DiamondRock Hospitality Company (DRH) Q2 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary shows mixed signals: a revised down RevPAR outlook and EBITDA guidance, but positive factors like successful cost management, share repurchase, and refinancing flexibility. The Q&A section highlights urban group booking improvements and optimism about labor costs but lacks clarity on long-term sustainability and Chico opportunity specifics. Considering the small-cap nature, the stock may experience moderate volatility, but the lack of strong positive catalysts or negative surprises suggests a neutral movement in the short term.
Key Financial Performance
Comparable RevPAR growth 0.1%, driven by a 1.1% increase in rate and an 80 basis point decline in occupancy. RevPAR was negatively impacted by approximately 50 basis points due to the ongoing conversion of the Orchards Inn in Sedona to the Cliffs at L'Auberge.
Total RevPAR growth 1.1%, as a result of a 4.2% increase in out-of-room revenues per occupied room, which reached a new quarterly high of $160 per occupied room.
Group room revenue Increased 0.8%, with rates up 3.3% and room nights down 2.5%. This reflects a strong group revenue pace for 2025, despite some reticence to commit in an uncertain environment.
Business transient revenue Increased 4.2%, showing growth in this segment.
Leisure transient revenue Declined 1.6%, indicating a drop in this segment.
Food and beverage (F&B) revenues Increased 3.1%, with gains in both banquets and catering and outlets. F&B profit increased over 6%, and margins increased 105 basis points due to reengineering menu pricing, reconsidering portion sizes, and refining outlet operating hours.
Operating expenses Increased 0.7% on 1.1% revenue growth, excluding a larger-than-expected property tax increase in Chicago. Including the tax increase, total expense growth was 2.6%, leading to a hotel EBITDA margin contraction of 97 basis points. Excluding the tax increase, margins would have increased 30 basis points.
Corporate adjusted EBITDA $90.5 million, reflecting the company's financial performance.
Adjusted FFO per share $0.35, showing the funds from operations per share.
Free cash flow per share Increased approximately 4.5% to $0.63 per share, calculated as adjusted FFO less CapEx.
Urban portfolio RevPAR growth 3%, with April being the strongest month at 4.6% growth. Rate growth held steady at approximately 2.5% over the quarter. Total RevPAR growth was 100 basis points stronger than RevPAR growth, with food and beverage revenues up over 5%.
Urban portfolio expenses Increased 5.7%. Excluding the property tax increase in Chicago, total expense growth was 2.5%, implying margin growth of approximately 95 basis points versus the 104 basis point decline reported.
Resort portfolio comparable RevPAR Declined 6.3%, and total RevPAR declined 3.9%. Excluding the Cliffs at L'Auberge, comparable RevPAR and total RevPAR declined 4.7% and 2.7%, respectively. The delay in opening the redeveloped Orchards Inn impacted performance.
Florida resorts RevPAR Declined 4.1%, an improvement from Q1. Out-of-room spend per occupied room increased 6.7%, resulting in a total RevPAR decline of just 0.6%. Tight cost controls led to nearly flat hotel EBITDA margins.
The Hythe in Vail RevPAR Declined 23%, as it benefited from a large in-house group last year.
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Operating Highlights
Cliffs at L'Auberge: The Orchards Inn in Sedona was converted to the Cliffs at L'Auberge. Renovations included a new hillside pool, bar area, and event space, with transient and group bookings accelerating. Wedding revenues are expected to more than double compared to 2024.
Urban Portfolio Performance: Urban hotels achieved 3% RevPAR growth, with strong performance in San Francisco, San Diego, New York, Boston, and Chicago. Food and beverage revenues increased over 5%.
Resort Portfolio Performance: Comparable RevPAR declined 6.3%, impacted by delays in the Cliffs at L'Auberge project. Florida resorts saw a 4.1% RevPAR decline, but out-of-room spend increased 6.7%.
Cost Management: Operating expenses increased only 0.7% on 1.1% revenue growth, excluding a property tax increase in Chicago. F&B profit increased over 6%, with margins up 105 basis points.
Debt Refinancing: Refinanced and upsized senior unsecured credit facility to $1.5 billion, with no debt maturities until 2029 and all debt prepayable without penalty.
Asset Recycling and ROI Projects: Focused on recycling low-yield hotels into higher-yield investments and reinvesting in ROI projects like the Cliffs at L'Auberge, expected to achieve a 10% stabilized yield.
Share Repurchase: Repurchased 3.6 million shares year-to-date for $27.3 million at a cap rate of just under 10%.
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Risk or Challenges
RevPAR growth challenges: Comparable RevPAR growth in the second quarter was only 0.1%, with a decline in occupancy by 80 basis points. Resort portfolio RevPAR declined 6.3%, and total RevPAR declined 3.9%, impacted by delays in the redevelopment of Orchards Inn in Sedona.
Occupancy and group bookings: Group room nights declined by 2.5%, and conversion rates for group bookings have not reaccelerated, reflecting continued reticence to commit in an uncertain environment.
Economic and policy uncertainties: Increased uncertainty stemming from federal policy changes and tariff announcements has slowed RevPAR gains and negatively impacted asset disposition timelines.
Property tax increases: A larger-than-expected property tax increase in Chicago led to a contraction in hotel EBITDA margins by 97 basis points.
Renovation disruptions: Delays in obtaining a certificate of occupancy for the Cliffs at L'Auberge in Sedona caused revenue disruptions and negatively impacted resort portfolio performance.
Competitive pressures in acquisitions: High asking cap rates for acquisitions and the need for upfront capital and property tax resets make acquisitions less attractive compared to share repurchases.
Labor cost pressures: Florida resorts experienced larger labor cost gains post-pandemic, which have now stabilized but remain a factor in cost management.
Future uncertainties in group revenue: While group revenue pace for 2025 is up 1%, there are difficult comparisons to the strong performance in the second half of 2024, and conversion rates remain a concern.
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Guidance & Outlook
RevPAR Growth: Maintaining full year outlook for RevPAR growth of negative 1% to plus 1%. For the third quarter, RevPAR is expected to decline in the low single digits.
Total RevPAR Growth: Expected to outperform RevPAR growth by 50 basis points in 2025, an increase from prior assumption of in-line performance.
Corporate Adjusted EBITDA: Projected to be in the range of $275 million to $295 million for 2025, up $2.5 million at the midpoint.
FFO Per Share: Expected to be in the range of $0.96 to $1.06 for 2025, up $0.01 at the midpoint.
Capital Expenditures: Projected to remain unchanged at $85 million to $95 million for 2025.
Group Revenue Pace: Group revenue pace for 2025 is up approximately 1%, with a strong setup for 2026 as group revenue pace is currently up 12%.
Cliffs at L'Auberge ROI Project: Expected to achieve a 10% yield on cost upon stabilization, with transient and group bookings accelerating and wedding revenues expected to more than double in 2025.
Future Renovation Tailwinds: Renovations in 2025 are expected to provide a tailwind in 2026, with the Cliffs at L'Auberge alone driving a 25 to 50 basis point tailwind to RevPAR growth in 2026.
Debt and Balance Sheet: No debt maturities until 2029, with all debt prepayable at any time without cost or penalty. Upsized credit facility to $1.5 billion from $1.2 billion.
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Shareholder Return Plan
Quarterly Common Dividend: Declared or paid a quarterly common dividend of $0.08 per share to date this year. Depending on 2025 taxable income, an additional sub-dividend for the fourth quarter may be declared.
Share Repurchase Program: Repurchased just under 1.7 million common shares at an average price of $7.46 during the quarter. Continued repurchases post-quarter, resulting in 3.6 million shares repurchased year-to-date for $27.3 million at a cap rate of just under 10%. $146.8 million of capacity remains on the share repurchase authorization.
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Key Q&A
Q:Jeff, I wanted to ask you about something you said in your prepared remarks and the release about stabilization at the higher end of the portfolio. Could you just talk about -- were you talking about specific properties? Were you talking about guests within your overall portfolio that you would deem higher end that are spending more? Or kind of just -- could you just sort of flesh that out a little bit?
A:Jeffrey John Donnelly clarified that the comment referred to the portfolio as a whole, indicating that demand is no longer as soft as in recent months and is moving towards stabilization, reflecting improving fundamentals.
Q:Are you seeing low single-digit RevPAR declines across the board? Or is there particular weakness in leisure?
A:Justin L. Leonard explained that the Q3 weakness was anticipated due to a strong Q3 last year, particularly due to the Democratic National Convention in Chicago, which created a difficult comparison. The decline is not attributed to a change in trend but rather to nonrecurring events.
Q:Could you provide an update on the Sedona repositioning? Curious if you can provide any update on expected performance at the hotel and how rates on forward bookings there are trending for Q4?
A:Jeffrey John Donnelly stated that the Sedona hotel has just begun marketing itself. While Q4 is not traditionally a peak season, the booking pace is encouraging, with group business being secured and rates up $150 to $200 year-over-year, indicating early success.
Q:Which segments of the business are driving the group pace improvement? Is it urban, resort, or related to the opening in Sedona?
A:Jeffrey John Donnelly noted that the improvement in group booking pace is primarily in urban areas, with some success in short-term group bookings. Justin L. Leonard added that Q4 optimism is due to the absence of an election year, providing more availability for group bookings.
Q:Could you frame up how much of a drag group has been on portfolio RevPAR growth this year? And what are the big drivers of group revenue pace in 2026?
A:Jeffrey John Donnelly mentioned that group has not been a drag on RevPAR growth this year, with group pace relatively flat year-over-year. For 2026, Boston is expected to be a significant driver due to a strong citywide calendar, with group revenue pace showing low double-digit growth.
Q:Have you studied the impact of cruise lines on the hotel industry, particularly resorts?
A:Jeffrey John Donnelly acknowledged the difficulty in determining the impact of cruise lines on resorts, as it depends on the price point and region. He noted that high-end properties like Lake Austin may not compete directly with cruise lines, but there could be competition in areas like the Keys.
Q:Would you say you're more or less encouraged than you were 3 or 6 months ago on the direction of pressure on wages?
A:Jeffrey John Donnelly expressed optimism, noting that labor costs have been better than expected, with wages up about 2%. He attributed this to the portfolio's leisure exposure, which recovered earlier in the pandemic, allowing for earlier adjustments in labor costs.
Q:What would you view as the key drivers of acceleration in industry RevPAR?
A:Jeffrey John Donnelly suggested that reduced economic uncertainty and increased private fixed investment could drive RevPAR acceleration. He also noted the lack of supply in the pipeline as a positive factor.
Q:Can you talk about the flexibility provided by the recent refinancing?
A:Briony R. Quinn highlighted that the refinancing provides operational and transactional flexibility, with properties now unencumbered by secured debt and all debt prepayable without penalty. Jeffrey John Donnelly added that the debt is now at market rates, eliminating headwinds to FFO and cash flow.
Q:Is the growth in out-of-room spend sustainable into 2026? And what is driving this growth?
A:Jeffrey John Donnelly stated that it is too early to determine sustainability into 2026, as it depends on group and leisure performance. Growth appears broad-based, driven by both group and leisure transient business, with pricing likely playing a significant role.
Q:Can you talk about your intention to pursue asset sales over the next 1 to 2 years and how you balance this with being a smaller cap REIT?
A:Jeffrey John Donnelly acknowledged the balance between asset sales and the company's size but noted that smaller companies in the sector often have better valuations. He emphasized doing the right thing for the company, regardless of size.
Q:Should the market evaluate DiamondRock based on growth in adjusted EBITDA or FFO per share?
A:Jeffrey John Donnelly suggested that while EBITDA is commonly used, investors should also consider capital expenditures and focus on metrics like free cash flow per share to better understand valuation.
Q:Can you provide details on the Chico opportunity?
A:Jeffrey John Donnelly mentioned that it is too early to provide specifics but noted opportunities for residential development, additional keys, or modular options like glamping. Returns would need to be well above 10% to justify investment.
Q:How are you marketing and competing for group business in a competitive environment?
A:Jeffrey John Donnelly and Justin L. Leonard explained that the approach depends on the asset. Smaller, independent, high-ADR properties focus on differentiated experiences for small corporate meetings, while larger branded hotels rely on brand-led channels for convention business.
Q:Are there any hurdles still impacting disposition plans?
A:Jeffrey John Donnelly noted that challenges like credit market volatility, property tax increases, and foreign investment taxation concerns have impacted disposition plans but did not indicate any ongoing hurdles.
Q:Review of Unclear Management Responses
A:Management appeared to avoid giving a direct answer to the question about the sustainability of out-of-room spend growth into 2026, citing it as too early to determine. Additionally, specifics on the Chico opportunity were not provided, with management stating it was too early to give details or returns.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Cliffs LAuberge
Co
Conference
Division Chris
Donnelly
Executive VP
FFO share
Florida RevPAR
Inc Research
Instructions
LLC Research
Research Division
RevPAR decline
RevPAR hotel
RevPAR increase
RevPAR month
Sedona Cliffs
conversion
credit facility
environment
gain
group pace
group portfolio
hotel basis
hotel resort
increase Chicago
portfolio RevPAR
property tax
reminder
resort portfolio
revenue portfolio
room spend
share date
share price
size
tax increase
transient
DRH Transcript
DiamondRock Hospitality Company (DRH) Q3 2025 Earnings Call Transcript
Positive11-7
The earnings call summary indicates a stable financial outlook with positive elements such as increased EBITDA projections, a strong setup for future revenue growth, and a focus on shareholder returns through potential share repurchases. The Q&A section shows management's strategic focus on efficiency and growth, with no major disruptions expected. Although guidance is cautious, the overall sentiment and strategic initiatives suggest a positive impact on the stock price over the next two weeks.
DiamondRock Hospitality Company (DRH) Q2 2025 Earnings Call Transcript
Unknown8-8
The earnings call summary shows mixed signals: a revised down RevPAR outlook and EBITDA guidance, but positive factors like successful cost management, share repurchase, and refinancing flexibility. The Q&A section highlights urban group booking improvements and optimism about labor costs but lacks clarity on long-term sustainability and Chico opportunity specifics. Considering the small-cap nature, the stock may experience moderate volatility, but the lack of strong positive catalysts or negative surprises suggests a neutral movement in the short term.
DiamondRock Hospitality Company (DRH) Q1 2025 Earnings Call Transcript
Unknown5-2
The earnings call presents mixed signals: steady financial performance with some positive RevPAR growth and share repurchases, but concerns about debt maturities and economic uncertainties. The Q&A reveals management's cautious stance on cost control and renovation expenses. The market cap indicates moderate stock sensitivity, suggesting a neutral impact on stock price over the next two weeks.
DiamondRock Hospitality Company (NYSE:DRH) Q4 2024 Earnings Call Transcript
Unknown3-1
The earnings call presented a mixed picture. While there are positive elements such as strategic asset management and a slight increase in adjusted FFO guidance, concerns remain due to weak RevPAR guidance and economic uncertainties, particularly in Florida. The Q&A highlighted management's cautious stance on economic conditions and unclear responses regarding specific financial allocations. The market cap suggests moderate sensitivity, leading to a neutral outlook as the positives and negatives balance out.
DRH Report
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