The chilled U.S. hotel transactions environment is beginning to thaw, according to executives from DiamondRock Hospitality Company.
DiamondRock kicked the tires on a handful of potential hotel acquisitions during the third quarter, but the asking prices plus the renovations needed kept the company from making a deal, CEO and Director Jeff Donnelly said. The Bethesda, Maryland-based hotel real estate investment trust has a portfolio of 36 hotels and approximately 9,600 rooms in 16 states split between independent and premium-branded properties.
"We continue to underwrite acquisition opportunities, mostly group-oriented hotels, urban select-service hotels and resorts," he said. "While we had our eye on a few potential candidates this past quarter, we did not feel the ultimate pricing was defendable after considering realistic CapEx needs versus where our shares are trading."
DiamondRock officials agreed that the total acquisition costs on some of the potential buys was better spent upgrading its own portfolio. Plus, the company has fielded offers to sell some of its hotels and could be more of an active seller in the year ahead, Donnelly said.
"We continue to have active conversations around the disposition of a handful of our assets, and we expect to remain active in the market in the coming year," he said. "We have nothing to share at this time, but we believe we will see elevated capital recycling in the next 12 to 18 months compared to our history."
When pressed to share how many of DiamondRock's hotels and resorts could be sold, Donnelly said the company is looking to exit a handful but has also received calls about some of its portfolio anchors.
"In the past, we've kind of talked about two to three, two to four assets that we've looked at [selling]," he said. "But as I mentioned, there is some unsolicited interest in some of our, what I would describe as, core assets, as well. And it's just a function of whether or not we can achieve pricing there that would work for us. So I don't have a specific number for you, but we're trying to be opportunistic about execution."
In general, conditions could be improving for large-scale mergers and acquisitions involving hotel REITs, Donnelly said. Specifically, he cited the cuts in U.S. interest rates as a positive to spur hotel transaction activity and possibly private equity firms stepping in to acquire a hospitality REIT and take it private.
"I think there is an appetite. For a while there earlier this year, it probably had a little bit of a pause," Donnelly said. "It's coming back, because I think there's an expectation that RevPAR growth is going to be stronger next year. Interest rates are coming lower. ... So it feels like probably a better environment where they could sort of strike and get the growth that they need to sort of drive the returns that private equity would need if you were looking for those types of situations."
But there's still plenty of risk involved in such deals, Donnelly added.
"The only thing I would just caution, and I say this to everybody, is that, ultimately, a lot of that math works where you can drive financing on assets, and for financing you need cash flow," he said. "Effectively, it's very hard for people to underwrite assets in markets where cash flow is not recovered. It's one of the struggles even we have when we look at some of the markets, for example, on the West Coast, where you can have RevPAR recovering but that asset is still losing money. That's very hard from a pricing standpoint. And I would say that applies to public companies, too."
During the quarter, DiamondRock refinanced and extended the maturities of its senior unsecured credit facility. Its hotel portfolio is currently unencumbered by secured debt and including extension options its earliest maturity isn't until 2029, said Briony Quinn, executive vice president and chief financial officer. DiamondRock ended the third quarter with total debt of $1.1 billion in three unsecured term loans with a 5.3% weighted average interest rate, $400 million in its undrawn revolving credit facility and $145.3 million of unrestricted cash.
Renovation and CapEx strategy
Between 2018 and 2024, DiamondRock completed several types of hotel renovations, including raising a property's brand level four times, uncoupling from a brand twice and major life-cycle renovations nine times, Donnelly said. In that six-year period, the REIT spent 9% of its revenue on CapEx renovation projects, and in the last three years, the company has spent just 7% of its revenue on CapEx. DiamondRock's peers, meanwhile, are spending an average of 10.5% to 11% — and some as high as 14% — of their revenue on renovations, Donnelly added.
"With only 5% of our hotels brand-managed, we have a competitive advantage of exerting more control over the scope and timing of renovations. As owner, we are in the best position to determine the balance between operating performance, value creation and capital expenditure, not the brand manager," Donnelly said. "We are making capital decisions that will drive our outperformance and maximize our total share of the return. They are playing a different game. They're paid off the top line, understandably focused on brand standards but less concerned with an owner's ROI. So how is it we keep our CapEx spending so efficient? It's important to mention that hotel brands typically mandate room renovations every seven years. We work hard to elongate that cycle and reduce the cost of renovations when undertaken."
DiamondRock recently completed a renovation of the 242-room Kimpton Hotel Palomar Phoenix, its first overhaul since the hotel opened in 2012, according to CoStar data. The company's renovation strategy — including a longer planning window, monitoring the supply chain, reviewing furniture, fixtures and equipment, and efficiently managing labor productivity and availability — kept the project cost at $21,000 per key, Donnelly said.
"If the asset still looks fresh, competes effectively and is operating efficiently, then we do not need to renovate every seven years. It's simply not a prudent use of our shareholders' capital to play a role in someone else's design war," Donnelly said. "To be clear, we are not anti-brand. Branding is a choice and in the right circumstances, brands deliver exemplary performance. Instead, I would say we are pro-flexibility."
DiamondRock owns The Westin Seaport District in Boston, a 793-room hotel adjacent to the city's convention center. President and Chief Operating Officer Justin Leonard said the hotel's franchise agreement expires at the end of 2026 but keeping the property affiliated with a brand is still on the table.
"We're in the middle of running a brand RFP process with most of the major brands. I think we've been very positively impressed with the amount of interest," Leonard said. "It's just very difficult for brands to get that kind of distribution in a major Northeast city attached to the convention center, so we're going to continue to evaluate the best option for shareholders going forward, whether that's a significant amount of inducements upfront or creating that in exchange for lower run rate fees over the duration of an extended franchise agreement."
Third-quarter numbers
In the third quarter, DiamondRock reported a net income of $20.1 million, a 16.3% year-over-year decrease, according to its earnings release. Comparable total revenue was mostly flat at $285.4 million. Comparable RevPAR in the first quarter was $214.21, a 0.3% decrease year over year. Average daily rate of DiamondRock's hotels dipped 0.4% to $281.05 while occupancy was flat at 76.2%. Comparable hotel adjusted EBITDA during the quarter was $83.2 million, a 1.5% increase year over year.
DiamondRock narrowed its full-year 2025 outlook during its third-quarter earnings presentation. The REIT forecasts comparable RevPAR change between a 0.5% decline and a 0.5% increase, along with flat performance to a 1% increase in comparable total RevPAR growth. The company anticipates full-year adjusted EBITDA to land between $287 million and $295 million.
As of publication time, DiamondRock’s stock was trading at $8.80 per share, down 2.6% year to date. The NYSE Composite Index was up 11.5% for the same time period.