate travel, and banquet business; resort occupancy and rates softened as leisure demand normalized.
- First-half hotel operating expenses rose 16.2%, faster than revenue growth of 11.8%, reflecting higher occupancy, staffing, wages and benefits, property taxes, and insurance premiums.
- Interest expense increased to $32.7m for the first half from $13.8m, primarily due to higher rates on variable-rate debt, term loans entered into in 2022, and changes in swap fair value/accounting designation.
- First-half adjusted EBITDA increased to $141.1m from $136.9m, despite lower GAAP net income. Results include a $0.9m impairment of construction in progress in 2023; the comparable 2022 period included a $2.8m impairment of a right-to-manage intangible asset.
Outlook, risks, contingencies, and unusual items
- Management expects to spend $100m–$115m on hotel capital improvements in 2023; approximately $47.9m had been invested through June 30. Projects include renovations and hotel repositionings, some extending into 2024.
- On August 1, 2023, the company acquired Chico Hot Springs Resort for $33.0m, funded with corporate cash. It had paid $1.5m in deposits by June 30.
- A $75.3m mortgage matures in August 2024. Management expects to repay it with operating cash flow or available revolving-credit capacity. The $400m revolving facility had no borrowings at June 30; a separate $300m term loan matures in January 2025, with a potential one-year extension subject to conditions and fees.
- Of $1.2bn face-value debt, $425m was variable-rate. Management estimated a 100-basis-point rate movement would change annual interest expense by approximately $4.5m. Interest-rate swaps hedge some exposure; $4.2m of gains in accumulated other comprehensive income was expected to reduce interest expense over the next 12 months.
- Credit agreement covenant headroom was reported as substantial: actual leverage ratio 28.0% against a 60% maximum, and fixed-charge coverage 3.19x against a 1.50x minimum.
- Principal risks cited include inflation, higher interest rates, labor and operating costs, financing availability, lodging demand, competition, renovations, and natural disasters or health emergencies. Management reported no material change to previously disclosed risk factors.
- Routine litigation is ongoing; management does not expect uninsured liabilities to have a material adverse effect, but outcomes remain uncertain. No mortgage cash traps were in place at June 30. A $0.9m construction-in-progress impairment and $0.1m of business-interruption insurance income were recorded in Q2.
- The company paid common dividends of $0.03 per share in April and July and preferred dividends of $0.515625 per share in March and June. It repurchased 318,454 common shares for $2.4m in the first half; $185.3m remained under its repurchase authorization as of August 4. No full-year earnings or revenue guidance is provided in the filing text.
Most important facts for investors to verify
- Whether RevPAR and urban group/corporate demand continue to offset weaker resort performance, while expense growth remains elevated.
- Current debt pricing, swap coverage, and the refinancing or repayment plan for the August 2024 mortgage and January 2025 term loan.
- Execution, timing, and funding of the 2023 capital program and the post-quarter Chico Hot Springs acquisition.
- Whether operating cash flow can support capital needs, debt service, acquisitions, repurchases, and distributions without additional financing.
- How company-defined non-GAAP measures reconcile to GAAP results; these measures should not be treated as substitutes for GAAP earnings or cash flow.