DiamondRock Hospitality Company Reports Third Quarter 2018 Results

BETHESDA, Md., Nov. 5, 2018 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") (NYSE: DRH), a lodging-focused real estate investment trust that owns a portfolio of 30 premium hotels in the United States, today announced results of operations for the quarter ended September 30, 2018.

Third Quarter 2018 Highlights

• Net Income: Net income was $31.4 million and earnings per diluted share was $0.15.
• Comparable RevPAR: RevPAR was $192.07, a 0.7% decrease from the comparable period of 2017.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 31.51%, a 4 basis point contraction from the comparable period of 2017. The Company maintained tight cost controls with total comparable hotel expenses increasing only 1.4%.
• Adjusted EBITDA: Adjusted EBITDA was $70.3 million, an increase of $7.2 million from 2017.
• Adjusted FFO: Adjusted FFO was $56.9 million and Adjusted FFO per diluted share was $0.27.
• Business Interruption Income: The Company recognized $8.2 million of business interruption income during the quarter related to the insurance claims for Frenchman's Reef and Morning Star Marriott Beach Resort, Havana Cabana Key West and The Lodge at Sonoma Renaissance Resort & Spa.
• Insurance Claim Settlements: The Company settled its insurance claims for the Havana Cabana Key West and The Lodge at Sonoma Renaissance Resort & Spa in July 2018.
• Dividends: The Company declared a dividend of $0.125 per share during the third quarter, which was paid on October 12, 2018.

Recent Development

• October RevPAR: Comparable RevPAR for October 2018 increased 3.0% from the comparable period in 2017.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company stated, "While third quarter results came in modestly below expectations, our asset management team did an excellent job maintaining cost controls during the quarter.  We are adjusting our full year 2018 RevPAR guidance to reflect recent weather events and headwinds from the union strike at our Westin Boston.  Separately, we are excited to announce the launch of the rebuilding and repositioning of the Frenchman's Reef and Morning Star Beach Resort into what will be one of the finest resorts in the Caribbean.  Finally, our luxury resort acquisition in Northern California remains on track to close during the fourth quarter."

Operating Results      

Please see "Non-GAAP Financial Measures" attached to this press release for an explanation of the terms "EBITDAre," "Adjusted EBITDA," "Hotel Adjusted EBITDA Margin," "FFO" and "Adjusted FFO" and a reconciliation of these measures to net income. Comparable operating results include our 2018 and 2017 acquisitions for all periods presented and exclude the Frenchman's Reef and Morning Star Marriott Beach Resort ("Frenchman's Reef") and Havana Cabana Key West for all periods presented due to the closure of these hotels. In addition, comparable operating results exclude Hotel Rex beginning September 1, 2018 and the comparable period of 2017 due to the closure of the hotel for renovation.  See "Reconciliation of Comparable Operating Results" attached to this press release for a reconciliation to historical amounts.

For the quarter ended September 30, 2018, the Company reported the following:

The Company's operating results for the quarter ended September 30, 2018 were negatively impacted by renovation disruption at the Vail Marriott and the Westin Fort Lauderdale Beach Resort.  Excluding both hotels, the Company's Comparable RevPAR increased 0.7% and Comparable Hotel Adjusted EBITDA margins expanded 35 basis points.

For the nine months ended September 30, 2018, the Company reported the following:

Update on Insurance Claims

As previously disclosed, the Company has filed insurance claims resulting from the hurricanes that impacted Frenchman's Reef and Havana Cabana Key West in 2017, as well as from the 2017 wildfires in Northern California that impacted The Lodge at Sonoma.  In July 2018, the Company settled the insurance claims for Havana Cabana Key West and The Lodge at Sonoma.  During the third quarter, the Company recognized $8.2 million of business interruption income related to Frenchman's Reef, Havana Cabana Key West and The Lodge at Sonoma, as well as a $1.7 million gain on the settlement of the property damage claim for Havana Cabana Key West.  Year to date, the Company has recognized $16.3 million of business interruption income.

Frenchman's Reef: During the third quarter, the Company signed a memorandum of understanding with the government of the U.S. Virgin Islands to support the rebuilding of the hotel, which was significantly damaged by last year's hurricanes and remains closed. The public-private partnership will provide economic support for the rebuilding of the hotel, as well as ongoing tax incentives once the hotel is reopened. With the site fully stabilized, the Company has begun preparations for a comprehensive rebuild to begin in the fourth quarter.  The Company projects that Frenchman's Reef will reopen in the second quarter of 2020.      

The Company submitted an updated insurance claim during the third quarter and is working diligently with its insurance carriers to ensure the best outcome for its shareholders, while negotiating with major hotel operators regarding the future branding and management of the resort. The Company has filed a supplement to its investor presentation with additional details regarding the rebuild and future vision for Frenchman's Reef.

Capital Expenditures

The Company invested approximately $76.8 million in capital improvements at its hotels during the nine months ended September 30, 2018, primarily related to the completion of renovations at the Chicago Marriott Downtown, Havana Cabana Key West, Bethesda Marriott Suites, Westin Boston Waterfront Hotel, Westin Fort Lauderdale Beach Resort and the Vail Marriott Mountain Resort & Spa.  The Company continues to expect to spend approximately $135 million for capital improvements in 2018.  Significant projects planned for the remainder of 2018 include:

• Hotel Rex: In connection with its addition to the Viceroy Collection, the Company commenced a comprehensive renovation and re-positioning of the hotel in September 2018. The hotel is closed for approximately four months during renovation and will reopen as the Hotel Emblem. The renovation is expected to be completed in time to take advantage of an expected strong 2019 lodging market in San Francisco.
• JW Marriott Denver: The Company expects to begin renovating the hotel's guest rooms, public space and meeting rooms in the fourth quarter of 2018, with the majority of the work occurring in 2019. The renovation is expected to secure the hotel's position as the top luxury hotel in the high-end Cherry Creek submarket of Denver.

The Company incurred approximately $2.5 million in displacement of Hotel Adjusted EBITDA for the third quarter of 2018, primarily attributed to the renovations of the Vail Marriott Mountain Resort & Spa, Westin Fort Lauderdale Beach Resort and Hotel Rex.  The Company anticipates approximately $1.0 million in additional Hotel Adjusted EBITDA displacement for the remainder of 2018, which is primarily attributable to the renovation closure of the Hotel Rex.

Pending Acquisition Update

As previously disclosed, the Company is under contract to purchase a luxury resort in California for approximately $150 million.  In connection with the acquisition, the Company will issue up to 1.2 million of common limited partnership interests in the Company's Operating Partnership to the sellers at $11.76 per unit.  While certain closing conditions remain, the Company expects the transaction to close before the end of the 2018.

Balance Sheet

As of September 30, 2018, the Company had $169.7 million of unrestricted cash on hand and approximately $931.6 million of total debt, which primarily consisted of property-specific mortgage debt and $300.0 million of unsecured term loans. The Company currently has no outstanding borrowings on its $300.0 million senior unsecured credit facility and 22 of its 30 hotels are unencumbered by debt.

Subsequent to the end of the quarter, the Company entered into a new five-year $50 million term loan to support the Company's pending acquisition. The term loan will be funded upon closing of the acquisition before the end of the year.  The interest rate on the term loan is based on a pricing grid ranging from 140 to 220 basis points over LIBOR, based on the Company's leverage ratio.

Increased Share Repurchase Authorization

The Board of Directors approved an increase to the Company's share repurchase authorization from $150 million to $250 million.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.125 per share to stockholders of record as of September 28, 2018.  The dividend was paid on October 12, 2018.

Guidance

The Company is providing annual guidance for 2018, 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 is revising its 2018 guidance for RevPAR growth primarily to incorporate the impact of weather events in the third quarter, the union strike at the Westin Boston Waterfront Hotel in the fourth quarter and ongoing Marriott/Starwood integration issues.  Adjusted EBITDA is further revised for the impact of higher than expected property tax reassessments in Chicago and lower than expected business interruption income. The Company expects the full year 2018 results to be as follows:

The guidance above incorporates the following assumptions:

• Business interruption insurance income of approximately $19 million;
• Corporate expenses of approximately $29 million;
• Real estate taxes of approximately $56 million, which increased $1 million compared to prior guidance due to recent assessments at the Company's Chicago hotels;
• Interest expense of approximately $41 million;
• Income tax expense of $4 million to $5 million; and
• Does not include the pending acquisition.

Selected Quarterly Comparable Operating Information

The following table is presented to provide investors with selected quarterly comparable operating information.  The operating information includes the Company's 2018 and 2017 acquisitions and excludes Frenchman's Reef and Havana Cabana Key West for all periods presented and Hotel Rex for September 1, 2017 to December 31, 2017.

Earnings Call

The Company will host a conference call to discuss its third quarter results on Tuesday, November 6, 2018, at 9:00 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 9849529. 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 30 premium quality hotels with over 9,900 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, including statements related to the expected duration of closure of Frenchman's Reef and anticipated insurance coverage. 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, EBITDAre, 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 U.S. GAAP.  EBITDA, EBITDAre, 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, EBITDAre, 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 U.S. 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 U.S. GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by U.S. GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our U.S. GAAP results and the reconciliations to the corresponding U.S. 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, EBITDAre and FFO

EBITDA represents net income (calculated in accordance with U.S. GAAP) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization.  The Company computes EBITDAre in accordance with the National Association of Real Estate Investment Trusts ("Nareit") guidelines, as defined in its September 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate."  EBITDAre represents net income (calculated in accordance with U.S. GAAP) adjusted for: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization; (4) gains or losses on the disposition of depreciated property including gains or losses on change of control; (5) impairment write-downs of depreciated property and of investments in unconsolidated affiliates caused by a decrease in value of depreciated property in the affiliate; and (6) adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates.

We believe EBITDA and EBITDAre are useful to an investor in evaluating our operating performance because they help 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, and in the case of EBITDAre, impairment and gains or losses on dispositions of depreciated property) from our operating results. In addition, covenants included in our debt agreements use EBITDA as a measure of financial compliance. We also use EBITDA and EBITDAre as one measure in determining the value of hotel acquisitions and dispositions.

The Company computes FFO in accordance with standards established by the Nareit, which defines FFO as net income determined in accordance with U.S. 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 gains or losses on the 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 EBITDA when combined with U.S. 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 the 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, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels.

• Hotel Manager Transition Items: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels.

• 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; costs incurred related to natural disasters; and gains from insurance proceeds, other than income related to business interruption insurance.

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, EBITDAre and Adjusted EBITDA

The following tables are reconciliations of our GAAP net income to EBITDA, EBITDAre 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 includes the pre-acquisition results for our 2018 and 2017 acquisitions and excludes the results for the closed hotels (in thousands):

Comparable Hotel Operating Expenses

The following table sets forth hotel operating expenses for the three and nine months ended September 30, 2018 and 2017 for each of the hotels that we owned during these periods.  Our GAAP hotel operating expenses for the three and nine months ended September 30, 2018 and 2017 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 2018 comparable to 2017, the amounts in the column titled "Adjustments for Acquisitions" represent the pre-acquisition operating costs of The Landing Resort & Spa and the Hotel Palomar for the period from January 1, 2018 to February 28, 2018 and January 1, 2017 to September 30, 2017, respectively, and the L'Auberge de Sedona and Orchards Inn Sedona for the period from January 1, 2017 to February 27, 2017.  The amounts in the column titled "Adjustments for Closed Hotels" represent the operating costs for all periods presented of Frenchman's Reef and Havana Cabana Key West and Hotel Rex from September 1, 2018 to September 30, 2018 and the comparable period of 2017. Both Frenchman's Reef and Havana Cabana Key West closed in early September 2017 in advance of Hurricane Irma. Havana Cabana Key West reopened in April 2018 and Frenchman's Reef remains closed.  Hotel Rex closed on September 4, 2018 for a comprehensive renovation.  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.