Diamondrock Hospitality Company

Good day, and thank you for standing by. Welcome to the Diamond Rock Hospitality Company first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, we'll open up for questions. 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 call is being recorded. I would like to hand it over to our first speaker, Brian McQuinn, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to Diamond Rock's first quarter 2026 earnings call and webcast. 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 are pleased to report that first quarter results exceeded our expectations. This was a tough quarter as we comped over our strongest revenue growth from last year, particularly in the group segment, and faced disruptive weather challenges in several markets. Despite those headwinds, the portfolio performed better than anticipated. Comparable rev par increased 2%, and total rev par increased 2.5%. With hotel operating expense growth of less than 1%, we delivered corporate adjusted EBITDA of $60.6 million and adjusted FFO per share of $0.22. Our FFO margin increased an impressive 225 basis points this quarter. On a trailing 12-month basis, our free cash flow per share was $0.75, increasing 19% year over year. Starting with the top line, the comparable Rev Park growth of 2% exceeded our outlook of a flat quarter and improved sequentially in each month. Occupancy in the quarter declined 30 basis points, while ADR increased 2.6%. As expected, our resorts outperformed our urban hotels. However, the magnitude of that outperformance was wider than we had anticipated. By customer segment, Transient outperformed with revenues up 2.1% on improving demand and rate. Group revenues were down 0.8%, driven by softer demand early in the quarter. For the fourth quarter in a row, our guests continued to spend once on property across our restaurants, spas, and other retail outlets. Total REVPAR grew 2.5%, outpacing REVPAR growth by 50 basis points. and out-of-room revenue per occupied room climbed 4%, right in line with the trend we saw through most of 2025. That tells us two things. Our guests have the spending power, and our out-of-room offerings are giving them good reasons to use it. And for further context, out-of-room spend per occupied room at our resorts averaged $320 per night, more than three times what we saw across our urban portfolio. RevPAR at our resorts increased 3.6%, with total RevPAR growth modestly higher, outperforming the urban portfolio on both measures. We've been saying that our resort portfolio was due for an inflection in 2026 after three years of trailing the urban portfolio's accelerating growth. If you think back, our resorts were actually the first to bounce back from the pandemic, but then lost momentum as international outbound travel picked up and domestic leisure trends normalized through 2024 and 2025. Even so, RevPar at our comparable resorts is up more than 20% from 2019 levels, compared to high single-digit growth at our urban hotels. We remain constructive on the trajectory of our resort portfolio this year. In Sedona, the completed renovation and full integration are translating to both top line and profit. The property was under renovation in the first quarter of last year, but if you compare the most recent quarter against first quarter of 2024, total REVPAR is up over 23% and hotel EBITDA is up 67%. The property generated a 37% EBITDA margin. the highest first quarter margin in its history, driven by diversified revenue streams, rates matching their views, and the execution of creative cost efficiencies. In our urban portfolio, REVPAR increased 0.9%, and total REVPAR increased 1.6% in the first quarter. January and February were modestly negative, while results in March meaningfully accelerated. The strongest urban rep bar growth came from Hotel Emblem in San Francisco, the recently renovated Hilton Garden in Times Square, the Denver Courtyard, and the Hotel Clio in Denver, all of which posted double-digit gains. We've been tracking how our hotels with average daily rates above $300 stack up against the rest of the portfolio over the last several quarters, and the story is pretty compelling. When you consider that our guest average total bill runs about $450 per night, with several properties averaging over $1,500, it's clear we're serving a predominantly higher-earning customer base. That strength at the higher end is showing up in the numbers. Over the past three quarters, our $300-plus hotels have outpaced the rest of the portfolio by 290 basis points in total rent part. 1,200 basis points in EBITDA growth. Simply put, robust spending from this segment and our ability to turn it into earnings has been a real engine for the company's growth. Turning to expenses. Right-sizing expenses for the demand environment remains a key focus for our team. During the quarter, total hotel operating expenses increased 0.8% on total revenue growth of 2.5%. resulting in a 127 basis point improvement in total EBITDA margins. This is our portfolio's largest quarterly margin improvement since the fourth quarter of 2024, and is 275 basis points higher than the margin achieved in 2019. Wages and benefits, which represent nearly half of our total expenses, increased just 0.7% during the first quarter. reflecting continued productivity gains. Looking back to 2025, total operating expenses on a per-occupied-room basis increased 2% during the year. This quarter, our expenses were up less than 1.5% on a per-occupied-room basis, a very disciplined start to the year. Before I turn to the balance sheet and capital allocation, A quick update on our group results in the first quarter and how our pace is shaping up for the rest of 2026. Group room revenues declined 0.8% in the quarter, with rates up 3.5%, but room nights down 4.2%. Winter storms in the eastern U.S. and limited snow in our ski markets negatively impacted group travel in January and February. We are encouraged by our hotel's group pickup for the remainder of 2026, particularly in Vail, greater San Francisco, Chicago, and Fort Lauderdale. Since our last call, our group revenue pace for the year has improved more than 100 basis points, with pickup in each quarter. Following a hard-earned new peak in group revenues in 2025, we are trending toward another record year for the portfolio. Turning to the balance sheet, our capital structure remains simple and conservative. We have no debt maturities until 2029, no secured or convertible debt, no preferred equity, and no off-balance sheet encumbrances. All of our debt is fully prepayable. Our leverage sits on the lower end compared to peers, and that is by design. In a cyclical business, we think having the optionality and flexibility to pursue growth when the right opportunities come along is key. We paid a common dividend of $0.09 per share for the first quarter and expect to declare quarterly dividends of $0.09 per share for the remainder of the year, with the potential for a fourth quarter sub-dividend based on full-year results. Our payout ratio remains below historical levels as we continue to utilize net operating losses to offset our taxable income. As those net operating losses are utilized over the next few years, we expect our payout ratio to increase. We are currently under contract to sell one hotel and anticipate the closing to occur during the second quarter. Proceeds are expected to be used for general corporate purposes, which could include opportunistic share repurchases. Jeff will provide additional context on this transaction in his remarks. I'll conclude today with our updated outlook for 2026. We are raising our 2026 REVPAR guidance by 50 basis points to 1.5% to 3.5%, with total REVPAR 25 basis points higher, which is unchanged from our prior outlook. Our adjusted EBITDA guidance is now $296 million to $308 million, a 2.5% increase at the midpoint. and our adjusted FFO per share guidance is now $1.12 to $1.18. The increase to our guidance reflects the stronger than expected first quarter operating performance, as well as the benefit of a more favorable renewal of our insurance program on April 1 than we had anticipated. This is the third consecutive year we have achieved meaningful year-over-year reductions in our premiums. In aggregate over three years, we have reduced premiums by just under 40%, With anticipated capital expenditures of $80 to $90 million this year, our RAISE guidance implies 7% growth in free cash flow per share. With that, I'll turn the call over to Jeff.

Thanks, Ronnie, and thank you for joining us this morning. Earlier this week, we celebrated Bill McCartan as he retired from the board and his role as chairman after more than two decades of leadership. Bill's integrity and commitment to doing what is right will have an enduring impact on Domino Rock. We also welcomed Bruce Wardinsky to his first board meeting as our new chairman. We look forward to the perspective and leadership he will bring as we execute our strategy. Nearly two years ago, we launched Diamond Rock 2.0, and since that time, our shares have delivered the strongest returns in the lodging REIT sector, outperforming peers by roughly 2,700 basis points and broad equity REIT indices by more than 500 basis points. And we believe we are just getting started. Diamond Rock's ability to drive the financial results behind our outperformance stems from deliberate and foundational decisions we have made in the past two years. First, culture. We've worked to build a culture of excellence where teams are encouraged to challenge assumptions and work collaboratively towards superior outcomes. We've also strengthened the organization with added expertise across IT, legal, capital markets, design and construction, and accounting. Second, We align compensation with total shareholder returns, not just at the executive level, but across the entire organization. The goal is straightforward. Our team benefits only when the shareholders benefit. This alignment and empowerment has slashed turnover and improved execution. Third, we invested in our infrastructure. We implemented new accounting and enterprise analytics platforms to amplify the strength of our asset management and accounting teams and to accelerate the use of AI-enabled tools across the organization. We took a comprehensive approach to simplifying the organization, modernizing corporate policies, shrinking the board, relocating our offices, and moving our listing to NASDAQ. The outcome is a leaner G&A structure with a headcount per hotel ratio that remains about 50% below the peer average. Taken together, These actions have helped make Diamond Rock more efficient, more disciplined, and more focused on how we allocate capital. We're proud of the progress the team has made, and we're committed to earning your confidence through consistent execution. Last quarter, I walked through our five-year capital expenditure plan and our intent to recycle capital within the portfolio. Today, I'll build on that discussion with an update on the Westin-Boston Seaport District, and then close with our outlook for 2026. The existing franchise agreement for the Westin Seaport expires on December 31st, 2026. We viewed this as a meaningful value creation opportunity, and beginning in 2025, we ran a comprehensive process to evaluate brand interest in representing Boston's premier convention hotel. We appreciated the level of interest and the creativity and flexibility we saw from brands throughout the process. After evaluating the proposals, we concluded that reinforcing the Westin brand's superior position in the seaport would minimize disruption and create the greatest near, medium, and long-term value for shareholders. While we can't disclose the specific economic terms, given the strength of our balance sheet, we elected not to pursue a key money loan. The decision to avoid that expense of capital helped us stay focused on the fundamentals that matter most to shareholder value creation, the fee structure, the renovation scope and timing, and contract duration assignments interminability. Value creation begins with the commencement of the new agreement on January 1st, 2027. And as with all major capital decisions, we approach this with a focus on cash flow, flexibility, and risk-adjusted returns. With respect to the five-year capital plan we shared last quarter, importantly, our guidance remains unchanged. We continue to forecast investing 7% to 9% of annual revenue across the portfolio or about 80 to 100 million dollars per year in each of the next five years. The renovation of the Weston-Boston Seaport District was already contemplated in our prior guidance as an internally funded project. The key takeaway here is we are working to provide greater transparency and consistency. Generating attractive risk-adjusted returns is central to our capital allocation philosophy. We deploy capital across both ROI-driven initiatives and more traditional cycle renovations. Each plays an important role, but they sustain and create value in different ways. In that vein, I want to provide an update on two recent ROI projects. The first is the Dagny in Boston. With a franchise agreement for the Hilton Boston downtown Faneuil Hall approaching expiration in 2022, we began evaluating long-term alternatives in 2020. We narrowed our options to remaining within Hilton or for an incremental $5 million, deflag and reposition the hotel as an independent property. We chose independent positioning because we are confident that even if we initially seeded ground on the top line, we could still drive higher profits through operating cost savings. The underwrote EBITDA would exceed $16 million in 2027 versus the $10 million earned in 2023. But how are we doing? We delivered $15.5 million in 2025 and we're not finished yet. so we are comfortable this ROI project will be ahead of underwriting. The icing on the cake is unencumbered hotels regularly achieve a 15% to 20% valuation premium to comparable brand encumbered products. So our repositioning has created value through earnings and asset value. The second example is LaBerge de Sedona. In the third quarter of 2025, we completed the renovation of the Orchards Inn and fully integrated its operations within our adjacent luxury resort, La Berge. While Orchards enjoyed some of the best views in Sedona, it was operating as a mid-scale product with a premium location and a luxury resort market. Our strategy was to unlock that untapped value. By upgrading the room product and creating more connectivity between the two hotels, we were able to transform the properties in a cohesive luxury destination in a supply-constrained, highly rated market. We invested approximately $25 million and underwrote stabilization at a 10% EBITDA yield. Early results have exceeded our expectations. In the first two quarters following integration, revenues increased nearly 25% and EBITDA increased 55%. This project exemplifies our discipline. We right-sized the investment focused on operational excellence throughout the project, and conservatively underwrote its potential returns with upside preserves for our shareholders. And let me remind you, 2026 was not underwritten as Lobarish's year of stabilization. We prefer to consistently hit singles and doubles rather than hope for a home run on a complex, capital-intensive, and disruptive multi-year project. That said, when we look back, I expect we'll call Lobert's Diamond Rocks version of a home run. Our ability to execute consistent, cost-efficient, and impactful CapEx spending is a result of several unique portfolio traits, including a strong competitive position, unsecured capital structure, young portfolio age, and a high percentage of independent and third-party managed hotels. This gives us control over scope and timing. While we highlight four or five larger projects each year, our in-house design and construction team is actually executing on more than 400 individual projects this year alone, from elevator modernizations that reduce service calls to reconfiguring outlets to add seating and drive revenue, and room renovations to enhance guest appeal and housekeeper productivity. The effectiveness of our capital spending will ultimately be reflected in our long-term free cash flow for share growth. We view our capital program as a core differentiator that originates from our portfolio construction and is a key reason Diamond Rock is a free cash flow per share growth story. Turning to capital recycling, as we noted last quarter, we expect to be a net seller of hotels in 2026. We are under no pressure to sell, but we believe we can accretively recycle capital within the portfolio. Transaction markets are stronger than a year ago, And though recent geopolitical events have slowed the pace of some discussions, ongoing engagement has continued. We are currently under contract to sell one hotel. We have a non-refundable deposit and expect the transaction to close in the second quarter. At that time, we will be able to discuss the factors that informed our wholesale decision. We continue to place more lines in the water than in past years. Not every process will result in a transaction. We will only sell assets when, all else equal, recycling reduces risk or drives free cash flow for share growth over the medium to long term. ROI projects and share repurchases remain a compelling use of proceeds, but we have underwritten a few external opportunities that could be nearly as additive. These range from modern urban hotels with brand availability to experiential assets and supply-constrained resort markets. We have nothing to announce today but trust that our focus is on accelerating our free cash flow for share growth and reducing risks to long-term performance. Turning to our outlook for 2026, we entered the year knowing the first quarter would be our toughest comp of the year. Despite that hurdle and the incremental headwind created by poor weather conditions, the portfolio was able to rebound in the second half of the quarter and delivered stronger than expected revenue growth and expense efficiencies. As we look ahead to the remainder of the year, we benefit from easy comps created by Liberation Day and the longest federal government shutdown, a favorable holiday calendar, outsized exposure to FIFA World Cup post markets, American 250 celebrations, and successful renovations. While it is early, we are not seeing a reticence for guests to take to the road this summer. For example, portfolio revenues on Memorial Day weekend are pacing up in the mid-single digits. Our FIFA World Cup post-market hotels have experienced increased demand at elevated rates, but we don't expect to see activity accelerate until we're much closer to the event. As a reminder, our hotels have budgeted for 20 basis points of annual rev par growth from the games. We're seeing a similar booking pattern emerge around America 250 celebrations. Rates for early bookings have been strong, up double digits, but the pace at our urban hotels has been tepid. As citywide July 4th programming comes into focus, we expect the pace of bookings to improve. Our resorts, however, are currently seeing more activity than our urban hotels over the July 4th weekend. We are excited to reap the benefit from the hard work our team put into renovations last year. Among these renovations, the returns generated by La Verge de Sedona are expected to be the most material, driving at least a 50 basis point tailwind Diamond Rocks Rep Park growth rate in 2026. All in, we now expect our 2026 RevPAR to increase 1.5% to 3.5%, a 50 basis point improvement from last quarter, with total RevPAR growth outpacing RevPAR growth by 25 basis points. By right-sizing expenses for demand and maintaining a disciplined capital expenditure program, that 2.5% RevPAR growth at the midpoint should again drive Diamond Rock to a new peak FFO in 2026, We also expect to generate 7% in free cash flow per share growth for our shareholders this year. This would mark over a 30% cumulative increase in the past three years. We appreciate the trust you place in us, and we look forward to building on each successive peak. Thank you for your time this morning, and we are happy to answer your questions.