Diamondrock Hospitality Company

Good day and thank you for standing by. Welcome to the Diamond Rock Hospitality Company second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to your speaker today, Brian E. Quinn, Chief Financial Officer.

Good morning, everyone, and welcome to Diamond Rock's second quarter 2025 earnings call and 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. Comparable RevPAR growth in the second quarter was 0.1%, driven by a 1.1% increase in rate and an 80 basis point decline in occupancy. RevPAR was negatively impacted by approximately 50 basis points due to our ongoing conversion of the Orchards Inn in Sedona to the cliffs at La Verge. Total RevPAR growth was 1.1%. as a result of a 4.2% increase in out-of-room revenues per occupied room, a notable acceleration from the first quarter and exceeding our expectations. In fact, out-of-room spend reached a new quarterly high of $160 per occupied room. During the quarter, the portfolio's group room revenue increased 0.8%, business transient revenue increased 4.2%, and leisure transient revenue declined 1.6%. Food and beverage was a bright spot in the quarter, both on the top and bottom line. F&B revenues increased 3.1%, with gains in both banquets and catering and outlets. While we were pleased with top-line performance, we are even more proud of the flow-through. F&B profit increased over 6%, or twice that of the revenue growth, and margins increased 105 basis points. Our asset management team has worked hard to re-engineer menu pricing, reconsider portion sizes, and refine outlet operating hours to maximize productivity. Turning to overall expenses, we are incredibly proud of how our operators managed costs this quarter. Excluding a larger than expected property tax increase in Chicago, our operating expenses increased only 0.7% on 1.1% revenue growth, with wages and benefits increasing 3.1%. Factoring in the portfolio's full 2.6% expense growth, hotel EBITDA margins contracted 97 basis points. However, excluding the Chicago tax increase, margins would have increased 30 basis points. Corporate adjusted EBITDA was 90.5 million, and adjusted FFO per share was 35 cents. Finally, free cash flow per share for the trailing 12 months, calculated as adjusted FFO, less CapEx, increased approximately 4.5% to 63 cents per share. I'll now highlight the results of our urban hotels and our resorts for the quarter. Our urban portfolio, which accounts for just over 60% of our EBITDA, achieved 3% REVPAR growth in the quarter. April was the strongest month with 4.6% growth. However, with increased uncertainty stemming from Doge and tariff announcements, we saw the pace of REVPAR gains slow to 1.6% by June. Nevertheless, rate growth held steady at approximately 2.5% over the quarter. The strongest RevPar growth in the quarter was achieved by our hotels in San Francisco, San Diego, New York, Boston, and Chicago. Total RevPar growth at our urban hotels was 100 basis points stronger than RevPar growth, with food and beverage revenues up over 5%. Total expenses in our urban portfolio increased 5.7%. However, excluding the property tax increase in Chicago, total expense growth was just 2.5%, implying margin growth of approximately 95 basis points versus the 104 basis points decline reported. In our resort portfolio, comparable rev par declined 6.3% and total rev par declined 3.9%. The opening of the redeveloped orchards in Sedona, now known as the Cliffs at La Berge, was delayed by 12 weeks while we waited for the city to issue a certificate of occupancy, and thus weighed on the resort portfolio performance. Excluding the cliffs, our resort's comparable revpar and total revpar declined 4.7% and 2.7%, respectively. Similar to the urban portfolio, we saw softer performance in our resorts subsequent to April. However, out-of-room spend was less impacted than revpar in each month of the quarter. Our resorts in Florida experienced a 4.1% RevPar decline, an improvement from the decline reported in Q1. Out-of-room spend per occupied room increased an impressive 6.7%, resulting in a total RevPar decline of just 0.6%. Tight cost controls translated to nearly flat hotel EBITDA margins for these resorts. As a reminder, our Florida resorts experienced an early demand recovery coming out of the pandemic, and therefore experienced larger labor cost gains at that time, before settling into the lower, more stable increases experienced today. Outside of Florida, resort rev par performance varied. Chico and Sonoma were up in the mid single digits. However, the hyphen sale was down 23% as it benefited from a large in-house group last year. Looking into the third quarter, we expect our total portfolio REVPAR to decline in the low single digits and that expense growth will remain low. Group room revenues across the portfolio increased 0.8%, with rates up 3.3% and room nights down 2.5%. When we entered the year, our group pace for 2025 was up approximately 1%, coming off the strongest group revenue in our company's history. We have been highlighting for several quarters now that our success in the second half of 2024 would present difficult comparisons for the same period in 2025. As of August 1st, our group revenue pace for 2025 is still up approximately 1%, but what you can't see is the re-acceleration we have delivered from a 20 basis point deficit just one month ago, created by post-liberation day pressures. Our group lead volumes improved throughout Q2, an encouraging statement about underlying demand. However, our conversion rate has yet to re-accelerate, highlighting the continued reticence to commit in an uncertain environment. We are pleased that our hotels have a strong setup for 2026, with group revenue pace currently at 12%. As a reminder, group typically accounts for approximately 30% of our portfolio's revenue. Turning to the balance sheet, in July, we successfully refinanced, upsized, and extended the maturities under our senior unsecured credit facility, increasing its size to $1.5 billion from $1.2 billion with our pricing grid unchanged. Following the repayment of mortgages on the Worthington Renaissance and Hotel Clio in May and July, respectively, we have one remaining mortgage on the Westin Boston Seaport which we intend to prepay in early September with the incremental proceeds from our new credit facility. At that time, we will have no assets encumbered by secured debt, no debt maturities until 2029, including our extension options, and all of our debt will be prepayable at any time without cost or penalty. We greatly appreciate the unwavering support of our lending partners throughout this process. We have declared or paid a quarterly common dividend of $0.08 per share to date this year, and depending on our 2025 taxable income, may declare an additional sub-dividend for the fourth quarter. Once again this quarter, we took advantage of the disconnect in our share price and repurchased just under 1.7 million common shares at an average price of $7.46. Since the end of the quarter, we have continued to repurchase shares, resulting in 3.6 million shares repurchased year-to-date for 27.3 million at a cap rate of just under 10%. We have 146.8 million of capacity remaining on our share repurchase authorization and continue to view repurchases as one of our best uses of capital in this environment. With that, I'll turn the call over to Jeff.

Thanks, Bryony, and thank you all for joining us this morning. Before I begin today, I want to take a moment to congratulate our team and our founder and chairman, Bill McCartan, on Diamond Rock's 20th anniversary, which we celebrated in June. I am grateful for the energy and passion our people bring to Diamond Rock, and I am genuinely honored to work with this best-in-class team. I want to focus my comments today on how we intend to drive outsized free cash flow per share growth over the medium term, the current transaction environment, our ROI projects, near-term value creation opportunities, and lastly, the building blocks of our 2025 outlook. We believe REITs that drive among the strongest earnings and free cash flow per share growth should be rewarded with leading total shareholder returns. Yes, lodging is more volatile than other property sectors that benefit from long-term leases that can mask their underlying volatility, but that does not mean we cannot strive for competitive per share growth on average over time. To achieve this end, the following is what you should expect from DiamondRock. recycling out of low free cash flow yield hotels into higher yielding investments, capitalizing on opportunities to dispose of assets where buyers see greater value than we do, reinvesting in our assets when and where outsized ROIs exist, not just outsized RevPar growth, thoughtfully stretching the renovation lifecycle, especially when asset quality and operating performance do not warrant refreshment, and reinvesting in ourselves through share repurchases when a valuation disconnect exists. As you'll remember, historically we have spent 20% less per key on capital expenditures. The age and condition of our portfolio has and should continue to benefit our CapEx decision, giving us a relative advantage. In office or retail properties, outsized tenant allowances can be employed to drive premium rents, but that does not mean it is always a sensible use of capital to do so. Similarly, Revpar and EBITDA, too, can be arguably bought through excess capital investment. Earlier, Bryony shared our free cash flow per share results. I encourage folks to incorporate after-CAPEX metrics into your valuation framework to understand whether stewards are earning an appropriate return on your capital. With respect to the transaction environment, not much has changed since our last call. There continues to be Interesting acquisition opportunities, however, sellers generally remain unpressured and patient. Over the last few months, our underwriting has leaned toward group and leisure-oriented resorts as well as distressed urban properties. Asking cap rates on these resorts range from 7% to 9%, but after upfront capital and property tax resets are realistically 100 to 150 basis points tighter. Higher-end irreplaceable resorts are often marketed with 5% to 6% asking cap rates. In urban markets, newer, high-performing assets are asking 7% cap rates, whereas older assets requiring capital are asking 9% cap rates. Again, after initial CapEx, the going-in yields can be 100 to 150 basis points lower. In all of these cases, pricing is at a premium to where we currently trade. Accordingly, our best use of capital has been and continues to be repurchasing our shares at just under a 10% cap rate, and funding our ROI project in Sedona, which we expect to achieve a greater than 10% stabilized yield. We continue to work on asset dispositions. Our timeline was negatively impacted by repercussions of recent federal policy changes. Nevertheless, we remain focused on accretive recycling opportunities. While we do not typically put a timeframe on such transactions, we expect to be more active over the next 12 to 24 months than we have been historically. Turning to our internal investment projects, Last year, we had six hotels with staggered renovations throughout the year, and this year we have four, again, staggered to minimize renovation disruption. The hotels under renovation last year provided solid revenue and EBITDA tailwinds for our portfolio this year, and we again look forward to a tailwind in 2026 from this year's renovations. The largest tailwind and most meaningful with respect to the value of the hotel is the roughly $25 million renovation and integration of the Orchards Inn, now known as The Cliffs. into L'Auberge de Sedona. With stunning views of the Red Rocks, the renovated rooms have been exceptionally well received by guests. The two resorts will be fully integrated in late Q3, with the new hillside pool, bar area, and event space completed at that time. Despite the elevated revenue disruption from waiting for a certificate of occupancy, transient and group bookings are now accelerating. Wedding revenues at the cliffs in this partial year are expected to more than double the full year of 2024. The cliffs alone should drive a 25 to 50 basis point tailwind to REVPAR growth in 2026. We remain quite comfortable this ROI project will achieve a 10% yield on cost upon stabilization. It is our view that renovations and repositionings with a compact scope and timeline, such as Sedona or the Dagny in Boston, are the most suitable for a public company. You should not expect us to undertake large multi-year repositionings. As for future value creation opportunities in the portfolio, our single largest opportunity to add rooms is on our more than 700 acres at Chico Hot Springs in Montana. Down the road, there are potential oceanfront residential development opportunities in Destin as well as Fort Lauderdale. Moreover, three of our franchise agreements expire between 2025 and 2027. This rare occurrence represents an opportunity to create shareholder value with little to no material capital expenditure either through a reflagging, deflagging, or even sale. The largest among the three is the nearly 800-room Weston-Boston Seaport District with an agreement set to expire in December 2026. We look forward to updating you as that process unfolds. Before wrapping up with our 2025 guidance, I'd like to provide some context around our portfolio as we sit in an operating environment that has been and is expected to continue to benefit higher-end portfolios. When compared to our full-service peers, we have the second-highest annual occupancy, the second-highest percentage of rooms with ADRs over $300 per night, the second-highest hotel EBITDA margin with the highest rooms and F&B margins this quarter, a year-to-date RevPAR index of 115, and 40% of our hotels enjoy top five TripAdvisor ranking. Now, these results were achieved with the lowest G&A per hotel, almost 40% below average, while spending 20% less per key on CapEx than our peers. Expense and capital efficiency are just as critical as top line performance. Now to our outlook. In broad strokes, our crystal ball is by no means clear, but it does feel incrementally less cloudy than it did just three months ago. The pace of federal policy shifts over the last several months have likely peaked and should moderate into midterm elections. While these shifts have been highly disruptive, and we've experienced their incremental impact on performance thus far, they have had relatively less impact on our corporate and more affluent leisure customers. We have seen this in the improving group lead volumes throughout Q2 in our higher-end portfolio, an acceleration in our 2025 and 2026 group pace in the last month, continued strength in out-of-room spend for both transient and group guests, and flat demand in July after several months of downward pressure. I'll emphasize it is early, but our operating results and forward bookings indicate we are possibly entering a more stable operating environment than we were experiencing just three months ago. We are maintaining our full year outlook for REVPAR growth of negative one to plus 1%, but we are encouraged by the increased out-of-room spending trends we experienced in Q2 and early Q3. We now expect total REVPAR growth to outperform RevPAR growth by 50 basis points in 2025, an increase from our prior assumption of inline performance. For the third quarter, we expect RevPAR to be down in the low single digits with the toughest comparisons in August. We expect our 2025 corporate adjusted EBITDA to be in the range of $275 to $295 million, up $2.5 million at the midpoint, and FFO per share to be in the range of $96 to $1.06, up one cent at the midpoint. Our projected capital expenditures are unchanged at $85 to $95 million. Our 2025 guidance does not assume we redeem our 8.25% preferred shares, which can be redeemed on or after August 31st. Our guidance does not assume the repurchase of additional common shares, which are currently at an implied 9.7% cap rate, although our upsized credit facility has provided us with the liquidity to do so, should we so choose. So thank you for your time this morning, and we'll be happy to answer your questions.