DiamondRock Hospitality Company Third Quarter 2026 Earnings Conference Call - DIAMONDROCK HOSPITALITY CO

Financial Performance:

• Total RevPAR increased 6.6% (driven by 200 bps occupancy gain and 3.8% rate improvement).
• Hotel Adjusted EBITDA rose 12.5% (nearly double the revenue growth rate), with 166 bps margin expansion in Q3.
• Adjusted EBITDA for the quarter was $84.8 million; Adjusted FFO per share was $0.32 (+7% YoY).
• Trailing 12-month Free Cash Flow per share grew 27% to $0.83 (excluding property tax benefit).
• Total expenses increased 3.9%, yet F&B profit grew 15% with departmental margins expanding >200 bps.
• Comparable RevPAR year-to-date is up 5.4% vs. total expense growth of 2.2% (pre-tax appeal).

Guidance and Future Outlook:

• Revised 2026 RevPAR growth guidance to 4.75%–5.25% (midpoint increased by 175 bps).
• 2026 Adjusted EBITDA guidance set at $322M–$327M; Adjusted FFO per share at $1.24–$1.26.
• 2026 Free Cash Flow per share expected to grow ~25% based on $75M–$80M capital expenditures.
• Outlook for 2027 emphasizes steady growth driven by stabilizing renovated assets, special events, and expense structure efficiency.
• Strongest group booking pace expected in Q4 2026 and Q2/Q3 2027, with Q1 2027 offering significant pickup potential.

Business Segments and Product Lines:

• Resorts: Resort RevPAR grew 8.4% (outpacing urban hotels), with resort EBITDA up 19%; margins expanded 275 bps over four quarters.
• Urban: Urban RevPAR increased 5.8%, driven by 200 bps occupancy growth and business transient demand.
• Product Specifics: Cavallo Point led performance; The DAGNY (independent) saw group revenue double since 2019; L'Auberge post-renovation revenue +23%, EBITDA +58%.
• On-Property Spend: Food & Beverage revenue +7.1%; average guest bill exceeded $440/night; top 5 luxury hotels averaged ADR >$1,300.
• Acquisitions: Acquired Belmore Inn and Spa (Delaware) for $31M on Oct 1; expected to stabilize at 9.5% yield.

Market and Competitive Landscape:

• Demand Mix: Transient revenue +8.3% (Business transient +12%); Group revenue +1% (rates +2.8% offset volume decline).
• Pricing Power: Group rates up 25% vs. 2019 levels; luxury assets with ADR >$300 generated 370 bps more RevPAR growth vs. lower-tier assets.
• Supply Constraints: Scarce new supply in upper-upscale and luxury segments supports pricing power.
• Technology: Early adoption of AI for direct booking, reservations, and upselling, particularly effective in resort segments and independent properties.

Risks and Challenges:

• Cost Pressures: Wage inflation and rising utility/benefit costs remain primary expense headwinds; labor productivity gains (4.2% improvement) are necessary offsets.
• Expense Growth: F&B revenue growth (lower margin) and higher occupancy will drive elevated absolute expense growth, potentially limiting margin expansion rates.
• Macro Risks: Management cites the broader macroeconomic environment as the primary risk factor rather than portfolio-specific issues.
• Operational Risk: Potential for lower productivity gains as "low-hanging fruit" is harvested in the coming year.

Management Commentary and Tone:

• Tone: Highly confident and constructive; management emphasizes a "flexible ownership model" and strong execution.
• Strategy: Focus on optionality through four levers: consistent execution, management changes, brand independence (e.g., The DAGNY), and targeted capital investment.
• Capital Allocation: Active on both sides of the market; conservative balance sheet (Net Debt/EBITDA 3.0x) allows for acquisitions and dividend increases (raised to $0.11/share).
• 2027 Drivers: Identifies specific catalysts including the Westin Boston franchise renegotiation, stabilization of new assets (Belmore), and special events.

Analyst Questions and Answers:

• AI & Fees: Management anticipates AI may lower customer acquisition costs and potentially brand fees over time, though immediate brand fee reductions are unconfirmed; focus is on driving direct bookings.
• Expense Outlook: Next year expense growth may be higher due to benefits, utilities, and revenue mix shifts, with productivity gains harder to achieve than in the past.
• Specific Assets: Chicago Marriott group pace up mid-high single digits for 2027; Westin Boston franchise deal yields significant immediate fee savings starting Q1 2027.
• Acquisition Strategy: No plans for "trophy" assets with low cap rates; focus remains on FFO-accretive deals using cash or conservative leverage.
• Brand vs. Independent: Independence allows for revenue management flexibility but requires time to rebuild transient segmentation; management sees value in both models.

Other Key Points:

• Lobby Renovation: Work commenced at the Westin San Diego Bayview during the quarter.
• Franchise Decisions: 10 franchise expirations expected over the next decade (2 immediate at Kempton Shorebreak and Courtyard Denver), offering optionality to switch brands or go independent.
• Labor Efficiency: Achieved 4.2% improvement in labor hours per occupied room over the trailing 12 months.
• Group Recovery: YTD group revenue is 17.5% above 2019 levels, with rate increases of >25% across all continuously-owned properties.