DiamondRock Hospitality Company (DRH) Q1 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, we will open the call for questions. To ask a question during the session, you need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Be advised that today’s call is being recorded. I would now like to hand it over to our first speaker, Briony R. Quinn. Please go ahead.

Good morning, everyone, and welcome to DiamondRock Hospitality Company’s first quarter 2026 earnings call and webcast. With me on the call today is Jeffrey John Donnelly, our Chief Executive Officer, and Justin L. Leonard, our President and Chief Operating Officer. Before we begin, 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 law. 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 what we discuss 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. We are pleased to report that first quarter results exceeded our expectations. This was a tough quarter as we comped over our strongest revenue growth from last year, particularly in the group segment, and faced disruptive weather challenges in several markets. Despite those headwinds, the portfolio performed better than anticipated. Comparable RevPAR increased 2% and total RevPAR increased 2.5%. With hotel operating expense growth of less than 1%, we delivered corporate adjusted EBITDA of $60.6 million and adjusted FFO per share of $0.22. Our FFO margin increased an impressive 225 basis points this quarter. On a trailing twelve-month basis, our free cash flow per share was $0.75, increasing 19% year over year. Starting with the top line, the comparable RevPAR growth of 2% exceeded our outlook of a flat quarter and improved sequentially in each month. Occupancy in the quarter declined 30 basis points while ADR increased 2.6%. As expected, our resorts outperformed our urban hotels; however, the magnitude of that outperformance was wider than we had anticipated. By customer segment, transient outperformed with revenues up 2.1% on improving demand and rate. Group revenues were down 0.8% driven by softer demand early in the quarter. For the fourth quarter in a row, our guests continued to spend once on property across our restaurants, spas, and other retail outlets. Total RevPAR grew 2.5%, outpacing RevPAR growth by 50 basis points, and out-of-room revenue per occupied room climbed 4%, right in line with the trend we saw through most of 2025. That tells us two things: our guests have the spending power, and our out-of-room offerings are giving them good reasons to use it. For further context, out-of-room spend per occupied room at our resorts averaged $320 per night, more than three times what we saw across our urban portfolio. RevPAR at our resorts increased 3.6%, with total RevPAR growth modestly higher, outperforming the urban portfolio on both measures. We have been saying that our resort portfolio was due for an inflection in 2026 after three years of trailing the urban portfolio’s accelerating growth. If you think back, our resorts were actually the first to bounce back from the pandemic but then lost momentum as international outbound travel picked up and domestic leisure trends normalized through 2024 and 2025. Even so, RevPAR at our comparable resorts is up more than 20% from 2019 levels, compared to high single-digit growth at our urban hotels. We remain constructive on the trajectory of our resort portfolio this year. In Sedona, the completed renovation and full integration are translating to both top line and profit. The property was under renovation in the first quarter of last year, but if you compare the most recent quarter against 2024, total RevPAR is up over 23% and hotel EBITDA is up 67%. The property generated a 37% EBITDA margin, the highest first-quarter margin in its history, driven by diversified revenue streams, rates matching their views, and the execution of creative cost efficiency. In our urban portfolio, RevPAR increased 0.9%, and total RevPAR increased 1.6% in the first quarter. January and February were modestly negative, while results in March meaningfully accelerated. The strongest urban RevPAR growth came from Hotel Emblem in San Francisco, the recently renovated Hilton Garden Inn Times Square, the Denver Courtyard, and Hotel Clio in Denver, all of which posted double-digit gains. We have been tracking how our hotels with average daily rates above $300 stack up against the rest of the portfolio over the last several quarters, and the story is pretty compelling. When you consider that our guest average total bill runs about $450 per night, with several properties averaging over $1.5 thousand, it is clear we are serving a predominantly higher-earning customer base. That strength at the higher end is showing up in the numbers. Over the past three quarters, our $300-plus hotels have outpaced the rest of the portfolio by 290 basis points in total RevPAR and 1.2 thousand basis points in EBITDA growth. Simply put, robust spending from this segment and our ability to turn it into earnings has been a real engine for DiamondRock Hospitality Company’s growth. Turning to expenses, rightsizing expenses for the demand environment remained a key focus for our team. During the quarter, total hotel operating expenses increased 0.8% on total revenue growth of 2.5%, resulting in a 127 basis point improvement in hotel EBITDA margin. This is our portfolio’s largest quarterly margin improvement since 2024 and is 275 basis points higher than the margin achieved in 2019. Wages and benefits, which represent nearly half of our total expenses, increased just 0.7% during the first quarter, reflecting continued productivity gains. Looking back to 2025, total operating expenses on a per occupied room basis increased 2% during the year. This quarter, our expenses were up less than 1.5% on a per occupied room basis, a very disciplined start to the year. Before I turn to the balance sheet and capital allocation, a quick update on our group results in the first quarter and how our pace is shaping up for the rest of 2026. Group room revenues declined 0.8% in the quarter, with rates up 3.5% but room nights down 4.2%. Winter storms in the Eastern U.S. and limited snow in our ski market negatively impacted group travel in January and February. We are encouraged by our hotels’ group pickup for the remainder of 2026, particularly in Vail, Greater San Francisco, Chicago, and Fort Lauderdale. Since our last call, our group revenue pace for the year has improved more than 100 points with pickup in each quarter. Following a hard-earned new peak in group revenues in 2025, we are trending toward another record year for this portfolio. Turning to the balance sheet, our capital structure remains simple and conservative. We have no debt maturities until 2029, no secured or convertible debt, no preferred equity, and no off-balance sheet encumbrances. All of our debt is fully prepayable. Our leverage sits on the lower end compared to peers, and that is by design. In a cyclical business, we think having the optionality and flexibility to pursue growth when the right opportunities come along is key. We paid a common dividend of $0.09 per share for the first quarter and expect to declare quarterly dividends of $0.90 per share for the remainder of the year, with the potential for a fourth quarter sub-dividend based on full-year results. Our payout ratio remains below historical levels as we continue to utilize net operating losses to offset our taxable income. As those net operating losses are utilized over the next few years, we expect our payout ratio to increase. We are currently under contract to sell one hotel and anticipate the closing to occur during the second quarter. Proceeds are expected to be used for general corporate purposes, which could include opportunistic share repurchases. Jeffrey John Donnelly will provide additional context on this transaction in his remarks. I will conclude today with our updated outlook for 2026. We are raising our 2026 RevPAR guidance by 50 basis points to 1.5% to 3.5%, with total RevPAR 25 basis points higher, which is unchanged from our prior outlook. Our adjusted EBITDA guidance is now $296 million to $308 million, a 2.5% increase at the midpoint, and our adjusted FFO per share guidance is now $1.12 to $1.18. The increase to our guidance reflects the stronger-than-expected first quarter operating performance as well as the benefit of a more favorable renewal of our insurance program on April 1 than we had anticipated. This is the third consecutive year we have achieved meaningful year-over-year reductions in our premiums. In aggregate, over the three years, we have reduced premiums by just under 40%. With anticipated capital expenditures of $80 million to $90 million this year, our raised guidance implies 7% growth in free cash flow per share. With that, I will turn the call over to Jeff.

Thanks, Briony, and thank you for joining us this morning. Earlier this week, we celebrated Bill McCartney as he retired from the board and his role as chairman after more than two decades of leadership.

Bill’s integrity and commitment to doing what is right will have an enduring impact on DiamondRock Hospitality Company. We also welcomed Bruce Wardinski to his first board meeting as our new chairman. We look forward to the perspective and leadership he will bring as we execute our strategy. Nearly two years ago, we launched DiamondRock Hospitality Company 2.0, and since that time, our shares have delivered the strongest returns in the lodging REIT sector, outperforming peers by roughly 2.7 thousand basis points and broad equity REIT indices by more than 500 basis points. We believe we are just getting started. DiamondRock Hospitality Company’s ability to drive the financial results behind our outperformance stems from deliberate and foundational decisions we have made in the past two years. First, culture. We have worked to build a culture of excellence where teams are encouraged to challenge assumptions and work collaboratively toward superior outcomes. We also strengthened the organization with added expertise across IT, legal, capital markets, design and construction, and accounting. Second, we align compensation with total shareholder returns, not just at the executive level, but across the entire organization. The goal is straightforward: our team benefits only when the shareholders benefit. This alignment and empowerment has slashed turnover and improved execution. Third, we invested in our infrastructure, implemented new accounting and enterprise analytics platforms to amplify the strength of our asset management and accounting teams, and accelerated the use of AI-enabled tools across the organization. We took a comprehensive approach to simplifying the organization, modernizing corporate policies, shrinking the board, relocating our offices, and moving our listing to Nasdaq. The outcome is a leaner G&A structure with a headcount-per-hotel ratio that remains about 50% below the peer average. Taken together, these actions help make DiamondRock Hospitality Company more efficient, more disciplined, and more focused on how we allocate capital. We are proud of the progress the team has made, and we are committed to earning your confidence through consistent execution. Last quarter, I walked through our five-year capital expenditure plan and our intent to recycle capital within the portfolio. Today, I will build on that discussion with an update on the Westin Boston Seaport District and then close with our outlook for 2026. The existing franchise agreement for the Westin Seaport expires on 12/31/2026. We view this as a meaningful value creation opportunity, and beginning in 2025, we ran a comprehensive process to evaluate brand interest in representing Boston’s premier convention hotel. We appreciated the level of interest and the creativity and flexibility we saw from brands throughout the process. After evaluating the proposals, we concluded reinforcing the Westin brand’s superior position in the Seaport would minimize disruption and create the greatest near-, medium-, and long-term value for shareholders. While we cannot disclose the specific economic terms, given the strength of our balance sheet, we elected not to pursue a T Money loan. The decision to avoid that expensive capital helped us stay focused on the fundamentals that matter most to shareholder value creation: the fee structure, the renovation scope and timing, and contract duration, assignments, and terminability. Value creation begins with the commencement of the new agreement on 01/01/2027, and as with all major capital decisions, we approached this with a focus on cash flow, flexibility, and risk-adjusted returns. With respect to the five-year capital plan we shared last quarter, importantly, our guidance remains unchanged. We continue to forecast investing 7% to 9% of annual revenue across the portfolio, or about $80 million to $100 million per year, in each of the next five years. The renovation of the Westin Boston Seaport District was already contemplated in our prior guidance as an internally funded project. The key takeaway here is we are working to provide greater transparency and consistency. Generating attractive risk-adjusted returns is essential to our capital allocation philosophy. We deploy capital across both ROI-driven initiatives and more traditional cycle renovations. Each plays an important role, but they sustain and create value in different ways. In that vein, I want to provide an update on two recent ROI projects. The first is The Dagny in Boston. With the franchise agreement for the Hilton Boston Downtown Faneuil Hall approaching expiration in 2022, we began evaluating long-term alternatives in 2020. We narrowed our options to remaining within Hilton, or for an incremental $5 million, deflag and reposition the hotel as an independent property. We chose independent positioning because we were confident that even if we initially ceded ground on the top line, we could still drive higher profits through operating cost savings. We underwrote EBITDA to exceed $16 million in 2027 versus the $10 million earned in 2023. So how are we doing? We delivered $15.5 million in 2025, and we are not finished yet, so we are comfortable this ROI project will be ahead of underwriting. The icing on the cake is unencumbered hotels regularly achieve a 15% to 20% valuation premium to comparable brand-encumbered product; our repositioning has created value through earnings and asset value. The second example is L’Auberge de Sedona. In 2025, we completed the renovation of the Orchard Inn and fully integrated its operations within our adjacent luxury resort, L’Auberge. While Orchard’s enjoyed some of the best views in Sedona, it was operating as a midscale product with a premium location in a luxury resort market. Our strategy was to unlock that untapped value. By upgrading the room product and creating more connectivity between the two hotels, we were able to transform the properties into a cohesive luxury destination in a supply-constrained, highly rated market. We invested approximately $25 million and underwrote stabilization at a 10% EBITDA yield. Early results have exceeded our expectations. In the first two quarters following integration, revenues increased nearly 25% and EBITDA increased 55%. This project exemplifies our discipline. We right-sized the investment, focused on operational excellence throughout the project, and conservatively underwrote its potential returns with upside reserved for our shareholders. Let me remind you, 2026 was not underwritten as L’Auberge’s year of stabilization. We prefer to consistently hit singles and doubles rather than hope for a home run on a complex, capital-intensive, and disruptive multiyear project. That said, when we look back, I expect we will call L’Auberge DiamondRock Hospitality Company’s version of a home run. Our ability to execute consistent, cost-efficient, and impactful CapEx spending is a result of several unique portfolio traits, including a strong competitive position, unsecured capital structure, young portfolio age, and a high percentage of independent and third-party managed hotels. This gives us control over scope and timing. While we highlight four or five larger projects each year, our in-house design and construction team is actually on more than 400 individual projects this year alone, from elevator modernizations that reduce service calls to reconfiguring outlets to add seating and drive revenue, and room renovations to enhance guest appeal and housekeeper productivity. The effectiveness of our capital spending will ultimately be reflected in our long-term free cash flow per share growth. We view our capital program as a core differentiator that originates from our portfolio construction and is a key reason DiamondRock Hospitality Company is a free cash flow per share growth story. Turning to capital recycling, as we noted last quarter, we expect to be a net seller of hotels in 2026. We are under no pressure to sell, but we believe we can accretively recycle capital within the portfolio. Transaction markets are stronger than a year ago, and though recent geopolitical events have slowed the pace of some discussions, ongoing engagement has continued. We are currently under contract to sell one hotel. We have a nonrefundable deposit and expect the transaction to close in the second quarter. At that time, we will be able to discuss the factors that informed our sale decision. We continue to place more lines in the water than in past years. Not every process will result in a transaction. We will only sell assets when, all else equal, recycling reduces risk or drives free cash flow per share growth over the medium to long term. ROI projects and share repurchases remain compelling uses of proceeds, but we have underwritten a few external opportunities that could be nearly as additive. These range from modern urban hotels with brand availability to experiential assets in supply-constrained resort markets. We have nothing to announce today, but trust that our focus is on accelerating our free cash flow per share growth and reducing risks to long-term performance. Turning to our outlook for 2026, we entered the year knowing the first quarter would be our toughest comp of the year. Despite that hurdle and the incremental headwind created by poor weather conditions, the portfolio was able to rebound in the second half of the quarter and delivered stronger-than-expected revenue growth and expense efficiency. As we look ahead to the remainder of the year, we benefit from easy comps created by Liberation Day and the longest federal government shutdown, a favorable holiday calendar, outsized exposure to FIFA World Cup host markets, America 250 celebrations, and successful renovations. While it is early, we are not seeing a reticence for guests to take to the road this summer. For example, portfolio revenues on Memorial Day weekend are pacing up in the mid-single digits. Our FIFA World Cup host market hotels have experienced increased demand at elevated rates, but we do not expect to see activity accelerate until we are much closer to the event. As a reminder, our hotels have budgeted for 20 basis points of annual RevPAR growth in the veins. We are seeing a similar booking pattern emerge around America 250 celebrations. Rates for early bookings have been strong, up double digits, but the pace at our urban hotels has been tepid. As citywide July 4 programming comes into focus, we expect the pace of bookings to improve. Our resorts, however, are currently seeing more activity than our urban hotels over the July 4 weekend. We are excited to reap the benefit from the hard work our team put into renovations last year. Among these renovations, the returns generated by L’Auberge de Sedona are expected to be the most material, driving at least a 50 basis point tailwind to DiamondRock Hospitality Company’s RevPAR growth rate in 2026. All in, we now expect our 2026 RevPAR to increase 1.5% to 3.5%, a 50 basis point improvement from last quarter, with total RevPAR growth outpacing RevPAR growth by 25 basis points. By rightsizing expenses for demand and maintaining a disciplined capital expenditure program, that 2.5% RevPAR growth at the midpoint should again drive DiamondRock Hospitality Company to a new peak FFO in 2026. We also expect to generate 7% in free cash flow per share growth for our shareholders this year. This would mark over a 30% cumulative increase in the past three years. We appreciate the trust you place in us, and we look forward to building on each successive peak. Thank you for your time this morning, and we are happy to answer your questions.

We will now open the call for questions. To ask a question during the session, you will need to press 101 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. One moment for our first question. Our first question will come from the line of Jack Armstrong from Wells Fargo. Your line is open.

Hey. Good morning. Thanks for taking the question. How are you thinking about the best uses of incremental capital at this stage given the recent performance of your shares? Are we nearing a point where you should shift away from repurchases and into more ROI projects or potentially some value-add acquisitions?

We always have shovel-ready projects all the time. I would say that share repurchases are really the most appealing use. I think at the margin you are starting to see some acquisition opportunities get there, but I think you need a healthier spread to justify that. So to reiterate, share repurchases would be the most appealing.

That makes sense. And then on the expense side, can you take us through some of the building blocks for the full year across wages and benefits, insurance, and utilities, and what is giving you confidence in your expense growth, particularly for labor, significantly below where we are seeing national averages come in?

I think we have had some very good recent history leaning into productivity. Candidly, we are not necessarily seeing it on the wage rate side. We have been able to keep our labor rates relatively low because we have been finding fewer hours worked throughout the portfolio through productivity, and that has been in a myriad of different places both in housekeeping productivity, focusing on hours of operations within our food and beverage outlets, and then, like every other company, some small administrative efficiencies that we found through the implementation of AI tools.

I will add, Jack, that we actually had savings on our insurance renewal that starts on April 1, and that will be about a $1 million benefit to the full year. That was one of the other areas where we had some cost savings.

One moment for our next question. Our next question will come from the line of Smedes Rose from Citi. Your line is open.

Hi. Thanks. I wanted to ask you a little more. You said you have a contract for sale. Could you give some updated thoughts on the overall transaction market in terms of pricing and the overall level of activity?

I think the transaction market today certainly feels a lot better than it did about a year ago. When you go back twelve months, remember it was post–Liberation Day. We ended up having several consecutive quarters of flat RevPAR, and shortly after Liberation Day, interest rates for more of a PE buyer, who tends to use leverage, were all-in around 7% to 8%. Now, RevPAR has certainly been much better this first quarter. I think there is a more positive outlook with more demand drivers in 2026, and interest rates are maybe 150 basis points lower. So I think you have a better setup, and it has definitely brought more interest to the market. You have seen many more assets come to market. There are maybe two dozen assets out there and two large portfolios, and I would say each of them are probably nine-figure-plus assets, but there are certainly properties beyond. You are starting to see a little bit of loosening. Pricing is still robust. Resorts continue to be the priciest assets, with urban maybe trading at a discount to that, largely because urban assets, speaking in broad strokes, have not quite recovered as consistently as resorts have.

Thanks. And then I just wanted to go back. You mentioned the dividend payout ratio will go up, and I think you said that is because the NOLs will be exhausted. Could you talk about that a little bit more, the timing and when you would expect the payout ratio to move up?

Sure. We generated significant net operating losses during the pandemic that built up over two to three years. We have a significant balance left, and we have worked through about 50% of it. Our intention is to use those ratably over the next few years to gradually increase our dividend payout ratio.

Thank you.

Your next question will come from the line of Michael Bellisario from Baird. Your line is open.

Thanks. Good morning, everyone. Jeff, can you give us an update on 2Q and how April performed? And then taking a step back, how would you broadly characterize the recent change in trajectory for each of the customer segments: group, BT, and leisure?

So far, the momentum that we saw into April continued to be healthy. Some of the acceleration we saw in March effectively continued into that month, more on the leisure side. Looking at Q1, BT was strong for us, and our leisure or resort markets were pretty healthy. I feel like this will be the first year—still early, but a very good probability—where all three channels, BT, leisure, and group, will be delivering positive growth for the industry, which has been lacking for the last five years. That is going to be pretty impactful for the lodging sector. It is great when you have two working, but it is a seven-day-a-week business, and you cannot always get to where you want when you only have two legs of the stool. I am encouraged by the way the year is setting up.

Got it. That is helpful. And then just a follow-up on the group side. The pace improvement that was mentioned in a few markets—anything you can point to in terms of reasons why, customer types, industry types that experienced that group pickup in those markets?

I am not sure there is necessarily a great read just in terms of customer base, but we continue to be optimistic about the group outlook for the remainder of the year, particularly given where the calendar sits around a couple of the major holidays with things like Juneteenth and July 4 shifting toward the weekend. It really gives us a larger number of potential pattern weeks that we can sell into where we have some availability. That has been more indicative of our short-term pickup—we have just had a bit more availability given how the calendar has shifted, and we have been able to sell into that.

Thank you. One moment for our next question. Our next question comes from the line of Austin Todd Wurschmidt from KeyBanc Capital. Your line is open.

Hey. Good morning. It is Josh on for Austin. You discussed some additional group pickup you might need due to some tough comps in 3Q. How much additional business do you need to backfill at this point in time? And what are some of the different strategies you can implement to fill that demand if need be?

Part of our pace has to do with our World Cup exposure. We have World Cup availability in one of our biggest hotels in Boston, so we have displaced some group, hoping that transient pickup will fill in some of those gaps. Generally speaking, as we get closer to Q3, we move out of the group booking window, so we are really focused on transient strategy to drive incremental transient business. We are optimistic that given some of the demand generators going on, particularly in July, we will be able to backfill a fair amount with transient business.

Just to give people some context, in some ways this emanates back from the Democratic National Convention. We had a very good year out of Chicago at that time in the third quarter, and then last year in 2025, that was the hole we thought we had to climb over, and we successfully climbed over it. In some ways, we were a victim of our own success—we continue to comp there—but the actual magnitude of the hole we referred to is just a few million dollars on group business. It is not an insurmountable task; it is single-digit millions of dollars on the group side.

I appreciate that additional color, Jeff. And then on the asset sale, should we view this as you testing the waters a little bit in the transaction market before you would bring additional and potentially larger assets to the market?

I would not call it testing the waters in advance of larger assets. We are always trying to find opportunities where we can monetize assets at attractive prices, and you do not always hit it out of the park on that. It is more important to have more lines in the water and be exploring. In the last year or so, we have had a handful of properties we have explored—some one-off or privately and some with listed situations. It is not necessarily a precursor. Every asset has its own unique setup, buyers, and market conditions, so I would not assume one has to precede the other.

Thank you. One moment for our next question. Our next question will come from the line of Duane Thomas Pfennigwerth from Evercore ISI. Your line is open.

Hi. This is Peter on for Duane. Thanks for taking the questions. Could you unpack a little bit of your expectations for New York this year? I know you probably have assumptions on the upcoming contract renewal, but more curious how you see top-line growth in that market following a few strong years.

We continue to be optimistic about New York. It has the FIFA final game, so in particular over the summer, we are expecting to see some compression in the market. As you mentioned, there is going to be some margin pressure given the contract renewal, which we have factored in, and that accounts for some of the forecasted uptick in our operating expenses as we progress through the year. Generally speaking, while maybe we saw a bit of a falloff in short-term booking patterns right at the beginning of the war, we have seen that level off and continue to see demand in New York as strong as it has been for the last two years.

Thanks. And then just on CapEx, you mentioned $80 million to $100 million per year for the next five years as a range. It seems like from your comments, maybe you are not considering or do not see another opportunity of something larger like L’Auberge. Is that correct? And then on L’Auberge, when is peak season in that market, and just remind us when the renovation finished last year?

That is already incorporated into that $80 million to $100 million per year. To the extent that we see opportunities for ROI projects, that is effectively embedded within that figure. It is not that we do not see those opportunities down the road.

Sedona is an interesting market in that you really have a couple of different peak seasons that shoulder between the winter and the heat of the summer. Part of the success of that asset is that given how hot it was in Phoenix—record heat earlier in the year—we got a lot more drive-to business earlier in the season. Typically, we see peak season in March to May and then again on the back end of the summer, September to October. Candidly, the market does quite well year-round.

The hotel was under renovation for all of 2025 up until about September 1. That is when the hotel reopened and launched as an integrated property.

And our next question will come from the line of Rich Hightower from Barclays. Your line is open.

Hey. Good morning, guys. I want to go back to Briony’s comment earlier about how the over-$300 ADR hotels are outperforming pretty materially versus the rest of the portfolio. Thinking more broadly, how does a statistic like that inform things like portfolio construction or how you think about CapEx on certain hotels and the buy/sell/hold decision? Walk us through how that informs the framework.

We are not the only ones looking toward the very top end of the U.S. consumer base as being more resilient than the rest of the population. That is a trend we have seen over the last 18 months, and it is definitely something we factor into acquisition decisions. Candidly, this is not a revelation that other market participants do not also see, so the assets that cater to that part of the market are being bid up to significant premiums. We are excited that we have a number of those already in the existing portfolio and continue to look for ways to enhance them—like a L’Auberge-type project—where we can take more of our portfolio and shift it toward targeting that consumer. We also look at potential opportunities where we can add to the portfolio, but those are quite often very premiumly priced.

Thanks. The middle part of my question cut out. It was also a follow-on about CapEx within that same context. How do you think about the returns? You spend the same dollars on a given hotel, but if it carries a higher rate, arguably the returns are higher simply because of that. How does it inform the CapEx program as well?

Unfortunately, you do not always spend the same amount of capital on a true luxury hotel. Some of the properties we have that are very highly rated I would not necessarily describe as five-star hotels—more like four-and-a-half. It is a subtle but important distinction because you do not spend the same amount of CapEx on luxury hotels. Some of the brands folks are familiar with, when you look at their operating margins and what their CapEx is, historically have very low returns on investment. You are trying to find situations—and this is where being independent in some of those hotels is more critical—where you can direct the CapEx to what is most critical to driving rate and profitability, rather than trying to maintain someone else’s standard. When you look at the margins on our higher-rated, more luxury resorts, they are quite high relative to what you might see from some peers who have branded luxury hotels.

If you do not mind, second question: back to the Westin Seaport franchise renewal. If we were having the same situation five or ten years ago, would the outcome have been equivalent to what you achieved here, or does something imply a change in the balance of power between the brands and owners or more sophisticated owners? Walk us through the evolution.

Today’s management team probably thinks about that a little differently than in the past. We look at how we are creating flexibility at the asset level and where we can create value, whether that shows up in cash flows or in future asset value. Having one particular structure—franchise or managed—or accepting key money, what have you, may have been viewed differently in the past. We were looking more for flexibility and did not see the need for key money.

To your question, given the brands’ focus on net unit growth and the difficulty they are having prompting incremental development, it has definitely gotten a bit friendlier on the owner side. We had a very large audience of potential brands interested in the hotel, and the inducements, compared to ten years ago, are definitely better from an owner perspective. It is not double, but is it 15% or 20% better? That is probably a fair assessment.

And our next question comes from the line of Chris Darling from Green Street. Your line is open.

Thanks. Good morning. Circling back to the CapEx discussion and the remaining value-creation opportunity across the portfolio—whether it be franchise expirations or ROI projects—is anything more actionable in the near term, assuming continued fundamental strength? How flexible do you intend to be as it relates to the five-year CapEx plan?

There are projects that are actionable. We continue to look at timing and scope to ensure the returns we want. There are also very small projects within properties—back-of-house work or energy savings—that are not necessarily advertised but can be small projects with good returns. There is a lot of that already embedded in spending. Do not expect that CapEx number to swing around a lot. We have spent a lot of time diagramming every potential project over the next five years for all of our hotels and phasing them to make that a consistent figure and have things done on time at a level that is impactful to the property. The intent is to de-risk our future earnings volatility at the margin, and we are going to try hard to stick to that.

Helpful to hear. As a follow-up to the discussion around the consumer, can you elaborate on what you are seeing in out-of-room spend and how things have trended relative to expectations? Any other insights on the health of the consumer—broad-based or high-end strength relative to mid or lower end?

In the first quarter, out-of-room spend continued to accelerate at a faster rate than hotel RevPAR. We continue to see the ability, once we get the customer on property, to get them to spend in different ways—across a number of spas throughout the portfolio and in food and beverage. We were encouraged by what we were able to do in food and beverage given it was a down group quarter. From both a revenue and profitability perspective, we saw nice lift in the outlets throughout the portfolio that drove increased food and beverage profit even when banqueting and catering were slightly down. We continue to see a customer, once on property, that continues to spend freely across ADR tiers—not just at the high end.

And our next question will come from the line of Kenneth G. Billingsley from Compass Point Research. Your line is open.

Hi. Good morning. I just wanted to follow up on the World Cup. I believe you said it was 20 basis points that you have in RevPAR. Is that correct? Given the shift going on, are you seeing this becoming less of an international event and shifting to more domestic? It also seems like it is becoming more of a luxury event. In the past, have you seen last-minute booking being successful when there is an opportunity for people to go to these kinds of higher-ticket experiences?

There is not much precedent for this occurring in the U.S. I understand the initial ticket prices have been high. I personally wonder whether that has given some pause to people’s desire to attend. Ultimately, I do not think we will be seeing empty stadiums. I think they will get filled, which leads me to believe that maybe folks who were speculating on the tickets early on will end up having to capitulate and find a market-clearing price. As far as demand, from anecdotes we have had from various cities that meet with hotel councils and share data, it has been about a third, a third, a third between international demand for the tickets, domestic demand, and local demand. My takeaway is about two-thirds of the tickets are being consumed by people who will ultimately require a hotel room, but time will tell as we get closer.

Thank you. And as a reminder, to ask a question, that is star 11. One moment for our next question. Our next question will come from the line of Floris van Dijkum from Ladenburg Thalmann. Your line is open.

Hi. Good morning. This is Eduardo on for Floris. Thank you for taking the question. Can you talk about how you reserve for potential bonus payments to third-party operators this year?

Generally, bonus thresholds are multi-tiered throughout our properties, and a lot of them have a gatekeeper around financial performance and financial performance relative to budget. That was one of the upticks we saw in labor costs in the first quarter because we have a number of properties that are exceeding their operating budget for the year and expect to exceed operating budget for the year. It is something we track actively to make sure we are accruing the appropriate amount of incentive compensation for performers that are outperforming expectations.

It is an important distinction because accruing for it mitigates risk. Compared to hotels that do not accrue for it, there can be a year-end surprise on the labor expense side with a true-up on bonuses owed at year end. We accrue throughout the year.

I am not showing any further questions in the queue. I would like to turn it back over to Jeff for any closing remarks.

Thank you, folks, for dialing in. I know it has been a busy week, but we look forward to seeing you soon. Have a good summer.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone, have a great day.