DiamondRock Hospitality Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. DiamondRock is a lodging REIT that owned 31 hotels with 10,102 rooms at quarter-end; Frenchman’s Reef remained closed following Hurricane Irma damage.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $50.1 million | $240.3 million | $240.4 million | $700.6 million |
| Net income (loss) | $(79.6) million | $11.6 million | $(187.7) million | $49.6 million |
| Net income (loss) attributable to common stockholders | $(80.4) million | $11.5 million | $(187.8) million | $49.4 million |
| Basic and diluted EPS | $(0.40) | $0.06 | $(0.93) | $0.24 |
| RevPAR | $37.55 | $197.14 | $60.09 | $187.96 |
For Q3, occupancy was 18.6% versus 82.7% a year earlier; ADR was $201.82 versus $238.50. For the nine-month period, occupancy was 28.7% versus 79.7%, and ADR was $209.23 versus $235.89. The filing does not provide a single headline operating-margin figure.
- Cash flow: Nine-month operating cash flow was $(54.7) million, investing cash flow $(69.2) million, and financing cash flow $86.1 million. Cash, cash equivalents and restricted cash totaled $142.0 million at September 30, including $110.6 million unrestricted cash.
- Debt and liquidity: Total debt was $1.10 billion, with a weighted-average interest rate of 3.84%. The company reported $300.0 million of available capacity on its $400 million revolving facility. Minimum liquidity under amended credit agreements is $100 million during the specified relief/restriction periods.
- Balance sheet: Total assets were $3.35 billion and total equity was $1.84 billion at September 30. Debt increased from $1.09 billion at December 31, 2019.
Material changes versus the prior comparable period
- Q3 revenue fell 79.2% and nine-month revenue fell 65.7%, reflecting COVID-19 travel disruption, hotel closures and sharply lower demand. Nine-month RevPAR declined 68.0%.
- Hotel operating expenses fell 56.6% in Q3 and 44.4% for the nine-month period, less than the revenue decline. Nine-month interest expense rose to $43.7 million from $38.3 million, largely reflecting interest-rate-swap fair-value changes.
- Nine-month operating cash flow moved from $135.7 million provided in 2019 to $54.7 million used in 2020.
- The company issued 4.76 million Series A preferred shares in August and September, raising $114.5 million net. It suspended the common dividend beginning with the payment otherwise due in April; it paid a $0.178-per-share preferred dividend in September.
Outlook, management commentary and risks
- Management expected COVID-19 to continue materially affecting operations, financial position and cash flow into 2021. It reported faster recovery at leisure-focused hotels than urban properties, but demand remained sensitive to infection levels, consumer confidence and government guidance.
- The company did not provide numerical earnings guidance. It expected no meaningful net operating cash flow from hotels for the remainder of 2020 and did not expect a common dividend through year-end.
- Management said existing cash and revolving-facility capacity were expected to cover short-term liquidity needs, and concluded as of November 6, 2020 that substantial doubt about going concern over the next 12 months did not exist.
- Credit amendments waived quarterly tested financial covenants through Q1 2021 and imposed restrictions, including minimum liquidity requirements and limits on dividends, repurchases, debt and certain spending. The company cautioned it might not meet future covenants or obtain further waivers.
- All but one mortgage loan had triggered cash-trap provisions at September 30; management did not expect these to impair short-term liquidity. The Salt Lake City mortgage was refinanced, replacing a $52.5 million loan with a $48 million loan maturing in January 2022, with a conditional extension option.
- The company paused Frenchman’s Reef reconstruction and canceled or deferred over 65% of planned 2020 capital expenditures; it expected approximately $50 million of capital improvements at operating hotels in 2020. It recorded $7.8 million of nine-month hotel severance costs and a $12.4 million deferred-tax valuation allowance in Q3. No hotel-property impairment was recorded, but management noted future impairment remained possible.
- Other notable exposure includes $323 million of variable-rate debt; a 100-basis-point rate change would affect annual interest expense by approximately $3.2 million. Management also identified uncertainty from the planned LIBOR transition. Routine litigation was not expected to have a material adverse effect, though outcomes remain uncertain.
Important facts for investors to verify
- Hotel reopening progress, occupancy, ADR and RevPAR trends, especially at urban properties; three previously operating hotels remained closed at September 30, while 27 of 30 were open as of November 6.
- Cash burn, unrestricted liquidity, compliance with minimum-liquidity terms and the company’s ability to meet covenants after relief periods end.
- Common-dividend reinstatement conditions, preferred-dividend obligations and any financing-agreement restrictions on distributions.
- Frenchman’s Reef reconstruction timing, remaining capital needs and potential impairment exposure.
- Whether COVID-19 demand recovery, capital spending and refinancing assumptions align with management’s stated outlook.