Pivoting the real estate investment trust's strategy to focus on destination resorts and lifestyle hotels continues to pay off for DiamondRock Hospitality, according to President and CEO Mark Brugger.
"The positive results of the fourth quarter and the full year were powered by DiamondRock's large portfolio of drive-to resorts," he said on a fourth quarter and full-year earnings call with analysts Friday. "Several resorts achieved record-breaking rates in 2021, and we are seeing this trend continuing."
In total, a dozen of the REIT's resort and lifestyle hotels beat 2019 revenue per available room levels in the fourth quarter, led by properties such as the Henderson Beach Resort in Destin, Florida.
DiamondRock made the decision seven years ago to strategically focus on resorts in destination markets, which have significantly benefited from robust leisure demand, he said.
"Since that pivot, we have completed more than $1 billion in transactions to assemble a portfolio that today defines DiamondRock.
"We remain all in on our thesis that superior profit growth can be achieved from experiential resorts and lifestyle hotels. Going forward, we intend to exclusively focus our investments on similar assets," he said.
To accelerate and fund that strategic direction, DiamondRock will recycle non-core branded urban hotels as opportunities come up, he said.
DiamondRock sold $220 million in hotels in 2021, then reinvested those proceeds into four independent and experiential properties.
Company executives expect that the REIT's acquisitions and dispositions in 2021 will add more than $20 million of incremental earnings before interest, taxes, depreciation and amortization to 2022 results.
Hotel acquisitions completed during 2021 and early 2022 have already shifted the REIT's portfolio to almost two-thirds leisure-oriented hotels and resorts.
The most recent acquisitions include the 220-room Bourbon Orleans Hotel in New Orleans for $89.9 million in July 2021; the 37-room Henderson Park Inn in Destin, Florida, for $27.5 million in July 2021; the 170-room Henderson Beach Resort in Destin for $112.5 million in December 2021; and the 103-unit Tranquility Bay Beachfront Resort in Marathon, Florida, for $63 million in January 2022.
Finding these deals in a competitive marketplace has largely been the result of building years-long relationships with owners in these "micro markets" instead of relying on brokers, Brugger said.
"We're optimistic we will close a similar volume of transactions in 2022. In fact, we are actively working on four deals right now at some stage of evaluation," he said, noting half of those deals are off-market.
Capital Improvements
Not only is DiamondRock growing in size, it's also internally improving asset value through repositions, spending $44.5 million throughout 2021.
The REIT repositioned its Lodge at Sonoma in Sonoma, California; The Hythe Vail, a Luxury Collection Resort in Vail, Colorado; and the Margaritaville Beach House Key West in Key West, Florida.
"The returns on these investments are projected to be a big catalyst to our 2022 earnings," Brugger said, noting the hotels are budgeted this year to collectively increase profits by $12 million over 2019, which is more than a 50% increase.
He said two more hotels will be repositioned in the first quarter of 2022.
DiamondRock in 2022 plans to spend approximately $100 million on capital improvements in hotels, including the JW Marriott Denver Cherry Creek, Hilton Boston Downtown/Faneuil Hall, Orchards Inn Sedona and Hilton Burlington Lake Champlain.
Fourth-Quarter Performance
Speaking during the earnings call, DiamondRock Chief Financial Officer Jeff Donnelly said fourth-quarter results were "a sharp lead" ahead of original forecasts.
"Profit flow-through was excellent. Hotel adjusted EBITDA profit margins were 22.5% and over 40 basis points above our forecast," he said.
The 12% upside to rooms revenue was driven by stronger-than-expected average daily rate, he said, partially offset by softer-than-expected occupancy from last-minute cancellations as the COVID-19 omicron variant emerged.
"The rate-driven upside pushed room profit margins over 200 basis points above forecast," he said.
For full-year 2021, resort revenues were $286 million, matching 2019. While urban hotels improved during the year, the segment remained well below pre-pandemic levels with revenues of $105 million in the fourth quarter.
In terms of business on the books, Donnelly said 135,000 definite room nights were booked during the fourth quarter, which was 8% more than the previous quarter. Of the room nights booked, 85% are for 2022. A total of 53% of travelers booked their rooms in December, he added.
DiamondRock reported a net loss of $2.9 million in the fourth quarter and a $195.4 million full year, according to the company news release.
Comparable revenues for the quarter totaled $196.8 million, representing a 13.3% decline in comparison to the same period in 2019. The full-year total was $611.7 million, a 33.5% decrease for the same period.
In the quarter, comparable RevPAR dropped 12.5% compared to the same period in 2019 to $158.53. In full-year terms, comparable RevPAR declined 32.6% to $124.74.
The REIT ended 2021 with 9,349 rooms across 32 hotels. As of today, the portfolio is at 33 hotels.
As of press time, DiamondRock's stock price was trading at $9.74 per share, up 1.4% year to date. The New York Stock Exchange composite was down 2.5% for the same period.