Diamondrock Hospitality Company

good day and thank you for standing by welcome to the diamond rock hospitality company fourth quarter and full year 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 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 A. Quinn, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to Diamond Rock's fourth quarter 2024 earnings call and webcast. Joining me on today's call 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 that our results for the fourth quarter, which we already anticipated to be strong, came in even better than expected. Comparable total REVPAR increased 5.5% over 2023, well ahead of our expectations going into the quarter, and over 250 basis points stronger than the growth achieved in the prior quarter. The upside to our expectations was most pronounced in our urban footprint, particularly in November and December. RESPAR at our urban hotels increased 8.2% on a 5.4% increase in average daily rate. November performance was less affected by the U.S. election than we originally expected, and more importantly, the calendar in December was favorable for two reasons. First, there were 17 business days in December ahead of Christmas, as compared to 15 days in 2023. Secondly, Hanukkah started on December 25th, or nearly three weeks later than the prior year. The combination of these calendar shifts led to exceptional growth across all our urban markets, with December RevPAR up 13.2%, led by our hotels in Chicago, Salt Lake, San Diego, and Boston. I also want to recognize the team at the AC Minneapolis for generating 17% RevPAR and 28% total RevPAR growth in our first full calendar month of ownership. Fourth quarter results at our resort hotels were mixed. RevPAR declined 150 basis points in the quarter, but out of room spending contains total revenue to a 10 basis point decline. Florida continues to see headwinds owing to what can best be characterized as a hangover from the pandemic. Heavy visitation, price inflation, Florida fans relocating to Florida, et cetera. But we're hopeful the market finds its footing in 2025. Our Florida resorts collectively saw a 5.8% decline in RESPAR, while all our other resorts, excluding Orchards Inn, which is under renovation, grew RESPAR 4.5% in the fourth quarter. Chico Hot Springs again performed well, delivering nearly 18% RESPAR growth on over 12% ADR growth, as our revenue management and marketing strategies continue to play out at that hotel. Both Vail and Sonoma had strong revenue and EBITDA growth in the fourth quarter. Group remained our strongest segment in the fourth quarter as it has throughout 2024. Fourth quarter group room revenues increased 8.1% over 2023 on a 5.9% increase in room nights. At our urban hotels, group room revenue increased 10.2% which drove a 6.4% increase in total food and beverage revenue. We continued to add groups to our resorts to build a base to preserve transient pricing and improve profitability. This strategy allowed us to deliver EBITDA growth at our resorts on essentially flat revenue. Turning to profits. Hotel adjusted EBITDA in the fourth quarter was $75.9 million, reflecting 16.4% growth over 2023 on a margin that was 250 basis points higher. Corporate adjusted EBITDA was $68.7 million, representing almost 20% growth over 2023. Adjusted funds from operations was $0.24 per share, 6 cents or 33% over 2023. Before I turn the call over to Jeff to discuss recent events, outlook, and strategy, let me touch on our dividend and our balance sheet. At the end of the fourth quarter, we announced we would pay a 20 cent per share stub dividend in addition to the regular 3 cents per share quarterly dividend we had paid throughout 2024. In total, we paid $0.32 per share of common dividends for 2024. With that announcement, we communicated our intention to pay regular quarterly dividends of $0.08 per share in 2025, and depending on our 2025 operating income, an additional stub dividend in the fourth quarter. Several analysts' reports and outlooks still reference a $0.03 per share quarterly dividend, so I'm not sure this material change was widely understood. And in fact, last night, we announced our common dividend for the first quarter of $0.08 per share. Turning to the balance sheet, we have three mortgage loans totaling just shy of $300 million, maturing in 2025 at a weighted average cost of approximately 4.2%. Moreover, we have a $300 billion term loan maturity in early 2026 that is of year-end at an average cost of approximately 5.8%. or 135 basis points over SOFR. Finally, our 8.25% preferred stock is callable in August. We continue to review the most cost-effective options to refinance these maturities through a combination of an inaugural corporate debt issuance, placement of mortgage debt, and a recast of our corporate credit facility. Included in the 2025 guidance Jeff will discuss, we have assumed that the maturing loans are replaced at a high 6% interest rate. Despite this, we do expect our overall interest expense to be slightly lower in 2025 as we realize the full-year benefit of interest rate swaps we executed in late 2024. On that note, I'll turn the call over to Jeff.

Thanks, Bryony, and thank you all for joining us this morning. Kudos to the entire team at Diamond Rock for exceeding expectations, not just in the fourth quarter, but throughout the year. It has been a very busy year. Our board took steps to reduce our G&A costs and increase efficiency. Under Justin, our asset managers exceeded performance throughout the year. In fact, we exceeded our original full-year total REVPAR growth, adjusted EBITDA, and AFFO per share guidance, guidance which we raised several times throughout the year. Moreover, our design and construction team rationalized our capital expenditures to minimize cost and maximize impact. Under Briney, our finance and accounting team seamlessly implemented new systems to improve and expedite financial reporting and data analysis, and they handled this yeoman's task without a hitch. And Annika Fisher has been a terrific addition to the team. She helped update corporate policies, strengthen governance, and internalize legal work that might have otherwise been outsourced to a costly third party. I also want to applaud our entire team for receiving NAREIT's Leader in the Light Award in recognition of our corporate responsibility success. I'm so proud of what we've accomplished and how we are positioned for the future. Let me start with capital expenditures. In 2024, we completed room renovations at Bourbon Orleans and Westin San Diego Bayview, the rebranding of the Hilton Burlington to Hotel Champlain, and a spa renovation at the Westin Fort Lauderdale, among other projects. The rooms at West and San Diego were completed in early 2024 at a cost of $14 million. The public spaces will be completed in 2025, where monies will be used to improve the sense of arrival and expand the bar area and provide grab-and-go food options. We spent about $5 million at Bourbon Orleans updating the rooms and corridors. We introduced a destination fee for a food and beverage credit that guests can redeem in the hotel. Fourth quarter other income is up about 80% over the prior year, and we continue to see REVPAR increases. Recall, we reduced the scope of our renovation here, eliminating the addition of a lobby and pool area F&B outlet to enhance the overall ROI. The $8 million expenditure at Hotel Champlain enhanced our arrival in food and beverage outlets. These opened in June, and in the last six months of the year, F&B outlet sales were up $850,000, or nearly 40% over the prior year. We need to see more from these venues. We're aiming for upwards of $1 million of incremental F&B profit in 2025. Lastly, the spa renovation in Fort Lauderdale was a $1.5 million endeavor on which we expect a very rapid payback. Looking to 2025, the redevelopment and repositioning of the orchards in Sedona is well underway, and we expect to be finished with the rooms product by summer 2025 and the new pool amenity by fall. We've spent about $10 million thus far in 2024, and the remaining $15 million will come in 2025. We expect this project will cause about $1.2 million of EBITDA disruption in the first half of the year, more in Q1 than in Q2. On a full year basis, we expect disruption will be about a half a million dollars as we expect significant year-over-year improvement when the repositioning is complete in late 2025. Finally, we are working to refine the scope of the renovation and expansion of the landing resort in Lake Tahoe to deliver a more impactful ROI, just as we did with Bourbon Orleans. There is more work to be done. We'll have an update in the coming quarters as to whether and how we're moving forward. It is important to circle back to performance of the Dagny Repositioning, a hotel we converted to an independent in August 2023. The hotel remains number two on TripAdvisor in all of Boston, up from the mid-50s when it was branded. Now, the decision to go independent was not about higher revenue, although that has been strong, up 15% in the quarter and 9% for the year. The decision was about expense control to drive profitability. Our thesis was that the brand contribution was simply too expensive and we could match or improve profits as an independent while enhancing value with an unencumbered property. I'm pleased to report Hotel Ibita, the Dagny, was up 90% in the quarter and up 40% for the year to $14 million, surpassing our 2024 budget by $2 million. We're looking for more of these opportunities. So let's talk about our recent sale in Washington, D.C. We closed the 410-room Westin for $92 million, which equates to about a 7% trailing NOI cap rate, or 12 times EBITDA. We intentionally managed the marketing to capture the post-election bidding excitement and timed closing to capture the inauguration benefit. We've been fortunate to avoid the uncertainty that has since overtaken the Washington DC market. The hotel performed better than expected last year. Several hotels in the brand family renovated in the past year, and we were able to draft off their associated average daily rate increases. I'm disappointed I could not return more of the capital that was invested in this hotel, but I am very pleased with the proceeds our team realized and the very real brand-mandated renovation we avoided. We anticipated the room renovation may have surpassed $30 million. A lobby atrium renovation could have pushed this figure meaningfully higher. Given the market dynamics in Washington, D.C., and especially the sub-market, We felt the incremental investment could have been wasted and not produced a return on your capital. That is why I believe our free cash flow yield cap rate on sale is closer to 5% if not lower. We are not collectors of hotels. They are merely the medium through which we are investing. We are here to invest, harvest, and reinvest your capital. Our job is to do this again and again to drive total shareholder return or return capital to you if we cannot. Today, the pool of external growth opportunities is not particularly deep. Lenders are making it easy for undercapitalized owners to continue kicking the can down the road unless they receive an unrealistic price. We will continue to look at our portfolio for opportunities to prune hotels where we feel we can realize attractive pricing. Given our source of funds, our common shares, preferred equity, and in some cases even our debt are among the most accretive options for deployment today. Let's get to our outlook for 2025. We expect REVPAR to grow 1 to 3 percent for the year. Total REVPAR growth is expected to be in line with REVPAR growth. Our group pace continues to improve with group revenue for the year up about 2 percent, which is about a 500 basis point improvement in our 2025 pace since our third quarter call. In the first half of the year, group pace is up in the mid to high single digits. The headwind to our year-over-year group pace is found at the Chicago Marriott. Recall, the Chicago Marriott benefited from the Democratic National Convention in August of 2024 and a strong calendar throughout the back half of 2024, a victim of its own success. As an interesting data point, if we exclude the Chicago Marriott from just the back half of 2025, Diamond Rock's comparable full-year 2025 group revenue pace increases close to 400 basis points to nearly 6% from just under 2%. Now, it's still early, but large group sales is where Marriott excels. Since the end of the third quarter, we've seen the Chicago Marriott's revenue pace in the second half of 2025 increase by over 1,500 basis points, so we're optimistic we'll narrow this gap. Looking ahead to 2026, Company-wide revenue pace is up 15% on strong room demand and rate growth, so we remain very encouraged. On the resort front, we remain cautious. We expect leisure will continue to see headwinds due to a combination of known issues, such as the value proposition of foreign destinations, and new concerns, such as the resurgence of inflation and job uncertainty. Overall, our guidance expects continued softness and leisure, and in the first quarter, we expect Florida markets we'll see mid-single-digit rep-par declines. As I mentioned earlier, we expect to see about $1.2 million of EBITDA disruption at the orchards in the first half of the year, but we expect to get back all but about half a million dollars by the end of the year. Continuing with guidance, 2025 corporate adjusted EBITDA is expected to be in the range of $275 to $300 million. Adjusting for the net impact of the AC Minneapolis acquisition and the Weston DC sale, as well as the removal of share-based compensation, 2025 adjusted EBITDA is slightly behind 2024 at the midpoint. As Bryony mentioned, we have a bit of financing work to do in 2025, and included in our guidance is the assumption we will execute some combination of a corporate debt issuance, credit facility recast, and possibly a mortgage loan on a hotel. Adjusted FFO is expected to be in the range of $199 to $224 million, and adjusted FFO per share is expected to be in the range of $0.94 to $1.06. In conclusion, our focus is on increasing earnings per share. One aspect of that means focusing on free cash flow per share, that is, FFO after normalized capital expenditures and dividends. The more free cash flow Diamond Rock can preserve and create, the more we can return to shareholders through share repurchases, dividends, and to reinvest to generate higher earnings. I encourage folks to consider FFO and free cash flow metrics in their valuation assessment of the sector. The disparity between portfolios is most evident in balance sheets and physical asset conditions, so it's important to consider the financial metrics that reveal these differences instead of focusing on metrics that ignore them, such as EBITDA. With that, I will thank you for your time, and we'll take your questions.