In connection with entering into certain management agreements with Marriott, Marriott provided the Company with yield support for those hotels. The yield support is designed to protect us from the disruption often associated with changing the hotel’s brand or manager or undergoing significant renovations. Across our portfolio, we are entitled to up to $2.5 million of yield support through December 31, 2007 for the Oak Brook Hills Marriott, $1.0 million of yield support through December 31, 2006 at the Orlando Airport Marriott and $100,000 in each of 2006 and 2007 for the Buckhead SpringHill Suites. We currently anticipate that we will recognize all $3.6 million of yield support available for the three hotels in 2006. We recorded yield support of $1.6 million for the period from January 1, 2006 to June 16, 2006. We recorded no yield support during the period from January 1, 2005 to June 17, 2005.
Depreciation and amortization. Our depreciation and amortization expense totaled $21.1 million and $8.7 million for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. 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. We have assigned shorter depreciable lives of 1 - 2 years for the furniture, fixtures and equipment of the Marriott Atlanta Alpharetta, the Frenchman’s Reef & Morning Star Marriott Beach Resort, the Los Angeles Airport Marriott, the Oak Brook Hills Marriott Resort and the Orlando Airport Marriott since these hotels will undergo, and/or have undergone, significant renovations within two years of acquisition.
Corporate expenses. Our corporate expenses totaled $5.2 million and $7.9 million for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. Corporate expenses principally consist of employee-related costs, including base payroll, bonus and restricted stock. Corporate expenses also include organizational costs, professional fees and directors’ fees. The Company recorded an expense of $3,736,250 during the fiscal quarter ended June 17, 2005 relating to the commitment to issue 382,500 deferred stock units to the Company’s senior executive officers.
Interest expense. Our interest expense totaled $15.1 million and $6.5 million for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. The 2006 interest expense is related to mortgage debt incurred (or assumed) in connection with our acquisitions of our hotels ($14 million), amortization and write off of deferred financing costs ($0.5 million) and interest and unused facility fees on our credit facility ($0.6 million). The 2005 interest expense is related to mortgage debt incurred (or assumed) in connection with our acquisitions of our hotels ($5.6 million) and amortization and write off of deferred financing costs ($0.9 million). As of June 16, 2006, we had property-specific mortgage debt outstanding on ten of our hotels. On all ten of the hotels, we have fixed-rate secured debt, which bears interest at rates ranging from 5.11% to 7.69% per year. Our weighted-average interest rate as of June 16, 2006 was 5.7%. Amounts drawn under the credit facility bear interest at a variable rate that fluctuates based on the level of outstanding indebtedness in relation to the value of our assets from time to time. The Company did not have an outstanding balance under the credit facility as of June 16, 2006.
Interest income. We recorded interest income of $1,390,530 and $560,827 for the periods from January 1, 2006 to June 16, 2006 and January 1, 2005 to June 17, 2005, respectively. Interest income increased from the comparable period in 2005 as a result of interest earned on cash received from the secondary offering completed in the second quarter of 2006.
Income taxes. We recorded income tax expense of $1,798,876 and $558,847 for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. The 2006 income tax expense was incurred on the $3,737,000 pre-tax income of our TRS for the period from January 1, 2006 to June 16, 2006. The Company recorded an income statement charge of $1.4 million in the 2005 first quarter to reverse a portion of the deferred tax assets recorded in 2004 in connection with our REIT election. This charge was offset by an income tax benefit of $0.8 million recorded on the pre-tax loss of our TRS for the period from January 1, 2005 to June 17, 2005.
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to fund future distributions to our shareholders to maintain our REIT status as well as to pay for operating expenses and other expenditures directly associated with our hotels, including maintenance and recurring capital expenditures as well as payments of interest and principal. We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our credit facility.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional hotels, renovations, expansions and other capital expenditures that need to be made periodically to our hotels, scheduled debt payments and making distributions to our stockholders. We expect to meet our long-term liquidity requirements through various sources of capital, cash provided by operations, existing cash balances, and borrowings as well as through the issuances of additional equity or debt securities. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us.
Our Financing Strategy
We are committed to maintaining a conservative capital structure with aggregate leverage weighted towards long-term fixed-rate debt. However, we maintain the flexibility to modify these strategies if we believe fundamental changes have occurred in the capital or lodging markets.
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As of June 16, 2006, 100% of our debt carries fixed interest rates, with a weighted-average interest rate of 5.7%, and a weighted-average maturity of 9 years. As of June 16, 2006, we had $662.8 million of debt outstanding.
In the current market, we have a preference towards fixed-rate, long-term, limited recourse, single property specific debt. When possible and desirable, we will seek to replace short-term sources of capital with long-term financing. In addition to property-specific debt and our credit facility, we intend to use other financing methods as necessary, including obtaining funds from banks, institutional investors or other lenders, bridge loans, letters of credit and other arrangements, any of which may be unsecured or may be secured by mortgages or other interests in our investments. In addition, we may issue publicly or privately placed debt instruments.
Our Senior Secured Revolving Credit Facility
We are party to a $75 million senior secured revolving credit facility with Wachovia Bank, National Association, as administrative agent under the credit facility. Citicorp North America, Inc. and Bank of America, N.A. are co-syndication agents under the credit facility. We have the right to extend the maturity date and increase the amount of the credit facility to $250 million subject to the lenders’ approval.
Interest is paid on the periodic advances under the credit facility at varying rates, based upon either LIBOR or the applicable prime rate, plus an agreed upon additional margin amount. The interest rate depends upon our level of outstanding portfolio indebtedness in relation to the value of our assets from time-to-time, as follows:
| | Leverage Ratio | |
| |
| |
| | 70% or greater | | 65% to 70% | | less than 65% | |
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|
| |
|
| |
|
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Prime rate margin | | | 1.25 | % | | 1.00 | % | | 0.75 | % |
LIBOR margin | | | 2.00 | % | | 1.75 | % | | 1.45 | % |
In addition to the interest payable on amounts outstanding under the credit facility, we are required to pay an amount equal to 0.35% of the unused portion of the credit facility.
On April 5, 2006, we repaid the remaining outstanding balance of $33 million under the credit facility. As of June 16, 2006, we did not have an outstanding balance under the credit facility.
Our senior secured revolving credit facility contains various financial covenants. We complied with all of these covenants as of June 16, 2006. A summary of the most restrictive covenants, along with our corresponding value for each covenant, as of June 16, 2006, is as follows:
Covenant Test | | Covenant | | Value at June 16, 2006 | |
| |
|
| |
|
| |
Maximum leverage ratio | | | 75 | % | | 47.3 | % |
Minimum fixed charge coverage ratio | | | 1.5 | x | | 3.4 | x |
Unhedged floating rate debt as a percentage of total indebtedness | | | 50 | % | | 0 | % |
Minimum implied debt service ratio for the borrowing base assets for the trailing twelve months | | | 1.40 | x | | N/A | |
Limitation on our distributions to stockholders | | | 100 | % | | 50.5 | % |
2006 Mortgage Financings
On March 24, 2006, in connection with our acquisition of the Chicago Marriott Downtown Magnificent Mile, the Company assumed $220 million of floating-rate debt. The Company refinanced the $220 million floating-rate loan with a fixed-rate loan bearing interest at 5.98% and a term of 10 years. The loan is interest only for 3.5 years, after which, the principal will amortize using a 30-year amortization schedule. The new loan is a limited recourse loan secured by a mortgage on the property. The remainder of the purchase price, after the application of the Company’s $10 million deposit, was financed by a $79.5 million short-term floating-rate loan made by Wachovia Investment Holdings, LLC, which was repaid with a portion of the net proceeds of our secondary offering of common stock, which closed on April 4, 2006.
On May 9, 2006, we refinanced the $23 million variable-rate mortgage debt on the Courtyard Manhattan/Fifth Avenue with a $51 million fixed-rate loan bearing interest at 6.48% and a term of 10 years. The loan is interest only for five years, after which, the principal will amortize using a 30-year amortization schedule. The new loan is a limited recourse loan secured by a mortgage on the property.
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Sources and Uses of Cash
Our principal sources of cash are cash from operations, borrowing under mortgage financings, draws on our senior secured credit facility and the proceeds from our equity offerings. Our principal uses of cash are debt service, asset acquisitions, capital expenditures, operating costs, corporate expenses and dividends.
Cash Provided by Operations. Our cash provided by operations was $37.5 million for the period from January 1, 2006 to June 16, 2006, which is the result of our net income, adjusted for the impact of several non-cash charges, including $21.1 million of depreciation, $3.4 million of non-cash straight line ground rent, $0.5 million of amortization of deferred financing costs, and $1.2 million of stock compensation, offset by $0.5 million of amortization of unfavorable agreements and unfavorable working capital changes of $6.3 million. Our cash provided by operations was $4.3 million for the period from January 1, 2005 to June 17, 2005, which is the result of our $11.1 million net loss, adjusted for the impact of several non-cash charges, including $8.7 million of depreciation, $3.2 million of non-cash straight line ground rent, $1.0 million of amortization of deferred financing costs, $5.0 million of stock compensation, and unfavorable working capital changes of $2.8 million.
Cash Used In Investing Activities. Our cash used in investing activities was $171.1 million and $81.9 million for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. During the period from January 1, 2006 to June 16, 2006, we utilized $145.6 million of cash for the acquisitions of the Chicago Marriott Downtown Magnificent Mile and Westin Atlanta North at Perimeter. During the period from January 1, 2006 to June 16, 2006, we also incurred normal recurring capital expenditures at our other hotels of $26.0 million. During the period from January 1, 2005 to June 17, 2005, we utilized $72.2 million to acquire the Torrance Marriott. During the period from January 1, 2005 to June 17, 2005, we also received $4 million of Key Money related to certain acquisitions, incurred normal recurring capital expenditures at our hotels of $3.7 million and paid $10.9 million for pre-acquisition costs related to the acquisition of the Blackacre Portfolio and Vail Marriott.
Cash Provided by Financing Activities. Approximately $233.0 million and $273.7 million of cash was provided by financing activities for the periods from January 1, 2006 to June 16, 2006, and January 1, 2005 to June 17, 2005, respectively. The cash provided by financing activities for the period from January 1, 2006 to June 16, 2006, primarily consists of $79.5 million of proceeds from a short-term loan incurred in conjunction with the acquisition of the Chicago Marriott, $271 million of proceeds from the mortgage debt of the Chicago Marriott ($220 million) and the Courtyard Manhattan/Fifth Avenue ($51 million), $238.2 million of net proceeds from our secondary offering of our common stock, and $24.0 million in draws under the Company’s senior secured credit facility. The cash provided by financing activities for the period from January 1, 2006 to June 16, 2006 was offset by the $325.5 repayment of debt, including the $220 variable-rate mortgage assumed in the acquisition of the Chicago Marriott, the $23 million variable-rate mortgage debt on the Courtyard Manhattan/Fifth Avenue, and the $79.5 million short-term loan incurred in conjunction with the acquisition of the Chicago Marriott, a $33.0 million repayment of the Company’s senior secured credit facility, $1.6 million of scheduled debt principal payments, $1.3 million payment of financing costs, and $18.3 million of dividend payments. The cash provided by financing activities for the period from January 1, 2005 to June 17, 2005, primarily consists of $44 million of proceeds from mortgage debt of the Torrance Marriott, and $290.2 million of net proceeds from the initial public offering of our common stock. The cash provided by financing activities for the period from January 1, 2005 to June 17, 2005 was offset by $2.1 million of financing costs paid during the period, $56.9 million repayment of the Torrance and Sonoma debt and $1.4 million cash paid for scheduled mortgage debt principal payments.
The following table summarizes our significant financing activities since January 1, 2006:
Transaction
Date | | Description of
Transaction | | Amount |
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| |
|
January 25, 2006 | | Draw under senior secured credit facility | | 11.0 million |
January 27, 2006 | | Payment of fourth quarter dividends | | (8.9 million) |
February 28, 2006 | | Draw under senior secured credit facility | | 5.0 million |
March 9, 2006 | | Draw under senior secured credit facility | | 5.0 million |
March 13, 2006 | | Draw under senior secured credit facility | | 3.0 million |
March 24, 2006 | | Repayment of senior secured credit facility | | (3.0 million) |
March 24, 2006 | | Proceeds from Wachovia short-term loan | | 79.5 million |
April 4, 2006 | | Proceeds from our follow on offering | | 239.2 million |
April 5, 2006 | | Repayment of senior secured credit facility | | (33.0 million) |
April 5, 2006 | | Repayment of Wachovia short-term loan | | (79.5 million) |
April 11, 2006 | | Payment of first quarter dividends | | (9.3 million) |
May 9, 2006 | | Net proceeds from Courtyard Manhattan/Fifth Avenue refinancing | | 27.3 million |
June 22, 2006 | | Payment of second quarter dividends | | (12.8 million) |
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Dividend Policy
Generally, we intend to continue to distribute to our stockholders each year on a regular quarterly basis sufficient amounts of our REIT taxable income so as to avoid paying corporate income tax and excise tax on our earnings (other than the earnings of our TRS and TRS lessees, which are all subject to tax at regular corporate rates) and to qualify for the tax benefits afforded to REITs under the Internal Revenue Code of 1986, as amended (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, plus |
| |
• | 90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code, minus |
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• | any excess non-cash income. |
During the first fiscal quarter of 2006, the Company’s board of directors declared a cash divided of $0.18 per share of our common stock. The divided was paid on April 11, 2006 to all stockholders of record as of March 24, 2006. During the second fiscal quarter of 2006, the Company’s board of directors declared a cash divided of $0.18 per share of our common stock. The divided was paid on June 22, 2006 to all stockholders of record as of June 16, 2006.
Capital Expenditures
The management 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 and fixtures at the hotel. Contributions to the property improvement fund are calculated as a percentage of hotel sales. 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 agreement. As of June 16, 2006, we had set aside $24.9 million for capital projects in property improvement funds ($19.3 million) and lender held restricted cash ($5.6 million). Funds held in property improvement funds for one hotel are not permitted to be applied to any other property.
We have a number of significant capital projects currently planned or underway and we expect to spend approximately $89 million on such projects in 2006. A description of the current status of significant capital projects is as follows:
• | Bethesda Marriott Suites: We completed all of the planned guest room renovations in the first quarter of 2006. |
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• | Courtyard Manhattan Fifth Avenue: We completed the guestroom and corridor renovation during 2005. The renovation of the lobby and other public spaces was completed in the second quarter of 2006. |
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• | Courtyard Manhattan Midtown East: During the first quarter, we substantially completed the renovation of guestrooms, lobby, restaurant and meeting space. |
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• | Frenchman’s Reef & Morning Star Marriott Beach Resort: In 2005, we completed the replacement of case goods in a portion of the guestrooms. We are currently planning several significant projects at the hotel during 2006, including additional replacement of case goods in select rooms and the renovation of guestrooms, restaurants, and certain meeting space. The work is expected to be done in the third and fourth quarter of this year. |
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• | Los Angeles Airport Marriott: In 2005, we completed a renovation of the hotel ballroom, conversion of a food outlet to a junior ballroom and renovation of the hotel bar. Additionally, we are currently completing a complete room renovation, which we have accelerated from 2007 to 2006. The project consists of the renovation of the hotel guestrooms and bathrooms and is being funded, in part, by a $1.5 million non-recoverable contribution from Marriott International. The renovation is scheduled to be completed by the end of 2006. |
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• | Oak Brook Hills Marriott Resort: We will begin a significant renovation in the fourth quarter of 2006. The renovation will include the hotel guestrooms and bathrooms, the hotel main ballroom and meeting rooms and the hotel lobby. |
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• | Orlando Airport Marriott: We will begin a significant renovation in 2006. The renovation will include the hotel guestrooms and bathrooms, the hotel meeting rooms and the hotel lobby. The renovation is scheduled for the third and fourth quarters of 2006. |
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• | Torrance Marriott: We are currently completing the renovation of the Torrance Marriott. The initial phase of the project consisted of the renovation of the hotel guestroom soft goods and bathrooms and the renovation of the hotel’s main ballroom and meeting rooms, which were completed in January 2006. During the third quarter of 2006, renovations will include the hotel lobby and the conversion of a food and beverage outlet to meeting space. |
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• | Vail Marriott: We are currently designing a major renovation of the hotel ballrooms. |
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 two non-GAAP financial measures that we believe are useful to investors as key measures of our operating performance: (1) EBITDA and (2) FFO. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP.
EBITDA represents net income (loss) excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sale of assets; and (3) depreciation and amortization. We believe EBITDA is useful to an investor in evaluating our operating performance because it helps 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) from our operating results. In addition, covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.
| | Fiscal Quarter
Ended
June 16, 2006 | | Fiscal Quarter
Ended
June 17, 2005 | | Period from
January 1,
2006 to
June 16, 2006 | | Period from
January 1,
2005 to
June 17, 2005 | |
| |
|
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|
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|
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|
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Net income (loss) | | $ | 13,896,680 | | $ | (5,824,555 | ) | $ | 18,262,694 | | $ | (11,086,066 | ) |
Interest expense | | | 9,324,262 | | | 3,630,470 | | | 15,131,967 | | | 6,484,739 | |
Income tax expense | | | 1,828,790 | | | 478,990 | | | 1,798,876 | | | 558,847 | |
Depreciation and amortization | | | 12,078,225 | | | 4,340,984 | | | 21,125,333 | | | 8,703,130 | |
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EBITDA | | $ | 37,127,957 | | $ | 2,625,889 | | $ | 56,318,870 | | $ | 4,660,650 | |
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We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, which defines FFO as net income (loss) (determined in accordance with GAAP), excluding gains (losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures (which are calculated to reflect FFO on the same basis). We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items, such as real estate depreciation and amortization and gain or loss on sale of assets. We also use FFO as one measure in determining our results after taking into account the impact of our capital structure.
| | Fiscal Quarter
Ended
June 16, 2006 | | Fiscal
Quarter
Ended
June 17, 2005 | | Period from
January 1,
2006 to
June 16, 2006 | | Period from
January 1,
2005 to
June 17, 2005 | |
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Net income (loss) | | $ | 13,896,680 | | $ | (5,824,555 | ) | $ | 18,262,694 | | $ | (11,086,066 | ) |
Real estate related depreciation and amortization | | | 12,078,225 | | | 4,340,984 | | | 21,125,333 | | | 8,703,130 | |
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FFO | | $ | 25,974,905 | | $ | (1,483,571 | ) | $ | 39,388,027 | | $ | (2,382,936 | ) |
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Critical Accounting Policies
Our consolidated financial statements include the accounts of DiamondRock Hospitality Company and all consolidated subsidiaries. The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 other 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. The following represent certain critical accounting policies that require us to exercise our business judgment or make significant estimates:
Investment in Hotels. Investments in hotels, land improvements, building and furniture, fixtures and equipment and identifiable intangible assets are recorded at fair value in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Property and equipment are recorded at fair value based on analyses, including current replacement cost for similar capacity and allocated to buildings, improvements, furniture, fixtures and equipment based on analysis performed by management and appraisals received from independent third parties. Property and equipment are depreciated using the straight-line method over an estimated useful life of 15 to 40 years for buildings and land improvements and one to ten years for furniture 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 typically enter into a new hotel management agreement based on market terms at the time of acquisition. 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.
We review our investments in hotels for impairment whenever events or changes in circumstances indicate that the carrying value of the investments in hotels 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 due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of an investment in a hotel exceed the hotel’s carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the estimated fair market value is recorded and an impairment loss recognized.
Revenue Recognition. Hotel revenues, including room, golf, food and beverage, and other hotel revenues, are recognized as the related services are provided.
Stock-based Compensation. The Company accounts for stock-based employee compensation using the fair value based method of accounting described in Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment. The Company records the cost of awards with service conditions based on the grant-date fair value of the award (with limited exceptions). 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. No awards with performance-based or market-based conditions have been issued.
Accounting for Key Money. Marriott has contributed to us certain amounts, which we refer to as key money, in exchange for the right to manage certain of our hotels. We defer key money received from a hotel manager in conjunction with entering into a long-term hotel management agreement and amortize the amount received against management fees over the term of the management agreement.
Accounting for Yield Support. Marriott has provided the Company with operating cash flow guarantees for certain hotels to fund shortfalls of actual hotel operating income compared to a negotiated target net operating income. We refer to these guarantees as “Yield Support”. Yield Support received is recognized over the period earned if the Yield Support is not refundable and there is reasonable uncertainty of receipt at inception of the management agreement. Yield Support is recorded as an offset to base management fees.
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Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.
Seasonality
The operations of hotels historically have been seasonal depending on location, and accordingly, we expect some seasonality in our business. Historically, we have experienced approximately two-thirds of our annual income in the second and fourth quarters.
New Accounting Pronouncements
FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). We will adopt the provisions of FIN 48 for fiscal years beginning after December 15, 2006. The Company does not expect FIN 48 to have a material impact on our results of operations, financial position, or cash flows.
Item 3. Qualitative Disclosure 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, which we expect to be exposed in the future, is interest rate risk. Our total outstanding debt at June 16, 2006 was approximately $662.8 million, none of which was variable rate debt. If market rates of interest were to increase by 1.0%, or approximately 100 basis points, the decrease in the fair value of our fixed-rate debt would be $40.4 million. On the other hand, if market rates of interest were to decrease by one percentage point, or approximately 100 basis points, the increase in the fair value of our fixed-rate debt would be $40.4 million. As of June 16, 2006, the fair value of the $662.8 million of fixed-rate debt was approximately $652.3 million.
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 Commissions 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
Item 1. Legal Proceedings
We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us other than routine litigation arising out of the ordinary course of business or which is expected to be covered by insurance and none of which is expected to have a material impact on our business, financial condition or results of operations.
Item 1A. Risk Factors
There have been no material changes in the risk factors described in Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) | The Company held its Annual Meeting of Stockholders on April 27, 2006. The proposals in front of our stockholders and the results of voting on such proposals were as noted below. |
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(b) | Election of Directors: the following persons were elected as directors for a one-year term expiring at the Annual Meeting held in 2007. |
| | | VOTES FOR | | VOTES WITHHELD |
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| William W. McCarten | | 38,875,750 | | 1,334,059 |
| John L. Williams | | 40,167,465 | | 42,344 |
| Daniel Altobello | | 39,222,394 | | 987,415 |
| W. Robert Grafton | | 39,509,544 | | 700,265 |
| Maureen L. McAvey | | 40,182,815 | | 26,994 |
| Gilbert T. Ray | | 40,137,757 | | 72,052 |
(c) | Ratification of Independent Auditors: the selection of KPMG LLP as our independent auditors for fiscal year ending December 31, 2006 was ratified. The voting results were as follows: |
| VOTES FOR | | VOTES AGAINST | | VOTES ABSTAINED |
|
| |
| |
|
| 40,188,348 | | 17,062 | | 4,400 |
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 | | |
| | |
10.1 | | Purchase and Sale Agreement, dated as of March 1, 2006, among Chicago 540 Hotel, L.L.C., Chicago 540 Lessee, Inc., and DiamondRock Chicago Owner, LLC (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7, 2006) |
| | |
12.1 | | Ratio of Earnings to Combined Fixed Charges and Preferred Dividends |
| | |
31.1 | | Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | |
31.2 | | Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| | |
32.1 | | Certification of Chief Executive Officer and Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DiamondRock Hospitality Company |
| |
| |
July 28, 2006 | /s/ Michael D. Schecter |
|
|
| Michael D. Schecter |
| Executive Vice President, |
| General Counsel and Corporate Secretary |
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