DiamondRock's Q3 2025 Earnings Call: Contradictions in Labor Costs, CapEx, and Group Bookings

Guidance:

• Maintaining midpoints of RevPAR and total RevPAR guidance while tightening ranges; implies slight Q4 decline at midpoint.
• Raised midpoint of adjusted EBITDA guidance to a $287M-$295M range.
• Raised midpoint of adjusted FFO per share guidance to $1.02-$1.06.
• Expect to declare an additional stub common dividend for Q4 and end year with >$150M cash on hand.
• Guidance assumes federal government shutdown is resolved in short order.

Business Commentary:

* Revenue and Financial Performance: - DiamondRock Hospitality reported corporate adjusted EBITDA of $79.1 million and adjusted FFO per share of $0.29 in Q3 2025. - The company exceeded expectations, with free cash flow per share growing 4% to $0.66 per share. - The improved performance was driven by strong expense control and a focus on driving out-of-room revenues.

• RevPAR and Segment Performance:
• Comparable RevPAR declined by 0.3%, outperforming expectations, with year-over-year occupancy flat and ADR declining by 0.4%.
• Business transient led with 2% growth, while leisure transient declined 1.5% and group room revenue by 3.5%.

• Despite tough comparisons, the company's out-of-room revenues increased by 5.1%, contributing to total RevPAR growth of 1.5%.

• Group Segment and Future Outlook:

• The group room revenues declined 3.5%, with room nights down 4.5%, but group conversions increased.
• For the balance of the year, DiamondRock booked 38% more groups, with group pace up in the mid to high single digits for 2026.

• The company expects continued success in securing group business, supported by strong demand in key markets.

• Capital Structure and Dispositions:

• DiamondRock successfully refinanced and upsized its credit facility, paying off all secured debt and extending maturities.
• With a strong balance sheet and cash on hand, the company anticipates further capital recycling through asset sales and potential share repurchases.
• The recycling plans aim to be accretive to earnings, focusing on quality assets and strategic acquisitions.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "corporate adjusted EBITDA in the third quarter was $79.1 million, and adjusted FFO per share was $0.29, each ahead of our expectations." They raised midpoints of adjusted EBITDA and adjusted FFO guidance and highlighted share repurchases (4.8M YTD) and >$150M expected year-end cash, signaling confidence and positive outlook.

Q&A:

• Question from Cooper Clark (Wells Fargo): It seems like you continue to make really strong progress on the expense side as cost controls continue to be a major focus for the sector. Could you speak to how much of this is driven by headcount reduction and if we should expect continued momentum on the expense control side into 2026?
  Response: Not driven by broad headcount cuts; improvements come from productivity gains and contract-labor reductions and targeted staffing optimization—ongoing focus but smaller incremental gains expected into 2026.

• Question from Cooper Clark (Wells Fargo): As we think about some of the farther value creation within the portfolio, how are you thinking about some of the recent or upcoming franchise expirations, and what are some of the options you’re considering to maximize value there?
  Response: Evaluating options case-by-case (upbrand, remain independent, or renew franchise); running RFPs (Boston) and weighing upfront inducements versus lower long-run fees to maximize shareholder returns.

• Question from Michael Bellisario (Baird): What projects looking out to next year are on the docket? Anything that would be disruptive or offset the 75 basis points of tailwind that you expect to recapture from this year’s projects?
  Response: No material disruptive projects anticipated; expect typical ~$2–4M of annual EBITDA disruption going forward, so 2026 should be a relatively clean year versus this year’s renovation cadence.

• Question from Michael Bellisario (Baird): On the disposition comments, if you sit here today, do you take proceeds, lean into share repurchases, build cash? How should we think about earnings power and per-share impacts over 12–24 months?
  Response: Likely a mix; share repurchases are compelling and likely to benefit, but some proceeds may be recycled into accretive assets—intent is to be accretive to earnings rather than hold excess cash.

• Question from Smith Rose (Citi): How are you thinking about the pace of labor costs for 2026? What's built in and can you continue to find efficiencies?
  Response: Unlikely to replicate the 1% wage outcome; absent offsets wages could be ~2.5–3%, but company expects to mitigate via productivity, administrative/sales efficiencies and technology/AI to keep wage growth below run-rate.

• Question from Smith Rose (Citi): You mentioned solid exposure to FIFA next year — how are you positioning yourselves into that? Are you selling room blocks into the FIFA games?
  Response: Being cautious until team matchups are confirmed; some blocks exist but not heavily counted in pace—will monetize more aggressively once team groupings and true compression visibility emerge.

• Question from Austin Worsham (KeyBanc Capital Markets): Can you provide a range for number of hotels or dollar amount you’re considering for elevated capital recycling? Do you expect recycling to be neutral or accretive to earnings?
  Response: No definitive number; historically 2–4 assets in scope but varies; intent is to recycle capital in an accretive manner—share repurchases likely a key outlet if pricing doesn’t justify acquisitions.

• Question from Austin Worsham (KeyBanc Capital Markets): Within the resort portfolio, what % of EBITDA is from the high-ADR cohort and how wide is the performance variation vs lower-ADR resorts?
  Response: Luxury/high-ADR resorts represent roughly 60% of resort EBITDA and the performance gap between ADR >$300 and < $300 cohorts is about 500 basis points in RevPAR.

• Question from Chris Rowanka (Deutsche Bank): Do you think there’s something about the resorts you own (size, market, segmentation) that’s allowing them to outperform peers? Any booking-window or sourcing changes?
  Response: Outperformance driven by unique destination positioning (often the best/only game in town) and higher average resort ADR (~$400) with limited lower-end exposure; booking patterns are market-dependent but no structural adverse change noted.

• Question from Chris Rowanka (Deutsche Bank): Given recent election results, does that make you more or less bullish on New York and do you have contingency plans if dynamics change?
  Response: Unclear immediate impact from election; remain cautiously optimistic and nimble—no material change to stance and ability to pivot quickly given franchise/management structures.

• Question from Duane Pfennigwerth (Evercore ISI): Has your target group mix changed for next year and are there particular industries or group types driving recovery?
  Response: No material change in target mix expected; group demand is broad-based (corporate/social), government exposure minimal (~2%); pacing for 2026 is up mid-to-high single digits but no structural mix shift.

• Question from Duane Pfennigwerth (Evercore ISI): Can you quantify how industry and portfolio-specific tailwinds add up to 2026 RevPAR?
  Response: No quantification provided—budgets are early and management declined to project a 2026 RevPAR estimate at this time.

• Question from Kenneth Denningsley (Compass Point Research): F&B and other revenues rose—can you continue to grow these and do margins flow to the bottom line? What composes 'other'?
  Response: F&B gains driven by menu re-engineering and higher in-house group demand, with margins expanded; 'Other' is mainly parking, spas and destination fees—highly incremental, non-commissionable revenue with largely fixed costs that flow to EBITDA.

• Question from Chris Daring (Green Street): Thoughts on steep NAV discounts for lodging REITs, appetite for large-scale portfolio transactions or privatizations, and how that might change next year?
  Response: Private appetite is returning with expected stronger RevPAR and lower rates, but transactions require sustainable cash flow—pricing constrained where assets are not yet cash-flow positive, so selective activity expected.

Contradiction Point 1

Labor Cost Control and Efficiency Strategies

It involves differing perspectives on the approach to labor cost control and strategies for managing labor costs, which directly impacts operational efficiency and financial forecasts.

What percentage of cost-cutting measures are due to workforce reductions? How much growth momentum is expected by 2026? - Cooper Clark (Wells Fargo)

2025Q3: Not necessarily by headcount reduction, but by finding productivity improvements. Teams have done a great job reducing hours with simple strategies. Focusing on efficiency, not layoffs. - Justin Leonard(COO)

Has wage pressure increased compared to the past 3-6 months? - Chris Woronka (Deutsche Bank)

2025Q2: Our wage growth has been a bit better than expected at around 2%. - Jeffrey Donnelly(CEO)

Contradiction Point 2

CapEx Plans and Impact on EBITDA

The statements regarding CapEx plans and their expected impact on EBITDA differ between quarters, which could influence financial expectations.

What are your CapEx plans for next year and could they disrupt your RevPAR tailwind? - Michael Bellisario (Baird)

2025Q3: No unique noise expected. Continuous projects, with $2-$4 million of EBITDA disruption annually. 2026 will be a clean year. - Jeff Donnelly(CEO)

How does the recent refinancing enhance operational and transactional flexibility? - Duane Pfennigwerth (Evercore ISI)

2025Q2: Our guidance is that we're going to be about where we were in 2024, which is $60 million. And so that's the number that we're working with today. - Briony Quinn(CFO)

Contradiction Point 3

Labor Cost Trends and Strategies

It involves differing perspectives on the expected growth rate of labor costs and strategies for managing them, which could impact operational efficiency and financial forecasts.

What is the forecast for labor cost pace in 2026, including potential wage or benefit increases? - Smith Rose (Citi)

2025Q3: Not expecting 1% year-over-year labor cost increase. Focusing on efficiency in administrative and sales labor using AI tools. - Justin Leonard(President and Chief Operating Officer)

How did wages and benefits compare to expectations, and what are the expectations for the remainder of the year? - Chris Darling (Green Street)

2025Q1: Wages and benefits were in line with expectations. We expect a growth rate of 3-3.5% for the rest of the year. - Briony Quinn(CFO)

Contradiction Point 4

Group Business and Event Bookings

It includes differing views on the strength and pacing of group business and event bookings, which are crucial for revenue forecasting and market positioning.

How are you leveraging the FIFA World Cup? - Smith Rose (Citi)

2025Q3: Being cautious until team groupings are known. Some blocks are in place but not heavily part of pacing. Will adjust plans once team groupings are finalized. - Justin Leonard(President and Chief Operating Officer)

Which markets are showing strong Group pacing? - Duane Pfennigwerth (Evercore ISI)

2025Q1: Denver and Salt Lake are showing strength in citywide bookings. San Diego is also seeing an uptick post-renovation. - Jeff Donnelly(Chief Executive Officer)

Contradiction Point 5

Capital Expenditure (CapEx) Strategy and Timing

It highlights differing perspectives on the company's CapEx strategy and the timing of major projects, impacting key financial metrics like free cash flow and asset longevity.

What are your CapEx plans for next year, and could they impact RevPAR growth? - Michael Bellisario (Baird)

2025Q3: No unique noise expected. Continuous projects, with $2-$4 million of EBITDA disruption annually. 2026 will be a clean year. - Jeff Donnelly(Chief Executive Officer)

Are you reducing CapEx due to inflation or another market factor? - Michael Bellisario (Baird)

2024Q4: For Bourbon Orleans, we simplified the scope due to higher costs and a focus on better ROI. For the Landing, we're being disciplined about potential ROI and occupancy expectations. - Jeff Donnelly(CEO), Justin Leonard(President and COO)