While people are traveling nearly as much as they were in 2019, there are varied factors at play cutting into domestic hotel demand, DiamondRock Hospitality executives said.

The slowing macroeconomic environment is weighing on the pace of business travel’s recovery, DiamondRock President and CEO Mark Brugger said during the company's second-quarter earnings call. Leisure travel remains strong, but hotels in the U.S. are again competing against cruise lines and international destinations.

“As evidence of that trend, the number of Americans traveling outbound from the U.S. to international destinations is projected to be up nearly 20% over last summer, and cruise lines are seeing big year-over-year bookings,” he said.

“In our view, some of these adjustments are just momentary events, but they were a headwind in the second quarter and will remain a headwind until later this year,” he said.

There is, however, an emerging baseline of travel demand that is more weighted toward leisure travel than in the past, he said. The industry’s growth will build on this foundation going forward after firming up its new normal in 2023.

Approximately 60% of the REIT’s portfolio is in urban locations and 40% is in resort destinations, Brugger said. Its 20 urban hotels were tailored to business, group and leisure travelers. Its 16 resorts cater to guests who prioritize experiences, and in many of these markets, DiamondRock has been the first to move among the other hotel REITs.

For DiamondRock’s resorts, second-quarter RevPAR increased by nearly 32% over 2019 while being down 13% compared to 2022, he said.

The REIT is already seeing signs this summer of demand stabilization at its resorts in Sonoma, Arizona; Sausalito, California; and Vail, Colorado. The Hythe, a Luxury Collection Hotel, in Vail has forward bookings for December up 24% compared to 2022.

“While the impact from this year's redistribution of leisure [demand] is leading to some near-term pullback, destination resorts remain a clear winner since the start of the pandemic, and we remain confident that resorts will enjoy the strongest new normal secular travel patterns and lodging [demand] due to a number of powerful factors,” he said.

Hybrid work has been a game changer, creating 2.7 billion days of flexibility to work from any location in the post-pandemic era, Brugger said. That’s more than two times the number of annual hotel stays in the entire U.S. That locational flexibility will disproportionately benefit leisure-focused hotels, he said.

People continue to value experiences more than things, and that’s partially driven by social media sharing as well as increasing travel by millennials and baby boomers, he said.

“By the end of the next decade, there will be nearly 40 million more people either in active retirement or starting a family than there was a decade ago,” he said. “The wanderlust of boomers is often underestimated.”

One of the most powerful reasons behind the company’s confidence in resorts is there is a fundamental supply imbalance with a limited number of resorts in the U.S., Brugger said.

“This imbalance will persist because of the often-insurmountable barriers to build new product in most resort markets,” he said.

At DiamondRock's urban hotels, revenue per available room was up 7.9% year over year, Brugger said. The second quarter was also the first time in the recovery that quarterly RevPAR at its urban hotels exceeded 2019 levels. Group demand was solide at DiamondRock’s two largest urban hotels: the Chicago Marriott and the Westin Boston Seaport District.

Total portfolio group room nights increased 4.6% year over year but are still 11.1% behind 2019 levels, he said. The company projects there are 67,000 open group room nights after 2023.

“We want to emphasize that we are very encouraged by the 2024 group bookings for our hotels,” he said. “2024 group revenue on the books is up almost 28%, led by strong convention calendars in many of our most important urban markets.”

Business-transient demand was more mixed during the second quarter and varied significantly by day and market, Brugger said. Demand was strong in cities such as New York, but weaker in others, such as San Francisco.

Midweek business transient occupancy at urban properties increased by 170 basis points compared to 2022. DiamondRock's three select-service hotels in Manhattan reported that strong business-transient demand pushed RevPAR above 2022 levels and 8.4% above 2019 even with the one-week closure of its Hilton Garden Inn.

“Longer term, we believe an expanding economy will allow business-transient demand to eventually recover to the 2019 peak, but it will require a few more years to get there on a nominal basis,” he said.

DiamondRock has invested approximately $47.9 million in capital expenditures across its hotels during the first half of 2023. The company expects to spend $100 million to $115 million in total for the full year.

Over the past 24 months, DiamondRock completed the conversion and upbranding of the Hythe in Vail and the Hotel Clio to the Luxury Collection as well as the Sheraton Key West to a Margaritaville resort and the Lodge at Sonoma to the Autograph Collection, Brugger said.

Those four hotels generated a collective RevPAR increase of 33.1% over 2019 in the second quarter with adjusted earnings before interest, taxes, depreciation and amortization up 65.3%, he said. DiamondRock recently announced the conversion of The Dagny in Boston, and it’s projected to grow EBITDA by $3 million next year and double this year’s EBITDA with stabilized EBITDA approaching $17 million.

DiamondRock has begun more return-on-investment repositionings, such as the Hilton Burlington becoming a lifestyle resort which will be renamed the Hotel Champlain and join Hilton’s Curio Collection. There’s also the Bourbon Orleans Hotel being repositioned to a premium urban lifestyle resort in the French Quarter of New Orleans. The REIT is also looking at projects with the Orchards Inn Sedona, the Lake Austin Spa Resort and the Landing Resort in Lake Tahoe.

“The benefit of these projects often play out for several years, so we expect to continue to reap market share gains and increased profits from these efforts for some time to come,” Brugger said.

On Aug. 1, DiamondRock acquired the Chico Hot Springs Resort in Paradise Valley, Montana, for $33 million. The independent resort has been owner-operated for a century, and it has a deep history with a loyal following, Brugger said.

The company is buying the property at a 8.1% net operating income cap rate, and it projects the hotel will stabilize north of a 10% NOI yield, he said. The seller typically set rates once per season and did not adjust rates based on demand, and the property regularly accepts reservations two to three years in advance at current rates. Most reservations are made over the phone because there is no GDS system or modern booking tools in place.

DiamondRock reported net income of $39.1 million, down from $52.7 million in the second quarter of 2022, according to its earnings release. Its total comparable revenue totaled $289.3 million, a 0.9% year over year increase and a 9.3% increase over 2019.

Comparable hotel adjusted earnings before interest, taxes, depreciation and amortization was $93.6 million, a 9.7% decrease compared to 2022 but a 3.5% increase over 2019. Comparable hotel adjusted EBITDA margin was 32.36%, a decrease of 381 basis points compared to 2022 and a 178-basis-point decrease compared to 2019.

DiamondRock’s achieved 0.5% year-over-year growth in comparable RevPAR to $226.41. The amount was also a 8% increase over 2019.

By the end of the quarter, the REIT had $604.8 million in liquidity, which breaks down to $98.6 million of restricted corporate cash, $106.2 million in unrestricted cash at its hotels and full capacity of its $400 million senior unsecured credit facility.

The company had $1.2 billion of total debt outstanding. That includes $800 million of unsecured term loans and $383 million of property-specific, non-recourse mortgage debt.

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