DiamondRock Hospitality Company Reports Second Quarter 2014 Results And Raises Full Year Guidance

BETHESDA, Md., Aug. 8, 2014 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") DRH, a lodging-focused real estate investment trust that owns a portfolio of 25 premium hotels in the United States, today announced results of operations for the quarter ended June 30, 2014.

Highlights

• Pro Forma RevPAR: Pro Forma RevPAR was $169.21, an increase of 11.9% from 2013.
• Pro Forma Hotel Adjusted EBITDA Margin: Pro Forma Hotel Adjusted EBITDA margin was 32.53%, an increase of 243 basis points from 2013.
• Pro Forma Hotel Adjusted EBITDA: Pro Forma Hotel Adjusted EBITDA was $74.7 million, an increase of 17.3% from 2013.
• Adjusted EBITDA: Adjusted EBITDA was $70.9 million, an increase of 13.6% from 2013.
• Adjusted FFO: Adjusted FFO was $51.9 million and Adjusted FFO per diluted share was $0.26.
• Dividends: The Company declared a quarterly dividend of $0.1025 per share during the second quarter.

Recent Developments

• Allerton Prepayment: The $58.5 million senior mortgage loan secured by the Allerton Hotel Chicago was prepaid at par during the second quarter.
• Litigation Settlement: The Company settled a litigation claim against certain contractors involved with the original construction of the Westin Boston Waterfront Hotel, which resulted in a net gain of $11.0 million during the second quarter.
• Hotel Refinancing: The Company refinanced the Courtyard Manhattan/Midtown East in July 2014 with a new $86.0 million mortgage bearing interest at 4.4%.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "Our strong second quarter results reflect the initial impact of our significant investments to reposition DiamondRock's portfolio of the past year. Additionally, the combination of our successful internal initiatives to drive performance and an extended lodging recovery enable us to raise our full year guidance.  The Company will benefit from the forthcoming acquisition of the Hilton Garden Inn Times Square Central and recent actions taken to lower our cost of capital. As we continue to execute on our strategy, strengthen our portfolio, and reap the benefits of completed renovations, we remain confident in our ability to deliver growth and strong shareholder returns across the full lodging cycle."

Operating Results     

Please see "Certain Definitions" and "Non-GAAP Financial Measures" attached to this press release for an explanation of the terms "EBITDA," "Adjusted EBITDA," "Hotel Adjusted EBITDA Margin," "FFO" and "Adjusted FFO." Discussions of "Pro Forma" exclude the Oak Brook Hills Resort, which was sold in April 2014.

For the quarter ended June 30, 2014, the Company reported the following:

 

For the six months ended June 30, 2014, the Company reported the following:

 

Hilton Garden Inn Times Square Update

The Company is under contract to purchase the 282-room hotel being constructed in Times Square for a fixed price of approximately $127 million, or $450,000 per key. The hotel will be branded a Hilton Garden Inn and be operated by Highgate Hotels, the largest operator of hotels in New York City.  The balance of the acquisition price, which is approximately $100 million, is expected to be with corporate cash on hand.  The Company currently expects the hotel to open during September and continues to expect the hotel to generate approximately $5.0 million of Hotel Adjusted EBITDA during 2014.

Courtyard Manhattan/Midtown East Refinancing

In July 2014, the Company entered into a new $86 million mortgage loan secured by the Courtyard Manhattan/Midtown East.  The new loan has a term of 10 years and bears interest at a fixed rate of 4.4%. The new loan is interest-only for the first two years after which principal will amortize over 30 years. The hotel was previously encumbered by a $41.3 million mortgage loan bearing interest at 8.81%.

Sale of Oak Brook Hills Resort        

As disclosed in its previous earnings announcement, the Company sold the 386-room Oak Brook Hills Resort to an unaffiliated third party for $30.1 million on April 14, 2014. In connection with the sale, the Company provided $4 million of seller financing.  The Company recognized a net gain on the sale of the hotel of approximately $1.3 million, which is excluded from Adjusted EBITDA and Adjusted FFO.

Allerton Loan Prepayment

The $58.5 million senior mortgage loan secured by the Allerton Hotel Chicago was prepaid at par on May 21, 2014.  In connection with the prepayment, the Company recognized a gain of $13.6 million, which is excluded from Adjusted EBITDA and Adjusted FFO.

Westin Boston Waterfront Hotel Litigation Settlement

In May 2014, the Company settled a legal action alleging certain issues related to the original construction of the Westin Boston Waterfront Hotel with the contractors and their insurers for $14.0 million in full and complete satisfaction of its claims against the contractors.  The settlement resulted in a net gain of $11.0 million, which is excluded from Adjusted EBITDA and Adjusted FFO. The Company recorded the settlement net of a $1.2 million contingency fee paid to legal counsel and $1.8 million of legal fees and other costs incurred over the course of the legal proceedings. The $1.8 million of legal fees and other costs were previously recorded as corporate expenses and the repayment of those costs through the settlement proceeds is recorded as a reduction of corporate expenses during the three months ended June 30, 2014.

Capital Expenditures

The Company has spent approximately $40.4 million on capital improvements during the six months ended June 30, 2014. The majority of the capital improvements related to the substantial completion of the Company's $140 million capital improvement program, which included the comprehensive renovations of the Westin Washington D.C. City Center, Westin San Diego, Hilton Boston and Hilton Burlington, as well as the guest room renovation at the Hilton Minneapolis.

The Company continues to expect to spend approximately $95 million on capital improvements at its hotels in 2014, of which approximately $45 million relates to the completion of the $140 million capital improvement program and approximately $50 million relates to new 2014 capital projects. The Company does not expect any material disruption from capital projects in 2014.

Balance Sheet

As of June 30, 2014, the Company had $253.9 million of unrestricted cash on hand and approximately $1.1 billion of total debt, which consists primarily of property-specific mortgage debt as well as $41.3 million outstanding borrowings under the Company's $200 million senior unsecured credit facility.  As of today, the Company has over $240 million of unrestricted cash on hand and no outstanding borrowings under its senior unsecured credit facility.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.1025 per share to stockholders of record as of June 30, 2014.  The dividend was paid on July 10, 2014.

Outlook and Guidance

The Company is providing annual guidance for 2014, but does not undertake to update it for any developments in its business.  Achievement of the anticipated results is subject to the risks disclosed in the Company's filings with the U.S. Securities and Exchange Commission.  The Company's outlook assumes the Hilton Garden Inn Times Square Central opens in September 2014.  The 2014 Pro Forma RevPAR growth excludes the Hilton Garden Inn Times Square Central, which is expected to positively impact the Company's RevPAR by approximately 75 basis points.

The Company is increasing its full year 2014 guidance to incorporate its second quarter outperformance.  The Company now expects the full year 2014 results to be as follows:

 

The Company expects approximately 26% of full year 2014 Adjusted EBITDA and Adjusted FFO to be earned during the third quarter 2014.

The midpoint of the guidance range above implies Hotel Adjusted EBITDA margin growth of over 265 basis points.  The Company also increased its Pro Forma RevPAR growth outlook excluding the New York City hotels under renovation during 2013 to 6 percent to 8 percent.

Earnings Call

The Company will host a conference call to discuss its second quarter results on Friday, August 8, 2014, at 10:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 866-318-8613 (for domestic callers) or 617-399-5132 (for international callers).  The participant passcode is 15358818. A live webcast of the call will be available via the investor relations section of DiamondRock Hospitality Company's website at www.drhc.com or www.earnings.com. A replay of the webcast will also be archived on the website for thirty days.

About the Company

DiamondRock Hospitality Company is a self-advised real estate investment trust (REIT) that is an owner of a leading portfolio of geographically diversified hotels concentrated in top gateway markets and destination resort locations.  The Company owns 25 premium quality hotels with over 10,700 rooms. The Company has strategically positioned its hotels to generally be operated under the leading global brands such as Hilton, Marriott, and Westin. For further information on the Company and its portfolio, please visit DiamondRock Hospitality Company's website at www.drhc.com.

This press release contains forward-looking statements within the meaning of federal securities laws and regulations. These forward-looking statements are identified by their use of terms and phrases such as "believe," "expect," "intend," "project," "forecast," "plan" and other similar terms and phrases, including references to assumptions and forecasts of future results.  Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially from those anticipated at the time the forward-looking statements are made.  These risks include, but are not limited to: national and local economic and business conditions, including the potential for additional terrorist attacks, that will affect occupancy rates at the Company's hotels and the demand for hotel products and services; operating risks associated with the hotel business; risks associated with the level of the Company's indebtedness; relationships with property managers; the ability to compete effectively in areas such as access, location, quality of accommodations and room rate structures; changes in travel patterns, taxes and government regulations which influence or determine wages, prices, construction procedures and costs; risks associated with the development of a hotel by a third-party developer; and other risk factors contained in the Company's filings with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this release is as of the date of this release, and the Company undertakes no obligation to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

 

⁽¹⁾ Includes $39.4 million of deferred tax assets, $26.9 million of purchase deposits on the Hilton Garden Inn Times Square, $9.8 million of prepaid expenses and $7.5 million of other assets as of June 30, 2014.
⁽²⁾ Includes $61.9 million of deferred ground rent, $8.3 million of deferred tax liabilities, $9.7 million of accrued property taxes, $5.2 million of accrued capital expenditures and $11.5 million of other accrued liabilities as of June 30, 2014.

 

 

Non-GAAP Financial Measures

We use the following non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.  EBITDA, Adjusted EBITDA, FFO and Adjusted FFO, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company.

EBITDA and FFO

EBITDA represents net income excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.

The Company computes FFO in accordance with standards established by NAREIT, which defines FFO as net income determined in accordance with GAAP, excluding gains or losses from sales of properties and impairment losses, plus depreciation and amortization. The Company believes that the presentation of FFO provides useful information to investors regarding its operating performance because it is a measure of the Company's operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets.  The Company also uses FFO as one measure in assessing its results.

Adjustments to EBITDA and FFO

We adjust EBITDA and FFO when evaluating our performance because we believe that the exclusion of certain additional recurring and non-recurring items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA and Adjusted FFO, when combined with GAAP net income, EBITDA and FFO, is beneficial to an investor's complete understanding of our operating performance.  We adjust EBITDA and FFO for the following items:

• Non-Cash Ground Rent: We exclude the non-cash expense incurred from the straight line recognition of rent from our ground lease obligations and the non-cash amortization of our favorable lease assets.
• Non-Cash Amortization of Favorable and Unfavorable Contracts: We exclude the non-cash amortization of the favorable management contract assets recorded in conjunction with our acquisitions of the Westin Washington D.C. City Center, Westin San Diego, and Hilton Burlington and the non-cash amortization of the unfavorable contract liabilities recorded in conjunction with our acquisitions of the Bethesda Marriott Suites, the Chicago Marriott Downtown, the Renaissance Charleston and the Lexington Hotel New York. The amortization of the favorable and unfavorable contracts does not reflect the underlying operating performance of our hotels.
• Cumulative Effect of a Change in Accounting Principle: Infrequently, the Financial Accounting Standards Board (FASB) promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude the effect of these one-time adjustments because they do not reflect its actual performance for that period.
• Gains or Losses from Early Extinguishment of Debt: We exclude the effect of gains or losses recorded on the early extinguishment of debt because we believe they do not accurately reflect the underlying performance of the Company.
• Acquisition Costs: We exclude acquisition transaction costs expensed during the period because we believe they do not reflect the underlying performance of the Company.
• Allerton Loan: We exclude the gain from the prepayment of the loan in 2014. Prior to the prepayment, cash payments received during 2010 and 2011 that were included in Adjusted EBITDA and Adjusted FFO and reduced the carrying basis of the loan were deducted from Adjusted EBITDA and Adjusted FFO, calculated based on a straight-line basis over the anticipated term of the loan.
• Other Non-Cash and /or Unusual Items: From time to time we incur costs or realize gains that we do not believe reflect the underlying performance of the Company. Such items include, but are not limited to, pre-opening costs, contract termination fees, severance costs, and gains from legal settlements, including the $11.0 million gain on the settlement of the Westin Boston Waterfront litigation, or insurance proceeds.

In addition, to derive Adjusted EBITDA we exclude gains or losses on dispositions and impairment losses because we believe that including them in EBITDA does not reflect the ongoing performance of our hotels. Additionally, the gains or losses on dispositions and impairment losses represent either accelerated depreciation or excess depreciation in previous periods, and depreciation is excluded from EBITDA.

In addition, to derive Adjusted FFO we exclude any fair value adjustments to debt instruments.  Specifically, we exclude the impact of the non-cash amortization of the debt premium recorded in conjunction with the acquisition of the JW Marriott Denver at Cherry Creek and fair market value adjustments to the Company's interest rate cap agreement.

The following tables are reconciliations of our U.S. GAAP net income to EBITDA and Adjusted EBITDA (in thousands):    

(1)     Includes $0.2 million of income tax expense reported in discontinued operations for the three and six months ended June 30, 2013.
(2)     Includes $0.6 million and $1.2 million of depreciation expense reported in discontinued operations for the three and six months ended June 30, 2013, respectively. 
(3)     Includes $14.0 million of settlement proceeds, net of a $1.2 million contingency fee paid to our legal counsel and $1.8 million of legal fees and other costs incurred over the course of the legal proceedings. The $1.8 million of legal fees and other costs were previously recorded as corporate expenses and the repayment of those costs through the settlement proceeds is recorded as a reduction of corporate expenses during the three months ended June 30, 2014.

 

 

The following tables are reconciliations of our U.S. GAAP net income to FFO and Adjusted FFO (in thousands):

(1)     Includes $0.6 million and $1.2 million of depreciation expense reported in discontinued operations for the three and six months ended June 30, 2013, respectively. 
(2)     Includes $14.0 million of settlement proceeds, net of a $1.2 million contingency fee paid to our legal counsel and $1.8 million of legal fees and other costs incurred over the course of the legal proceedings. The $1.8 million of legal fees and other costs were previously recorded as corporate expenses and the repayment of those costs through the settlement proceeds is recorded as a reduction of corporate expenses during the three months ended June 30, 2014.

 

 

Use and Limitations of Non-GAAP Financial Measures

Our management and Board of Directors use EBITDA, Adjusted EBITDA, FFO and Adjusted FFO to evaluate the performance of our hotels and to facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital intensive companies. The use of these non-GAAP financial measures has certain limitations. These non-GAAP financial measures as presented by us, may not be comparable to non-GAAP financial measures as calculated by other real estate companies. These measures do not reflect certain expenses or expenditures that we incurred and will incur, such as depreciation, interest and capital expenditures. We compensate for these limitations by separately considering the impact of these excluded items to the extent they are material to operating decisions or assessments of our operating performance. Our reconciliations to the most comparable GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures.

These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.

Certain Definitions

In this release, when we discuss "Hotel Adjusted EBITDA," we exclude from Hotel EBITDA the non-cash expense incurred by the hotels due to the straight lining of the rent from our ground lease obligations, the non-cash amortization of our favorable lease assets and other contracts, and the non-cash amortization of our unfavorable contract liabilities. Hotel EBITDA represents hotel net income excluding: (1) interest expense; (2) income taxes; and (3) depreciation and amortization. Hotel Adjusted EBITDA margins are calculated as Hotel Adjusted EBITDA divided by total hotel revenues. Net debt is calculated as total debt outstanding less unrestricted cash.

⁽¹⁾       Pro forma to exclude hotels sold in 2014 and 2013.

 

 

(1) We prepaid the mortgage loan in full on July 1, 2014.
(2) Non-cash GAAP adjustment recorded upon the assumption of the mortgage loan secured by the JW Marriott Denver Cherry Creek in 2011.
(3) Draw on the credit facility was used to fund the prepayment of the mortgage loan secured by the Courtyard Manhattan/Midtown East on July 1, 2014.  As    permitted under our credit facility, the mortgage was transferred to the credit facility until the closing of the new mortgage loan on July 18, 2014.

 

⁽¹⁾  Excludes the Oak Brook Hills Resort sold in April 2014.
⁽²⁾  Also excludes the three New York City hotels under renovation in 2013.

 

⁽¹⁾    Excludes the Oak Brook Hills Resort sold in April 2014.
⁽²⁾    Also excludes the three New York City hotels under renovation in 2013.

 

⁽¹⁾       The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.
⁽²⁾       Excludes the Oak Brook Hills Resort sold in April 2014.

 

⁽¹⁾     The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets and the non-cash amortization of our unfavorable contract liabilities.
⁽²⁾       Excludes the Oak Brook Hills Resort sold in April 2014.

 

⁽¹⁾       The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.
⁽²⁾       Excludes the Oak Brook Hills Resort sold in April 2014.

 

⁽¹⁾     The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.
⁽²⁾     Excludes the Oak Brook Hills Resort sold in April 2014.

 

SOURCE DiamondRock Hospitality Company