Diamondrock Hospitality Company

quarter 2025 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 again. Please be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to the EVP, Chief Financial Officer and Treasurer, Bryony Queen. The floor is yours.

Good morning, everyone, and welcome to Diamond Rock's first quarter 2025 earnings column 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 that our results for the first quarter were largely in line with our expectations. Comparable REVPAR increased 2% over 2024 and total REVPAR increased 1.6%. Our urban footprint was the primary driver of the portfolio's REVPAR growth, up 5% on a strong contribution from both the group and business transient segments. The growth was steady throughout the quarter, with room revenues up 3.1% in January, up 2.6% in February, and up 5.4% in March. Food and beverage revenue at our urban hotels declined 3.3% year over year. This was mainly due to the Chicago Marriott's exceptional in-house group programs with more extensive food and beverage contribution last year, compared to this quarter, where there was a larger proportion of citywide rooms-only group with limited in-house food and beverage spend. If we exclude the Chicago Marriott, food and beverage revenues at our urban hotels increased 5.5% instead of declining 3.3%, an 880 basis point swing. In anticipation of the question, total RevPAR growth excluding the Chicago Marriott was 2.5%, for about 90 basis points higher than the reported 1.6% growth for the entire portfolio. Total expenses in our urban portfolio increased 2.1% on a 1.5% increase in wages and benefits. Hotel adjusted EBITDA margins increased 54 basis points. Switching to our resort portfolio, comparable rev par declined 2.1% over 2024 and total rev par was down slightly, just 40 basis points. Total revenues were up slightly in January and February, 0.4% and 0.9% respectively, but declined 4.3% in March. Drilling into March, our resorts were largely flat through the first three weeks of the month, similar to January and February, but in late March when we hit the comparison to Easter week in 2024, we experienced sharp year-over-year declines, supporting that much of the softness was driven by the calendar shift. Consistent with our comments on last quarter's call, we saw mid-single-digit revenue declines at our Florida assets, with first quarter rev par down 5.9% and total rev par down 4.0%. Outside of Florida, where our resorts skew a little more luxury, REVPAR increased 1.7% and total REVPAR increased 2.9%. For example, the Heights and Vail enjoyed a great ski season and saw REVPAR increase 7% and total REVPAR increase 9.5%. The margin story at our resorts is important and bears highlighting. We had great success managing costs in the face of top-line softness to preserve profitability. We reduced overall expenses by 2.4% compared to 2024, expanding our hotel adjusted EBITDA margin by 76 basis points to 32.5%. Group remained our strongest segment in the first quarter, as it did throughout 2024. First quarter group room revenues increased 10.4% over last year on a 5.2% increase in room nights. At our urban hotels, group revenues increased 14.4% on a 5.9% increase in room nights. We remain focused on adding groups to our resorts to build a base that will preserve pricing and improve profitability. Although group lead generation remains strong, the closure rates have been softer recently as event planners have been slow to make a final decision due to the unsettled macroeconomic environment. As of the end of the quarter, our booking pace for 2025 continues to be up slightly versus the same time last year. Turning to profits, hotel adjusted EBITDA in the first quarter was $61.3 million, reflecting 2.2% growth over 2024 on a margin that was 39 basis points higher. Corporate adjusted EBITDA was $56.1 million flat the last quarter. An adjusted FFO was $0.19 per share, $0.01 or 5.6% over 2024. Finally, free cash flow per share in the trailing four quarters, calculated as AFFO less CapEx, increased 10% to $0.63 per share over the prior four-quarter period. Before I turn the call over to Jeff to discuss recent events, our updated outlook and strategy, let me touch on our dividend and our balance sheet. I want to reiterate that we intend to continue to pay an $0.08 per share quarterly dividend in 2025, and depending on our 2025 operating income, an additional stub dividend for the fourth quarter. Turning to the balance sheet, during the quarter, we repurchased 1.4 million shares of common stock at an average price of $7.85. We continued repurchases following quarter end, bringing the year-to-date total to approximately $16 million or 2.1 million shares. The average price equates to a trailing capitalization rate of a little over 10%. We have approximately 160 million of capacity remaining on our share repurchase authorization. Finally, we have three mortgage loans totaling just shy of 300 million, maturing in 2025, at a weighted average cost of approximately 4.2%. We also have a $300 million term loan maturity in early 2026 that as of quarter end had an average cost of approximately 5.8% or 135 basis points over SOFR. 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. At the current time, we believe a recast and upsize of our corporate credit facility is likely the most economical option for us to address our loan maturities. And this is factored into our updated 2025 guidance that Jeff will discuss. This updated assumption lowers our interest expense outlook by approximately $3 million. On that note, I'll turn the call over to Jeff.

Thanks, Bryony, and thank you for joining us this morning. Let's start by reviewing capital projects, then transactions, and I'll conclude with comments on what we're seeing and how that drives how we're thinking about the rest of the year. First off, recall that we completed guest room renovations at the Westin San Diego Bayview in early 2024. REVPAR in the first quarter was up 28% against a competitive set that declined 8%, and NOI increased 65% year over year. We're looking to close out this project with minor changes to the lobby configuration to improve F&B potential by expanding the seating area and potentially offering a grab-and-go option. At Bourbon Orleans, we concluded a room renovation in late 2024 that supported implementation of a resort fee. In the first quarter, other income increased over $200,000, or 90%, versus first quarter 2024. For the year, we are forecasting a $1 million increase in high-margin other income at the Bourbon, implying a mid-teen current yield on renovation costs. In the first quarter, we completed the room refresh at the Hilton Garden in Times Square, and the product looks great. This is the first time the rooms have been refreshed since the hotel was constructed in 2014. RevPar was down by over 16% due to displacement, and we saw a $500,000 impact to EBITDA. In a market that runs close to 90% occupancy, the first quarter is the most cost-effective window to execute such work, and our team did a great job executing here on time and on budget. Turning to Sedona, the renovation of our rooms at The Orchards is complete, and we are beginning the process of rebranding this property as The Cliffs Sedona. In fact, aerial photos on the website, thecliffssedona.com, We'll give you a good view of our location in the heart of Sedona and highly desirable views of the Red Rocks visible from every room of the hotel. All that remains is for the hillside work to be completed. This will create a new pool and bar area with stunning views of the Red Rocks and connect the Cliffs Hotel to our Loberge de Sedona that sits below on a shaded creek. Construction is well underway and will be completed by fall 2025. We are very excited about the repositioning opportunity and believe it will be an earnings and value driver. On the disposition front, we previously announced the sale of the Westin D.C. City Center Hotel for $92 million during the quarter, which equated to close to a 5% trailing cash flow yield after CapEx. A portion of these proceeds were accretively recycled into repurchasing common shares at an average price of better than a trailing 10 cap rate. We continue to pursue opportunities to dispose of non-strategic assets, as well as opportunistic dispositions, all with a focus on recycling proceeds into the most attractive investment alternatives. There is nothing we can comment on at this time, but we hope to be able to share more soon. On the transaction front, there are a good number of high-dollar resorts on the market, with prices ranging from $500,000 to as much as $2 million per key. All-in pricing after CapEx is in the range of 5.5% to about a 7% cap rate. Given our source of funds, our common shares, preferred equity, and even our debt are among the most accretive reinvestment options today, but we are always actively looking for accretive recycling opportunities. Before I get into guidance, let's talk about what we are seeing real time. On the resort front, RevPAR growth was up about 1% in January, 4.4% in February, and flat through about the first three weeks of March. It was only in the final days of March when the resorts were comparing against Easter week 2024 that we saw REVPAR decline. Fast forward to mid-April, and we saw a significant year-over-year REVPAR spike at the same properties for Easter week 2025. Moreover, the transient pickup for the second quarter remains consistent with last year. The point is that much of the choppiness seen thus far at our resorts seems to originate from holiday shifts and not the coincidental timing with negative macroeconomic headlines. Looking ahead, an unsettled economy may lead to more demand at the drive-to resorts common in our portfolio versus costly or fly-to destinations. Our direct exposure to foreign travelers is low, Nevertheless, foreign visitation to the U.S. will likely be softer than initial expectations, and it is not clear whether the incremental demand from U.S. travelers will be sufficient to backfill this potential gap. Currently, we are not seeing a meaningful shift in resort demand, but remain vigilant. The long-term secular drivers for U.S. resorts remain strong, but we recognize near-term performance could be soft. Nevertheless, we expect Diamond Rock's drive-to destinations will perform well in this environment. At our urban hotels, business transient demand increased in the mid-teens during the quarter and trends are encouraging. As for group, it's important to remind everyone Diamond Rock is building upon peak group room revenues in 2024. Given that backdrop, lead volume is still higher than last year. Group pickup for 2025, or in the year for the year bookings, increased in January and again in February, but we saw a pause in group pickup as we moved into the end of March. It is that pause, that deceleration in our lead conversion, leading us to a more cautious stance on the back of 2025. The optimistic view is that group demand is there, and a little more confidence in an unsettled economy will convert business leads to revenue. Considering we've seen capitulation on many aspects of the unpopular trade policies, one could argue we're already moving toward a calmer environment. The cautious view is confidence arrives too late for the industry to fully recapture its prior potential. Typically, group dependent hotels in the market grow anxious and start discounting, which leads to lower revenue creation than may have otherwise occurred. Our decision to reframe our 2025 guidance was driven by healthy group lead volume and business transient demand on the one hand, and the acknowledgement that a continuing pause in group pickup may make it more challenging for us to replicate the very strong group production we had in the back half of 2024. So let's get to our outlook for 2025. Our FFO per share guidance is unchanged at a range of 94 to $1.06 per share. We revised our full year 2025 RevPAR outlook to a range of minus 1% to plus 1% growth or about 200 basis points lower than our prior range. Total REVPAR growth is expected to be the same in the minus one to plus 1% range. The lower and upper bound of our new full year range assumes REVPAR for the remaining three quarters of the year is down less than 2% at the low end and slightly positive at the high end. 2025 corporate adjusted EBITDA is expected to be in the range of 270 to $295 million. or $5 million lower at the top and bottom than our previous guidance. This places the midpoint at $282.5 million. It bears noting that the revision includes the benefit of a $3 million savings on our insurance placement. As Brownie mentioned, we have a bit of financing work to do in 2025, and included in our guidance is the assumption we will execute a credit facility recast to address near-term debt maturities. Adjusted FFO is expected to be in the range of $198 to $223 million, or $1 million lower than prior guidance. Adjusted FFO per share is expected to be in the range of $94 to $1.06, which, as I said earlier, is unchanged from our prior guidance in part because of the share repurchases, as well as the flexibility our liquidity affords us to allow to pivot on our debt refinancing plans. In closing, the outlook is cloudy. Underlying trends were obscured rather than illuminated by the short-lived Doge days of spring coinciding with holiday shifts only to be immediately followed by the somewhat ironically named Liberation Day. It is my personal view the Trump administration will continue to soften their policies to settle the economy and improve the re-election potential of congressional Republicans in 2026. For this reason, I'm cautiously optimistic we'll see economic anxieties settle as we move through 2025. Regardless of the future path, increasing earnings per share remains our focus. Our greatest investment during the quarter, aside of course from the exciting work in Sedona, was the repurchase of our common shares and we will continue to lean in on opportunities to continue to prudently grow earnings and create value while preserving flexibility. Thank you for your time this morning and we'll be happy to answer your questions.