Diamondrock Hospitality Company

Good day, and thank you for standing by. Welcome to Diamond Rock Hospitality Company second 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'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian and Quinn, Chief Financial Officer. Please go ahead.

Thank you, Justin. Good morning, everyone, and thank you for joining us. With me on the call today is 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. We were pleased with our second quarter results, which exceeded our expectations going into the quarter. Comparable rev par grew 2.2% over last year, which was 260 basis points higher than the growth that we saw in the first quarter, and exceeded the 100 to 150 basis point of sequential acceleration we expected. Total rev par increased 4.5%, also an acceleration from the 2.4% total rev par growth in the first quarter. The 230 basis point gap between total RevPAR growth and room RevPAR growth was the result of an intentional mix shift toward group business that drove strong out-of-room spend. The strategy has worked. Group revenue increased 7.2% over last year, and banquet catering and AV revenue increased over 20%. The strong revenue growth was driven by both our resort and urban hotels. Comparable RevPAR at our resort was 1.9% higher than last year, with total RevPAR 2.7% higher. Comparable RevPAR at our urban hotels was 2.2% higher than last year, with total RevPAR 5.4% above 2023. Comparable hotel operating expenses increased 4.5% from last year, which was largely in line with our expectations. Total wages and benefits increased by 7%, a better growth rate than the prior quarter. Early in the second quarter, we renewed our insurance program with a better than anticipated outcome. Overall, our premium cost was reduced by 16%, which led to insurance expense for the quarter declining 14.5% from 2023. Comparable hotel adjusted EBITDA was $99.5 million, reflecting a 5.5% growth over last year on a 20 basis point increase in margin. Adjusted FFO per share increased 6% over 2023 to 34 cents per share. Turning to our outlook, the success of our group strategy has exceeded our expectations. Shifting our mix towards group, as well as a focus on building occupancy in our resorts, may reduce room rev par growth, but it has done so to the benefit of total rev par and ultimately profit. Accordingly, we are adjusting our RevPAR growth outlook to a range of 1.5% to 3%. However, we expect total RevPAR growth to be in the range of 3% to 4.5%. Our group strategy has performed well, and we expect it will continue to drive incremental revenue and profit. But due to the types of groups on the calendar, we do not expect out-of-room spending in the second half of the year will contribute 250 basis points toward total RESPAR growth as it did in the first half of the year. We now expect 2024 adjusted EBITDA to range between $278 million and $290 million, our 2024 adjusted FFO to range between $201.5 million to $213.5 million, and the resulting adjusted FFO per share range increases from $0.95 to $1. Turning to capital allocation, we commenced share repurchase activity during the quarter. To date, we have repurchased 2.8 million shares with a weighted average price of $8.36 per share for total consideration of approximately $23.5 million. We continue to explore asset dispositions, the proceeds of which can fund additional share repurchases, internal ROI projects, or external growth. Our balance sheet remains strong. As of the end of the quarter, our net debt to EBITDA ratio was 3.8 times trailing four-quarter results, and our liquidity was $630 million. We plan to repay our $73 million mortgage maturity in early August with cash on hand. In addition, we intend to exercise our one-year extension right on our $300 million term loan, bringing the maturity to January 2026. We continue to monitor and assess all available options to address our upcoming 2025 debt maturities, and we'll continue to keep you updated on that front. I also want to share that during the quarter, Diamond Rock successfully completed the implementation of a new Oracle cloud-based ERP system that has streamlined our accounting-related activities, as well as a new enterprise analytics system to better collect and analyze the enormous volume of hotel-level operating and financial data available to us. Together, we expect these systems will extend our impact while maintaining one of the most efficient teams amongst our peers. Kudos to our accounting and asset management teams for their efforts on this significant project. I'll now turn the call over to Jeff for additional color on the quarter.

Thanks, Bryony, and thanks to all of you for joining us this morning. I want to highlight the excellent efforts of our entire team, who worked hard this quarter to deliver strong Q2 results amid a transition in leadership and information systems. I also want to recognize Bill Tennis, who recently retired after serving as Diamond Rock's General Counsel for 14 years. Finally, I want to welcome Annika Fisher, who joined Diamond Rock as Senior Vice President and General Counsel from Essex Property Trust. She's been an excellent addition to our team, and I'm personally very happy to have this rising star on board. Now, let's talk a little more about the second quarter. It is critical to understand we're focused on maximizing profit, not rev par, not margin. This is why Justin and his team made the conscious decision a few quarters ago to increase our focus on group. All else equal, this mix shift can result in slightly lower room rev par growth to the benefit of higher total rev par growth. The year-to-date spread between our room REVPAR and total REVPAR growth was a robust 250 basis points. And while higher total REVPAR growth can result in higher total expenses, expense growth, and possibly even lower margin, it accrues to the benefit of higher bottom line profit. And to us, profit is king. As Bryony mentioned, comparable EBITDA for the portfolio increased 5.5% in the quarter And F&B profit at our urban hotels increased nearly 27% after the incremental costs, such as food and labor, associated with non-group revenue. Urban hotels had the largest spread between total RevPAR and RevPAR growth. The Clios spread was 1,000 basis points. The Worthington, 780. Chicago Marriott, 740. Weston Seaport, 520. And the Gwen, 480 basis points. Looking ahead to the second half of 2024, group room revenue on the books is up 14% over the prior year with well over 30% growth at the Chicago Marriott, Weston, D.C., and the Worthington. For the year, we have 704,000 group room nights on the books, which is a 7.3% increase over 2023 and represents 88% of our 2024 budget. Turning to our resorts, this was the first quarter of positive RevPAR growth in our resort portfolio since the end of 2022. Resort comparable occupancy increased 8.6% offset by a 6.1% decline in ADR. Despite the increased reliance on occupancy, a historically more expensive source of revenue growth, we were able to drive EBITDA 7.1% higher by holding expenses to 2.5% growth. Importantly, we are outperforming our markets, taking share in 14 of our 16 resorts, and like our urban hotels, we have leaned into groups, sometimes to the detriment of average rate, to maximize total rev par and profit. It is no longer 2021 or 2022 when resorts were richly rewarded for holding out for last-minute transient, but it isn't quite 2019 either. Our resorts are still operating over 40% above 2019 levels, and we are staying nimble on our revenue strategy to maximize profit. In the back half of the year, we expect we will profitably trade off ADR per occupancy. It is partly for this reason we expect our full-year room REVPAR growth will be slightly lower than original guidance, but the total REVPAR and profit growth expectations are higher. We completed the room renovation of the Western San Diego Bayfront. We also completed the conversion of Hilton Burlington to Hotel Champlain. The hotel has a casual, fun, and creative new restaurant called Original Skiff Fish and Oysters by renowned chef Eric Ornstead. The hotel product feels great from the sense of arrival to the two-story lobby, new health club, and spacious rooms. We have a pipeline of additional ROI opportunities underway, such as the new hotel bar at Havana Cabana, a marina at Tranquility Bay, and the integration of our two Sedona resorts in 2025. We are constantly reviewing our portfolio for value-add opportunities, but are also reexamining our six-year capital expenditure plan to maximize efficiency for increased capital retention. In this regard, we've elected to reduce the scope of the ROI project we are pursuing in New Orleans by 40%. We had previously expected to spend about $13 million to renovate the 220 rooms and re-concept the lobby and pool areas to create new F&B outlets. The rationale for the original budget was based upon the expectation the expenditure would justify the implementation of an urban amenity fee, capture incremental market share, and drive incremental F&B outlet profit. Since conception, we have asset managed the hotel to gain significant share, and we now believe it is prudent to reduce the scope of the capital plan to focus exclusively on renovating the rooms product. The revised scope still supports the business case behind the amenity fee, while retaining optionality pursue the additional outlets later. We expect the renovation will be complete before Super Bowl. This is a good moment to step back and talk about strategy. Shareholders have asked us how the recent leadership transition will change strategy, and we've said we will continue to have a long-term focus on growing our leisure market exposure, whether those are resorts and unique destinations or hotels and lifestyle cities, but we also see value in targeted urban markets. We've also said you should expect we will be more deliberate and analytical in our actions. Our overarching focus is identifying avenues to drive incremental earnings per share as a path towards narrowing our discount to net asset value. The stock market focuses on REVPAR, but this only captures a portion of revenue and doesn't contemplate the effect leverage, branding, age, and other factors have on long-term earnings growth. To support our focus on earnings per share growth, we're working to reduce our costs. At the corporate level, we focused on our G&A through our leadership transition, as well as implementation of new technologies to drive efficiency. At our hotels, we are working to reduce our capital expenditures as a percentage of revenues through thoughtful scrutiny of what truly creates cash flow and value. Full-service hotel REITs historically spend about 11% to 12% of revenue on capital expenditures. When you consider typical dividend payouts, and that most companies are well over five times leveraged, including Preferred, It is simply too high to have meaningful retained earnings to organically fund share repurchases, pursue ROI projects, or acquisitions to drive earnings per share growth. It is a priority for us to manage our annual capital spend to the high single digits. Every 100 basis points we reduce our capital expenditures is over $10 million preserved and potentially 50 basis points of per share earnings growth. The $5 million reduction in scope in New Orleans, while small, is significant because it highlights how Diamond Rock is improving to be prudent and aggressive stewards of your capital. It also highlights that we are the sole decision maker on the scope and timing of renovations at our independent hotels in order to cater the product to our target customer in that specific market. What else can we do? Average age is important. Real estate can of course be renovated, but like a snowball rolling downhill, The frequency and scope of capital investment picks up speed and size with age. Yet market values do not always accurately reflect the obsolescence of older assets. We've all seen instances of new hotels transacting at similar EBITDA multiples despite the growing capital needs of an older asset. We are working to take advantage of opportunities to recycle non-core assets in our portfolio into higher after-capital cash flow yields such that it accretes to earnings. We also need to be flexible and cater our investment strategy to the local environment. For instance, in some markets, urban markets, an upscale hotel may be far more lucrative over the long term than an upper upscale product, given the similar profit per key but reduced capital scope. In conclusion, our asset focus remains largely unchanged, but what has changed are the approaches we are taking to drive earnings per share growth. It is our belief this focus will ultimately drive relative multiple expansion and total shareholder return. At this time, we would like to open it up so Justin, Bryony, and I can take your questions.