Diamondrock Hospitality Company

Good day, and thank you for standing by. Welcome to the Diamond Rock Hospitality Company third 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 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 Quinn, Chief Financial Officer of Diamond Rock Hospitality. Please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to Diamond Rock Hospitality's third quarter 2024 earnings call-in webcast. Joining me 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 are pleased to report another solid quarter, with results largely in line with our expectations. Comparable RevPAR growth was 2.8% over 2023, which was 60 basis points stronger than the prior quarter, and comparable total RevPAR growth was 2.3% over 2023. As we discussed on last quarter's earnings call, we anticipated that the growth in out-of-room spend would be significantly lower in the second half of the year due to a shift towards citywide-driven group business at our larger group hotels. While the portfolio did not sustain any material damage from Hurricane Helene in September, cancellations and business interruption held back our RevPAR and total RevPAR growth by approximately 35 basis points. Our urban hotels led the portfolio with comparable RESPAR growth of 4.2% in the quarter. Average daily rates were up 5.6%, offset by a percentage point decline in occupancy. While group demand continued to show strength, transient pickup, particularly on the weekends, was slightly weaker than we anticipated. Comparable RESPAR at our resorts declined 80 basis points from 2023. The 35 basis points of portfolio headwind from Hurricane Helene translated to an 86 basis point reduction to our resort RevPar and total RevPar growth. Despite this headwind, our resorts delivered total revenue growth of 1.6%. A few highlights in the resort portfolio include Cavallo Point delivering RevPar growth of over 18% on a very strong group quarter and Sonoma delivering RevPar growth of 7%, despite the headwinds in San Francisco. Chico Hot Springs delivered RevPar growth of 16%, all driven by an increase in ADR, as our revenue management strategies for this hotel are playing out. Group continued to be our strongest segment in the third quarter, increasing 15.7% over 2023, driven by an 8.8% increase in rate and a 6.3% increase in roommates. The strength in group was not limited to our urban hotels. Group revenues in our resort portfolio increased approximately 15% as we continue to add base at these hotels in order to preserve our transient pricing. As we mentioned previously, we had a significant shift to citywide group in the quarter, which caused a decline in banquet and catering revenue compared to the third quarter of 2023, and was a reversal of the double-digit growth in food and beverage revenue that we saw in the first half of this year. But as we talked about the last two quarters, it was that growth in lower margin F&B revenue that had been driving our higher headline expense growth numbers. With the leveling out in F&B revenues, total expense growth dropped from the over 5% growth rate we saw in the first half of the year to 2.6% in the third quarter. Comparable hotel adjusted EBITDA was 82.3 million, reflecting 2.2% growth over 2023 on a nine basis point lower margin. Corporate adjusted EBITDA increased 3.3% to 75.6 million. Last quarter, we provided an update on our technology initiatives, including a new ERP system alongside a robust enterprise analytics platform. These systems have greatly enhanced our ability to perform detailed custom analyses and forecasts with greater speed and precision. Moving forward, we are focused on strategically leveraging technology across operations, financial management, and ESG reporting to achieve meaningful savings in both workforce resource and time across the organization. Before I turn the call over to Jeff to discuss our outlook and strategy, let me touch on our capital markets activity and balance sheet. During the quarter, we continued activity under our share repurchase program, buying back an additional 700,000 shares at an average price of $8.14 per share. To date, we have repurchased 3.1 million shares with a weighted average price of $8.33 per share, for total consideration of approximately $26 million. Turning to our balance sheet, we ended the quarter with a net debt to EBITDA ratio of 3.7 times. In early August, we repaid the $73.3 million mortgage loan secured by the Courtyard Manhattan Midtown East. The loan was repaid with cash on hand, and our liquidity remained strong with over $75 million in corporate cash and full availability on our $400 million revolver. Also during the quarter, we took advantage of the steep decline in the forward rate curve and executed several swaps that will take effect in the fourth quarter and early 2025 to fix SOFR at an average rate of 3.2%. The forward curve has flattened considerably since those swaps were executed, and similar swaps would price much wider in today's market. As a result of these transactions, we will enter 2025 with approximately 57% of our debt at fixed rates. We also exercise the one year extension right on our $300 million term loan, which now matures in January 2026. Our next debt maturity is now in May of 25, and we continue to assess all available options to us, both secured and unsecured, and we'll continue to keep you updated on that front. As Jeff will elaborate on further, we are actively working on both asset acquisitions and dispositions as part of our capital allocation strategy and continue to evaluate share repurchases and high return internal investments. With that, I'll turn the call over to Jeff.

Thanks, Bryony, and thank you all for joining us this morning. I want to thank our entire team who, again, worked hard to deliver strong third quarter results, all while focusing on planning for 2025 and executing capital plans. Before I start, I want to highlight some recent accolades we recently received. Lake Austin Spa Resort was awarded number one destination spa by Condé Nast Traveler Reader's Choice Awards. La Fuga, the restaurant at Kimpton Shore Break Fort Lauderdale Beach Resort, was awarded Trip Advisor 2024 Traveler's Choice Best of the Best winner. Lastly, the Gwen was designated a One Key Hotel by The Michelin Guide is a symbol of excellence and was named one of the top hotels in Chicago for the fifth time by Condé Nast. We also want to announce that Diamond Rock has been awarded Hotel Global Sector Leader status by Gresby for the fifth consecutive year as part of its annual real estate assessment in recognition of our continued dedication to our corporate responsibility program and ESG transparency. So congratulations to our team for these and many other hard-earned and prestigious distinctions. Turning to an update on our capital and ROI projects, the conversion of the Dagny in Boston, which was completed a year ago, has been a big success. The Dagny is consistently ranked as the number one or number two hotel and trip advisor as an independent, up from a ranking in the mid-50s when it was branded. The hotel is performing in line with our underwriting, and we remain optimistic there will be significant cash flow growth in the years ahead. The hotel delivered a 13.5% rev car growth in the quarter and continue to pick up share from its competitive set. The debut of the Hotel Champlain in Burlington was completed in July for a total cost of $9 million, and our outlook is positive. In the third quarter, we generated over a half million dollars more revenue than last year from our new F&B outlets. We completed a comprehensive room renovation at the Westin San Diego Bayfront in June, totaling $16 million, which was almost $2 million below our budget. Guest feedback has been very positive, and since completion, the hotel has been taking share on ADR relative to peers. The Bourbon Orleans room renovation was completed in September, and we expect a refresh of the public areas to be completed by early 2025, ahead of the Super Bowl. Finally, we completed the addition of a new bar at Havana Cabana in Key West, which opened subsequent to quarter end. The bar replaces a rarely used fitness center with views of the water and will be a driver of incremental profits. So while you won't be able to work out at Havana Cabana any longer, you will now have two places to drink, and we think that has a better fit for this hotel's clientele. We hope you all get a chance to visit these special places. We aren't done. We continue to have a strong pipeline of high ROI opportunities, including projects like the combination of our two Sedona resorts in 2025 and the new marina at Tranquility Bay. We are constantly innovating to uncover value-add opportunities while reexamining our capital expenditure plans to maximize efficiency. In that regard, we are reducing our full-year capital expenditure guidance to $85 million from the previous range of $90 to $100 million. This reduction is the result of cost savings from reassessment of pieces of projects or entire projects, as well as better planning and execution. Our projected spend equates to approximately 7.5% of revenue, much lower than the double-digit levels typical of the industry. Now let's talk a little more about the outlook for the rest of the year and beyond. We are affirming the midpoint of our EBITDA guidance for the full year and narrowing the range based on the impact from recent hurricanes, as well as our outlook on the current economy and near-term demand. The midpoint of our full-year adjusted FFO per share guidance increases slightly. This updated guidance does not consider any unanticipated impacts to the business or operations. We are tightening guidance on our comparable REVPAR growth to a range of 1.5% to 2% compared to our previous guidance of 1.5% to 3% and continue to expect full-year total REVPAR growth to be about 150 basis points higher than REVPAR growth. 2024 adjusted EBITDA is expected to be between $281 to $287 million compared to $278 to $290 million previously. We now expect full-year adjusted FFO to be between $205 to $210 million compared to $201.5 to $213.5 million. Finally, the adjusted FFO per share range increases to $0.97 to $0.99 per share, a half-cent increase at the midpoint versus the prior range of $0.95 to $1. I want to commend my partners at Diamond Rock for delivering strong performance this year, consistently at or above our original expectations. This year hasn't been easy. Slowing economic growth, the result of sharp interest rate increases by the Fed in 2022 and 2023 presented a difficult backdrop. Hotel demand is evolving. It's not quite like 2022, but it's not like 2019 either. Group has been the winner this year, and for Diamond Rock, group revenues have surpassed pre-pandemic levels on a comparable volume of room nights. Looking ahead, Our group booking pace for 2025 is currently down over 3% compared to the same time last year, but we are seeing meaningful positive growth in pace for the first half of 2025 as we continue to lean into more group that are smaller, leisure-oriented assets whose groups typically have a short booking window. Business transient remains well below pre-pandemic levels, and while it is improving, it has a ways to go. I think BT demand parallels the return-to-office trend. Cities that have been quicker to return to office, such as Manhattan, have seen a more robust recovery in midweek demand, whereas cities like San Francisco, Portland, or Minneapolis that are only now seeing a return to office have seen a slower hotel recovery thus far. Leisure has been the winner over the cycle, and while growth may have slowed, broadly speaking, resorts are holding on to pandemic-era gains. I remain optimistic on resorts. They were a beneficiary of secular and demographic trends prior to the pandemic, so it is not surprising they delivered premium cumulative growth these past few years, well ahead of inflation. It's because of those drivers I expect resorts can hold on to much of their gains and return to premium growth. We're in the middle of our budgeting process for 2025, so I don't have any color to share at this time. But looking at the bigger picture, I am personally optimistic that 2025 is going to feel progressively better as we move through the year. Monetary policy shifts usually need a year to take hold in business fixed investment and personal consumption. SOFR increased on average 350 basis points in 2023, and we're feeling its impact in 2024. This year, however, SOFR is only up about 25 basis points over last year, and we've already seen the first rounds of what is expected to be several more rounds of rate cuts. That leads me to believe that as we progress through 2025, Main Street will feel what Wall Street is experiencing now, Consider the cadence of REVPAR. On whole, comparisons are easier in the second half of 2025 than in the first half. Looking at the demand segments, my instinct is they will line up similarly to 2024, although I wouldn't be surprised if the pace of growth in group decelerates at the margin, but business transient picks up some of that slack as more employees return to office. I expect leisure grows as rate cuts take pressure off consumers and comparisons get easier. We remain focused on driving free cash flow. To me, that begins with culture. Internally at Diamond Rock, we talk about being all-in and scrappy. They're key parts of our core values that speak to how we are aligned to focus on driving performance. Operations are, of course, the core of our success, and we manage to maximize profit and ultimately cash flow. However, it doesn't stop at Hotel Adjusted EBITDA. Our board took action to make our G&A more efficient, and we're working to preserve those savings. while making investments in systems to make us more effective. We are working to maximize our financial flexibility while keeping our overall financing costs low. Capital application is critical, so we're evaluating capital expenditures to be more efficient and more impactful. To be clear, it is not about ignoring critical items, but ensuring those precious dollars are well spent on both thoughtful cycle renovations and ROI projects. We're evaluating assets for disposition that we believe are a good source of capital that in turn can be reinvested accretively to cash flow per share. As part of that effort, we are working to enhance the marketability of non-core assets by extending ground leases, pre-negotiating PIPs, and vetting financing options. Reinvestment could be, of course, in share repurchases or perhaps at another hotel with a significantly higher free cash flow yield. From an asset perspective, Destination resorts have an appeal for the long-term growth and differentiation that they provide, but we also see value in targeted urban assets. In fact, we are close on a small acquisition that satisfies the criteria we are seeking. I'm hopeful we can share more in the future. In my career, the industry is focused on owning the largest hotels or generating the highest absolute rev par. Several peers have a stated focus on high EBITCO. It hasn't worked. As a group, hotel REITs are infrequent outperformers. FFO per share growth has been the missing ingredient. The industry is economically sensitive. That cannot be changed. But Diamond Rock can take steps to reduce our risks and volatility to enhance our performance. We focus on segments such as resorts with stronger long-term secular drivers. In urban centers where competition is high, a low investment basis well below replacement costs can reduce risk of new supply or outsized property tax assessments. Capital expenditures are our single largest cost, so we want to control how and when that money is spent, which is partly why we have leaned into independent as well as third-party managed hotels. Driving free cash flow per share is paramount. It is my strong belief that an intense analytical focus on free cash flow per share growth is our path to premium FFO per share growth. premium dividend growth, and ultimately narrowing our discount to net asset value. At this time, we would like to open it up so Justin, Bryony, and I can take your questions.