DiamondRock Hospitality Company Reports First Quarter 2013 Results

BETHESDA, Md., May 10, 2013 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") (NYSE: DRH), a lodging-focused real estate investment trust that owns a portfolio of 27 premium hotels in the United States, today announced results of operations for the quarter ended March 31, 2013.

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First Quarter Highlights

• RevPAR: The Company's RevPAR was $119.40, an increase of 2.0% from 2012. Excluding the Company's New York City hotels under renovation, the Company's RevPAR increased 5.6% from 2012.
• Hotel Adjusted EBITDA Margin: The Company's Hotel Adjusted EBITDA margin was 20.98%, a decrease of 38 basis points from 2012.  Excluding the Company's New York City hotels under renovation, the Company's Hotel Adjusted EBITDA margin was 22.98%, an increase of 93 basis points from 2012.
• Adjusted EBITDA: The Company's Adjusted EBITDA was $34.3 million.
• Adjusted FFO: The Company's Adjusted FFO was $26.8 million and Adjusted FFO per diluted share was $0.14.
• Hotel Financings: The Company raised $102 million through two separate secured financings during the first quarter.
• Allerton Settlement: The Company closed on the settlement of the bankruptcy and related litigation involving its senior mortgage loan secured by the Allerton Hotel, receiving a $5.0 million principal payment and a new $66.0 million mortgage loan.
• Chief Operating Officer: On April 1, 2013, Robert Tanenbaum joined the Company as Chief Operating Officer and Executive Vice President, Asset Management.
• Dividends: The Company declared a quarterly dividend of $0.085 per share during the first quarter.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "Our first quarter operating results were in line with our expectations as lodging fundamentals continue to be very solid. We experienced growth in RevPAR, Adjusted EBITDA and Adjusted FFO despite our operating results being impacted by more than 24,000 displaced rooms at our three New York City hotels under renovation. We also continued to strengthen our balance sheet during the quarter by entering into two attractive loans. DiamondRock is progressing well on the strategic initiatives we outlined in March to position the Company for future growth through value-creating capital investments and further balance sheet enhancements."

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." 

For the quarter ended March 31, 2013, the Company reported the following:

The Company's operating results for the quarter ended March 31, 2013 were significantly impacted by its three hotels in New York City under renovation, the Lexington Hotel New York, Courtyard Manhattan Midtown East and Courtyard Fifth Avenue.  The following are selected operating results for the Company excluding these three hotels:

The Company also recorded a severance charge of approximately $3.1 million during the quarter in connection with the retirement of John L. Williams.

Capital Expenditures

As previously announced, the Company plans to invest approximately $140 million for capital improvements in 2013 and early 2014. As of March 31, 2013, the Company has spent approximately $13.9 million toward capital improvements at its hotels.  The most significant capital projects are as follows:

• Lexington Hotel New York: In connection with executing the rebranding strategy at the Lexington Hotel, the Company is continuing the comprehensive renovation of the hotel, including the lobby, corridors, guest rooms and guest bathrooms. The estimated renovation cost is expected to be approximately $45 million and be substantially complete during the third quarter of 2013.
• Manhattan Courtyards:  The Company is continuing the $12.0 million renovation of the guest rooms and guest bathrooms at the Courtyard Manhattan/Midtown East and Courtyard Manhattan/Fifth Avenue.  The renovation scope at the Courtyard Midtown East also includes the public space and the addition of five new guest rooms. The renovations are on time and on budget and will be substantially complete during the second quarter of 2013.
• Westin Washington D.C.:  The Company expects to commence a comprehensive $16.0 million renovation during the fourth quarter of 2013 to reposition the hotel to capture higher-rated business, leisure and group customers.  The renovation scope will enhance every aspect of the guest experience, including the guest rooms, corridors, meeting space and the lobby.
• Westin San Diego: The Company expects to commence a comprehensive $14.0 million renovation beginning in the fourth quarter 2013 of the guestrooms, corridors, lobby, public areas, and meeting space at the hotel.
• Hilton Minneapolis: The Company expects to undertake a $13.0 million renovation of the guest rooms, guest bathrooms and corridors at the hotel beginning in late 2013.
• Hilton Boston Downtown: The Company expects to undertake a $7.0 million renovation of the guest rooms, corridors, public areas, and meeting space at the hotel in early 2014.
• Hilton Burlington:  The Company expects to undertake a $6.0 million renovation of the corridors and guest rooms at the hotel in early 2014. 

The Company continues to expect renovation disruption of $10 to $12 million of Hotel Adjusted EBITDA during the year ended December 31, 2013, which has been factored into its outlook for 2013 detailed below.

Reporting Calendar Change

Effective January 1, 2013, the Company reports its quarterly results of operations on a calendar cycle. Historically, the Company reported its quarterly results of operations based on the fiscal calendar used by Marriott International. Since the Company is not changing its fiscal year, its 2012 financial information will not be restated in its quarterly filings with the U.S. Securities and Exchange Commission. The following table highlights the periods presented in the Company's 2012 and 2013 reporting calendars. 

The Company cannot fully restate its 2012 operating results because Marriott did not provide 2012 operating results on a daily basis. Hotel operating results incorporated into the Company's financial statements are prepared by its hotel managers. The unavailability of 2012 operating results on a calendar quarter basis for all of the Company's hotels prevented the restatement of the Company's 2012 quarterly financial statements. Instead, in comparing 2013 quarterly results to 2012 results, the Company will (i) use the non-Marriott 2012 results on a calendar quarter basis and (ii) amend the previously reported Marriott 2012 quarterly results as follows:

• The first quarter of 2012 includes Marriott operating results from January 1 to March 23.
• The second quarter of 2012 includes Marriott operating results from March 24 to June 15.
• The third quarter of 2012 includes Marriott operating results from June 16 to October 5.
• The fourth quarter of 2012 includes the Marriott operating results from October 6 to December 31.

The following table reallocates selected 2012 quarterly pro forma operating information as described above into the 2013 reporting calendar.

Balance Sheet

As of March 31, 2013, the Company had $77.4 million of unrestricted cash on hand and approximately $1.1 billion of total debt, which consists of property-specific mortgage debt and $10.0 million outstanding on the Company's senior unsecured credit facility. Subsequent to the end of the quarter, the Company repaid the $10.0 million outstanding on the credit facility.

Hotel Financings

In March 2013, the Company raised $102.0 million through two separate secured, non-recourse financings with different lenders on attractive terms. The financings include a $31 million mortgage loan secured by The Lodge at Sonoma Renaissance Resort & Spa with a term of ten years and a fixed interest rate of 3.96% and a $71 million mortgage loan secured by the Westin San Diego with a term of ten years and a fixed interest rate of 3.94%.  Principal repayments on each loan are based on a 30-year amortization schedule.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.085 per share to stockholders of record as of March 28, 2013, representing a 6% increase over 2012.  The dividend was paid on April 12, 2013.

Outlook and Guidance

The Company is providing annual guidance for 2013, 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 2013 RevPAR guidance assumes all of the Company's 27 hotels were owned since January 1, 2012.

The Company is maintaining its 2013 guidance, which was previously provided in connection with the reporting of its 2012 results in February 2013.  The Company continues to expect the full year 2013 results to be as follows:

Earnings Call

The Company will host a conference call to discuss its first quarter results on Friday, May 10, 2013, at 11:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 800-901-5241 (for domestic callers) or 617-786-2963 (for international callers).  The participant passcode is 97572145. 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 year.

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 27 premium quality hotels with over 11,500 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; risks associated with the rebranding of the Lexington Hotel New York; 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, 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 (loss) 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 (loss) 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 (loss), 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 from Early Extinguishment of Debt: We exclude the effect of gains 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:  In 2012, due to the uncertainty of the timing of the bankruptcy resolution, we excluded both cash interest payments received and the legal costs incurred as a result of the bankruptcy proceedings from our calculation of Adjusted EBITDA and Adjusted FFO.  Due to the settlement of the bankruptcy proceedings and amended and restated loan, we commenced recognizing interest income in 2013, which includes the amortization of the difference between the carrying basis of the old loan and face value of the new loan. Cash payments received during 2010 and 2011 that were included in Adjusted EBITDA and Adjusted FFO and reduced the carrying basis of the loan will be now be deducted from Adjusted EBITDA and Adjusted FFO on a straight-line basis over the anticipated five-year term of the new loan. 
• Other Non-Cash and /or Unusual Items:  We exclude the effect of certain non-cash and/or unusual items because we believe they do not reflect the underlying performance of the Company.  In 2012, we excluded the franchise termination fee paid to Radisson because we believe that including it would not be consistent with reflecting the ongoing performance of the hotel. In 2013, we exclude the severance costs associated with the retirement of our Chief Operating Officer because these costs do not reflect the underlying performance of the Company.

In addition, to derive Adjusted EBITDA we exclude gains or losses on dispositions and impairment losses because we believe that including them in EBITDA is not consistent with reflecting the ongoing performance of our hotels. Additionally, the gain or loss 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 table is a reconciliation of our U.S. GAAP net loss to EBITDA and Adjusted EBITDA (in thousands):

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

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, the non-cash amortization of the unfavorable contract liabilities recorded in conjunction with the acquisitions of the Bethesda Marriott Suites, the Chicago Marriott Downtown, the Renaissance Charleston and the Lexington Hotel New York. 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.

                                                                                                                                                                                                                                                                                                                                 

SOURCE DiamondRock Hospitality Company