DiamondRock Hospitality pany(DRH) - 2023 Q4 - Annual Report

Part I Business DiamondRock Hospitality Company, a self-advised REIT, owns 36 premium hotels and resorts, emphasizing aggressive asset management and sustainability - As of December 31, 2023, the company owns a portfolio of 36 premium hotels and resorts, containing 9,746 guest rooms across 25 U.S. markets[26] - The company's business strategy involves aggressive asset management, prudent financial strategy, and disciplined capital allocation to high-quality lodging properties in North American urban and resort markets with high barriers-to-entry[28][32] - DiamondRock operates through an UPREIT structure, where hotels are owned by its operating partnership, DiamondRock Hospitality Limited Partnership, with the company owning 99.7% of the common OP units[54] - The company emphasizes corporate responsibility and was ranked first in sustainability performance as the America's Regional Listed Sector Leader for Hotels for the fifth consecutive year by the GRESB Real Estate Assessment in 2023[46] - The hotel industry is highly competitive, with competition based on location, brand, price, and services, including alternative lodging like Airbnb and other institutional investors[58][59][60] Risk Factors The company faces risks from volatile hotel operations, reliance on third-party managers, debt and interest rate challenges, and the critical requirements for maintaining REIT status - The business model is highly volatile due to its concentration in premium full-service hotels, which are sensitive to economic cycles, and the daily fluctuation of rates and occupancy[82][83] - The company is highly dependent on third-party hotel management companies for daily operations and has limited ability to influence operating decisions, which could impact performance[117][118] - A substantial number of hotels (22 of 36) operate under Marriott, Hilton, or IHG brands, creating a concentration risk tied to the performance and reputation of these three chains[121][122] - The company faces significant refinancing risk, as most debt has large balloon payments at maturity, potentially forcing asset sales or default if refinancing is not on acceptable terms[150] - Failure to maintain REIT qualification would have severe adverse consequences, including being subject to corporate income tax and being unable to deduct dividends paid to stockholders[166][167] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[206] Cybersecurity The company manages cybersecurity risk through external experts, internal oversight, regular risk assessments, and board-level governance - The company utilizes external experts, including a virtual Chief Information Security Officer (vCISO) and a virtual Chief Information Officer (vCIO), to guide its technology and security strategy[207] - A cyber risk management program assesses the cybersecurity maturity of third-party property managers operating the company's hotels[209] - The Audit Committee oversees cybersecurity risks, receiving regular reports from senior management, with the full Board also involved in risk oversight[211][212] Properties As of December 31, 2023, the company's portfolio includes 36 hotels with 9,746 rooms, managed by third-party operators, with most agreements terminable at will and some properties subject to debt or ground leases Portfolio Overview (as of December 31, 2023) | Metric | Value | | :--- | :--- | | Total Hotels | 36 | | Total Rooms | 9,746 | | Key Markets | Chicago, Boston, New York, San Diego, Fort Lauderdale, Washington D.C. | - The majority of hotel management agreements are terminable at will by the company, with four agreements (Chicago Marriott, Hilton Garden Inn NY/Times Square, Margaritaville Key West, Worthington Renaissance) being non-terminable[217] - Management fees typically consist of a base fee (1-3.5% of gross revenues) and an incentive fee based on operating profits exceeding a specified owner's priority return[219][523] - Nineteen hotels operate under franchise agreements, primarily with Marriott, Hilton, and IHG, requiring royalty fees based on a percentage of gross room sales and, in some cases, food and beverage sales[223][527] - As of year-end 2023, four hotels are encumbered by mortgage debt, and eight hotels are subject to ground lease agreements[228][229] Legal Proceedings The company is involved in routine litigation, with management expecting no material adverse impact on financial condition or operations - The company is involved in routine litigation but does not expect the outcomes to materially and adversely impact its financial condition, net of insurance coverage[231] Mine Safety Disclosures This item is not applicable to the company - Not applicable[232] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, with its five-year total return underperforming the S&P 500 but outperforming the Dow Jones U.S. Hotels Index, and it has an active share repurchase program Five-Year Cumulative Total Stockholder Return (2018-2023) | Company/Index | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | DiamondRock Hospitality | $100.00 | $129.66 | $96.55 | $112.46 | $96.94 | $112.76 | | S&P 500 Total Return | $100.00 | $131.49 | $155.68 | $200.37 | $164.08 | $207.21 | | Dow Jones U.S. Hotels Total Return | $100.00 | $109.70 | $73.24 | $87.06 | $81.38 | $99.96 | - The company has a share repurchase program with an authorized capacity of $200.0 million, with approximately $185.3 million remaining available as of December 31, 2023, and no shares repurchased in Q4 2023[247] - As of December 31, 2023, there were 2,903,835 securities to be issued under equity compensation plans, primarily performance and deferred stock units with no exercise price[244] Reserved This item is not applicable - Not applicable[249] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, total revenues increased 7.3% to $1.075 billion, while net income decreased due to higher interest expense, with the company maintaining strong liquidity and planning $100 million in 2024 capital improvements Revenue Comparison (in thousands) | Revenue Type | 2023 | 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Rooms | $717,447 | $681,269 | $36,178 | 5.3% | | Food and beverage | $259,757 | $238,234 | $21,523 | 9.0% | | Other | $97,663 | $82,000 | $15,663 | 19.1% | | Total revenues | $1,074,867 | $1,001,503 | $73,364 | 7.3% | Key Hotel Operating Statistics (2023 vs. 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Occupancy % | 72.1% | 68.3% | 3.8% | | ADR | $282.11 | $289.07 | (2.4)% | | RevPAR | $203.32 | $197.50 | 2.9% | - Total hotel operating expenses increased by 12.2% to $781.8 million in 2023, primarily due to acquisitions, increased occupancy, higher labor costs, property tax assessments, and insurance premiums[272] - Interest expense increased by 70.0% to $65.1 million in 2023, mainly due to rising interest rates on variable-rate term loans and mark-to-market adjustments on interest rate swaps[278] - The company maintains a conservative capital structure with $1.2 billion of debt outstanding and 32 of its 36 hotels unencumbered by mortgage debt as of December 31, 2023[288] - For 2024, the company plans to spend approximately $100 million on capital improvements, including repositioning the Hilton Burlington and Bourbon Orleans hotels, and renovating the Westin San Diego Bayview[308] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk on its $0.8 billion variable-rate debt, mitigated by $325 million in interest rate swaps, with a 100 basis point change impacting annual interest expense by approximately $4.8 million - The primary market risk is interest rate risk, with $0.8 billion of the $1.2 billion total debt at a variable interest rate[338] - The company holds interest rate swaps on $325 million of its variable-rate debt to manage interest rate volatility[338] - A 100 basis point (1%) fluctuation in interest rates on the unhedged variable rate debt would impact annual earnings and cash flows by approximately $4.8 million[338] Financial Statements and Supplementary Data This item directs the reader to the company's financial statements, indexed on page F-1 - This item directs the reader to the company's financial statements, which are indexed on page F-1[339] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[340] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the most recent fiscal quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[341] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, these controls[342] Other Information The company reports no other information for this item - None[345] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[346] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference to the 2024 proxy statement[350] Executive Compensation Information for this item is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference to the 2024 proxy statement[351] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item, including equity compensation plans, is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference to the 2024 proxy statement[352] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2024 proxy statement - Information is incorporated by reference to the 2024 proxy statement[353] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's 2024 proxy statement, with KPMG LLP serving as the independent public accounting firm - Information is incorporated by reference to the 2024 proxy statement[354] - The company's independent public accounting firm is KPMG LLP, McLean, Virginia, PCAOB Auditor ID: 185[355] Part IV Exhibits and Financial Statement Schedules This item provides an index of all financial statements, schedules, and exhibits included with the 10-K filing, such as Schedule III - Real Estate and Accumulated Depreciation - This item provides an index of all financial statements, schedules, and exhibits included with the 10-K filing[358][360] - Financial Statement Schedule III - Real Estate and Accumulated Depreciation is included in the filing[359] Form 10-K Summary This item is not applicable to the company - Not applicable[363]