DiamondRock Hospitality Company isn't jumping into the fray of hotel transactions, and instead executives at the real estate investment trust are focused on reinvesting in DiamondRock's portfolio and growing their share of group business.
The 36-hotel REIT, based in Bethesda, Maryland, did not acquire any hotels in the second quarter after also standing pat in the first quarter.
When asked by an analyst during the company's recent earnings call if there were any hotels in DiamondRock's portfolio that the REIT would consider selling, CEO Jeff Donnelly mentioned the 189-room Courtyard New York Manhattan Fifth Avenue, the 1,200-room Chicago Marriott Magnificent Mile and the 410-room Westin Washington, D.C. City Center. He said those three hotels have been considered "non-core" to DiamondRock's portfolio for a while.
"That list isn't more extensive, it hasn't changed materially," he said. "It's how we're looking at those assets when we kind of think about the long-term capital leases for them and where we think we can find reinvestment opportunities. It's not all going to happen in a day, but I think those are the most likely characters that we look at as non-core for us in the coming quarters."
DiamondRock doesn't have a specific date or deadline for when it might move to sell those hotels, Donnelly said.
"We're just looking for an opportunity where interest rates are fortunately moving — or the expectation of rate cuts — seem to be moving in a favorable direction and results in our hotels doing well, so I think the stars are aligning for that," he said. "There's not a lot of assets that have been on the market that could play to our advantage, but I think there's going to be time in the coming quarters where we're going to investigate them."
When the time comes to sell something from DiamondRock's portfolio, Donnelly said he's hopeful the sell price will be favorable enough to spur the REIT to invest that capital into multiple acquisitions.
"Right now, maybe we're about two-thirds, 60% give or take, in urban markets, and I think longer term, it's appealing to us to grow our resort or leisure exposure, which we want to do so profitably, and right now it's very difficult to do that," he said. "That doesn't mean you stop looking. I think what could happen, or I guess I'd say I'd like to see happen, is that maybe you sell one of those larger urban assets and it results in two transactions — it results in an urban asset that you purchased that right now can have some attractive returns if we find the right situations.
"But maybe it results in a resort asset as well. So potentially you can replace the same or roughly the same amount of income and end up with higher concentration of leisure but you have two assets and are a little more diversified that have a better growth profile."
In the first half of the year, DiamondRock spent $35.8 million on capital improvements to its hotel portfolio, according to its earnings release. The REIT anticipates between $90 million and $100 million of CapEx for the full year. In July, DiamondRock completed the conversion of its Hotel Champlain Burlington in Vermont from a Hilton hotel to a Curio Collection by Hilton.
It's been about a year since DiamondRock converted the Hilton Boston Downtown/Faneuil Hall into The Dagny, a 403-room independent lifestyle hotel. Donnelly said its success as an independent property means the company isn't looking at aligning its other independent hotels with a soft brand to weather a possible recession in the next year.
"There's a lot of focus that people pay to the top line, but I look to The Dagny, that's one we went in the other direction and we exited a hotel system," he said. "And we said upfront that that's one where we can shed potentially 10% of top line revenue leaving the system but you will also gain back a significant amount of expense and that decision was really based on that."
Renewed Focus on Group Demand
DiamondRock's group room revenue on the books for the second half of 2024 is up 14% year over year, and group room nights on the books are 7.3% higher than 2023.
Justin Leonard, DiamondRock's president and chief operating officer, said the company's balance between leisure transient and group demand is normalizing a bit more to what the mix looked like pre-pandemic.
"I think it's more of a reversion back to prior patterns as opposed to just being a weakness in the overall leisure-transient customer. I mean, during this period of COVID, you were penalized for having groups, you were penalized for having base because the [leisure] demand was so strong and the demand pattern was so consistent," Leonard said. "I think we've seen midweek in some of our resorts reverting back to what it was in '19 but definitely not what it was in '21, and we're having to layer in more of those discounted leisure customers midweek and more groups, and I think that's where we've had success honestly and building the base."
He added DiamondRock's resorts are growing their share of group business and that's a positive sign.
"We were up 20% in group at our resorts for [the second quarter] and we anticipate to be up about the same in [the third quarter]. That's where our pace is getting, that continued shift," he said. "I think we still have the ability to put more group into these resort assets and get back to closer to what we were in 2019 from a resort perspective segmentation."
Donnelly added DiamondRock's resorts weren't losing anything by increasing their share of group demand.
"The last few years, a lot of hotels out there were effectively trained to always be taking transients, and they have to be maximizing their rates every day of the year," he said. "And then as we began to transition to today, you began to see those patterns change and I think there's a little bit of re-education in some of these resorts to realize that — this is a made up example — but the $500 rate you get on a weekend, it's OK to sell it for $350 a night to a group midweek. The transient guest doesn't perceive that, but it's revenue to us that otherwise might have been missed had we been trying to hold out for a transient guest during the week."
Second-Quarter Performance
In its updated full-year 2024 guidance, DiamondRock anticipates growth in revenue per available room between 1.5% and 3%, a revision down 0.75% at the midpoint. The REIT raised its projections for 2024 adjusted earnings before interest, taxes, depreciation and amortization to between $278 million and $290 million.
DiamondRock ended the second quarter with $629.5 million of liquidity. As of June 30, it has $1.2 billion of total debt outstanding, comprising $800 million of unsecured term loans and $373.3 million of property-specific, non-recourse mortgage debt.
In the second quarter, DiamondRock reported a net income of $24.6 million.
Comparable total revenues were $309.3 million, which was a 4.8% increase year over year. Comparable revenue per available room in the second quarter was $229.21, a 2.2% increase year over year.
Comparable hotel adjusted earnings before interest, taxes, depreciation and amortization during the second quarter was $99.5 million, a 5.5% increase year over year.
As of publication time, DiamondRock’s stock was trading at $8.10 per share, down 13.6% year to date. The Nasdaq Composite Index was up 13.5% for the same time period.