For the past several quarters, DiamondRock Hospitality Company has thrived on booming leisure demand, which executives said has driven the performance of its luxury resorts and urban lifestyle hotels.
Mark Brugger, DiamondRock’s president and CEO, said on a first-quarter earnings conference call the company is satisfied with its 60/40 split between urban and resort markets. The Bethesda, Maryland-based real estate investment trust has 35 hotels with more than 9,600 rooms in its portfolio.
Brugger added there are a few markets DiamondRock has preferred to avoid.
“Just as importantly, we have largely avoided markets like San Francisco, Portland and Los Angeles, where values have been crushed from post-pandemic structural changes to demand, new transfer taxes and reduced operating efficiencies for recently adopted hotel ordinances,” Brugger said.
DiamondRock’s key resort markets are Vail, Colorado; California wine country in Sonoma; and the Florida Keys.
“It is really the resorts segment that continues to be the big, long-term beneficiary of travel trends that began before the onset of the pandemic,” Brugger said. “There is a fundamentally favorable imbalance of vast leisure demand for the limited number of resorts in the U.S. This imbalance underpins our belief that resorts remain a great capital allocation choice for the coming years. In fact, it’s now obvious that the more resorts you acquired prior to the pandemic, the better off you are now.”
While DiamondRock’s portfolio has thrived on leisure demand in the recovery from the COVID-19 pandemic, Brugger said the company won’t be quick to unload its larger hotels that rely more on group business. He added the demand segment is rebounding and DiamondRock executives expect group demand to regain the share it had lost.
“Group will continue to be good this year and next year. We still like the leisure segment probably the best over the next five to 10 years. But this year, our group hotels are doing excellent; probably the value of all those hotels increases over the next 12 months,” he said. “And for large hotels, it still remains a difficult debt market, so those things combined lead us to think it’s probably better to hold any group hotel in 2023. But that being said, everything’s for sale at the right price.”
For now, DiamondRock isn’t circling any new acquisitions for its portfolio, Brugger said.
“This isn’t the time to go out and do a big deal. We think we have ample liquidity, and something we’d do given our cost of capital would have to be something that has relatively high returns. And we’re in a market where there’s still a lot of private equity chasing deals,” he said.
The most attractive hotels and resorts for DiamondRock to possibly acquire are held by owner-operators that the REIT already has a business relationship with, Brugger added.
“But I can say in the broadly marketed deals we’ve seen, it’s still very competitive in the pricing. The price on those probably doesn’t make sense for us. We’re trying to focus on the things where we think we have a competitive advantage,” he said.
During the first quarter, DiamondRock invested $21.6 million in capital improvements in its hotel portfolio. For the year, the company anticipates capital expenditures between $100 million and $115 million.
In the fourth quarter of 2022, DiamondRock began a major renovation at the 403-room, upper-upscale Hilton Boston Downtown Faneuil Hall, including updating the guestrooms, lobby, meeting space and gym. The renovation is on track to be completed in mid-2023, and DiamondRock executives said they are considering taking the property independent.
“We think it’s a fabulous location in Boston; it’s a seven-day-a-week location, which gives us a lot more optionality,” Brugger said. “We’re not dependent on the brand and the brand channel at that particular location. We’re spending about $31 million on the property this year. … It’s kind of a unique special property. We probably will go independent at that property this summer.”
DiamondRock Executive Vice President and Chief Financial Officer Jeff Donnelly said any revenue disruption the Boston hotel experiences this year will likely be regained once the transition is complete and the property can charge higher nightly rates.
“This summer, I think there will be some displacement depending on whether or not we go fully independent or remain within the Hilton system,” Donnelly said.
“The change is going to cause some disruption,” he said, adding that the estimated impact to revenue and earnings before interest, taxes, depreciation and amortization for the full year is “probably going to be around $5 million to $6 million.”
“Then the plan is that as we grow back, we’ll be able to pick up substantially more than that just because … [of] that particular location and being able to appeal to a leisure customer, being so close to all the tourist destinations, but also business customers in the financial district. Having more of an independent feel to that hotel, we’ll be able to command a much higher rate premium than we have in the past and ultimately better profitability.”
DiamondRock acquired the Hilton Boston Downtown Faneuil Hall in 2012 as part of a four-hotel portfolio from Blackstone. The $495 million deal also included the Westin Washington D.C. City Center, the Hilton Burlington in Vermont and the Westin San Diego Downtown.
DiamondRock reported net income of $9.2 million during the first quarter, according to the company’s earnings release. Its comparable total revenue was $243.6 million, an 23.8% year-over-year increase over the first quarter of 2022.
Comparable hotel adjusted EBIDTA was $61.9 million, a 15.9% increase over 2022 levels.
Comparable RevPAR for DiamondRock’s portfolio during the first quarter was $185.27, a 16.9% increase from the first quarter of 2022. Average daily rate was $277.92, which was down 2% from a year ago but 23.1% ahead of the first quarter of 2019. Hotel occupancy reached 66.7%, which outpaced the first quarter of 2022 by 19.3%, but trailed the first quarter of 2019 by 7.5%.
As of press time, DiamondRock’s stock was trading at $8.45 per share, up 3% year to date. The Nasdaq Composite Index was up 16.8% for the same time period.
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