DiamondRock Hospitality Company (DRH) Earnings

Management highlights

### Core Strategy & Shareholder Value - The Diamond Rock 2.0 strategy has a single core objective: growing free cash flow per share to drive long-term shareholder returns. Trailing 12-month free cash flow per share has grown approximately 30% over the past two years, driven by disciplined execution across capital investment, asset management, and capital allocation. - Management maintains a highly conservative balance sheet with no debt maturities until 2029, no secured/convertible debt, no preferred equity, and no off-balance sheet encumbrances. Leverage is at the lower end of peer ranges, and one additional turn of leverage would provide ~$500 million in incremental investment capacity while remaining within target leverage ranges. This conservative structure creates strategic optionality for acquisitions, internal investment, and shareholder returns. - The firm announced a 22% increase in the quarterly common dividend to 11 cents per share, with the payout ratio expected to increase over time as net operating losses are utilized. ### Transaction Market Update - The transaction market is healthier than it has been in several years, with more acquisition and disposition opportunities available. Management is actively underwriting potential acquisitions, focused on opportunities that offer a clear path to higher cash flow that other buyers do not identify. - The firm's most successful historical acquisitions have come from longstanding owner relationships, typically for exceptional hotels in supply-constrained markets. These acquisitions have generated nearly 10% compounded annual EBITDA growth from pre-pandemic levels, which is the risk-adjusted return profile the firm continues to target. - Disposition activity is at its highest level in recent years, with strong buyer interest (one marketed property received over a dozen bids). Management expects to be active on both acquisitions and dispositions over the next 6 to 12 months, with the core goal of enhancing earnings growth, reducing risk, and creating shareholder value. The firm currently expects to be a net seller in calendar 2026. ### Strategic Optionality - Nearly 90% of the portfolio operates under at-will third-party management agreements, which creates strong alignment with managers and preserves the firm's ability to make value-maximizing ownership changes. This flexibility also increases asset value when selling, as buyers prefer control over operations. - Independent hotels in the portfolio have historically delivered 50% higher EBITDA per key than branded hotels, a spread management expects to widen as artificial intelligence is integrated into travel marketing and distribution. The firm retains the option to brand assets if it creates value, a flexibility not available to firms locked into long-term brand agreements. - Two upcoming brand/operational decisions are currently being vetted: 1) Kimpton Shorebreak Huntington, where the brand agreement has expired and is currently month-to-month; 2) Courtyard Denver Downtown, where the franchise agreement expires in 2027, and the property has adjacent expansion land that supports multiple strategic paths including remaining branded, rebranding, converting to independent, expanding, or selling. Management will select the path that delivers maximum long-term value. ### 2027 Earnings Growth Drivers - Management remains constructive on earnings growth into 2027, supported by five core drivers: 1) continued strength in spending from higher-income consumers, which has driven outperformance for higher ADR properties; 2) limited new supply in most of the firm's core markets, with replacement costs per key exceeding $700,000 versus a current trading value of $350,000 per key; 3) strong citywide event calendars in major markets including Boston, Chicago, and San Diego; 4) upside from $80 million in completed guest-facing renovations at properties representing one quarter of firm EBITDA, which have not yet stabilized; 5) improved margin flow through at the West and Boston Seaport following successful renegotiation of the franchise agreement.

Guidance

- Management upwardly revised 2026 full-year guidance, now expecting full-year RevPAR growth of 2.5% to 4%, representing a 75 basis point increase at the midpoint of the range. - 2026 adjusted EBITDA is now guided to a range of $310 million to $320 million, with adjusted FFO per share guided between $1.18 and $1.23. - 2026 capital expenditures are expected to be between $75 million and $85 million, and the updated guidance implies 18% year-over-year growth in full-year free cash flow per share. - Management expects 2026 fourth quarter RevPAR growth to be stronger than third quarter RevPAR growth. Group pace for the second half of 2026 is up approximately 1% year-over-year, driven by fourth quarter strength, while third quarter group pace is expected to be essentially flat relative to 2025. Short-term transient demand has picked up enough to offset most of the expected third quarter group deficit. - Back-half 2026 expense growth is assumed to be approximately 2.5% year-over-year, with margin growth expected to moderate relative to the strong second quarter performance due to higher labor costs from the New York Hotel Union contract renewal and higher performance-based bonus accruals.

Segment performance

Diamond Rock operates two core hotel segments: resorts and urban hotels. In Q2 2026, the resort segment delivered 7.9% RevPAR growth, outperforming the urban segment as management expected. Standout resort properties including La Berge de Sedona, Caballo Point, the two Destin resorts, and the Landing Lake Tahoe all achieved double-digit RevPAR growth. Since its integration, La Berge de Sedona has delivered 17% revenue growth and 40% hotel adjusted EBITDA growth compared to pre-integration levels, and it is expected to contribute at least 75 basis points to 2026 full-year RevPAR growth, up from the prior estimate of 50 basis points. The urban hotel segment delivered 6.6% RevPAR growth in the quarter, with performance accelerating steadily to nearly 10% RevPAR growth in June. By the end of 2026, pro forma urban revenues are expected to exceed 2019 levels by double digits, with top performing properties including the Dagny, the two Chicago hotels, Bourbon Orleans, the Kempton Palomar Phoenix, and Hotel Emblem. Across all segments, group revenue grew 6.6%, driven by over 3.5% rate growth and 2.5% higher occupancy, with broad-based strength across the portfolio. Total comparable company RevPAR for the firm grew 7% overall in Q2 2026, with total revenue growing 5.5% year-over-year. Total hotel operating expenses grew just 1.8% year-over-year, driving 240 basis points of hotel adjusted EBITDA margin expansion excluding the one-time property tax benefit. The firm delivered Q2 2026 corporate adjusted EBITDA of $107.9 million and adjusted FFO per share of 44 cents, including a 3 cent per share benefit from multi-year Chicago property tax appeal settlements. Excluding this benefit, FFO margin expanded 303 basis points, and trailing 12 months free cash flow per diluted share grew 27% year-over-year to $0.80.

Risks & headwinds

- Intense competition for attractive acquisition assets has led to bid prices that are 10% to 15% above Diamond Rock's underwriting value, meaning the firm has lost out on multiple prospective deals recently. Pricing for resort assets is particularly competitive, which has limited the firm's ability to execute on its preference to add more resort properties. - While the firm has a strong disposition pipeline with high buyer interest, there is no assurance that any planned transactions will be completed on favorable terms. - Labor cost productivity gains that have driven strong margin expansion over the past several quarters cannot be sustained indefinitely, and margin growth will moderate as the firm reaches the limit of incremental labor efficiency gains. - 2027 group booking data is still very early (only 5% to 6% of 2027 total group revenue is on the books), so performance volatility across hotels makes it impossible to draw reliable conclusions about full-year 2027 group demand at this stage. - Local zoning and regulatory requirements can increase the cost and delay the timing of planned property expansion and renovation projects, making it harder to align ROI projects with the firm's five-year capital expenditure plan.

Analyst Q&A

• Q: Will the firm prioritize resort acquisitions over urban acquisitions given its existing resort tilt and the strong long-term resort demand drivers?

  A: While all else equal, management would prefer to tilt the portfolio toward resorts due to their attractive long-term secular demand drivers, pricing on resort assets is very competitive this year, with most asking prices falling outside the firm's target return range. The firm evaluates all opportunities across both resorts and urban markets, and will pursue any asset that meets its return hurdles regardless of segment.

• Q: Why is Key West underperforming relative to other Florida resort assets, and what is driving softness at the higher end of the consumer market?

  A: Key West properties generally target a lower price point than the firm's other Florida assets in Destin, which have delivered very strong performance this year. Summer is also the off-season for Key West, which explains the recent soft results. The current strength in travel spending reflects consumer preferences for experiences, not reckless spending, and higher-income consumer demand remains robust with no signs of cracking near-term.

• Q: What has driven the firm's consistent outperformance on expense growth, and is this cost discipline sustainable into 2027?

  A: The core driver is a relentless, property-level focus on matching staffing levels to actual weekly demand, combined with incremental productivity improvements across the portfolio. The firm is also using AI to improve labor efficiency, which will continue to drive incremental productivity gains going forward. While rising occupancy will lead to some labor cost growth, incremental demand can be served at a lower marginal cost, supporting continued discipline relative to prior periods.

• Q: How much acquisition capacity does the firm have within its target leverage range, and what value creation opportunities does the firm see that other buyers miss?

  A: By the end of 2026, leverage is expected to be close to 3x net debt to EBITDA, giving the firm roughly $500 million of borrowing capacity within its 3x to 4x target leverage range. Value creation opportunities typically come from replacing underperforming third-party managers, identifying unrecognized cost efficiencies, unlocking expansion value from underutilized land (similar to the La Berge de Sedona project), and repositioning assets that are misaligned with their current brand or operating structure.