DiamondRock Hospitality Company Reports Third Quarter 2016 Results

BETHESDA, Md., Nov. 9, 2016 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") DRH, a lodging-focused real estate investment trust that owns a portfolio of 26 premium hotels in the United States, today announced results of operations for the quarter ended September 30, 2016.

Third Quarter 2016 Highlights

• Net Income: Net income was $29.9 million and earnings per diluted share was $0.15.
• Comparable RevPAR: RevPAR was $187.91, a 0.8% increase from the comparable period of 2015.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 32.12%, an increase of 23 basis points from the comparable period of 2015.
• Adjusted EBITDA: Adjusted EBITDA was $65.6 million, a decrease of $3.7 million or 5.3% from 2015.  Adjusted EBITDA for the comparable period of 2015 included $6.8 million of Adjusted EBITDA from the three non-core hotels that were sold in 2016.
• Adjusted FFO: Adjusted FFO was $52.1 million and Adjusted FFO per diluted share was $0.26.
• Hotel Disposition: As previously announced, the Company sold the 169-room Hilton Garden Inn Chelsea on July 7, 2016 for $65.0 million.
• Share Repurchases: The Company repurchased 92,600 shares at an average price of $8.90 per share during the third quarter. Subsequent to September 30, 2016, the Company repurchased an additional 634,537 shares at an average price of $8.92 per share.
• Dividends: The Company declared a dividend of $0.125 per share during the third quarter, which was paid on October 12, 2016.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "Our portfolio gained 2.1 points of market share in the quarter despite moderating transient demand. Our tight cost controls resulted in impressive third quarter profit margins. Year-to-date, the Company has kept total expenses flat. Additionally, the Company has successfully executed on its strategic priority of increasing liquidity and expects to end the year with over $200 million in corporate cash, no outstanding borrowings on our corporate credit facility, and more than half the portfolio unencumbered by debt. DiamondRock continues to pay a competitive, well-covered dividend and remains well positioned to deploy capital opportunistically, including through share repurchases, which began at the end of the quarter."

Operating Results      

Please see "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"and a reconciliation of these measures to net income. Comparable operating results include our 2015 acquisitions for all periods presented and exclude our 2016 dispositions for all periods presented. See "Reconciliation of Comparable Operating Results" attached to this press release for a reconciliation to historical amounts.

For the quarter ended September 30, 2016, the Company reported the following:

 

For the nine months ended September 30, 2016, the Company reported the following:

 

 

Share Repurchase Program

In September 2016, the Company began repurchasing shares of its common stock pursuant to its previously announced $150 million share repurchase program, and it has continued such repurchases since the end of the third quarter. Year-to-date, the Company has repurchased 727,137 shares of its common stock at an average price of $8.92 per share for a total purchase price of $6.5 million.  The Company has $143.5 million of remaining authorized capacity under its share repurchase program. The shares are purchased in the open market or through private transactions from time-to-time, depending upon market conditions, pursuant to a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

Capital Expenditures

The Company spent approximately $78.7 million on capital improvements during the nine months ended September 30, 2016.  The investments relate primarily to three major projects: the second phase of the Chicago Marriott Downtown renovation; the first phase of the renovation at The Gwen; and the Worthington Renaissance guest room renovation.  The Company currently expects to spend approximately $130 million on capital improvements at its hotels in 2016.  Significant projects in 2016 include:

• The Gwen, a Luxury Collection Hotel: The Company rebranded the Conrad Chicago to Marriott's Luxury Collection brand on September 1, 2015. The renovation work associated with the brand conversion will be completed in two phases. The first phase, consisting of the lobby, rooftop bar and other public spaces, was completed in May 2016. The second phase of the renovation, consisting of the guest rooms, is expected to be completed during the seasonally slow winter season beginning in late 2016.
• Chicago Marriott Downtown: The second and largest phase of the multi-year renovation was completed early in the second quarter 2016. This phase included the upgrade renovation of approximately 460 guest rooms as well as construction of a new, state-of-the-art fitness center. The remaining guest rooms will be renovated during the seasonally slow winter months over the next two years.
• The Lodge at Sonoma: The Company expects to renovate the guest rooms at the hotel during the seasonally slow period during late 2016 through early 2017.
• Charleston Renaissance: The Company expects to renovate the guest rooms at the hotel during the seasonally slow period from the end of the year through early 2017.
• Worthington Renaissance: The Company has commenced the guest room renovation at the hotel and expects to complete the project at the end of 2016.

Balance Sheet

As of September 30, 2016, the Company had $236.0 million of unrestricted cash on hand and approximately $0.9 billion of total debt, which consisted of property-specific mortgage debt and $100.0 million of borrowings on its term loan. The Company expects to end the year with over $200 million in unrestricted cash, approximately $0.9 billion of total debt and no outstanding borrowings on its senior unsecured credit facility.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.125 per share to stockholders of record as of September 30, 2016.  The dividend was paid on October 12, 2016.

Guidance

The Company is providing annual guidance for 2016, 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.  Comparable RevPAR assumes that all of the Company's 26 hotels were owned since January 1, 2015.

Given recent moderating trends in business transient demand, the Company is reducing its RevPAR outlook.  However, because of better than expected cost controls from asset management initiatives, the Company is maintaining prior full year 2016 Adjusted EBITDA and Adjusted FFO guidance. In addition, the Company now expects full year 2016 corporate expenses to range from $23 million to $24 million.

The Company now expects the full year 2016 results to be as follows:

 

Selected Quarterly Comparable Operating Information

The following table is presented to provide investors with selected quarterly comparable operating information for 2015 and 2016 year-to-date.  The operating information includes our 2015 acquisitions for all periods presented and excludes our 2016 dispositions for all periods presented.

 

 

 

Earnings Call

The Company will host a conference call to discuss its third quarter results on Wednesday, November 9, 2016, at 10:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 844-287-6622 (for domestic callers) or 530-379-4559 (for international callers).  The participant passcode is 90906627. 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 one week.

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 26 premium quality hotels with over 9,400 rooms. The Company has strategically positioned its hotels to be operated both under leading global brand families such as Hilton and Marriott as well as unique boutique hotels in the lifestyle segment. 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; 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.

 

 

 

 

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, Hotel EBITDA, Hotel 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, Hotel EBITDA, Hotel 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.

Use and Limitations of Non-GAAP Financial Measures

Our management and Board of Directors use EBITDA, Adjusted EBITDA, Hotel EBITDA, Hotel 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.

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 debt agreements 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 operating results.

Hotel EBITDA

Hotel EBITDA represents net income excluding:  (1) interest expense, (2)  income taxes, (3) depreciation and amortization, (4) corporate general and administrative expenses (shown as corporate expenses on the consolidated statements of operations), and (5) hotel acquisition costs. We believe that Hotel EBITDA provides our investors a useful financial measure to evaluate our hotel operating performance, excluding the impact of our capital structure (primarily interest), our asset base (primarily depreciation and amortization), and our corporate-level expenses (corporate expenses and hotel acquisition costs).  With respect to Hotel EBITDA, we believe that excluding the effect of corporate-level expenses provides a more complete understanding of the operating results over which individual hotels and third-party management companies have direct control.  We believe property-level results provide investors with supplemental information on the ongoing operational performance of our hotels and effectiveness of the third-party management companies operating our business on a property-level basis.

Adjustments to EBITDA, FFO and Hotel EBITDA

We adjust EBITDA, FFO and Hotel EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance and that the presentation of Adjusted EBITDA, Adjusted FFO and Hotel Adjusted EBIDTA when combined with GAAP net income, EBITDA, FFO and Hotel EBITDA, is beneficial to an investor's complete understanding of our consolidated and property-level operating performance.  Hotel Adjusted EBITDA margins are calculated as Hotel Adjusted EBITDA divided by total hotel revenues.

We adjust EBITDA, FFO and Hotel EBITDA 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.  We exclude these non-cash items because they do not reflect the actual rent amounts due to the respective lessors in the current period and they are of lesser significance in evaluating our actual performance for that period.
  
   
• Non-Cash Amortization of Favorable and Unfavorable Contracts: We exclude the non-cash amortization of favorable and unfavorable contracts recorded in conjunction with certain acquisitions because the non-cash amortization is based on historical cost accounting and is of lesser significance in evaluating our actual performance for that period.
  
   
• 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 adjustments, which include the accounting impact from prior periods, because they do not reflect the Company's actual underlying performance for the current 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 these gains or losses result from transaction activity related to the Company's capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels.
  
   
• Hotel Acquisition Costs:  We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels.
  
   
• Severance Costs:  We exclude corporate severance costs incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations because we believe these costs do not reflect the ongoing performance of the Company or our hotels.
  
   
• Hotel Manager Transition Costs:  We exclude the transition costs associated with a change in hotel manager because we believe these costs do not reflect the ongoing performance of the Company or our hotels. During the nine months ended September 30, 2015, we excluded the transition costs associated with the change of hotel managers in connection with the acquisitions of the Westin Fort Lauderdale and the Shorebreak Hotel.
  
   
• Other Items:  From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels.  Such items may include, but are not limited to the following: pre-opening costs incurred with newly developed hotels; lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; bargain purchase gains incurred upon acquisition of a hotel; and gains from 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 are based on historical cost accounting and 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.  We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.

Reconciliations of Non-GAAP Measures

EBITDA and Adjusted EBITDA

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

 

 

 

Hotel EBITDA and Hotel Adjusted EBITDA

The following table is a reconciliation of our GAAP net income to Hotel EBITDA and Hotel Adjusted EBITDA (in thousands):

 

FFO and Adjusted FFO

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

 

 

 

Reconciliation of Comparable Operating Results

The following presents the revenues, Hotel Adjusted EBITDA and Hotel Adjusted EBITDA Margin together with comparable prior year results, which excludes the results for our 2016 dispositions and includes the pre-acquisition results for our 2015 acquisitions (in thousands):

 

 

Comparable Hotel Operating Expenses

The following tables set forth hotel operating expenses for the three and nine months ended September 30, 2016 and 2015 for each of the hotels that we owned as of September 30, 2016.  Our GAAP hotel operating expenses for the three and nine months ended September 30, 2016 consisted of the line items set forth below (dollars in thousands) under the column titled "As Reported."  The amounts reported in this column include amounts that are not comparable period-over-period. In order to reflect the period in 2015 comparable to our ownership period in 2016, the amounts in the column titled "Adjustments for Acquisitions and Dispositions" represent the pre-acquisition operating results of the Shorebreak Hotel for the period from January 1, 2015 to February 5, 2015 and the Sheraton Suites Key West for the period from January 1, 2015 to June 29, 2015 and exclude the operating results of the Orlando Airport Marriott, Minneapolis Hilton and Hilton Garden Inn Chelsea for the time periods presented.  We provide this important supplemental information to our investors because this information provides a useful means for investors to measure our operating performance on a comparative basis.  See the column titled "Comparable."

 These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP in this release.  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 at our hotels 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. In particular, we note the pre-acquisition operating results set forth in the column titled "Adjustments for Acquisitions" were obtained from the respective sellers of the hotels during the acquisition due diligence process.  We have made no adjustments to the amounts provided to us by the respective sellers.  The pre-acquisition operating results were not audited or reviewed by our independent auditors.

 

 

 

 

 

 

 

 

 

 

 

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SOURCE DiamondRock Hospitality Company