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DiamondRock Obtains Financial Covenant Waivers Through 1Q21

Zacks Equity Research
·3 mins read

DiamondRock Hospitality Company DRH secured an amendment to the credit agreement for its $400-million senior unsecured revolving credit facility as well as unsecured term loans of $350 million and $50 million.

Notably, the company was in compliance with the financial covenants under its credit agreements as of Mar 31, 2020. Nonetheless, on its first-quarter earnings release, DiamondRock stated that a probable drastic decline in hotel earnings due to the impact of the COVID-19 outbreak on demand is likely to hinder its ability to comply with certain financial covenants, starting with the second-quarter end.

Hence, the amendment enables the company to obtain waivers from its lenders prior to any violations. Other than staying in compliance with its entire loan requirements, the amendment provides it with the flexibility to pursue opportunistic investments amid this period of market dislocation.

Key terms of the credit amendments include a waiver of the existing quarterly-tested financial covenants through a relief period between second-quarter 2020 and first-quarter 2021.

For this term, certain restrictions were imposed, including the limitation on share buybacks as well as dividend and distribution payments exceeding 100% of taxable net income. Further, new covenants constrain the company to incur additional debt, asset dispositions and discretionary capital expenditure.

Moreover, during this period, acquisitions amounting to not more than $300 million of encumbered hotels are permitted. Purchases of unencumbered hotels are allowed, conditional upon a partial repayment of any outstanding balance on the revolving credit facility or if it is funded with junior capital.

Additionally, at the end of the relief term, certain quarterly-tested financial covenants are modified to ease compliance through fourth-quarter 2021.

The COVID-19 outbreak-related restrictions on travel resulted in a sharp decline in group, business and leisure travel, impacting the demand for hotels. Moreover, delays or cancellation of conventions and conferences as well as other large public gatherings and events, which are typically demand-drivers at the company’s hotels, have impacted its performance.

Moreover, shares of this Zacks Rank #3 (Hold) company have plunged 36.6% over the past year compared with the industry’s decline of 7.7%.

Stocks to Consider

Alexander Baldwin Holdings, Inc.’s ALEX Zacks Consensus Estimate for 2020 funds from operations (FFO) per share has been unchanged at 83 cents over the past month. The company currently flaunts a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
One Liberty Properties, Inc.’s OLP FFO per share estimate for the ongoing year has been unchanged at $1.89 over the past 30 days. The company currently sports a Zacks Rank of 1.

Gladstone Land Corporation’s LAND FFO per share estimate for 2020 has been unchanged at 68 cents over the past month. Further, it currently carries a Zacks Rank of 2 (Buy).

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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