DiamondRock Hospitality President and CEO Mark Brugger expects buyers will be waiting until the end of the year or even longer for high-quality hotels to hit the market, as interest rates remain elevated.
During an earnings conference call Friday, Brugger was frank about the state of hotels on the market and reemphasized the acquisition strategy of the Bethesda, Maryland-based hotel real estate investment trust. Meanwhile, as the company stands pat on acquisitions, the pace of group bookings across DiamondRock's portfolio is a reason for optimism.
Brugger said much of what's on the market comes straddled with significant renovations or repairs needed, and any hotels facing maturing loans aren't of the quality the REIT is looking for.
"I think the consensus view — and again, I could be wrong — but between both lenders and owners is if you have a quality asset, you're more likely to get a higher price in the market at the end of this year or next year," Brugger said. "And I think people are working towards that timeline versus bringing things to market now. There's not a lot on the market now.
"'Worst is first' is certainly a motto for now. The stuff that is coming in, I'd say the distress that's in the market, are really pretty terrible hotels that have things that are unfixable generally; we're not seeing quality assets come to market right now that are distressed."
DiamondRock's acquisition target this year is "one or two transactions," Brugger said.
"We have focused on off-market transactions as you know over the last several years, but those transactions kind of go on their own timeline based on the individual owners' circumstances," Brugger said. "We continue to maintain an active pipeline of those deals. Given our cost of capital and the discount to [net asset value] of our stock, they have to be exceptional deals and continue to need to be exceptional deals to be able to do them.
"We are actively looking at things now but we need to be sensitive to our cost of capital. We certainly have the dry powder and the balance sheet to do interesting deals."
DiamondRock ended 2023 with total liquidity of $623.5 million, including full capacity on its $400 million senior unsecured credit facility. Brugger clarified that the REIT isn't hesitant to pursue deals.
"We're looking at things where we think we can put our best practices. It might be an owner-operator who hasn't kept up with the market or moving rates or may not be efficient in labor practices and other things that we can bring to the table," Brugger said. "Those are the inefficiencies. We're unlikely to buy a luxury asset that's well-run in a competitive process; that's just not going to be accretive for our shareholders."
Recovery of Group Demand
Entering 2024, the group revenue pace of DiamondRock's portfolio is up 21%. Chief Operating Officer Justin Leonard said the REIT's group bookings pace for the year is at approximately 530,000 rooms, an increase from about 450,000 group rooms on the books at the same time a year ago.
"What we consider to be equal if not more significant is that we're seeing that pace increase spread throughout the portfolio," Leonard said. "It's not just driven by good years in our big group [hotels]. Our resort portfolio — though it makes up much smaller piece of the segmentation — is also up about 20% as we've really leaned in to kind of reorienting our sales teams and trying to drive some incremental demand into those resorts as we saw leisure demand tail off a bit last year."
Overall, DiamondRock's urban hotels performed better in 2023 and will benefit from busier citywide convention calendars in 2024, including in Boston; Chicago; Washington, D.C.; San Diego; New Orleans; Denver; and Fort Lauderdale, Florida.
"In Chicago, the citywide demand was fairly bunched up in 2023 with peak activity" in the second quarter, Brugger said. "In 2024, the citywide roomnights are steady after [the first quarter] in Chicago. This means the [second-quarter] citywide room nights in Chicago are lower than last year, but that the [third-quarter] and [fourth-quarter] activity is much stronger, almost two times stronger."
While group demand has recovered across DiamondRock's portfolio, Brugger admitted corporate transient demand is still down from pre-pandemic levels.
"The big special corporates, a lot of the big consulting companies and the ones that generate hundreds of thousands of room nights a year, a lot of those are down 30%, 40%, 50% from where they were in a pre-pandemic world," he said. "And we're seeing that heal gradually and slowly, and what's built into our guidance is that it continues to get a little better every quarter, but not a big upshift in the level that we're at today."
Outlook and Performance Highlights
For 2024, DiamondRock anticipates growth in revenue per available room between 2% and 4%. The REIT expects adjusted earnings before interest, taxes, depreciation and amortization to land between $260 million and $290 million.
DiamondRock ended 2023 with net income of $86.6 million, according to the company’s earnings release. Its comparable total revenue was $1.1 billion, a 4% increase over 2022.
Full-year comparable hotel adjusted EBITDA was $302.6 million, a 6.2% decrease from 2022 levels.
Comparable full-year RevPAR for DiamondRock's portfolio was $203.41, a 3.1% increase from 2022. Average daily rate was $282.02, which was down 2.3% from 2022. Hotel occupancy reached 72.1%, which outpaced 2022 by 3.8%.
As of publication time, DiamondRock’s stock was trading at $9.38 per share, down 0.1% year to date. The Nasdaq Composite Index was up 6.5% for the same time period.