Q4 2022 Diamondrock Hospitality Co Earnings Call
Participants
Briony R. Quinn; Senior VP & Treasurer; DiamondRock Hospitality Company
Jeffrey John Donnelly; Executive VP & CFO; DiamondRock Hospitality Company
Justin L. Leonard; Executive VP & COO; DiamondRock Hospitality Company
Mark W. Brugger; Co-Founder, President, CEO & Director; DiamondRock Hospitality Company
Anthony Franklin Powell; Research Analyst; Barclays Bank PLC, Research Division
Charles Patrick Scholes; MD of Lodging, Gaming and Leisure Equity Research & Analyst; Truist Securities, Inc., Research Division
Chris Darling; Analyst of Lodging; Green Street Advisors, LLC, Research Division
Chris Jon Woronka; Research Analyst; Deutsche Bank AG, Research Division
Dany Asad; VP & Research Analyst; BofA Securities, Research Division
Duane Thomas Pfennigwerth; Senior MD; Evercore ISI Institutional Equities, Research Division
Floris Gerbrand Hendrik Van Dijkum; MD & Senior Research Analyst; Compass Point Research & Trading, LLC, Research Division
Michael Joseph Bellisario; Director and Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Smedes Rose; Director & Senior Analyst; Citigroup Inc., Research Division
Stephen White Grambling; Equity Analyst; Morgan Stanley, Research Division
William Andrew Crow; Analyst; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company's Fourth Quarter 2022 Earnings Conference Call.
Briony R. Quinn
Good morning, everyone. Welcome to DiamondRock's Fourth Quarter 2022 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 or implied by 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.
Mark W. Brugger
Good morning, and thank you for joining us today. I'm here with our entire executive team, and we'll be happy to take your questions after the prepared remarks. The fourth quarter kept off the best year in the history of DiamondRock, with record revenues, record margins and record profits. For the full year, comparable hotel adjusted EBITDA was $319.8 million. This was an increase of 121.9% or $175.7 million over 2021. Results even surpassed pre-pandemic 2019 with comparable RevPAR better by 5.5% and comparable hotel adjusted EBITDA better by $38.4 million. Importantly, comparable profit margins were 31.36%, surpassing our pre-pandemic peak by 184 basis points. These tremendous operating results were made possible by the consistent execution of our strategy to curate a portfolio that is uniquely focused on the leading secular travel trends.
Jeffrey John Donnelly
Thanks. As Mark said, it was a record quarter and a record year for DiamondRock. Total comparable revenues for the company were $257 million in the quarter, an increase of $47 million or nearly 23% over the comparable period in 2021. Comparable RevPAR for the portfolio in the fourth quarter was $196 or 6.7% higher than 2019. This growth was driven by run rates over 19% above 2019. Occupancy is down 780 basis points to 2019. Closing this gap remains one of several sources of future growth. Other revenue, which speaks directly to our asset management team's creativity in identifying and expanding new income streams was up 31% or $5.1 million over 2019. F&B revenue was over $5.2 million above 2019, driven by the repositioning of several F&B outlets during the pandemic. We will share with you soon several new or upgraded outlets we are working on for 2023 and beyond that will continue to drive profits to new levels.
Mark W. Brugger
Thanks Jeff. Our outlook remains constructive. Importantly, we are starting from a position of strength. Our portfolio recovered quickly as our portfolio's favorable composition led to all-time record performance. We also ended 2022 with great profit margins, 184 basis points above prior peak. For 2023, the significant variability of the overall U.S. economy, in our view, makes providing guidance of little value at this time. Like the rest of the industry, we do expect some challenges this year to profit growth margins from rising property taxes and insurance costs as well as from increases in hotel staffing and wages that occurred progressively throughout 2022. By the end of 2023, we expect expense comparisons to normalize. Also for this year, we are projecting corporate G&A to be approximately $32.5 million and interest expense to be roughly $61 million. However, despite these headwinds, travel demand continues to be very strong, and our operator prepare budgets show growth in every segment of the business in 2023.
Question and Answer Session
Operator
Thank you.
Smedes Rose
I wanted to ask you, Mark, and Jeff, you talked a little bit about the GAAP to occupancies in 2019, and it sounds like you believe that, that gap can continue to close in '23. And I'm just wondering kind of what gives you confidence there? Do you feel like it's more on the business side or just more on the leisure side? And I guess if you could maybe just couple that with your remarks around margin pressures in '23, and I kind of lost you right there at the end. I mean, are you expecting margins to be flat or kind of decline in '23 versus '22? If you could just speak to that a little bit.
Mark W. Brugger
So to take the first question on occupancy, yes, we expect the majority of the gain this year to be in occupancy, particularly the urban hotels. If you look at just January is a harbinger, occupancy was up versus last year at 15.8%. And we're seeing almost all of that come through the urban properties. So there's room to run there. group's going to be a big part of that component. And we sell the momentum building as Jeff talked about in the prepared remarks, as we move through 2022, concluding the fourth quarter at almost parity to where we were in 2019. So I think the data and the momentum and the trend line are pretty clear that occupancy gains are going to be significant as we move into 2023.
Smedes Rose
So can you just say -- just to follow up, what sort of percent increases are you expecting, I guess, in wages and benefits kind of at the property level for '23?
Mark W. Brugger
We're not giving specific guidance, but we've seen -- it ranges from 4% to 18% in our properties. So it's a little bit misleading on the percentages be some of the low-cost markets, the percentages actually have been higher, so you might move from $14 to $17. And in some of the higher wage markets, you might be at 28 already. So the increase is smaller, but it's on a much larger base. So we're seeing wide variability within the portfolio, but we would expect the industry to be up high single digits, certainly in expenses this year.
Operator
Our next question comes from Dany Asad of Bank of America.
Dany Asad
Mark, just clarifying, I think in your prepared remarks, you were talking about operator prepared budgets are showing growth in every segment for 2023. Does this hold true for all 4 quarters of the year? Or is this 1Q kind of driving a lot of that?
Mark W. Brugger
The growth in this year, given the comps for last year are going to be weighted towards the first half of the year. Certainly, the 40% increase we had in RevPAR in January isn't going to be consistent for every month of this year. But it looks good. I mean, every segment, whether it's group business or resorts, we're showing growth in the operating prepared budgets. So we're encouraged by that trend.
Dany Asad
And then my other question for you is how are you underwriting leisure rates for this year as kind of in your budgets kind of as we look at the -- for all of '23?
Mark W. Brugger
Yes, it's interesting. Leisure is very disparate this year. So while, for instance, Jeff talked about in the prepared remarks, Key West and the shoulder seasons is getting a little softer, we're going to see new record performance and very strong performance in Q1 at Vail, Sonoma, Huntington Beach, all continue to accelerate in their ability to charge higher rates. So I think as we look at underwriting to your specific question, it's really very market specific and what the individual leisure demand drivers are in that particular market.
Operator
And our next question will come from Michael Bellisario of Baird.
Michael Joseph Bellisario
Mark or maybe for Justin, just on group trends. I was hoping you could perhaps differentiate what you're seeing in terms of spend and booking behavior at your big box hotels versus what you're seeing on the group side at your resort properties.
Justin L. Leonard
Sure. I mean we continue to see growth in group demand throughout the portfolio. And I think as Mark mentioned on the resort side, maybe first, part of our success going forward is as we've seen a little bit of falloff in leisure transient some of our ability to grow profit. So the group growth there is actually going to be just as significant as you see on the urban side, if you really replace the leisure traveler and the post groups, I mean, we're filling incremental demand. But we did about 7% incremental group bookings in the fourth quarter versus the same quarter in 2019 at rates that are over 10% higher. So we continue to see the group booking trends accelerate throughout the portfolio. And just given that shorter booking window and given our larger space availability throughout the portfolio, we're pretty excited about group opportunity as the year progresses.
Michael Joseph Bellisario
Helpful. And then just a follow-up on the Late Boston acquisition, Mark, you touched on it a little bit. Can you provide maybe some timing or maybe your initial thoughts on the timing of some of those longer-term ROI projects and redevelopment potential there at the property?
Mark W. Brugger
We've disclosed on the asset in November, but we've been working with the land use attorneys and others in evaluating the rights that we have with the property. So we think we have significant -- we've confirmed with the lands that we have significant expansion opportunities. It will probably take a couple of years to actually get through that. There's an extension of the sewer lines, some of the things that would need to get done. But we feel fairly confident that we have the ability to do it, and we are going to evaluate this year the kind of the master plan and get it locked in and then be able to execute on it.
Operator
Our next question will come from Anthony Powell of Barclays.
Anthony Franklin Powell
I guess a question on revenues and margins. If you could maybe get into what you think need RevPAR growth to be this year for your portfolio to get to those flat GOP margins. And maybe talk about that more on an ongoing basis given wage pressures, insurance costs and whatnot on an ongoing basis?
Mark W. Brugger
Sure. It's haven't we're not giving specific guidance. But the industry, if you look at STR, they're saying the industry is up about 3.7%. -- upper upscale, up about -- a little over 8%. We think those that kind of environment generally for upper upscale, we'd be able to hold margins for the industry kind of GOP flat. So that's the environment. It will depend how the economic outlook plays out. But right now, I think that's kind of a fair assessment on margins. Jeff, do you have anything else to add on that?
Jeffrey John Donnelly
No, that's the comment I was going to make as well just because earlier, you mentioned that we should be expecting sort of high single-digit expense increases. So same -- to get high single digit -- to get flat margins, GOP margins you would need actively high single-digit revenue growth.
Anthony Franklin Powell
And I guess more on the economic outlook. I mean, you've talked about the opportunity to have good short-term bookings later this year. I guess, given the uncertain environment, how certain are you and your ability to drive some of those short-term bookings in group throughout the year?
Mark W. Brugger
Yes. So I would say a couple of comments on the group piece. So we saw in the fourth quarter, as Justin mentioned, the acceleration of bookings in the quarter, fourth quarter and in the quarter for 2023. So we crossed over the end of the year with good momentum. The window for booking group remains shorter than prepandemic. So if people are booking even large groups on relatively short time lines, that seems to be the world order that we're in this year. I think we're really encouraged on not only the momentum that we experienced in the fourth quarter, but the fact that the availability that remains in 2023 is still on some very attractive dates, sometimes when we have -- we cross over, we have sold the best date -- all the best states, if you will. But we still have very attractive dates like summertime in Boston, summertime in Chicago that are still available, and that gives us more confidence in the ability to close the group booking gap and the fact that we're going to be able to put high-quality groups into those open periods.
Operator
Our next question will come from Duane Pfennigwerth ,Evercore ISI.
Duane Thomas Pfennigwerth
Just with respect to the -- I think you put out a January up 10.5% relative to 2019 in your investor deck. Sorry for the short-term question, but could you put sort of January in context from a comps perspective relative to February and March, the balance of the March quarter?
Mark W. Brugger
Yes, this is Mark. I'll make a couple of comments on Q1. So we did preannounce January. So the results, as you mentioned, were up 10.5% over '19, up 39.6% over '22. We do anticipate that Q1 will be the biggest year from the easy comp to Q1 of '22 with the overcome impact -- but we're expecting the entire quarter to be fairly robust. And all the urban markets, in fact, we expect total RevPAR to exceed 2019 levels at our hotels in markets like Salt Lake City, Dallas, Fort Worth, New York and Phoenix. So that's going to help power our Q1 overall. And even the resorts, as I mentioned, while Florida Keys may be moderating from being up over 50% from 2019, we still expect robust growth in Q1 from resorts in Vail, Huntington Beach and Sonoma, among others. So we expect to finish, I think, in total Q1 with total RevPAR that is up double digits, low double digits in 2019. So I would say January is not out of line with what we expect for the quarter. We expect those overall results for the quarter versus 2019 will probably put us at the front of the pack among the peer set.
Duane Thomas Pfennigwerth
And then just the comment on the Florida Keys and maybe what we're seeing is just sort of normal seasonality coming back relative to a period of time where there was no seasonality, it was sort of peak forever. I'm just wondering, is your approach to revenue management different in these off-peak shoulder seasons? Is there something through the pandemic that you learned that changes your approach to off-peak versus the past?
Mark W. Brugger
On the Florida Keys, let's say, we can't own enough Florida Keys in some ways. So we're talking about rates that are 50% higher than they were in 2019 with incredible ability to flow that higher rate to the bottom line. So it's an incredibly profitable place to be. What we're seeing is I think the impact last year of Omocron where people could -- all of a sudden, they got their another 60 days of work from home that they didn't anticipate, and they were trying to figure somewhere where they could drive and take advantage of the last gas of work from home before they had to go back to the office a couple of days a week. And the floors where they really participated in that surge, if you will, from the last-minute pushback caused by the macro variant. So what we're seeing now is, yes, Christmas week, we can still push it. But that unusual surge that we saw is moderating a little bit. And when I mean moderating it, it's not like it's going back to anywhere close to 2019. We're talking small percentage declines. And our strategy is to maintain rate. We've retrained the traveler to pay rates that are 50, sometimes 100% higher than they were 4 years ago. And we're not going to get back $1 of that very easily. So that's our strategy.
Operator
Our next question will come from Patrick Scholes of Truist Securities.
Charles Patrick Scholes
Most of my questions have been answered. Just when we think about comparable margins versus 2019 and ability to have permanent margin increase. What are your latest thoughts on that? I know it may not be specifically you folks, but if we go back 6 months a year ago, sort of the industry was thinking plus 100, maybe 200 basis points. Is that -- would that something like that still be on the table?
Mark W. Brugger
I'll let Jeff bump in some details, but we ended 2022 184 basis points above 2019. So I think DiamondRock's proven we can operate hotels with higher margins. Now in 2023, there will be some expense pressures. So there'll be some pressure against that margin increase. But we're already substantially higher than we were in 2019. Jeff, do you want to jump in on some details?
Jeffrey John Donnelly
Yes. I was also going to just chime in on that, Patrick, that I think on the resort side of the portfolio, as Mark mentioned earlier, that's where our rate growth has been highest and our flows have been strongest. And I think that's going to be the area to where you continue to see our premium performance on margins holding out better. There's a lot of structural reasons for that as it relates to -- for everything from taxes and insurance to labor costs in those markets that drive that. But I think that's probably where you'll see those premium margins more apt to be held in relative to '19.
Operator
Thank you. Our next question will come from Chris Woronka of Deutsche Bank.
Chris Jon Woronka
Mark, I think you mentioned in the prepared comments, you still have a lot of room to go even at the resorts on occupancy. And the question would be, do you think -- can you get that at the rates that you want to get? Or is it -- is there going to be a function of eventually rates come down, OpCos up, which obviously is a little tougher for margins. I mean how do you get that full occupancy back in the resorts?
Mark W. Brugger
Chris, it's a great question. The resorts are really -- you have to think about them, their own micro businesses, and it's going to be different at different kinds of resorts. In Fort Lauderdale, for instance, Justin was saying, we're grouping up to replace some of that leisure. So the way we're going to get back to the kind of Max Ox hotel like for Lauderdale, which has a great group meeting platform is that we're going to supplement in more and more group than we had last year, and that's going to allow us to close that gap. Some of the hotels, if you have a 100-room hotel that has no group, it's going to be harder to recover that, and we're going to have to play with the rate strategy there a little bit to figure out where the maximum profit mix is on revenues. So the overall goal is to continue to maximize profits. We'll close some occupancy gap through adding group throughout the portfolio, but it might not close entirely in 2023.
Chris Jon Woronka
And then I was hoping we could go back to the comment about group and still having some prime dates. I thought that's a little bit unusual, maybe different than what we've heard from others. I mean, are those -- again, are those open because the rates are at a level where there's more selective demand. And I mean do you worry at all that you're going to miss it, but something changes in the macro, and it's too late to even get close in.
Mark W. Brugger
That's a good question. I think it's more of the fact that our portfolio -- a lot of the prime data in markets like Chicago and Boston are still 6 months out 5, 6 months out. And the nature of group bookings stays a little shorter window. So I think it just happens to be the geography of our portfolio. We're actually super super happy with the way it's laying out on a calendar basis this year, but I'll let Justin add any details for other question.
Justin L. Leonard
I think it also also comes down to average group size. I mean our portfolio skews maybe a little bit smaller than some of our competitors. Those average groups that are maybe in the 50 to 150 rooms are going to book shorter end than maybe of the larger hotels there, 500 plus. So it gives us the ability to sort of look towards a higher percentage of our business from that short-term booking window.
Operator
Thank you. Our next question will come from Floris Gerbrand Van Dijkum of Compass Point LLC.
Floris Gerbrand Hendrik Van Dijkum
I know you're not providing guidance, but you're hoping to keep margins the same, and you're saying that some of your costs could go up, your operating costs could go up by 8%-ish or somewhere in that range, which would essentially mean that your EBITDA would have to go higher as well. I mean, put another way, is there -- under what scenario do you see EBITDA going down, barring a hard-landing recession, what scenario do you see DiamondRock posting negative EBITDA growth in '23? That's my first question.
Mark W. Brugger
First. Well, we're not giving guidance. But as we mentioned earlier, STR's guidance of 3.7% for the industry and high single digits for upper upscale. In that environment, that's the environment that we think we can hold GOP margins flat, if that's kind of the economic scenario that they're utilizing, and that's how the industry plays out, we think we can do well in that environment. So hopefully, that's helpful.
Floris Gerbrand Hendrik Van Dijkum
I just I guess my second question is, I noticed you still had last year, 2 hotels that actually posted negative EBITDA. Your Embassy Suites in Bethesda and your Kimpton and Fort Lauderdale. Maybe talk a little bit about that and maybe also touch upon actually your highest EBITDA producer, which doesn't really fit into, I think, where you want to take the company, which is your Chicago Marriott, which represents over 10% of your EBITDA. How should we think about that hotel going forward? And how would you replace the lost income, if you were to trade out of that asset?
Mark W. Brugger
Okay. So on the 2 that you mentioned, Bethesda Suites had a brand transition, which was disruptive. So that's the reason how EBITDA and it's ramping back up this year. The Shorebreak in Fort Lauderdale, we acquired, we're repositioning that asset. So as anticipated, where we're doing the roof and that repositioning won't be done until probably ended the second quarter of this year. And it's all -- both of these are tiny assets for the overall portfolio. But both were in transition. That's the reason. Famer, it had a great year. It exceeded our expectations. The market and the ability for us to bring leisure in over the summer and then the group rebound as the year went in Chicago were ahead of our expectations.
Operator
Thank you. Next question will come from Chris Darling of Green Street.
Chris Darling
Related to staffing levels, are you more or less running at the right headcount today? Or is there more work to be done in terms of hiring across the portfolio?
Justin L. Leonard
Yes. I think generally, we're running at the required staffing levels for what we anticipate the business levels to be. As we progress through the year, we will have some comparables that are not perfect on a year-over-year basis, just given where business levels were same time last year as Omacron sort of worked its way through the country in early 2022. But I think by the end of last year, we're pretty much fully ramped from a staffing perspective. in terms of where we see operating fund bills going forward. But those levels are, in a lot of cases, significantly below 2019. We've been able to really rethink and streamline the business as we've ramped these staff back up from what was a pretty significantly reduced levering build a pandemic. I think our hotels, western in Boston is really a great example of that. And we're forecasting about 20 less managers in 2023 budget versus 2019 operating levels. So we've really found ways to complex roles throughout the portfolio, especially in some of the larger assets to find a more efficient and streamlined business model.
Chris Darling
And then shifting gears, Mark, you mentioned there's not too much available in the transaction market today, but curious if you've considered putting capital to work, maybe in the form of mezz debt, preferred equity, just thinking about other ways to maybe get a foot in the door of assets you might like to own over the longer term?
Mark W. Brugger
We do have kind of strategic conversations all the time about capital deployment. But we love our balance sheet. We love the clean story that DiamondRock is today. And frankly, there's a lot of competition from private equity in doing mezz debt and tranches of buying tranches of debt in other places. And actually, the competition there is fairly intense. So we're most likely to keep it relatively simple, not that we wouldn't do something creative on that front, but I think that it has to be a very high bar to overcome for us to move down that. And frankly, we find opportunities that we found that 6 opportunities of great acquisitions in the last 24 months. And while the volume is low on the market, we're having active conversations about deals, primarily off-market deals right now. So it's not like it's zero -- and one of the advantages of having only 35 assets to be in our size, if we could do a few deals this year, it can really move the needle for us. We don't need to do $1 billion of acquisitions to be the top-performing REIT in 2023. So I think we'll continue to find smart deals. One of the things we've been able to do is find off-market deals. And looking at our pipeline, we have a number of those that we're in active dialogue on today.
Operator
Thank you. One moment for our next question, please. Our next question will come from Stephen Grambling of Morgan Stanley.
Stephen White Grambling
The comments on the first quarter were helpful. Are there any additional thoughts you can provide on the quarterly cadence for the remainder of the year as we think about big citywides or other factors to consider for whether it's revenue or margins by quarter. And as a related follow-up, were there more cancellation fees in 2022, outsized there's any way to think about how cancellation fees may have contributed on a quarterly basis last year.
Mark W. Brugger
I mean I will say people we're not going to give guidance on revenues and margins by quarter. But as Mark said, our first quarter is probably going to be most significant in terms of revenue growth. I actually think that EBITDA growth year-over-year is probably going to be more a month of the year weighted just given the comparisons to last year and how the business ramped over last year. So I think from a call it a risk-adjusted standpoint, I think having our earnings more front-end weighted is an encouraging sign. I'm looking at Justin, I'm not sure if we have the cancellation fee revenue handy or if we can always follow up the offline.
Justin L. Leonard
Yes. Mark, we did have like, I think, most of our competitors more cancellation versus '19, but it was a little over $2 billion more than we had in '19. So it's not that material to over $1 billion in revenue. I think it's less material to us, but it has probably some of our others with the larger group component.
Operator
And one moment, please for our next question. Our next question will come from Bill Crow of Raymond James.
William Andrew Crow
And Jeff, one for you. If we just think about revenues up in the mid- to high single-digit range, which I think you've established and -- or the industry and then we think about expenses up in a similar amount, we kind of get to a flattish EBITDA number, maybe a slight positive bias. But you did -- you have made transactions over the course of the year. I'm just thinking about how the portfolio changes would then be additive to kind of the baseline number?
Jeffrey John Donnelly
Yes. I guess I would say, Bill, we tend to think of all this on a comparable basis. So I mean, I guess when we're getting guidance or talking about the portfolio in that way, it is called same-store on that level. So I wouldn't think of the acquisitions as sort of incremental or outside of that. We're trying to be as transparent as possible and adjust for the transactions that we've already made in our past numbers and our -- how we think about the year going forward. So I don't know, is that helpful to you?
William Andrew Crow
I guess. But in Austin, for example, you only owned it for a short period of time, right? So you're going to get that benefit rolling through this year?
Jeffrey John Donnelly
Certainly. And it's a very profitable asset. But when we think about our year-over-year growth, we obviously look to the historical contribution that, that asset would have made to the extent we had owned it for all prior periods.
Operator
And speakers, I see no further questions in the queue. I would now like to turn the conference back to Mark Brugger for closing remarks.
Mark W. Brugger
Thank you. For everyone on the call, we appreciate your interest in DiamondRock, and we look forward to updating you next quarter. Have a great day.
Operator
This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.