DIAMONDROCK HOSPITALITY COMPANY 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 theSecurities and Exchange Commission , including in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 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, job loss or growth trends, a continued 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 (including the proposed sale ofThe Lexington Hotel ); •risks and uncertainties affecting hotel management, operations and renovations (including, without limitation, 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 the reopening of our hotels that suspended operations as a result of the novel coronavirus (COVID-19); •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 theU.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 qualify 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. OverviewDiamondRock Hospitality Company is a lodging-focusedMaryland corporation operating as a real estate investment trust ("REIT"). As ofMarch 31, 2021 , we owned a portfolio of 31 premium hotels and resorts that contain 10,103 guest rooms located in 21 different markets inNorth America and theU.S. Virgin Islands . Subsequent toMarch 31, 2021 , we sold the Frenchman'sReef & Morning Star Marriott Beach Resort ("Frenchman's Reef") located inSt. Thomas, U.S. Virgin Islands . See -21- --------------------------------------------------------------------------------
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Note 3 to the accompanying consolidated financial statements for further
discussion of the sale. Frenchman's Reef has been closed since
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. 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 inthe United States . Our portfolio is concentrated in key gateway cities 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 withU.S. Generally Accepted Accounting Principles ("U.S. GAAP"), as well as other financial information that is not prepared in accordance withU.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
•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 69% of our total revenues for the three months endedMarch 31, 2021 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 asU.S. economic conditions generally, 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. -22- --------------------------------------------------------------------------------
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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."
Impact of COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the novel coronavirus, or COVID-19, a global pandemic. The virus spread throughoutthe United States and globally. As a result of the pandemic, government mandates and health official recommendations, the overall demand for lodging has materially decreased. We suspended operations at 20 of our 30 previously operating hotels for a portion of 2020. For the three months endedMarch 31, 2021 , four of our 30 previously operating hotels were closed for all or a portion of the quarter. We have taken aggressive steps to mitigate the COVID-19 pandemic's operational and financial impacts on our business, as described in our consolidated financial statements contained within our Annual Report on Form 10-K filed onMarch 1, 2021 . The COVID-19 pandemic has had a material adverse impact on our operations and financial results for the three months endedMarch 31, 2021 . The severity and duration of the COVID-19 pandemic cannot be reasonably estimated at this time, but we expect it will continue to have a material adverse impact on our results of operations, financial position and cash flow in 2021. The situation surrounding the COVID-19 pandemic remains fluid. Market demand for lodging at our hotels is closely correlated with reported infection levels near our hotel locations, consumer confidence, and guidance from health officials and federal, state, and local governments. Demand at our leisure-focused hotels has improved in the latter part of 2020 and the first quarter of 2021. Demand at our other hotels, however, remains at historically low levels. Several markets throughout the country experienced a resurgence of COVID-19 case counts during the recent winter months and reimplemented or strengthened closures, quarantines, and social distancing requirements. The availability and effectiveness of COVID-19 vaccines, as well as other public health and geopolitical factors, are likely to impact the timing, pace, and extent of a lodging demand recovery. As demand returns, we will continue to aggressively asset manage our hotels. We continue to carefully assess staffing needs, cleanliness and safety protocols, business mix, and other initiatives. We expect that the COVID-19 pandemic will decrease the pipeline of supply of new hotel rooms within the markets we operate, which will further stabilize RevPAR and profitability. As ofMarch 31, 2021 , the Company had liquidity of$436.9 million , which includes unrestricted corporate cash of$99.8 million ,$300.0 million of borrowing capacity on our senior unsecured credit facility, and unrestricted cash held at our hotels, which is included in due from hotel managers on our accompanying consolidated balance sheets.
Our Hotels
The following tables set forth certain operating information for the three months endedMarch 31, 2021 for each of our hotels. The table indicates the operating status of each hotel and the occupancy percentage, ADR and RevPAR for each hotel for the portion of the three months endedMarch 31, 2021 that it was open. Hotels Open Throughout the Three Months EndedMarch 31, 2021 % Change Number of from 2020 Property Location Rooms Occupancy (%) ADR ($) RevPAR($) RevPARWestin Boston Waterfront (1)Boston, Massachusetts 793 15.0 %$ 119.58 $ 17.91 (84.8) %Salt Lake City Marriott Downtown atCity Creek Salt Lake City, Utah 510 30.5 % 108.20 33.00 (62.4) % Worthington Renaissance FortWorth Hotel Fort Worth, Texas 504 34.9 % 136.41 47.54 (57.7) %Westin San Diego Downtown San Diego, California 436 22.0 % 141.50 31.06 (75.3) %Westin Fort Lauderdale Beach ResortFort Lauderdale, Florida 433 55.9 % 255.18 142.74 (35.9) %Westin Washington , D.C. City CenterWashington, D.C. 410 8.8 % 150.94 13.23 (88.6) %Hilton Boston Downtown/Faneuil Hall (1)Boston, Massachusetts 403 21.2 % 106.46 22.60 (82.1) %Vail Marriott Mountain Resort (1)Vail, Colorado 344 73.6 % 373.06 274.74 (7.0) % CourtyardNew York Manhattan /Midtown East New York, New York 321 67.0 % 126.21 84.54 (34.2) % -23-
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Atlanta Marriott Alpharetta Atlanta, Georgia 318 22.9 % 94.37 21.61 (75.8) %The Gwen Hotel (1)Chicago, Illinois 311 23.5 % 191.04 44.84 (61.9) %Bethesda Marriott Suites Bethesda, Maryland 272 18.5 % 105.58 19.49 (76.0) % Hilton Burlington Lake Burlington,Champlain (1)Vermont 258 32.7 % 114.95 37.63 (28.7) %Hotel Palomar Phoenix (1)Phoenix, Arizona 242 49.8 % 147.96 73.63 (55.3) %JW Marriott Denver Cherry Creek (1)Denver, Colorado 199 39.4 % 200.92 79.12 (39.3) % BarbaryBeach House Key West (1)Key West, Florida 184 83.2 % 347.09 288.93 7.4 % TheLodge atSonoma Sonoma, California 182 27.7 % 216.11 59.82 (43.3) %Renaissance Resort & Spa (1) Courtyard Denver Downtown (1)Denver, Colorado 177 35.7 % 94.11 33.60 (57.4) % Renaissance Charleston Charleston, SouthHistoric District Hotel Carolina 167 56.8 % 214.87 122.12 (21.2) % Huntington Beach,Kimpton Shorebreak Resort California 157 43.4 % 229.94 99.69 (28.4) % Cavallo Point, The Lodge at Sausalito, theGolden Gate (1)California 142 19.3 % 547.30 105.82 (48.7) % Havana CabanaKey West (1)Key West, Florida 106 90.8 % 261.53 237.49 2.5 % Hotel Emblem San Francisco San Francisco, (1)California 96 15.2 % 128.42 19.52 (88.7) % L'Auberge deSedona Sedona, Arizona 88 80.8 % 716.68 578.77 63.4 % The Landing Lake Tahoe Resort South Lake Tahoe, & Spa (1)California 82 49.5 % 338.05 167.37 25.9 %Orchards Inn Sedona (1)Sedona, Arizona 70 62.2 % 253.24 157.61 32.7 % TOTAL/WEIGHTED AVERAGE FOR OPEN HOTELS 7,205 35.8 % 216.93 77.68 (44.3) %
Hotels Closed for a Portion of the Three Months Ended
Number of % Change
Property (2) Location Date of Closure Date of Reopening Rooms Occupancy (%) ADR ($) RevPAR ($) from 2020 RevPAR
Chicago Marriott Downtown
Magnificent Mile Chicago, Illinois 4/10/2020 1/3/2021 9/1/2020 (3) 1,200 0.2 % $ 148.58 $ 0.35 (99.5) %
The Lexington Hotel (1) New York, New York 3/29/2020 - 725 - % - - (100.0) %
Hilton Garden Inn New
York/Times Square Central (1) New York, New York 3/29/2020 (4) 282 - % - - (100.0) %
Courtyard New York
Manhattan/Fifth Avenue (1) New York, New York 3/27/2020 - 189 - % - - (100.0) %
TOTAL/WEIGHTED AVERAGE FOR
CLOSED HOTELS 2,396 0.1 % 148.58 0.17 (99.8) %
TOTAL/WEIGHTED AVERAGE 9,601 26.9 % $ 216.85 $ 58.34 (54.4) %
____________________
(1)Operations were suspended for a portion of the three months ended March 31,
2020 .
(2)Frenchman's Reef closed on September 6, 2017 due to Hurricane Irma and
remains closed. Accordingly, there is no operating information for the three
months ended March 31, 2021 .
(3) On January 3, 2021 , we suspended operations at the Chicago Marriott
Downtown Magnificent Mile due to lack of travel demand. We reopened the hotel on
April 15, 2021 .
(4) The hotel reopened on May 3, 2021 .
Results of Operations
The comparability of our results of operations for the three months endedMarch 31, 2021 to the three months endedMarch 31, 2020 has been significantly impacted by the effects of the COVID-19 pandemic. We expect the comparability of our results of operations in future periods will be similarly impacted.
Comparison of the Three Months Ended
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In response to the COVID-19 pandemic, operations were suspended at four of our hotels for all or a portion of the three months endedMarch 31, 2021 . Operations were suspended at 18 of our hotels for a portion of the three months endedMarch 31, 2020 .
Revenue. Revenue consists primarily of the room, food and beverage and other operating revenues from our hotels, as follows (dollars in millions):
Three Months Ended March 31,
2021 2020 % Change
Rooms $ 50.4 $ 111.8 (54.9) %
Food and beverage 13.9 43.9 (68.3) %
Other 8.6 14.3 (39.9) %
Total revenues $ 72.9 $ 170.0 (57.1) %
Our total revenues decreased
The following are key hotel operating statistics for the three months endedMarch 31, 2021 and 2020. Three Months Ended March 31, 2021 2020 % Change Occupancy % 26.9 % 59.1 % (32.2) % ADR$ 216.85 $ 216.46 0.2 % RevPAR$ 58.34 $ 127.98 (54.4) %
Food and beverage revenues decreased
Other revenues, which primarily represent spa, parking, resort fees and
attrition and cancellation fees, decreased by
Hotel operating expenses. The operating expenses consisted of the following
(dollars in millions):
Three Months Ended March 31,
2021 2020 % Change
Rooms departmental expenses $ 13.8 $ 35.7 (61.3) %
Food and beverage departmental expenses 11.6 31.1 (62.7)
Other departmental expenses 2.0 3.9 (48.7)
General and administrative 9.9 25.0 (60.4)
Utilities 4.1 4.8 (14.6)
Repairs and maintenance 5.8 8.3 (30.1)
Sales and marketing 5.8 14.1 (58.9)
Franchise fees 2.4 5.8 (58.6)
Base management fees 1.1 3.5 (68.6)
Property taxes 14.1 14.6 (3.4)
Other fixed charges 3.8 4.4 (13.6)
Severance costs 0.1 - 100.0
Professional fees and pre-opening costs related to
Frenchman's Reef 0.6 (0.3) N/A
Lease expense 2.8 3.0 (6.7)
Total hotel operating expenses $ 77.9 $ 153.9 (49.4) %
Our hotel operating expenses decreased $76.0 million from $153.9 million for the
three months ended March 31, 2020 to $77.9 million for the three months ended
March 31, 2021 .
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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 decreased$3.1 million , or 10.4%, from the three months endedMarch 31, 2020 . This is primarily due to the timing of fully depreciated capital expenditures.
Impairment losses. During the three months ended
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 increased$1.6 million , or 28.8%, from$5.6 million for the three months endedMarch 31, 2020 to$7.2 million for the three months endedMarch 31, 2021 primarily due to increases in employee-related compensation and other employee-related expenses. Interest expense. Our interest expense was$8.5 million and$21.2 million for the three months endedMarch 31, 2021 and 2020, respectively, and was comprised of the following (in millions): Three Months Ended March 31, 2021 2020 Mortgage debt interest $ 6.3$ 6.5 Unsecured term loan interest 3.6 3.2 Credit facility interest and unused fees 0.7
0.7
Amortization of debt issuance costs and debt premium 0.6
0.5
Capitalized interest -
(1.0)
Interest rate swap mark-to-market and net
settlements (2.7) 11.3
$ 8.5 $ 21.2 The decrease in interest expense is primarily related to the mark-to-market of our interest rate swaps, partially offset by the cessation of interest capitalization due to the pause on the reconstruction of Frenchman's Reef.
Income taxes. We recorded income tax expense of
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay our scheduled debt service and operating expenses and capital expenditures directly associated with our hotels. We have suspended our quarterly common stock dividend. We currently expect that our existing cash balances and available capacity on our senior unsecured credit facility will be sufficient to meet our short-term liquidity requirements. Some of 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 ofMarch 31, 2021 , the debt service coverage ratios or debt yields for all of our mortgage loans with cash trap provisions were below the minimum thresholds such that the cash trap provision of each respective loan was triggered. 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") 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, -26- --------------------------------------------------------------------------------
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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 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 the Company.
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. 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 ofCavallo Point , TheLodge at theGolden 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 ofMarch 31, 2021 , we had$1.1 billion of debt outstanding with a weighted average interest rate of 3.87% and a weighted average maturity date of approximately 3.2 years. We have no near-term mortgage debt maturities and 23 of our 31 hotels 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. Further information is available in Note 1 to the accompanying consolidated financial statements for measures taken in response to the impact of COVID-19.
ATM Program
We have 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 million . No shares were sold under the ATM Program during the three months endedMarch 31, 2021 . As ofMay 7, 2021 , shares of common stock having an aggregate offering price of up to$112.1 million remained available for sale under the ATM Program. Preferred Shares In 2020, we issued a total of 4,760,000 shares of Series A Preferred Stock with a liquidation preference of$25.00 per share, for net proceeds of$114.5 million . On or afterAugust 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.
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
We are party to a$400 million senior unsecured credit facility expiring inJuly 2023 , a$350 million unsecured term loan maturing inJuly 2024 and a$50 million unsecured term loan maturing inOctober 2023 . The maturity date for the senior unsecured credit facility may be extended for an additional year upon the payment of applicable fees and the satisfaction of certain customary conditions. OnJune 9, 2020 , we executed amendments (the "First Amendments") to the credit agreements (the "Credit Agreements") for our$400 million senior unsecured credit facility and$400 million of unsecured term loans. The First Amendments provided for a waiver of the quarterly tested financial covenants beginning with the second quarter of 2020 through the first quarter of 2021 and certain other modifications to the covenants thereafter through the fourth quarter of 2021. -27- --------------------------------------------------------------------------------
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OnAugust 14, 2020 , we entered into additional amendments (the "Second Amendments") that permit us to pay dividends on preferred stock up to$17.5 million annually. OnJanuary 20, 2021 , we executed additional amendments (the "Third Amendments" and together with the First Amendments and Second Amendments, the "Credit Agreement Amendments") to the Credit Agreements to extend the existing waiver of the quarterly tested financial covenants through the fourth quarter of 2021, unless terminated early at our option. The Third Amendments also extend the modification of certain financial covenants, once quarterly testing resumes, through the first quarter of 2023. As ofMarch 31, 2021 , we had$100.0 million of borrowings outstanding under our senior unsecured credit facility.
Additional information about the Amended Credit Agreements, including the restrictions imposed by the Amended Credit Agreements and their impacts on our liquidity, sources of capital, and ability to incur additional debt, can be found in Note 8 to the accompanying consolidated financial statements.
Sources and Uses of Cash
Our principal sources of cash are net cash flow from hotel operations, sales of common and preferred stock, debt financings and proceeds from hotel dispositions. Our principal uses of cash are acquisitions of hotel properties, debt service and maturities, share repurchases, capital expenditures, operating costs, corporate expenses, and distributions to holders of common stock, common units and preferred stock. As ofMarch 31, 2021 , we had$99.8 million of unrestricted cash and$24.1 million of restricted cash and$100.0 million of outstanding borrowing on our senior unsecured credit facility. Our net cash used in operations was$34.9 million for the three months endedMarch 31, 2021 . 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$12.0 million for the three months endedMarch 31, 2021 , which consisted of capital expenditures at our operating hotels and Frenchman's Reef. Our net cash provided by financing activities was$36.0 million for the three months endedMarch 31, 2021 , which consisted of$45.0 million in borrowings on our senior unsecured credit facility, offset by$2.5 million of distributions paid to holders of preferred stock,$3.8 million of scheduled mortgage debt principal payments,$1.1 million paid for financing costs for the Amended Credit Agreements, and$1.6 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 year endingDecember 31, 2021 will be the net cash flow from hotel operations as the lodging disruptions from COVID-19 subside and the net proceeds from the sale of Frenchman'sReef and The Lexington Hotel . We expect our estimated uses of cash for the year endingDecember 31, 2021 will be scheduled debt service payments, capital expenditures, potential funding of hotel working capital requirements, distributions to preferred stockholders, and corporate expenses.
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 TRS, 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.
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Our board of directors suspended the quarterly common dividend commencing with the first quarter dividend that would have been paid inApril 2020 . The resumption in quarterly common dividends will be determined by our board of directors after considering our projected taxable income, obligations under our financing agreements, expected capital requirements, and risks affecting our business.
We have paid the following dividends to holders of our Series A Preferred Stock during 2021, and through the date of this report:
Dividend
Payment Date Record Date per Share
March 31, 2021 March 18, 2021 $ 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 ofMarch 31, 2021 , we have set aside$17.3 million for capital projects in property improvement funds, which are included in restricted cash. In response to the COVID-19 pandemic, we canceled or deferred a significant portion of the planned capital improvements at our operating hotels and paused the rebuild of Frenchman's Reef. In 2021, we expect to spend approximately$55 million on necessary capital improvements and a select few transformational projects with attractive returns on investment. Significant projects in 2021 include the following: •The Lodge atSonoma : We are completing an upgrade renovation to reposition and rebrand the hotel to anAutograph Collection Hotel in the third quarter of 2021. The renovation includes a newMichael Mina restaurant. •Vail Marriott Mountain Resort: We plan to complete the final phase of a multi-year renovation to rebrand the hotel as aLuxury Collection Hotel in the fourth quarter of 2021. •JW Marriott Denver Cherry Creek: We plan to complete the renovations in the second half of 2021 to rebrand the hotel as aLuxury Collection Hotel at the start of 2022. We invested approximately$9.5 million in capital improvements at our operating hotels during the three months endedMarch 31, 2021 . We spent approximately$2.5 million on the rebuild of Frenchman's Reef during the three months endedMarch 31, 2021 .
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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 withU.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 ownerswho 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, -29- --------------------------------------------------------------------------------
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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 comparableU.S. GAAP financial measures, and our consolidated statements of operations and cash flows, include interest expense, capital expenditures, and other excluded items, all of which should be considered when evaluating our performance, as well as the usefulness of our non-GAAP financial measures. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance withU.S. GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed byU.S. GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with ourU.S. GAAP results and the reconciliations to the correspondingU.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 withU.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 theNational Association of Real Estate Investment Trusts ("Nareit") guidelines, as defined in itsSeptember 2017 white paper "Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate." EBITDAre represents net income (calculated in accordance withU.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 withU.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 withU.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: TheFinancial 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. -30- --------------------------------------------------------------------------------
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•Gains or Losses from Early Extinguishment of Debt: We exclude the effect of gains or losses recorded on the early extinguishment of debt because these gains or losses result from transaction activity related to the Company's capital structure that we believe are not indicative of the ongoing operating performance of the Company or our hotels. •Hotel Acquisition Costs: We exclude hotel acquisition costs expensed during the period because we believe these transaction costs are not reflective of the ongoing performance of the Company or our hotels. •Severance Costs: We exclude corporate severance costs, or reversals thereof, incurred with the termination of corporate-level employees and severance costs incurred at our hotels related to lease terminations or structured severance programs because we believe these costs do not reflect the ongoing performance of the Company or our hotels. •Hotel Manager Transition Items: We exclude the transition items associated with a change in hotel manager because we believe these items do not reflect the ongoing performance of the Company or our hotels. •Other Items: From time to time we incur costs or realize gains that we consider outside the ordinary course of business and that we do not believe reflect the ongoing performance of the Company or our hotels. Such items may include, but are not limited to the following: pre-opening costs incurred with newly developed hotels; lease preparation costs incurred to prepare vacant space for marketing; management or franchise contract termination fees; gains or losses from legal settlements; costs incurred related to natural disasters; and gains 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
Three Months Ended March 31,
2021 2020
Net loss $ (171,567) $ (34,692)
Interest expense 8,484 21,218
Income tax expense (benefit) 1,613 (6,443)
Real estate related depreciation and amortization 26,962 30,100
EBITDA / EBITDAre (134,508) 10,183
Impairment losses 122,552 -
EBITDAre (11,956) 10,183
Non-cash lease expense and other amortization 1,672 1,750
Professional fees and pre-opening costs related to Frenchman's Reef (1)
575 (297)
Hotel manager transition items 128 227
Severance costs (2) 10 -
Adjusted EBITDA $ (9,571) $ 11,863
____________________(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 are not covered by insurance.
(2) Three months ended
elimination of positions at our hotels, which are classified within other hotel
expenses on the consolidated statement of operations.
The following table is a reconciliation of our
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Three Months Ended March 31,
2021 2020
Net loss $ (171,567) $ (34,692)
Real estate related depreciation and amortization 26,962 30,100
Impairment losses 122,552 -
FFO (22,053) (4,592)
Distributions to preferred stockholders (2,454) -
FFO available to common stock and unit holders (24,507) (4,592)
Non-cash lease expense and other amortization 1,672 1,750
Professional fees and pre-opening costs related to Frenchman's Reef (1)
575 (297)
Hotel manager transition items 128 227
Severance costs (2) 10 -
Fair value adjustments to interest rate swaps (2,731) 11,312
Adjusted FFO available to common stock and unit holders
____________________
(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 are not covered by insurance.
(2) Three months ended
elimination of positions at our hotels, which are classified within other hotel
expenses on the consolidated statement of operations.
Critical Accounting Policies
Our unaudited consolidated financial statements include the accounts ofDiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity withU.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 endedDecember 31, 2020 . 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 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. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally five to 40 years for buildings, land improvements and building improvements and one to 10 years for furniture, fixtures and equipment. 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 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. -32- --------------------------------------------------------------------------------
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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. However, competitive pressures or other factors may limit the ability of our management companies to raise room rates. Inflation may also affect our expenses, including, without limitation, increasing such costs as labor, employee-related benefits, food, commodities, taxes, property and casualty insurance and utilities.
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.
New Accounting Pronouncements Not Yet Implemented
None.
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