DiamondRock Hospitality Company Reports Fourth Quarter And Full Year 2018 Results

BETHESDA, Md., Feb. 25, 2019 /PRNewswire/ -- DiamondRock Hospitality Company (the "Company") (NYSE: DRH), a lodging-focused real estate investment trust that owns a portfolio of 31 premium hotels in the United States, today announced results of operations for the quarter and year ended December 31, 2018.

Fourth Quarter 2018 Highlights

• Net Income: Net income was $24.0 million and earnings per diluted share was $0.12.
• Comparable RevPAR: RevPAR was $188.55, a 1.9% increase from the comparable period of 2017.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 30.23%, a 92 basis point contraction from the comparable period of 2017.  Excluding the Westin Boston, which was impacted by a union strike, the Company's Hotel Adjusted EBITDA margin was flat to the comparable period of 2017.
• Adjusted EBITDA: Adjusted EBITDA was $64.5 million, an increase of $2.6 million from 2017.
• Adjusted FFO: Adjusted FFO was $53.8 million and Adjusted FFO per diluted share was $0.26.
• Hotel Acquisition: In December 2018, the Company acquired Cavallo Point in Sausalito, California for total consideration of $152 million.
• Business Interruption Income: The Company recognized $3.1 million of business interruption income during the quarter related to the insurance claim for Frenchman's Reef and Morning Star Marriott Beach Resort ("Frenchman's Reef").
• Share Repurchases: The Company began repurchasing shares of its common stock in December 2018.  To date, the Company has repurchased 6.5 million shares of its common stock at an average price of $9.50 per share.

Full Year 2018 Highlights

• Net Income: Net income was $87.8 million and earnings per diluted share was $0.43.
• Comparable RevPAR: RevPAR was $187.13, a 1.3% increase from the comparable period of 2017.
• Comparable Hotel Adjusted EBITDA Margin: Hotel Adjusted EBITDA margin was 30.27%, a 70 basis point contraction from the comparable period of 2017.  Excluding the Westin Boston, which was impacted by Marriott/Starwood integration issues and a union strike during 2018, the Company's Hotel Adjusted EBITDA margin contracted 8 basis point from the comparable period of 2017.
• Adjusted EBITDA: Adjusted EBITDA was $254.1 million, an increase of $4.1 million from 2017.
• Adjusted FFO: Adjusted FFO was $210.0 million and Adjusted FFO per diluted share was $1.02.
• Business Interruption Income: The Company recognized $19.4 million of business interruption income during the year related to the insurance claims for Frenchman's Reef, Havana Cabana Key West and The Lodge at Sonoma Renaissance Resort & Spa.
• Hotel Acquisitions: The Company acquired three hotels in 2018 for total consideration of approximately $274 million.
• ATM Equity Offering Program: The Company issued approximately 7.5 million shares of its common stock for an average price of $12.56 per share during the first half of 2018.

Mark W. Brugger, President and Chief Executive Officer of DiamondRock Hospitality Company stated, "Full year 2018 results were consistent with our internal expectations and above the mid-point of our guidance.  We were pleased with 1.3% RevPAR growth in light of an 80 basis point headwind from renovation disruption and an additional 50 basis point headwind from the union strike and Marriott/Starwood integration issues at the Boston Westin.  The year also marked great progress on several major repositionings, including the Hotel Emblem San Francisco and Havana Cabana Key West.  Additionally, we repurchased 6.5 million shares of our stock over the last 90 days under our share repurchase plan to take advantage of the large discount to the net asset value of our real estate."

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 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 Emblem (formerly Hotel Rex) from September 1 to December 31, 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 December 31, 2018, the Company reported the following:

The Company's operating results for the fourth quarter were negatively impacted by the union strike and ongoing Marriott/Starwood integration issues at the Westin Boston Waterfront Hotel.  Excluding Westin Boston, the Company's Comparable RevPAR increased 2.3% and Comparable Hotel Adjusted EBITDA margins were essentially flat.  Additionally, the Company incurred approximately $1.0 million of Hotel Adjusted EBITDA displacement due to the closure of Hotel Emblem for renovation beginning on September 1, 2018.

For the year ended December 31, 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.  During the third quarter of 2018, the Company settled the insurance claims for Havana Cabana Key West and The Lodge at Sonoma.  The Company recognized business interruption insurance income related to these insurance claims as follows:

The Company is in the process of rebuilding Frenchman's Reef following the significant damage caused by the hurricanes in 2017 and the resort is expected to reopen in 2020.  Under its insurance policy, the Company is entitled to be compensated for, among other things, the cost to replace the damaged property, as well as lost profits during the rebuilding period.  The Company and its insurers are currently in discussions and litigation regarding the Company's insurance claim.

Capital Expenditures

The Company invested approximately $115.2 million in capital improvements at its hotels during the year ended December 31, 2018, which included the following significant projects:

• Chicago Marriott Downtown: The Company substantially completed the hotel's multi-year renovation, which included the remaining 258 of 1,200 guest rooms and 60,000 square feet of meeting space.
• Havana Cabana Key West:  The Company completed a comprehensive renovation of the hotel as part of the remediation of the substantial wind and water-related damage caused by Hurricane Irma.  The hotel reopened as the Havana Cabana Key West in April 2018.
• Bethesda Marriott Suites:  The Company completed a renovation of the guestrooms at the hotel during the first quarter.
• Westin Boston Waterfront Hotel:  The Company completed a refresh of the hotel's guest rooms during the first quarter.
• Vail Marriott:  The Company completed a renovation of the hotel's guest rooms and meeting space in the third quarter.
• Westin Fort Lauderdale Beach Resort:  The Company completed a renovation of the hotel's guest rooms in the third quarter.
• Hotel Emblem San Francisco: The Company substantially completed a comprehensive renovation and re-positioning of the former Hotel Rex as the Hotel Emblem San Francisco, part of Viceroy's Urban Retreats Collection, in the fourth quarter. The hotel closed for approximately four months during renovation and reopened in January 2019.

DiamondRock expects to invest approximately $125 million on capital improvements at its hotels in 2019, which includes carryover of $20 million from certain projects that commenced in 2018.  Significant projects in 2019 include the following:

• JW Marriott Denver:  The Company commenced a renovation of the hotel's guest rooms and meeting space in January 2019 and will renovate the public space later this year.  The renovation is expected to secure the hotel's position as the top luxury hotel in the high-end Cherry Creek submarket of Denver.
• Sheraton Suites Key West: The Company expects to complete a comprehensive renovation of the hotel, which will include upgrades to the resort's entrance, lobby, restaurant, outdoor lounge, pool area and guestrooms.  In order to minimize disruption, the renovation is expected to occur from August to November, the hotel's slowest period of the year.
• The Lodge at Sonoma: The Company expects to enhance the cottage rooms and landscaping to better align the hotel with the luxury competition in the market, reposition the restaurant with a new concept from world-renowned chef, Michael Mina, and enhance the spa to a luxury level.  The Company is also evaluating a brand change for the hotel.
• Vail Marriott: The Company expects to complete the second phase of the hotel renovation, which includes the upgrade renovation of the spa and fitness center.  The scope of this project is consistent with the Company's multi-phased strategy to renovate the hotel to a luxury standard.
• Worthington Renaissance: The Company expects to renovate the lobby and reposition the restaurant outlets during the third quarter of 2019.

Hotel Acquisition Activity

The Company acquired three hotels during 2018 for a combined investment of $274 million.  On March 1, 2018, the Company acquired the 77-room Landing Resort & Spa in South Lake Tahoe, California for $42 million, or $545,000 per key.  The Landing is a premier luxury resort with one of the best locations in Lake Tahoe.  Also on March 1, 2018, the Company acquired the 242-room Hotel Palomar in Phoenix, Arizona for $80 million, or $331,000 per key.  The Hotel Palomar is a highly-rated boutique hotel located in the heart of the CityScape mixed-use project in downtown Phoenix.

On December 12, 2018, the Company acquired the 142-room Cavallo Point, the Lodge at the Golden Gate for total consideration of $152 million.  Cavallo Point is a premier luxury hotel located in the Golden Gate National Recreation Area in Sausalito, California and has been ranked #1 Best Hotel in the San Francisco Bay Area by Travel + Leisure magazine.  In connection with the acquisition, the Company issued 796,684 units of common limited partnership interests in the Company's Operating Partnership to certain of the sellers at $11.76 per unit.  Additionally, the Company entered into a new five-year $50 million unsecured term loan for purposes of maintaining qualified non-recourse debt associated with the property.

Balance Sheet

As of December 31, 2018, the Company had $43.9 million of unrestricted cash on hand and approximately $978.0 million of total debt, which consisted of property-specific mortgage debt, $350.0 million of unsecured term loans and no outstanding borrowings on its $300.0 million senior unsecured credit facility.  Subsequent to December 31, 2018, the Company borrowed $45.0 million on its senior unsecured credit facility.

Share Repurchase & ATM Programs

The Company has repurchased 6.5 million shares of its common stock at an average price of $9.50 per share since it began repurchasing shares in December 2018.  The Company repurchased 3.4 million shares of its common stock at an average price of $9.49 per share for a total purchase price of $32.2 million during the fourth quarter of 2018.  Subsequent to December 31, 2018, the Company repurchased 3.1 million shares of its common stock at an average price of $9.52 per share for a total purchase price of $30.0 million.  The Company has $188 million of remaining authorized capacity under its $250 million share repurchase program.

Earlier in 2018, the Company opportunistically sold approximately 7.5 million shares of its common stock at an average price of $12.56 per share under its "at-the-market" (ATM) equity offering program.

Guidance

The Company is providing annual guidance for 2019, 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 assumes all of the Company's hotels were owned as of January 1, 2018, but excludes Havana Cabana Key West for January 1 to March 31, 2018 and 2019, Hotel Emblem for September 1 to December 31, 2018 and 2019 and Frenchman's Reef for all periods.

The Company expects the full year 2019 results to be as follows:

The guidance above incorporates business interruption insurance income related to Frenchman's Reef of only $8.8 million, which is less than the $16.1 million recognized in 2018.  The Company believes it is entitled to at least $16.1 million of business interruption insurance income for the full year 2019, but the insurers have only agreed to $8.8 million at this time, which represents lost profits through April 2019.  The Company continues to negotiate with its insurers to recover all of the amounts to which it believes it is legally entitled, but the timing of a resolution is uncertain.  The following chart provides a quarterly comparison of income received from business interruption insurance in 2018 and projected for 2019:

The Company's guidance also incorporates the following assumptions:

• Renovation disruption of approximately $3 million to $4 million to Hotel Adjusted EBITDA;
• Corporate expenses of $28.5 million to $29.5 million;
• Interest expense of $49 million to $50 million;
• Income tax expense of $2 million to $5 million; and
• No additional share repurchases.

The Company expects approximately 17% to 19% of its full year 2019 Adjusted EBITDA to be earned during the first quarter of 2019.  Based on seasonality, group patterns and the impact of the government shutdown, the Company expects the first quarter to be its lowest growth quarter of the year with modestly positive RevPAR growth.  The Company expects significant acceleration of RevPAR growth in the second and third quarters due to the benefit from recent renovations, asset management initiatives at newly acquired hotels and an easy comparison from the 2018 merger integration challenges at the Westin Boston.

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 acquisitions for all periods and excludes Havana Cabana Key West for January 1, 2018 to March 31, 2018, Hotel Emblem for September 1, 2018 to December 31, 2018 and Frenchman's Reef for all periods.

Earnings Call

The Company will host a conference call to discuss its fourth quarter and full year results on Tuesday, February 26, 2019, 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 7979009. 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 31 premium quality hotels with over 10,000 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.