DiamondRock Hospitality Company Reports Third Quarter 2013 Results

BETHESDA, Md., Nov. 8, 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 third quarter ended September 30, 2013.

Highlights

• Comparable RevPAR: The Company's RevPAR increased 5.0% compared to the third quarter 2012 as adjusted to a calendar quarter basis, excluding the Lexington Hotel New York City.
• RevPAR: The Company's RevPAR was $141.03, an increase of 1.1% from 2012. Excluding the Lexington Hotel New York City, the Company's RevPAR increased 4.8% from 2012.
• Hotel Adjusted EBITDA Margin: The Company's Hotel Adjusted EBITDA margin was 25.89%, a decrease of 204 basis points from 2012.  Excluding the Lexington Hotel New York City, the Company's Hotel Adjusted EBITDA margin was 27.05%, a decrease of 32 basis points from 2012.
• Hotel Refinancing: The Company entered into a new $63.0 million non-recourse mortgage loan secured by the Salt Lake City Marriott with a term of seven years and a fixed interest rate of 4.25%. In conjunction with the financing, the Company prepaid the existing $27.3 million mortgage loan secured by the hotel.
• Non-Core Hotel Disposition: The Company entered into an agreement to sell the 487-room Torrance Marriott South Bay for a contractual sales price of $74 million.  The sale is expected to close during the fourth quarter of 2013.
• Lexington Hotel: The Lexington Hotel New York City joined Marriott's Autograph Collection in mid-August 2013.  The comprehensive renovation of the hotel is now complete. Since conversion, the hotel has has increased average daily rates approximately $40 from the comparable period of 2012.
• Adjusted EBITDA: The Company's Adjusted EBITDA was $51.0 million, which was impacted by approximately $5.0 million of renovation disruption.
• Adjusted FFO: The Company's Adjusted FFO was $35.9 million and Adjusted FFO per diluted share was $0.18.
• Dividends: The Company declared a quarterly dividend of $0.085 per share during the third quarter.
• Guidance: The Company is reaffirming its full year 2013 guidance of Adjusted EBITDA of $195 million to $205 million and Adjusted FFO per share of $0.70 to $0.74. The guidance includes $17 million of displaced EBITDA from renovation disruption.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "We are pleased with our third quarter operating results, with Comparable RevPAR growth of 5.0%. Importantly, we continue to execute on our strategic initiatives. Our renovation program passed a major milestone with the completion of the rebranding and repositioning of the Lexington Hotel. The hotel looks fantastic and we are glad to mark the end of the major disruption from our renovation program. On our non-core disposition initiative, we announced today the agreement to sell the Torrance Marriott at a 14x EBITDA multiple. Our efforts this year continue to position the Company for a strong 2014, bolstered by strong group pace and renovation tailwinds."

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." "Comparable RevPAR" compares 2013 RevPAR to 2012 Pro Forma RevPAR on a calendar quarter basis.

The year-over-year comparability of the Company's third quarter results is significantly impacted by the change in its reporting calendar.  For the Company's Marriott managed hotels, the 2013 third quarter includes 20 fewer days than the pro forma 2012 third quarter, which results in the 2013 third quarter including approximately 10% fewer available room nights as compared to the pro forma 2012 third quarter.

For the quarter ended September 30, 2013 (92 days), the Company reported the following:

The Company's operating results for the quarter ended September 30, 2013 were significantly impacted by the renovation at the Lexington Hotel, which displaced approximately 29,000 room nights during the quarter and resulted in approximately $5 million of Hotel Adjusted EBITDA disruption. The renovation was completed in October and total renovation disruption from this project was $14.5 million, approximately $2.0 million higher than previously estimated. 

The following are selected operating results for the Company, excluding the Lexington Hotel:

For the nine months ended September 30, 2013, the Company reported the following:

The Company's operating results for the nine months ended September 30, 2013 were significantly impacted by the displacement of approximately 84,000 room nights at its three New York City hotels under renovation, the Lexington Hotel, Courtyard Manhattan Midtown East and Courtyard Fifth Avenue. The renovations of the two Courtyards were completed during the second quarter of 2013 and the renovation of the Lexington Hotel was completed in October 2013.  The following are selected operating results for the Company excluding these three hotels:

Capital Expenditures

As previously announced, the Company is investing approximately $140 million for capital improvements at its hotels in 2013 and early 2014. As of September 30, 2013, the Company has spent approximately $75.3 million on these capital improvements. The Company currently expects renovation disruption of approximately $17 million of Hotel Adjusted EBITDA during the year ended December 31, 2013, which is reflected in its outlook for 2013. The Company does not expect meaningful disruption during 2014. The following is an update on the most significant capital projects.

Lexington Hotel New York: The Company has completed its comprehensive renovation of the Lexington Hotel, with all 725 guestrooms currently available for sale. The hotel joined Marriott's Autograph Collection during August 2013 and the hotel has increased average daily rates approximately $40 from the comparable period in 2012. Hotel Adjusted EBITDA disruption was approximately $5 million during the third quarter and $14 million year to date.  This disruption is approximately $2 million higher than previously expected due to incremental displacement that occurred during the closing stages of the renovation. The Company estimates the full year 2013 renovation disruption from the project to be approximately $14.5 million, including $0.5 million during the fourth quarter.

The Company has other renovation projects planned for late in 2013 and early 2014, which are not expected to cause material disruption. A description of the most significant projects is as follows:

• Westin Washington D.C.:  A comprehensive $17 million renovation commenced in October 2013 and is expected to be completed in early 2014. 
• Westin San Diego: A comprehensive $14.5 million renovation commenced in October 2013 and is expected to be completed in early 2014.
• Hilton Minneapolis: A $13 million renovation of the guest rooms, guest bathrooms and corridors is expected to commence in November 2013 and be completed in early 2014.
• Hilton Boston Downtown: A $7 million renovation of the guest rooms, corridors, public areas, and meeting space commenced in October 2013 and is expected to be completed in early 2014.
• Hilton Burlington:  A $6 million renovation of the lobby, corridors, guest rooms and outdoor space is expected to commence in November 2013 and be completed in early 2014. 

Salt Lake City Marriott Refinancing

The Company entered into a new $63 million mortgage loan secured by the Salt Lake City Marriott in October 2013.  The new loan has a term of seven years and bears interest at a fixed rate of 4.25%. As part of the refinancing, the Company prepaid the $27.3 million mortgage loan previously secured by the hotel, which had a fixed interest rate of 5.5 % and a maturity date of January 2015. The cost of prepaying the loan though defeasance was approximately $1.5 million, which will be added back to Adjusted EBITDA and Adjusted FFO. The Company used the proceeds from the new loan to repay the prior loan and to create additional investment capacity for the acquisition of the Hilton Garden Inn Times Square South in mid-2014.

Sale of Torrance Marriott South Bay

The Company entered into an agreement to sell a non-core hotel, the 487-room Torrance Marriott South Bay, to an unaffiliated third party for proceeds of approximately $76 million, including credit for the hotel's replacement reserve. The sale is expected to close during the fourth quarter of 2013.  The proceeds from the sale will be used to create investment capacity for the acquisition of the Hilton Garden Inn Times Square South in mid-2014.  The Torrance Marriott South Bay generated $5.4 million of Hotel Adjusted EBITDA during the trailing four quarters ending September 30, 2013.

Balance Sheet

As of September 30, 2013, the Company had $43.4 million of unrestricted cash on hand and approximately $1.1 billion of total debt, which consists solely of property-specific mortgage debt.  The Company has no outstanding borrowings on its $200 million senior unsecured credit facility. 

Following the refinancing of the Salt Lake City Marriott, which occurred subsequent to the end of the third quarter, and the sale of the Torrance Marriott, the Company expects to have approximately $145 million of unrestricted cash on hand at December 31, 2013. 

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.085 per share to stockholders of record as of September 30, 2013.  The dividend was paid on October 10, 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 reaffirming its 2013 guidance to reflect the following:

• Increase of full year renovation disruption to $17 million as a result of incremental displacement at the Lexington Hotel
• Stronger group performance at the Westin Boston Waterfront and the Chicago Marriott Downtown
• Impact of the Federal Government shutdown on the Company's Washington DC market hotels during the fourth quarter
• Sale of Torrance Marriott South Bay at the end of the fourth quarter 2013

The Company expects the full year 2013 results to be as follows:

Earnings Call

The Company will host a conference call to discuss its third quarter results on Friday, November 8, 2013, at 10:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 877-415-3180 (for domestic callers) or 857-244-7323 (for international callers).  The participant passcode is 37412479. 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.

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.

Therefore, the 2013 calendar quarters will have 8 additional days in the first quarter, 7 additional days in the second quarter, 20 fewer days in the third quarter and 5 additional days in the fourth quarter.

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

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 11,600 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.

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:  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:  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 and severance costs.  In 2012, we excluded the franchise termination fee paid to Radisson and, in 2013, we excluded the severance costs associated with the retirement of our Chief Operating Officer.

In addition, to derive Adjusted EBITDA we exclude gains or losses on sales of properties and impairment losses because we believe that including them in EBITDA is not consistent with reflecting the ongoing performance of our hotels. Additionally, the gains or losses on sales of properties 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):

The following tables are reconciliations of our U.S. GAAP net income 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 and other contracts, 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