DiamondRock Hospitality: Key Takeaways from Meetings with Management; Reiterate Buy

Research evidence excerpt

DiamondRock Hospitality: Key Takeaways from Meetings with Management; Reiterate Buy

hat the hotel transactional market was effectively frozen for

much of the past four years, dating back to 2002 due to some combination of

uncertainty around interest rates, a flattening out of full service RevPAR growth

for the final three quarters of 2025, and sticky pricing (cap rate) expectations on

the part of sellers (we estimate that overall hotel sale volumes averaged roughly

25% of pre-Covid levels over the last four years). Now, however, management is

seeing more two way activity across various sizes of portfolios. There are multiple

buyer types/groups. We think this increases the likelihood that DRH sells

additional non-core assets within the next few years and could also be a positive

catalyst for DRH to recycle some proceeds into prototypical acquisitions.

Management indicated that rising construction costs are another reason why the

focus on highly selective cap-ex has become incrementally important. We are

aware that as hotel franchise contracts are renewed (as DRH recently did with its

Westin Boston Waterfront), property appraisals are often coming back showing a

replacement cost close to double sell-side per key values as reported by

Bloomberg and/or Consensus Metrix. To us, this is a strong indicator that there

should be a de minimis level of newly constructed full service hotels developed in

the U.S. for the foreseeable future. We believe there would need to be several

consecutive years of mid single digit or better RevPAR growth in order to make

ground-up projects pencil out.

DRH views brand companies as natural operators of large, group-centric hotels

(it only owns two) but believes, and we agree, that the flexibility afforded by