It wasn't too long ago when hoteliers rallied around the high demand and pricing peaks of "the golden age of travel," and since the onset of the COVID-19 pandemic, the industry as a whole has been longing to get back to those good times.
But Mark Brugger, president and CEO of DiamondRock Hospitality Company, believes hoteliers no longer have to wait for those days to return.
"We are in a golden age of travel," Brugger said during DiamondRock's second-quarter conference call. "Consumer expenditures are turning away from durable goods briefly popular during the pandemic. Today, consumers are seeking out cherished shared experiences, such as travel and dining out together. Travelers are clearly back on the road."
Brugger said the pent-up demand from the pandemic has created a "permanently higher level of leisure demand" that extends longer into the traditional "shoulder" seasons. He was very bullish on DiamondRock's 14 resorts, adding that the segment is "the long-term winner versus pre-COVID."
"They're the ones that are going to stabilize with higher margins," he said. "I think we're under-resorted as a country. It doesn't mean like every quarter they're going to continue to go up forever, but resorts if you think about where the profitability will be and where the incremental demand kind of on a macro basis or secular changes occurred, I think resorts are still an excellent risk-adjusted place to be investing your capital."
Resorts also have more opportunities for ancillary revenue generation, which make them attractive pieces to have in DiamondRock's portfolio, Brugger said.
"There's just other revenue streams to tap. If you have a Hyatt Place in a market, there's no other levers to pull with that," he said. "If you have a Margaritaville in Key West, well, we just added a second bar, we added a retail shop, there's other ways to market other things in there.
"We can offer more amenities and charge amenity fees, we can rent bikes, there's just a lot more ways to increase margins in a resort just because you have all these different potential revenue streams."
Beyond leisure, DiamondRock's group and business-transient demand segments appear healthy, Brugger said. Group revenue on the books for 2022 has exceeded $140 million, and projected group revenue in the second half of the year is closing the gap to 2019.
"Our full-year group revenues are still behind 2019 by approximately $30 million. Recouping the impact from omicron plus the restoration of our highly profitable banquet business should power 2023 to new levels of portfolio profitability," he said.
Brugger added that the gains in the group segment continue to surprise.
"Group looks pretty solid; the outside-the-room spend has kind of exceeded our expectations every week for the last certainly 16 weeks," he said.
Transaction Opportunities
At the start of the second quarter, DiamondRock acquired the 96-room Kimpton Fort Lauderdale Beach Resort for $35.3 million in an off-market deal. HEI Hotels & Resorts will manage the property.
Brugger said the REIT also considered acquiring a boutique resort on the West Coast during the quarter, but executives ultimately determined the property wasn't a good fit.
"While we have significant dry powder for future acquisitions, we will remain very disciplined," he said. "In fact, during the quarter we carefully evaluated a West Coast boutique resort but terminated based on valuation after completing intensive due diligence."
When asked for more details on the asset DiamondRock walked away from, Brugger said that upon further review, the property was a bit limited for the company's expansion vision.
"It was a hotel we really liked, it was an irreplaceable location, independent, fee simple. We thought there was value-add things to enhance," Brugger said. "One of the major components for the value of the deal had to do with the ability to expand the boutique and add about 30% more units. But based on some of the land-use restrictions after our due diligence, we thought that that ability was more limited than we would have hoped and we weren't willing to pay for it, essentially."
Second-Quarter Performance
DiamondRock reported net income of $52.7 million during the quarter, according to the company’s earnings release. Its comparable total revenue was $279.4 million, a 7.4% increase over 2019.
Comparable hotel adjusted earnings before interest, taxes, depreciation and amortization was $101 million, a 13.1% increase over 2019 levels. Adjusted EBITDA was $92 million.
Comparable RevPAR for DiamondRock's portfolio during the second quarter was $222.70, a 6.9% increase from the second quarter of 2019. Average daily rate was $297.36, which was up 17.7% from 2019. Hotel occupancy reached 74.9%, which outpaced the second quarter of 2021 by 25.6%, but lagged the second quarter of 2019 by 7.5%.
As of press time, DiamondRock’s stock was trading at $9.16 per share, down 5.3% year to date. The NYSE Composite Index was down 11.6% for the same time period.