DiamondRock Hospitality Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. DiamondRock is a lodging REIT that owns, but does not operate, hotels. At quarter-end it owned 26 hotels with 9,461 rooms.
Financial and operating results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $220.2m | $238.5m | $689.9m | $697.2m |
| Operating profit | $41.3m | $41.4m | $123.7m | $107.0m |
| Net income | $29.9m | $24.5m | $90.9m | $59.9m |
| Diluted EPS | $0.15 | $0.12 | $0.45 | $0.30 |
| Adjusted EBITDA | $65.6m | $69.3m | $200.1m | $198.9m |
| Adjusted FFO | $52.1m | $52.3m | $158.0m | $151.5m |
Operating profit margin was approximately 18.8% in Q3 2016 versus 17.4% in Q3 2015, and 17.9% for the first nine months versus 15.3%. Q3 net income benefited from lower interest expense and gains on hotel sales; nine-month net income also benefited from the absence of prior-year impairment losses.
Comparable hotel RevPAR increased 0.7% in Q3 to $187.87, with occupancy of 84.1% and ADR of $223.34. For the first nine months, RevPAR declined 0.2% to $175.58; occupancy fell 0.6 percentage points to 80.7%, while ADR rose 0.6% to $217.54. Revenue comparisons are affected by acquisitions and dispositions; excluding non-comparable properties, revenue increased 2.7% in Q3 and 1.0% year to date.
For the first nine months, operating cash flow was $152.5m, versus $157.8m a year earlier. Capital expenditures were $78.7m, compared with $46.1m. Investing cash flow was positive $107.9m, largely reflecting $183.5m in net sale proceeds. Financing cash flow was negative $238.1m, including $249.8m of mortgage repayments and $75.6m of dividends. Cash and cash equivalents increased $22.4m to $236.0m; restricted cash was $47.7m.
Balance sheet, debt and liquidity
Total debt was $923.0m at September 30, down from $1,169.7m at December 31, 2015. The weighted-average debt interest rate was 3.72%, and weighted-average maturity was approximately 5.7 years. Debt included $823.6m of net mortgage debt and a $100m unsecured term loan; the $300m unsecured credit facility had no borrowings outstanding. The company reported a 22.1% leverage ratio and stated it was in compliance with credit and mortgage financial covenants.
Cash on hand, undrawn revolver capacity and expected operating cash flow are identified as liquidity sources. Management expected these and other potential financing or disposition proceeds to meet short-term requirements. The company expected approximately $130m of hotel capital improvements in 2016; $39.8m was held in property-improvement funds at quarter-end. Common dividends were $0.125 per share quarterly.
Material changes, outlook and risks
- DiamondRock sold the Orlando Airport Marriott, Hilton Minneapolis and Hilton Garden Inn Chelsea/New York City in June and July 2016, recognizing aggregate pre-tax gains of approximately $10.3m. The Hilton Minneapolis buyer assumed $89.5m of mortgage debt.
- The company repaid $201.7m and $48.1m of mortgage loans during the period, and refinanced part of its funding with a new $100m five-year unsecured term loan. Its revolving credit facility was amended: capacity rose to $300m, pricing declined and maturity extended to May 2020.
- The mortgage on the Lexington Hotel New York triggered a cash-trap provision in Q3. Its $170.4m loan matures in October 2017. Extension options require, among other conditions, a 13% debt yield; reported debt yield was approximately 5.7% at September 30, 2016.
- A hotel franchisor notified the company that a hotel was in default under its franchise agreement because of low guest-satisfaction scores. The franchisor had not terminated the agreement, and the mortgage lender had not called a default, but both reserved their rights. Failure to resolve the matter could have a material adverse effect.
- Management highlighted lodging seasonality and sensitivity to economic conditions, local competition, hotel supply, travel demand and interest rates. A 25-basis-point change in rates on variable-rate debt was estimated to affect annual interest expense by $0.7m. No specific full-year earnings or RevPAR guidance is provided in the filing text.
- Management reported no material change in risk factors from prior filings, no material off-balance-sheet arrangements, and no expected material adverse effect from ordinary-course litigation, while noting litigation outcomes remain uncertain.
Key facts for investors to verify
- Whether the Lexington Hotel’s operating performance improves enough to meet loan-extension conditions, and the implications of its cash trap and 2017 maturity.
- Whether the hotel with the franchise-agreement default resolves guest-satisfaction concerns and avoids franchise termination or lender action.
- Comparable-property operating trends, particularly the weak year-to-date RevPAR and the gap between GAAP earnings and adjusted EBITDA/FFO.
- Completion and funding of the planned renovations, the expected 2016 capital spending, and the continuing impact of hotel dispositions on revenue and cash flows.
- Debt refinancing costs, interest-rate exposure, dividend sustainability and the effect of ongoing share repurchases on liquidity.