Hotel acquisitions in resort destinations have provided a performance boost to DiamondRock Hospitality Company's portfolio, leading executives to commit to kicking the tires on additional assets on the market.
On a call to report third quarter performance, executives at the Bethesda, Maryland-based real estate investment trust also spoke candidly about the state of hotel transactions, their appetite for mergers and acquisitions, and busy 2022 convention calendars in their urban markets.
During the third quarter, DiamondRock acquired two hotels for $108.6 million: the 220-room, lifestyle boutique Bourbon Orleans Hotel in New Orleans' French Quarter, and the 37-room Henderson Park Inn, a beachfront property located in Destin, Florida. Including transaction costs, the total investment in the deal was $117.4 million.
DiamondRock President and CEO Mark Brugger said both properties have already shown their value at the tail end of the summer leisure season and into the fall. He added the REIT is considering deals for similar properties in U.S. leisure markets.
"These acquisitions align with our strategy to focus on hotels that resonate with today's traveler, as they are experiential and leisure-oriented lifestyle hotels," Brugger said, adding DiamondRock is "actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets."
DiamondRock has invested $30.1 million through the first three quarters of 2021 to upgrade some of its other hotels and resorts in leisure markets. The Lodge at Sonoma in Sonoma, California, completed a renovation and was rebranded to Marriott International's Autograph Collection. The company is almost finished renovating the Vail Marriott Mountain Resort in Vail, Colorado, which will be rebranded as The Hythe Vail, a Luxury Collection Hotel. DiamondRock also is converting the Barbary Beach House Key West in Florida to the Margaritaville Beach Resort Key West and intends to renovate and rebrand the JW Marriott Denver Cherry Creek to Hotel Clio, a Luxury Collection Hotel.
Brugger was asked if the leisure demand wave and high rates will continue next summer and if DiamondRock's investments in leisure markets make sense in the long term.
"I think people have permanently valued leisure higher. There's been some retraining on what the rates are at a lot of these properties," he said. "And the work-from-anywhere environment, particularly, is going to create that Thursday-through-Sunday [booking]. They'll arrive Thursday, leave Monday; it'll create periods of traveling that didn't exist before."
Transaction Opportunities
DiamondRock has approximately $300 million on its balance sheet that executives are comfortable deploying on new hotel acquisitions, Brugger said. He added the company has sent out offers on five properties in mostly off-market negotiations.
"We've lost every bid in a broker deal this year because there is a ton of capital chasing hotels," he said. "It is a highly competitive environment. Every private equity firm is chasing hotels; they like the recovery story. And some other REITs have stretched much more than we would have on certain acquisitions with just different assumptions and outlooks."
As DiamondRock expands its portfolio with boutique, experiential hotels, Brugger said the company will also look at opportunities to shed large group hotels in major urban markets. Chief among the markets DiamondRock could reduce its footprint is in Chicago, where the REIT has the 1,200-room Chicago Marriott Downtown Magnificent Mile and the 311-room The Gwen, a Luxury Collection Hotel.
"Chicago is a market that probably over time, we would love to shrink our exposure given that it's always had supply challenges, and it's much more rate-sensitive than a market like Boston," Brugger said. "It could provide an opportunity when cash flows are returning to potentially reduce some of that exposure. ... We'll continue our strategy that we've had for the last seven or eight years of moving more into these lifestyle experiential properties and submarkets, like Sedona and Huntington Beach and Vail, and so selling something like a Chicago asset would certainly be consistent with executing on that long-term strategy."
Group and Business Transient Expectations
That doesn't mean DiamondRock is looking to exit all of its urban markets. Brugger said there is plenty of evidence supporting a recovery of business transient and group demand segments. Citywide room nights scheduled for 2022 look on pace with or above 2019 levels in Chicago, Boston, Phoenix, San Diego and Washington, D.C.
The recovery of business transient demand, specifically, is a matter of when, not if, said Thomas Healy, DiamondRock's chief operating officer and executive vice president of asset management.
"The consulting groups are coming back, and that's very positive. The question is, how fast do they come back?" Healy said. "We certainly believe once we get into [the first quarter] of 2022, when we get through that and all the vaccines get done ... we should see a real big spike up in business transient activity. We are also seeing a lot of short-term pharmaceutical group [business] and if you think about them back in the '90s, pharmaceutical drove the hospitality business."
Appetite for a Merger
Analysts asked if DiamondRock would accept any buyout offers, which Brugger didn't dissuade.
"We're not scared of private equity. We're fiduciaries for our shareholders and will always do what's right," Brugger said. "If that means we get a big offering to sell the company at a premium, it's certainly something that would be the right thing to do for our shareholders. The merge to avoid that would not be a strategy we deploy."
At present, DiamondRock is not looking to join with other public hotel REITs to gain more leverage in the hospitality industry, Brugger said, noting such mergers aren't a guarantee to success in the hotel space.
"Mergers in the public-to-public [space] make sense if you can articulate a clear strategy after the merger, and you clearly articulate that you didn't pay too much," he said. "If it's a clear strategy and the stock price should be higher, that's fine. But we're in a space that bigger hasn't proven by itself to create value."
Third Quarter Performance
In the third quarter, DiamondRock reported a net loss of $1.8 million, down 115.5% from the third quarter of 2019. Hotel adjusted earnings before interest, taxes, depreciation and amortization was $48.3 million, down 31.6% from the same quarter in 2019, according to the company's third quarter financial release.
DiamondRock's portfolio reported comparable hotel occupancy was 65.1% in the quarter, a 16.5% decrease from the third quarter of 2019. Comparable average daily rate was $238.34, up 0.7% from 2019. Revenue per available room was $155.17 in the third quarter of 2021, down 19.6% from the same quarter in 2019.
As of press time, DiamondRock's stock price was trading at $10.52 per share, up 27.5% year to date. The New York Stock Exchange composite was up 18.7% for the same period.