DiamondRock Hospitality Company (DRH) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to DiamondRock's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I will now hand the conference over to your first speaker, Bryan Quinn, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to DiamondRock'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 discuss 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 RevPAR 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 $0.44 during the quarter. Our results benefited from the settlement of multiyear property tax appeals on our 2 Chicago hotels, which totaled $6.9 million or $0.03 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 RevPAR 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 RevPAR growth, and we now expect it to contribute approximately 30 basis points for 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 3 major holiday weekends, RevPAR growth range 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 the low single digits, 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 2/3 of our EBITDA. At our top 5 ADR hotels, the average bill exceeded $1,200 per night. Over the last year, our hotels generating ADRs above $300 a have outperformed lower-rated hotels by almost 300 basis points on total RevPAR 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 DiamondRock. 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 onetime 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 Liberis DeSadona, Caballo Point, our 2 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 Laberge Dacodona, our most recent ROI project. The property continues to outperform expectations. In its first 3 quarters as an integrated resort, revenues increased 17%, hotel adjusted EBITDA increased 40% and margins expanded 670 basis points each compared to 2 years ago when the hotels operated separately. We have increased our estimate of the hotel's contribution to 2026 RevPAR 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 Bedagne, our 2 Chicago hotels, Bourbon Orleans, the Kimpton 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 room rates. Strength was broad-based across the portfolio with particularly strong contributions from our Boston hotels, Cavallo Point, Sonoma and Laberge Dacion. 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, 1 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 $0.11 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, Bonnie, and thank you all for joining us this morning. Over the past 2 years, DiamondRock 2.0 has been focused on 1 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 drive 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 3 topics: stability and intent of our 5-year capital investment program, the value and optionality created through our renegotiated franchise agreement for the Westin Boston Seaport and the execution of our capital allocation philosophy. Today, I want to focus on 3 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 even 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 our 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 long-standing relationships with other owners, those opportunities typically involve exceptional hotels in supply-constrained markets with a 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 5 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 but at any point in recent years, and the breadth of interest is encouraging. In fact, 1 property we are marketing received well over a dozen days. 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 DiamondRock to be active on both acquisitions and dispositions over the next 6 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 Diamondrock's greatest strength 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 the 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 a branding creates value, we have the option to move in that direction. The reverse is far more difficult. We have 2 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 DiamondRock 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. Levers DeSedona 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 1 event or 1 market. It reflects the broader strength throughout the portfolio. Looking ahead to 2027, we see 5 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 exceeds $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 1/4 of our EBITDA that have not yet stabilized. And finally, improved flow-through with the Westin Boston Seaport following our successful negotiation of the franchise agreement. Over the last 2 years, we have demonstrated what a sound strategy and disciplined execution can accomplish. Shareholder returns have responded. Today, DiamondRock has a stronger portfolio, a better balance sheet and more opportunities to create shareholder value than we've had in many years. As we look ahead, we believe DiamondRock 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.

[Operator Instructions] First question is coming from the line Chris Woronka with Deutsche Bank.

Congratulations on a really nice quarter. I think you guys mentioned in the prepared comments about labor costs being down in the quarter despite higher occupancy. And I'm curious kind of how that breaks down between maybe your independent hotels and your branded hotels or your independently managed hotels? Or is there also any benefit coming through from the brands possibly working with you guys a little bit more on brand standards in terms of amenities and things like that? And then I have a follow-up.

Sure, Chris. I don't think we said that labor was actually down for the quarter. I think we said it was slightly down or generally flat on a per occupied room basis. But -- but I think that just echoes the continued success we've had on finding productivity throughout productivity improvements throughout the portfolio. It's not necessarily driven by 1 type of hotel or 1 sector of hotel. I don't think it's driven by brand implementation of any kind of cost saving over it's really just our focus on finding productivity and finding efficient ways to deliver debt service throughout our portfolio of hotels.

Okay. And Jeff, I know you mentioned that you're seeing more activity in your pipeline on both potential acquisitions and dispositions on the acquisition front, I'm curious as to whether you guys are kind of thought as being a little bit more resort heavy than a lot of your peers. So we think directionally that you're leaning more in that direction? Or is it more a market-specific or customer segment-specific kind of hotels that you're looking at?

Yes. Thanks, Chris. I wouldn't say market-specific. I think all else equal, if price was no object, I would -- I think the long-term secular drivers for resorts are particularly attractive. But pricing on resorts has been very, very competitive and has tightened substantially this year. So while we do look at a lot of them, there's a lot that I think get bid outside of what we're willing to pay. We do look at urban markets as well. So I would tell you, all else equal, yes, I would like to tilt towards resorts, but we do look at everything, both urban markets and resorts.

Our next question in queue coming from the line of Nick Joseph with Citi.

You touched on the improving transaction market and the intense competition. I was hoping if you could just give some more color on kind of the buyer pool or the new entrants and kind of what are you seeing in terms of that competition today? .

Justin can chime in here, too, but I think you've seen high net worth. It depends on the type of property, but I think you see a lot of high net worth capital sort of PE capital that's showing up for those types of assets. I think some owner operators...

But I would say, while it's probably been more skewed towards high net worth capital over the preceding 12 to 24 months, we've definitely seen private equity significantly more active. And I think that's really responsible for a lot of the increased transaction and the increased bidder depth that we see on bidder sheets. .

And then you said you've been close on a few deals. How far off are you on these? Is it the underbidder are you just below? Or is it that competitive that maybe that gap is still a little wide?

Yes, it's a good question. Actually, I guess I should probably rephrase it and say there's some that I thought we would be closed and then we prove -- and then we proved to be like 10% to 15% off with many bidders in between. I think that's what's probably been most surprising is maybe a year ago, the gap between a first round bind and a second-round bid was relatively tight. We've seen that widen out pretty substantially, I think on the last few properties that we were pursuing, where there could be as much of a sort of a move is maybe 10%, 15% or even buyers sort of going hard with a letter of intent. So it's gotten much more aggressive for certain properties.

Our next question in queue coming from Delina, Jack Armstrong with Wells Fargo. .

Could you touch on some of the booking trends you're seeing in the Q3 by demand segment and how you're working to fill some of the group holes that you have there in the quarter from a comparison perspective.

Sure, Jack. I think we've been pleased with the uptick in short-term transient pickup, and that's probably given us a little bit more optimism particularly as it pertains to Q3 where I think we've been vocal about a little bit of a group pace deficit that we've had coming into the year. And that really makes up, I think, some of the optimism for the back half of the year, the change in view that we're going to be able to fill more of that group deficit with short-term transient pickup. So I think that's the 1 thing that we saw over the course of the last 45 to 60 days that really encouraged us in terms of the back year forecast.

Helpful there. And then any early read you can give on 2027 group pace, what you've got on the books so far and how the comps set up after a heavy 2026 even?

Yes. It's actually pretty early for us, Jack. I would say if we look to 2027, we probably only have I would say probably 5% to 6% of our total revenues in our group pace, which ultimately is going to be maybe 20% of our actual production that year. So candidly, the results are quite negative and very volatile by hotels. So it's really hard for us with the types of hotels we have to make any big prognostications. I would say, to give you an example, there are some hotels like Chicago that are up low double digits year-over-year. But conversely, there are some other group boxes we have that are sort of down sort of single digits year-over-year, but all that disparity in those hotels is in Q4 '27. So there's still quite a lot of time until you encounter that period for hotels that ultimately see bookings on a shorter-term basis. So it's just -- it's a little early for us.

Our next question in queue will come from the line Richard Hitler with Barclays.

Obviously, the resort segment broadly, as you described, is seeing a lot of strength. But remind us what is going on in Key West at the moment, we just had a couple of relatively softer quarters?

Yes. I would describe, when you think about what's been going on in leisure, I think where you've seen probably the most exceptional strength is at the higher price point hotels. If you look within Florida, we have 2 assets in Destin, Florida, which have done very, very well this quarter and year-to-date. Conversely, if you look down to the keys, which tends to be below a luxury price point. And it's also during a period of time where summer is not necessarily the key strong time, effectively where it's drawing a higher-end consumer. So I think what you're seeing is not necessarily the lower leg of the K-shaped economy, so to speak, but somewhere in between where you see a little bit of that softness in Florida that can come during sort of their off-season months?

Okay. That makes sense. And then, I guess, just to maybe continue that line of questioning, I guess, sticking to the upper end of the K rather. I mean, I guess, Jeff, if you had to index where the higher-end consumer business spend and that sort of thing is on a sort of a spending stupidly index relative to history, right? We've seen episodes where 2007 was an example kind of 2021 was a bit of an example coming out of COVID I mean where are we on that sort of index of just people spending stupid money on once they get on property. And when does that consumer break in terms of just being willing to spend higher and higher prices on rooms and out of room spend?

I don't know. I don't have the perspective to sort of say broadly about how people are spending. I think within our portfolio. I guess I look at it is, generally speaking, when you think about resorts and U.S. resort destinations, we are producing as a country, more and more people who have exceptional net worth, but we are not growing our resort base. So it's sort of a supply and demand imbalance that's driving a lot of that in my view. So I don't necessarily think it's spending stupidly. It's just -- they're spending on what their available options are.

Our next question comes from the line of Michael Bellisario with Baird.

Thanks. Good morning, everyone. Jeff, you guys were 1 of the groups that signed a letter to Marriott. Can you maybe give us an update on some of the conversations you've had with them and also other owners since that letter was made public don't so how are you thinking about sort of potential outcomes and revenues with your largest franchisor?

I think, Mike, we continue to have conversations with our brand partners. It's not something that we want to publicly comment on at this point.

Fair enough. And then just switching over to Chicago. Can you just maybe help us understand the implications and benefits for the Chicago property tax refund and then just sort of how you think about valuation and liquidity of the big Marriott asset that I think you've been trying to sell for a while.