DiamondRock Hospitality Company Q2 FY2025 earnings call

• RevPAR and Revenue Breakdown: Comparable RevPAR in Q2 was 0.1% growth, driven by 1.1% rate increase and 80 basis point occupancy decline. Total RevPAR growth was 1.1% due to 4.2% increase in out-of-room revenues per occupied room. Group room revenue increased 0.8%, business transient up 4.2%, leisure transient down 1.6%. Food and beverage revenues up 3.1% with profit increasing over 6% and margins up 105 basis points.
• Expenses: Operating expenses increased 0.7% excluding larger-than-expected Chicago property tax increase. Wages and benefits increased 3.1%. Hotel EBITDA margins contracted 97 basis points excluding Chicago tax increase, would have increased 30 basis points.
• Balance Sheet: Successfully refinanced, upsized, and extended senior unsecured credit facility to $1.5 billion. Repurchased just under 1.7 million common shares in the quarter, with 3.6 million shares repurchased year-to-date for $27.3 million at a cap rate of just under 10%.
• 20th Anniversary: Congratulated team and Founder/Chairman Bill McCarten on DiamondRock's 20th anniversary in June.
• Free Cash Flow Growth: Focus on recycling out of low free cash flow yield hotels into higher-yielding investments, capitalizing on asset disposal opportunities, reinvesting in assets with outsized ROIs, stretching renovation life cycle, and share repurchases when valuation disconnect exists.

Urban Hotels

• Account for just over 60% of EBITDA. Achieved 3% RevPAR growth in the quarter. April was strongest with 4.6% growth, but pace of RevPAR gains slowed to 1.6% by June. Rate growth held steady at approx. 2.5% over the quarter. Total RevPAR growth was 100 basis points stronger than RevPAR growth with food and beverage revenues up over 5%. Total expenses in urban portfolio increased 5.7%. Excluding property tax increase in Chicago, total expense growth was just 2.5%, implying margin growth of approximately 95 basis points.

Resorts

• Comparable RevPAR declined 6.3% and total RevPAR declined 3.9%. Opening of redeveloped Orchards in Sedona delayed by 12 weeks weighed on performance. Excluding Cliffs, comparable RevPAR declined 4.7% and total RevPAR declined 2.7%. Resorts in Florida experienced 4.1% RevPAR decline, but out-of-room spend per occupied room increased 6.7%, resulting in total RevPAR decline of just 0.6%. Tight cost controls led to nearly flat hotel EBITDA margins. Chico and Sonoma resorts up in mid-single digits, while The Hythe in Vail down 23% due to large in-house group last year.

• Third Quarter Outlook: Expect total portfolio RevPAR to decline in the low single digits and expense growth to remain low.
• 2025 Full-Year: Crystal ball is less cloudy than 3 months ago. RevPAR growth expected to be in the range of -1% to +1%, with total RevPAR growth outperforming RevPAR growth by 50 basis points. Corporate adjusted EBITDA expected in the range of $275 million to $295 million, FFO per share in the range of $0.96 to $1.06. Capital expenditures unchanged at $85 million to $95 million. No assumption of redeeming 8.25% preferred shares or repurchasing additional common shares in guidance, but $146.8 million capacity remaining on share repurchase authorization.

• Federal policy changes negatively impacted asset disposition timelines.
• Group booking conversion rate yet to reaccelerate, indicating reticence to commit in uncertain environment.
• Larger-than-expected property tax increase in Chicago impacted operating expenses.
• Delay in opening of Cliffs at L'Auberge in Sedona weighed on resort portfolio performance.

Q: Could you talk about the stabilization at the higher end of the portfolio?

A: The quote referred to the portfolio as a whole moving towards stabilization with fundamentals improving from a softer point in time.

Q: Why is there low single-digit RevPAR decline in the third quarter?

A: Difficult comp due to outsized events in August last year like the Democratic National Convention in Chicago which had over 50% group last year and was nonrecurring.

Q: How to think about continued share buybacks with respect to redeeming preferred after it becomes redeemable?

A: Share buybacks are attractive use of capital, but redemption of preferred is not in 2025 guidance and will be weighed as to best use of capital.

Q: Update on Sedona repositioning and Q4 performance?

A: Hotel just begun marketing, booking pace in Q4 encouraging with group business and rates up $150 to $200 year-over-year.

Q: Which segments are driving group pace pick up?

A: Improvement in group booking pace revenue is really on the urban side, with some short-term group success though conversion still difficult.

Q: Impact of cruise on resort acquisitions?

A: Difficult to definitively know, but considered as it relates to property type and market, with some regions like Keys possibly having more direct competition.

Q: Confidence in out-of-room spend growth into 2026?

A: Too early to say, but optimistic as group and leisure customer performance matters, growth broad-based across urban and resort hotels.

Q: Balance of asset sales for smaller cap REIT?

A: Considered but not losing sleep over, with other smaller companies in the sector having different valuations.

Q: Chico opportunity details?

A: Still too early, but substantial land with opportunities like residential developments, adding keys, or other modular options, with prospective returns not yet specific.

Q: Group marketing and hurdles in disposition plans?

A: Targeting smaller groups not fitting others, some disposition plans impacted by regulations and market volatility like credit market pricing and foreign investment taxation hurdles.