Q2 2025 DiamondRock Hospitality Co Earnings Call

Speaker #2: Went the distance, now I'm back on my feet. Just a man and his will to survive. So many times it happened too fast.

Speaker #3: Good day and thank you for standing by. Welcome to the DiamondRock Hospitality Company second quarter 2025 earnings conference call. At this time, all participants are in a

Speaker #3: listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentations, there will be a question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced.

Speaker #3: To withdraw your question, please press star, one, one again. I would now like to hand the conference over to your speaker today, Briony Quinn, Chief Financial Officer.

Speaker #4: Good morning, everyone, and welcome to DiamondRock's second quarter 2025 earnings call and webcast. Joining me today is Jeff Donnelly, our Chief Executive Officer and Justin Leonard, our President and Chief Operating Officer.

Speaker #4: Before we begin, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under federal securities laws.

Speaker #4: As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from what we discussed today.

Speaker #4: In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.

Speaker #4: Comparable REPCAR growth in the second quarter was 0.1%, driven by a 1.1% increase in rate and an 80 basis point decline in occupancy. REPCAR was negatively impacted by approximately 50 basis points due to our ongoing conversion of the orchards in and Sedona, to the cliffs at La Verge.

Speaker #4: Total REPCAR growth was 1.1%, resulting from a 4.2% increase in out-of-room revenues per occupied room. This represents a notable acceleration from the first quarter and exceeds our expectations.

Speaker #4: In fact, out-of-room spend reached a quarterly high of $160 per occupied room. During the quarter, the portfolio's group room revenue increased 0.8%, business transient revenue increased 4.2%, and leisure transient revenue declined 1.6%.

Speaker #4: Food and beverage was a bright spot in the quarter, both on the top and bottom line. F&B revenues increased 3.1%, with gains in both banquets and catering and outlets.

Speaker #4: While we were pleased with top-line performance, we are even more proud of the flow-through. F&B profit increased over 6%, or twice that of revenue growth, and margins increased 105 basis points.

Speaker #4: Our asset management team has worked hard to re-engineer menu pricing, reconsider portion sizes, and refine outlet operating hours to maximize productivity. Turning to overall expenses, we are incredibly proud of how our operators manage costs this quarter.

Speaker #4: Excluding a larger-than-expected property tax increase in Chicago, our operating expenses increased only 0.7% on 1.1% revenue growth, with wages and benefits increasing 3.1%. Factoring in the portfolio's full 2.6% expense growth, hotel EBITDA margins contracted by 97 basis points.

Speaker #4: However, excluding the Chicago tax increase, margins would have increased 30 basis points. Corporate-adjusted EBITDA was 90.5 million, and adjusted FFO per share was 35 cents.

Speaker #4: Finally, free cash flow per share for the trailing 12 months calculated as adjusted FFO less CapEx increased approximately 4.5% to $63 cents per share.

Speaker #4: I'll highlight the results of our urban hotels and our orts for the quarter. Our urban portfolio, which accounts for just over 60% of our EBITDA, achieved 3% REPCAR growth.

Speaker #4: In the quarter, April was the strongest month, with 4.6% growth. However, with increased uncertainty stemming from DOGE and tariff announcements, we saw the pace of REPCAR gains slow to 1.6% by June.

Speaker #4: Nevertheless, rate growth held steady at approximately 2.5% over the quarter. The strongest REPCAR growth in the quarter was achieved by our hotels in San Francisco and San Diego, New York, Boston, and Chicago.

Speaker #4: Total REPCAR growth at ur urban hotels was 100 basis points stronger than REPCAR growth, with food and beverage revenues up over 5%. Total expenses in our urban portfolio increased 5.7%.

Speaker #4: However, excluding the property tax increase in Chicago, total expense growth was just 2.5%. This implies margin growth of approximately 95 basis points, versus the 104 basis points decline reported.

Speaker #4: In our resort portfolio, comparable REPCAR declined 6.3% and total REPCAR declined 3.9%. The opening of the redeveloped orchards in Sedona now known as the cliffs at La Verge was delayed by 12 weeks while we waited for the city to issue a certificate of occupancy.

Speaker #4: And thus, it weighed on the resort portfolio performance. Excluding the cliffs, our resort's comparable REPCAR and total REPCAR declined 4.7% and 2.7%, respectively. Similar to the urban portfolio, we saw softer performance in our resort subsequent to April.

Speaker #4: However, out-of-room spend was less impacted than REPCAR in each month of the quarter. Our resorts in Florida experienced a 4.1% REPCAR decline, an improvement from the decline reported in Q1.

Speaker #4: Out-of-room spend per occupied room increased an impressive 6.7%, resulting in a total REPCAR decline of just 0.6%. Tight cost controls translated to nearly flat hotel EBITDA margins for these resorts.

Speaker #4: As a reminder, our Florida resorts experienced an early demand recovery coming out of the pandemic and therefore experienced larger labor cost gains at that time before settling into a lower, more stable increases experienced today.

Speaker #4: Outside of Florida, resort REPCAR performance varied. Chico and Sonoma were up in the mid-single digits. However, the hyphen fail was down 23% as it benefited from a large in-house group last year.

Speaker #4: Looking into the third quarter, we expect our total portfolio REPCAR to decline in the low single digits and that expense growth will remain low.

Speaker #4: Group room revenues across the portfolio increased 0.8%, with rates up 3.3% and room nights down 2.5%. When we entered the year, our group pace for 2025 was up approximately 1%, coming off the strongest group revenue in our company's history.

Speaker #4: We have been highlighting for several quarters now that our success in second half of 2024 would present difficult comparisons for the same period in 2025.

Speaker #4: As of August 1st, our group revenue pace for 2025 is still up approximately 1%, but what you can't see is the re-acceleration we have delivered from a 20 basis point deficit just one month ago, created by post-liberation day pressures.

Speaker #4: Our group lead volumes improved throughout Q2, and encouraging statement about underlying demand. However, our conversion rate has yet to re-accelerate highlighting the continued reticence to commit in an uncertain environment.

Speaker #4: We are pleased that our hotels have a strong setup for 2026, with group revenue pace currently up 12%. As a reminder, group typically accounts for approximately 30% of our portfolio's revenue.

Speaker #4: Turning to the balance sheet, in July, we successfully refinanced upsized and extended the maturities under our senior unsecured credit facility. Increasing its size to 1.5 billion from 1.2 billion, with our pricing grid unchanged.

Speaker #4: Following the repayment of mortgages on the Worthington Renaissance and Hotel Clio in May and July, respectively, we have one remaining mortgage on the Westin Boston Seaport, which we intend to prepay in early September with the incremental proceeds from our new credit facility.

Speaker #4: At that time, we will have no assets encumbered by secured debt, no debt maturities until 2029, including our extension options. And all of our debt will be prepayable at any time without cost or penalty.

Speaker #4: We greatly appreciate the unwavering support of our lending partners throughout this process. We have declared or paid a quarterly common dividend of 8 cents per share, to date this year, and depending on our 2025 taxable income, may declare an additional sub-dividend for the fourth quarter.

Speaker #4: Once again, this quarter, we took advantage of the disconnect in our share price and repurchased just under 1.7 million common shares at an average price of $7.46.

Speaker #4: Since the end of the quarter, we have continued to repurchase shares, resulting in 3.6 million shares repurchased year to date, for 27.3 million, at a cap rate of just under 10%.

Speaker #4: We have 146.8 million of capacity remaining on our share repurchase authorization, and continue to view repurchases as one of our best uses of capital in this environment.

Speaker #4: With that, I'll turn the call over to Jeff.

Speaker #5: Thanks, Briony, and thank you all for joining us this morning. Before I begin today, I want take a moment to congratulate our team and our founder and chairman, Bill McCarten, on DiamondRock's 20th anniversary, which we celebrated in June.

Speaker #5: I am grateful for the energy and passion our people bring to DiamondRock, and I am genuinely honored to work with this best-in-class team. I want to focus my comments today on how we intend to drive outsized free cash flow per share growth over the medium term, the current transaction environment, our ROI projects, near-term value creation opportunities, and lastly, the building blocks our 2025 outlook.

Speaker #5: We believe REITs that drive among the strongest earnings and free cash flow per share growth should rewarded with leading total shareholder returns. Yes, lodging more volatile than other property sectors that benefit from long-term leases that can mask their underlying volatility, but that does not mean we cannot strive for competitive per-share growth on average over time.

Speaker #5: To achieve this end, the following is what you should expect from DiamondRock. Recycling out of low free cash flow yield hotels into higher yielding investments, capitalizing on opportunities to dispose of assets where buyers see greater value than we do, reinvesting in our assets when and where outsized ROIs exist, not just outsized REPCAR growth, thoughtfully stretching the renovation lifecycle, especially when asset quality and operating performance do not warrant refreshment, and reinvesting in ourselves through share repurchases when evaluation disconnect exists.

Speaker #5: As you'll ember, historically, we have spent 20% less per key on capital expenditures. The age and condition of our portfolio has and should continue to benefit our CapEx decisions.

Speaker #5: Giving a relative advantage. In office or retail properties, outsized tenant allowances can be employed to drive premium rents, but that does not mean it is always a sensible use of capital to do so.

Speaker #5: Similarly, REPCAR and EBITDA too can be arguably bought through excess capital investment. Earlier, Briony shared our free cash flow per share results. I encourage folks to incorporate after CapEx metrics into your evaluation framework to understand whether stewards are earning an appropriate return on your capital.

Speaker #5: With respect to the transaction environment, not much has changed since our last call. There continues to be interesting acquisition opportunities. However, sellers generally remain unpressured and patient.

Speaker #5: Over the last few months, our underwriting has leaned toward group and leisure-oriented resorts, as well as distressed urban properties. Asking cap rates on these resorts range from 7% to 9%, but after upfront capital and property tax resets, are realistically 100% 150 basis points tighter.

Speaker #5: Higher-end irreplaceable resorts are often marketed with 5% to 6% asking cap rates. And urban markets, newer, high-performing assets are asking 7% cap rates, whereas older assets requiring capital are asking 9% cap rates.

Speaker #5: Again, after initial CapEx, the going in yields can be 100% 150 basis points lower. In all of these cases, pricing is at a premium to where we currently trade.

Speaker #5: Accordingly, our best use of capital has been and continues to be repurchasing our shares at just under a 10% cap rate and funding our ROI project in Sedona, which we expect to achieve a greater than 10% stabilized yield.

Speaker #5: We continue to work on asset dispositions. Our timeline was negatively impacted by repercussions of recent federal policy changes, nevertheless, we remain focused on a creative recycling opportunities.

Speaker #5: While we do not typically put a timeframe on such transactions, we expect to be more active over the next 12 to 24 months than we have been historically.

Speaker #5: Turning to our internal investment projects, last year we had six hotels with staggered renovations throughout the year, and this year we have four, again, staggered to minimize renovation disruption.

Speaker #5: The hotels under renovation last year provided solid revenue and EBITDA tailwinds for our portfolio this year, and we again look forward to a tailwind in 2026 from this year's renovations.

Speaker #5: The largest tailwind and most meaningful with respect to the value of hotel is the roughly $25 million renovation and integration of the orchards in now known as the cliffs.

Speaker #5: Into La Verge de Sedona. With stunning views of Red Rocks, the renovated rooms have been exceptionally well received by guests. The two resorts will be fully integrated in late Q3, with the new hillside pool, bar area, and event space completed at that time.

Speaker #5: Despite the elevated revenue disruption from waiting for a tificate of occupancy, transient and group bookings are now accelerating. Wedding revenues at the cliffs in this partial year are expected to more than double the full year of 2024.

Speaker #5: The cliffs alone should drive a 25% to 50 basis point tailwind to REPCAR growth in 2026. We remain quite comfortable this ROI project will achieve a 10% yield on cost upon stabilization.

Speaker #5: It is our view that renovations and repositionings with a compact scope and timeline, such as Sedona, or the Dagnay in Boston, are the most suitable for a public company.

Speaker #5: You should not expect us to undertake large multi-year repositionings. As for future value creation opportunities in portfolio, our single largest opportunity to add rooms is on our more than 700 acres at Chico Hot Springs in Montana.

Speaker #5: Down the road, there are potential oceanfront residential development opportunities in Destin as well as Fort Lauderdale. Moreover, three of our franchise agreements expire between 2025 and 2027.

Speaker #5: This rare occurrence represents an opportunity to create shareholder value with little to no material capital expenditure, either through reflagging, deflagging, or even sale.

Speaker #5: The largest among the three is the nearly $800 room Westin Boston Seaport District. With an agreement set to expire in December 2026. We look forward to updating you as that process unfolds.

Speaker #5: Before wrapping up with our 2025 guidance, I'd like to provide some context around our portfolio as we sit in an operating environment that has been and is expected to continue to benefit higher-end portfolios.

Speaker #5: When compared to our full-service peers, we have the second highest annual occupancy, the second highest percentage of rooms with ADRs over $300 per night, the second highest hotel EBITDA margin with the highest rooms and F&B margins this quarter, a year-to-date REPCAR index of 115, and 40% of our hotels enjoy top five TripAdvisor ranking.

Speaker #5: Now, these results were achieved with the lowest G&A per hotel, almost 40% below average. While spending 20% less per key on CapEx than our peers.

Speaker #5: Expense and capital efficiency are just as critical as top-line performance. Now, to our outlook. In broad strokes, our crystal ball is by no means clear, but it does feel incrementally less cloudy than it did just three months ago.

Speaker #5: The pace of federal policy shifts over the last several months have likely peaked and should moderate into mid-term elections. While these shifts have been highly disruptive and we've ienced their incremental impact on performance thus far, they have had relatively less impact on our corporate and more affluent leisure customers.

Speaker #5: We have seen this in the improving group lead volumes throughout Q2 in our higher-end portfolio, an acceleration in our 2025 and 2026 group pace in the last month, continued strength in out-of-room spend for both transient and group guests, and flat demand in July after several months of downward pressure.

Speaker #5: I'll emphasize it is early, but our operating results and forward bookings indicate we are possibly entering a more stable operating environment than we are experiencing just three months ago.

Speaker #5: We are maintaining our full-year outlook for REPCAR growth of negative 1% to plus 1%, but we are encouraged by the increased out-of-room spending trends we experienced in Q2 and early Q3.

Speaker #5: We now expect total REPCAR growth to outperform REPCAR growth by 50 basis points in 2025, an increase from our prior assumption of in-line performance.

Speaker #5: For the third quarter, we expect REPCAR to be down in the low single digits, with the toughest comparisons in August. We expect our 2025 corporate-adjusted EBITDA to be in the range of $275 to $295 million, up 2.5 million at the midpoint.

Speaker #5: An FFO per share to be in the range $96 to $1.6, up 1 cent at the midpoint. Our projected capital expenditures are unchanged at $85 to $95 million.

Speaker #5: Our 2025 guidance does not assume we redeem our eight and a quarter percent preferred shares, which can be redeemed on or after August 31st.

Speaker #5: Our guidance does not assume the repurchase of additional common shares, which are currently at an implied 9.7% cap rate. Although our upsized credit facility has provided us with a liquidity to do so, should we so choose.

Speaker #5: So, thank you for our time this morning, and we'll be happy to answer your questions.

Speaker #6: Thank you. As a reminder, to ask a question, please press star one one on our telephone and wait for our name to be announced.

Speaker #6: To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Smeads Rose with Citi. You may proceed.

Speaker #7: Morning, Smeads. hi, good, hi, good ning. Jeff, I wanted to ask you about, something you said in, in your prepared remarks and the, and the release about stabilization at the higher end of the portfolio.

Speaker #7: could ou just talk about, were you talking about specific properties? Were you talking about guests within your overall portfolio that you would deem higher end that are spending more or kind of just could you just sort of, flesh that out a little bit?

Speaker #8: Sure, sure. And, sorry for any confusion. yeah, the, the quote I had in the release was really referring to our portfolio on whole. and we were speaking to demand no longer being as, as soft as we were seeing in recent months.

Speaker #8: so effectively, we are moving towards stabilization. So bottom line, it was meant to be a comment, speaking about fundamentals improving from sort of a softer point in time.

Speaker #7: Okay. And then I wanted ask you just mentioned for the third quarter low single-digit REPCAR declines, you know, I think that's kind of a theme we've seen across, the industry as we kind of rap up second quarter.

Speaker #7: But just for you guys specifically, are you seeing it across the board, or is there particular weakness in leisure? Could you just talk about what’s driving the decline?

Speaker #8: It scares me to just that, I think we've, honestly, I think we've been pretty consistent about, you know, Q3 weakness, from the beginning of the year.

Speaker #8: We, you ow, we had a phenomenal Q3 last year in particular with the DNC in Chicago. It was kind of a one-time, you ow, anomalous event that makes for a difficult comp for the company.

Speaker #8: So I think that's really what's driving our Q3 weakness. It's not necessarily a change in trend line. I just think particularly in August, you know, we have a bit of a group pace deficiency given some outsized events that happened last year that are non-recurring.

Speaker #7: Okay. I mean, I just, you know, looking at the results last year for the Chicago Marriott, I mean, it looks like it was pretty much in line with the prior year of '23.

Speaker #7: I'm just wondering what, did they both, I an, is it just a more difficult comp for both years or?

Speaker #8: It, I think Boston also has a bit of a difficult comp, just to give you an example, I mean, in August, I think the Chicago Marriott did over 50% group last year.

Speaker #8: That, 's just not a typical, you know, group component in a month like August for that hotel. You know, at a rate that was, you know, significantly in excess of what we typically achieve in August, just attributable to the Democratic National Convention.

Speaker #8: So I think that in particular is the, you know, is, the one thing that proves a difficult comp for us.

Speaker #7: Okay. Thank ou.

Speaker #6: Thank ou. Our next estion comes from Cooper Clark with Wells Fargo. You may proceed.

Speaker #9: Hey, thanks for ing the question. Appreciate your earlier comments on shared buybacks, and it seems like you still got some room left within your leverage target, but curious how to think about the continued buybacks with respect to addressing the preferred after it becomes redeemable later this month.

Speaker #8: yeah, good ning and thank you. I mean, certainly share buybacks are an attractive use of capital. It's something that at this point, you ow, where we're trading today, I ink is still sort of a high nine cap rate close to a 10 cap rate.

Speaker #8: It is very appealing. you ow, we certainly look , the opportunity to repurchase the preferred. That's not in our guidance for the rest of the year.

Speaker #8: It's something that we'll continue to weigh is, you know, we frankly move through the quarter end of the year end as to at the best use of capital is.

Speaker #8: But I think we have a lot of flexibility to pursue, you know, attractive options across the board.

Speaker #9: Great. Thanks. And then just as a quick follow-up, could you provide an update on the Sedona repositioning? Curious if you can provide any update on expected performance at the hotel and how rates on forward bookings there are trending for Q4.

Speaker #8: Yeah, there's, it's still early. I an, the, the hotel is really kind gotten to a point where it's really begun marketing itself. And when you think about Q4, it's not, traditionally like what I will call in-season for Sedona.

Speaker #8: you know, typically it's more of a spring and fall season, but the, the booking pace that I was looking at yesterday was actually pretty encouraging that when you look at just the cliffs building, you know, we're etting group business in Q4, which is historically a period of time that we would not be getting that type of business.

Speaker #8: I think a lot of that has to do with this renovation, but also when you look at the rates year over year, they were up 150 to $200 over the prior year.

Speaker #8: So it, it does seem like it's very early days, but it's working out as we were expecting.

Speaker #9: Great. Thank you y much.

Speaker #6: Thank you. Our next question comes from Austin Wirschmidt with KeyBank Capital Markets. You may proceed.

Speaker #10: Thanks. And good morning, everybody. You had referenced that you’d started to see kind of the group pace pick up here over the last month and sort of closing the gap from the negative 20 bps to plus 1 over the back half of the year.

Speaker #10: W-which segments of the business are really driving that? Is it urban, resort? Is it, you know, a little bit due to the opening in Sedona?

Speaker #10: And then, you know, I was wondering if you typically see lead volume improve before kind of the conversions, to booked business, you know, increase in, in kind of these types of periods and just that shorter booking window overall.

Speaker #10: Thanks.

Speaker #8: I, I mean, this is Jeff. I say on the first part of your question, I mean, a lot of the, the improvement of in the group booking pace revenue for the year is really gonna be in urban side.

Speaker #8: I mean, you know, some of our resorts, they might have a small group component, but, maybe not so much that it's going to, you know, carry the weight for the entire portfolio.

Speaker #8: I think it's just the success we've on some of the short-term group, candidly still is been more difficult to get some conversions. I don't know, Dustin, do you have thoughts on?

Speaker #11: I, I think from a short-term perspective too, we're a little bit more optimistic about Q4, just given that we don't have an election on a year-over-year basis.

Speaker #11: There's a couple more weeks of availability that we're kind of off the table last year just from a group booking perspective that we have the ability to sell into in the short term.

Speaker #9: I got it. And then could you just frame up how much of a drag, you know, group has been on portfolio REPCAR growth this year and, and while I know the, the group pace for '26 doesn't necessarily equate to what you'll actualize, but is there any way frame up what the magnitude of that swing could be?

Speaker #9: And then which markets in '26 are really driving the uplift? Thanks.

Speaker #8: Yeah, I was gonna say I'm not re if, like, group is necessarily a drag. I mean, certainly business transient in the most recent quarter has been, you ow, one of the bright spots, I say, but I think when you think to back half of the year, our group pace is relatively flattish, I ink.

Speaker #8: you're on a -over-year basis. So thus far, it hasn't really been, a drag, but it's for reasons we mentioned. It's because of that DNC convention anniversary in, Q3 and, I would say largely it kind of creates the, the challenges on group in the back half of year for us.

Speaker #8: But that's been known; that's not new news, I would tell you. That's kind of been known for effectively 12 months since we had the good results last year.

Speaker #9: And then just with respect to '26, what are the big drivers of that?

Speaker #8: Oh, for, our pace in '26, I mean, I think Boston is probably our best market from a -over-year growth perspective. If it got a phenomenal citywide calendar in '26, I think it's, it's really the gest, biggest driver from a portfolio-wide perspective.

Speaker #9: Yeah. Our, our group revenue pace continues to be pretty strong for next year. I think it's low double digits.

Speaker #6: Thank you. Thank ou. Our next question comes from Chris Horongo with Deutsche Bank. You may proceed.

Speaker #12: Hey, good morning, guys. Thanks for questions.

Speaker #6: Sure.

Speaker #12: you, morning, Jeff. so on the leisure side, I, I think I, I think you mentioned a little while ago on the prepared comments, Jeff, that resorts were, you know, one area where you were, you were focusing, on potential acquisitions at, the right, right price.

Speaker #12: if, if you guys studied the, , the impact of cruise, you ow, I, I think there's some concern out there that, you ow, that the hotel industry is, particularly resorts is kind of in this secular trend of losing some business to the cruise line industry.

Speaker #12: And I'm curious as to whether you guys believe that or if you've done any work on that, and if that would potentially shape your decision.

Speaker #8: Yeah, it's a, it's a good estion. I would tell you that, I mean, 's always difficult because, you know, it's not like cruise line passengers call us and tell us that they would have come.

Speaker #8: so it's hard to definitively know. I ink some of it has to deal with the price point of hotel that you're ing after and maybe, in some ways, regionally where it is.

Speaker #8: you know, that it would be more of a, a cruise line customer. But, it's certainly something that we think . you know, whether or not, like, cruise is gaining share or not, but, you know, again, it's like it's, it's hard to isolate it one thing 'cause it depends on the type of property.

Speaker #8: I mean, Lake Austin, for ample, which is a very high-end spa product. I don't know if it necessarily competes directly with a cruise line customer, but, again, it just sort of relates to the, you know, where you're getting your market from.

Speaker #8: So it's, it's something we do think , certainly in the keys. I think you see more maybe direct competition.

Speaker #12: Yeah. Yeah. Okay. Make, makes sense. Thanks, Jeff. And then, there's a follow-up, on costs. You know, I, I think we're hearing, certainly from, you guys and, and, and from others, that, you know, there appears to be a little bit of letup in, , in the, in the pressure, especially on wages.

Speaker #12: And, and I know there's always gonna be a little nuances or, or maybe big nuances with property taxes and insurance, but overall, when you say you're, you ow, more or less encouraged than you were three or six months ago on kind of the direction of pressure on, especially wages.

Speaker #8: Yeah. I mean, I think this most recent quarter, taking out the Chicago property tax, I mean, our expenses is, I believe Briony mentioned, were up about 70 basis points.

Speaker #8: And I think 3% growth in, in labor costs, I think if I'm not mistaken, I think our wages were up about 2, I think it was.

Speaker #8: yeah. So, I mean, I ink, it, it's been a little bit better than we expected. I, I can't speak to what peers have seen, but I do think one of the advantages we've had is that, when you think about our portfolio over the last few years, we do have a little bit more leisure exposure, and I think those the assets and markets that recovered earlier in the pandemic.

Speaker #8: So, we were bringing staff, you know, when actually raising wages to bring people back to the hotel. Whereas I feel like some of the urban markets, which may be a little bit, I've seen their demand recover later in this cycle. You know, you probably have some markets like, for example, West Coast markets that might still be recovering their group demand.

Speaker #8: So they're still staffing up. And you're still probably learning what your true labor costs e. It would be my sense is like why our, why our cost exposure on, labor maybe is proving a little better than average.

Speaker #12: Yeah. Yeah. That makes sense. Great. Thanks, Jeff.

Speaker #8: Thanks.

Speaker #6: Thank you. Our next question comes from Dwayne Pennyworth with Evercore ISI. You may proceed.

Speaker #13: Hey, thanks. Morning. Happy Friday. Jeff, you have really good perspective on the lodging industry and, and industry macro. And, certainly wouldn't be asking you for guidance at this point, but as you look further out, what would you view as the kind of key drivers of acceleration, in industry REPCAR?

Speaker #13: Or is your base case, we are still kind of chopping around at these flattish levels next year?

Speaker #8: Well, I hope we're not. I mean, I'd like to believe that, you know, some ways, some of the uncertainty that think is, you ow, been looming around the economy, which in my opinion kind of stifles the private-fixed investment, which tends to be one of the gest drivers of REPCAR over time, you know, I, I think companies are being encouraged to reinvest domestically and, but even that aside, I think if we have sort of less turmoil on the political front that maybe gives companies a little more confidence, those things will improve or create an improved situation next year where you're maybe you'll see a little bit more fixed investment.

Speaker #8: And at the time, lodging really has no supply in the pipeline. It's just not a concern. So I'd like to believe that we'll see REPCAR be accelerating next year.

Speaker #12: Thank you. And then, specifically to this big refi you just did, which will unencumber some properties from mortgage debt, can you talk a little bit about what kind of flexibility this provides?

Speaker #12: Is it operational flexibility, or transactional flexibility, or something else?

Speaker #14: Yeah, Dwayne, I would say it's a little bit of both, right? It does provide us, having our properties unencumbered by secured debt, a lot of operational flexibility and allows us to make decisions at the property that don't get bogged down by needing lender consent.

Speaker #14: And I guess on the transaction front, right now, all of ur debt, is completely, you ow, prepayable at our option. with no penalty. So that's another advantage.

Speaker #12: Yeah. And one last point I would make, Dwayne, too, is that, you know, effectively all of our debt now is really at market.

Speaker #12: So there's no, I would call it, headwind to our FFO and cash flow around debt resetting and rolling up to where the market is, to the extent you had sort of pre-pandemic or pandemic RO level debt.

Speaker #12: Thank you.

Speaker #8: Thanks.

Speaker #6: Thank ou. Our next question comes from Daniel Hogan with Baird. You may proceed.

Speaker #15: Hi, good morning. Thanks for the e. quickly on the out-of-room spend, is this, is, is this level of growth then sustainable into 2026? And is there sort of any confidence behind, any reason for confidence behind that?

Speaker #15: And then, you talk a bit about the pricing power on the out-of-room spend, maybe breaking out, ou know, price versus volume that's baked into this growth.

Speaker #8: Yeah, it's, I, I would say it's a, it's sort of too early to say for 2026. We're just beginning our budgeting process. I think it's a function of how group shapes up, you ow, for next year and how that drives banking and catering.

Speaker #8: you know, group's had a, a nice run, don't read into that, that it won't continue to do well, but I think your group mix has something to do with that as well as just how is the leisure customer also performing.

Speaker #8: So, I'm, I'm optimistic that can hold, but there's nothing yet that I have, ou know, conviction to say one way or the other. as far as the, the price versus volume, I, I candidly don't have a great answer for you for that.

Speaker #8: I ink, I, I do think, h, it's probably skews maybe a bit more towards price because some of the out-of-room spend certainly is in F&B where it can be sort of, you know, rethinking our menus, whether it's pricing, whether it's portion control, but it's also non-food and beverage items.

Speaker #8: you know, like parking or amenity fees, and whatnot. So I, I don't have a great answer for you on the breakout, but, my, my instinct is it's probably a ittle bit more on price.

Speaker #9: Okay. And then, and following up then, do you have, do you have any info on the growth just out for the out-of-room spend on F&B, not F&B, banquet and catering, parking, is the growth being just driven across the board or, do you just, I guess, your, your growth rics?

Speaker #8: Yeah. Yeah, I gonna say, I mean, I think, I think this quarter, like, the growth that we've seen has been pretty broad-based. I mean, both in from group business and, sort of leisure transient business.

Speaker #8: So that means that really, it's something that we're eing in both urban hotels and, you know, more traditional and resort hotels.

Speaker #9: Okay. Great. Thank you very much.

Speaker #8: Thanks.

Speaker #6: Thank you. Our next question comes from Chris Darling with Green Street. You may proceed.

Speaker #16: Hey, thanks. Good morning. Jeff, you mentioned an intention to more actively pursue asset sales over the next call at one to two years. can you talk about how you balance the arbitrage opportunity on the one hand, relative to the reality of being a smaller cap REIT and some the efficiency concerns that might come with that?

Speaker #16: is that in any way a governor on your willingness to shrink, you know, relative to alternatives recycling capital into new acquisitions, thing like that?

Speaker #8: Yeah, that's a good question. I mean, I think, we, we occasionally get that question of how do you balance that? I guess I would say there certainly are, other companies in our sector that are smaller, than us.

Speaker #8: And ironically, some of them have op, you know, better valuations than us, which is a bit of a bit of a head-scratcher for me.

Speaker #8: So, you know, ultimately, I think, if there's a disconnect, meaning that we get too small, you know, there, there are other forces that can solve that for you.

Speaker #8: But, you know, it's something we consider, but I would say it's not something we lose sleep over in trying to do the right thing at the end of the day.

Speaker #16: Okay. That's, that's fair enough. That's it for me. Thank you.

Speaker #8: Thanks.

Speaker #6: Thank you. Our next question comes from Flora Spandictum with Leidenberg. You may proceed.

Speaker #17: Hey, guys. Thanks for taking my question. So, Jeff, I wanted to hear your thoughts more, big picture. you know, as, as you want to be judged by the market, sh-should the market look at DiamondRock in terms of growth and adjusted EBITDA, or should, you know, estors look at the growth and FFO per share?

Speaker #17: What are the key, you know, what are the things that you think people should be focusing on and, w-w-what are people misconstruing about the company?

Speaker #8: I think it's just more of a comment that I make about, you know, the sector and, and that's why I referenced some of the other property types, Flores, is that I think at the end of the day, if, you ow, any one of the people on this call owned this company entirely or any company entirely, you know, you'd be more focused on how much you personally bring to the bottom line rather than some, ou know, sort of the top of the income statement metrics.

Speaker #8: So, I understand that the industry uses EBITDA, both public and private, for valuing assets, but I think if you were a private investor, you were much more cognizant to the capital you're spending to drive that.

Speaker #8: I think the way that, you know, Wall Street, sometimes just focuses more on REPCAR and EBITDA unfortunately ignores some of capital that goes in to drive those results.

Speaker #8: And I, there's a balance. I think you wanna be, you know, sort of investing appropriately rather than just necessarily overspending. So, I'm not saying it's necessarily one metric versus the other, but I think ou have to keep an eye on that CapEx.

Speaker #8: So whether it's a, an EBITDA after CapEx or it's a, an FFO after CapEx, like a free cash flow per share, I think there, it, it has merit to look at as part of a valuation framework.

Speaker #17: Thanks. And m-maybe my follow-up question, maybe if you guys could talk a little about the Chico opportunity. what's, what do you think you can do?

Speaker #17: How much capital could you spend there? And what are some potential returns? Is it still too early at this point?

Speaker #8: It's still too early at this point. It's just that we have a substantial amount of land there that, you know, whether it could be, think it's like residential developments, not that we would do , per se, but, you ow, there's opportunities that you could sell off land for that or it could be add keys there.

Speaker #8: that, as I mentioned, that land is, is substantial enough. And if you've seen it, there's ways that you could add rooms and make it part of the existing property, but you could make something entirely different.

Speaker #8: And, you know, to be lear, like, I, I, don't think we necessarily wanna be hotel developers. But, that's something where you could do, you ow, whether it's glamping or something that's more modular, there's, there's opportunities.

Speaker #8: That's something that we're thinking . But it's not at the point now where I could give you sort specific numbers or returns, but it's, it's certainly, an interesting opportunity given, I would say sort of the, the ease of maybe building out there.

Speaker #17: Presumably, the returns would have to be well in excess of 10% in order for you to justify putting capital into that, right?

Speaker #8: Yeah, or higher. You know, you want to hire certainty. It's, you know, I, I off the cuff, would tell you that I would not expect that to be, you know, materially larger than like the work that we've done at Sedona, for example, or the Dagnay.

Speaker #17: Great. Thanks, Jeff.

Speaker #8: Thanks.

Speaker #6: Thank you. And as a reminder, to ask a question, please press star one one on your telephone. Our xt question comes from Ken Billingsley with Compass Point Research and Trading.

Speaker #6: You may proceed.

Speaker #15: Good morning. I wanted to ask a question on...

Speaker #8: Oh, sorry. We lost you.

Speaker #15: Your. Can you hear me?

Speaker #8: nope, sorry. I lost you there for a second.

Speaker #15: Oh, I remember business as. Oh, all right. great. so my, my question's just on, on group with, being 30% of revenue, and it's I would expect competition, in the industry going after group and trying to get it to accelerate for them is, is gonna be high.

Speaker #15: So can you talk about how, you know, it's ike an unbranded portfolio versus the, branded or maybe have rewards? Like, how do you market and, and how are you guys going after and grabbing group business and what will likely be a more competitive environment?

Speaker #8: Yeah, I gu I ess I'd say just sort of depends on the asset. You know, for ample, like, like Cavallo Points in, in Sausalito, like, that's an example where, you know, the type of customer going after, you know, during the week, they can be sort of small group meetings looking for like an off-site, you know, it's the 30 to 50 to 70 person meeting, that's maybe for sort of tech companies.

Speaker #8: And they, they're not inclined to want to go into downtown San Francisco right now. So, I guess I would say it really depends on the situation. Because at the other end of the spectrum, you have a 1,200-room Chicago Marriott where you're hosting more of an association business.

Speaker #8: you know, and Marriott is, excellent at that type of, marketing and sales. I, I, I definitely. I think they're, their reality of our portfolio is our large hotels, our predominantly brand, you ow, in brand encumbered.

Speaker #8: And so we do rely on to some extent on kind of that, that brand lead channel for a large amount of our group business.

Speaker #8: But I think, Jeff mentioned, on the smaller side, especially as you sort of tilt into the luxury segment, I think customers are looking for a differentiated experience and don't necessarily wanna have, you know, a high dollar event at something that carries a brand tagline.

Speaker #8: So I think that's where we've definitely seen some excess, success in places like Cavallo, Sedona, Henderson Beach, where people are looking for a differentiated experience.

Thank you. I would now like to turn the call back over to Jeffrey Donnelly for any closing remarks.

Uh, no, no closing remarks. I hope everyone has a good summer. Thanks.

Thank you, this concludes the conference. Thank you for your participation. You may now disconnect

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