DiamondRock Hospitality Company Reports Third Quarter 2014 Results And Raises Full Year Guidance

BETHESDA, Md., Nov. 4, 2014 /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 September 30, 2014.

Operating Highlights

• Pro Forma RevPAR: Pro Forma RevPAR was $170.88, an increase of 18.6% from the comparable period of 2013.
• Pro Forma Hotel Adjusted EBITDA Margin: Pro Forma Hotel Adjusted EBITDA margin was 31.39%, an increase of 531 basis points from the comparable period of 2013.
• Pro Forma Hotel Adjusted EBITDA: Pro Forma Hotel Adjusted EBITDA was $71.7 million, an increase of 39.1% from the comparable period of 2013.
• Adjusted EBITDA: Adjusted EBITDA was $66.8 million, an increase of 31.0% from the comparable period of 2013.
• Adjusted FFO: Adjusted FFO was $48.3 million and Adjusted FFO per diluted share was $0.25.
• Hilton Garden Inn Times Square Central Acquisition: The Company acquired the 282-room Hilton Garden Inn Times Square Central in New York for $127.2 million during the third quarter. The hotel opened on September 1, 2014.
• Inn at Key West Acquisition: The Company acquired the Inn at Key West, a 106-room boutique hotel, for $47.5 million.
• Courtyard Midtown East Refinancing: The Company refinanced the Courtyard Manhattan/Midtown East during the third quarter. The new $86.0 million mortgage has a ten-year term and bears interest at a fixed rate of 4.40%.
• Dividends: The Company declared a quarterly dividend of $0.1025 per share during the third quarter.

Recent Developments

• Lexington Hotel Loan: The Company amended its existing $170.4 million mortgage loan secured by the Lexington Hotel New York City in early October. The amendment reduced the interest rate and extended the term of the loan.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company, stated, "The third quarter was the highest growth quarter in the 10-year history of the Company. We continue to reap the benefits of our urban and resort focus and the payoff from our value-add strategies implemented over the past few years, as well as benefiting from strong lodging fundamentals. Moreover, our industry-leading profit margin expansion is a testament to our asset management initiatives to increase market share and tightly control expenses. The outperformance of our portfolio enables us to raise our full year guidance for the second time this year.  We also expect our future results to benefit from the recent acquisitions of the Hilton Garden Inn Times Square Central and the Inn at Key West."

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." Discussions of "Pro Forma" exclude the Oak Brook Hills Resort sold in April 2014 and the Hilton Garden Inn Times Square Central, which opened on September 1, 2014, and include the results of operations of the Inn at Key West under previous ownership.

For the quarter ended September 30, 2014, the Company reported the following:

The Lexington Hotel New York City achieved outstanding results in the third quarter, benefiting from its renovation and branding to Marriott's Autograph Collection.  Excluding the hotel, which was under renovation during the comparable period of 2013, the Company's Pro Forma RevPAR increased 13.5% from 2013 and Pro Forma Hotel Adjusted EBITDA margin increased 353 basis points from 2013.

For the nine months ended September 30, 2014, the Company reported the following:

Hilton Garden Inn Times Square Central Acquisition

On August 29, 2014, the Company acquired the fee-simple condominium interest in the 282-room Hilton Garden Inn Times Square Central for $127.2 million, or $451,000 per key. The hotel opened on September 1, 2014 and is operated by Highgate Hotels, the largest operator of hotels in New York City.  The purchase price represents less than 12 times the hotel's projected 2015 EBITDA.

Inn at Key West Acquisition

The Company acquired the fee simple interest in the Inn at Key West, a 106-room boutique hotel located in Key West, Florida for $47.5 million, or $448,000 per key.  The purchase price represents a 12.1 multiple on forecasted 2014 Hotel Adjusted EBITDA and a 7.6% capitalization rate of the forecasted 2014 net operating income.

Courtyard Manhattan/Midtown East Refinancing

In July 2014, the Company entered into a new 10-year $86 million mortgage loan secured by the Courtyard Manhattan/Midtown East.  The loan bears interest at a fixed rate of 4.4% and is interest-only for the first two years, after which principal will amortize over 30 years. The new loan provided more than 100 percent of the proceeds and half the interest rate of the prior loan, as a result of the hotel's strong operating performance and more favorable debt market conditions.

Lexington Hotel New York City Refinancing

In October 2014, the Company amended its existing $170.4 million mortgage loan secured by the Lexington Hotel New York City.  The amended loan bears interest at an initial floating rate of LIBOR plus 275 basis points, and features a pricing grid that will further reduce the spread to as low as 175 basis points upon achieving certain hotel cash flow hurdles.  The reduced borrowing costs are expected to save the Company between $1.5 million and $2.0 million in annual interest expense.  The amended loan extends the term of the loan by 30 months.

Capital Expenditures

The Company continues to expect to spend approximately $95 million on capital improvements at its hotels in 2014, of which approximately $45 million relates to the completion of the $140 million capital improvement program and approximately $50 million relates to new 2014 capital projects.

The Company has spent approximately $56.1 million on capital improvements during the nine months ended September 30, 2014.  The majority of the capital improvements related to the substantial completion of the comprehensive renovations of the Westin Washington D.C. City Center, Westin San Diego, Hilton Boston and Hilton Burlington, as well as the guest room renovation at the Hilton Minneapolis.

Balance Sheet

As of September 30, 2014, the Company had $119.1 million of unrestricted cash on hand and approximately $1.1 billion of total debt, which consists of property-specific mortgage debt.  The Company has no outstanding borrowings on its $200 million senior unsecured credit facility.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.1025 per share to stockholders of record as of September 30, 2014.  The dividend was paid on October 10, 2014.

Outlook and Guidance

The Company has provided annual guidance for 2014, 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.  Pro Forma RevPAR growth excludes the Hilton Garden Inn Times Square Central, which is expected to increase the Company's RevPAR growth by approximately 75 basis points.

The Company is increasing its full year 2014 guidance to incorporate its third quarter outperformance and the acquisition of the Inn at Key West. The Company now expects the full year 2014 results to be as follows:

The midpoint of the guidance range above implies Hotel Adjusted EBITDA margin growth of over 265 basis points.

Earnings Call

The Company will host a conference call to discuss its third quarter results on Tuesday, November 4, 2014, at 10:00 a.m. Eastern Time (ET).  To participate in the live call, investors are invited to dial 866-202-0886 (for domestic callers) or 617-213-8841 (for international callers).  The participant passcode is 72798585. 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.

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 11,000 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.

⁽¹⁾ Includes $39.4 million of deferred tax assets, $7.2 million of prepaid expenses and $5.9 million of other assets as of September 30, 2014.

⁽²⁾ Includes $63.3 million of deferred ground rent, $11.9 million of deferred tax liabilities, $8.8 million of accrued property taxes, $3.3 million of accrued capital expenditures and $13.5 million of other accrued liabilities as of September 30, 2014.

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: We exclude the gain from the prepayment of the loan in 2014. Prior to the prepayment, cash payments received during 2010 and 2011 that were included in Adjusted EBITDA and Adjusted FFO and reduced the carrying basis of the loan were deducted from Adjusted EBITDA and Adjusted FFO, calculated based on a straight-line basis over the anticipated term of the 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, severance costs, and gains from legal settlements, bargain purchase gains, and insurance proceeds.

In addition, to derive Adjusted EBITDA we exclude gains or losses on dispositions and impairment losses because we believe that including them in EBITDA does not reflect the ongoing performance of our hotels. Additionally, the gains or losses 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):  

(1)     Includes $0.1 million and $0.3 million of income tax expense reported in discontinued operations for the three and nine months ended September 30, 2013, respectively. 

(2)     Includes $0.6 million and $1.8 million of depreciation expense reported in discontinued operations for the three and nine months ended September 30, 2013, respectively. 

(3)     Includes $14.0 million of settlement proceeds, net of a $1.2 million contingency fee paid to our legal counsel and $1.8 million of legal fees and other costs incurred over the course of the legal proceedings for the nine months ended September 30, 2014. The $1.8 million of legal fees and other costs were previously recorded as corporate expenses and the repayment of those costs through the settlement proceeds is recorded as a reduction of corporate expenses.

(4)     Classified as other hotel expenses on the consolidated statements of operations.

(5)     Classified as corporate expenses on the consolidated statements of operations.

The following tables are reconciliations of our U.S. GAAP net income to FFO and Adjusted FFO (in thousands):

(1)     Includes $0.6 million and $1.8 million of depreciation expense reported in discontinued operations for the three and nine months ended September 30, 2013, respectively.

(2)     Includes $14.0 million of settlement proceeds, net of a $1.2 million contingency fee paid to our legal counsel and $1.8 million of legal fees and other costs incurred over the course of the legal proceedings for the nine months ended September 30, 2014. The $1.8 million of legal fees and other costs were previously recorded as corporate expenses and the repayment of those costs through the settlement proceeds is recorded as a reduction of corporate expenses.

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, and the non-cash amortization of our unfavorable contract liabilities. 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.

⁽¹⁾       Pro forma to exclude sold hotels and the Hilton Garden Inn Times Square Central, as this hotel was newly built in 2014, and include the results of operations of acquired hotels under previous ownership for the periods presented.

⁽²⁾       Classified as other hotel expenses on the consolidated statements of operations.

(1) The loan may be extended for two additional one-year terms subject to the satisfaction of certain conditions and the payment of an extension fee.

(2) Non-cash GAAP adjustment recorded upon the assumption of the mortgage loan secured by the JW Marriott Denver Cherry Creek.

(3) The credit facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions.     

⁽¹⁾  Excludes the Hilton Garden Inn Times Square Central, which opened on September 1, 2014. Includes operating results for all other hotels assuming they were owned since January 1, 2013.

⁽²⁾  Excludes the Lexington Hotel New York under renovation during the third quarter of 2013.

⁽¹⁾  Excludes the Oak Brook Hills Resort sold in April 2014 and the Hilton Garden Inn Times Square Central, which opened on September 1, 2014.  Includes operating results for all other hotels assuming they were owned since January 1, 2013.

⁽²⁾  Excludes the three hotels in New York City under renovation during the nine months ended September 30, 2013; the Lexington Hotel New York, Courtyard Manhattan Midtown East and Courtyard Fifth Avenue.

⁽¹⁾   The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.

⁽²⁾   Excludes the Hilton Garden Inn Times Square Central, which opened on September 1, 2014. Includes operating results for all other hotels assuming they were owned since January 1, 2013.

⁽³⁾    Excludes the Lexington Hotel New York under renovation during the third quarter of 2013.

⁽¹⁾     The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets and the non-cash amortization of our unfavorable contract liabilities.

⁽²⁾       Includes operating results for each of the Company's hotels assuming they were owned since January 1, 2013.

⁽³⁾        Excludes the Lexington Hotel New York under renovation during the third quarter of 2013.

⁽¹⁾       The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.

⁽²⁾       Excludes the Oak Brook Hills Resort sold in April 2014 and the Hilton Garden Inn Times Square Central, which opened on September 1, 2014.  Includes operating results for all other hotels assuming they were owned since January 1, 2013.

⁽³⁾       Excludes the three hotels in New York City under renovation during the nine months ended September 30, 2013; the Lexington Hotel New York, Courtyard Manhattan Midtown East and Courtyard Fifth Avenue.

⁽¹⁾     The non-cash adjustments include expenses incurred by the hotels due to the straight lining of the rent from ground lease obligations, the non-cash amortization of our favorable lease assets, and the non-cash amortization of our unfavorable contract liabilities.

⁽²⁾     Excludes the Oak Brook Hills Resort sold in April 2014 and includes operating results all other hotels assuming they were owned since January 1, 2013.

⁽³⁾       Excludes the three hotels in New York City under renovation during the nine months ended September 30, 2013; the Lexington Hotel New York, Courtyard Manhattan Midtown East and Courtyard Fifth Avenue.

SOURCE DiamondRock Hospitality Company