DiamondRock Hospitality Company (the "Company") (NYSE: DRH), a lodging-focused real estate investment trust that owns a portfolio of 29 premium hotels in the United States, today announced results of operations for the quarter ended September 30, 2015.
Third Quarter 2015 Highlights
- Pro Forma RevPAR: Pro Forma RevPAR was $176.92, an increase of 2.2% from the comparable period of 2014.
- Pro Forma Hotel Adjusted EBITDA Margin: Pro Forma Hotel Adjusted EBITDA margin was 31.49%, an increase of 39 basis points from 2014.
- Pro Forma Hotel Adjusted EBITDA: Pro Forma Hotel Adjusted EBITDA was $73.8 million, an increase of 4.3% from 2014.
- Adjusted EBITDA: Adjusted EBITDA was $69.3 million, an increase of 3.7% from 2014.
- Adjusted FFO: Adjusted FFO was $52.3 million and Adjusted FFO per diluted share was $0.26.
- Hotel Refinancing: The Company refinanced the JW Marriott Denver at Cherry Creek in July 2015 with a new 10-year $65 million mortgage loan bearing interest at a fixed rate of 4.33%.
- Hotel Brand Conversion: On September 1, 2015, the hotel formerly known as the Conrad Chicago converted to Starwood's Luxury Collection as The Gwen, a Luxury Collection Hotel.
- Dividends: The Company declared a dividend of $0.125 per share during the third quarter, which was paid on October 13, 2015.
Recent Developments
- Share Repurchase Program: On November 4, 2015, the Company's Board of Directors authorized a $150 million share repurchase program.
- Westin Boston Financing: On October 27, 2015, the Company entered into a new $205 million mortgage loan secured by the Westin Boston Waterfront Hotel. The mortgage loan has a term of 10 years and bears interest at a fixed rate of 4.36%.
- Orlando Loan Prepayment: On October 9, 2015, the Company prepaid the $55.3 million mortgage loan secured by the Orlando Airport Marriott.
Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "In a challenging environment during the third quarter our asset management shined with our portfolio, achieving 74% profit flow-through and 39 basis points of Hotel Adjusted EBITDA margin growth on modest revenue growth. Additionally, we also successfully completed our strategic objective to address near-term debt maturities and lower borrowing costs. Our 2015 financing activity will result in annual interest expense savings of approximately $8 million."
Operating Results
Discussions of "Pro Forma" assumes the Company owned each of its 29 hotels since January 1, 2014 but excludes the Hilton Garden Inn Times Square Central from January 1, 2015 to August 31, 2015, since the hotel opened for business on September 1, 2014. 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."
The Company's operating results for the third quarter were negatively impacted by several items, as follows:
- The disruption during the period leading up to and after the conversion of the Conrad Chicago to The Gwen, a Luxury Collection Hotel, was approximately $1.0 million higher than the Company had factored into its Adjusted EBITDA guidance. The disruption reduced the Company's Pro Forma RevPAR growth by approximately 80 basis points and Pro Forma Hotel Adjusted EBITDA margin growth by approximately 50 basis points. The Company expects the disruption to continue in the fourth quarter, and this is incorporated into its updated guidance. Notwithstanding the incremental conversion disruption, the Company continues to expect the hotel to meet its multi-year underwriting.
- The Company received a new property tax assessment for the Chicago Marriott, which was significantly higher than the Company forecasted. The increased assessment resulted in property taxes during the third quarter that were approximately $1.1 million above forecast. The property tax adjustment reduced the Company's Pro Forma Hotel Adjusted EBITDA margin growth by approximately 47 basis points. The Company is currently appealing the property tax assessment.
- The Company received a 15-year extension of the income tax agreement with the U.S. Virgin Islands (USVI) related to the Frenchman's Reef & Morning Star Marriott Beach Resort early in the fourth quarter. The Company's third quarter income tax provision was approximately $1.1 million above prior guidance, which assumed the extension would be received during the third quarter. Although the extension is retroactive to February, the Company is required to record the adjustment to its income tax provision to reflect the reduced tax rate during the fourth quarter.
Hotel Financing Activity
On July 1, 2015, the Company refinanced the JW Marriott Denver at Cherry Creek with a new $65.0 million mortgage loan. The new loan has a term of 10 years and a fixed interest rate of 4.33%. The new loan is interest-only for the first year after which principal will amortize on a 30-year schedule. The hotel was previously encumbered by a $38.1 million mortgage loan with a fixed interest rate of 6.47%.
On October 9, 2015, the Company prepaid the $55.3 million mortgage loan secured by the Orlando Airport Marriott. The prepayment will save approximately $0.7 million of interest expense during the fourth quarter, which was factored into the Company's prior guidance.
On October 27, 2015, the Company entered into a new $205 million mortgage loan secured by the Westin Boston Waterfront Hotel. The new loan has a term of 10 years, a fixed interest rate of 4.36% and will amortize on a 30-year schedule. The proceeds from the loan will be utilized to prepay the approximately $200 million mortgage loan secured by the Chicago Marriott in early 2016. The lower interest rate on the new loan is expected to save the Company over $3.0 million in annual interest expense beginning in 2016.
Capital Expenditures
The Company spent approximately $46.1 million on capital improvements during the nine months ended September 30, 2015, which includes the following significant projects::
- Hilton Boston Downtown: The Company completed a return on investment project at the hotel to create an incremental 41 guest rooms and upgrade additional guest rooms, which created over 90 premium rooms.
- Chicago Marriott Downtown: The Company commenced a multi-year guest room renovation at the hotel. Marriott is contributing to the cost of the renovation through an amendment to the hotel's management agreement to reduce management fees for the remaining term of the agreement. The amendment is expected to reduce management fees by approximately $1.8 million in 2015. The first phase of the guest room renovation, which consisted of 140 rooms, including all 25 suites, was successfully completed during the first quarter of 2015. The Company also added Marriott's new prototype F&B grab-and-go outlet in the hotel's lobby. The second phase of the guest room renovation will be completed during the seasonally slow winter months over the next three years and is not expected to result in material disruption.
The Company is also in the planning stages of additional significant projects, which include the following:
- The Lodge at Sonoma: The Company expects to renovate the guest rooms at the hotel during the seasonally slow months during 2016 and 2017.
- The Gwen, a Luxury Collection: The Company rebranded the Conrad Chicago to Starwood's Luxury Collection on September 1, 2015. The renovation work associated with the brand conversion is expected to cost approximately $25 million and take place over the next two seasonally slow winter seasons with no material disruption.
Balance Sheet
As of September 30, 2015, the Company had $62.0 million of unrestricted cash on hand and approximately $1.1 billion of total debt, which consisted of property-specific mortgage debt and $25.0 million outstanding on the Company's $200.0 million senior unsecured credit facility. There are currently no outstanding borrowings on its senior unsecured credit facility.
ATM Equity Offering Program
The Company did not sell any shares under its $200 million at-the-market ("ATM") equity offering program during the third quarter. The Company currently has $128.3 million remaining under the ATM program. The Company does not expect to utilize the program at this time, but believes it is appropriate to have the program in place.
Share Repurchase Program
On November 4, 2015, the Company's Board of Directors authorized a $150 million share repurchase program. Repurchases under this program will be made in open market or privately negotiated transactions from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The Company has not repurchased any shares of its common stock since the program started.
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