DiamondRock Hospitality Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. DiamondRock is a lodging REIT and hotel owner, not a hotel operator; third-party managers run its properties. At year-end it owned 31 hotels with 10,091 rooms across 21 markets. Frenchman’s Reef remained closed after 2017 hurricane damage.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $863.7 million | $870.0 million | Down 0.7% |
| Operating income | $130.1 million | $139.8 million | Down approximately 7% |
| Net income attributable to common stockholders | $87.8 million | $91.9 million | Down 4.5% |
| Diluted EPS | $0.43 | $0.46 | Down 6.5% |
| Adjusted EBITDA | $254.1 million | $250.0 million | Up 1.6% |
| FFO | $192.3 million | $194.6 million | Down 1.2% |
| Adjusted FFO | $210.0 million | $201.0 million | Up 4.5% |
| Cash from operations | $219.3 million | $202.0 million | Up 8.6% |
GAAP operating margin was approximately 15.1%, versus 16.1% in 2017; net margin was approximately 10.2%, versus 10.6%. Adjusted EBITDA and Adjusted FFO are non-GAAP measures and should be considered alongside GAAP results.
On the company’s comparable-property basis, occupancy was 79.1% (down 1.0 percentage point), ADR was $234.40 (up 2.5%), and RevPAR was $185.51 (up 1.3%). Excluding non-comparable property and ownership-period effects, revenue increased 1.6%. Fourth-quarter revenue was $223.4 million versus $207.0 million in Q4 2017; net income was $24.0 million versus $24.8 million, and diluted EPS was $0.12 in both periods.
Cash and liquidity at year-end included $43.9 million unrestricted cash and $47.7 million restricted cash. The company reported $978.0 million of debt, with a 4.01% weighted-average interest rate and approximately 5.5-year weighted-average maturity; the debt table gives face principal of $983.8 million. It had no borrowings on its $300 million unsecured credit facility at year-end, but borrowed $45 million after year-end. Twenty-three of 31 hotels were unencumbered by mortgage debt. The company paid $102.7 million in cash dividends and declared $0.50 per common share for 2018.
Changes, transactions, and unusual items
- Acquired The Landing Resort & Spa and Hotel Palomar Phoenix in March for contractual prices of $42 million and $80 million, respectively, and Cavallo Point in December for $152 million.
- Revenue declined slightly despite acquisitions, chiefly reflecting the full-year closure of Frenchman’s Reef. Comparable RevPAR grew modestly, with occupancy lower and room rates higher.
- Hotel operating expenses rose 3.1% to $621.7 million. The year included $10.9 million of severance costs tied to a voluntary unionized-employee buyout at the Lexington Hotel New York; hotel operating costs also reflected acquisitions and other non-comparable items.
- Recognized $19.4 million of business-interruption insurance income and a $1.7 million gain on the Havana Cabana property-damage settlement. Received $85 million of Frenchman’s Reef insurance proceeds during 2018; the claim remains unresolved.
- Spent $115.2 million on capital improvements. Repurchased 3.38 million shares for $32.2 million at an average $9.49 per share; issued 7.47 million shares under the prior ATM program for $92.9 million net proceeds.
Outlook, risks, and contingencies
Management expected RevPAR growth to decelerate in 2019 and anticipated rising labor costs. It cited hotel supply growth of 2.9% for the top 25 urban markets, with projected growth of 7.5% in New York City and 4.8% in Boston. Management expected resort properties to outperform the broader U.S. market, less renovation disruption, and continued cost-control and asset-management efforts. Planned 2019 capital improvements were approximately $125 million. No numerical company-wide 2019 RevPAR or earnings guidance is provided in the supplied filing text.
- Frenchman’s Reef: Reopening was expected in 2020, but the company had not agreed with insurers on the scope or total cost of redevelopment. The company sued insurers in the U.S. Virgin Islands over coverage; insurers filed a related declaratory action in New York. Recovery may not cover all rebuilding costs, and construction faces delay and cost-overrun risks.
- Insurance and weather exposure: Hurricane, earthquake, wildfire, climate, and other casualty risks may cause business interruption or losses beyond coverage; deductibles for named storms and earthquakes at specified properties are 5% of total insured value.
- Operating and market risks: Hotel results are cyclical and seasonal; competition, alternative lodging, new room supply, labor costs, and dependence on third-party managers and major brands can pressure occupancy, rates, and margins. A 2018 strike affected the Westin Boston Waterfront.
- Franchise contingency: One hotel remained in default under a franchise agreement due to guest-satisfaction scores. The franchisor had not terminated the agreement, but could seek termination and liquidated damages.
- Debt and capital: $350 million of debt was variable-rate at year-end; a 100-basis-point rate change was estimated to affect annual interest expense by about $3.5 million. A January 2019 swap fixed the rate on the $50 million term loan. Debt covenants, cash-trap provisions, refinancing needs, and substantial renovation commitments could constrain liquidity or distributions.
- Other considerations: REIT qualification depends on complex tax rules; the operating partnership began being treated as a partnership for tax purposes in September 2018. Adoption of the new lease standard was expected to increase assets and liabilities by an estimated $95–$125 million, before specified existing lease adjustments, without a material expected effect on operations, cash flows, or liquidity.
Important facts for investors to verify
- Progress, cost estimates, insurer negotiations, litigation, and timing of the Frenchman’s Reef reconstruction and reopening.
- Underlying hotel performance excluding acquisitions, closures, renovation downtime, and insurance income; reconcile comparable RevPAR figures to reported revenue.
- Debt principal and maturity schedule, variable-rate exposure, the post-year-end $45 million facility borrowing, and covenant headroom.
- Whether 2019 cost inflation, urban-market supply growth, and planned capital spending affect margins, cash available for dividends, or renovation returns.
- Status and potential financial impact of the unresolved franchise default and any other material manager or brand disputes.
- Execution and funding of the $125 million planned 2019 capital program, share repurchases, and the continued sustainability of the $0.50 annual dividend.