UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2022
OR
For the transition period from _________ to _________
Commission File Number: 001-32514
(Exact Name of Registrant as Specified in Its Charter)
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||||
| | ||||||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||||||||
(240 ) 744-1150
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | |||||||||||||||||||||||||||
| 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 pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
The registrant had 209,374,830 shares of its $0.01 par value common stock outstanding as of November 4, 2022.
Table of Contents
INDEX
| Page No. | |||||
PART I. FINANCIAL INFORMATION
Item I.Financial Statements
DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Property and equipment, net | $ | $ | |||||||||
| Right-of-use assets | |||||||||||
| Restricted cash | |||||||||||
| Due from hotel managers | |||||||||||
| Prepaid and other assets | |||||||||||
| Cash and cash equivalents | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Mortgage and other debt, net of unamortized debt issuance costs | $ | $ | |||||||||
| Unsecured term loans, net of unamortized debt issuance costs | |||||||||||
| Senior unsecured credit facility | |||||||||||
| Total debt | |||||||||||
| Lease liabilities | |||||||||||
| Deferred rent | |||||||||||
| Due to hotel managers | |||||||||||
| Unfavorable contract liabilities, net | |||||||||||
| Accounts payable and accrued expenses | |||||||||||
| Distributions declared and unpaid | |||||||||||
| Deferred income related to key money, net | |||||||||||
| Total liabilities | |||||||||||
| Equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Distributions in excess of earnings | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-1-
DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Rooms | $ | $ | $ | $ | |||||||||||||||||||
| Food and beverage | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Rooms | |||||||||||||||||||||||
| Food and beverage | |||||||||||||||||||||||
| Management fees | |||||||||||||||||||||||
| Franchise fees | |||||||||||||||||||||||
| Other hotel expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Impairment losses | |||||||||||||||||||||||
| Corporate expenses | |||||||||||||||||||||||
| Business interruption insurance income | ( | ||||||||||||||||||||||
| Total operating expenses, net | |||||||||||||||||||||||
| Interest and other expense (income), net | ( | ||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| Loss on early extinguishment of debt | |||||||||||||||||||||||
| Total other expenses, net | |||||||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) | ( | ( | |||||||||||||||||||||
| Less: Net (income) loss attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to the Company | ( | ( | |||||||||||||||||||||
| Distributions to preferred stockholders | ( | ( | ( | ( | |||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Earnings (loss) per share available to common stockholders—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share available to common stockholders—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-2-
DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share and per share amounts)
(unaudited)
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on common stock/units ($ | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
-3-
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Additional Paid-In Capital | Accumulated Deficit | Total Stockholders' Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership Units | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
Distributions on preferred stock ($ | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of Operating Partnership units | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-4-
DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Corporate asset depreciation as corporate expenses | |||||||||||
| Loss on early extinguishment of debt | |||||||||||
| Non-cash lease expense and other amortization | |||||||||||
| Non-cash interest rate swap fair value adjustment | ( | ||||||||||
| Amortization of debt issuance costs | |||||||||||
| Impairment losses | |||||||||||
| Amortization of deferred income related to key money | ( | ( | |||||||||
| Share-based compensation | |||||||||||
| Changes in assets and liabilities: | |||||||||||
| Prepaid expenses and other assets | ( | ||||||||||
| Due to/from hotel managers | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Extension of the Salt Lake City Marriott Downtown ground lease | ( | ||||||||||
| Property acquisitions | ( | ( | |||||||||
| Net proceeds from sale of hotel properties | |||||||||||
| Receipt of deferred key money | |||||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Scheduled mortgage debt principal payments | ( | ( | |||||||||
| Proceeds from senior unsecured term loan | |||||||||||
| Repayments of senior unsecured term loans | ( | ||||||||||
| Draws on senior unsecured credit facility | |||||||||||
| Repayments of senior unsecured credit facility | ( | ( | |||||||||
| Payment of financing costs | ( | ( | |||||||||
| Distributions on common stock and units | ( | ( | |||||||||
| Distributions on preferred stock | ( | ( | |||||||||
| Shares redeemed to satisfy tax withholdings on vested share-based compensation | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-5-
DIAMONDROCK HOSPITALITY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
(unaudited)
Supplemental Disclosure of Cash Flow Information:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for income taxes, net | $ | $ | |||||||||
| Non-cash investing and financing activities: | |||||||||||
| Unpaid dividends and distributions declared | $ | $ | |||||||||
| Accrued capital expenditures | $ | $ | |||||||||
| Transfer of land interest in consideration for extension of ground lease (see Note 4) | $ | $ | |||||||||
| Redemption of Operating Partnership units for common stock | $ | $ | |||||||||
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount shown within the consolidated statements of cash flows:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
-6-
DIAMONDROCK HOSPITALITY COMPANY
Notes to the Consolidated Financial Statements
(Unaudited)
1. Organization
DiamondRock Hospitality Company (the “Company” or “we”) is a lodging-focused real estate company that owns a portfolio of premium hotels and resorts. Our hotels are concentrated in major urban markets and in destination resort locations, and the majority of our hotels are operated under a brand owned by one of the leading global lodging brand companies (Marriott International, Inc., Hilton Worldwide, or IHG Hotels & Resorts). We are an owner, as opposed to an operator, of the hotels in our portfolio. As an owner, we receive all of the operating profits or losses generated by our hotels after we pay fees to the hotel managers and hotel brands, which are based on the revenues and profitability of the hotels.
As of September 30, 2022, we owned 34 hotels with 9,567 guest rooms, located in the following markets: Atlanta, Georgia; Boston, Massachusetts (2 ); Burlington, Vermont; Charleston, South Carolina; Chicago, Illinois (2 ); Denver, Colorado (2 ); Destin, Florida (2 ); Fort Lauderdale, Florida (2 ); Fort Worth, Texas; Huntington Beach, California; Key West, Florida (2 ); Marathon, Florida; New Orleans, Louisiana; New York, New York (3 ); Phoenix, Arizona; Salt Lake City, Utah; San Diego, California; San Francisco, California (2 ); Sedona, Arizona (2 ); Sonoma, California; South Lake Tahoe, California; Washington, D.C. (2 ); and Vail, Colorado.
During the nine months ended September 30, 2022, we acquired the Tranquility Bay Beachfront Resort located in Marathon, Florida and Kimpton Fort Lauderdale Beach Resort located in Fort Lauderdale, Florida. See Note 9 for further discussion of these acquisitions.
We conduct our business through a traditional umbrella partnership real estate investment trust, or UPREIT, in which our hotel properties are owned by our operating partnership, DiamondRock Hospitality Limited Partnership, or subsidiaries of our operating partnership. The Company is the sole general partner of our operating partnership and owns 99.7 % of the limited partnership units (“common OP units”) of our operating partnership as of September 30, 2022. The remaining 0.3 % of the common OP units are held by third parties and executive officers of the Company. See Note 5 for additional disclosures related to common OP units.
2.Summary of Significant Accounting Policies
Basis of Presentation
Our financial statements include all of the accounts of the Company and its subsidiaries in accordance with U.S. GAAP. All intercompany accounts and transactions have been eliminated in consolidation. If the Company determines that it has an interest in a variable interest entity within the meaning of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Our operating partnership meets the criteria of a variable interest entity. The Company is the primary beneficiary and, accordingly, we consolidate our operating partnership.
In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly our financial position, the results of our operations, the statements of equity, and cash flows. Interim results are not necessarily indicative of full-year performance because of the impact of seasonal and short-term variations. We believe the disclosures made are adequate to prevent the information presented from being misleading. However, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed on February 22, 2022.
Change in Presentation
We have made certain financial statement line item reclassifications from prior year in order to conform to current year presentation. The changes in presentation are not material to the financial statements.
-7-
Use of Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The state of the overall economy can significantly impact hotel operational performance and thus, impact our financial position. Currently, some of the most significant risks and uncertainties relate to future developments in the COVID-19 pandemic and the impact of rising inflation and increasing interest rates on the overall economy. Should any of our hotels experience a significant decline in operational performance, it may affect our ability to make distributions to our stockholders and service debt or meet other financial obligations.
Fair Value Measurements
In evaluating fair value, U.S. GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the observability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
•Level 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities
•Level 2 - Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets in markets that are not active and model-derived valuations whose inputs are observable
•Level 3 - Model-derived valuations with unobservable inputs
Property and Equipment
Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets. Property and equipment purchased after the hotel acquisition date is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 5 to 40 years for buildings, land improvements, and building improvements and 1 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.
We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its useful life. If present, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel, less costs to sell, exceed its carrying amount. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized.
-8-
Revenue Recognition
Revenues from hotel operations are recognized when the goods or services are provided. Revenues consist of room sales,
food and beverage sales, and other hotel department revenues, such as telephone, parking, gift shop sales and resort fees. Rooms revenue is recognized over the length of stay that the hotel room is occupied by the customer. Food and beverage revenue is recognized at the point in time in which the goods and/or services are rendered to the customer, such as for restaurant dining services or banquet services. Other revenues are recognized at the point in time or over the time period that goods or services are provided to the customer. Certain ancillary services are provided by third parties and we assess whether we are the principal or agent in these arrangements. If we are the agent, revenue is recognized based upon the commission earned from the third party. If we are the principal, we recognize revenue based upon the gross sales price.
Advance deposits are recorded as liabilities when a customer or group of customers provides a deposit for a future stay or
banquet event at our hotels. Advance deposits are converted to revenue when the services are provided to the customer or when a customer with a noncancelable reservation fails to arrive for part or all of the reservation. Conversely, advance deposits are generally refundable upon guest cancellation of the related reservation within an established period of time prior to the reservation.
Income Taxes
We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings during the period in which the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of September 30, 2022 and December 31, 2021, we had a valuation allowance of $11.7 million and $14.9 million, respectively, on our deferred tax assets.
We have elected to be treated as a real estate investment trust, or REIT, under the provisions of the Internal Revenue Code of 1986, as amended, which requires that we distribute at least 90% of our taxable income annually to our stockholders and comply with certain other requirements. In addition to paying federal and state taxes on any retained income, we may be subject to taxes on “built-in gains” on sales of certain assets. Our taxable REIT subsidiaries will generally be subject to federal, state, local and/or foreign income taxes. In order for the income from our hotel property investments to constitute “rents from real properties” for purposes of the gross income tests required for REIT qualification, the income we earn cannot be derived from the operation of any of our hotels. Therefore, we lease each of our hotel properties to wholly owned taxable REIT subsidiaries.
We may recognize a tax benefit from an uncertain tax position when it is more-likely-than-not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. If a tax position does not meet the more-likely-than-not recognition threshold, despite our belief that our filing position is supportable, the benefit of that tax position is not recognized in the consolidated statements of operations. We recognize interest and penalties, as applicable, related to unrecognized tax benefits as a component of income tax expense. We recognize unrecognized tax benefits in the period that the uncertainty is eliminated by either affirmative agreement of the uncertain tax position by the applicable taxing authority, or by expiration of the applicable statute of limitation.
We had no
Intangible Assets and Liabilities
Intangible assets and liabilities recorded may include management or franchise agreement intangibles and in-place lease intangibles assumed as part of the acquisition of certain hotels. We review the terms of agreements assumed in conjunction with the purchase of a hotel to determine if an intangible asset or liability exists. Intangible assets or liabilities are recorded at the acquisition date and amortized using the straight-line method over the expected useful life. We do not amortize intangible assets with indefinite useful lives, but we review these assets for impairment annually or at interim periods if events or circumstances
-9-
Earnings (Loss) Per Share
Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period plus other potentially dilutive securities such as stock grants. No adjustment is made for shares that are anti-dilutive during a period.
Share-based Compensation
We account for share-based employee compensation using the fair value based method of accounting. We record the cost of awards with service or market conditions based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service.
Comprehensive Income
We do not have any comprehensive income other than net income. If we have any comprehensive income in future periods, such that a statement of comprehensive income would be necessary, such statement will be reported as one statement with the consolidated statement of operations.
Derivative Instruments
In the normal course of business, we are exposed to the effects of interest rate changes. We may enter into derivative instruments, including interest rate swaps and caps, to manage or hedge interest rate risk. Derivative instruments are recorded at fair value on the balance sheet date. We have not elected hedge accounting treatment for the changes in the fair value of derivatives. Changes in the fair value of derivatives are recorded each period and are included in interest expense in the consolidated statements of operations.
Noncontrolling Interests
The noncontrolling interest is the portion of equity in our consolidated operating partnership not attributable, directly or indirectly, to the Company. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. The noncontrolling interests are classified as permanent equity as we have the right to choose to settle each holder's redemption of the interest in either cash or delivery of shares of our common stock. See Note 5 for additional details. On the consolidated statements of operations, revenues, expenses and net income or loss from our less-than-wholly-owned operating partnership are reported within the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for stockholders’ equity, noncontrolling interests and total equity.
Restricted Cash
Restricted cash primarily consists of cash held in reserve for replacement of furniture and fixtures generally held by our hotel managers and cash held in escrow pursuant to lender requirements.
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Due to/from Hotel Managers
The due from hotel managers consists of hotel level accounts receivable, periodic hotel operating distributions receivable from managers and prepaid and other assets held by the hotel managers on our behalf. The due to hotel managers represents liabilities incurred by the hotel on behalf of us in conjunction with the operation of our hotels which are legal obligations of the Company.
Key Money
Key money received in conjunction with entering into hotel management or franchise agreements or completing specific capital projects is deferred and amortized over the term of the hotel management agreement, the term of the franchise agreement, or other systematic and rational period, if appropriate. Key money is classified as deferred income in the accompanying consolidated balance sheets and amortized as an offset to management fees or franchise fees.
Leases
We determine if an arrangement is a lease or contains an embedded lease at inception. For agreements with both lease and nonlease components (e.g., common-area maintenance costs), we do not separate the nonlease components from the lease components, but account for these components as one. We determine the lease classification (operating or finance) at lease inception.
Right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at the commencement date. The discount rate used to determine the present value of the lease payments is our incremental borrowing rate as of the lease commencement date, as the implicit rate is not readily determinable. The right-of-use assets also include any initial direct costs and any lease payments made at or before the commencement date, and is reduced for any unrestricted incentives received at or before the commencement date.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of our cash and cash equivalents. We maintain cash and cash equivalents with various financial institutions. We perform periodic evaluations of the relative credit standing of these financial institutions and limit the amount of credit exposure with any one institution.
Segment Reporting
Each one of our hotels is an operating segment. We evaluate each of our properties on an individual basis to assess performance, the level of capital expenditures, and acquisition or disposition transactions. Our evaluation of individual properties is not focused on property type (e.g. urban, suburban, or resort), brand, geographic location, or industry classification.
We aggregate our operating segments using the criteria established by U.S. GAAP, including the similarities of our product offering, types of customers and method of providing service. All of our properties react similarly to economic stimulus, such as business investment, changes in Gross Domestic Product, and changes in travel patterns. As such, all our operating segments meet the aggregation criteria, resulting in a single reportable segment represented by our consolidated financial results.
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Recently Issued Accounting Pronouncements
In March 2020, the FASB issued Accounting Standard Update 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”). ASU 2020-04 provides temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications to ease reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. ASU 2020-04 permits a contract with a modified reference rate to be accounted for as a continuation of the existing contract. We have not entered into any contract modifications yet as it directly relates to reference rate reform, but we anticipate undertaking such modifications in the future related to our interest rate swaps indexed to LIBOR. The adoption of ASU 2020-04 is not expected to have a material impact on our consolidated financial statements.
3.Property and Equipment
Property and equipment as of September 30, 2022 and December 31, 2021 consists of the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Land improvements | |||||||||||
| Buildings and site improvements | |||||||||||
| Furniture, fixtures and equipment | |||||||||||
| Construction in progress | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| $ | $ | ||||||||||
As of September 30, 2022 and December 31, 2021, we had accrued capital expenditures of $4.3 million and $7.3 million, respectively.
4. Leases
We are subject to operating leases, the most significant of which are ground leases. We are the lessee to ground leases under eight of our hotels and two parking garages as of September 30, 2022. The lease liabilities for our operating leases assume the exercise of all available extension options, as we believe they are reasonably certain to be exercised. As of September 30, 2022, our operating leases have a weighted-average remaining lease term of 65 years and a weighted-average discount rate of 5.77 %.
The components of operating lease expense, which is included in other hotel expenses in our consolidated statements of operations, and cash paid for amounts included in the measurement of lease liabilities, are as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Variable lease payments | $ | $ | $ | $ | ||||||||||||||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
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| Year Ending December 31, | ||||||||
| 2022 (excluding the nine months ended September 30, 2022) | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | |||||||
| Total lease liabilities | $ | |||||||
5. Equity
Common Shares
We are authorized to issue up to 400 million shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of our common stock are entitled to receive dividends out of assets legally available for the payment of dividends when authorized by our board of directors.
In August 2021, we implemented an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.
On September 29, 2022, our board of directors approved a share repurchase program authorizing us to repurchase up to $200.0 million of our common stock through February 28, 2025. The timing and actual number of shares repurchased will depend on a variety of factors, including price and general business and market conditions. Under the share repurchase program, repurchases can be made from time to time using a variety of methods, including open market purchases or privately negotiated transactions, all in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements. The share repurchase program does not obligate us to acquire any particular amount of shares, and the share repurchase program may be suspended or discontinued at any time at our discretion. Subsequent to September 30, 2022, we repurchased 1.6 million shares of common stock at an average price of $7.81 per share for a total purchase price of $12.3 million. As of November 4, 2022, we have $187.7 million of authorized capacity remaining under our share repurchase program.
Preferred Shares
We are authorized to issue up to 10 million shares of preferred stock, $0.01 par value per share. Our board of directors is required to set for each class or series of preferred stock the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption.
As of September 30, 2022 and December 31, 2021, there were 4,760,000 25.00 per share. On or after August 31, 2025, the Series A Preferred Stock will be redeemable at the Company's option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
Operating Partnership Units
In connection with our acquisition of Cavallo Point in December 2018, we issued 796,684 common OP units to third parties, otherwise unaffiliated with the Company, at $11.76 per unit. Each common OP unit is redeemable at the option of the holder. Holders of common OP units have certain redemption rights, which enable them to cause our operating partnership to redeem their units in exchange for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one -for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions.
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Long-Term Incentive Partnership units (“LTIP units”), which are also referred to as profits interest units, may be issued to eligible participants under the 2016 Plan (as defined in Note 6 below) for the performance of services to or for the benefit of our operating partnership. LTIP units are a class of partnership unit in our operating partnership and will receive, whether vested or not, the same per-unit distributions as the outstanding common OP units, which equal per-share dividends on shares of our common stock. Initially, LTIP units have a capital account balance of zero, do not receive an allocation of operating income (loss), and do not have full parity with common OP units with respect to liquidating distributions. If such parity is reached, vested LTIP units are converted into an equal number of common OP units, and thereafter will possess all of the rights and interests of common OP units, including the right to exchange the common OP units for cash per unit equal to the market price of our common stock, at the time of redemption, or, at our option, for shares of our common stock on a one -for-one basis, subject to adjustment upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions. See Note 6 for additional disclosures related to LTIP units.
There were 719,542 and 639,622 common OP units held by unaffiliated third parties and executive officers of the Company as of September 30, 2022 and December 31, 2021, respectively. There were 98,050 and 135,388 unvested LTIP units outstanding as of September 30, 2022 and December 31, 2021, respectively. All vested LTIP units have reached economic parity with common OP units and have been converted into common OP units.
Dividends and Distributions
Our board of directors suspended our quarterly common dividend commencing with the first quarter dividend that would have been paid in April 2020 and resumed quarterly common dividends beginning with the third quarter dividend that was paid in October 2022. We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2022:
| Payment Date | Record Date | Dividend per Share | ||||||||||||
| October 12, 2022 | September 30, 2022 | $ | ||||||||||||
We have paid the following dividends to holders of our Series A Preferred Stock during 2022:
| Payment Date | Record Date | Dividend per Share | ||||||||||||
| March 31, 2022 | March 18, 2022 | $ | ||||||||||||
| June 30, 2022 | June 17, 2022 | $ | ||||||||||||
| September 30, 2022 | September 16, 2022 | $ | ||||||||||||
6. Stock Incentive Plans
We are authorized to issue up to 6,082,664 shares of our common stock under our 2016 Equity Incentive Plan (the “2016 Plan”), of which we have issued or committed to issue 5,135,195 shares as of September 30, 2022. In addition to these shares, additional shares of common stock may be issued from time to time in connection with the performance stock unit awards as further described below.
Restricted Stock Awards
Restricted stock awards issued to our officers and employees vest over a to five year period from the date of grant based on continued employment. We measure compensation expense for the restricted stock awards based upon the fair market value of our common stock at the date of grant. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying consolidated statements of operations. A summary of our restricted stock awards from January 1, 2022 to September 30, 2022 is as follows:
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| Number of Shares | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance at September 30, 2022 | $ | ||||||||||
The total unvested share awards as of September 30, 2022 are expected to vest as follows: 8,202 shares during 2022, 382,822 shares during 2023, 443,492 shares during 2024, 259,345 shares during 2025, and 271,278 shares during 2026. As of September 30, 2022, the unrecognized compensation cost related to restricted stock awards was $8.6 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 30 months. We recorded $1.1 million and $1.0 million of compensation expense related to restricted stock awards for each of the three months ended September 30, 2022 and 2021, respectively. We recorded $3.2 million and $2.8 million of compensation expense related to restricted stock awards for each of the nine months ended September 30, 2022 and 2021, respectively. The compensation expense recorded for the nine months ended September 30, 2022 includes the reversal of $0.2 million of previously recognized compensation expense in connection with the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer, as well as certain other employees.
Performance Stock Units
Performance stock units (“PSUs”) are restricted stock units that vest or five years from the date of grant. Each executive officer is granted a target number of PSUs (the “PSU Target Award”). The actual number of shares of common stock issued to each executive officer is based on the Company's achievement of certain performance targets. Under this framework, 50 % of the PSUs are based on relative total stockholder return and 50 % on hotel market share improvement. The achievement of certain levels of total stockholder return relative to the total stockholder return of a peer group of publicly-traded lodging REITs is measured over a three-year or five-year performance period. There is no payout of shares of our common stock if our total stockholder return falls below the 30 th percentile of the total stockholder returns of the peer group. The maximum number of shares of common stock issued to an executive officer is equal to 150 % of the PSU Target Award and is earned if our total stockholder return is equal to or greater than the 75 th percentile of the total stockholder returns of the peer group. The number of PSUs earned is limited to 100 % of the PSU Target Award if the Company's total stockholder return is negative for the three-year performance period. The improvement in market share for each of our hotels is measured over a three-year or five-year performance period based on a report prepared for each hotel by STR Global, a well-recognized benchmarking service for the hospitality industry. There is no payout of shares of our common stock if the percentage of our hotels with market share improvements is less than 30 %. The maximum number of shares of common stock issued to an executive officer is equal to 150 % of the PSU Target Award and is earned if the percentage of our hotels with market share improvements is greater than or equal to 75 %.
We measure compensation expense for the PSUs based upon the fair market value of the award at the grant date. Compensation expense is recognized on a straight-line basis over the vesting period and is included in corporate expenses in the accompanying consolidated statements of operations. The grant date fair value of the portion of the PSUs based on our relative total stockholder return is determined using a Monte Carlo simulation performed by a third-party valuation firm. The grant date fair value of the portion of the PSUs based on hotel market share improvement is the closing price of our common stock on the grant date.
In the nine months ended September 30, 2022, our board of directors granted 407,570 PSUs to our executive officers. The determination of the grant-date fair values of outstanding awards included the following assumptions:
| Award Grant Date | Volatility | Risk-Free Rate | Total Stockholder Return PSUs | Hotel Market Share PSUs | ||||||||||||||||||||||
| February 22, 2022 | % | % | $ | $ | ||||||||||||||||||||||
| August 9, 2022 | % | % | $ | $ | ||||||||||||||||||||||
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A summary of our PSUs from January 1, 2022 to September 30, 2022 is as follows:
| Number of Target Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
Vested (1) | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Unvested balance at September 30, 2022 | $ | ||||||||||
______________________
(1)The number of shares of common stock earned for the PSUs vested in 2022 was equal to 100.0 % of the PSU Target Award.
The total unvested PSUs as of September 30, 2022 are expected to vest as follows: 296,596 units during 2023, 294,445 units during 2024, 321,078 units during 2025 and 34,934 units during 2027. The number of shares earned upon vesting is subject to the attainment of the performance goals described above. As of September 30, 2022, the unrecognized compensation cost related to the PSUs was $4.5 million and is expected to be recognized on a straight-line basis over a weighted average period of 28 months. We recorded $0.7 million and $0.8 million of compensation expense related to the PSUs for the three months ended September 30, 2022 and 2021, respectively. We recorded $1.6 million and $2.2 million of compensation expense related to the PSUs for the nine months ended September 30, 2022 and 2021, respectively. The compensation expense recorded for the nine months ended September 30, 2022 includes the reversal of $0.5 million of previously recognized compensation expense in connection with the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer.
LTIP Units
LTIP units are designed to offer executives a long-term incentive comparable to restricted stock, while potentially allowing them to enjoy a more favorable income tax treatment. Each LTIP unit awarded is deemed equivalent to an award of one share of common stock reserved under the 2016 Plan. At the time of award, LTIP units do not have full economic parity with common OP units, but can achieve such parity over time upon the occurrence of specified events in accordance with partnership tax rules.
A summary of our LTIP units from January 1, 2022 to September 30, 2022 is as follows:
| Number of Units | Weighted- Average Grant Date Fair Value | ||||||||||
| Unvested balance at January 1, 2022 | $ | ||||||||||
| Granted | |||||||||||
Vested (1) | ( | ||||||||||
| Unvested balance at September 30, 2022 | $ | ||||||||||
______________________
The total unvested LTIP units as of September 30, 2022 are expected to vest as follows: 41,183 during 2023, 14,217 14,216 during 2027.
As of September 30, 2022, the unrecognized compensation cost related to LTIP unit awards was $0.7 million and the weighted-average period over which the unrecognized compensation expense will be recorded is approximately 50 months. We recorded $0.1 million and $0.3 million of compensation expense related to LTIP unit awards for the three months ended September 30, 2022 and 2021, respectively. We recorded $0.4 million and $0.8 million of compensation expense related to LTIP unit awards for the nine months ended September 30, 2022 and 2021, respectively.
7. Earnings (Loss) Per Share
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Basic EPS is calculated by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is calculated by dividing net income (loss) available to common stockholders that has been adjusted for dilutive securities, by the weighted-average number of common shares outstanding including dilutive securities.
Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of EPS pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested share-based compensation (participating securities) have been excluded, as applicable, from net income or loss available to common stockholders used in the basic and diluted EPS calculations.
The following is a reconciliation of the calculation of basic and diluted EPS (in thousands, except share and per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Dividends declared on unvested share-based compensation | |||||||||||||||||||||||
| Net income (loss) available to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding—basic | |||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||
| Unvested restricted common stock | |||||||||||||||||||||||
| Shares related to unvested PSUs | |||||||||||||||||||||||
| Weighted-average number of common shares outstanding—diluted | |||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Earnings (loss) per share available to common stockholders—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share available to common stockholders—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
For the three and nine months ended September 30, 2021, 190,554 and 399,605 of unvested restricted common shares, respectively, were excluded from diluted weighted-average common shares outstanding, as their effect would be anti-dilutive. For the three months and nine months ended September 30, 2021, 254,684 and 279,755 of unvested PSUs, respectively, were excluded from the diluted weighted-average common shares outstanding, as their effect would be anti-dilutive. There were no
8. Debt
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| Principal Balance as of | ||||||||||||||||||||||||||
| Loan | Interest Rate as of September 30, 2022 | Maturity Date | September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Salt Lake City Marriott Downtown at City Creek mortgage loan | LIBOR + | January 2023 (2) | $ | $ | ||||||||||||||||||||||
| Westin Washington, D.C. City Center mortgage loan | January 2023 (3) | |||||||||||||||||||||||||
| The Lodge at Sonoma Resort mortgage loan | April 2023 (2) | |||||||||||||||||||||||||
| Westin San Diego Bayview mortgage loan | April 2023 | |||||||||||||||||||||||||
| Courtyard New York Manhattan/Midtown East mortgage loan | August 2024 | |||||||||||||||||||||||||
| Worthington Renaissance Fort Worth Hotel mortgage loan | May 2025 | |||||||||||||||||||||||||
| Hotel Clio mortgage loan | July 2025 | |||||||||||||||||||||||||
| Westin Boston Seaport District mortgage loan | November 2025 | |||||||||||||||||||||||||
| Unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||
| Total mortgage debt, net of unamortized debt issuance costs | ||||||||||||||||||||||||||
| Unsecured term loan | LIBOR + | October 2023 (6) | ||||||||||||||||||||||||
| Unsecured term loan | LIBOR + | July 2024 (7) | ||||||||||||||||||||||||
| Unsecured term loan | SOFR + | January 2028 | ||||||||||||||||||||||||
| Unsecured term loan | SOFR + | January 2025 (8) | ||||||||||||||||||||||||
| Unamortized debt issuance costs | ( | ( | ||||||||||||||||||||||||
| Unsecured term loans, net of unamortized debt issuance costs | ||||||||||||||||||||||||||
| Senior unsecured credit facility | SOFR + | September 2026 (8) | ||||||||||||||||||||||||
| Total debt, net of unamortized debt issuance costs | $ | $ | ||||||||||||||||||||||||
Weighted-Average Interest Rate (9) | ||||||||||||||||||||||||||
_______________________
(1)LIBOR is subject to a floor of 1.0 %.
(2)The loan was prepaid on November 1, 2022.
(3)The loan was prepaid on October 6, 2022.
(4)Prior to August 1, 2022, the applicable margin was 2.40 %.
(5)LIBOR is subject to a floor of 0.25 %.
(6)The loan was prepaid on September 28, 2022.
(7)The loan was prepaid on September 27, 2022.
(8)Maturity date may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions.
(9)Weighted-average interest rate as of September 30, 2022 includes effect of interest rate swaps.
Mortgage Debt
We have incurred limited recourse, property specific mortgage debt secured by certain of our hotels. In the event of default, the lender may only foreclose on the secured assets; however, in the event of fraud, misapplication of funds or other customary recourse provisions, the lender may seek payment from us. As of September 30, 2022, eight of our 34 hotels were secured by mortgage debt, and four of our mortgage loans had a maturity date within twelve months from the date of this report. The principal balance of these mortgage loans was $178.6 million as of September 30, 2022. We utilized the proceeds from the Amended Credit Agreement, as defined and discussed below, to repay much of this mortgage debt. On October 6, 2022, we paid off the Westin Washington, D.C. City Center mortgage loan. On November 1, 2022, we paid off the Salt Lake City
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Marriott Downtown at City Creek and The Lodge at Sonoma Resort mortgage loans. We intend to repay the mortgage loan secured by Westin San Diego Bayview in December 2022.
Our mortgage debt contains certain property specific covenants and restrictions, including minimum debt service coverage ratios or debt yields that trigger “cash trap” provisions, as well as restrictions on incurring additional debt without lender consent. Such cash trap provisions are triggered when the hotel’s operating results fall below a certain debt service coverage ratio or debt yield. When these provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio or debt yield is reached and maintained for a certain period of time. Such provisions do not provide the lender the right to accelerate repayment of the underlying debt. As of September 30, 2022, we had $4.2 million held in cash traps, which is included within the restricted cash on the accompanying consolidated balance sheet. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements.
Senior Unsecured Credit Facility and Unsecured Term Loans
Prior to September 27, 2022, we were party to credit agreements (the “Credit Agreements”) that provided for a $400 million senior unsecured credit facility (the “Revolving Credit Facility”), which was scheduled to mature on July 2023, a $350 million unsecured term loan that was scheduled to mature in July 2024 (the “Facility Term Loan”) and a $50 million unsecured term loan that was scheduled to mature in October 2023 (the “2023 Term Loan”). The interest rate on the Revolving Credit Facility and unsecured term loans was based upon LIBOR, plus an applicable margin based upon the Company’s leverage ratio. In addition to the interest payable on amounts outstanding under the Revolving Credit Facility, we were required to pay an amount equal to 0.20 % of the unused portion of the Revolving Credit Facility if the average usage is greater than 50 % or 0.30 % of the unused portion of the Revolving Credit Facility if the average usage is less than or equal to 50 %.
On each of June 9, 2020, August 14, 2020, January 20, 2021 and February 4, 2022, we executed amendments (the “Amendments”) to the Credit Agreements. These Amendments provided for a waiver of the quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2022 (the “Covenant Relief Period”) and allowed for certain other modifications to the covenants thereafter through the second quarter of 2023 (the “Ratio Adjustment Period”). During the Covenant Relief Period and the Ratio Adjustment Period, the Amendments also set the applicable interest rate to LIBOR plus a margin of 2.55 % for the Revolving Credit Facility and LIBOR plus a margin of 2.40 % for the Facility Term Loan and 2023 Term Loan. The Amendments also added a LIBOR floor of 0.25 % to the variable interest rate calculation. As of June 30, 2022, we were in compliance with all of the original, unmodified financial covenants under the Credit Agreements for two consecutive quarters, and had exited covenant waiver restrictions.
On September 27, 2022, we entered into a Sixth Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. The revolving credit facility under the Amended Credit Agreement matures on September 27, 2026. We may extend the maturity date of the revolving credit facility for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. We also have the right to increase the aggregate amount of the facilities to $1.4 billion upon the satisfaction of certain standard conditions. The term loan facilities consist of a $500 million term loan that matures on January 3, 2028 and a $300 million term loan that matures January 3, 2025. The maturity date of the $300 million term loan may be extended for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions.
We utilized the proceeds from the term loans to repay the prior $350 million Facility Term Loan, the $50 million 2023 Term Loan and $150 million that was outstanding on our Revolving Credit Facility. We plan to utilize the remaining proceeds to repay our remaining 2023 mortgage loan maturities. Upon the repayment of the remaining mortgage loan, we will have no debt maturities until August 2024. We recognized a $9.7 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs and fees paid to the lenders in consideration for the Amended Credit Agreement.
Interest is paid on the periodic advances on the revolving credit facility and amounts outstanding on the term loans at varying rates, based upon the adjusted Secured Overnight Financing Rate (“SOFR”), as defined in the Amended Credit Agreement, plus an applicable margin. The applicable margin is based upon our leverage ratio, as follows:
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| Leverage Ratio | Applicable Margin for Revolving Loans | Applicable Margin for Term Loans | ||||||||||||
| Less than 30% | ||||||||||||||
| Greater than or equal to 30% but less than 35% | ||||||||||||||
| Greater than or equal to 35% but less than 40% | ||||||||||||||
| Greater than or equal to 40% but less than 45% | ||||||||||||||
| Greater than or equal to 45% but less than 50% | ||||||||||||||
| Greater than or equal to 50% but less than 55% | ||||||||||||||
| Greater than or equal to 55% | ||||||||||||||
The Amended Credit Agreement contains various comparable financial covenants. A summary of the most significant covenants is as follows:
| Actual at | ||||||||||||||
| Covenant | September 30, 2022 | |||||||||||||
Maximum leverage ratio (1) | ||||||||||||||
Minimum fixed charge coverage ratio (2) | ||||||||||||||
| Secured recourse indebtedness | Less than | |||||||||||||
| Unencumbered leverage ratio | ||||||||||||||
| Unencumbered implied debt service coverage ratio | ||||||||||||||
_____________________________
(1)Leverage ratio is net indebtedness, as defined in the Credit Agreements, divided by total asset value, defined in the Credit Agreements as the value of our owned hotels based on hotel net operating income divided by a defined capitalization rate.
As of September 30, 2022, our leverage ratio was 29.6 %. Accordingly, interest on our borrowings under the revolving credit facility and term loans will be based on SOFR plus 1.40 % and 1.35 %, respectively, for the following quarter.We incurred interest and unused fees on our revolving credit facilities of $1.9 million and $0.3 million for the three months ended September 30, 2022 and September 30, 2021, respectively. We incurred interest and unused fees on our revolving credit facilities of $5.1 million and $2.0 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
9. Acquisitions
On January 6, 2022, we acquired the 103 -room Tranquility Bay Beachfront Resort located in Marathon, Florida, for $63.0 million, excluding prorations and transaction costs. The acquisition was funded with corporate cash. The acquisition includes income from 84 units owned by third parties that currently participate in the hotel's rental management program and the majority of the intervals in three units that are structured as vacation ownership. In March 2022, we entered into agreements to purchase four of the third-party owned units for $4.1 million in aggregate. In connection with the purchase agreements, we evaluated the recoverability of the right-to-manage intangible asset related to the long-term rental agreements ("RMAs"), and as a result, we recorded an impairment loss of $2.8 million. On March 23, 2022, we closed on the purchase of two of the four third-party owned units and on April 7, 2022, we closed on the purchase of the remaining two third-party owned units.
We recognized a $45.2 million right-to-manage intangible asset related to the RMAs that were purchased as part of the acquisition. The intangible asset will be amortized over a period of 40 years, which is our estimate of its useful life, inclusive of expected renewal periods. The remaining useful life of this intangible asset as of September 30, 2022 is approximately 39.3 years. The intangible asset, net of accumulated amortization of $0.8 million, was $41.6 million as of September 30, 2022 and is recorded within prepaid and other assets on the accompanying consolidated balance sheet. Amortization expense for the three
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10. Fair Value Measurements and Interest Rate Swaps
The fair value of certain financial assets and liabilities and other financial instruments as of September 30, 2022 and December 31, 2021, in thousands, is as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
Carrying Amount (1) | Fair Value | Carrying Amount (1) | Fair Value | ||||||||||||||||||||
| Debt | $ | $ | $ | $ | |||||||||||||||||||
_______________
(1)The carrying amount of debt is net of unamortized debt issuance costs.
The fair value of our debt is a Level 2 measurement under the fair value hierarchy (see Note 2). We estimate the fair value of our debt by discounting the future cash flows of each instrument at estimated market rates.
The Company's interest rate derivatives, which are not designated or accounted for as cash flow hedges, consisted of the following as of September 30, 2022 and December 31, 2021, in thousands:
| Fair Value of Assets (Liabilities) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedged Debt | Type | Rate Fixed | Index | Effective Date | Maturity Date | Notional Amount | September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||
| Senior unsecured term loans | Swap | % | 1-Month LIBOR | January 7, 2019 | October 18, 2023 | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| Senior unsecured term loans | Swap | % | 1-Month LIBOR | July 25, 2019 | July 25, 2024 | $ | ( | |||||||||||||||||||||||||||||||||||||||||||
| $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
The fair values of the interest rate swap agreements are included in accounts payable and accrued expenses on the accompanying consolidated balance sheets as of September 30, 2022 and December 31, 2021. The fair value of our interest rate swaps is a Level 2 measurement under the fair value hierarchy. We estimate the fair value of the interest rate swap based on the interest rate yield curve and implied market volatility as inputs and adjusted for the counterparty's credit risk. We concluded the inputs for the credit risk valuation adjustment are Level 3 inputs, however these inputs are not significant to the fair value measurement in its entirety.
The carrying amount of our other financial instruments approximate fair value due to the short-term nature of these financial instruments.
11. Commitments and Contingencies
Litigation
We are subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of our hotels and Company matters. While it is not possible to ascertain the ultimate outcome of such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on our financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on management’s current expectations and assumptions and are not guarantees of future performance. Factors that may cause actual results to differ materially from current expectations include, but are not limited to, the risks discussed herein and the risk factors discussed from time to time in our periodic filings with the Securities and Exchange Commission, including in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021 as updated by our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this report to reflect events, circumstances or changes in expectations after the date of this report.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:
•negative developments in the economy, including, but not limited to, rising inflation and interest rates, job loss or growth trends, an increase in unemployment or a decrease in corporate earnings and investment;
•increased competition in the lodging industry and from alternative lodging channels or third party internet intermediaries in the markets in which we own properties;
•failure to effectively execute our long-term business strategy and successfully identify and complete acquisitions and dispositions;
•risks and uncertainties affecting hotel management, operations and renovations (including, without limitation, rising inflation, construction delays, increased construction costs, disruption in hotel operations and the risks associated with our management and franchise agreements);
•risks associated with the availability and terms of financing and the use of debt to fund acquisitions and renovations or refinance existing indebtedness, including the impact of higher interest rates on the cost and/or availability of financing;
•risks associated with our level of indebtedness and our ability to satisfy our obligations under our debt agreements;
•risks associated with the lodging industry overall, including, without limitation, decreases in the frequency of travel and increases in operating costs;
•risks and uncertainties associated with our obligations under our management agreements;
•risks associated with natural disasters and other unforeseen catastrophic events, including the emergence of a pandemic or other widespread health emergency;
•the adverse impact of COVID-19 on the U.S., regional and global economies, travel, the hospitality industry, and on our financial condition and results of operations and our hotels;
•costs of compliance with government regulations, including, without limitation, the Americans with Disabilities Act;
•potential liability for uninsured losses and environmental contamination;
•risks associated with security breaches through cyber-attacks or otherwise, as well as other significant disruptions of our and our hotel managers’ information technologies and systems, which support our operations and those of our hotel managers;
•risks associated with our potential failure to maintain our qualification as a REIT (as defined below) under the Internal Revenue Code of 1986, as amended (the “Code”);
•possible adverse changes in tax and environmental laws; and
•risks associated with our dependence on key personnel whose continued service is not guaranteed.
Overview
DiamondRock Hospitality Company is a lodging-focused Maryland corporation operating as a real estate investment trust (“REIT”). As of September 30, 2022, we owned a portfolio of 34 premium hotels and resorts that contain 9,567 guest rooms located in 23 different markets in North America.
As an owner, rather than an operator, of lodging properties, we receive all of the operating profits or losses generated by our hotels after the payment of fees due to hotel managers and hotel brands, which are calculated based on the revenues and profitability of each hotel.
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Our strategy is to apply aggressive asset management, prudent financial strategy, and disciplined capital allocation to high quality lodging properties in North American urban and resort markets with superior growth prospects and high barriers-to-entry. Our goal is to deliver long-term stockholder returns that exceed those generated by our peers through a combination of dividends and enduring capital appreciation.
Our primary business is to acquire, own, asset manage and renovate premium hotel properties in the United States. Our portfolio is concentrated in major urban markets and destination resort locations. Each of our hotels is managed by a third party—either an independent operator or a brand operator, such as Marriott International, Inc.
We critically evaluate each of our hotels to ensure that we own a portfolio of hotels that conforms to our vision, supports our mission and corresponds with our strategy. On a regular basis, we analyze our portfolio to identify opportunities to invest capital in certain projects or market non-core assets for sale in order to increase our portfolio quality. We are committed to a conservative capital structure with prudent leverage. We regularly assess the availability and affordability of capital in order to maximize stockholder value and minimize enterprise risk. In addition, we are committed to following sound corporate governance practices and to being open and transparent in our communications with our stockholders.
Key Indicators of Financial Condition and Operating Performance
We use a variety of operating and other information to evaluate the financial condition and operating performance of our business. These key indicators include financial information that is prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), as well as other financial information that is not prepared in accordance with U.S. GAAP. In addition, we use other information that may not be financial in nature, including statistical information and comparative data. We use this information to measure the performance of individual hotels, groups of hotels and/or our business as a whole. We periodically compare historical information to our internal budgets as well as industry-wide information. These key indicators include:
•Occupancy percentage;
•Average Daily Rate (or ADR);
•Revenue per Available Room (or RevPAR);
•Earnings Before Interest, Income Taxes, Depreciation and Amortization (or EBITDA), Earnings Before Interest, Income Taxes, Depreciation and Amortization for real estate (or EBITDAre), and Adjusted EBITDA; and
•Funds From Operations (or FFO) and Adjusted FFO.
Occupancy, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy percentage, is an important statistic for monitoring operating performance at the individual hotel level and across our business as a whole. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a company-wide and regional basis. ADR and RevPAR include only room revenue. Room revenue comprised approximately 68% of our total revenues for the nine months ended September 30, 2022 and is dictated by demand, as measured by occupancy percentage, pricing, as measured by ADR, and our available supply of hotel rooms.
Our ADR, occupancy percentage and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions generally, increasing inflation, increasing interest rates, regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, increased use of lodging alternatives, new hotel construction and the pricing strategies of our competitors. In addition, our ADR, occupancy percentage and RevPAR performance is dependent on the continued success of our hotels' global brands.
We also use EBITDA, EBITDAre, Adjusted EBITDA, FFO and Adjusted FFO as measures of the financial performance of our business. See “Non-GAAP Financial Measures” for further discussion on these financial measures.
COVID-19 Pandemic
The novel coronavirus (COVID-19) has had and continues to have a significant effect on our industry in general and our business in particular. The demand for lodging materially decreased beginning in March 2020 and remained low throughout
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2021. In the first nine months of 2022, demand has significantly improved as a result of vaccinations, lifting of governmental restrictions, and overall increase in public demand for leisure travel, among other factors. As a result, occupancy at our resort hotels is at or above pre-pandemic levels, and our urban hotels are continuing to see an increase in demand.
Four of our hotels (one of which was sold on June 30, 2021) had suspended operations for a period of time during the three and nine months ended September 30, 2021. All of our hotels were open during the three and nine months ended September 30, 2022.
The COVID-19 pandemic is expected to continue to contribute to uncertainty and volatility with respect to our results of operations, financial position and cash flows for the remainder of 2022 as the recovery continues. We expect that the pace will vary from market to market and may be uneven in nature. Although there are signs of a robust recovery in business travel in 2022 to date relative to 2021, there remains significant uncertainty regarding the future pace of recovery and whether and when business travel and larger group meetings will return to pre-pandemic levels. The emergence of new variant strains of COVID-19 has the potential to slow or reverse positive trends expected in the remainder of 2022 and beyond.
Our Hotels
The following tables set forth certain operating information for the nine months ended September 30, 2022 for each of our hotels owned during the period.
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| Property | Location | Number of Rooms | Occupancy (%) | ADR ($) | RevPAR ($) | % Change from 2021 RevPAR(1) | ||||||||||||||||||||||||||||||||
Chicago Marriott Downtown Magnificent Mile (2) | Chicago, Illinois | 1,200 | 53.9 | % | $ | 241.50 | $ | 130.14 | 166.9 | % | ||||||||||||||||||||||||||||
Westin Boston Seaport District | Boston, Massachusetts | 793 | 75.5 | % | 238.48 | 180.00 | 157.9 | % | ||||||||||||||||||||||||||||||
| Salt Lake City Marriott Downtown at City Creek | Salt Lake City, Utah | 510 | 60.2 | % | 176.93 | 106.44 | 73.8 | % | ||||||||||||||||||||||||||||||
| Worthington Renaissance Fort Worth Hotel | Fort Worth, Texas | 504 | 68.0 | % | 186.23 | 126.62 | 66.2 | % | ||||||||||||||||||||||||||||||
| Westin San Diego Bayview | San Diego, California | 436 | 74.1 | % | 203.80 | 151.06 | 87.2 | % | ||||||||||||||||||||||||||||||
| Westin Fort Lauderdale Beach Resort | Fort Lauderdale, Florida | 433 | 79.2 | % | 271.85 | 215.27 | 51.0 | % | ||||||||||||||||||||||||||||||
| Westin Washington, D.C. City Center | Washington, D.C. | 410 | 58.8 | % | 210.68 | 123.90 | 245.3 | % | ||||||||||||||||||||||||||||||
Hilton Boston Downtown/Faneuil Hall | Boston, Massachusetts | 403 | 79.0 | % | 291.00 | 229.86 | 124.8 | % | ||||||||||||||||||||||||||||||
| The Hythe Vail | Vail, Colorado | 344 | 56.8 | % | 416.30 | 236.33 | 62.0 | % | ||||||||||||||||||||||||||||||
| Courtyard New York Manhattan/Midtown East | New York, New York | 321 | 81.3 | % | 299.94 | 243.72 | 88.7 | % | ||||||||||||||||||||||||||||||
| Atlanta Marriott Alpharetta | Atlanta, Georgia | 318 | 54.9 | % | 150.91 | 82.78 | 66.9 | % | ||||||||||||||||||||||||||||||
| The Gwen Hotel | Chicago, Illinois | 311 | 72.4 | % | 296.79 | 214.85 | 80.1 | % | ||||||||||||||||||||||||||||||
Hilton Garden Inn New York/Times Square Central (2) | New York, New York | 282 | 91.5 | % | 247.70 | 226.63 | 202.7 | % | ||||||||||||||||||||||||||||||
| Embassy Suites by Hilton Bethesda | Bethesda, Maryland | 272 | 48.8 | % | 144.33 | 70.50 | 106.1 | % | ||||||||||||||||||||||||||||||
| Hilton Burlington Lake Champlain | Burlington, Vermont | 258 | 74.7 | % | 246.52 | 184.15 | 34.6 | % | ||||||||||||||||||||||||||||||
| Hotel Palomar Phoenix | Phoenix, Arizona | 242 | 67.9 | % | 215.33 | 146.24 | 66.5 | % | ||||||||||||||||||||||||||||||
| Henderson Beach Resort | Destin, Florida | 233 | 69.4 | % | 494.31 | 343.16 | 9.1 | % | ||||||||||||||||||||||||||||||
| Bourbon Orleans Hotel | New Orleans, Louisiana | 220 | 60.9 | % | 231.33 | 140.87 | 198.5 | % | ||||||||||||||||||||||||||||||
| Hotel Clio | Denver, Colorado | 199 | 69.6 | % | 305.20 | 212.32 | 33.6 | % | ||||||||||||||||||||||||||||||
Courtyard New York Manhattan/Fifth Avenue (2) | New York, New York | 189 | 92.0 | % | 251.64 | 231.47 | 212.5 | % | ||||||||||||||||||||||||||||||
| Margaritaville Beach House Key West | Key West, Florida | 186 | 83.1 | % | 469.76 | 390.37 | 19.3 | % | ||||||||||||||||||||||||||||||
The Lodge at Sonoma Resort | Sonoma, California | 182 | 63.4 | % | 464.17 | 294.12 | 50.1 | % | ||||||||||||||||||||||||||||||
| Courtyard Denver Downtown | Denver, Colorado | 177 | 75.2 | % | 208.00 | 156.32 | 71.7 | % | ||||||||||||||||||||||||||||||
| Renaissance Charleston Historic District Hotel | Charleston, South Carolina | 167 | 86.7 | % | 357.66 | 310.06 | 30.7 | % | ||||||||||||||||||||||||||||||
| Kimpton Shorebreak Resort | Huntington Beach, California | 157 | 81.7 | % | 357.34 | 292.03 | 36.9 | % | ||||||||||||||||||||||||||||||
| Cavallo Point, The Lodge at the Golden Gate | Sausalito, California | 142 | 51.7 | % | 714.46 | 369.12 | 40.8 | % | ||||||||||||||||||||||||||||||
Havana Cabana Key West | Key West, Florida | 106 | 87.9 | % | 337.36 | 296.70 | 14.6 | % | ||||||||||||||||||||||||||||||
| Tranquility Bay Beachfront Resort | Marathon, Florida | 103 | 76.0 | % | 784.86 | 596.75 | 12.8 | % | ||||||||||||||||||||||||||||||
Hotel Emblem San Francisco | San Francisco, California | 96 | 73.5 | % | 227.72 | 167.44 | 186.3 | % | ||||||||||||||||||||||||||||||
| Kimpton Fort Lauderdale Beach Resort | Fort Lauderdale, Florida | 96 | 61.4 | % | 199.10 | 122.19 | 46.1 | % | ||||||||||||||||||||||||||||||
| L'Auberge de Sedona | Sedona, Arizona | 88 | 72.6 | % | 964.94 | 700.49 | 1.2 | % | ||||||||||||||||||||||||||||||
The Landing Lake Tahoe Resort & Spa | South Lake Tahoe, California | 82 | 52.8 | % | 527.40 | 278.45 | 14.3 | % | ||||||||||||||||||||||||||||||
Orchards Inn Sedona | Sedona, Arizona | 70 | 66.4 | % | 298.31 | 197.97 | (1.6) | % | ||||||||||||||||||||||||||||||
| Henderson Park Inn | Destin, Florida | 37 | 77.7 | % | 668.31 | 519.31 | 11.6 | % | ||||||||||||||||||||||||||||||
| TOTAL/WEIGHTED AVERAGE | 9,567 | 68.6 | % | $ | 285.89 | $ | 196.23 | 66.9 | % | |||||||||||||||||||||||||||||
____________________
(1)The percentage change from 2021 RevPAR reflects the comparable period in 2021 to our 2022 ownership period for our 2022 and 2021 acquisitions.
(2)The hotel was closed for a portion of the nine months ended September 30, 2021.
Results of Operations
Our results of operations for the three and nine months ended September 30, 2022 improved relative to the three and nine months ended September 30, 2021 as all of our hotels were open for the period and travel demand increased.
Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021
Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (dollars in millions):
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| Three Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Rooms | $ | 185.0 | $ | 128.7 | 43.7 | % | |||||||||||
| Food and beverage | 61.9 | 36.5 | 69.6 | % | |||||||||||||
| Other | 21.3 | 14.3 | 49.0 | % | |||||||||||||
| Total revenues | $ | 268.2 | $ | 179.5 | 49.4 | % | |||||||||||
Our total revenues increased $88.7 million from $179.5 million for the three months ended September 30, 2021 to $268.2 million for the three months ended September 30, 2022.
Rooms revenues increased by $56.3 million from the three months ended September 30, 2021 to the three months ended September 30, 2022 primarily due to increases in occupancy and ADR primarily at our resort hotels. Additionally, the acquisitions of the Bourbon Orleans Hotel and Henderson Park Inn in July 2021, Henderson Beach Resort in December 2021, Tranquility Bay Beachfront Resort in January 2022 and Kimpton Fort Lauderdale Beach Resort in April 2022 (collectively, our “2021/2022 Acquisitions”) accounted for $14.8 million of the increase in rooms revenue.
The following are key hotel operating statistics for the three months ended September 30, 2022 and 2021. The 2021 operating statistics reflect the period in 2021 comparable to our ownership period in 2022 for hotels acquired in 2021 and 2022.
| Three Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Occupancy % | 75.0 | % | 65.2 | % | 9.8 | % | |||||||||||
| ADR | $ | 280.40 | $ | 249.34 | 12.5 | % | |||||||||||
| RevPAR | $ | 210.18 | $ | 162.66 | 29.2 | % | |||||||||||
Food and beverage revenues increased $25.4 million from the three months ended September 30, 2021 to the three months ended September 30, 2022 primarily due to increases in occupancy which resulted in an increase in outside the room spend at our resorts. Additionally, our 2021/2022 Acquisitions contributed to the increase in food and beverage revenues by $4.4 million.
Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased by $7.0 million from the three months ended September 30, 2021 to the three months ended September 30, 2022 primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic, as well as increases in resort fees, rental income, and spa revenues. Additionally, our 2021/2022 Acquisitions contributed to the increase in other revenues by $2.8 million.
Hotel operating expenses. The operating expenses consisted of the following (dollars in millions):
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| Three Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Rooms departmental expenses | $ | 43.9 | $ | 32.4 | 35.5 | % | |||||||||||
| Food and beverage departmental expenses | 43.2 | 27.0 | 60.0 | ||||||||||||||
| Other departmental expenses | 6.3 | 3.8 | 65.8 | ||||||||||||||
| General and administrative | 22.3 | 16.3 | 36.8 | ||||||||||||||
| Utilities | 6.6 | 5.4 | 22.2 | ||||||||||||||
| Repairs and maintenance | 10.1 | 8.5 | 18.8 | ||||||||||||||
| Sales and marketing | 17.0 | 11.7 | 45.3 | ||||||||||||||
| Franchise fees | 8.7 | 6.0 | 45.0 | ||||||||||||||
| Base management fees | 5.0 | 3.0 | 66.7 | ||||||||||||||
| Incentive management fees | 1.7 | 0.1 | 1,600.0 | ||||||||||||||
| Property taxes | 9.1 | 11.2 | (18.8) | ||||||||||||||
| Other fixed charges | 8.8 | 6.2 | 41.9 | ||||||||||||||
| Professional fees and pre-opening costs related to Frenchman's Reef | — | 0.3 | (100.0) | ||||||||||||||
| Lease expense | 3.2 | 3.0 | 6.7 | ||||||||||||||
| Total hotel operating expenses | $ | 185.9 | $ | 134.9 | 37.8 | % | |||||||||||
Our hotel operating expenses increased $51.0 million from the three months ended September 30, 2021 to the three months ended September 30, 2022 primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic. Additionally, our 2021/2022 Acquisitions contributed to the increase in hotel operating expenses by $16.3 million.
Depreciation and amortization. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $1.5 million, or 5.9%, from the three months ended September 30, 2021 primarily due to our 2021/2022 Acquisitions.
Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus, restricted stock and severance. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses decreased $0.8 million, or 9.6%, from $8.3 million for the three months ended September 30, 2021 to $7.5 million for the three months ended September 30, 2022 primarily due to an decrease in employee compensation.
Interest expense. Our interest expense decreased $1.0 million from $10.1 million for the three months ended September 30, 2021 to $9.1 million for the three months ended September 30, 2022, and was comprised of the following (in millions):
| Three Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Mortgage debt interest | $ | 6.2 | $ | 6.3 | |||||||
| Unsecured term loan interest | 4.1 | 3.8 | |||||||||
| Credit facility interest and unused fees | 1.9 | 0.3 | |||||||||
| Amortization of debt issuance costs and debt premium | 0.7 | 0.6 | |||||||||
| Interest rate swap mark-to-market and net settlements | (3.8) | (0.9) | |||||||||
| $ | 9.1 | $ | 10.1 | ||||||||
The decrease in interest expense is primarily related to the mark-to-market of our interest rate swaps, partially offset by an increase in credit facility interest due to rising interest rates and an increased outstanding borrowings on the revolving credit facility.
Loss on early extinguishment of debt. On September 27, 2022, we refinanced our senior unsecured credit facility and unsecured term loans. As a result, we recognized a $9.7 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs and fees paid to the lenders in consideration for our refinancing.
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Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
In response to the COVID-19 pandemic, operations were suspended at four of our hotels, one of which was sold in 2021, for a portion of the nine months ended September 30, 2021. All of our hotels were open during the nine months ended September 30, 2022.
Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (dollars in millions):
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Rooms | $ | 510.2 | $ | 266.1 | 91.7 | % | |||||||||||
| Food and beverage | 176.3 | 76.1 | 131.7 | % | |||||||||||||
| Other | 60.0 | 35.0 | 71.4 | % | |||||||||||||
| Total revenues | $ | 746.5 | $ | 377.2 | 97.9 | % | |||||||||||
Our total revenues increased $369.3 million from $377.2 million for the nine months ended September 30, 2021 to $746.5 million for the nine months ended September 30, 2022.
Rooms revenues increased by $244.1 million from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to increases in occupancy and ADR primarily at our resort hotels. Additionally, our 2021/2022 Acquisitions accounted for $50.2 million of the increase in rooms revenue.
The following are key hotel operating statistics for the nine months ended September 30, 2022 and 2021. The 2021 operating statistics reflect the period in 2021 comparable to our ownership period in 2022 for hotels acquired in 2021 and 2022.
| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Occupancy % | 68.6 | % | 48.2 | % | 20.4 | % | |||||||||||
| ADR | $ | 285.89 | $ | 243.88 | 17.2 | % | |||||||||||
| RevPAR | $ | 196.23 | $ | 117.57 | 66.9 | % | |||||||||||
Food and beverage revenues increased $100.2 million from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to increases in occupancy which resulted in an increase in outside the room spend at our resorts. Additionally, our 2021/2022 Acquisitions contributed to the increase in food and beverage revenues by $14.4 million.
Other revenues, which primarily represent spa, parking, resort fees and attrition and cancellation fees, increased by $25.0 million from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to increases in resort fees, rental income, and spa revenues. Additionally, our 2021/2022 Acquisitions contributed to the increase in other revenues by $7.8 million.
Hotel operating expenses. The operating expenses consisted of the following (dollars in millions):
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| Nine Months Ended September 30, | |||||||||||||||||
| 2022 | 2021 | % Change | |||||||||||||||
| Rooms departmental expenses | $ | 120.4 | $ | 67.7 | 77.8 | % | |||||||||||
| Food and beverage departmental expenses | 119.9 | 58.1 | 106.4 | ||||||||||||||
| Other departmental expenses | 16.8 | 8.3 | 102.4 | ||||||||||||||
| General and administrative | 61.7 | 39.2 | 57.4 | ||||||||||||||
| Utilities | 17.8 | 13.7 | 29.9 | ||||||||||||||
| Repairs and maintenance | 28.5 | 21.0 | 35.7 | ||||||||||||||
| Sales and marketing | 45.5 | 25.5 | 78.4 | ||||||||||||||
| Franchise fees | 23.2 | 12.2 | 90.2 | ||||||||||||||
| Base management fees | 13.9 | 6.3 | 120.6 | ||||||||||||||
| Incentive management fees | 3.1 | 0.2 | 1,450.0 | ||||||||||||||
| Property taxes | 29.3 | 36.3 | (19.3) | ||||||||||||||
| Other fixed charges | 25.7 | 13.3 | 93.2 | ||||||||||||||
| Severance costs | (0.5) | (0.2) | 150.0 | ||||||||||||||
| Professional fees and pre-opening costs related to Frenchman's Reef | — | 1.4 | (100.0) | ||||||||||||||
| Lease expense | 9.6 | 8.7 | 10.3 | ||||||||||||||
| Total hotel operating expenses | $ | 514.9 | $ | 311.7 | 65.2 | % | |||||||||||
Our hotel operating expenses increased $203.2 million from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 primarily due to increases in occupancy as our hotels continued to recover from the COVID-19 pandemic and other related operating costs stemming from the timing and extent of the COVID-19 pandemic. Additionally, our 2021/2022 Acquisitions contributed to the increase in hotel operating expenses by $51.7 million. The increase in hotel operating expenses was partially offset by a $5.6 million decrease due to our dispositions of Frenchman's Reef & Morning Star Marriott Beach Resort in April 2021 and The Lexington Hotel in June 2021.
Depreciation and amortization. Depreciation and amortization is recorded on our hotel buildings over 40 years for the periods subsequent to acquisition. Depreciable lives of hotel furniture, fixtures and equipment are estimated as the time period between the acquisition date and the date that the hotel furniture, fixtures and equipment will be replaced. Our depreciation and amortization expense increased $3.9 million, or 5.0%, from the nine months ended September 30, 2021 primarily due to our 2021/2022 Acquisitions.
Impairment losses. During the nine months ended September 30, 2022, we recorded an impairment loss of $2.8 million on the right-to-manage intangible asset related to the rental management agreements at Tranquility Bay Beachfront Resort upon entering into purchase agreements during the nine months ended September 30, 2022 to acquire four third-party owned units. During the nine months ended September 30, 2021, we recorded impairment losses of $126.7 million related to the dispositions of The Lexington Hotel and Frenchman's Reef & Morning Star Marriott Beach Resort.
Corporate expenses. Corporate expenses principally consist of employee-related costs, including base payroll, bonus, restricted stock and severance. Corporate expenses also include corporate operating costs, professional fees and directors’ fees. Our corporate expenses decreased $1.5 million, or 6.4%, from $23.8 million for the nine months ended September 30, 2021 to $22.3 million for the nine months ended September 30, 2022 primarily due to the reversal of compensation expense during the first quarter of 2022 resulting from the forfeiture of long-term incentive awards related to the resignation of our former Executive Vice President, Asset Management and Chief Operating Officer.
Business interruption insurance income. During the nine months ended September 30, 2022, we recognized $0.5 million of business interruption insurance income related to the impact of the Caldor wildfire at The Landing Lake Tahoe Resort & Spa, which caused the hotel to be closed for 21 days in 2021. We did not recognize any business interruption insurance income during the nine months ended September 30, 2021.
Interest expense. Our interest expense decreased $6.3 million, from $29.2 million for the nine months ended September 30, 2021 to $22.9 million for the nine months ended September 30, 2022, and was comprised of the following (in millions):
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| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Mortgage debt interest | $ | 18.3 | $ | 18.7 | |||||||
| Unsecured term loan interest | 11.5 | 11.1 | |||||||||
| Credit facility interest and unused fees | 5.1 | 2.0 | |||||||||
| Amortization of debt issuance costs and debt premium | 2.0 | 1.9 | |||||||||
| Interest rate swap mark-to-market and net settlements | (14.0) | (4.5) | |||||||||
| $ | 22.9 | $ | 29.2 | ||||||||
The decrease in interest expense is primarily related to the mark-to-market of our interest rate swaps, partially offset by an increase in credit facility interest due to rising interest rates and an increased outstanding borrowings on the revolving credit facility.
Loss on early extinguishment of debt. On September 27, 2022, we refinanced our senior unsecured credit facility and unsecured term loans. As a result, we recognized a $9.7 million loss on early extinguishment of debt related to the write-off of certain unamortized debt issuance costs and feeds paid to the lenders in consideration for our refinancing.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service (including four mortgage loans with maturities in 2023 discussed below), operating expenses, ground lease payments, capital expenditures directly associated with our hotels, any share repurchases, distributions to our common and preferred stockholders, and the cost of acquiring additional hotels. On October 6, 2022, we repaid the mortgage loan secured by the Westin Washington, D.C. City Center. On November 1, 2022, we repaid the mortgage loans secured by Salt Lake City Marriott Downtown at City Creek and The Lodge at Sonoma Resort. We intend to repay the mortgage loan secured by Westin San Diego Bayview in December 2022. The repayments were made with the proceeds from the refinancing of our credit agreements discussed further below.
Our mortgage debt agreements contain “cash trap” provisions that are triggered when the hotel’s operating results fall below a certain debt service coverage ratio. When these cash trap provisions are triggered, all of the excess cash flow generated by the hotel is deposited directly into cash management accounts for the benefit of our lenders until a specified debt service coverage ratio is reached and maintained for a certain period of time. Such provisions do not allow the lender the right to accelerate repayment of the underlying debt. As of September 30, 2022, we had $4.2 million held in cash traps, which is included within the restricted cash on the accompanying consolidated balance sheet. We do not expect that such cash traps will affect our ability to satisfy our short-term liquidity requirements.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments, debt maturities, redemption of limited operating partnership units (“common OP units”), ground lease payments, and making distributions to our common and preferred stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, including cash provided by operations, borrowings, issuances of additional equity, including common OP units, and/or debt securities and proceeds from property dispositions. Our ability to incur additional debt is dependent upon a number of factors, including the state of the credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise capital through the issuance of additional equity and/or debt securities is also dependent on a number of factors including the current state of the capital markets, investor sentiment and our intended use of proceeds. We may need to raise additional capital if we identify acquisition opportunities that meet our investment objectives and require liquidity in excess of existing cash balances. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us.
Our Financing Strategy
Since our formation in 2004, we have been committed to a conservative capital structure with prudent leverage. Our outstanding debt consists of fixed interest rate mortgage debt, unsecured term loans and borrowings on our senior unsecured credit facility. We have a preference to maintain a significant portion of our portfolio as unencumbered assets in order to provide balance sheet flexibility. We expect that our strategy will enable us to maintain a balance sheet with an appropriate amount of debt throughout all phases of the lodging cycle. We believe that it is prudent to reduce the inherent risk of highly cyclical lodging fundamentals through a low leveraged capital structure.
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We prefer a relatively simple but efficient capital structure. We generally structure our hotel acquisitions to be straightforward and to fit within our capital structure; however, we will consider a more complex transaction, such as the issuance of common OP units in connection with the acquisition of Cavallo Point, The Lodge at the Golden Gate, if we believe that the projected returns to our stockholders will significantly exceed the returns that would otherwise be available.
We believe that we maintain a reasonable amount of debt. As of September 30, 2022, we had $1.4 billion of debt outstanding with a weighted average interest rate of 4.26% and a weighted average maturity date of approximately 3.2 years. We have four near term mortgage debt maturities, three of which were repaid subsequent to September 30, 2022 and one of which we intend to repay in December 2022. Upon the repayment of the remaining mortgage loan, we will have no debt maturities until August 2024. The majority of our hotels are unencumbered by mortgage debt. We remain committed to our core strategy of prudent leverage.
Information about our financing activities is available in Note 8 to the accompanying consolidated financial statements.
ATM Program
In August 2021, our board of directors approved an “at-the-market” equity offering program (the “ATM Program”), pursuant to which we may issue and sell shares of our common stock from time to time, having an aggregate offering price of up to $200.0 million. We have not sold any shares under the ATM Program.
Share Repurchase Program
On September 29, 2022, our board of directors approved a share repurchase program authorizing us to repurchase shares up to $200.0 million of our common stock through February 2025. Subsequent to September 30, 2022, we repurchased 1.6 million shares of common stock at an average price of $7.81 per share for a total purchase price of $12.3 million. Information about our share repurchase program is in Note 5 to the accompanying consolidated financial statements.
Short-Term Borrowings
Other than borrowings under our senior unsecured credit facility, discussed below, we do not utilize short-term borrowings to meet liquidity requirements.
Senior Unsecured Credit Facility and Unsecured Term Loans
Prior to September 27, 2022, we were party to a $400 million senior unsecured credit facility expiring in July 2023, a $350 million unsecured term loan maturing in July 2024 and a $50 million unsecured term loan maturing in October 2023. On each of June 9, 2020, August 14, 2020, January 20, 2021 and February 4, 2022, we executed amendments to the credit agreements for our corporate credit facility and term loans. These amendments provided for a waiver of the applicable quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2022 and allowed for certain other modifications to the covenants thereafter through the second quarter of 2023. As of June 30, 2022, we were in compliance with all of the original unmodified financial covenants under the credit agreements for two consecutive quarters and had exited the covenant waiver restrictions.
On September 27, 2022, we entered into a Sixth Amended and Restated Credit Agreement (the “Amended Credit Agreement”). The Amended Credit Agreement provides for a $400 million senior unsecured revolving credit facility and two term loan facilities in the aggregate amount of $800 million. The revolving credit facility under the Amended Credit Agreement matures on September 27, 2026. We may extend the maturity date of the revolving credit facility for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions. We also have the right to increase the aggregate amount of the facilities to $1.4 billion upon the satisfaction of certain standard conditions. The term loan facilities consist of a $500 million term loan that matures on January 3, 2028 and a $300 million term loan that matures January 3, 2025. The maturity date of the $300 million term loan may be extended for an additional year upon the payment of applicable fees and satisfaction of certain standard conditions.
We utilized the proceeds from the term loans to repay the $350 million term loan in the prior facility, the $50 million term loan facility that was scheduled to mature in October 2023 and the $150 million that was outstanding on our revolving credit facility. We utilized the proceeds from the Amended Credit Agreement to repay the Westin Washington, D.C. City Center mortgage loan on October 6, 2022 and the Salt Lake City Marriott Downtown at City Creek and The Lodge at Sonoma
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Resort mortgage loans on November 1, 2022. We intend to repay the mortgage loan secured by Westin San Diego Bayview in December 2022. Upon the repayment of the remaining mortgage loan, we will have no debt maturities until August 2024.
Additional information about the credit agreements, including a summary of significant covenants, can be found in Note 8 to the accompanying consolidated financial statements.
Sources and Uses of Cash
We expect that our principal sources of cash will include one or more of the following: net cash flow from hotel operations, sales of our equity and debt securities, debt financings and proceeds from any hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, ground lease payments, corporate expenses, and any distributions to holders of common stock, common units and preferred stock. As of September 30, 2022, we had $313.9 million of unrestricted cash, $46.0 million of restricted cash and no outstanding borrowings on our senior unsecured credit facility.
Our net cash provided by operations was $158.0 million for the nine months ended September 30, 2022. Our cash from operations generally consists of the net cash flow from hotel operations, offset by cash paid for corporate expenses and other working capital changes.
Our net cash used in investing activities was $149.8 million for the nine months ended September 30, 2022, which consisted of $44.6 million of capital expenditures, $106.2 million paid for the acquisitions of Tranquility Bay Beachfront Resort, including the subsequent purchase of four third-party owned units at the resort, and Kimpton Fort Lauderdale Beach Resort, offset by $1.0 million of deferred key money received for the Henderson Beach Resort.
Our net cash provided by financing activities was $276.1 million for the nine months ended September 30, 2022, which consisted of proceeds of $800.0 million from unsecured term loans, offset by net repayments of $90.0 million on our senior unsecured credit facility, $400.0 million of repayments of unsecured term loans, $7.4 million of distributions paid to holders of preferred stock, $11.9 million of scheduled mortgage debt principal payments, $13.8 million paid for financing costs for the credit agreements, and $0.8 million paid to repurchase shares for the payment of tax withholding obligations and for accrued dividends upon the vesting of restricted stock.
We currently anticipate our significant sources of cash for the remainder of the year ending December 31, 2022 will be the net cash flow from hotel operations and any potential hotel dispositions. We expect our estimated uses of cash for the remainder of the year ending December 31, 2022 will be mortgage debt maturities, scheduled debt service payments, capital expenditures, distributions to preferred and common stockholders, corporate expenses and potential hotel acquisitions.
Dividend Policy
We intend to distribute to our stockholders dividends at least equal to our REIT taxable income to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our taxable REIT subsidiaries, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Code. In order to qualify as a REIT under the Code, we generally must make distributions to our stockholders each year in an amount equal to at least:
•90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital gains, plus
•90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus
•any excess non-cash income.
The timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors, including our financial performance, restrictions under applicable law and our current and future loan agreements, our debt service requirements, our capital expenditure requirements, the requirements for qualification as a REIT under the Code and other factors that our board of directors may deem relevant from time to time.
Our board of directors suspended our quarterly common dividend commencing with the first quarter dividend that would have been paid in April 2020 and resumed quarterly common dividends beginning with the third quarter dividend that was paid in October 2022. We have paid the following dividends to holders of our common stock and distributions to holders of common OP units and LTIP units during 2022:
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| Payment Date | Record Date | Dividend per Share | ||||||||||||
| October 12, 2022 | September 30, 2022 | $ | 0.03 | |||||||||||
We have paid the following dividends per share to holders of our Series A Preferred Stock during 2022, and through the date of this report:
| Payment Date | Record Date | Dividend per Share | ||||||||||||
| March 31, 2022 | March 18, 2022 | $ | 0.515625 | |||||||||||
| June 30, 2022 | June 17, 2022 | $ | 0.515625 | |||||||||||
| September 30, 2022 | September 16, 2022 | $ | 0.515625 | |||||||||||
Capital Expenditures
The management and franchise agreements for each of our hotels provide for the establishment of separate property improvement funds to cover, among other things, the cost of replacing and repairing furniture, fixtures and equipment at our hotels and other routine capital expenditures. Contributions to the property improvement fund are calculated as a percentage of hotel revenues. In addition, we may be required to pay for the cost of certain additional improvements that are not permitted to be funded from the property improvement fund under the applicable management or franchise agreement. As of September 30, 2022, we have set aside $31.1 million for capital projects in property improvement funds, which are included in restricted cash.
In 2022, we expect to spend approximately $100 million on necessary capital improvements and a select few transformational projects with attractive returns on investment. We invested approximately $44.6 million in capital improvements at our hotels during the nine months ended September 30, 2022. Significant projects in 2022 include the following:
•Hotel Clio: We completed renovations in March 2022 to rebrand the JW Marriott Denver Cherry Creek as the Hotel Clio, a Luxury Collection Hotel.
•Kimpton Hotel Palomar Phoenix: We are in the process of completing a comprehensive rebranding and repositioning of the rooftop bar and pool at the hotel.
•Hilton Boston Downtown/Faneuil Hall: We expect to commence a comprehensive renovation in the fourth quarter of 2022 to reposition the hotel as an experiential lifestyle property to be completed in mid-2023.
•Hilton Burlington Lake Champlain: We have commenced a repositioning of the hotel to rebrand it as a Curio Collection hotel. The repositioning is expected to be completed in early 2023 and includes a new restaurant concept by a local chef.
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, 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, 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, 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.
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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.
Adjustments to EBITDAre and FFO
We adjust EBITDAre and FFO 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 and Adjusted FFO, when combined with U.S. GAAP net income, EBITDAre and FFO, is beneficial to an investor's complete understanding of our consolidated operating performance. We adjust EBITDAre and FFO for the following items:
•Non-Cash Lease Expense and Other Amortization: We exclude the non-cash expense incurred from the straight line recognition of expense from our ground leases and other contractual obligations and the non-cash amortization of our favorable and unfavorable contracts, originally recorded in conjunction with certain hotel acquisitions. We exclude these non-cash items because they do not reflect the actual cash amounts due to the respective lessors in the current period and they are 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.
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•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 on property insurance claim settlements, other than income related to business interruption insurance.
In addition, to derive Adjusted FFO we exclude any unrealized fair value adjustments to interest rate swaps. We exclude these non-cash amounts because they do not reflect the underlying performance of the Company.
The following table is a reconciliation of our U.S. GAAP net income to EBITDA, EBITDAre and Adjusted EBITDA (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | 28,555 | $ | (1,771) | $ | 91,316 | $ | (192,457) | |||||||||||||||
| Interest expense | 9,072 | 10,052 | 22,866 | 29,246 | |||||||||||||||||||
| Income tax expense | 312 | 2,371 | 949 | 1,433 | |||||||||||||||||||
| Real estate related depreciation and amortization | 27,053 | 25,555 | 81,097 | 77,209 | |||||||||||||||||||
| EBITDA | 64,992 | 36,207 | 196,228 | (84,569) | |||||||||||||||||||
| Impairment losses | — | — | 2,843 | 126,697 | |||||||||||||||||||
EBITDAre | 64,992 | 36,207 | 199,071 | 42,128 | |||||||||||||||||||
| Non-cash lease expense and other amortization | 1,551 | 1,664 | 4,675 | 5,007 | |||||||||||||||||||
Professional fees and pre-opening costs related to Frenchman's Reef (1) | — | 335 | — | 1,388 | |||||||||||||||||||
| Hotel manager transition items | 11 | 523 | 247 | 651 | |||||||||||||||||||
Severance costs (2) | — | — | (532) | (216) | |||||||||||||||||||
Uninsured costs related to natural disasters (3) | — | 187 | — | 187 | |||||||||||||||||||
| Loss on early extinguishment of debt | 9,698 | — | 9,698 | — | |||||||||||||||||||
| Adjusted EBITDA | $ | 76,252 | $ | 38,916 | $ | 213,159 | $ | 49,145 | |||||||||||||||
____________________
| (1) | Represents pre-opening costs and professional fees related to the reopening of Frenchman's Reef, as well as legal and other costs incurred at Frenchman's Reef as a result of Hurricane Irma that were not covered by insurance. | |||||||
| (2) | Consists of severance costs incurred, or adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statements of operations. | |||||||
| (3) | Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that did not exceed the insurance deductible. | |||||||
The following table is a reconciliation of our U.S. GAAP net income to FFO and Adjusted FFO (in thousands):
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| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income (loss) | $ | 28,555 | $ | (1,771) | 91,316 | $ | (192,457) | ||||||||||||||||
| Real estate related depreciation and amortization | 27,053 | 25,555 | 81,097 | 77,209 | |||||||||||||||||||
| Impairment losses, net of tax | — | (2,215) | 2,843 | 127,282 | |||||||||||||||||||
| FFO | 55,608 | 21,569 | 175,256 | 12,034 | |||||||||||||||||||
| Distributions to preferred stockholders | (2,454) | (2,454) | (7,362) | (7,362) | |||||||||||||||||||
| FFO available to common stock and unit holders | 53,154 | 19,115 | 167,894 | 4,672 | |||||||||||||||||||
| Non-cash lease expense and other amortization | 1,551 | 1,664 | 4,675 | 5,007 | |||||||||||||||||||
Professional fees and pre-opening costs related to Frenchman's Reef (1) | — | 335 | — | 1,388 | |||||||||||||||||||
| Hotel manager transition items | 11 | 523 | 247 | 651 | |||||||||||||||||||
Severance costs (2) | — | — | (532) | (216) | |||||||||||||||||||
Uninsured costs related to natural disasters (3) | — | 187 | — | 187 | |||||||||||||||||||
| Loss on early extinguishment of debt | 9,698 | — | 9,698 | — | |||||||||||||||||||
| Fair value adjustments to interest rate swaps | (3,780) | (919) | (14,002) | (4,488) | |||||||||||||||||||
| Adjusted FFO available to common stock and unit holders | $ | 60,634 | $ | 20,905 | $ | — | $ | 167,980 | $ | 7,201 | |||||||||||||
____________________
| (1) | Represents pre-opening costs and professional fees related to the reopening of Frenchman's Reef, as well as legal and other costs incurred at Frenchman's Reef as a result of Hurricane Irma that were not covered by insurance. | |||||||
| (2) | Consists of severance costs incurred, or adjustments thereto, associated with the elimination of positions at our hotels, which are classified within other hotel expenses on the consolidated statements of operations. | |||||||
| (3) | Represents costs incurred at the Bourbon Orleans Hotel as a result of Hurricane Ida that did not exceed the insurance deductible. | |||||||
Critical Accounting Estimates and Policies
Our unaudited consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. While we do not believe the reported amounts would be materially different, application of these policies involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We evaluate our estimates and judgments, including those related to the impairment of long-lived assets, on an ongoing basis. We base our estimates on experience and on various assumptions that are believed to be reasonable under the circumstances. All of our significant accounting policies are disclosed in the notes to our consolidated financial statements. All of our significant accounting policies, including certain critical accounting policies, are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:
Investment in Hotels
Investment purchases of hotel properties, land, land improvements, building and furniture, fixtures and equipment, lease assets and liabilities, and identifiable intangible assets that are not businesses are accounted for as asset acquisitions and recorded at relative fair value based upon total accumulated cost of the acquisition. Property and equipment purchased after the hotel acquisition date is recorded at cost.
Identifiable intangible assets are typically related to contracts, including ground lease agreements and hotel management agreements, which are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates for corresponding contracts. Contracts acquired that are at market do not have significant value. We enter into a hotel management agreement at the time of acquisition and such agreements are generally based on market terms. Intangible
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assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.
We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying amount of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform a review include, but are not limited to, adverse changes in the demand for lodging at our properties, current or projected losses from operations, and an expectation that the property is more likely than not to be sold significantly before the end of its previously estimated useful life. If such events or circumstances are identified, management performs an analysis to compare the estimated undiscounted future cash flows from operations and the net proceeds from the ultimate disposition of a hotel to the carrying amount of the asset. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotels' estimated fair value is recorded and an impairment loss is recognized. The fair value is determined through various valuation techniques, including discounted cash flow models with estimated discount and terminal capitalization rates, comparable market transactions, third-party appraisals, the net sales proceeds from pending offers, or from transactions that closed subsequent to the end of the reporting period.
Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Generally, our management companies may adjust room rates daily, excluding previous contractually committed reservations. However, competitive pressures or other factors may limit the ability of our management companies to raise room rates. Inflation may also affect our expenses and cost of capital improvements, including, without limitation, by increasing the costs of labor, employee-related benefits, food, commodities and other materials, taxes, property and casualty insurance and utilities.
Inflation has increased recently to levels not seen in years. The United States Federal Reserve has raised, and may contine to raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty, and increasing the cost of new indebtedness and servicing our outstanding variable debt.
Seasonality
The periods during which our hotels experience higher revenues vary from property to property, depending principally upon location and the customer base served. Accordingly, we expect some seasonality in our business. Volatility in our financial performance from the seasonality of the lodging industry could adversely affect our financial condition and results of operations. Additionally, historical trends have been disrupted in recent years as a result of COVID-19, however, we expect seasonality trends in the remainder of 2022 to be in line with historical seasonality trends.
New Accounting Pronouncements Not Yet Implemented
See Note 2 to the accompanying consolidated financial statements for additional information relating to recently issued accounting pronouncements.
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Item 3.Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business strategies, the primary market risk to which we are currently exposed, and, to which we expect to be exposed in the future, is interest rate risk. The face amount of our outstanding debt as of September 30, 2022 was $1.4 billion, of which $842.2 million was variable rate. If market rates of interest on our variable rate debt fluctuate by 100 basis points, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows, by $8.4 million annually.
We are party to interest rate swap agreements to fix LIBOR at 2.41% for $50 million of unsecured term loans and to fix LIBOR at 1.70% for $175 million of unsecured term loans. Information about our unsecured term loans and interest rate swap agreements can be found in Notes 8 and 10 to the accompanying consolidated financial statements.
The LIBOR benchmark has been the subject of national, international and other regulatory guidance and proposals for reform and replacement, with most LIBOR settings not expected to be published after June 30, 2023. In the U.S., the Alternative Reference Rates Committee (“AARC”), which was convened by the Federal Reserve Board and the Federal Reserve Bank of New York, has recommended the Secured Overnight Financing Rate (“SOFR”) plus a recommended spread adjustment as its preferred alternative to USD-LIBOR. There are significant differences between LIBOR and SOFR, such as LIBOR being an unsecured lending rate while SOFR is a secured rate, and SOFR is an overnight rate while LIBOR reflects term rates at different maturities.
We have contracts that are indexed to LIBOR, including contracts governing our variable rate debt and our interest rate swaps. We expect that all LIBOR settings relevant to us will cease to be published or will no longer be representative after June 30, 2023. As a result, any of our LIBOR-based borrowings that extend beyond such date will need to be converted to a replacement rate. Certain risks may arise in connection with transitioning contracts to SOFR or any other alternative variable rate, including any resulting value transfer that may occur. The value of loans, securities, or derivative instruments tied to LIBOR could also be impacted. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require substantial negotiation with each respective counterparty. If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact is likely to vary by contract.
The discontinuation of LIBOR will not affect our ability to borrow or maintain already outstanding borrowings or swaps, but if our contracts indexed to LIBOR, including contracts governing our variable rate debt and our interest rate swaps, are converted to SOFR, the differences between LIBOR and SOFR, plus the recommended spread adjustment, could result in interest costs that are higher than if LIBOR remained available. Additionally, although SOFR is the AARC’s recommended replacement rate, it is also possible that lenders may instead choose alternative replacements that may differ from LIBOR in ways similar to SOFR or in ways that would result in higher interest costs for us. It is not yet possible to predict the magnitude of LIBOR’s end on our borrowing costs given the remaining uncertainty about which rates will replace LIBOR.
Item 4.Controls and Procedures
The Company’s management has evaluated, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and has concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to give reasonable assurances that information we disclose in reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during the Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal Proceedings
We are subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of our hotels and company matters. While it is not possible to ascertain the ultimate outcome of such matters, management believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on our financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties.
Item 1A.Risk Factors
The following risk factor supplements the risk factors described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and should be read in conjunction with the other risk factors presented in the Annual Report on Form 10-K.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term stockholder value. Share repurchases could also increase the volatility of the price of our common stock and could diminish our cash reserves.
The timing, manner, price and actual number of shares repurchased under our share repurchase program will depend on a variety of factors including stock price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. Our share repurchase program may be limited, suspended or terminated at any time without prior notice. In addition, repurchases of our common stock pursuant to our share repurchase program could affect our stock price and increase its volatility. The existence or use of our share repurchase program may cause our stock price to be higher than it would otherwise be, and could potentially reduce the market liquidity for our stock. Additionally, our share repurchase program could diminish our cash reserves, which may impact our ability to finance future growth and to pursue possible any future strategic opportunities or acquisitions. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock. Although our share repurchase program is intended to enhance long-term stockholder value, there is no assurance that it will do so, and short-term stock price fluctuations could reduce the program’s effectiveness.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(a)During the three months ended September 30, 2022, we issued an aggregate of 21,502 shares of common stock in exchange for OP units held by certain limited partners. These shares were issued in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act. We relied on this exemption based upon factual representations received from the limited partners who received the shares of common stock.
(b)Not applicable.
(c)
| Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in thousands) (1) | ||||||||||||||||||||||
| July 1 - July 31, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| August 1 - August 31, 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| September 1 - September 30, 2022 | — | $ | — | — | $ | 200,000 | ||||||||||||||||||||
(1)Represents amounts available under the Company's $200.0 million share repurchase program approved by the board of directors on September 29, 2022 (the “Share Repurchase Program”). The Share Repurchase Program does not obligate the Company to acquire any
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particular amount of shares, and the share repurchase program may be suspended or discontinued at any time at the Company’s discretion. The Share Repurchase Program expires on February 28, 2025.
Subsequent to September 30, 2022, we repurchased 1.6 million shares of common stock at an average price of $7.81 per share for a total purchase price of $12.3 million. As of November 4, 2022, we have $187.7 million of authorized capacity remaining under our share repurchase program.
Item 3.Defaults Upon Senior Securities
Not applicable.
Item 4.Mine Safety Disclosures
Not applicable.
Item 5.Other Information
None.
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Item 6.Exhibits
(a)Exhibits
The following exhibits are filed as part of this Form 10-Q:
| Exhibit | ||||||||
Sixth Amended and Restated Credit Agreement dated as of September 27, 2022 (incorporated by reference to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 28, 2022) | ||||||||
31.1* | Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act | |||||||
31.2* | Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act | |||||||
32.1** | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104* | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) | |||||||
| * Filed herewith | ||||||||
| ** Furnished herewith | ||||||||
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SIGNATURES
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, thereunto duly authorized.
| DiamondRock Hospitality Company | ||
| November 4, 2022 | ||
| /s/ Jeffrey J. Donnelly | ||
| Jeffrey J. Donnelly | ||
| Executive Vice President and Chief Financial Officer | ||
| (Principal Financial Officer) | ||
| /s/ Briony R. Quinn | ||
| Briony R. Quinn | ||
| Senior Vice President and Treasurer | ||
| (Principal Accounting Officer) | ||
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Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, Mark W. Brugger, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of DiamondRock Hospitality Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2022
| /s/ Mark W. Brugger | |||||
| Mark W. Brugger | |||||
| Chief Executive Officer (Principal Executive Officer) | |||||
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) and Rule 15d-14(a)
I, Jeffrey J. Donnelly, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of DiamondRock Hospitality Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 4, 2022
| /s/ Jeffrey J. Donnelly | |||||
| Jeffrey J. Donnelly | |||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||
Exhibit 32.1
Certification
Pursuant to 18 U.S.C. Section 1350
The undersigned officers, who are the Chief Executive Officer and Chief Financial Officer of DiamondRock Hospitality Company (the “Company”), each hereby certifies to the best of his knowledge, that the Company’s Quarterly Report on Form 10-Q (the “Report”) to which this certification is attached, as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ Mark W. Brugger | /s/ Jeffrey J. Donnelly | |||||||
Mark W. Brugger | Jeffrey J. Donnelly | |||||||
| Chief Executive Officer | Executive Vice President and Chief Financial Officer | |||||||
| November 4, 2022 | November 4, 2022 | |||||||