Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Diamondrock Hospitality Co (DRH, Financial) exceeded expectations for Q2 2024, with comparable RevPAR growing 2.2% over last year.
- Total RevPAR increased by 4.5%, driven by a strategic mix shift towards Group business, which boosted out-of-room spend.
- Group revenue increased by 7.2% over last year, with banquet catering and AV revenue rising over 20%.
- The company successfully renewed its insurance program, reducing premium costs by 16% and lowering insurance expenses by 14.5% from 2023.
- Diamondrock Hospitality Co (DRH) repurchased 2.8 million shares at an average price of $8.36 per share, totaling approximately $23.5 million.
Negative Points
- Comparable hotel operating expenses increased by 4.5% from last year, driven by a 7% rise in total wages and benefits.
- The company expects a slight reduction in room RevPAR growth due to the focus on group and occupancy strategies.
- Out-of-room spending in the second half of the year is not expected to contribute as significantly to total RevPAR growth as it did in the first half.
- The transaction market remains challenging, with a significant drop-off in hospitality transactions and a large bid-ask spread between buyers and sellers.
- The company is cautious about its leverage, which may limit the extent of share repurchases and other capital allocation strategies.
Q & A Highlights
Q: Jeff, how far along are you in identifying the non-core assets you'd potentially like to sell? Can you provide an update on the transaction market and the depth of the buyer pool?
A: Good morning, Austin. The list of non-core assets includes those we've previously mentioned, like our Westin in Washington, D.C., Chicago Marriott, and Fifth Avenue Courtyard in New York. The list hasn't changed materially. The current market is challenging for buyers due to high debt costs, creating a bid-ask spread between buyers and sellers.
Q: What's the latest update on the rate sensitivity of the leisure transient customer? Does the group demand remain strong enough for you to continue with the strategy of filling the base without sacrificing rate too much?
A: It's more of a reversion to prior patterns rather than weakness in the leisure transient customer. During COVID, demand was strong and consistent, but midweek patterns have reverted somewhat. We are successfully building the base with more discounted leisure customers midweek and more group bookings. Group demand remains strong, with group revenue up 20% in Q2 and expected to be similar in Q3.
Q: How have you been able to raise your guidance for two consecutive quarters, especially given the pressure on the leisure customer?
A: We leaned into group bookings several quarters ago, not just at urban hotels but also at resort-oriented properties. This strategy has allowed us to maximize revenue by filling midweek slots with group bookings at lower rates, which transient guests don't perceive. This approach has been realistic and effective in the current environment.
Q: What is your appetite for dilutive trophy asset acquisitions and levering up now that rates are higher?
A: Dilutive acquisitions are not appealing to us. We aim to allocate capital well, and there are many distressed urban assets with low or negative yields, which are not attractive. We seek assets with good deals from a basis perspective and some yield, threading the needle between value and returns.
Q: What does the new enterprise analytics platform give you access to that you didn't previously have, and how do you intend to utilize it?
A: The new platform standardizes P&Ls from our 12 different managers, allowing us to benchmark within the portfolio and identify cost issues more efficiently. This has helped us mitigate costs and implement best practices across comparable assets.
Q: What are your priorities for capital allocation, and would you consider a programmatic share repurchase program?
A: Share repurchases are currently one of the more lucrative areas for capital allocation. We trade at a high cap rate, making share repurchases appealing. We are comfortable buying back shares and recycling capital from asset sales into repurchases, while carefully managing our financial leverage.
Q: What is the downside of grouping up, and what circumstances might lead to leaving money on the table by taking a more aggressive approach on group bookings?
A: The downside is the long booking window for larger assets, which means taking surety for potential rate upside if the market reaccelerates. However, we decided to prioritize safety and ancillary spend by shifting towards group bookings. Our smaller assets have shorter booking windows, allowing us to be more nimble.
Q: How long do we need to wait for the larger asset disposition strategy to unlock, and what circumstances are needed for your recycling strategy to kick in?
A: I can't give a specific date, but we are looking for favorable conditions such as rate cuts and strong hotel results. The stars are aligning, and we will investigate opportunities in the coming quarters.
Q: Regarding the 14% group pace for the back half of the year, where do you think that actualizes by year-end, and what's the pace differential between Q3 and Q4?
A: We forecast high single-digit actualized growth year-over-year, with slightly better performance in Q3 compared to Q4.
Q: Are you seeing any evidence that the consumer is trading down, or is the weakness in the leisure transient segment more about travel choices rather than spending levels?
A: We see more people looking for discounts or sales and willing to change travel patterns relative to price. This is more about trading days rather than trading down. We are encouraging travelers to fill hotels during off-peak periods through price variability.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
