DiamondRock Hospitality Co. is testing the waters on potentially selling some of its urban hotels, but its chief executive doesn't see a big wave of private equity coming for the public hotel real estate investment trusts, at least not yet.
During the third quarter, Bethesda, Maryland-based DiamondRock bought the Chico Hot Springs Resort and an adjacent ranch in Paradise Valley, Montana, near Yellowstone National Park for $33 million in cash.
DiamondRock's hotel portfolio includes 36 hotels and resorts in the U.S., with a 60-40 split of urban hotels and resort properties.
Mark Brugger, DiamondRock's president, CEO and director, said the REIT is actively marketing some of its hotels, and when pressed for specifics, he admitted the company is looking to sell some of its urban properties.
"The assets that we are testing the market on are all urban assets, so that's a correct assumption," Brugger said during an earnings conference call Wednesday. "It's really deals below $100 million, where there seems to be more liquidity and volume, than bigger deals just because of where the debt markets are."
He added that the $100 million figure was intentional as "you're more likely to get a number of bidders on those more small to midsize deals than you are on the $200 million deals that are out in the marketplace."
Although a few hotel deals are still happening, Brugger said it's not a great time to be a seller.
"In our portfolio, everything's for sale, and there certainly seems to be an arbitrage between private market values and public market implied values. We'd like to get into that arbitrage," he said. "We're trying to be prudent about making sure that we're doing what's in the best interest of our shareholders on release prices."
In late August, KSL Capital announced an all-cash deal to acquire Hersha Hospitality Trust for $1.4 billion, taking one of DiamondRock's fellow public REITs private.
Asked about the deal, Brugger said the level of interest in Hersha was "encouraging," but he added it doesn't change DiamondRock's company outlook. He predicted private-equity buyers are still waiting out economic uncertainties and might be more active next year.
"I think private equity is still interested. But it doesn't feel like this is the moment in time when they're particularly leaning in to get super aggressive on pricing for the public REITs," Brugger said. "Based on where we are with the Fed and the concern of a slower economy, I would imagine that the middle of next year is probably going to be a more robust time for PE firms to lean in.
"You'll be hopefully past the peak of the Fed raising the rates; hopefully liquidity will get even more robust in the debt markets. Today, it's functioning, I would say, but it's not robust. Those things should come together in the middle of next year. And I imagine that'll be a more optimal time for people and private equity to make aggressive decisions."
Going Independent in Boston
In the third quarter, DiamondRock completed its conversion of the former Hilton Boston Downtown/Faneuil Hall into The Dagny, which it describes as a 403-room independent lifestyle hotel. DiamondRock also owns the 793-room Westin Boston Seaport District hotel in the market.
Earlier this week, Mexico City-based Parks Hospitality Holdings acquired the 1,060-room Boston Park Plaza for $370 million from hotel REIT Sunstone Hotel Investors with plans to convert it back into a Hilton property.
Brugger said the Boston Park Plaza sale will increase the value of other hotels in the market, and he doubled down on DiamondRock's decision to walk away from Hilton with its relaunch of The Dagny as an independent hotel.
"On the Hilton branding, one of the reasons we went independent is we have a seven-day-a-week kind of location that lends itself to consistent demand," Brugger said. "It avoided what would have been a problem as Hilton has decided to put another Hilton [hotel with] 1,000 rooms not too far away from our hotel. I think in a lot of ways it vindicates our decision to not be exposed to new Hilton supply within this market. We feel good about our decision."
Third-Quarter Performance
DiamondRock reported net income of $27.3 million during the third quarter, according to the company’s earnings release. Its comparable total revenue was $277.1 million, a 0.1% year-over-year increase over the third quarter of 2022, but 12% higher than 2019.
Comparable hotel adjusted earnings before interest, taxes, depreciation and amortization during the third quarter was $81.1 million, a 6.6% decrease from 2022 levels and a 8.9% increase from 2019.
Comparable RevPAR for DiamondRock's portfolio during the third quarter was $210.03, a 1.1% decrease from the third quarter of 2022 but a 7.6% increase from the third quarter of 2019. Average daily rate was $274, which was down 3% from a year ago but 14.1% ahead of 2019. Hotel occupancy reached 76.7%, which outpaced the third quarter of 2022 by 2.1%, but trailed the third quarter of 2019 by about 5.7%.
DiamondRock officials did not release any outlook for 2024 as part of their third-quarter performance results.
"Right now, you have two wars going on. You have the uncertainty of the Fed going on and a number of other factors," Brugger said. "Hopefully by the time we get to February, things will will be a little bit clearer and we'll be able to give a more forward outlook, but I think we'll have to take it kind of one quarter at a time right now."
In his prepared remarks, Brugger said he's still optimistic travel demand will stay consistent despite the unknown direction of the U.S. economy. Group demand is high in 2024 for cities such as Chicago, Washington, D.C., and San Diego, which all have robust convention calendars, he added.
"ADR is likely to increase at or above inflation. Corporate transient should continue to improve, albeit gradually, but with special corporate rates of mid- to high-single digits," he said. "Group demand should continue to stay strong as forward bookings nationally are solid. And finally, limited hotel supply in most markets provides a good backdrop for fundamentals."
As of publication time, DiamondRock’s stock was trading at $7.74 per share, down 5.6% year to date. The Nasdaq Composite Index was up 24.3% for the same time period.