DiamondRock Hospitality Company Reports Second Quarter 2013 Results

BETHESDA, Md., Aug. 9, 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 June 30, 2013.

Second Quarter Highlights

• RevPAR: The Company's RevPAR was $146.84, an increase of 0.2% from 2012. Excluding the Company's New York City hotels under renovation, the Company's RevPAR increased 6.7% from 2012.
• Hotel Adjusted EBITDA Margin: The Company's Hotel Adjusted EBITDA margin was 29.59%, a decrease of 104 basis points from 2012.  Excluding the Company's New York City hotels under renovation, the Company's Hotel Adjusted EBITDA margin was 30.93%, an increase of 130 basis points from 2012.
• Adjusted EBITDA:The Company's Adjusted EBITDA was $62.4 million.
• Adjusted FFO: The Company's Adjusted FFO was $43.2 million and Adjusted FFO per diluted share was $0.22.
• Dividends: The Company declared a quarterly dividend of $0.085 per share during the second quarter.
• Share Repurchase Program: The Company is announcing today that its Board of Directors has authorized a $100 million share repurchase program.
• Guidance: The Company reaffirmed full year 2013 guidance, including post-renovation Adjusted EBITDA of $195 million to $205 million and Adjusted FFO per share of $0.70 to $0.74.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "We are pleased with our second quarter operating results with RevPAR growing 6.7% and profit margins expanding 130 basis points, excluding hotels under renovation.  We continue to see favorable lodging trends, particularly in the group segment, which led to stronger than expected performance at the Westin Boston and the Chicago Marriott Downtown.

"We made significant progress on our renovation program during the quarter and we expect to complete the most disruptive work by the end of the third quarter.  The renovations of our two New York City Courtyard by Marriott hotels, including the addition of 5 incremental guest rooms, are complete.  We are getting closer to completing our  comprehensive renovation of the Lexington Hotel, upgrading the property and adding 15 new rooms, and we expect to officially join Marriott's Autograph Collection this month.  We are positioning our portfolio to deliver outstanding growth as we realize the upside potential of our properties and benefit from our strong market concentrations."

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 June 30, 2013, the Company reported the following:

The Company's operating results for the quarter ended June 30, 2013 were significantly impacted by the displacement of approximately 31,400 room nights at its three New York City hotels 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:

For the six months ended June 30, 2013, the Company reported the following:

The following are selected operating results for the Company, excluding the three New York City hotels under renovation, which resulted in the displacement of approximately 55,300 room nights during the six months ended June 30, 2013:

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 June 30, 2013, the Company has spent approximately $42.6 million on these capital improvements. The Company currently expects renovation disruption of $12 to $15 million of Hotel Adjusted EBITDA during the year ended December 31, 2013, which has been factored into 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 made significant progress on its comprehensive renovation of the Lexington Hotel during the second quarter, essentially completing the hotel's public spaces and returning approximately 365 renovated rooms to available inventory, with the balance of the rooms all under renovation. The remaining rooms will be substantially complete by the end of the third quarter and the hotel is now integrated with the Marriott reservation system. The upgrade to Marriott's Autograph Collection is expected to occur during the month of August 2013.

The Company will create 15 new rooms at the hotel by splitting several underutilized junior suites and converting an underutilized lounge into two new rooms.  After renovation, the Lexington Hotel will include 725 guestrooms. The incremental rooms will cost less than $1 million, or less than $70,000 per key.  The Company believes that the addition of 15 new rooms will increase the net asset value of the hotel by approximately $8 million.  The total estimated renovation cost is expected to be approximately $46 million, after including the cost of the new rooms.

Manhattan Courtyards:  The Company completed the renovation of the guest rooms, corridors and guest bathrooms at the Courtyard Manhattan/Midtown East and Courtyard Manhattan/Fifth Avenue.  The renovation at the Courtyard Midtown East included the addition of 5 new guest rooms that the Company believes will add approximately $2.5 million to the net asset value of the hotel.

The Company has other significant renovation projects planned for later in 2013 and early 2014, which are not expected to cause material disruption.  The Company has finalized the scope and timing of the following projects:

• Westin Washington D.C.:  A comprehensive $16.5 million renovation is expected to start during the fourth quarter of 2013 and to be completed in early 2014.  After renovation, the hotel will be well positioned to regain market share and 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: A comprehensive $14.5 million renovation is expected to start during the fourth quarter of 2013 and be completed in early 2014.  The renovation scope will include the guestrooms, corridors, lobby, public areas, and meeting space at the hotel.
• Hilton Minneapolis:A $13 million renovation of the guest rooms, guest bathrooms and corridors is expected to commence in late 2013. The renovated hotel is expected to allow the hotel to further penetrate the group segment.
• Hilton Boston Downtown: A $7 million renovation of the guest rooms, corridors, public areas, and meeting space is expected to commence during the fourth quarter of 2013 and be completed in early 2014. The Company is also evaluating the feasibility of converting more than 20 of the 66 existing suites into additional rooms at the hotel.
• Hilton Burlington:  A $6 million renovation of the lobby, corridors, guest rooms and outdoor space is expected to commence during the fourth quarter of 2013 and be completed in early 2014. 

Hilton Garden Inn Times Square Update

The Company is under contract to purchase the 282-room hotel being constructed in Times Square for a fixed price of approximately $127 million, or $450,000 per key.  Construction is progressing on schedule and the Company expects to close on the acquisition of the hotel in mid-2014.  The hotel has recently completed vertical construction at 37 stories, and the Company made its final $5 million deposit in July, bringing the total deposit to $27 million.  The hotel will be branded a Hilton Garden Inn and be operated by Highgate Hotels, the largest operator of hotels in New York City.  At this time, the Company anticipates the balance of the acquisition price of approximately $100 million will be funded by corporate cash, a draw on its corporate credit facility, or proceeds from financing one of its unencumbered assets.

Balance Sheet

As of June 30, 2013, the Company had $54.3 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.

Share Repurchase Program

The Company's Board of Directors voted to authorize the Company to purchase up to $100 million in shares of its common stock. Repurchases under this program will be made in open market or privately negotiated transactions.  This authority may be exercised from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations.  The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.  The share repurchase program may be suspended or terminated at any time without prior notice.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.085 per share to stockholders of record as of June 28, 2013.  The dividend was paid on July 11, 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.  The current guidance reflects the outperformance of certain of the Company's hotels compared to previous expectations, specifically:

• Stronger group performance at the Westin Boston Waterfront and the Chicago Marriott Downtown
• Stronger transient demand at the San Diego Westin and Salt Lake City Marriott.

This outperformance is offset by an increase in estimated renovation disruption to a range of $12.0 million to $15.0 million.  The increase is the result of additional displaced rooms at the Lexington Hotel as a result of a power interruption and construction of the 15 new rooms. The increase to the Company's disruption estimate will primarily impact the third quarter.

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

Earnings Call

The Company will host a conference call to discuss its second quarter results on Friday, August 9, 2013, at 9:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 866-515-2915 (for domestic callers) or 617-399-5129 (for international callers).  The participant passcode is 61365633. 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.

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 11,500 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 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 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 reflect 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 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, 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.