DiamondRock Hospitality Company Reports Second Quarter 2009 Results
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DiamondRock Hospitality Company Reports Second Quarter 2009 Results
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Category: Worldwide - Industry economy
- Figures / Studies
This is a press release selected by our editorial committee and published online for free on 2009-07-28
DiamondRock Hospitality Company (the "Company") (NYSE: DRH) today announced results of operations for its second quarter ended June 19, 2009. The Company is a lodging-focused real estate investment trust that owns twenty premium hotels in North America.
Second Quarter 2009 Highlights
-- RevPAR: The Company's RevPAR was $109.85, a decrease of 22.2 percent
compared to the same period in 2008.
-- Hotel Adjusted EBITDA Margins: The Company's Hotel Adjusted EBITDA
margins were 25.19%, a decrease of 604 basis points compared to the
same period in 2008.
-- Adjusted EBITDA: The Company's Adjusted EBITDA was $32.6 million, a
decline of 39% compared to the same period in 2008.
-- Adjusted FFO: The Company's Adjusted FFO was $24.9 million and
Adjusted FFO per diluted share was $0.24.
-- Successful Equity Raise: The Company issued 17,825,000 shares of its
common stock at $4.85 per share during the second quarter, which
resulted in net proceeds of $82.1 million.
"The second quarter results reflect the continuing challenges in the economy and, more specifically, the travel industry. Our asset managers, working in concert with our operators, did a solid job managing Hotel Adjusted EBITDA margins in light of the virtually unprecedented declines in hotel revenue. We continue to focus on cost containment initiatives and strengthening the balance sheet to ultimately position DiamondRock to grow at the appropriate time," stated Mark W. Brugger, Chief Executive Officer of DiamondRock Hospitality Company.
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 Margins," "FFO" and "Adjusted FFO."
For the second quarter, beginning March 28, 2009 and ended June 19, 2009, the Company reported the following:
-- Revenues of $143.6 million compared to $181.0 million for the
comparable period in 2008.
-- Adjusted EBITDA of $32.6 million compared to $53.5 million for the
comparable period in 2008.
-- Adjusted FFO and Adjusted FFO per diluted share of $24.9 million and
$0.24, respectively, compared to $41.2 million and $0.43,
respectively, for the comparable period in 2008.
-- Net income of $2.5 million (or $0.02 per diluted share) compared to
net income of $21.8 million (or $0.23 per diluted share) for the
comparable period in 2008.
RevPAR for the second quarter decreased 22.2 percent (from $141.28 to $109.85) from the comparable period in 2008, driven by a 6.7 percentage point decrease in occupancy (from 75.7 percent to 69.0 percent) and a 14.6 percent decrease in the average daily rate (from $186.53 to $159.30). Hotel Adjusted EBITDA margins decreased 604 basis points (from 31.23% to 25.19%) from the comparable period in 2008.
For the period from January 1, 2009 to June 19, 2009, the Company reported the following:
-- Revenues of $262.2 million compared to $313.9 million for the
comparable period in 2008.
-- Adjusted EBITDA of $53.0 million compared to $83.7 million for the
comparable period in 2008.
-- Adjusted FFO and Adjusted FFO per diluted share of $39.7 million and
$0.41, respectively, compared to $64.4 million and $0.68,
respectively, for the comparable period in 2008.
-- Net loss of $2.8 million (or $0.03 per diluted share) compared to net
income of $26.9 million (or $0.28 per diluted share) for the
comparable period in 2008.
Year-to-date RevPAR decreased 19.9 percent (from $130.53 to $104.53) from the comparable period in 2008, driven by a 12.8 percent decrease in the average daily rate (from $180.48 to $157.36) and a 5.9 percentage point decrease in occupancy (from 72.3 percent to 66.4 percent). Year-to-date Hotel Adjusted EBITDA margins decreased 548 basis points (from 28.44% to 22.96%) from the comparable period in 2008.
Hotel Fundamentals
The impact of the severe economic recession on U.S. travel fundamentals and the Company's operating results is likely to persist for some period of time. Lodging demand has historically correlated with several key economic indicators such as GDP growth, employment trends, corporate profits, consumer confidence and business investment. Although there have been recent signs that occupancy in the industry may have stabilized, the average daily rate has continued to decline. The Company expects lodging demand to follow its historical course and lag the general economic recovery by several quarters and thus, the Company anticipates a challenging operating environment for the balance of 2009 and into 2010.
The Company's RevPAR declined in the second quarter by 22.2%. Most of the decline in RevPAR can be attributed to a significant decline in the average daily rate and reflects a number of negative trends within the Company's primary customer segments, including a change in the mix between those segments. The Company's room revenue by primary customer segment in the second quarter was as follows:
Second Quarter 2009 Second Quarter 2008 %
------------------- ------------------- Decrease
$ in millions % of Total $ in millions % of Total
Business
Transient $22.2 25% $35.4 31% 37.0%
Group $34.0 38% $44.2 38% 23.2%
Leisure and
Other $34.0 37% $36.4 31% 6.7%
----- --- ----- --- ----
Total $90.2 100% $116.0 100% 22.2%
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-- Business Transient: Revenue from the business transient segment,
traditionally the most profitable segment for hotels, has declined
more than any other customer segment. Business transient revenue was
partially replaced with lower-rated government, leisure and contract
business. The Company expects business transient demand trends to
remain negative until there is an improvement in the overall economic
climate in the United States.
-- Group: Groups have postponed, cancelled or reduced their meetings in
response to the current economic recession. The deterioration in
revenue is primarily due to a decline in group room nights and, to a
much lesser extent, rate. Moreover, as there were fewer cancellations
in the second quarter compared to the first quarter, the deterioration
in group room nights appears to have been caused by a decline in
short-term group pick-up. As of the end of the second quarter, the
Company's group booking pace was 19% lower than at the same time last
year, which represents the continued deterioration of group booking
trends during the year.
-- Leisure and Other: The decline in revenue from the leisure and other
segment was almost entirely driven by lower average daily rates.
The Company continued to focus on identifying and implementing aggressive cost containment at its hotels. Since last summer, the Company's asset managers have worked closely with its hotel operators in designing and implementing significant cost containment measures. As a result, despite the 22.2 % decline in RevPAR, the Company's second quarter Hotel Adjusted EBITDA margins declined only 604 basis points compared to the same period in 2008. Evidence of the success of some of these initiatives is as follows:
-- The Company reduced support costs at its hotels by almost 13%.
-- The Company reduced the single largest hotel expense category, labor
(wages & benefits) by almost 12%.
-- Productivity at the Company's hotels in the second quarter increased
by more than 8%, as measured by manhours per occupied room.
The Company will continue to work with its hotel operators to monitor the continued implementation of the cost containment plans and to identify additional, innovative opportunities to reduce operating costs. The Company expects the margin trends to become more difficult in the coming months as the prior year comparisons begin to reflect the benefit of its 2008 cost containment successes.
New hotel supply remains a short-term negative and a long-term positive. Although the industry benefited from supply growth that was below historical averages from 2004 through 2007, new hotel supply began to increase at the end of the last economic expansion. While some of those projects have been delayed or eliminated, the rate of new supply is expected to peak in 2009 and remain above historical averages in 2010. The Company has been or will be impacted by new supply in a few of its markets, most notably major new hotels opening in Fort Worth, Texas in 2009 and in Chicago and Austin in 2010. Due to a number of factors, the Company expects below average supply growth for an extended period of time beginning in 2011, when it expects minimal new supply to be a significant positive for operating fundamentals.
Balance Sheet and Liquidity
As of the end of the second quarter, the Company had total assets of approximately $2.1 billion. Cash and cash equivalents were $81.7 million, including $30.2 million of restricted cash.
As of the end of the second quarter, the Company had $819.4 million of debt outstanding, which consists solely of property-specific mortgage debt with few near-term maturities. Eight of the Company's 20 hotels are unencumbered by mortgage debt and the Company's $200 million senior unsecured credit facility is unused.
DiamondRock has always strived to operate its business with conservative leverage. During the current recession and credit crisis, the Company continues to focus on preserving and enhancing its liquidity. The Company has taken, or intends to take, a number of steps to achieve these goals, as follows:
-- The Company completed a follow-on public offering of its common stock
during the second quarter. The Company sold 17,825,000 shares of
common stock, including the underwriters' overallotment of 2,325,000
shares, at an offering price of $4.85 per share. The net proceeds,
after deduction of offering costs, were approximately $82.1 million.
In addition, the Company's Board of Directors recently authorized the
Company to sell up to $75 million of common stock.
-- The Company repaid the $52 million outstanding on its senior unsecured
credit facility during the second quarter with a portion of the
proceeds from its follow-on offering.
-- The Company intends to pay its next dividend to stockholders of record
as of December 31, 2009. The Company expects the 2009 dividend will be
in an amount equal to 100% of its 2009 taxable income, which is
expected to be in the range of $35 million to $45 million. The
Company may elect to pay up to 90 percent of its 2009 dividend in
shares of its common stock, as permitted by the Internal Revenue
Service's Revenue Procedure 2009-15.
-- The Company has focused on minimizing capital spending during 2009 and
expects to fund approximately $10 million of 2009 capital expenditures
from corporate cash.
-- The Company explored the potential sale of certain hotels earlier in
the year, but currently does not have any hotels listed for sale with
a broker. The Company will evaluate any unsolicited offers received
for any of its hotels.
The Company has only two near-term mortgage debt maturities totaling $68 million. The debt maturities include the $40.2 million coming due on the Courtyard Manhattan/Midtown East on December 11, 2009 and the $27.7 million coming due on the Griffin Gate Marriott in January 2010. The status of the Company's efforts to address its near-term debt maturities is as follows:
-- The Company has signed a term sheet with Massachusetts Mutual Life
Insurance Company to provide a new $43 million non-recourse mortgage
loan on the Courtyard Manhattan/Midtown East bearing an interest rate
of 8.8% and a term of five years. The closing of the loan is subject
to numerous closing conditions, including a material adverse change
clause.
-- The Company is currently assessing the best alternatives to address
the Griffin Gate Marriott mortgage debt maturity, including either
refinancing the loan or repaying the loan with corporate cash.
The Company continues to maintain its straightforward capital structure. As of the end of the second quarter, the Company continued to own 100% of its properties directly and has never issued operating partnership units or preferred stock.
Impairment
During the second quarter, the Company recorded an impairment loss of $1.3 million on the favorable leasehold asset related to its option to develop an addition to the Westin Boston Waterfront on an adjacent parcel of land. This impairment reflects the deterioration of the value of this option from $12.1 million to $10.8 million during the second quarter. As of June 19, 2009, the Company has a total of $13.3 million of intangible assets with indefinite useful lives that it regularly assesses for impairment.
Capital Expenditures
Although DiamondRock has significantly curtailed the capital expenditures at its hotels, it continues to benefit from the extensive capital investments made from 2006 to 2008, during which time many of its hotels were fully renovated. In 2009, the Company has focused its capital expenditures primarily on life safety, capital preservation, and return-on-investment projects. The total budget in 2009 for capital improvements is $35 million, only $10 million of which is expected to be funded from corporate cash and the balance to be funded from hotel escrow reserves. The Company spent approximately $13.3 million on capital improvements during the period from January 1, 2009 through June 19, 2009, of which approximately $3.7 million was funded from corporate cash.
Outlook
The macroeconomic environment lacks sufficient clarity at this time to provide accurate guidance. However, the Company is providing the following relevant information to assist investors and analysts in deriving their own estimates for 2009.
-- The Company projects approximately $51 million of debt service based
on its current capital structure. The 2009 debt service includes
approximately $4.7 million of regularly scheduled principal payments,
excluding the $40.2 million scheduled debt maturity on the Courtyard
Manhattan/Midtown East loan.
-- The Company expects to complete approximately $35 million of capital
expenditures during 2009 which will consist of $25 million funded from
existing reserve accounts and approximately $10 million funded from
corporate cash.
-- The Company expects to incur $16.0 million of corporate G&A in 2009,
which includes approximately $10.5 million of cash expenses.
-- The Company's 2009 weighted average fully diluted shares will be
approximately 103.3 million shares, which is based on its current
total shares outstanding of 108.0 million.
-- The Company expects its 2009 distributable taxable income to be in the
range of $35 million to $45 million.
Earnings Call
The Company will host a conference call to discuss its second quarter 2009 results on Tuesday, July 28, 2009, at 10:00 am Eastern Time (ET). To participate in the live call, investors are invited to dial 1-888-713-4214 (for domestic callers) or 617-213-4866 (for international callers). The participant passcode is 55276125. A live webcast of the call will be available via the investor relations section of DiamondRock Hospitality Company's website at www.drhc.com. A replay of the webcast will also be archived on the website for one year.
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