Diamondrock Hospitality Company

Welcome to Diamond Rock's second quarter 2026 earnings conference call. At this time, all participants are on 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. As a reminder, today's conference is being recorded. I will now hand the conference over to your first speaker. Briony Quinn, Chief Financial Officer, please go ahead.

Good morning, everyone, and welcome to Diamond Rock's second quarter 2026 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. We are pleased to report another quarter of strong operating performance Our business model demonstrated its earnings power as RESPAR grew 7% supported by improving trends across all customer segments, while expenses, excluding the benefit of favorable property tax appeals, increased just 1.8% due to our relentless focus on efficiency. The significant operating leverage drove our 240 basis point margin expansion and led to strong profit growth. we delivered corporate adjusted EBITDA of 107.9 million and adjusted FFO per share of 44 cents during the quarter. Our results benefited from the settlement of multi-year property tax appeals on our two Chicago hotels, which totaled 6.9 million or 3 cents per share. Excluding this benefit, our FFO margin expanded by an impressive 303 basis points and our trailing 12 months Free Cash Flow Per Diluted Share, defined as adjusted FFO, less capital expenditures, increased 27% year-over-year to $0.80. Starting with the top-line performance, comparable rev par increased 7% during the quarter, with April and May each growing approximately 5.5%, followed by 10.1% growth in June, reflecting broad-based strength across all customer segments. While the World Cup benefited several of our markets, most notably Boston and greater San Francisco, it was not the primary driver of our performance. We estimate the World Cup contributed approximately 90 basis points to our second quarter rev part growth, and we now expect it to contribute approximately 30 basis points to the full year, which is modestly above our initial estimate of 20 basis points. Group and transient revenue growth were fairly similar during the quarter, each increasing more than 6%. Group demand remained consistently strong throughout the quarter, while transient demand accelerated as the quarter progressed. Looking across the last three major holiday weekends, REVPAR growth ranged from approximately 9% to 12%, providing further evidence of healthy leisure demand. Guest spending while on property also remains healthy, Food and beverage, spa, and parking revenues each increased in a low single digit, leading to total RevPar growth of 5.6%. We continue to benefit from the relative strength of higher income consumers and their preference to spend their time and money on unique experiences. At checkout, the average guest bill exceeded $475 per day this quarter, with hotels above that level accounting for approximately two-thirds of our EBITDA. At our top five ADR hotels, the average bill exceeded $1,200 per night. Over the last year, our hotels generating ADRs above $300 have outperformed lower-rated hotels by almost 300 basis points on total RESPAR growth. We expect that trend to continue through the remainder of this year and into 2027. Strong demand is only a part of the story. Maintaining operating discipline below the top line remains a core competency for Diamond Rock. During the quarter, total hotel operating expenses increased just 1.8% compared to total revenue growth of 5.5%, resulting in 240 basis points of hotel adjusted EBITDA margin expansion without the one-time property tax benefit. Year to date, operating expenses have increased only 1.3% while total revenue grew 4.2%, driving nearly 200 basis points of margin gains. Wages and benefits, which represent nearly half of our total expenses, increased 2.2% during the quarter, reflecting continued productivity gains as labor hours worked declined despite the increased occupancy. Our focus remains simple, control costs without compromising the guest experience. Revpar at our resorts increased 7.9%, led by La Berge de Sedona, Caballo Point, our two Destin resorts, and the Landing Lake Tahoe, all of which delivered double-digit growth. We expected that our resorts would outperform our urban hotels in 2026, and that thesis continues to play out. We view our resort portfolio favorably, given its strong cash flow generation, supply constraints, and embedded ROI opportunities. Before turning to our urban portfolio, I want to provide an update on La Verge de Sedona, our most recent ROI project. The property continues to outperform expectations. In its first three quarters as an integrated resort, revenues increased 17%, hotel adjusted EBITDA increased 40% and margins expanded 670 basis points. each compared to two years ago when the hotels operated separately. We have increased our estimate of the hotel's contribution to 2026 Rev Park growth from 50 basis points to at least 75 basis points. Importantly, the property has not yet stabilized. Its 2027 group pace is more than double this year's level, and we continue to expect meaningful earnings tailwinds from LaBerge into 2027. RevPar at our urban hotels increased 6.6%, led by the Dagny, our two Chicago hotels, Bourbon Orleans, the Kempton Palomar Phoenix, and Hotel Emblem. Urban performance accelerated steadily throughout the quarter, reaching nearly 10% RevPar growth in June. Importantly, this performance reflects broad-based strength across the portfolio rather than a single market recovery story. By year end, pro forma urban revenues are expected to exceed 2019 levels by double digits. Group revenue increased 6.6% during the quarter, driven by rate growth of more than 3.5% and 2.5% higher roommates. Strength was broad-based across the portfolio, with particularly strong contributions from our Boston hotels, Cavallo Point, Sonoma, and LaBerge de Sedona. One notable characteristic of our group business this year has been the consistency of rate growth, which we view as an encouraging indicator of underlying pricing power and the quality of demand our hotels are attracting. Looking ahead, pace for the second half of the year is currently up approximately 1%, led by strength in the fourth quarter, as the third quarter is expected to be essentially flat. Despite the exceptionally strong group year we achieved in 2025, we again expect to report a record group year in 2026. 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. Our debt remains fully prepayable and leverage remains at the lower end of our peer group. We believe maintaining a conservative balance sheet provides optionality, allowing us to pursue external growth, fund internal investments, and return capital to shareholders as opportunities arise. For perspective, one additional turn of leverage would provide approximately $500 million of incremental investment capacity while remaining within our target leverage range. The strength of our operating performance continued momentum entering the second half of the year and our confidence in the earnings outlook supported both our dividend increase and our updated 2026 guidance. We announced a 22% increase in our quarterly common dividend to 11 cents per share and continue to expect our payout ratio to increase over time as our net operating losses are utilized. We are also raising our 2026 outlook. We now expect RevPar growth of 2.5 to 4%, up 75 basis points at the midpoint. We expect that RevPar growth in the fourth quarter will be stronger than the third quarter. Adjusted EBITDA is now expected to be in the range of $310 million to $320 million, and adjusted FFO per share between $1.18 and $1.23. With anticipated capital expenditures of $75 million to $85 million this year, our raised guidance implies 18% growth in free cash flow per share. With that, I'll turn the call over to Jeff.

Thanks, Briony, and thank you all for joining us this morning. Over the past two years, Diamond Rock 2.0 has been focused on one objective, growing free cash flow per share. Every major decision we've made has been in the service of that goal because free cash flow per share growth restarts the flywheel and ultimately drives shareholder returns. On a trailing 12-month basis, free cash flow per share has increased approximately 30%, reflecting disciplined execution across capital investment, asset management, oversight of hotel operations, and capital allocation. Last quarter, I highlighted three topics, stability and intent of our five-year capital investment program, the value and optionality created through our renegotiated franchise agreement for the West and Boston Seaport, and the execution of our capital allocation philosophy. Today, I want to focus on three new topics. First, the improving transaction market. Second, the optionality embedded in our business strategy. And third, why we remain constructive on our earnings growth into 2027. The transaction market feels healthier than it has been in several years. We are seeing more opportunities to buy, sell, and create value, and we have been actively underwriting potential acquisitions. While competition is intense, we remain focused on opportunities where we see a clear path to higher cash flow and long-term value creation that others do not. We believe lodging REITs create the most value when they can internally fund their external growth. That philosophy underpins our focus on free cash flow per share. Our strong earnings growth is creating additional balance sheet capacity, allowing us to pursue attractive opportunities while remaining comfortably within our conservative target leverage. Historically, our most successful acquisitions have come through our longstanding relationships with other owners. Those opportunities typically involve exceptional hotels in supply-constrained markets, where the combination of the right real estate manager, capital investment, and asset management can unlock meaningful value. That formula has served us extremely well. Over the last five years, acquisitions sourced through those relationships have generated nearly 10% compounded annual growth in EBITDA from pre-pandemic levels. That type of risk-adjusted earnings growth is what we continue to seek. We have been close to several attractive investment opportunities this year. If successful, we expect to fund them through a combination of accretive capital recycling, cash on hand, and selective incremental leverage. On the disposition side, we're more active today than at any point in recent years, and the breadth of interest is encouraging. In fact, one property we are marketing received well over a dozen bids. While there is no assurance we will complete any transaction, our pipeline is more active than it has been in recent years. As we look ahead, I expect Diamond Rock to be active on both acquisitions and dispositions over the next six to 12 months. Our objective remains simple, enhance earnings growth, reduce risk, and Create Shareholder Value. The second topic I want to discuss is optionality. One of Diamond Rock's greatest strengths is not just the number of avenues we have to create value, but the fact we control more of our own outcomes than most lodging REITs. It begins with a balance sheet. We have maintained a conservative leverage profile that provides flexibility to act when opportunities emerge, whether those opportunities are dispositions, share repurchases or acquisitions. It also extends to how our hotels are managed. nearly 90% of our portfolio operates under third party management agreements that can be terminated at will. That structure creates strong alignment with our managers while preserving our ability to make ownership decisions that maximize value. Moreover, when we ultimately sell an asset, that flexibility translates into higher value because buyers are often willing to pay more for hotels where they control their own operating destiny. The same principle applies to our independent hotels. Their positioning, pricing, marketing, and capital investment strategies are designed specifically to maximize our return on investment rather than support the objectives of a brand system. Historically, EBITDA per key at our independent hotels has been 50% higher than our branded hotels. As the benefits of AI are fully integrated into travel, we do believe that spread will continue to expand. Branding is a choice, and if branding creates value, We have the option to move in that direction. The reverse is far more difficult. We have two upcoming brand versus independent decisions. At the Kimpton Shorebreak Huntington, our brand agreement has expired and is now month to month. At the Courtyard Denver Downtown, our franchise agreement expires in 2027. The Courtyard is a powerhouse. It could remain a Courtyard, repositioned to a higher rated brand, expanded on adjacent land, converted to independent or even sold. We will choose the path that creates the greatest long-term value. Ownership requires the ability to make decisions solely in the best interest of each hotel, and we have deliberately structured Diamond Rock to preserve that freedom. I will close with our outlook. While the World Cup helped a handful of markets, it was never the primary reason to be excited about Diamond Rock in 2026. The more important story is the breadth of demand across the portfolio. Leisure remained healthy, business transient continued to improve, and Group Demand was strong. Historically, the industry's strongest REVPAR growth occurs when we see all demand channels growing. And that's exactly what we saw during the quarter in our portfolio and continue to see as we enter the second half of the year. The L'Auberge de Sedona is outperforming our expectations. What began as a project expected to generate a low double digit EBITDA yield for nearly $3 million of incremental EBITDA on our $25 million investment is now on track to produce a 20% yield on invested capital. Given the strength of the second quarter and encouraging momentum in the back half of the year, we have increased our 2026 guidance and raised our common dividend. What gives us incremental confidence is that performance has not been driven by one event or one market. It reflects the broader strength throughout the portfolio. Looking ahead to 2027, we see five drivers of earnings growth. First, continued strength among higher income travelers. Second, a lack of new supply in most of our markets. We estimate replacement costs for our portfolio exceed $700,000 per key versus a trading value today of $350,000 per key. Third, a tailwind of strong citywide calendars, notably in our major markets of Boston, Chicago, and San Diego. Fourth, additional upside from nearly $80 million spent on guest facing renovations at hotels that comprise nearly one quarter of our EBITDA that have not yet stabilized. And finally, improved flow through with the West and Boston Seaport following our successful negotiation of the franchise agreement. Over the last two years, we have demonstrated what a sound strategy and disciplined execution can accomplish. Shareholder returns have responded. Today, Diamond Rock has a stronger portfolio, a better balance sheet, and more opportunities to create shareholder value than we have had in many years. As we look ahead, we believe Diamond Rock is exceptionally well positioned and we remain confident in the opportunities ahead. Thank you for your continued trust and support. We are happy to answer your questions.