By several metrics, DiamondRock Hospitality’s hotel portfolio is performing near, at or above 2019 benchmarks.
The rebound in travel demand exceeded expectations despite the effects of the omicron variant of COVID-19 in January, DiamondRock President and CEO Mark Brugger said during the company’s first quarter earnings call. As a result, DiamondRock's hotel portfolio delivered adjusted earnings before interest, taxes, depreciation and amortization above the comparable period in 2019.
“Based on current demand trends, we expect portfolio total revenue to exceed full-year 2019 same-store total revenues for the full year 2022,” Brugger said.
Travelers, especially leisure travelers, are focused on experiential travel, he said. The hotel real estate investment trust’s 14 resorts are expected to continue to lead portfolio performance for the foreseeable future because consumer demand for frequent leisure trips has accelerated.
“The U.S. remains massively under-resorted and new supply remains permanently restrained due to the scarcity of prime resort land parcels and regulatory restrictions that often lead to an outright prohibition against new development,” he said.
So far resort guests have shown little price resistance, and advance bookings at the resorts extend into 2023 with rates higher than this year, he said.
DiamondRock is well-positioned to capture strong demand from citywide events in its key markets this year and next, Brugger said. Meeting planners are actively booking, and the company should exceed its budgeted goals for this year.
“The pent-up group demand and the need to meet make it likely that group bookings will hit new highs over the next few years,” he said. “The last segment to recover, business transient, is coming back and it has increased dramatically in just the last few weeks.”
While there have been big jumps in business transient demand, it’s starting out at low levels, he said. Full recovery will take time, and it will vary significantly by city, he said.
“With that said, overall, each demand segment is trending much stronger than we thought even as recently as our last earnings call,” he said.
Positive Trends
“The momentum in the quarter was terrific,” said Jeff Donnelly, executive vice president and chief financial officer.
Excluding January, margins in the quarter were up 384 basis points compared to 2019, he said. Room profits were strong, and room profit margins were ahead of 2019. However, food and beverage revenue and profitability lagged because of the omicron impact in January and less high-margin banquet business associated with groups.
DiamondRock’s comparable urban hotel revenue was $82 million during the first quarter, a $60 million improvement over last year, leaving a $34 million upside opportunity to get back to 2019 levels, Donnelly said. Urban hotels had a strong recovery over the quarter, with occupancy gaining 30 points from January to March and ending the quarter with average daily rate less than 1% from 2019 rates.
EBITDA margins at the urban hotels were 7% for the quarter, but the progression is the important story and highlights the opportunity, he said. EBITDA margins in January were -32% due to omicron, but by March the margins were 74% and within 350 basis points of 2019.
“Going forward, we expect the urban hotels will ultimately stabilize at profit margins better than our pre-pandemic performance,” he said.
After the setback early in the year, the company saw a steady improvement in business travel indicators, Donnelly said. Midweek occupancy grew from 36% in January to 57% in February to 70% in March and 78% in April. Business on the books for the next four weeks is already ahead of January and February, and the short-term booking trend indicators show more demand will fill in through the rest of the quarter.
Group activity accelerated during the quarter while cancellations declined, he said. During the quarter, DiamondRock had more than 16,000 group leads turn into 2.8 million room nights of business, a 36% increase in leads over pre-pandemic levels and a 40% sequential increase in room nights. Group rates on the books for the rest of the year are up 5.5% compared to 2019, and 2023 is up another 6%.
“The outlook is very encouraging, and we expect full-year group room nights to recover to 85% of 2019 levels,” he said.
Comparable resort revenue was $115 million in the first quarter, and resort RevPAR was 31% ahead of 2019, driving hotel adjusted EBITDA margin up to nearly 40%. Resorts’ total revenue was up almost 10% over 2019 in January despite omicron, 31% in February and 35% in March.
Occupancy on the books for resorts over the next 12 months is up 12% year over year at 19% higher rates, he said. In the next 90 days, occupancy on the books at the resorts is up 32% year over year at 15% higher rates.
Portfolio Management
In 2021, DiamondRock completed the repositioning of the Lodge and Sonoma, the Hythe, a Luxury Collection Hotel, in Vail, and the Margaritaville Beach House Key West. In the first quarter, those three hotels generated “massive RevPAR growth,” exceeding monthly 2019 levels by 22.7% in January, 22.6% in February and 82.7% in March, Brugger said.
The three repositioned hotels delivered an incremental $5 million of EBITDA in the quarter compared to 2019 and are projected to generate more than $15 million of incremental profit and 13% net operating income yield on the total investment in 2022, he said.
“That’s a heck of a return on our investment,” he said.
DiamondRock has several other high-return-on-investment projects either underway or under evaluation, Brugger said. The company is in the first phase of the renovation and repositioning of the Orchards Inn Sedona as the Cliffs at L’Auberge, the upgrading of its Hilton Burlington Lake Champlain to join Hilton’s Curio Collection, and the conversion of the Hilton Boston Downtown/Faneuil Hall to a lifestyle property.
The incremental stabilized EBITDA associated with those three projects is about $8 million a year, he said. That doesn’t include the benefits of adding 14 rooms to the Landing in Lake Tahoe, a new rooftop bar at the Gwen, a Luxury Collection Hotel, in Chicago or updating the rooftop pool at the Palomar Phoenix.
DiamondRock just completed its acquisition of the Kimpton Fort Lauderdale Beach Resort for $35.3 million. It was a synergistic deal with its Westin Fort Lauderdale Beach Resort, located two blocks away, Brugger said. The hotel checked all the boxes: lifestyle, fee simple, terminable at-will management agreements and “amazing upside opportunities with the best rooftop bar in the market,” he said. The company expects the resort to stabilize north of 8% yield.
The REIT has significant room for future acquisitions, he said. It’s currently close on one deal for a West Coast boutique resort, and there are several others in various stages of evaluation.
By the Numbers
DiamondRock reported net income of $10.1 million during the quarter, according to the company’s earnings release. Its comparable total revenue was $197.3 million, a 128.1% increase over 2021 and a 4.4% decline from 2019.
Comparable hotel EBITDA was $51.1 million, a 0.2% increase over 2019 levels. Adjusted EBITDA was $44.9 million.
Comparable RevPAR was $155.76, a 122.3% increase over 2021 and a 3.5% decline from 2019.
The REIT finished the quarter with more than $350 million in total liquidity and $200 million undrawn from its revolving credit facility, Donnelly said. Inclusive of its asset recycling capacity, the company has a gross potential acquisition capacity of $650 million.
The company had $1.2 billion of total debt outstanding, including $576.6 million of property-specific, non-recourse mortgage debt, $400 million of unsecured term loans and $200 million of outstanding borrowings on its $400 million senior unsecured credit facility.
The company has been restructuring and converting the majority of its Marriott International management agreements, Donnelly said. These modifications have reduced its exposure to incentive management fees, eliminating the profit-flow-through drag that its competitors face as profitability is restored, he said. In 2022, the company expects to pay $4 million, or 80%, less in incentive management fees compared to 2019.
“This is a distinct advantage for DiamondRock as the recovery matures as compared to a brand-managed portfolio,” he said.
As of press time, DiamondRock’s stock was trading at $10.40 a share, up 8.2% year to date. The NYSE Composite Index was down 8.8% for the same time period.