DiamondRock Hospitality Company Reports Fourth Quarter And Full Year 2017 Results

BETHESDA, Md., Feb. 26, 2018 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") (NYSE: DRH), a lodging-focused real estate investment trust that owns a portfolio of 28 premium hotels in the United States, today announced results of operations for the quarter and year ended December 31, 2017.

2017 Operating Highlights

• Net Income: Net income was $91.9 million and earnings per diluted share was $0.46.
• Comparable RevPAR: RevPAR was $183.99, a 2.5% increase from the comparable period of 2016.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 31.21%, a 74 basis point contraction from the comparable period of 2016.
• Adjusted EBITDA: Adjusted EBITDA was $250.0 million, a decrease of $8.9 million from 2016. The decrease was due primarily to dispositions in 2016 and natural disaster impact in 2017.
• Adjusted FFO: Adjusted FFO was $201.0 million and Adjusted FFO per diluted share was $1.00.
• Dividends: The Company declared four quarterly dividends totaling $0.50 per share during 2017, returning over $100 million to shareholders.

Fourth Quarter 2017 Highlights

• Net Income: Net income was $24.8 million and earnings per diluted share was $0.12.
• Comparable RevPAR: RevPAR was $184.24, a 3.8% increase from the comparable period of 2016.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 31.22%, a 77 basis point contraction from the comparable period of 2016.
• Adjusted EBITDA: Adjusted EBITDA was $61.9 million, an increase of $3.2 million from 2016.
• Adjusted FFO: Adjusted FFO was $50.7 million and Adjusted FFO per diluted share was $0.25.
• Business Interruption Insurance Income: The Company recognized $4.1 million of business interruption insurance income during the quarter related to Frenchman's Reef and Morning Star Marriott Beach Resort and the Inn at Key West.
• Dividends: The Company declared a dividend of $0.125 per share during the fourth quarter, which was paid on January 12, 2018.

Recent Developments

• Hotel Acquisition: In January 2018, the Company signed a purchase and sale agreement to acquire the Landing Resort & Spa in South Lake Tahoe, California. The acquisition is expected to close before the end of the first quarter and will be funded with cash on hand.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company stated, "Our fourth quarter performance marked a great finish to 2017, as the portfolio generated the strongest RevPAR growth for the year.  Our portfolio continues to gain market share from smart renovations, excellent locations, and our leading asset management platform.  As we begin 2018, DiamondRock is confident about its internal value-creation opportunities.  We are investing in our portfolio to increase net asset value from repositionings such as those at the Hotel Rex San Francisco by Viceroy, Havana Cabana Key West, Vail Marriott Resort and Chicago Marriott Downtown.  The Company is also finding high-quality acquisitions to enhance its portfolio and drive additional value creation for shareholders with the Landing under contract.  We continue to evaluate other opportunities to add unique resorts and urban lifestyle hotels to our portfolio."

Operating Results      

Please see "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" and a reconciliation of these measures to net income. Comparable operating results include our 2017 acquisitions for all periods presented, exclude the Frenchman's Reef and Morning Star Marriott Beach Resort ("Frenchman's Reef") and the Inn at Key West for all periods presented due to the closure of these hotels and exclude our 2016 dispositions.  See "Reconciliation of Comparable Operating Results" attached to this press release for a reconciliation to historical amounts.

For the quarter ended December 31, 2017, the Company reported the following:

For the year ended December 31, 2017, the Company reported the following:

Update on Impact from Natural Disasters

The current status of the Company's hotels most impacted by natural disasters is as follows:

• Frenchman's Reef: The Company has made progress on remediation of the significant hurricane-related damage. The hotel is currently expected to remain closed through the end of 2019. The Company is currently working with its insurance carriers and the USVI government to evaluate all alternatives. The Company expects to receive insurance proceeds for its business interruption losses, including lost profits, during the closure period.
• The Inn at Key West: The Company is in the process of completing a comprehensive renovation of the hotel in connection with remediation of the substantial wind and water-related damage from Hurricane Irma. The hotel is expected to reopen as the Havana Cabana Key West in April 2018. The Company expects to receive insurance proceeds for its business interruption losses, including lost profits, during the closure period.

As previously disclosed, the Company is pursuing insurance claims for the remediation of property damage and business interruption at Frenchman's Reef, the Inn at Key West and the Lodge at Sonoma. The Company is insured for up to $361 million for each covered event, subject to certain deductibles and other conditions.  During the fourth quarter, the Company recognized $4.1 million of business interruption income for Frenchman's Reef and Inn at Key West.

Hotel Acquisition Activity

During 2017, the Company acquired two hotels for a total purchase price of $97 million in the resort market of Sedona, Arizona.  The L'Auberge de Sedona and the Orchards Inn Sedona generated combined RevPAR growth of 19.3% and Hotel Adjusted EBITDA margin growth of 382 basis points during 2017.  The combined hotels outperformed the Company's underwriting by $1.2 million in 2017 and the Company's total investment represents a 9% yield on full year 2017 Hotel Adjusted EBITDA.

The Company is under contract to acquire the 77-room Landing Resort & Spa in South Lake Tahoe, California for $42 million, or $545,000 per key. The Landing Resort & Spa is a premier luxury resort with one of the best locations in Lake Tahoe.  TripAdvisor currently ranks The Landing as one of the top 20 hotels in the U.S. and Condé Nast Readers' Choice Award named the hotel the #1 resort in Northern California in 2016.  The resort was redeveloped and opened essentially new in 2012.  The acquisition is expected to close before the end of the first quarter and will be funded with corporate cash.  The Company has identified a number of value-add and asset management opportunities and has underwritten the resort to stabilize in the coming years at an approximate 9.5% EBITDA yield on its total investment after full implementation of its value-add asset management plan.  The acquisition represents a 7% yield on 2017 Hotel Adjusted EBITDA.

Hotel Manager Changes

The Company made several manager changes during 2017 that it believes will create value going forward.  In August 2017, the Company terminated its management agreement with Marriott at the Courtyard Midtown East and entered into a new franchise agreement with Marriott and a new management agreement with HEI.  In October 2017, the Company entered into a new management agreement with Viceroy Hotels & Resorts for the Hotel Rex as part of its strategy to significantly reposition the hotel into a higher rate category.  In December 2017, the Company terminated its management agreement with the seller at the L'Auberge de Sedona and Orchards Inn Sedona and entered into a new management agreement with Two Roads Hospitality, a national hotel operator with extensive luxury resort experience.  The Company exercised its right to terminate its management agreement with Marriott for Frenchman's Reef due to the hotel's extensive property damage, effective February 20, 2018.

Capital Expenditures

The Company invested approximately $100 million on capital improvements during the year ended December 31, 2017, which included the following significant projects:

• Chicago Marriott Downtown: The Company completed the third phase of its multi-year renovation, which included the upgrade renovation of approximately 340 guest rooms. The hotel gained over 5.5 percentage points in market share during 2017.
• The Gwen Chicago: The Company completed the $27 million rebranding renovation of the hotel, including a complete renovation of its 311 guest rooms in April 2017. The hotel is currently ranked in the Top 10 of all hotels in Chicago by TripAdvisor.
• Worthington Renaissance: The Company completed the renovation of the hotel's 504 guest rooms in January 2017. Since the renovation, RevPAR has increased 23% and the hotel gained over 20 points of market share.
• Charleston Renaissance: The Company completed the renovation of the hotel's 166 guest rooms in February 2017. The hotel has gained significant market share post renovation, most dramatically in the fourth quarter with a 21 percentage point gain.
• The Lodge at Sonoma: The Company completed the renovation of the hotel's 182 guest rooms in April 2017. The ramp up after the renovation was interrupted by the impact of wildfires in Northern California, however the hotel is expected to gain market share in 2018.

In pursuit of optimizing its capital allocation, the Company is finding the highest return opportunities in the current environment are through value creation investments in its existing portfolio.  In total, DiamondRock expects to invest approximately $135 million on capital improvements at its hotels in 2018, which includes carryover from certain projects that commenced in 2017. Significant projects in 2018 include the following:

• Chicago Marriott Downtown: The Company commenced the final phase of its $110 million, multi-year renovation, which includes the final 258 of 1,200 guest rooms and all of the hotel's 60,000 square feet of prime meeting space. Meeting planners have responded well with post-renovation booking pace up 12.7% in 2018. With the best location and strong brand, the hotel is well positioned to continue to gain market share following the first quarter renovation disruption.
• Havana Cabana Key West: The Company will relaunch this newly-themed boutique hotel following a comprehensive repositioning of the entire asset post hurricane. The hotel will re-open as the Havana Cabana Key West in April 2018. This fully renovated and repositioned boutique hotel is expected to drive incremental market share of 5 to 10 percentage points. The Company does not anticipate significant Hotel Adjusted EBITDA displacement as it expects to receive business interruption insurance proceeds for the closure period.
• Vail Marriott Resort: This well-located Vail resort becomes unencumbered by brand and management over the next several years, creating numerous up-branding options to capture higher revenues and close the ADR gap among the luxury hotels in this growing market. In anticipation of this, the Company will complete a comprehensive renovation of the hotel's guest rooms and meeting space in 2018 after the ski season. The renovation will be done to a luxury standard to position the hotel to gain market share and partially close the gap with the luxury comp set, which currently has a $175 average daily rate premium to the Vail Marriott.
• Westin Fort Lauderdale Beach Resort: Since its acquisition in 2014, the Westin has cumulatively exceeded underwriting by $5.5 million in Hotel Adjusted EBITDA and is currently generating a 9.8x EBITDA multiple on the Company's all-in investment. To capitalize on this high-performing asset, the Company expects to renovate the hotel's 432 guest rooms in 2018. This renovation follows the completion of the newly-created Lona restaurant and redeveloped lobby experience. The rooms renovation will give the Westin the ability to increase business transient rates and to increase both group room nights and rates.
• JW Marriott Denver: To maintain its leadership position as the premier luxury hotel within Denver's high-end submarket of Cherry Creek, the Company expects to commence a renovation in the fourth quarter of 2018 of the JW Marriott's guest rooms, public space and meeting rooms. Since the majority of this renovation will take place in 2019, the Company does not expect any material displacement in 2018.
• Hotel Rex: This boutique hotel located in the heart of San Francisco's Union Square will close for the last four months of 2018 to complete a comprehensive renovation and transformation to a Viceroy hotel. Following this renovation and relaunch, the hotel will be well-positioned to take advantage of an anticipated record year in San Francisco in 2019.

The Company anticipates approximately $6 million in renovation displacement to Hotel Adjusted EBITDA in 2018, which is approximately $2 million more than the prior year. The displacement is primarily attributable to the upgrade renovations at the Vail Marriott Resort, Hotel Rex San Francisco, Westin Ft. Lauderdale Beach Resort, and the Chicago Marriott Downtown.  The displacement is expected to be approximately $2 million during the first quarter, $1 million during the second quarter, and $1.5 million during each of the third and fourth quarters.

Balance Sheet

As of December 31, 2017, the Company had $183.6 million of unrestricted cash on hand and approximately $937.8 million of total debt (approximately 3.0x full year 2017 Adjusted EBITDA), which consisted of property-specific mortgage debt and $300.0 million of unsecured term loans. The Company has no outstanding borrowings on its $300 million senior unsecured credit facility and 20 of its 28 hotels are unencumbered by debt.

Dividends

The Company's Board of Directors declared a quarterly dividend of $0.125 per share to stockholders of record as of December 31, 2017.  The dividend was paid on January 12, 2018.

ATM Equity Offering Program

The Company issued common stock under its "at-the-market" equity offering program subsequent to December 31, 2017.  In 2018, the Company opportunistically sold 230,719 shares of its common stock at an average price of $12.02 per share for net proceeds of $2.7 million.

Guidance

The Company's actual results for the year ended December 31, 2017, which came in at or above the high end of its previously provided guidance, are as follows:

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.  Comparable RevPAR growth includes the Landing Resort & Spa and excludes Frenchman's Reef and the Inn at Key West for all periods.

The Company expects the full year 2018 results to be as follows:

The guidance above incorporates the following assumptions:

• Hotel Adjusted EBITDA from the Landing Resort & Spa of approximately $2.5 million;
• Business interruption insurance proceeds of approximately $20 million;
• Corporate expenses of $27.5 million to $28.5 million, excluding severance charges expected as a result of the Company's CFO transition;
• Interest expense of $40 million to $41 million; and
• Income tax expense of $9 million to $12 million;

The Company expects approximately 14% to 15% of its full year 2018 Adjusted EBITDA to be earned during the first quarter of 2018.  Comparable RevPAR growth for the first quarter is expected to be approximately 1%. The Company's first quarter operating results are expected to be impacted by approximately $2.0 million of renovation displacement, primarily at the Chicago Marriott and the comparison to strong results in the Washington D.C. market from the Presidential inauguration in 2017.

Selected Quarterly Comparable Operating Information

The following table is presented to provide investors with selected quarterly comparable operating information.  The operating information is for our 27-hotel portfolio, which includes our 2018 and 2017 acquisitions and excludes Frenchman's Reef and the Inn at Key West for all periods presented.

Earnings Call

The Company will host a conference call to discuss its fourth quarter and full year results on Tuesday, February 27, 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 8076259. 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. As of February 26, 2018, the Company owns 28 premium quality hotels with over 9,600 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 the Inn at Key West and anticipated insurance coverage and closing of the pending acquisition. 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.