Business context and reporting period
DiamondRock Hospitality Company is a lodging-focused REIT that owns hotels and resorts rather than operating them directly. At March 31, 2013, it owned 27 hotels with 11,590 rooms, held a senior mortgage loan secured by another hotel, and had a right to acquire a hotel under development. This unaudited Form 10-Q covers the quarter ended March 31, 2013.
Comparability caveat: Beginning in 2013, the company changed to calendar-quarter reporting. The prior-year reported quarter ended March 23 and included different operating periods for Marriott- and non-Marriott-managed hotels; the filing says reported quarterly results are not directly comparable. For selected comparisons, management presents 2012 “As Adjusted” results that include March operations for certain hotels.
Financial and operating performance
| Metric | Q1 2013 | Prior period / context |
|---|---|---|
| Total revenue | $181.3 million | $147.0 million, 2012 As Adjusted; up 23.3%. Excluding five 2012 acquisitions, revenue rose 8.6%. |
| Hotel operating statistics | Occupancy 70.6%; ADR $169.15; RevPAR $119.40 | 2012 As Adjusted: occupancy 72.0%, ADR $162.67, RevPAR $117.09. RevPAR increased 2.0%. |
| Operating profit (loss) | $2.0 million | $(4.7) million as reported in 2012; periods and hotel coverage differ. |
| Net income (loss) | $(4.1) million; $(0.02) per diluted share | $2.6 million; $0.02 per diluted share in 2012, including $12.7 million of discontinued-operations income, largely from a hotel sale. |
| Adjusted EBITDA | $34.3 million | $23.4 million in the reported 2012 quarter; includes adjustments described by the company. |
| FFO / Adjusted FFO | $22.7 million / $26.8 million | $13.1 million / $15.1 million in the reported 2012 quarter. |
| Operating cash flow | $18.2 million | $1.7 million in the reported 2012 quarter. |
| Debt and cash | Total debt $1.078 billion; unrestricted cash $77.4 million; restricted cash $90.1 million | Debt was $988.7 million and cash and cash equivalents $9.6 million at December 31, 2012. Weighted-average debt interest rate was 5.21%. |
Revenue growth reflected both acquisitions and stronger comparable-hotel results. RevPAR gains were driven by 4.0% higher ADR, partly offset by a 1.4 percentage-point decline in occupancy; management attributed the occupancy decline to renovations at three New York hotels, and said occupancy excluding displaced rooms rose 1.3 percentage points. Comparable-hotel operating expenses increased, primarily from higher wages and benefits, repairs and maintenance, and administrative costs.
Liquidity, debt, and capital spending
Quarter-end debt comprised $1.068 billion of mortgage debt and $10 million drawn on a $200 million unsecured credit facility. The company reported $190 million of facility capacity at quarter-end and repaid the $10 million outstanding after March 31. It said it was in compliance with mortgage and facility financial covenants; the facility’s reported leverage ratio was 42.4% against a 60% maximum, and fixed-charge coverage was 2.63x against a 1.50x minimum. Thirteen of 27 hotels were unencumbered by mortgage debt. Management expected available cash, hotel operating cash flow and, if needed, credit-facility borrowings to cover short-term needs.
Investing cash outflow was $21.6 million, including $13.9 million of hotel capital expenditures and funding of a lender-held improvement reserve. Financing cash inflow was $71.1 million, including $102 million of new mortgage proceeds, partly offset by debt repayments and $15.7 million of cash dividends. The company planned approximately $140 million of capital improvements during 2013, including a roughly $45 million Lexington Hotel New York renovation. The quarterly cash-flow statement reports a $67.8 million increase in cash and cash equivalents.
Most debt was fixed-rate; $180.4 million was variable-rate. Management estimated that a 25-basis-point move in rates would change annual interest expense by approximately $0.5 million. The company uses an interest-rate cap for variable-rate debt associated with the Lexington Hotel.
Material developments, outlook, and risks
- Allerton mortgage loan: A bankruptcy and litigation settlement closed in January 2013. DiamondRock received $5 million of principal and restructured the loan into a new $66 million, four-year mortgage bearing 5.5% interest, with a one-year extension option. The loan returned to accrual status; the company recorded $1.3 million of interest income in the quarter and reported no impairment.
- New financing: The company raised $102 million through 10-year, fixed-rate mortgages on The Lodge at Sonoma and the Westin San Diego at 3.96% and 3.94%, respectively.
- Unusual expense and leadership change: The COO’s retirement, effective May 1, 2013, resulted in approximately $3.1 million of first-quarter severance expense. A successor joined in April and became COO in May.
- Management agreements: Oak Brook Hills Marriott, Orlando Airport Marriott, and Hilton Garden Inn Chelsea/New York City failed performance tests at the end of 2012. DiamondRock gave Oak Brook Hills’ manager notice of termination and was discussing timing; it reduced the Chelsea hotel’s base management fee to 2% of gross revenue for the remaining term; and it elected to take no action on Orlando Airport Marriott.
- Outlook and risks: Management expected operating cash flow to be the principal source of cash for the remainder of 2013 and expected cash resources to cover planned uses. Hotel performance is exposed to economic and local-market conditions, travel demand, competition, new supply, brand performance, seasonality, and interest-rate movements. Renovations may disrupt room availability. No formal earnings guidance is stated in the filing.
- The company reported no material litigation, no material off-balance-sheet arrangements, and no new risk factors in this filing. It cautioned that interim results may not indicate full-year performance.
Important facts for investors to verify
- Assess year-over-year trends using the filing’s adjusted comparison and property-level data, not the reported-quarter totals alone, given the reporting-calendar change.
- Track renovation costs, timing, room displacement, and whether the planned 2013 capital program is funded as expected.
- Monitor comparable-hotel revenue and expenses, particularly the balance between ADR growth, occupancy, and labor and other cost increases.
- Verify the Allerton loan’s cash collections and collateral value, and follow progress on Oak Brook Hills’ management termination discussions.
- Review debt maturities, variable-rate exposure, covenant headroom, and dividend capacity alongside operating cash flow and restricted cash balances.