Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
  
CURRENT REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
February 25, 2019 
DiamondRock Hospitality Company
(Exact name of registrant as specified in charter)
 
 
 
 
 
 
Maryland
 
001-32514
 
20-1180098
(State or Other Jurisdiction
of Incorporation)
 
(Commission
File Number)
 
(IRS Employer
Identification No.)
2 Bethesda Metro Center, Suite 1400
Bethesda, MD 20814
(Address of Principal Executive Offices) (Zip Code)
(240) 744-1150
(Registrant’s telephone number, including area code)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
o Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      o

 





This Current Report on Form 8-K (“Current Report”) 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,” “anticipate,” “position,”  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 those risks and uncertainties associated with our business described from time to time in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K filed on February 27, 2018. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that the expectations will be attained or that any deviation will not be material. All information in this Current Report is as of the date of this Current Report, and we undertake no obligation to update any forward-looking statement to conform the statement to actual results or changes in our expectations.
ITEM 2.02. Results of Operations and Financial Condition.
On February 25, 2019, DiamondRock Hospitality Company (the “Company”) issued a press release announcing its financial results for the quarter and year ended December 31, 2018. A copy of that press release is furnished as Exhibit 99.1 and is incorporated by reference herein.

The information furnished pursuant to this Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for any purpose, including for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of any general incorporation language in such filing.

ITEM 9.01. Financial Statements and Exhibits.
(d) Exhibits.
The following exhibits are included with this report: 
 
 
 
Exhibit No.
  
Description
 
 
99.1
  





SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
 
 
 
 
DIAMONDROCK HOSPITALITY COMPANY
 
 
 
 
Date: February 25, 2019
 
 
 
By:
 
/s/ Briony R. Quinn
 
 
 
 
 
 
Briony R. Quinn
 
 
 
 
 
 
Senior Vice President and Treasurer







Exhibit

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12732804&doc=3

COMPANY CONTACT    

Jay Johnson
(240) 744-1150

FOR IMMEDIATE RELEASE

DIAMONDROCK HOSPITALITY COMPANY REPORTS FOURTH QUARTER AND FULL YEAR 2018 RESULTS
Repurchased 6.5 Million Shares
Three Strategic Acquisitions in 2018
Repositioned Havana Cabana Key West and Hotel Emblem
BETHESDA, Maryland, Monday, February 25, 2019 – 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.


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For the quarter ended December 31, 2018, the Company reported the following:
 
Fourth Quarter
 
 
2018
 
2017
Change

Comparable Operating Results (1)
 
 
 
 
ADR

$244.82

 

$239.01

2.4
%
Occupancy
77.0
%
 
77.4
%
-0.4 percentage points

RevPAR

$188.55

 

$185.04

1.9
%
Revenues
$229.5 million

 
$224.2 million

2.4
%
Hotel Adjusted EBITDA Margin
30.23
%
 
31.15
%
-92 basis points

 
 
 
 
 
Actual Operating Results (2)
 
 
 
 
Revenues
$223.4 million

 
$207.0 million

7.9
%
Net income
$24.0 million

 
$24.8 million

-$0.8 million

Earnings per diluted share

$0.12

 

$0.12


$0.00

Adjusted EBITDA
$64.5 million

 
$61.9 million

$2.6 million

Adjusted FFO
$53.8 million

 
$50.7 million

$3.1 million

Adjusted FFO per diluted share

$0.26

 

$0.25


$0.01

(1) Comparable operating results include exclude Frenchman’s Reef, Havana Cabana Key West and Hotel Emblem for all periods presented and include pre-acquisition operating results for The Landing Resort & Spa and Hotel Palomar Phoenix from October 1, 2017 to December 31, 2017 and Cavallo Point from October 1, 2018 to December 9, 2018 and October 1, 2017 to December 31, 2017. Pre-acquisition operating results were obtained from the seller during the acquisition due diligence process. We have made no adjustments to the amounts provided to us by the seller and these pre-acquisition operating results were not audited or reviewed by the Company's independent auditors.
(2) Actual operating results include Frenchman’s Reef, Havana Cabana Key West and Hotel Emblem and the operating results of hotels acquired for the Company's respective ownership periods.

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.


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For the year ended December 31, 2018, the Company reported the following:
 
Year Ended
 
 
2018
 
2017
Change

Comparable Operating Results (1)
 
 
 
 
ADR

$237.07

 

$231.27

2.5
 %
Occupancy
78.9
%
 
79.9
%
- 1.0 percentage points

RevPAR

$187.13

 

$184.80

1.3
 %
Revenues
$902.4 million

 
$886.6 million

1.8
 %
Hotel Adjusted EBITDA Margin
30.27
%
 
30.97
%
-70 basis points

 
 
 
 
 
Actual Operating Results (2)
 
 
 
 
Revenues
$863.7 million

 
$870.0 million

-0.7
 %
Net income
$87.8 million

 
$91.9 million

-$4.1 million

Earnings per diluted share

$0.43

 

$0.46


-$0.03

Adjusted EBITDA
$254.1 million

 
$250.0 million

$4.1 million

Adjusted FFO
$210.0 million

 
$201.0 million

$9.0 million

Adjusted FFO per diluted share

$1.02

 

$1.00


$0.02

(1) Comparable operating results exclude Frenchman’s Reef and Havana Cabana Key West for all periods presented and Hotel Emblem from September 1, 2018 to December 31, 2018 and the comparable period of 2017 and include pre-acquisition operating results for The Landing Resort & Spa and Hotel Palomar Phoenix from January 1, 2018 to February 28, 2018 and January 1, 2017 to December 31, 2017, for Cavallo Point from January 1, 2018 to December 9, 2018 and January 1, 2017 to December 31, 2017 and for L'Auberge de Sedona and Orchards Inn Sedona from January 1, 2017 to February 27, 2017. Pre-acquisition operating results were obtained from the seller during the acquisition due diligence process. We have made no adjustments to the amounts provided to us by the seller and these pre-acquisition operating results were not audited or reviewed by the Company's independent auditors.
(2) Actual operating results include Frenchman’s Reef, Havana Cabana Key West and Hotel Emblem and the operating results of hotels acquired for the Company's respective ownership periods.

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:
Hotel
Quarter Ended
Year Ended
December 31, 2018
Frenchman's Reef
$3.1 million
$16.1 million
Havana Cabana Key West
 
$2.1 million
The Lodge at Sonoma
 
$1.2 million
Total
$3.1 million
$19.4 million

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.


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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.


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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:
 
Metric
Low End
High End
 
 
(Includes Frenchman's Reef Business Interruption Agreed Upon For Partial Year 2019)
 
Comparable RevPAR Growth
0.5 percent
2.5 percent
 
Adjusted EBITDA
$256 million
$268 million
 
Adjusted FFO

$204 million
$214 million
 
Adjusted FFO per share (based on 205 million diluted shares)

$1.00 per share
$1.04 per share

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

6



is uncertain. The following chart provides a quarterly comparison of income received from business interruption insurance in 2018 and projected for 2019:
Frenchman's Reef BI Income
Quarter 1
Quarter 2
Quarter 3
Quarter 4
Full Year
2018
$5.3 million
$2.0 million
$5.7 million
$3.1 million
$16.1 million
2019
$8.8 million
TBD
TBD
TBD
$8.8 million + TBD
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.
 
Quarter 1, 2018
Quarter 2, 2018
Quarter 3, 2018
Quarter 4, 2018
Full Year 2018
ADR
$
215.62

$
248.73

$
235.89

$
244.43

$
236.71

Occupancy
73.6
%
82.7
%
82.2
%
76.9
%
78.9
%
RevPAR
$
158.72

$
205.69

$
193.90

$
188.06

$
186.75

Revenues (in thousands)
$
195,580

$
248,351

$
232,028

$
231,328

$
907,287

Hotel Adjusted EBITDA (in thousands)
$
47,047

$
84,225

$
73,043

$
69,921

$
274,236

        % of full Year
17.2
%
30.7
%
26.6
%
25.5
%
100.0
%
Hotel Adjusted EBITDA Margin
24.06
%
33.91
%
31.48
%
30.23
%
30.23
%
Available Rooms
853,470

869,590

879,368

873,540

3,475,968

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

7



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.

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DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

 
December 31, 2018
 
December 31, 2017
ASSETS
(unaudited)
 
 
Property and equipment, net
$
2,944,617

 
$
2,692,286

Restricted cash
47,735

 
40,204

Due from hotel managers
86,914

 
86,621

Favorable lease assets, net
63,945

 
26,690

Prepaid and other assets (1)
10,506

 
71,488

Cash and cash equivalents
43,863

 
183,569

Total assets
$
3,197,580

 
$
3,100,858

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Mortgage and other debt, net of unamortized debt issuance costs
$
629,747

 
$
639,639

Term loans, net of unamortized debt issuance costs
348,219

 
298,153

Total debt
977,966

 
937,792

 
 
 
 
Deferred income related to key money, net
11,739

 
14,307

Unfavorable contract liabilities, net
73,151

 
70,734

Deferred ground rent
93,719

 
86,614

Due to hotel managers
72,678

 
74,213

Dividends and distributions declared and unpaid
26,339

 
25,708

Accounts payable and accrued expenses (2)
51,395

 
57,845

Total other liabilities
329,021

 
329,421

Stockholders’ Equity:
 
 
 
Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 204,536,485 and 200,306,733 shares issued and outstanding at December 31, 2018 and 2017, respectively
2,045

 
2,003

Additional paid-in capital
2,126,472

 
2,061,451

Accumulated deficit
(245,620
)
 
(229,809
)
Total stockholders’ equity
1,882,897

 
1,833,645

Noncontrolling interests
7,696

 

Total equity
1,890,593

 
1,833,645

Total liabilities, noncontrolling interests and stockholders’ equity
$
3,197,580

 
$
3,100,858


(1) Includes $0.2 million and $55.8 million of insurance receivables, $0.3 million and $0.9 million of deferred tax assets, $3.9 million and $8.0 million of prepaid expenses and $6.1 million and $6.8 million of other assets as of December 31, 2018 and December 31, 2017, respectively.

(2) Includes $7.2 million and $6.0 million of deferred tax liabilities, $1.9 million and $11.2 million of accrued hurricane-related costs, $17.8 million and $15.3 million of accrued property taxes, $12.4 million and $11.7 million of accrued capital expenditures, and $12.1 million and $13.6 million of other accrued liabilities as of December 31, 2018 and December 31, 2017, respectively.

9



DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
 
Three Months Ended December 31,
 
Year Ended December 31,
 
2018
 
2017
 
2018
 
2017
Revenues:
(unaudited)
 
(unaudited)
 
(unaudited)
 
 
Rooms
$
161,262

 
$
152,627

 
$
631,048

 
$
635,932

Food and beverage
48,811

 
42,858

 
184,097

 
183,049

Other
13,334

 
11,552

 
48,559

 
51,024

Total revenues
223,407

 
207,037

 
863,704

 
870,005

Operating Expenses:
 
 
 
 
 
 
 
Rooms
40,106

 
38,123

 
158,078

 
158,534

Food and beverage
30,507

 
27,136

 
118,709

 
120,460

Management fees
6,617

 
3,652

 
22,159

 
21,969

Other hotel expenses
81,276

 
74,236

 
322,713

 
302,272

Depreciation and amortization
27,220

 
24,059

 
104,524

 
99,090

Impairment losses

 
852

 

 
3,209

Hotel acquisition costs

 

 

 
2,028

Corporate expenses
6,424

 
7,512

 
28,563

 
26,711

Business interruption insurance income
(3,125
)
 
(4,051
)
 
(19,379
)
 
(4,051
)
Gain on property insurance settlement

6

 

 
(1,724
)
 

Total operating expenses, net
189,031

 
171,519

 
733,643

 
730,222

 

 

 

 

Interest and other income, net
(378
)
 
(897
)
 
(1,806
)
 
(1,820
)
Interest expense
10,586

 
9,691

 
40,970

 
38,481

Loss on early extinguishment of debt

 

 

 
274

Loss on sales of hotel properties, net

 
764

 

 
764

  Total other expenses, net
10,208

 
9,558

 
39,164

 
37,699

Income before income taxes
24,168

 
25,960

 
90,897

 
102,084

Income tax expense
(162
)
 
(1,188
)
 
(3,101
)
 
(10,207
)
Net income
24,006

 
24,772

 
87,796

 
91,877

Less: Net income attributable to noncontrolling interests
(12
)
 

 
(12
)
 

Net income attributable to common stockholders
$
23,994

 
$
24,772

 
$
87,784

 
$
91,877

Earnings per share:
 
 
 
 
 
 
 
Net income per share available to common stockholders - basic
$
0.12

 
$
0.12

 
$
0.43

 
$
0.46

Net income per share available to common stockholders - diluted
$
0.12

 
$
0.12

 
$
0.43

 
$
0.46

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
208,259,006

 
200,835,786

 
205,462,911

 
200,784,450
Diluted
208,939,302

 
201,626,820

 
206,131,150

 
201,521,468






10




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 measures 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 real estate related 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 related 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

11



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: The Financial Accounting Standards Board promulgates new accounting standards that require or permit 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 derivative instruments. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.



12



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):
 
Three Months Ended December 31,
 
Year Ended December 31,
 
2018
 
2017
 
2018
 
2017
Net income
$
24,006

 
$
24,772

 
$
87,796

 
$
91,877

Interest expense
10,586

 
9,691

 
40,970

 
38,481

Income tax expense
162

 
1,188

 
3,101

 
10,207

Real estate related depreciation and amortization
27,220

 
24,059

 
104,524

 
99,090

EBITDA
61,974

 
59,710

 
236,391

 
239,655

Impairment losses

 
852

 

 
3,209

Loss on sale of hotel properties (1)

 
764

 

 
764

EBITDAre
61,974

 
61,326

 
236,391

 
243,628

Non-cash ground rent
1,990

 
1,535

 
7,305

 
6,290

Non-cash amortization of favorable and unfavorable contract liabilities, net
(495
)
 
(478
)
 
(1,969
)
 
(1,912
)
Hotel acquisition costs

 

 

 
2,028

Hurricane-related costs (2)
850

 
1,787

 
3,855

 
3,280

Hotel manager transition and pre-opening items (3)
209

 
(2,275
)
 
(1,491
)
 
(3,637
)
Gain on property insurance settlement
6

 

 
(1,724
)
 

Loss on early extinguishment of debt

 

 

 
274

Severance costs (4)

 

 
11,691

 

Adjusted EBITDA
$
64,534

 
$
61,895

 
$
254,058

 
$
249,951


(1)  
During the year ended December 31, 2017, we recognized an incremental pre-tax loss of $0.8 million due to a post-closing adjustment for hotel expenses incurred under our ownership period related to 2016 dispositions.
(2)  
Represents stabilization, cleanup, and other costs (such as professional fees and hotel labor) incurred at our hotels impacted by Hurricanes Irma or Maria that have not been or are not expected to be recovered by insurance.
(3)
Three months ended December 31, 2018 consists of $0.2 million related to pre-opening costs related to Hotel Emblem. Year ended December 31, 2018 consists of (a) manager transition costs of $0.1 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona and (b) pre-opening costs of $0.6 million related to Havana Cabana Key West and Hotel Emblem, offset by $2.2 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.
Three months ended December 31, 2017 consists of a reduction in employee severance costs of approximately $0.1 million related to Courtyard Manhattan Midtown East; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement. Year ended December 31, 2017 consists of the following costs for Courtyard Manhattan Midtown East: (a) employee severance costs of approximately $0.3 million, (b) manager transition costs of approximately $0.1 million offset by (c) $1.9 million of accelerated amortization of key money received from Marriott; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.
(4)  
Year ended December 31, 2018 consists of (a) $10.9 million related to payments made to unionized employees under a voluntary buyout program at the Lexington Hotel New York, which are classified within other hotel expenses on the consolidated statement of operations and (b) $0.8 million related to the departure of our former Executive Vice President and Chief Financial Officer, which is classified within corporate expenses on the consolidated statement of operations.
 

13



 
Full Year 2019 Guidance
 
Low End
 
High End
Net income
$
79,700

 
$
94,700

Interest expense
50,000

 
49,000

Income tax expense
2,000

 
5,000

Real estate related depreciation and amortization
116,000

 
111,000

EBITDAre
247,700

 
259,700

Non-cash ground rent
7,300

 
7,300

Non-cash amortization of favorable and unfavorable contracts, net
(2,000
)
 
(2,000
)
Hurricane-related costs
3,000

 
3,000

Adjusted EBITDA
$
256,000

 
$
268,000


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):
 
Three Months Ended December 31,
 
Year Ended December 31,
 
2018
 
2017
 
2018
 
2017
Net income
$
24,006

 
$
24,772

 
$
87,796

 
$
91,877

Interest expense
10,586

 
9,691

 
40,970

 
38,481

Income tax expense
162

 
1,188

 
3,101

 
10,207

Real estate related depreciation and amortization
27,220

 
24,059

 
104,524

 
99,090

EBITDA
61,974

 
59,710

 
236,391

 
239,655

Corporate expenses
6,424

 
7,512

 
28,563

 
26,711

Interest and other income, net
(378
)
 
(897
)
 
(1,806
)
 
(1,820
)
Hotel acquisition costs

 

 

 
2,028

Loss on early extinguishment of debt

 

 

 
274

Hurricane-related costs (1)
850

 
1,787

 
3,855

 
3,280

Impairment losses

 
852

 

 
3,209

Loss on sale of hotel properties (2)

 
764

 

 
764

Severance costs (3)

 

 
10,914

 

Gain on property insurance settlement
6

 

 
(1,724
)
 

Hotel EBITDA
68,876

 
69,728

 
276,193

 
274,101

Non-cash ground rent
1,990

 
1,535

 
7,305

 
6,290

Non-cash amortization of favorable and unfavorable contract liabilities, net
(495
)
 
(478
)
 
(1,969
)
 
(1,912
)
Hotel manager transition and pre-opening items (4)
209

 
(2,275
)
 
(1,491
)
 
(3,637
)
Hotel Adjusted EBITDA
$
70,580

 
$
68,510

 
$
280,038

 
$
274,842

     
(1)     Represents stabilization, cleanup, and other costs (such as professional fees and hotel labor) incurred at our hotels impacted by Hurricanes Irma or Maria that have not been or are not expected to be recovered by insurance.
(2)     During the three months ended December 31, 2017, we recognized an incremental pre-tax loss of $0.8 million due to a post-closing adjustment for hotel expenses incurred under our ownership period related to 2016 dispositions.
(3) Represents payments made to unionized employees under a voluntary buyout program at the Lexington Hotel New York, which are classified within other hotel expenses on the condensed consolidated statement of operations.
(4) Three months ended December 31, 2018 consists of $0.2 million related to pre-opening costs related to Hotel Emblem. Year ended December 31, 2018 consists of (a) manager transition costs of $0.1 million related to Hotel Emblem, L'Auberge de Sedona and Orchards

14



Inn Sedona and (b) pre-opening costs of $0.6 million related to Havana Cabana Key West and Hotel Emblem, offset by $2.2 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.
Three months ended December 31, 2017 consists of a reduction in employee severance costs of approximately $0.1 million related to Courtyard Manhattan Midtown East; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement. Year ended December 31, 2017 consists of the following costs for Courtyard Manhattan Midtown East: (a) employee severance costs of approximately $0.3 million, (b) manager transition costs of approximately $0.1 million offset by (c) $1.9 million of accelerated amortization of key money received from Marriott; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.

FFO and Adjusted FFO
The following tables are reconciliations of our GAAP net income to FFO and Adjusted FFO (in thousands):
 
Three Months Ended December 31,
 
Year Ended December 31,
 
 
 
 
 
 
 
 
 
2018
 
2017
 
2018
 
2017
Net income
$
24,006

 
$
24,772

 
$
87,796

 
$
91,877

Real estate related depreciation and amortization
27,220

 
24,059

 
104,524

 
99,090

Impairment losses

 
852

 

 
3,209

Loss on sale of hotel properties, net of income tax (1)

 
458

 

 
458

FFO
51,226

 
50,141

 
192,320

 
194,634

Non-cash ground rent
1,990

 
1,535

 
7,305

 
6,290

Non-cash amortization of favorable and unfavorable contract liabilities, net
(495
)
 
(478
)
 
(1,969
)
 
(1,912
)
Hotel acquisition costs

 

 

 
2,028

Hurricane-related costs (2)
850

 
1,787

 
3,855

 
3,280

Hotel manager transition and pre-opening items (3)
209

 
(2,275
)
 
(1,491
)
 
(3,637
)
Gain on property insurance settlement
6

 

 
(1,724
)
 

Loss on early extinguishment of debt

 

 

 
274

Severance costs (4)

 

 
11,691

 

Adjusted FFO
$
53,786

 
$
50,710

 
$
209,987

 
$
200,957

Adjusted FFO per diluted share
$
0.26

 
$
0.25

 
$
1.02

 
$
1.00


(1)  
During the three months ended December 31, 2017, we recognized an incremental loss of $0.5 million due to a post-closing adjustment for hotel expenses incurred under our ownership period related to 2016 dispositions.
(2)  
Represents stabilization, cleanup, and other costs (such as professional fees and hotel labor) incurred at our hotels impacted by Hurricanes Irma or Maria that have not been or are not expected to be recovered by insurance.
(3)
Three months ended December 31, 2018 consists of $0.2 million related to pre-opening costs related to Hotel Emblem. Year ended December 31, 2018 consists of (a) manager transition costs of $0.1 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona and (b) pre-opening costs of $0.6 million related to Havana Cabana Key West and Hotel Emblem, offset by $2.2 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.
Three months ended December 31, 2017 consists of a reduction in employee severance costs of approximately $0.1 million related to Courtyard Manhattan Midtown East; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement. Year ended December 31, 2017 consists of the following costs for Courtyard Manhattan Midtown East: (a) employee severance costs of approximately $0.3 million, (b) manager transition costs of approximately $0.1 million offset by (c) $1.9 million of accelerated amortization of key money received from Marriott; manager transition costs of approximately $0.4 million related to Hotel Emblem, L'Auberge de Sedona and Orchards Inn Sedona; offset by $2.6 million of accelerated amortization of key money in connection with the termination of the Frenchman's Reef management agreement.
(4) Year ended December 31, 2018 consists of (a) $10.9 million related to payments made to unionized employees under a voluntary buyout program at the Lexington Hotel New York, which are classified within other hotel expenses on the consolidated statement of operations and (b) $0.8 million related to the departure of our former Executive Vice President and Chief Financial Officer, which is classified within corporate expenses on the consolidated statement of operations.

15



 
Full Year 2019 Guidance
 
Low End
 
High End
Net income
$
79,700

 
$
94,700

Real estate related depreciation and amortization
116,000

 
111,000

FFO
195,700

 
205,700

Non-cash ground rent
7,300

 
7,300

Non-cash amortization of favorable and unfavorable contract liabilities, net
(2,000
)
 
(2,000
)
Hurricane-related costs
3,000

 
3,000

Adjusted FFO
$
204,000

 
$
214,000

Adjusted FFO per diluted share
$
1.00

 
$
1.04


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 closed hotels (in thousands):
 
Three Months Ended December 31,
 
Year Ended December 31,
 
2018
 
2017
 
2018
 
2017
Revenues
$
223,407

 
$
207,037

 
$
863,704

 
$
870,005

Hotel revenues from prior ownership (1)
7,921

 
18,573

 
43,628

 
74,368

Hotel revenues from closed hotels (2)
(1,872
)
 
(1,441
)
 
(4,889
)
 
(57,762
)
Comparable Revenues
$
229,456

 
$
224,169

 
$
902,443

 
$
886,611

 
 
 
 
 
 
 
 
Hotel Adjusted EBITDA
$
70,580

 
$
68,510

 
$
280,038

 
$
274,842

Hotel Adjusted EBITDA from prior ownership (1)
1,737

 
5,622

 
11,573

 
20,229

Hotel Adjusted EBITDA from closed hotels (2)
(2,950
)
 
(4,305
)
 
(18,474
)
 
(20,505
)
Comparable Hotel Adjusted EBITDA
$
69,367

 
$
69,827

 
$
273,137

 
$
274,566

 
 
 
 
 
 
 
 
Hotel Adjusted EBITDA Margin
31.59
%
 
33.09
%
 
32.42
%
 
31.59
%
Comparable Hotel Adjusted EBITDA Margin
30.23
%
 
31.15
%
 
30.27
%
 
30.97
%
(1) 
Amounts represent the pre-acquisition operating results of The Landing Resort & Spa and Hotel Palomar for the period from January 1, 2018 to February 28, 2018 and January 1, 2017 to December 31, 2017, Cavallo Point for the period from January 1, 2018 to December 9, 2018 and January 1, 2017 to December 31, 2017 and the pre-acquisition operating results of the L'Auberge de Sedona and Orchards Inn Sedona for the period from January 1, 2017 to February 27, 2017. Pre-acquisition operating results were obtained from the seller during the acquisition due diligence process. We have made no adjustments to the amounts provided to us by the seller and these pre-acquisition operating results were not audited or reviewed by the Company's independent auditors.
(2) 
Amounts represent the operating results of Frenchman's Reef and Havana Cabana Key West for all periods presented and the operating results of Hotel Emblem from September 1 through December 31, 2018 and 2017, respectively.



16



Comparable Hotel Operating Expenses
The following table sets forth hotel operating expenses for the three months and years ended December 31, 2018 and 2017 for each of the hotels that we owned during these periods. Our GAAP hotel operating expenses for the three months and years ended December 31, 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 December 31, 2017, Cavallo Point for the period from January 1, 2018 to December 9, 2018 and January 1, 2018 to December 31, 2017 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 Emblem from September 1, 2018 to December 31, 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 Emblem closed on September 4, 2018 for a comprehensive renovation and reopened in January 2019. 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.













17



 
As Reported
 
Adjustments for Closed Hotels
 
Adjustments for Acquisitions
 
Comparable
 
Three Months Ended December 31,
 
 
Three Months Ended December 31,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rooms departmental expenses
$
40,106

 
$
38,123

 
5.2
 %
 
$
(425
)
 
$
(399
)
 
$
1,108

 
$
2,142

 
$
40,789

 
$
39,866

 
2.3
 %
Food and beverage departmental expenses
30,507

 
27,136

 
12.4
 %
 
(161
)
 
(109
)
 
2,459

 
5,209

 
32,805

 
32,236

 
1.8
 %
Other direct departmental
2,803

 
2,310

 
21.3
 %
 
(58
)
 
(26
)
 
818

 
1,278

 
3,563

 
3,562

 
 %
General and administrative
20,857

 
18,037

 
15.6
 %
 
(315
)
 
(187
)
 
754

 
1,715

 
21,296

 
19,565

 
8.8
 %
Utilities
5,094

 
4,769

 
6.8
 %
 
(88
)
 
(41
)
 
3

 
293

 
5,009

 
5,021

 
(0.2
)%
Repairs and maintenance
8,529

 
8,160

 
4.5
 %
 
(174
)
 
(52
)
 
263

 
495

 
8,618

 
8,603

 
0.2
 %
Sales and marketing
15,202

 
14,525

 
4.7
 %
 
(227
)
 
(101
)
 
390

 
870

 
15,365

 
15,294

 
0.5
 %
Franchise fees
6,912

 
6,682

 
3.4
 %
 

 

 

 

 
6,912

 
6,682

 
3.4
 %
Base management fees
4,947

 
1,978

 
150.1
 %
 
(171
)
 
2,582

 
198

 
502

 
4,974

 
5,062

 
(1.7
)%
Incentive management fees
1,670

 
1,674

 
(0.2
)%
 

 

 

 

 
1,670

 
1,674

 
(0.2
)%
Property taxes
13,511

 
12,748

 
6.0
 %
 
(120
)
 
(148
)
 

 
49

 
13,391

 
12,649

 
5.9
 %
Ground rent
3,107

 
2,540

 
22.3
 %
 

 

 
74

 
511

 
3,181

 
3,051

 
4.3
 %
Insurance
1,962

 
1,122

 
74.9
 %
 
(152
)
 
(75
)
 
115

 
163

 
1,925

 
1,210

 
59.1
 %
Hurricane-related costs
850

 
1,787

 
(52.4
)%
 
(850
)
 
(675
)
 

 

 

 
1,112

 
(100.0
)%
Hotel manager transition/pre-opening items
209

 
329

 
(36.5
)%
 
(209
)
 

 

 

 

 
329

 
(100.0
)%
Other fixed expenses
2,240

 
1,227

 
82.6
 %
 
(157
)
 
(27
)
 
3

 
20

 
2,086

 
1,220

 
71.0
 %
Total hotel operating expenses
$
158,506

 
$
143,147

 
10.7
 %
 
$
(3,107
)
 
$
742

 
$
6,185

 
$
13,247

 
$
161,584

 
$
157,136

 
2.8
 %
Hurricane-related costs
(850
)
 
(1,787
)
 
 
 
850

 
675

 

 

 

 
(1,112
)
 
 
Hotel manager transition/pre-opening items
(209
)
 
2,275

 
 
 
209

 
(2,604
)
 

 

 

 
(329
)
 
 
Non-cash ground rent
(1,990
)
 
(1,535
)
 
 
 

 

 

 
(296
)
 
(1,990
)
 
(1,831
)
 
 
Non-cash amortization of favorable and unfavorable contract liabilities, net
495

 
478

 
 
 

 

 

 

 
495

 
478

 
 
Total adjusted hotel operating expenses
$
155,952

 
$
142,578

 
9.4
 %
 
$
(2,048
)
 
$
(1,187
)
 
$
6,185

 
$
12,951

 
$
160,089

 
$
154,342

 
3.7
 %




18



 
As Reported
 
Adjustments for Closed Hotels
 
Adjustments for Acquisitions
 
Comparable
 
Year Ended December 31,
 
 
Year Ended December 31,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rooms departmental expenses
$
158,078

 
$
158,534

 
(0.3
)%
 
$
(1,123
)
 
$
(7,536
)
 
$
5,852

 
$
10,289

 
$
162,807

 
$
161,287

 
0.9
 %
Food and beverage departmental expenses
118,709

 
120,460

 
(1.5
)%
 
(514
)
 
(12,777
)
 
12,553

 
20,619

 
130,748

 
128,302

 
1.9
 %
Other direct departmental
10,420

 
11,479

 
(9.2
)%
 
(157
)
 
(2,164
)
 
4,005

 
4,568

 
14,268

 
13,883

 
2.8
 %
General and administrative
75,371

 
74,724

 
0.9
 %
 
(706
)
 
(5,510
)
 
4,103

 
7,267

 
78,768

 
76,481

 
3.0
 %
Utilities
20,694

 
23,396

 
(11.5
)%
 
(273
)
 
(3,949
)
 
165

 
1,316

 
20,586

 
20,763

 
(0.9
)%
Repairs and maintenance
32,436

 
34,496

 
(6.0
)%
 
(371
)
 
(2,899
)
 
1,295

 
2,187

 
33,360

 
33,784

 
(1.3
)%
Sales and marketing
61,080

 
59,109

 
3.3
 %
 
(523
)
 
(4,078
)
 
2,165

 
4,001

 
62,722

 
59,032

 
6.3
 %
Franchise fees
26,194

 
23,959

 
9.3
 %
 

 

 

 

 
26,194

 
23,959

 
9.3
 %
Base management fees
16,354

 
15,710

 
4.1
 %
 
1,919

 
988

 
1,121

 
1,984

 
19,394

 
18,682

 
3.8
 %
Incentive management fees
5,805

 
6,259

 
(7.3
)%
 

 

 

 

 
5,805

 
6,259

 
(7.3
)%
Property taxes
55,461

 
51,927

 
6.8
 %
 
55

 
(355
)
 
81

 
304

 
55,597

 
51,876

 
7.2
 %
Ground rent
11,758

 
10,243

 
14.8
 %
 

 

 
124

 
1,438

 
11,882

 
11,681

 
1.7
 %
Insurance
7,097

 
5,980

 
18.7
 %
 
(434
)
 
(1,313
)
 
517

 
696

 
7,180

 
5,363

 
33.9
 %
Severance costs
10,914

 

 
100.0%

 

 

 

 

 
10,914

 

 
100.0%

Hurricane-related costs
3,855

 
1,929

 
99.8
 %
 
(3,855
)
 
(675
)
 

 

 

 
1,254

 
(100.0
)%
Hotel manager transition/pre-opening items
692

 
838

 
(17.4
)%
 
(607
)
 

 

 

 
85

 
838

 
(89.9
)%
Other fixed expenses
6,741

 
4,192

 
60.8
 %
 
(328
)
 
(465
)
 
118

 
468

 
6,531

 
4,195

 
55.7
 %
Total hotel operating expenses
$
621,659

 
$
603,235

 
3.1
 %
 
$
(6,917
)
 
$
(40,733
)
 
$
32,099

 
$
55,137

 
$
646,841

 
$
617,639

 
4.7
 %
Severance costs
(10,914
)
 

 
 
 

 

 

 

 
(10,914
)
 

 
 
Hurricane-related costs
(3,855
)
 
(3,280
)
 
 
 
3,855

 
2,026

 

 

 

 
(1,254
)
 
 
Hotel manager transition/pre-opening items
1,491

 
3,637

 
 
 
(1,576
)
 
(2,604
)
 

 

 
(85
)
 
1,033

 
 
Non-cash ground rent
(7,305
)
 
(6,290
)
 
 
 

 

 
(50
)
 
(995
)
 
(7,355
)
 
(7,285
)
 
 
Non-cash amortization of unfavorable contract liabilities
1,969

 
1,912

 
 
 

 

 

 

 
1,969

 
1,912

 
 
Total adjusted hotel operating expenses
$
603,045

 
$
599,214

 
0.6
 %
 
$
(4,638
)
 
$
(41,311
)
 
$
32,049

 
$
54,142

 
$
630,456

 
$
612,045

 
3.0
 %

19



Market Capitalization as of December 31, 2018
(in thousands)
Enterprise Value
 
 
 
 
 
Common equity capitalization (at December 31, 2018 closing price of $9.08/share)
 
$
1,869,961

Consolidated debt (face amount)
 
983,764

Cash and cash equivalents
 
(43,863)

Total enterprise value
 
$
2,809,862

Share Reconciliation
 
 
 
 
 
Common shares outstanding
 
204,536

Unvested restricted stock held by management and employees
 
642

Share grants under deferred compensation plan
 
765

Combined shares outstanding
 
205,943

Debt Summary as of February 25, 2019
(dollars in thousands)

Loan
 
Interest Rate
 
Term
 
Outstanding Principal

 
Maturity
Marriott Salt Lake City Downtown
 
4.25%
 
Fixed
 
$
54,892

 
November 2020
Westin Washington D.C. City Center
 
3.99%
 
Fixed
 
62,385

 
January 2023
The Lodge at Sonoma, a Renaissance Resort & Spa
 
3.96%
 
Fixed
 
27,580

 
April 2023
Westin San Diego
 
3.94%
 
Fixed
 
63,142

 
April 2023
Courtyard Manhattan / Midtown East
 
4.40%
 
Fixed
 
82,384

 
August 2024
Renaissance Worthington
 
3.66%
 
Fixed
 
82,281

 
May 2025
JW Marriott Denver at Cherry Creek
 
4.33%
 
Fixed
 
62,230

 
July 2025
Westin Boston Waterfront Hotel
 
4.36%
 
Fixed
 
193,882

 
November 2025
New Market Tax Credit loan(1)
 
5.17%
 
Fixed
 
2,943

 
December 2020
     Unamortized debt issuance costs
 
 
 
 
 
(3,888
)
 
 
Total mortgage and other debt, net of unamortized debt issuance costs
 
 
 
 
 
627,831

 
 
 
 
 
 
 
 
 
 
 
Unsecured term loan
 
LIBOR + 1.45(2)
 
Variable
 
100,000

 
May 2021
Unsecured term loan
 
LIBOR + 1.45(2)
 
Variable
 
200,000

 
April 2022
Unsecured term loan
 
LIBOR + 1.45(3)
 
Variable
 
50,000

 
October 2023
     Unamortized debt issuance costs
 
 
 
 
 
(1,688
)
 
 
Unsecured term loans, net of unamortized debt issuance costs
 
 
 
348,312

 
 
 
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
LIBOR + 1.50(4)
 
Variable
 
45,000

 
May 2020 (5)
 
 
 
 
 
 
 
 
 
Total debt, net of unamortized debt issuance costs
 
 
 
 
 
$
1,021,143

 
 
Weighted-average interest rate of fixed rate debt
 
4.23
%
 
 
 
 
 
 
Total weighted-average interest rate
 
4.14
%
 
 
 
 
 
 
(1) 
Assumed in connection with the acquisition of the Hotel Palomar Phoenix in March 2018.
(2) 
The interest rate as of February 25, 2019 was 3.96%.
(3) 
The Company entered into an interest rate swap agreement in January 2019 to fix LIBOR through October 2023, resulting in an interest rate as of February 25, 2019 of 3.86%.
(4) 
The interest rate as of February 25, 2019 was 4.02%.
(5) 
May be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions.

20