Diamondrock Hospitality Company

Good day and thank you for standing by. Welcome to the Diamond Rock Hospitality Company's first quarter 2024 earnings conference call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Bryony Quinn, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Michelle. Good morning, everyone. Welcome to Diamond Rock's first quarter 2024 earnings call and webcast. Joining me today are Jeff Donnelly, our Chief Executive Officer, and Justin Leonard, our President and Chief Operating Officer. Before we begin, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from what we discussed today. In addition, on today's call, We will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Jeff.

Good morning, and thank you for joining us. Before we discuss our first quarter results, I'd like to briefly highlight the leadership and organizational changes we announced last month. As you saw from today's earnings release, Diamond Rock's strong performance is continuing into 2024. Our new leadership appointments and organizational structure position us to build on the momentum we are seeing. We have outstanding talent across the organization, and we are now able to tap into that talent in a deeper way. I am honored to lead Diamond Rock as CEO and excited by the opportunity to leverage my experience in this new role. Dustin's promotion to president underscores both his contributions to Diamond Rock and his deep industry expertise. For those of you who haven't had the chance to meet Justin, he is perhaps the sharpest and most talented hotel investment professional I've met, and I'm proud he's on our team. In addition to continuing his responsibilities as Chief Operating Officer, Justin will be assuming responsibilities for transactions as well. As the company's Treasurer and Chief Accounting Officer, Bryony has been a trusted partner to me, a leader in the organization, and she has excelled in each of her finance and accounting positions over her 17-year career at Diamond Rock. To me, Briny is the ideal choice for the company's next chief financial officer. With the opportunity to leverage all this experience in new ways and establish a more simplified organizational structure than we had with our previous six-member executive team, we can expedite decision-making in a more opportunistic and dynamic investment world and accelerate performance and value creation. In short, Domino Arc was great before this transition, and with it, we will be even better. Our goal is to drive superior long-term total shareholder return. To do this, we will maintain our investment focus primarily on lifestyle resort and urban hotels, no different than we have in the past. We will continue to mine our network of independent owners to unearth unique destination resorts, but we are equally in favor of uncovering attractive urban market opportunities with growth potential. We will be more deliberate in harvesting capital from slower growth capital intensive assets, and recycling proceeds into higher return investments such as share repurchases, internal ROI projects, or new investments. Value creation is our magnetic north. It is important to me that I personally recognize Mark and Troy as we make this shift. Their individual contributions established Diamond Rock as an industry leader, and Mark was instrumental in assembling the independent board and team we have today. All of us at Diamond Rock wish them both the absolute best in their future endeavors. Before I turn to our first quarter results, I want to recognize the teams at three of our hotels recognized by the Michelin Guide. Cavallo Point, who earned a Michelin 2 key rating, the Gwen, who earned a Michelin 1 key rating, and the Shorebreak Huntington Beach. These are rare honors. Just 80 hotels received 1 key status, and only 33 achieved 2 key status. Diamond Rock was among the few winners of multiple keys. Okay, let's get into Q1. Overall, the leisure segment proved a little softer than expected due to inflation, the pressure of higher interest rates, and an uncertain economic picture. Group demand remained strong, with first quarter group sales production steady versus last year. REVPAR declined 0.4% in the quarter compared to the prior year. This was slightly weaker than our original expectation from a little softness from the top line at the resorts. Despite the small REVPAR decline, total revenues increased 3.8% on strong food and beverage performance from the increased group activity. Total expenses increased a little over 6%, driven in large part by group banquet volumes that were up 24% over Q1 last year. While those revenues drove a significant increase to both food and beverage margin and overall portfolio profit, the growth in food and beverage revenue does drive higher headline expense growth and overall margin erosion given that food and beverage is a less profitable part of our business than rooms. That segmentation shift to group was most evident at three of our largest hotels in the quarter, Chicago Marriott, Westin Boston, and Westin Fort Lauderdale, where expenses grew over 15% due to an increased segmentation shift to group with great food and beverage spend. If we exclude these three hotels, our overall expense growth increased just 3.4%, Overall expense growth is highly dependent on revenue mix, with increases in food and beverage driving higher overall expense growth. Given our significant increase in group pace year over year, we expect the corresponding group spend in food and beverage will keep our expense run rate at around 5% for the remainder of the year. Turning to resorts, first quarter is a critical season for our resorts. The resort segment contributed approximately 45% of first quarter total revenue, but 60% of hotel-adjusted EBITDA. As we said in the last call, the first quarter would be the toughest quarter for our resorts. REVPAR in the resort segment declined 4% from the prior year, which was a little weaker than our original expectation due to a 7.6% REVPAR decline at our highest-rated luxury resorts versus nearly flat for our lifestyle resorts. Favorably, our outside-of-the-room outlet spend performed very well driving a total revenue increase at the resorts of 0.4%. Despite a shift to lower margin F&B revenues, we were still able to manage expense growth down to 4.1% in the quarter. The Florida Keys were a highlight, with collective rev par up 6.6% in the quarter, consistent with the growth for this trio in Q4-23. The lodge at Sonoma experienced a 28% rev par decline, pushing EBITDA $1 million below last year. Excluding this one hotel, our resort segment RevPar would have been 110 basis points better. As we discussed in the last earnings call, the wine country market was very weak this quarter, but we underperformed in Sonoma because we faced a particularly difficult Q1 23 comparison. We had less group on the books for the quarter, and our revenue management strategy was simply too aggressive for this setup. The market is stabilizing, the team is course-corrected, and we have seen our recent results return to in-line market performance. The height and veil was also behind our expectation due to lower visitation owing to what is best described as lumpier snowfall patterns, more ski destinations available than in the prior season, as well as a drop-off in loyalty redemption nights. Ref par was down 9%, and hotel-adjusted EBITDA was $1 million behind first quarter 2023. Encouragingly, our group pace on the books for the rest of 2024 at this hotel is up over 30% compared to last year. A note on redemptions, loyalty redemptions at our resorts were down 23% from prior year and 40% from 2022. The sharp reduction in redemptions means there's a larger number of room nights to fill and sometimes that means turning to OTAs or other less profitable channels. Looking ahead, we believe Our resorts are positioned to deliver better results in the second half of 2024. The difficult comparisons in South Florida and the Keys have been lapped, and we expect the remaining resort markets will follow suit by the end of the year. We recognize high interest rates and inflation are placing pressure on consumer spending, but these same pressures should drive incremental preference for domestic travel over international travel and drive-to destinations over fly-to destinations. Based on the latest airlift data, There was a 12% year-to-date increase in total international arrivals into our markets versus 2023, and the loyalty redemptions data could foreshadow fewer outbounds for international destinations. Turning to our urban portfolio, first quarter REVPAR increased 2%, group room nights increased 10.7%, and the strong accompanying out-of-room spend pushed total revenue growth up 6.8%. Business transient revenue increased 9.4%, but BT is still 23% behind 2019. Expenses were higher than expected, owing mainly to the staffing increases that accompany the increases in banquet revenues. Overall EBITDA at our urban hotels was up 3.1%. The DAGNY in Boston continued to outperform Proforma. Last year's renovation has placed the DAGNY as the top three hotel in the entire Boston market on TripAdvisor, compared to number 56 in the market prior to renovation. This has been a well-executed transformation by the team at Diamond Rock and the hotel, and we are elated to see the follow-through in performance. The Westin Seaport, also in Boston, delivered 17% REVPAR growth in the quarter, increasing total revenues $3 million over the prior year. Our 1,200-room Chicago Marriott had an excellent quarter with REF PAR up 7.4% and total REF PAR up 24.8%. Group room nights were up 50% over last year with the banquet contribution per group room up 10%. The net result was a better than 100% increase in EBITDA and 313 basis point improvement in margin. Downtown Washington, D.C. turned a corner and we are seeing market improvements. albeit from a depressed level, at our Westin. REVPAR increased just shy of 3% in the quarter, but total revenue increased over 11% on the improvement in group activity. Accordingly, EBITDA was almost half a million dollars better than last year. We are most positive on the group outlook for 2024. We believe our strong volume of business on the books is a competitive advantage. At the end of the quarter, we had 85% of our budgeted full-year group revenue on the books. representing a 14% increase over the same point in 2023. Looking at the quarterly breakdown, our group revenue was up 10% in Q1 and PACE is up approximately 5% in Q2 and over 15% in the third and fourth quarters. Looking at just our big box hotels, our group PACE for 2024 is up 16% or about 200 basis points better than our total portfolio. The most notable performers are our Renaissance Worthington up 32%, the Hive up over 25%, Chicago Marriott up 22%, the Westin Fort Lauderdale up 19%, and Washington, D.C. up 15%. Looking ahead to next year, at the end of Q1, our big box room night pace for 2025 is flat with 2024 with time to go. Let me turn the floor over to Bryony to talk about financial highlights and our revised guidance. Bryony?

Thanks, Jeff. As Jeff mentioned previously, top line results were slightly below our original expectation, but we were nonetheless able to achieve our original expectation of 17 cents of FFO per share. Although first quarter REVPAR declined slightly, total revenues increased 3.8% on an 11% increase on food and beverage income, driven by the strong group contribution in the quarter, which exceeded our expectations. Approximately 65% of the incremental F&B revenues above our expectation flowed to gross operating profit. Gross operating profit was up nearly 1% compared to 2023, which was slightly behind our expectation. Food and beverage profits and support cost savings all but offset the decline in rooms department profits. Comparable hotel-adjusted EBITDA was $61.4 million, or approximately $2 million below the prior year, on a 169 basis point decline in margin. Corporate G&A costs were $8.9 million, which were approximately $700,000 higher than we originally expected due to the announcement in the first quarter of our general counsel's intention to retire on June 30th. This required us to accelerate the compensation expense of his outstanding equity awards during the quarter. Unlike severance costs, we do not add back retirement expenses to our G&A. Turning to our 2024 guidance, let me start with the changes to our G&A outlook. Earlier in the year, we provided guidance of $33 to $34 million for full year corporate expenses. we expect the net savings from the leadership realignment will reduce our 2024 G&A by nearly $4 million. The result is a reduced corporate expense outlook of $29.5 to $30.5 million for 2024. We are raising our 2024 adjusted EBITDA guidance range to $270 million to $290 million, with a midpoint that is $5 million higher than the prior guidance range in large part due to the G&A cost savings, but also our confidence in our group pace. Our adjusted FFO per share guidance is increased by one cent per share at the midpoint. A higher for longer interest rate outlook has shifted the prospect of rate cuts to much later in the year, increasing our interest expense outlook to 65 to 66 million from prior guidance of 61 to 63 million. Additionally, we are comfortable with the current Q2 consensus estimates for adjusted EBITDA and adjusted FFO per share. Turning to capital allocation, there were no acquisitions or dispositions during the quarter, and we did not repurchase any shares. We continue to explore dispositions, the proceeds of which can fund share repurchases, internal ROI projects, or external growth. Maximizing shareholder value is the singular focus of our capital allocation strategy. We remain committed to having a flexible balance sheet. Our leverage is conservative as demonstrated by the low net debt to EBITDA ratio of 3.9 times trailing four quarter results. Our liquidity is strong with 120 million of corporate cash, 108 million of hotel level cash, and an undrawn $400 million revolver. We have a 73 million CMBS loan on our courtyard Midtown East maturing in early August. It is our current expectation that we will repay this mortgage with cash on hand at maturity. If the capital markets cooperate, we may look to a larger corporate financing transaction in the near future to address our remaining mortgage maturities through 2025. With that, let me turn the floor back to Jeff.

Thanks, VQ. I want to conclude with a few points before Justin, Bronnie, and I answer your questions. First, I mentioned at the onset that our investment strategy remains unchanged, but I believe our execution will be more analytical and our actions more deliberate. To borrow a term from my partner, Justin, that means we will work to manufacture core product, ideally with limited capital intensity. To us, competitive auctions for a brand-managed big box hotel is not the path to success, and the investment community has limited patience for big-ticket, highly disruptive renovations. Instead, we want to select situations where our capital and creativity can unlock value that will drive long-term outperformance. Similarly, we will be thoughtful about how and when we elect to dispose of assets. Proceeds will be recycled to the uses we believe create the most value at the time. whether that is a new investment, share repurchases, or internal ROI project. Concerning the transaction market, activity was down 35% in the first quarter, which is off a 53% decline last year. It is still early, but we are starting to hear of a little more product trickling into what I'll call the shadow pipeline. To the extent interest rates remain higher for longer, it's likely we see more distressed owners bring product to the market, or transactions may emerge where the path to ownership may require a little extra creativity. We continue to have success with our ROI projects. The Dagny Boston, which was converted in the third quarter of last year, continues to outperform our expectations as it ramps to its full potential. The Hilton Burlington will convert this summer to the Hotel Champlain, a lifestyle curio hotel with a specialty restaurant led by a James Beard-nominated chef. In the Florida Keys, we are making progress on building a small marina with a high ROI at Tranquility Bay, and we expect to complete a new bar at Havana Cabana in Key West this summer that we anticipate will generate over $1 million a year in revenue at a 25% margin on a $1.5 million cost. We are moving ahead on expanding the room count at the Landing Resort in Lake Tahoe by 20%, which is expected to be completed in 2025. Finally, We are also moving ahead with integrating the Orchards Inn into our luxury L'Auberge de Sedona hotel through an upgraded room product and new shared cliffside pool and bar. We believe once completed, this will be a strong financial performer for us. In conclusion, Diamond Rock is well positioned to continue our top-tier performance in the sector. We believe our group bookings and market footprint position us well to outperform in 2024. Our substantial group revenue on the books provides a significant level of embedded growth, and we are optimistic our resort properties will see momentum return over the remainder of the year. ROI projects will add incremental growth in the next 12 to 24 months as projects such as the DAGNY are completed in RAMP. In conclusion, we really like our setup, and we are singularly focused on accelerating and enhancing our earnings growth. At this time, we would like to open it up to any of your questions.

Thank you. As a reminder, to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit yourself to one question and one follow-up. One moment while we compile our Q&A roster. And our first question is going to come from the line of Dori Kisten.

with wells fargo your line is open please go ahead thanks good morning um by your last comments jeff is it fair to say that dime rocks will likely be more active recycling capital going forward than you have been previously

We're under no mandate, or let me say good morning, Dory. I would say we're under no mandate to necessarily be more acquisitive or more focused on sales, I think. But we are trying to be more thoughtful, I would say, about, and I use the word deliberate in my remarks, about the assets that we hold and the assets that we acquire. So I think in the next 24 to 36 months, as we've said in prior calls, that we do intend to dispose of assets and recycle that capital. But I wouldn't presume from that that there's any sort of mandate on us to be moving quicker.

Okay. And if you were providing total REVPAR guidance, where would that be today and how has that changed since your initial guide? And I apologize if I missed it. Did you say what April REVPAR was?

On the total REVPAR question, we made the comment at the beginning of the year that comparable room REVPAR growth is about 2% to 4%. We thought that our including out-of-room spend, you would add about 50 to 75 basis points to that, and that view really hasn't changed. What was the second question? I apologize. April REVPAR is right now trending about Flattish. Thank you. You're welcome. Thanks.

Thank you, and one moment for our next question. And our next question is going to come from the line of Austin Werschmitt with KeyBank Capital Markets. Your line is open. Please go ahead.

Hey, good morning, everybody. Just wanted to start off a little bit on resorts and some of the leisure-oriented assets. I mean, the ADRs for this bucket of hotels has clearly been under a little bit of pressure here now for around a year, a little over a year. I'm just wondering if you think we're at a point where we could begin to see that stabilize or even increase. Just curious what sort of the outlook looks like from a booking perspective and how we should be thinking about rate for that pool of assets.

Thanks, Austin and Justin. So we've seen a little bit of weakness, I would say, over the last 60 days versus the first 60 days of the year, but nothing to be too concerned about.

I think one thing to note is we are sort of shifting segmentation throughout the portfolio. not just on the urban side, but also on the resort side. And I think portfolio-wide for us, we do have a bit of a discount between group rate and transient rate. So some of what you're seeing from a rate deterioration perspective is not necessarily a rate fall-off, but it's actually just a segmentation shift away from transient into resort. And that's intentional. We're trying to build base, given some of the weakness we saw at the end of last year. And the hope is, as we continue to group up some of these hotels and make them smaller, and require less transient demand that we'll be able to see some more rate stability and compressed transient rate.

When do you lap some of the, you mentioned that loyalty redemption nights are down. When do you start to lap, you know, some of the comps there and see the mix, you know, on a more comparable basis year over year with the strategy you're currently pursuing with group?

Just from a redemption standpoint,

perspective solely. You know, I can't really probably be a better question for Marriott. I wish they had a little bit disclosure, a little bit more disclosure about what the point balance is that they hold kind of from a global perspective. But, you know, we have seen a continued deterioration, you know, of that balance into our hotels over the course of the last two years. And so we're optimistic. Hopefully by the time we get to summer, we'll start to see some stability. But it has been a bigger slide and a longer slide than we would have expected.

Okay. That's helpful. And then just last one for me, you mentioned the shadow pipeline and the transaction market building, Jeff, but capital markets remain challenging. You alluded to using some cash to maybe repay a mortgage later this year. I guess I'm curious if you guys are starting to build a pipeline of potential dispositions to kind of prepare for any opportunities that emerge and has the strategy on which assets to sell and when changed versus maybe what the previous executive team had flagged for potential sale.

Yeah, I mean, Justin and I can both speak to this. I think when we think about dispositions, it's trying to be, and I keep using the word, a little more deliberate, rather than maybe trying to be reacting to the situations that are in the market, is to be a little bit more planned around our dispositions and making sure that we're positioning assets to be in their best position for sale. So yes, there are assets, and some that we've discussed in prior calls that Really, I think we think of as either non-core or we think are less likely to return to their prior peaks that at some point we would like to move away from. But there's no mandate that we have to do that, just to be clear. In the next few quarters, we're trying to be opportunistic about it as we move ahead. Great. Thanks for the time.

Thanks.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Duane Finnegworth with Evercore ISI. Your line is open. Please go ahead.

Hey, thanks. Firstly, congratulations to the team on the new roles. Jeff, it's important for cell site analysts to find higher and better uses, so congrats to the team.

Thank you, Duane. I'll try to carry the flag.

Thank you. We're rooting for you. Can you talk a little bit about some of the pitches maybe you did not swing at over the past few years or what types of pitches you'd be more willing to swing at with the new streamlined org structure?

That's a good question. I mean, there's always going to be situations that we've looked at acquisitions or disposition opportunities that weren't pursued before. I don't know. I think going forward, we're just going to try to be thoughtful about, and this is an often used line, about sort of skating to where the puck is going as opposed to where the puck was. And that's, I guess, how I think about it. I think there's oftentimes, when I look at the lodging reed industry over the last two, three decades, I find that there always tended to be a little bit of group think. in terms of the markets that got crowded around the same time. And, you know, oftentimes when everyone's buying in one place is frankly where I wish we were selling at that time. So, um, I couldn't give you a specific example, but when I think forward, uh, and I borrowed a term from Justin where I do like the idea of manufacturing core assets, meaning that, you know, we want to be doing things today that will become core product in the future. Cause that's really how you can create value.

Appreciate those thoughts. And, um, Certainly don't want to lock you into quarterly guidance, but could you expand a little bit on how you see the comps for May and June relative to the April flattish commentary?

Sure.

Yeah, Dwayne, I think it's prominently driven by what our group outlook is. And we knew that April was going to be our toughest month from a group perspective. And so I think coming out of April flat, given where we stood from a group A's perspective, and that's probably our worst month of the year on a year-over-year basis, I think we're pretty optimistic that we'll see continued growth from that flat range for the last two months of the quarter because we're in a much better position just in group A. So assuming we see the same type of transient booking trends, we should see that sort of 300 basis point escalation from what we saw in April on REVPAR. Okay.

Thank you. Thanks.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Anthony Powell with Barclays. Your line is open. Please go ahead.

Hi. Good morning and congrats to everyone on the new roles. Uh, I wanted to dig in a bit more on the redemption comments, which I think are interesting and important. You know, in terms of points per room, I know it's myself that the points required to redeem have gone up. So is that kind of a driving issue there? And also, how much control do you have as an owner on the whole points per night, I guess, values?

I'll have Justin speak to that. He's pretty intimately involved with this. I think the way I sort of think about it is, as these programs have evolved, the accumulations are not just about hotel stay. In a lot of ways, they've really become more focused on the credit card spend. And so in the middle of the pandemic, you had a lot of people that were spending on their credit cards, generating these large point balances while not traveling and not utilizing them. So I think Part of what we're seeing is just a continued burn off of that accumulation that happened during the pandemic. And that's why we saw a big uptick as the sort of revenge travel started two years ago. We've seen a fall off since that point, as opposed to just the increase in the points required. There is some of that as well. I think as occupancies return, The other brands have reoriented their programs in order to try and not run those programs at a loss on an annual basis. And so there's been a significant uptick as rates have risen to the number of points required to get into the hotels. In terms of our control, I would say fairly little. We have the ability to lobby for changes to the programs, but they are a bit of a black box in terms of where the point totals are set. Yeah, I would I would chime in that I think that's one of the reasons why we've liked some of these independent, you know, more destination resort locations where I think we're a little more more in control of our own future at those properties.

So maybe one more broad picture on, I guess, asset mix. You know, group has done well over the past couple years and looks good over the next couple years. I know there's been discussion in the past about reducing your group exposure. So maybe can you just discuss what your approach to group is as a representative of your hotel event?

We're roughly about a third group right now, give or take. And I don't think there's not an intention on our part to to reduce that, meaning like exit group assets, if I heard you correctly. It does provide stability to our portfolio. We do like that business. I think it's all about making sure that we have assets that are well positioned and excel at being good group houses. But yeah, if I heard your question correctly, we're happy with that concentration in our portfolio.

Got it. So like properties at Chicago Marriott are now kind of still core as opposed to maybe potential assets still?

I wouldn't necessarily say that like Chicago Marriott per se or any of those assets are core. I'm just saying that I think, you know, we're not trying to exit the group segment. I think we talked about it in the past that Chicago Marriott for us is actually a terrific property. It's very well located. It's very well run. I think we question whether or not it sort of fits with the rest of our portfolio. So that's really been our thinking on Chicago Marriott.

Okay.

Thank you. Thanks.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line, uh, some needs rose with city. Your line is open. Please go ahead.

Hi, thanks. And congratulations to each of you on the, on the new roles. Um, I wanted to just ask a little bit, you kept your rev par outlook, uh, two to 40% unchanged, but it sounds like things were lighter than expected in the first quarter. You mentioned a little bit of color around the second quarter. So what do you need to see to get to the high end of that range? It sounds like group is kind of locked in. Is it more business transient or is it more leisure? What would need to happen?

I think it's a combination of factors. I think we have very strong group pace. Of course, that can come in at or above, depending on how in the year, for the year, group is shaping up. And obviously, the risks to the downside are obvious both in leisure and in group I think to get to the high end, you know, we would have to see our group continue to come in very strong with less attrition and fewer cancellations, and leisure to have a more pronounced ramp probably. But we're not expecting anything too dramatic in the back half of the year for leisure.

Okay. And then for leisure, it sounds like it was sort of the higher end of your kind of leisure customer that came in weaker than expected. Is it? I mean, are you hearing or seeing anything that just would suggest like just an overall economic pullback, or do you think it's more of a sort of a comp issue?

I think in our case, it's a little bit more of a comp issue, frankly, because, you know, we're not of the size that we necessarily have a lens that's so broad that we're able to make that type of a determination. And the two examples I called out in my remarks, I mean, one, Sonoma seemed to be fairly asset-specific as is the case with Vail. Those two in particular really were the source of the majority of the weakness for what we would call our luxury resort group. So I don't think there's necessarily a very specific trend impacting, though I'm aware that there are concerns in the broader economy that I'm sure affect people's purchases at some level. I don't think it was solely driven by that. Okay. All right. Thank you. Thanks.

Thank you, and one moment as we move on to our next question. Our next question is going to come from the mind of Danny Assad with Bank of America. Your line is open. Please go ahead.

Hi, good morning, everybody, and congrats, Jeff and Brian and Justin. Jeff, in your prepared remarks, you mentioned that you're at 85% of budgeted rooms on the books at the end of Q1. How much would you normally have on the books for the year at this time?

That's a good question. I think last year we were around 80 at this point, maybe high 70s. Yeah, I think it was, we're up certainly year over year.

Understood. Okay. And then, look, I know this is not probably a very clean answer for this, but, you know, historically, what has your, you know, you're just thinking about the group PACE color that you gave in your prepared remarks. What has this group PACE historically resulted in terms of actualized group REF PARC?

Yeah, that's a good question, Danny. I mean, as you progress through the year, it begins to, of course, as you sort of realize group, that number naturally sort of averages down. I think, you know, if you kind of think about where we could end up, if this is roughly a third of our business, this is just a guess at this point, I would say you're probably in the high single digits total revenue growth for group. Got it. Super helpful.

Thank you very much. Thanks.

Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Michael Belsario with Baird. Your line is open. Please go ahead.

Thank you. Good morning, everyone. Good morning, Mike. Good morning. Just one more on loyalty redemptions. Can you just size that up for us? How important is that? What percentage of roommates at your resorts are actual residents? redeemed nights? And then what is it for the rest of the portfolio X resorts?

It's funny, it's going to vary by property. So I'm not sure we're going to be able to have give you a number that's company wide, we can probably follow up with you on something like that. I think there's specific examples of properties where that maybe Justin can share that will give you a flavor for it. I think that's really where it manifested itself for us in the first quarter. As Jeff said, it's kind of all over the map. I could come back to you on a portfolio-wide number, because obviously we have a number of assets that are not branded, so it's 0% of our segmentation. But I would say in the resorts, in season, for an asset like Vail, in the height of season, it can be as high as 40%. As we go season-wide, it's probably in the high teens. But for an asset like Charleston, which might surprise people, is our number one redemption hotel. So in 2022, you know, Redemptions and Charleston were over 30% of our total segmentation. So when you get a significant fall off in that number, that's 30% of your business, you know, it's tough to maintain share against a comp set that's not completely branded. So I'd say, you know, it is very variable depending on asset, but for the resorts, it's a meaningful piece of the segmentation.

Got it. That's helpful. I was just trying to understand the absolute change there with Yeah, the negative 20 plus percent year over year figure that you provided. So that's helpful. And then just switching gears, just one more on transactions. It does sound like urban is on the list. I know that it wasn't off the list before, but it did seem like there wasn't as much interest or focus on acquiring urban assets previously. So maybe what does the urban acquisition target look like to you guys? And then how do you think about returns, underwriting, any differently, especially in some of the slower to recover markets, or maybe looking at deeper turn renovation projects as well today? Thanks.

Yeah, it's a good question. Concerning in the past, I will just say is that it's difficult to buy what's really not available to be bought. I would say that there really wasn't a lot of urban product in the market in the last few years that was appealing to us. There was some high quality product, but candidly, I would say the pricing was a little rich, either per key or on cap rates, or as you mentioned, there's somewhere it really required a strong view on recovery that could be three to five years away. I think, as Justin and I think about it now, I think we're getting to that point where we're a little later into this cycle that you're starting to see more stress on some of these owners or assets that will probably start to shake more loose in the next six to 12 months. But I think we look at it very similarly in the way that we think about resources. It's all sort of a risk-adjusted return You know, the resorts, the benefits they have right now is, generally speaking, they produce a lot of cash flow today and currently. And I think we can get a little more comfortable with where they'll settle out. But urban, I think, generally speaking, requires a little bit more view on where the future comes. I don't know. Justin, if there's anything you want to add. I think it's also maybe a little bit more focus on basis, right? When I think about what our advantage is, especially as we look towards the urban markets today against you know, other capital sources that utilize a lot more leverage than we do, it's really a cost of capital advantage. And so I think maybe looking at an asset that's at a significant discount to what it would cost to replace it. I don't mean a, you know, 60-year-old sort of functionally obsolete asset where, you know, replacement costs may not be as relevant, but something that was new or built, but maybe doesn't, you know, maybe in a market that's had some issues. I think that's something that we might find more interesting than we would have before because we have an advantage against some of the people we're bidding against still have to underwrite levering it up and carrying it from a negative carry perspective two to three years until recovery. So if that gives us an opportunity to go into a market with an asset that we really like at a discount to replacement cost, we just think that's the proper investment decision that's going to give us opportunity for growth before the development pipeline gets started up again.

How helpful. Thank you.

Thank you, and one moment for our next question. And our next question is going to come from the line of Flores Van Dishcombe with Compass Point LLC. Your line is open. Please go ahead.

Good morning, guys. Thanks for taking the question. Congrats, Jeff, Justin, and Bryony for your new roles. Obviously, I'm not the first one to do this, but kudos. Just curious, maybe, Jeff, if you can talk a little bit about what you're able to share on your discussions with the new board, which you've just joined as well, which I'm glad to see that you're part of that as opposed to some other companies. Maybe talk about some of the issues like you know, the ensuring change of control statutes and the discussions around share buybacks? Is there any sort of meaningful change that you've seen there? And how focused are you on those kinds of issues?

Yeah, it's a good question. On the share repurchases, to me, that's a very valuable question. tool. I would say my experience has been that our shareholder base is somewhat split on it, but I do think it's a useful tool for returning capital to shareholders in a tax-efficient way and, frankly, a good way to invest capital that can be superior risk-adjusted returns relative to going out to the market sometimes and buying a new asset. That is something that we actively discuss with our board. As a general comment, I would say I think they'd like us to lean in on areas that we have conviction in, whether it's acquisitions, dispositions, share repurchases, it's not necessarily one direction. I think they are looking for us to be, I'll call it bold in our decision making, but I wouldn't, to be clear, I would not derive from that that there's any big pending announcement or anything along those lines. I apologize, was there another part to your question?

The change of control, you know, did you talk about that? Did you ensure to make sure that everybody in the team gets, you know, participates in the same way that senior management does?

Yeah, that's a great question. That really was a focus of mine in assuming this role is making sure that executive leadership of the company is all aligned and shares the same view and same incentives on change of control.

Thanks, Jeff. And maybe, you know, did I lose you, Forrest?

Thank you. We will go ahead and move on to our next question. One moment, please. And our next question will come from the line of Chris Darling with Green Street. Your line is open. Please go ahead.

Thanks. Good morning. Going back to the leadership transition, do you feel appropriately staffed in all areas of the organization below the C-suite level, just given the additional responsibilities that each of you on the call have taken on?

We do. I don't think there will be any major staffing changes in the organization. There were some open positions that we had, one or two, prior to this announcement, and those continue to be pursued. But there are no major staffing changes that are anticipated.

Okay. And then just one either for maybe Justin or Jeff, can you talk about the appetite among private buyers to transact at scale today? I know for really the better part of the last year, year and a half, we've talked about that $100 million or less price point really being the sweet spot, but I wonder if that dynamic either is beginning to change or maybe it was changing before the recent move higher in interest rates. So any comments you have around that would be interesting to hear.

Justin can chime in as well. I would say that from talking to folks in the brokerage community recently, I really think that for a lot of private buyers, they tend to be much more reliant upon debt capital for their transactions. And just given the interest rate environment right now, it just does not feel that not only is there not a lot of products coming to market, though that's changing, it doesn't feel like a lot of those buyers are equipped to be the best buyer. So I don't think that's changing. I don't know, Justin, if you think that No, I think that's right. I think the only encouraging sign we've seen is it does feel like there's been a bit of a thawing of the SASB markets or the large-scale single asset securitization market. So unfortunately, at the same time, we've seen an uptick in the underlying base rate. So despite the fact that that market seems to be coming alive and the spreads are tightening a little bit, the overall cost of that debt is still probably more expensive than it was three months ago, just given how much SOFR has come up. So I think we're... happy to see a little bit more liquidity come into the market, but just given where we would like to transact some of our assets, we feel like people need to see the Fed's trajectory start to move lower and see that movement in SOFR before that leverage becomes accretive and will really drive pricing.

Got it. That's helpful. Thank you.

Thank you. And one moment as we move on to our next question.

And our next question is going to come from the line of Stephen Grambling with Morgan Stanley. Your line is open. Please go ahead.

Hi, thanks. I heard the comments about the mixed shift impact on margins from S&B, but I'm wondering if there's any other major cost considerations over the back half of the year as we think about wages and other factors, insurance, property taxes, et cetera, that you have line of sight on, and then Any other broader comments just around, you know, inflation and expenses across different property types? Thanks.

Yeah, I mean, I'll take the tax and insurance side. That's the easy answer. I would say there's really no concerns that we have there. I mean, tax increases can surprise you, just as tax rebates can. But none that we really have today that I would say are particularly notable to our portfolio that we think will cause any sort of major disruption there. our headwind, I don't know, do you want to talk about labor? Yeah, I think wages have definitely, you know, at least the rate of growth seems to have cooled a little bit. I'm still definitely above, you know, kind of prior run rate free pandemic, but nothing like what we saw over the course of the last 24 months. I think, you know, we were encouraged to see that sort of per hour worked wage rate, inflationary rate kind of creeped down, you know, towards the three, three and a half percent in the first quarter. We obviously, as Jeff mentioned, added a lot more hours work just given that shift to food and beverage and the number of hours that are required to deliver that product. But I think that was encouraging. I think the one thing that maybe caused a little concern for us is just we continue to see growth and benefits, specifically in health and welfare, that I think everyone sees it in an operating business, that those costs continue to run at high single-digit numbers on a year-over-year basis.

That's helpful. Maybe one unrelated follow-up. I just want to make sure I understood you correctly. I think that you made some comments in terms of being more deliberate in terms of transactions. But have you had any unsolicited inbounds on assets at this point? Because you were referencing being maybe more offensive rather than reacting.

Yeah, we have had no unsolicited requests for any of our assets in the the last few months that I can think of. There's lots of times that you do get those requests just for your benefit, but you really have to assess the quality of the buyer beyond just their pricing in terms as well. Got it.

Thank you.

Thanks.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Chris Forwanka with Deutsche Bank. Your line is open. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question. Covered a lot of ground so far. So, Jeff, I guess, are you guys seeing any increase in the level of what I would call churn on reservations at your hotels? I mean, I think we've heard that kind of more in the select serve world, which you're not in, but that there's just more churn, there's cancellations, and booking windows are actually shortening a little bit. Is there anything like that going on in your portfolio, whether it's a market or a segment?

No, I mean, I think in the aggregate, I'd say no. We probably have seen maybe a little bit more in a couple of selective places. But candidly, we've been very focused on base building. And so, for example, in addition to group, we've really been leaning into advanced prepay, which gives us some insurance against that race to the bottom when we have those clients that are in the hotel that are sticky and can't effectively cancel and rebook. It gives us just a little bit more ability to keep rate high without sort of flushing through the entire reservations deck in a hotel on a given date. So I would say in the aggregate, we really haven't seen a change to cancellation policy in the short term on a per booking basis.

Okay. Thanks, Justin. And then just kind of going back to the, I guess, the new, I don't call it new, revamped acquisition strategy perhaps. Does that, should we take away that that could imply more chunkier assets and You guys have obviously done a lot of smaller assets, and I know there's good returns at those, but there's also probably some friction costs. Is that kind of a theme that we should look for, or would we not necessarily conclude that?

I mean, I would say, and I'm being a little funny when I say this, we'd like to buy assets that are bigger than $30 million. You know, that's actually, it's not new. I mean, we've always aimed for larger assets. I would say, generally speaking, I think given a company our size, we've shied away from transactions that start to get into that $300 million, $400 million, $500 million range, just because they create a little bit of a concentration issue for us. And sometimes we're not going to be the most competitive buyer, given the the risk that presents to our portfolio versus what it does to perhaps one of our peers or one of the private equity firms who might be more comfortable stretching there. But I think in the past, we've always kind of thought of our sweet spot as sort of that $50 to $150 million range. So there is certainly an efficiency to putting capital into those assets. And we understand that people want assets to be needle-moving. So I think I can't tell you that we won't buy or won't come across something that's sort of smaller and interesting, but I think our preference is to be a little more efficient in how we put out capital.

Okay, got it. Very helpful. Thanks, Jeff. Thanks, Chris.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Bill Crow with Raymond James. Your line is open. Please go ahead.

Good morning. Congrats, all. Justin, I wanted to start with you. Is there any read-through on changes in the amount of points that are being redeemed up or down at any given time to the health of the consumer? Do consumers lean more on points redemptions when times get tougher?

I think you'd find, Bill, maybe not surprised, that the consumer is actually pretty smart about it. I mean, I think they have sort of an idea in their mind about what the value of the points are and use them – when they see there's a perceived value. I don't think it's just the consumer that has no ability to vacation unless they use points. I think a lot of times people look at them as just another form of currency, and you really look at them relative to the ADR. So I'm not sure if that necessarily changes pricing decision. It just more maybe reallocates their decision to different markets based on their perceived value.

Yeah, okay, interesting. Jeff, I know you, and this is a topic that I think has surfaced three or four times already this morning, but you asked but didn't answer the question about how big box hotels might or might not fit into your portfolio. I want to give you a chance to answer that question. I think that's what a lot of people are asking. Is that really the difference between maybe your philosophy and Mark's prior philosophy?

I don't think there's necessarily a difference there. I guess I made a comment in our opening remarks about maybe not pursuing sort of the you know, the big box, you know, brand managed hotels. You know, really what I was meaning by that is I think there's a tendency historically in the sector to buy sort of a, you know, the fully renovated, it doesn't necessarily have to be brand managed, but the fully renovated, you know, hotel and then argue that it's somehow worth more than what someone just paid. I think we're trying to find situations where, you know, we can create that value. And whether it's through a renovation, it's through repositioning or, frankly, being smart about identifying assets that we're able to buy at attractive discounts in the marketplace because perhaps the owner is under some moment of distress or they don't see something that we see in the market. Or conversely, it's a market that we think is going to be improving and becoming a little more mainstream and more core.

And then finally for me, any indication that hotel worker turnover is calming down a little bit?

Yeah, I mean, I think we definitely see that in the portfolio.

But one way we see it is a continued shift away from contract. And that's really, you know, we kind of gauge what the turnover is, sort of looking at the number of hours we have that are coming in through contract labor as opposed to full-time. And we have sort of a desired intent to bring more of our employees in-house. We just think it helps us from a productivity perspective and helps build, you know, more loyalty and goodwill in the box. And we definitely saw a bit of that shift in the first quarter. So I think that's really probably the best indication I have of less turnover, that, you know, we're not having to backfill with contract labor hours, that we're actually shifting more of those hours' work towards, you know, the manager's direct employees.

Okay. Thanks. That's it for me.

Thank you. And one moment for our next question. And our last question is going to come from the line of Floris Van Dijkum with Compass Point LLC. Your line is open. Please go ahead.

Hey, thanks, guys. Just a follow-up question for me. Jeff, maybe if you could talk a little bit about your vision for branded versus unbranded. The discussion on redemption points, obviously, very interesting. It can be really good if you get high occupancy and you use the redemptions to fill and create that compression and get maximum revenues. But As you think about Diamond Rock's portfolio in three years' time, it sounds like you're probably more... tempted to have more unbranded where you're more in control of the revenue. Maybe if you can talk or maybe I'm interpreting that incorrectly. If you can talk a little bit about your vision on branded versus unbranded going forward and how that shapes the portfolio.

Yeah, and thanks for requeuing. I would say, to me, the decision to brand is really just a choice. At the end of the day, I'm not necessarily pro-brand or anti-brand. I think it's one where it's just a choice for an owner about whether or not we can maximize our returns and being realistic around the costs that are being associated with a brand. I think there's real benefits that they can deliver to you on the top line, but there are effectively costs as well through the expense structure and, of course, on the capital side. I think they're important to consider. I think one area where you would probably see us, maybe if I cut the answer a little differently, is we likely remain more unencumbered or not brand managed. I think we feel like we appreciate the flexibility of having independent management from the brands, and I think we feel like we have more success from that standpoint. But we do have a lot of branded hotels in our portfolio, predominantly franchised, and I think we're very happy with them So I don't think there's any desire to necessarily move away from those. I think it ultimately, as I said, really just comes down to a choice for each asset.

Thanks, Jeff.

Thanks, Loris.

Thank you, and I'm showing no further questions at this time, and I would like to hand the conference back to CEO Jeff Donley for closing remarks.

Well, thank you, everybody, for joining us today. I appreciate all the questions, and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.