Good day and thank you for standing by. Welcome to the DiamondRock Hospitality Company's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer of DiamondRock Hospitality. Please go ahead.

Thank you. Good morning, everyone. Welcome to DiamondRock's first quarter 2023 earnings call and webcast. Before we get started, 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. 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 those expressed in our comments today. 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. With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Thank you for joining us today. The first quarter results from the DiamondRock portfolio set records for both revenues and total profits. In the quarter, comparable RevPAR increased 16.9% and comparable revenues increased 18% over the prior year. Hotel adjusted EBITDA increased $8.5 million or 15.9%. The results were also well ahead of 2019, with comparable RevPAR up 13.8% and hotel adjusted EBITDA up 19.5%. These record results speak to the quality of our real estate, our favorable geographic footprint and our strategy to have a portfolio of differentiated hotels and resorts. It is the DiamondRock portfolio that is our competitive advantage. The DiamondRock portfolio distinguishes itself from its public peers by having only two of its 35 hotels, subject to long-term management agreements. This increases both the liquidity and the NAV of these unencumbered properties. The portfolio today is comprised of 35 properties, 20 in urban gateway markets and 15 in prime resort locations. It's a well-balanced portfolio. By full year revenue, it is about 60% urban and 40% resorts. We believe that we have carefully curated a unique portfolio that can outperform the industry averages over the long-term because of our focus on the right markets and the favorable experiential travel trend. Our urban properties are concentrated in some of the most desirable submarkets of the best gateway cities. These submarkets include New York's Times Square and Midtown East, Boston Seaport and Financial Districts, Chicago's, Magnificent Mile, Denver's, Cherry Creek District, San Diego's, Little Italy and Salt Lake City's Temple Square. Just as importantly, we have largely avoided markets like San Francisco, Portland and Los Angeles, where values have been crushed for post-pandemic structural changes in demand, new transfer taxes and reduced operating efficiencies from recently adopted hotel ordinances. Our resorts like our gateway hotels are situated in…

Thanks. As Mark said at the onset of the call, it was another strong quarter for DiamondRock. Comparable total revenue was up 18% over 2022 and 14% over 2019. Hotel adjusted EBITDA increased 16% over last year. This enabled us to generate corporate adjusted EBITDA of $55.4 million and adjusted FFO of $0.18 per share. Comparable RevPAR for the portfolio in the first quarter was $185, or nearly 17% higher than 2022 and nearly 14% higher than 2019. This growth was driven by a 23% increase in room rates over 2019. Occupancy was down 540 basis points to the first quarter in 2019. This is a 240 basis point sequential improvement, from Q4 2022. Closing this gap, remains one of several sources of future growth for DiamondRock. F&B and other revenue increased 14.1% or over $10 million on a combined basis, to nearly $83 million driven by several repositioned F&B outlets and new income streams created by our asset managers during the pandemic. We will share with you soon several new or upgraded outlets we are working on that will continue to drive profits to new levels, in 2024 and beyond. Comparable hotel adjusted EBITDA was $61.9 million, which beat first quarter 2019 by $10.1 million or nearly 20%. Adjusted EBITDA was $10.5 million and 23% better than 2022 and FFO per share was 28.6% better than 2022. Profit margins remain a great story for us. Comparable hotel adjusted EBITDA margins were 25.8%, up 117 basis points to 2019. Our resort portfolio finished the first quarter with a comparable hotel adjusted margin of 34.9% or 379 basis points higher than the same period in 2019. Importantly, this performance expanded upon the 341 basis point improvement reported by our resort portfolio in the fourth quarter of 2022. Comparable hotel adjusted EBITDA…

Thanks, Jeff. Let me end by saying that we remain bullish on the future of travel. Travel is one of the most highly valued assets in our society and around the world. Leisure demand enjoyed a strong period of outperformance that began before the pandemic and we see that secular trend of outperformance continuing in the coming years. On group, the funnel for future business looks very strong. On business travel, while there is still some uncertainty as to where demand ultimately settles out, there clearly has been positive momentum and we are primed to take share from other hotels because of our excellent locations and from repositionings like the Clio, Denver, Luxury Collection hotel or the upcoming conversion of our hotel in Boston. To wrap up, the first quarter of 2023 was a record for DiamondRock's portfolio in terms of both revenues and profits. Moreover, we believe that we are well positioned for this cycle with a very high-quality portfolio, a focused strategy and careful liquidity to move opportunistically. At this time, we would like to open it up for your questions.

Thank you. [Operator Instructions] First question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Thanks and good morning. Mark can you just put some further details around your comment that BT is moderating. I'm just curious if that's specific to any markets? Do you think this is a little bit of an air pocket, or are we actually seeing BT stall given what's happening maybe just more broadly given the macro backdrop?

Very good morning Austin. So I think it's somewhat in comparison to the other segments. So leisure has been great. We're well above and elevated from prior peak levels. Group is rebounding. And I think as we mentioned our group revenues will exceed prior peak this year. And then BT it's coming back. It came back behind those other two segments. And we saw good momentum in the first quarter. I think what we're trying to convey is we don't see it reaching prior peak levels this year and it may settle out at something below what as the demand levels were in 2019 ultimately. So good positive volume that momentum that came on in the fourth quarter continued through the first quarter. But what we're trying to indicate we don't see -- we talked about 16 percentage points of growth from January to March. We don't see that see that same velocity while we continue to see here we don't see the same velocity for the balance of the year.

Okay. Got it. And then just on group. I know you gave some stats but what percent of group revenues on the books relative to budget? And how much do you expect to pick up I guess in the quarter for the quarter over the balance of the year? And can you just talk a little bit about how the short-term leads are today relative to maybe what you saw last year?

So I'll take the front of that question and maybe I'll hand it over to Justin to talk a little bit more about group. So we have today we ended the quarter with about 80% of the group room nights already under contract that we need to hit our forecast for the full year. So we feel good about the position that we're sitting in for group. Justin, do you want to add some comments on the group?

Yes. I think we hit it in our highlights and we've seen group as an area of strength just in the industry generally. And in full year '22 we did 83% of prior peak. Q1 was 88% of prior peak and our current forecast is to get back to 94% of prior peak just in group room nights and we're expecting to exceed that in volume. But I think more importantly what we're seeing is in the year for the year pickup is actually accelerating. So in Q1 our in-the-quarter pickup for the remainder of 2023 was up 28% just in room night volume versus Q1 2019. So we continue to see that velocity while being somewhat short term expand over what we saw last year. And so we're optimistic that we can even further close that room night gap to what we're projecting for full year '23.

Got it. Thanks, Justin. Thanks, Mark.

You bet.

Thank you. One moment for our next question. Next question comes from the line of Dori Kesten with Wells Fargo. Your line is now open.

Thanks. Good morning. You talked a bit about your appetite to apply this year Mark. Should you transactionally assume you acquire pretty similar to what you have over the last several years like relatively small relationship potentially owner managed?

Hey, Dori, it's a great question. So we're still focused -- this isn't the time to go out and do a big deal. We think we have ample liquidity and something we do given our cost of capital would have to be something that has relatively high returns in a market where there's still a lot of private equity chasing deals. So we think our competitive advantage remains in these relationships we've built often in kind of differentiated resort markets from owner-operators. So that continues to be the bulk of the conversations that we're having. That's where we think we can create more value. It's where we think we can buy things relative to our cost of capital that might make sense. But I can say in the broadly marketed deals we've seen they're still -- it's still very competitive in the pricing. The pricing on this probably doesn't make sense for us. So we're trying to focus on the things where we think we have a competitive advantage.

Okay. And some peers have talked about selectively reducing FTEs in the near term. Do you feel the need to do so, or is your focus more on offsetting contracts with permanent workers?

Justin do you want to talk about the efforts we have for maintaining our margins?

Sure. I think specifically on labor, we're doing a number of things. I think one of the things Mark spoke about, specifically on the resort side where we've really cultivated a unique portfolio of small independent experiential resorts. We continue to look at how we can more efficiently run those small businesses by pooling resources. And I think it gives us an advantage both from a margin perspective but also in potential acquisitions. So, for test like cultivating relationships with luxury travel agents or small group meeting sales or even optimizing e-channel placement, we're using external third party resources in lieu of on-property staffing for some of these smaller assets. It allows us really to get best-in-class resources for a significantly lower cost and eliminate those on-property FTEs versus the owner-operated run rate model. I think with respect to contract, we are focused on decreasing reliance on contract labor portfolio-wide. I think in the tight labor market in the last couple of years, everyone was forced to step up quickly and really use all labor sources we could secure. But given that market contract, labor costs have really inflated much faster than overall wage growth in many of our markets. It now represents a premium cost in a lot of those markets to bring those associates onto our property level teams, especially we factor around additional turnover and training. So we are -- we continue to push for more FTEs on staff within our individual assets. Just as an example since acquiring Lake Austin, we've moved entirely away from contract labor in our spa operations. And we're seeing that benefit both on the spa expense side, but it also helps us deliver better service to guests and probably more importantly, eliminating that middle man delivers a better paycheck to the associate.

All right. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

Hey. Good morning. Thanks. Just on F&B, one of the trends we've seen really across lodging this sector is higher F&B relative to room revenue. I wonder if you could just provide some context on what you think is driving that. And again, from an industry perspective, if you see it as sustainable?

Sure. So, this is Mark. I'll kind of kick that off. So I think generally what we're seeing is we're seeing better than anticipated outside the room spend on banquet. So the groups that have been coming over the last really six months, I would say, have generally surprised to the upside on their AV rental, what they're doing for the events the food items. I think there's this general sense that from the event planners that if they're going to get people on the road and get them together, it needs to feel meaningful and have satisfied attendees you need to really kind of roll out the carpet to make sure that they feel like it's worth the effort given the tight labor market. So, we've been very pleased on that side. I think for the DiamondRock portfolio, specifically otherwise, we hit new records for outlets last year. So we've made a conscious effort to -- and we think increase the guest experience by putting in a number of specialty restaurants within our hotels whether that's a Richard Sandoval, Toro or a Michael Mina restaurant or Vivian Howard in Charleston, we've cultivated a number of these relationships, which have led to a much higher F&B, particularly in the outlet and that's sustainable. I think that continues to be something that makes our hotels more desirable, and it continues to resonate with the travelers today to have those kinds of choices within the properties. Justin, anything else on F&B?

I think on the resorts, we're pretty pleased to see continued growth in outlets, in food and beverage, I think due to some of those repositioning. I do think that comparable on a year-over-year basis will probably moderate for the urban. I mean there were a few of our urban assets. And I think there's just in the industry generally where the outlets were not fully open in Q1 of 2022 and we didn't have, for example, room service installed in Q1 of 2022. So, I do think some of that fruit of average growth will probably moderate just in terms of outsized revenue growth as we go through the year.

Thanks. And Mark, maybe I'll stick with you. When we were together in Bethesda with investors in late March, you had talked about increased dialogue with private equity firms, kicking tires on the sector and potentially kicking tires on DiamondRock specifically. Can you give us an update on that kind of the tenor and the pace of those conversations?

Sure. So I guess we always have a year of conversations with private equity firms. As you know, there's probably about -- I think what the last chart, I saw was about $230 billion raised to deploy against real estate and hotels have moved up as a desirable asset class among those private equity firms. That's what we're hearing. We've been engaged in some regular conversations with folks as we always are. I'm not sure, it's appropriate to comment on some of the substances and details of those conversations. But, I can tell you the interest in the sector from our conversations remains very high.

Thank you.

Thank you. One moment for your next question please. Our next question comes from the line of Smedes Rose with Citi. Your line is now open.

Thanks. I just wanted to ask you, you talked about return to the new normal in Florida. And I was wondering would you apply that to what you're seeing at the Lake Austin property, which looks like it saw a pretty steep year-over-year declines? And are you still comfortable with what you underwrote those assets with -- in your initial guidance when you had -- when you purchased them?

Sure. So let me start with leisure generally. So we are seeing leisure demand we think at an all-time high. If you look at the STR data the year-over-year Q1 RevPAR was up 12.9%. Recently we were just listening to airline CEOs and the cruise line CEOs, you're hearing about the robust demand. And frankly the airlines probably have the best data set. So we're believers that there is more leisure and that's going to continue. I think some of what we're seeing in the Florida Keys is the couple that might have gone to Florida Keys last year. They were nervous by COVID now maybe they're taking a cruise or they're going to the Caribbean, but the overall pie is just much bigger and that's a trend that we think continues to be a smart place asset allocate capital. On Lake Austin Spa, specifically that resort there was an ice storm in the first quarter. That was about a $500,000 hit. On the bottom line we're still -- through cost savings we're still on our underwriting for the first quarter. So we feel good about our position I know that Justin spoke about some of the things we did on the labor there. The systems we talked about when we acquired it, converting from an owner operator pretty primitive pricing model that they had in place with sophisticated new systems and best-in-class operating tools. Given the backlog on getting those implemented, they're really getting implemented in April and May and we think we'll see enormous returns from those and our ability to professionally asset manage and revenue manage that property going forward.

Okay. Thanks. And then I just wanted to ask you in Sonoma, you were up but I was just wondering did you guys see any weather impact out there from the rating activity during the quarter that may be depressed results at all or?

No. We thought Sonoma performed well. It hit our expectations, actually exceeded our expectations a little bit. So we didn't see any weather impact.

We had some minor disruption maybe day and a half, but it wasn't significant to the overall quarter.

Okay. Thank you guys.

Thank you. One moment for our next question. And our next question comes from Floris Van Dijkum with Compass Point Research & Trading. Your line is now open.

Thanks. Good morning guys. I had a question on your redevelopment assets. Obviously, you've got a couple of hotels that you're rebranding. I wanted to -- you haven't disclosed what you're rebranding the Boston Hilton to. Maybe if you could give us a little bit of insight into your thinking about having that be a soft brand versus a lifestyle unbranded hotel, and what the cost benefits potentially could be, because we understand that soft brands while they might have been seeing like an autograph or a Curio might have been cheaper two years ago, they probably aren't as cheap as they were back then. And if you could give us some more update on that that would be great?

Sure. Well, one, we think it's a fabulous location in Boston. It's a seven-day a week location, which gives us a lot more optionality. We're not dependent on the brand and the brand channel of that particular location. We're spending about $31 million on the property this year. Now it was due for rooms redo. So that's not all incremental to the repositioning. But we'll have it repositioned brand new spectacular gym that we built out, as well as the meeting space lobby everything redone. So we think it's a unique special property. We probably will go independent at that property this summer. Jeff, do you want to give some numbers? I know you have an analysis in front of you?

Yeah. How are you doing, Floris? As Mark mentioned we're looking at the path we ultimately take with that asset this summer. I think there will be some displacements depending on whether or not we go fully independent door remain within the Hilton system just the change is going to cause some disruption. I think the figures we looked at for the full year is probably going to be around $5 million to $6 million on sort of a revenue and EBITDA impact than the plan that as we grow back we'll be able to pick up substantially more than that just because I think that in that particular location and being able to appeal to a leisure customer being so close to Altisource destinations, but also a business customer in the financial district having more of an independent field to that hotel will be able to command a much higher rate premium than we have in the past and ultimately better profitability. So, it could be several million dollars more than the disruption we'll realize this year in terms of earn back on NOI in the future.

Thanks. And maybe my follow-up. I mean I looked at the EBITDA contribution of your Worthington Fort Worth Hotel and your Salt Lake and they jumped up significantly. Was the Worthington increase due to the buying out of the ground rent or what was behind the big jump in performance from those in particular those two hotels?

So, worthy to let's talk about that specifically. So the ground lease is relatively small as tens of thousands of dollars in lease payments. It was not a material difference to the earnings result, frankly it didn't impact Q1. We are excited to -- it covered a portion of the parties but we're always excited to eliminate any ground lease and now we have complete control of the property. And frankly, there is probably other things in the future that could be done with that location of that parcel. So we think that that's a win for DimondRock. Worthington had good group exposure. Markets like Fort Worth markets like Salt Lake City those cities are doing particularly well as some other major markets become less desirable those markets are really prime to take share from the San Francisco and this economy. We're seeing office and the desirability of the kind of companies wanting to be in those decisions really exceed what we're seeing on a nationwide trends. So they're benefiting from that.

Thanks Mark.

Thank you. The next question comes from the line of Michael Bellisario with Baird. Your line is open.

Thank you. Good morning everyone. Mark just wanted to go back to some commentary on the resorts and performance during the quarter. Maybe just give us your view of in aggregate how they perform versus your internal expectations? And were there any particular markets that were better or worse than forecasted during the quarter aside from the commentary you already provided on Sonoma?

Yes, I mean in addition to Sonoma, Vail, Huntington Beach were ahead of our expectations. I think the ones that were that kind of were different than our forecast at Lake Tahoe. There is obviously a record amount of snow and that impacted performance a little but it's a tiny asset so it doesn't move our overall numbers. And I would just say the -- except for Fort Largo, which was we were able to group up very effectively, the Florida Keys were behind our expectations for the first quarter as kind of things kind of new normal whether significantly ahead of 2019, we think we're establishing the new normal for the Florida Keys in 2023. And hopefully, we'll be able to grow from that as we move into 2024.

Got it. Thanks. And then just a follow-up and switching gears on margins. Just wanted to dig into the commentary there. Did you say flat margins for the remainder of the year, or is your expectation that the full year 2023 is roughly flat at the hotel EBITDA level? And then any quarterly cadence 2Q to 4Q that you could provide to help with modeling would be appreciated. Thanks.

Hey Mike, this is Jeff. I would say that on a full year basis, the thinking was that margins would be approximately flat to what they were in 2019 which is I believe about 29.5% was the number back in 2019 that we had on a comp basis out there. In terms of the cadence I'm just eyeballing this while we're talking. No, I mean I think when you look at the remainder of the year, I think from a timing standpoint, probably our most difficult quarter is the second quarter when you begin to think about margin gains just because you certainly had strong -- when you think about the comparisons to last year you had revenues that were very strong and ramping over the course of the year so the comparison will get tougher. And at the same time, if you think about the rebuild of expenses last year you still were earlier in the year seeing wage rates rise and staffing obviously moves with occupancy recovery. So I think probably the first half of the year generally has more difficult margin comparisons for us than the back end of the year.

Yeah. Just to add on to that. On the resorts if you look at the Sedona and the South Florida markets, you can see the new normal kind of getting into place starting September of last year. So those comps also get easier which I think will help the overall margin story as we kind of move into fourth quarter and start 2024.

Helpful. Thank you.

Thank you. One moment for our next question. The question comes from the line of Anthony Powell with Barclays. Your line is now open.

Hi. Good morning. I guess a follow-up on the fourth quarter and then leisure kind of reaccelerating. Is that based on booking trends you're seeing, for the holiday period? And do you expect the growth to be more in occupancy or rate?

Great question. So leisure doesn't usually book out six to nine months. But what we're seeing and kind of what we were watching in real time September, October, November, December of last year particularly in Sedona in South Florida as we could kind of see the world reopen. So while demand was robust, generally for leisure, people felt comfortable traveling to alternative destinations. So kind of got to that new normal, I think as the world was opening up the people were comfortable. So our expectation is that, that comp gets much easier when we approach the fourth quarter both on probably evenly split between knock-in rate is our expectation right now.

Got it. Thanks. And then, maybe one more in terms of dispositions, we talked about maybe selling some group hotels in the past. But given what you said about group being kind of a strong segment does it make sense to retain the group hotels that you currently own or even add more in the future?

Yes. We like group probably by room type about half of our hotels are -- by room number are about 40 -- let me calculate about 49% of our hotel rooms are in group-centric hotels over 400 keys. I think its fine. I mean, I think group will continue to be good this year and next year. We still like the leisure segment probably the best over the next five to 10 years. But this year our group hotels are doing excellent probably the value of all those hotels increases over the next 12 months. And for large hotels it still remains a difficult debt market. So, those things combined to lead us to, it's probably better to hold any group hotel in 2023.

Thank you.

But that said, everything is for sale at the right price.

Got it. Thanks.

Thank you. [Operator Instructions]. And currently showing no further questions at this time, I'd like to hand the conference back to Mr. Brugger for any closing comments.

Thank you, Operator. Well, thank you to everyone on this call. We appreciate your interest in DiamondRock. And we look forward to updating you next quarter. Take care. And have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.