DiamondRock Hospitality Company Stock

Good day, and thank you for standing by. Welcome to DiamondRock's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I will now hand the conference over to your first speaker, Bryan Quinn, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to DiamondRock's Second Quarter 2026 Earnings Call and Webcast. Joining me today is Jeff Donnelly, our Chief Executive Officer; and Justin 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 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 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 another quarter of strong operating performance. Our business model demonstrated its earnings power as RevPAR grew 7%, supported by improving trends across all customer segments. While expenses, excluding the benefit of favorable property tax appeals, increased just 1.8% due to our relentless focus on efficiency.

The significant operating leverage drove our 240 basis point margin expansion and led to strong profit growth. We delivered corporate adjusted EBITDA of $107.9 million and adjusted FFO per share of $0.44 during the quarter. Our results benefited from the settlement of multiyear property tax appeals on our 2 Chicago hotels, which totaled $6.9 million or $0.03 per share. Excluding this benefit, our FFO margin expanded by an impressive 303 basis points and our trailing 12 months free cash flow per diluted share defined as adjusted FFO less capital expenditures, increased 27% year-over-year to $0.80.

Starting with the top line performance. comparable RevPAR increased 7% during the quarter, with April and May each growing approximately 5.5%, followed by 10.1% growth in June, reflecting broad-based strength across all customer segments. While the World Cup benefited several of our markets, most notably Boston and Greater San Francisco, it was not the primary driver of our performance.

We estimate the World Cup contributed approximately 90 basis points to our second quarter RevPAR growth, and we now expect it to contribute approximately 30 basis points for the full year which is modestly above our initial estimate of 20 basis points. Group and transient revenue growth were fairly similar during the quarter, each increasing more than 6%. Group demand remained consistently strong throughout the quarter, while transient demand accelerated as the quarter progressed.

Looking across the last 3 major holiday weekends, RevPAR growth range from approximately 9% to 12%, providing further evidence of healthy leisure demand. Guest spending while on property also remains healthy. Food and beverage, spa and parking revenues each increased in the low single digits, leading to total RevPAR growth of 5.6%. We continue to benefit from the relative strength of higher income consumers and their preference to spend their time and money on unique experiences.

At checkout, the average guest bill exceeded $475 per day this quarter, with hotels above that level accounting for approximately 2/3 of our EBITDA. At our top 5 ADR hotels, the average bill exceeded $1,200 per night. Over the last year, our hotels generating ADRs above $300 a have outperformed lower-rated hotels by almost 300 basis points on total RevPAR growth. We expect that trend to continue through the remainder of this year and into 2027.

Strong demand is only a part of the story. Maintaining operating discipline below the top line remains a core competency for DiamondRock. During the quarter, total hotel operating expenses increased just 1.8% compared to total revenue growth of 5.5%, resulting in 240 basis points of hotel adjusted EBITDA margin expansion without the onetime property tax benefit. Year-to-date operating expenses have increased only 1.3%, while total revenue grew 4.2%, driving nearly 200 basis points of margin gains.

Wages and benefits, which represent nearly half of our total expenses increased 2.2% during the quarter reflecting continued productivity gains as labor hours worked declined despite the increased occupancy. Our focus remains simple, control costs without compromising the guest experience. RevPAR at our resorts increased 7.9%, led by Liberis DeSadona, Caballo Point, our 2 Destin resorts and the Landing Lake Tahoe, all of which delivered double-digit growth. We expected that our resorts would outperform our urban hotels in 2026, and that thesis continues to play out.

We view our resort portfolio favorably given its strong cash flow generation supply constraints and embedded ROI opportunities. Before turning to our urban portfolio, I want to provide an update on Laberge Dacodona, our most recent ROI project. The property continues to outperform expectations. In its first 3 quarters as an integrated resort, revenues increased 17%, hotel adjusted EBITDA increased 40% and margins expanded 670 basis points each compared to 2 years ago when the hotels operated separately.

We have increased our estimate of the hotel's contribution to 2026 RevPAR growth from 50 basis points to at least 75 basis points. Importantly, the property has not yet stabilized its 2027 group pace is more than double this year's level and we continue to expect meaningful earnings tailwinds from Laberge into 2027. RevPAR at our urban hotels increased 6.6%, led by Bedagne, our 2 Chicago hotels, Bourbon Orleans, the Kimpton Palomar Phoenix and Hotel Emblem. Urban performance accelerated steadily throughout the quarter, reaching nearly 10% RevPAR growth in June.

Importantly, this performance reflects broad-based strength across the portfolio rather than a single market recovery story. By year-end, pro forma urban revenues are expected to exceed 2019 levels by double digits. Group revenue increased 6.6% during the quarter, driven by rate growth of more than 3.5% and 2.5% higher room rates.

Strength was broad-based across the portfolio with particularly strong contributions from our Boston hotels, Cavallo Point, Sonoma and Laberge Dacion. One notable characteristic of our group business this year has been the consistency of rate growth, which we view as an encouraging indicator of underlying pricing power and the quality of demand our hotels are attracting. Looking ahead, pace for the second half of the year is currently up approximately 1%, led by strength in the fourth quarter as the third quarter is expected to be essentially flat.

Despite the exceptionally strong group year we achieved in 2025, we again expect to report a record group year in 2026. 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. Our debt remains fully prepayable and leverage remains at the lower end of our peer group.

We believe maintaining a conservative balance sheet provides optionality, allowing us to pursue external growth fund internal investments and return capital to shareholders as opportunities arise. For perspective, 1 additional turn of leverage would provide approximately $500 million of incremental investment capacity while remaining within our target leverage range. The strength of our operating performance, continued momentum entering the second half of the year and our confidence in the earnings outlook supported both our dividend increase and our updated 2026 guidance.

We announced a 22% increase in our quarterly common dividend to $0.11 per share and continue to expect our payout ratio to increase over time as our net operating losses are utilized. We are also raising our 2026 outlook. We now expect RevPAR growth of 2.5% to 4%, up 75 basis points at the midpoint. We expect that RevPAR growth in the fourth quarter will be stronger than the third quarter. Adjusted EBITDA is now expected to be in the range of $310 million to $320 million and adjusted FFO per share between $1.18 and $1.23.

With anticipated capital expenditures of $75 million to $85 million this year, our raised guidance implies 18% growth in free cash flow per share. With that, I'll turn the call over to Jeff.

Thanks, Bonnie, and thank you all for joining us this morning. Over the past 2 years, DiamondRock 2.0 has been focused on 1 objective, growing free cash flow per share. Every major decision we've made has been in the service of that goal because free cash flow per share growth restarts the flywheel and ultimately drive shareholder returns. On a trailing 12-month basis, free cash flow per share has increased approximately 30% reflecting disciplined execution across capital investment, asset management, oversight of hotel operations and capital allocation.

Last quarter, I highlighted 3 topics: stability and intent of our 5-year capital investment program, the value and optionality created through our renegotiated franchise agreement for the Westin Boston Seaport and the execution of our capital allocation philosophy. Today, I want to focus on 3 new topics. First, the improving transaction market; second, the optionality embedded in our business strategy; and third, why we remain constructive on our earnings growth into 2027.

The transaction market feels healthier than it has been in several years. We are seeing more opportunities to buy, sell and create value, and we even actively underwriting potential acquisitions. While competition is intense, we remain focused on opportunities where we see a clear path to higher cash flow and long-term value creation that others do not. We believe lodging REITs create the most value when they can internally fund our external growth.

That philosophy underpins our focus on free cash flow per share. Our strong earnings growth is creating additional balance sheet capacity, allowing us to pursue attractive opportunities while remaining comfortably within our conservative target leverage. Historically, our most successful acquisitions have come through our long-standing relationships with other owners, those opportunities typically involve exceptional hotels in supply-constrained markets with a combination of the right real estate manager, capital investment and asset management can unlock meaningful value. That formula has served us extremely well.

Over the last 5 years, acquisitions sourced through those relationships have generated nearly 10% compounded annual growth in EBITDA from pre-pandemic levels. That type of risk-adjusted earnings growth is what we continue to seek. We have been close to several attractive investment opportunities this year. If successful, we expect to fund them through a combination of accretive capital recycling cash on hand and selective incremental leverage.

On the disposition side, we're more active today but at any point in recent years, and the breadth of interest is encouraging. In fact, 1 property we are marketing received well over a dozen days. While there is no assurance we will complete any transaction, our pipeline is more active than it has been in recent years. As we look ahead, I expect DiamondRock to be active on both acquisitions and dispositions over the next 6 to 12 months. Our objective remains simple, enhance earnings growth, reduce risk and create shareholder value.

The second topic I want to discuss is optionality. One of Diamondrock's greatest strength is not just the number of avenues we have to create value, but the fact we control more of our own outcomes than most lodging REITs. It begins with the balance sheet. We have maintained a conservative leverage profile that provides flexibility to act when opportunities emerge, whether those opportunities are dispositions, share repurchases or acquisitions. It also extends to how our hotels are managed.

Nearly 90% of our portfolio operates under third-party management agreements that can be terminated at will. That structure creates strong alignment with our managers while preserving our ability to make ownership decisions that maximize value. Moreover, when we ultimately sell an asset, that flexibility translates into higher value because buyers are often willing to pay more for hotels where they control their own operating destiny. The same principle applies to our independent hotels.

Their positioning, pricing, marketing and capital investment strategies are designed specifically to maximize our return on investment rather than support the objectives of a brand system. Historically, EBITDA per key at our independent hotels has been 50% higher than our branded hotels. As the benefits of AI are fully integrated into travel, we do believe that spread will continue to expand. Branding is a choice and a branding creates value, we have the option to move in that direction.

The reverse is far more difficult. We have 2 upcoming brand versus independent decisions. At the Kimpton Shorebreak Huntington, our brand agreement has expired and is now month-to-month. At the Courtyard Denver downtown, our franchise agreement expires in 2027. The Courtyard is a powerhouse. It could remain a Courtyard repositioned to a higher-rated brand, expanded on adjacent land, converted to independent or even sold. We will choose the path that creates the greatest long-term value. Ownership requires the ability to make decisions solely in the best interest of each hotel, and we have deliberately structured DiamondRock to preserve that freedom.

I will close with our outlook. While the World Cup helped a handful of markets, it was never the primary reason to be excited about Diamond Rock in 2026. The more important story is the breadth of demand across the portfolio. Leisure remained healthy business transient continued to improve and group demand was strong. Historically, the industry's strongest RevPAR growth occurs when we see all demand channels growing, and that's exactly what we saw during the quarter in our portfolio and continue to see as we enter the second half of the year.

Levers DeSedona is outperforming our expectations. What began as a project expected to generate a low double-digit EBITDA yield for nearly $3 million of incremental EBITDA on our $25 million investment is now on track to produce a 20% yield on invested capital. Given the strength of the second quarter and encouraging momentum in the back half of the year, we have increased our 2026 guidance and raised our common dividend.

What gives us incremental confidence is that performance has not been driven by 1 event or 1 market. It reflects the broader strength throughout the portfolio. Looking ahead to 2027, we see 5 drivers of earnings growth. First, continued strength among higher income travelers; second, a lack of new supply in most of our markets. We estimate replacement costs for our portfolio exceeds $700,000 per key versus a trading value today of $350,000 per key.

Third, a tailwind of strong citywide calendars, notably in our major markets of Boston, Chicago and San Diego. Fourth, additional upside from nearly $80 million spent on guest-facing renovations at hotels that comprise nearly 1/4 of our EBITDA that have not yet stabilized. And finally, improved flow-through with the Westin Boston Seaport following our successful negotiation of the franchise agreement.

Over the last 2 years, we have demonstrated what a sound strategy and disciplined execution can accomplish. Shareholder returns have responded. Today, DiamondRock has a stronger portfolio, a better balance sheet and more opportunities to create shareholder value than we've had in many years. As we look ahead, we believe DiamondRock is exceptionally well positioned, and we remain confident in the opportunities ahead. Thank you for your continued trust and support. We are happy to answer your questions.

[Operator Instructions]

First question is coming from the line Chris Woronka with Deutsche Bank.

Congratulations on a really nice quarter. I think you guys mentioned in the prepared comments about labor costs being down in the quarter despite higher occupancy. And I'm curious kind of how that breaks down between maybe your independent hotels and your branded hotels or your independently managed hotels?

Or is there also any benefit coming through from the brands possibly working with you guys a little bit more on brand standards in terms of amenities and things like that? And then I have a follow-up.

Sure, Chris. I don't think we said that labor was actually down for the quarter. I think we said it was slightly down or generally flat on a per occupied room basis. But -- but I think that just echoes the continued success we've had on finding productivity throughout productivity improvements throughout the portfolio. It's not necessarily driven by 1 type of hotel or 1 sector of hotel.

I don't think it's driven by brand implementation of any kind of cost saving over it's really just our focus on finding productivity and finding efficient ways to deliver debt service throughout our portfolio of hotels.

Okay. And Jeff, I know you mentioned that you're seeing more activity in your pipeline on both potential acquisitions and dispositions on the acquisition front, I'm curious as to whether you guys are kind of thought as being a little bit more resort heavy than a lot of your peers. So we think directionally that you're leaning more in that direction? Or is it more a market-specific or customer segment-specific kind of hotels that you're looking at?

Yes. Thanks, Chris. I wouldn't say market-specific. I think all else equal, if price was no object, I would -- I think the long-term secular drivers for resorts are particularly attractive. But pricing on resorts has been very, very competitive and has tightened substantially this year. So while we do look at a lot of them, there's a lot that I think get bid outside of what we're willing to pay. We do look at urban markets as well.

So I would tell you, all else equal, yes, I would like to tilt towards resorts, but we do look at everything, both urban markets and resorts.

Our next question in queue coming from the line of Nick Joseph with Citi.

You touched on the improving transaction market and the intense competition. I was hoping if you could just give some more color on kind of the buyer pool or the new entrants and kind of what are you seeing in terms of that competition today? .

Justin can chime in here, too, but I think you've seen high net worth. It depends on the type of property, but I think you see a lot of high net worth capital sort of PE capital that's showing up for those types of assets. I think some owner operators...

But I would say, while it's probably been more skewed towards high net worth capital over the preceding 12 to 24 months, we've definitely seen private equity significantly more active. And I think that's really responsible for a lot of the increased transaction and the increased bidder depth that we see on bidder sheets. .

And then you said you've been close on a few deals. How far off are you on these? Is it the underbidder are you just below? Or is it that competitive that maybe that gap is still a little wide?

Yes, it's a good question. Actually, I guess I should probably rephrase it and say there's some that I thought we would be closed and then we prove -- and then we proved to be like 10% to 15% off with many bidders in between. I think that's what's probably been most surprising is maybe a year ago, the gap between a first round bind and a second-round bid was relatively tight. We've seen that widen out pretty substantially, I think on the last few properties that we were pursuing, where there could be as much of a sort of a move is maybe 10%, 15% or even buyers sort of going hard with a letter of intent.

So it's gotten much more aggressive for certain properties.

Our next question in queue coming from Delina, Jack Armstrong with Wells Fargo. .

Could you touch on some of the booking trends you're seeing in the Q3 by demand segment and how you're working to fill some of the group holes that you have there in the quarter from a comparison perspective.

Sure, Jack. I think we've been pleased with the uptick in short-term transient pickup, and that's probably given us a little bit more optimism particularly as it pertains to Q3 where I think we've been vocal about a little bit of a group pace deficit that we've had coming into the year. And that really makes up, I think, some of the optimism for the back half of the year, the change in view that we're going to be able to fill more of that group deficit with short-term transient pickup. So I think that's the 1 thing that we saw over the course of the last 45 to 60 days that really encouraged us in terms of the back year forecast.

Helpful there. And then any early read you can give on 2027 group pace, what you've got on the books so far and how the comps set up after a heavy 2026 even?

Yes. It's actually pretty early for us, Jack. I would say if we look to 2027, we probably only have I would say probably 5% to 6% of our total revenues in our group pace, which ultimately is going to be maybe 20% of our actual production that year. So candidly, the results are quite negative and very volatile by hotels.

So it's really hard for us with the types of hotels we have to make any big prognostications. I would say, to give you an example, there are some hotels like Chicago that are up low double digits year-over-year. But conversely, there are some other group boxes we have that are sort of down sort of single digits year-over-year, but all that disparity in those hotels is in Q4 '27. So there's still quite a lot of time until you encounter that period for hotels that ultimately see bookings on a shorter-term basis. So it's just -- it's a little early for us.

Our next question in queue will come from the line Richard Hitler with Barclays.

Obviously, the resort segment broadly, as you described, is seeing a lot of strength. But remind us what is going on in Key West at the moment, we just had a couple of relatively softer quarters?

Yes. I would describe, when you think about what's been going on in leisure, I think where you've seen probably the most exceptional strength is at the higher price point hotels. If you look within Florida, we have 2 assets in Destin, Florida, which have done very, very well this quarter and year-to-date. Conversely, if you look down to the keys, which tends to be below a luxury price point. And it's also during a period of time where summer is not necessarily the key strong time, effectively where it's drawing a higher-end consumer.

So I think what you're seeing is not necessarily the lower leg of the K-shaped economy, so to speak, but somewhere in between where you see a little bit of that softness in Florida that can come during sort of their off-season months?

Okay. That makes sense. And then, I guess, just to maybe continue that line of questioning, I guess, sticking to the upper end of the K rather. I mean, I guess, Jeff, if you had to index where the higher-end consumer business spend and that sort of thing is on a sort of a spending stupidly index relative to history, right? We've seen episodes where 2007 was an example kind of 2021 was a bit of an example coming out of COVID I mean where are we on that sort of index of just people spending stupid money on once they get on property.

And when does that consumer break in terms of just being willing to spend higher and higher prices on rooms and out of room spend?

I don't know. I don't have the perspective to sort of say broadly about how people are spending. I think within our portfolio. I guess I look at it is, generally speaking, when you think about resorts and U.S. resort destinations, we are producing as a country, more and more people who have exceptional net worth, but we are not growing our resort base. So it's sort of a supply and demand imbalance that's driving a lot of that in my view.

So I don't necessarily think it's spending stupidly. It's just -- they're spending on what their available options are.

Our next question comes from the line of Michael Bellisario with Baird.

Thanks. Good morning, everyone. Jeff, you guys were 1 of the groups that signed a letter to Marriott. Can you maybe give us an update on some of the conversations you've had with them and also other owners since that letter was made public don't so how are you thinking about sort of potential outcomes and revenues with your largest franchisor?

I think, Mike, we continue to have conversations with our brand partners. It's not something that we want to publicly comment on at this point.

Fair enough. And then just switching over to Chicago. Can you just maybe help us understand the implications and benefits for the Chicago property tax refund and then just sort of how you think about valuation and liquidity of the big Marriott asset that I think you've been trying to sell for a while.

Sure, Mike. I know it's near and dear to you because it's in your hometown. So we're pleased with the outcome that we were able to drive on the Chicago Marriott. We settled the entire Triennial as you probably know, and it's been a difficult time in the Chicago appraisal market. We've just seen -- we've seen a lot of valuation movement.

And so I think just settling that triennial and knowing that we're going to have certainty over the tax number for the foreseeable future. gives us think a path for execution of a potential transaction, a higher likelihood. Doesn't mean that we're necessarily going to be able to find a buyer for it. But I think we always felt that we were over assessed but getting a buyer to buy into the fact that the tax bill is going to go down, it's certainly harder than getting someone to underwrite what's now an actual assessment going forward.

Our next question coming from the line of Austin Wurschimdt with KeyBanc Capital Markets.

Jeff, I appreciated your commentary around capital allocation priorities and just the opportunities in front of you. you kind of mentioned about the ability or focus on internally funding external growth I mean how much internal investment capacity you have today to fund external growth without taking leverage outside of your target range?

And along kind of similar lines with where you're deploying capital what do you think you're looking at from a value creation perspective that other underwriters aren't beyond just market RevPAR growth forecast?

That's a good question, Austin. I would say that if we in rough numbers, if we sort of do nothing by the end of the year from this going forward, our leverage could effectively end the year close to 3x net debt to EBITDA. So if you think about staying within that 3 to 4 net debt-to-EBITDA range, we have about $500 million of borrowing capacity to still stay within that. And that's assuming that you're recycling capital effectively, the market pricing that we're seeing today.

We're using that capital to invest at the market pricing that we see today. It depends on the asset, frankly. Sometimes there are just situations where it's the wrong manager that's in place, and we see different revenue management strategies. There's others where there sort of cost efficiencies. And frankly, there's others where there's opportunities for expansion or doing something a little different.

Like for example, we have the property in Montana, Chico Hot Springs, where -- we have a small hotel there that is not about a square mile of land and that's 1 that we think down the road that we can begin to find ways to expand that property pretty accretively, not unlike how we joined the 2 adjacent properties in Sedona.

Helpful. And then just pivoting to guidance in the back half. One, what are you assuming for hotel EBITDA margins for the back half of the year and maybe what that implies for like a cost per occupied room growth. And then on the RevPAR side, you discussed the expectation of 4Q should be better than 3Q. But it seems like July should be coming in well based on some of the industry data.

You've got easier comps at Levers daysidona. So beyond the group hole you discussed in August, is there anything else that's skewing your view around the cadence of RevPAR growth in the third quarter versus the fourth quarter?

Well, I mean, just 1 thing I would say is that we've been talking about throughout much of this year was that August was a little bit of our hole in our group calendar and some of the confidence we've had in the back half of the year is that we're seeing transient fill in, and I think there's more confidence that we'll be able to sort of plug some of that whole, if you will but -- I don't know if you will...

Yes. I think from -- as Jeff said, we're a little bit more confident about Q3, but we do anticipate our expense growth rate to elevate a little bit. We've had things like the New York Hotel Union renewal that are going to elevate our labor cost a little bit on a year-over-year basis and also higher bonus accruals given performance versus same time last year.

So we do anticipate some of the margin growth we've been able to generate year-to-date is going to abate. We're hopeful that we're going to continue to be slightly elevated at the same time last year, but not to the degree we were able to perform in the segment.

And to your question also on margin, I don't have the back half of the margin in front of me, but our expense growth is sort of assumed to be around 2.5% for the back half of the year at our guidance. .

Next question in queue coming from the line of Duane Pfennigwerth.

Thank you for the question. I wanted to follow up on Chris' question on cost execution, sustainability. It's been very strong, especially in light of stronger RevPAR this year. I mean, you did a great job last year, but demand was pretty muted. I would assume it's actually harder to do to hold the line when demand is this strong. So can you just dig a little bit deeper on what it is you're up to and really the sustainability of that as we look into 2027 and beyond?

You're right that expenses are inevitably tied to occupancy. So to the extent you see outsized occupancy growing growth going forward, you will see some movement of course, in staffing levels to accommodate increased guest occupancy. But and Justin can chime in, but a lot of this has to do with just our asset manager staying on top of staffing levels at the property and trying to find ways to be more productive and more efficient with labor, whether that's in food and beverage outlets or it's in the rooms department.

Yes. And as Jeff mentioned, I mean, we've been able to keep labor growth at a fairly low run rate because we've been able to reduce hours worked in the portfolio every quarter for the last 4 or 5 quarters. So we can't do that added in at some point. But we're doing, I think, what a lot of companies are doing. We're doing a lot with AI in order to find labor efficiency in order to make our existing team members more efficient.

So I do think there's some incremental productivity we're going to be able to source from that. And it is more efficient to do the incremental room. So as occupancy and rates continue to grow, it's not that it doesn't cause some uptick in labor cost but we're able to service that at a lower marginal range.

And Jeff, in your prepared comments, 1 of the things that stuck out, you referenced a few properties that have optionality, I think, in terms of management agreement. So can you just expand a little bit? What do those conversations look like today? -- versus maybe prior periods? And how has your experience with the age kind of influenced your thinking as you approach these?

Yes. That's a great question, Duane, and timely. The 2 that I mentioned, the Kimpton Shorebreak and Huntington Beach and the Courtyard in Denver. I think we're at a time where brands are very focused on their unit growth, and those just happen to be assets where I think they have great locations. They performed very, very well, particularly in the case of Denver.

And there's aspects of those properties, whether it's being oceanfront in Southern California or having an adjacent parking lot that could have expansion rights in Denver, that just create opportunities, whether it's for us or to the extent those are assets that we look to monetize because we think we can get a better value, someone else might see a path that's different than we want to pursue.

But that's something that we engage with the brands on, but we're also running different scenarios here internally. So it's still a little early, but those are situations that we continue to met. -- estate telephone.

[Operator Instructions] Our next question coming from the line of Lars Vandikwith Ladenburg call.

Scott. I have 2 questions, but let me start with 1 that we sort of talked a little bit about. But if you look at your expense growth, I mean, I think you guys mentioned that expenses should go up when your occupancy increases. Your comp occupancy increased by 180 basis points and your hotel expenses actually declined. So maybe you could talk about and that I think you're probably among the lowest in terms of expense growth in our coverage universe anyway, among peers, talk about some of the key things that the initiatives that you have in place that drive that outperformance on the expense side.

That's our secret sauce I mean it's not only the perfect tie, but I would say that generally speaking, over time, there is a relation there. But I think it's really just having a relentless focus on staying on top of efficiency. I think it's easy for folks in all their jobs to effectively get comfortable, and I think that's our job is really to kind of stay on top of how we're staffing relative to the demand that we're seeing because as you can imagine, demand is always changing week by week at a hotel, and you want to be sure that across the entire organization.

You have sort of the right staffing for the demand that you're seeing at that time, and it's not being caught on the wrong side of it. I think that's a fair characterization .

Maybe my second question has -- regarding capital allocation. You mentioned you're going to be active both buying and selling over the next 12 months or probably 18 months -- maybe if you can talk about, are you going to be a net buyer or a net seller? And does that depend a little bit more on the share price continues to move upwards, how that changes your view? .

Yes. I mean, I think we look at it now today just because, as I mentioned, with our leverage coming down and generating incremental cash, I think shareholders want us to redeploy that capital accretively or return it to them if we cannot.

So Currently, when I said this at the beginning of the year that we would be a net seller this year, I think that's quite plausible that in this calendar year, we will be a net seller -- but as I look beyond and just seeing more transactions come to market, I guess I'm optimistic that we will eventually find something that we connect on.

So I think we will be potentially a buyer and a seller, but there's nothing imminent today that we're not hard on any transactions or anything like that for an acquisition at this time.

Next question in queue coming from the line of Chris Sterling with Green Street.

Jeff, in the prepared remarks, you spoke about strong performance at the landing in Lake Tahoe. What are your latest thoughts regarding your key count expansion at that asset? And then given some of the other opportunities throughout the portfolio, are you to starting sort of multiple overlapping ROI projects?

On the second part of that, we always want to be conscious of the rooms that we take out of service in our capital spending. I think 1 of the reasons that we gave that 5-year CapEx guidance was to really be deliberate and have intention to how we're spending money, so there's a little more predictability to our free cash flow per share for shareholders.

But I would also add that projects don't always align perfectly the way we want them to. You're also dealing with local zoning and other needs that you have at the property. And frankly, when seasonally, it makes sense to do that work so that you're delivering those rooms at sort of the right time of season.

And if I could wave a wand and make them all happen at once, it would be great, but there's somewhat of an intentionality to try to how we ladder them -- as far as the landings, I think that's an option for us down the road. It's not something we wanted to pursue today.

I think ultimately, some of the I guess I would say the requirements from the local municipality, it just didn't really make the cost makes sense for us at this time. But I think it's something that we could pursue again down the road.

Okay. That's understood. And then just a quick clarifying question from the prepared remarks again. I think you mentioned pace for the second half of the year at up 1%. Was that a group pace figure or a total revenue pace figure?

Yes, that was a group pace figure.

And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Jeff Donnelly for any closing comments. .

Thanks, folks, for joining us today, and we look forward to seeing you soon. .

This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Good day, and welcome to the DiamondRock Hospitality Company First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to hand it over to our first speaker, Briony Quinn, Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to DiamondRock's First Quarter 2026 Earnings Call and Webcast. With me on the call today is Jeff Donnelly, our Chief Executive Officer; and Justin 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 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 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 face disruptive weather challenges in several markets. Despite those headwinds, the portfolio performs better than anticipated. Comparable RevPAR increased 2% and total RevPAR increased 2.5% with total 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 12-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 demands early in the quarter. For the fourth quarter in a row, our guests continue to spend once on property across our restaurants, spots 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%. And right in line with the trend we saw through most of 2025. That tells us 2 things. Our guests have the spending power and our out-of-room offerings are giving them good reasons to use it. And for further context, room spend per occupied room at our resorts averaged $320 per night, more than 3x 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've been saying that our resort portfolio was due for an inflection in 2026 after 3 years of trailing the urban portfolio 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 pick up and domestic leisure trends normalized through 2024 and 2025. Even though 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 sedoma, 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 first quarter of 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 efficiencies. In our urban portfolio, RevPAR increased 0.9%, and total RevPAR increased 1.6% in the first quarter. January and February were modestly negative or result in March meaningfully accelerated.

The strongest urban RevPAR growth came from Hotel Adlon in San Francisco, the recently renovated Hilton Garden in Times Square, the Denver Coreguard and the Hotel Clio and Denver, all of which posted double-digit gains. We've 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 $1,500, it's clear we're serving a predominantly higher earning customer base. That strength at the higher end is showing up in the numbers. Over the past 3 quarters, our $300-plus hotels have outpaced the rest of the portfolio by 290 basis points in total RevPAR and 1,200 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 the company's growth.

Turning to expenses. Rightsizing expenses for the demand environment remains a key focus for our team. During the quarter, total wholesale operating expenses increased 0.8% on total revenue growth of 2.5% resulting in a 127 basis point improvement in total EBITDA margins. This was our portfolio's largest quarterly margin improvement since the fourth quarter of 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 and important.

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 occupier 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 markets negatively impacted group travel in January and February. We are encouraged by our hotels group pickup for the remainder of 2026, particularly in Vale, Greater San Francisco, Chicago and Fort Lauderdale. Since our last call, our group revenue pace for the year has improved more than 100 basis 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 the 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 prevailable. 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 $0.09 per share for the remainder of the year, with the potential for our fourth quarter set 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 1 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. Jeff will provide additional context on this transaction in his remarks.

I'll 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 3 years, we have reduced premiums by just under 40%. With anticipated capital expenditures of $80 million to $90 million this year, our rate guidance implies 7% growth in free cash flow per share.

With that, I'll turn the call over to Jeff.

Thanks, Briony, and thank you for joining us this morning. Earlier this week, we celebrated Bill Marton as he retired from the Board and his role as Chairman after more than 2 decades of leadership. Bill's integrity and commitment to doing Lotus right will have an enduring impact on DiamondRock. 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 2 years ago, we launched DiamondRock 2.0 and since that time, our shares have delivered the strongest returns in the lodging REIT sector outperforming peers by roughly 2,700 basis points and broad equity readies by more than 500 basis points. And we believe we are just getting started. DiamondRock's ability to drive the financial results behind our outperformance stems from deliberate and foundational decisions we have made in the past 2 years. First, culture. We've worked to build a culture of excellence where teams are encouraged to challenge assumptions and work collaboratively towards 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 a turnover and improved execution.

Third, we invested in our infrastructure. We implemented new accounting and enterprise analytics platforms to amplify the strength of our asset management and accounting teams and to accelerate 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 listening to NASDAQ. The outcome of a leaner G&A structure with a headcount per hotel ratio that remains about 50% below the peer average. Taken together, these actions helped make DiamondRock more efficient, more disciplined and more focused on how we allocate capital. We're proud of the progress the team has made, and we're committed to earning your confidence through consistent execution.

Last quarter, I walked through our 5-year capital expenditure plan and our intent to recycle capital within the portfolio. Today, I'll 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 Western Seaport expires on December 31, 2026. We view this as a meaningful value creation opportunity. And beginning in 2025, we ran a comprehensive process to evaluate brand interest and representing Boston's premier invention 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 that reinforcing the Weston Brands superior position in the Seaport would minimize disruption and create the greatest near, medium and long-term value for shareholders. While we can't disclose the specific economic terms, given the strength of our balance sheet, we elected not to pursue a Talon.

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 January 1, 2027. And as with all major capital decisions, we approach this with a focus on cash flow, flexibility and risk-adjusted returns. With respect to the 5-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 5 years. The renovation of the Winston Boston Seaport District was already contemplated in our prior guidance as an internally funded project. The key takeaway here is we are working to drive greater transparency and consistency.

Generating attractive risk-adjusted returns is central to our capital allocation philosophy. We deployed 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 2 recent ROI projects. The first is the Dagna Boston, with a franchise agreement for the Hilton Boston Downtown Fanal 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 are confident that even if we initially seeded granted on the top line, we could still drive higher profits through operating cost savings. The underwrote EBITDA would exceed $16 million in 2027 versus the $10 million earned in 2023. -- how are we doing? We delivered $15.5 million in 2025, and we're not finished yet. So we are comfortable this ROI project will be ahead of underwriting.

The icing on the cake as unencumbered hotels regularly achieve a 15% to 20% valuation premium to comparable brand encumbered product. So our repositioning has created value through earnings and asset value. The second example is Leber's to Sadara. In the third quarter of 2025, we completed the renovation of the Orchards Inn and fully integrated its operations within our adjacent luxury resort movers. While Orchards enjoyed some of the best views in Sedona, it was operating as a mid-scale product with a premium location in the luxury resort market. Our strategy was to unlock that untapped value. By upgrading the room product and creating more connectivity between the 2 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 2 quarters following integration, revenues increased nearly 25% and EBITDA increased 55%. This project exemplifies our discipline -- we rightsized the investment, focused on operational excellence through the product throughout the project and conservatively underwrote its potential returns, with upside reserves for our shareholders. And let me remind you '26 was not underwritten as Lovers' 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'll call Lebers DiamondRock's version of a home run. Our ability to execute consistent cost efficient and impactful CapEx spending is a result of several unique portfolio treats, 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 4 or 5 larger projects each year, our in-house design and construction team is actually executing 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 and 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 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 the recent geopolitical events have slowed the pace of some discussions. Ongoing engagement has continued. We are currently under contract to sell 1 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 wholesale 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 a compelling use 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 and 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, any 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 efficiencies. 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 Post markets, American 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 post-market hotels have experienced increased demand at elevated rates but we don't expect to see activity accelerate until we're much closer to the event.

As a reminder, our hotels have budgeted for 20 basis points of annual RevPAR growth from the means. We're 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 Sedona are expected to be the most material, driving at least a 50 basis point tailwind to dive in our 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 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 will mark over a 30% cumulative increase in the past 3 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.

[Operator Instructions] Our first question will come from the line of Jack Armstrong from Wells Fargo.

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 would shift away from repurchases and into more ROI projects or potentially some value-add acquisitions.

Shovel ready all the time. So I would say that share repurchases are really the most appealing use. I think at the margin, you're starting to see some acquisition opportunities get there, but I think you need a healthier spread to justify that. So I guess to reiterate, share repurchases would be the most appealing.

It 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's giving you confidence in your expense growth for labor significantly below where we're seeing national averages come in.

I think, Jack, we've had some very good recent history, I think, leaning into productivity. And candidly, we're not necessarily seeing it on the wage rate side, we've been able to keep our labor rates relatively low because we've been finding less hours worked throughout the portfolio through productivity gains. And that's been 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 just through the implementation of AI tools.

And I'll add Jack, that we actually had some savings or unexpected savings on our insurance renewal that starts on April 1, and that will be about $1 million benefit to the full year. So that was 1 of the other areas that we had some cost savings.

Next question from the line of Smedes Rose from Citi.

I wanted to ask you a little more. You said you have an asset, I think, under contract for sale. Could you just sort of give some updated thoughts on the overall transaction market in terms of kind of pricing and maybe what you're seeing and still grow sort of level activity?

Yes. I think the transaction market today certainly feels a lot better than it did about a year ago. I would tell you that when you go back 12 months, I think people were -- remember, it was post Liberation Day. I think 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 you're looking at interest rates that are all in interest rates that were sort of 7% to 8%. And now you look to today, I think RevPAR has certainly been much better this first quarter. I think there's a more positive outlook with more sort of demand drivers in 2026. And interest rates are maybe 150 basis points lower. So I think you have a better setup and there's -- it's definitely brought more interest to the market.

You've seen many more assets come to market. There's sort of maybe 2 dozen assets out there in 2 large portfolios. And I would say each of them are probably 9 figure plus assets. But there's certainly properties beyond that. I think you're starting to see a little bit of loosening. Pricing is still robust. I would say that resorts continue to be sort of the priciest assets with urban maybe trading at a discount to that, largely because urban assets have I'm speaking of broad strokes haven't quite recovered as consistently as resorts have.

And then I just wanted to go back, Brian, you mentioned -- I think I just missed it that the dividend payout ratio will go up, and I think you said that's because the NOLs will be exhausted. Could you just sort of talk about that a little bit more timing and when you would expect the payout ratio to move up?

Sure, sure. Yes. So we generated significant NOL, obviously, during the pandemic that builds up over probably 2 to 3 years. I think we've got a significant balance left. We've worked through about 50% of it. So our intention is to sort of ratably use those over the next 2 years to sort of gradually increase our dividend.

Our next question will come from the line of Michael Bellisario from Baird.

Can you give us an update just on sort of 2Q and how April performed and then taking a step back, how would you sort of broadly characterize the recent change in trajectory for each of the customer segments, group BT and leisure?

So far, I would say the trajectory that we saw in April continued to be healthy. Some of the acceleration we saw in March effectively continued into that month, I think more on the leisure side. I guess as you sort of think about the segments for the rest of the year, I mean, I guess, looking at Q1, I mean, BT was strong for us, like leisure or resort markets are pretty healthy. I feel like -- this will be the first year, I mean, it's still early, but I feel like this will be the first year where you have a very good probability that all 3 channels, sort of BT, leisure and group will be delivering positive growth for the industry, which has really been lacking for the last 5 years in the sector, and I think that's going to be pretty impactful for the lodging sector.

It's great when you have 2 working, but it's difficult because it's a 7-day a week business, and it's -- you can't always get to where you want to get to when you only have 2 legs of the stool there. So I'm encouraged by the way that the year is setting up.

Got it. That's helpful. And then just sort of a follow-up there. 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 3 or 4 markets that you mentioned? Any color there would be helpful. And that's all for me.

I'm not -- Mike, I'm not sure there's necessarily a great read-through just in terms of customer base, but I think we continue to be optimistic about the group outlook for the remainder of the year. I think, particularly given where the calendar sits around a couple of the major holidays with things like June 1, July 4, all sort of shifting towards the weekend that really gives us a larger -- like a larger number of potential pattern weeks that we can sell group into where we have some availability.

So I think that's been more, I think, indicative of our short-term pickup that we've just had a bit more availability given how the calendars shifted around, and we've been able to sell into that.

Our next question of the line of Austin Orchid from KeyBanc Capital.

It's Josh on for Austin. you've discussed some additional group pickup you might need due to some tough comps in 3Q. I guess, 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.

I think part of the -- part of our pace also has to do with we have World Cup exposure, I would say, World Cup availability in 1 of our biggest hotels in Boston. So we have sort of displaced some group, hoping that, that transient pickup is going to fill in some of those gaps. But I think generally speaking, as we get closer to Q3, we move out of the booking window. So we're really focused on transient strategies to drive incremental transient business. And I think we're optimistic that given some of the demand generators that are going on, particularly in July that we're going to be able to backfill a fair amount of that with transient business.

Josh, I'll add on just to give people some context, I mean, in some ways, this M&A back from the Democratic National Convention. Remember, we had a very good year out in Chicago at that time in third quarter. And then last year, in 2025, that was sort of the hole we thought we had to climb over and we successfully climbed over it. So in some ways, we were a victim of our own success. We continue to extend there. But the actual magnitude of the hole that we referred to is actually just -- it's a few million dollars on group business, just to give you a sense, it's not an insurmountable task, but it's a single-digit millions of dollars, I think, on the group side.

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

I wouldn't call it necessarily testing the waters in advance of larger assets. I mean I think we really kind of looked at this as you're always trying to find opportunities where you can monetize assets at attractive prices and you don't always hit it out of the park on that. So I think it's just more important to have more lines in the water and be exploring that. So in the last year or so, we've had a handful of properties that we've explored either sort of one-off or privately and some with listed situations. So it's not necessarily a precursor. And I think every asset kind of has its own unique setup in sort of buyers and market conditions.

So yes, I wouldn't assume that it's like 1 has to proceed the other.

Our next question will come from Duane Fanning Ward from Evercore ISI.

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

I think we continue to be optimistic about New York. As you know, it has the FIFA final game. So I think, in particular, over the summer, we're expecting to see some compression in the market. But as you mentioned, there is going to be some margin pressure given the contract renewal, which we factored in. And I think accounts for some of the sort of forecasted uptick in our operating expenses as we progress through the year. But generally speaking, while maybe we saw a bit of a falloff in short-term booking pattern right at the beginning of the war. We've seen that level off and continue to see demand in New York as strong as it's been for the last 2 years.

Okay. And then just on CapEx, Jeff, you mentioned $80 million to $100 million per year for the next 5 years is kind of a range. It seems like from your comments, maybe you're not considering or don't see another opportunity of something larger like labs. Is that correct? And then just on Laberge, when is peak season in that market and just remind us when the renovation finished last year. I appreciate the time.

Yes, I'll take the first one. Actually, no, that's actually already incorporated into that $80 million to $100 million a year to the extent that we see opportunities or ROI projects, that's effectively embedded within that figure. Yes. So it's not that we don't sort of see those opportunities down the road.

Yes. And Sedona is a bit of an interesting market and that like you really have a couple of different peak seasons that sort of shoulder in between the winter and the heat of the summer. So -- and part of, I think, the success of that asset is just given how hot it was in Phoenix, sort of, I think, record heat in Phoenix earlier in the year. We got a lot more of that drive to business earlier in the season. But typically, we sort of see peak season kind of March to May. And then again, on the back end of the summer, sort of September, October. But candidly, the market does quite well year-round.

And the hotel is under renovation sort of all of 2025 up until about September 1. So that's when the hotel reopened and launched as an integrated property.

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

I want to go back to -- I think it was Briony's comments earlier about how the over $300 hotels are outperforming pretty materially versus the rest of the portfolio. And so just thinking more broadly, how does the statistic like that inform things like portfolio construction or how you think about on certain hotels and obviously, the buy-sell hold decision. Just walk us through maybe how that informs that sort of framework.

Rich, this is Jeff. I actually missed the first part of your question. You're asking about how hotels over $300 inform our buy-sell-hold decisions.

Yes, just the outperformance, I guess, generally speaking, in the luxury space. Look, I don't think we're the only ones that are looking towards the very top end of the U.S. consumer base as being more resilient than perhaps the rest of the population. So that's a trend that we've seen over the course of the last 18 months, and it's definitely something that we feel -- we factor in an acquisition decisions. But candidly, -- this is not a renovation to the rest of the market participants don't also see. So the assets that cater to that particular part of the market are the ones that are being bid up to a pretty significant premium.

So we're excited that we've got a number of those already in the existing portfolio and continue to look for ways that we can enhance those like a over type project where we can take more of our portfolio shifting it towards targeting that particular consumer and look at potential opportunities where we can add to the portfolio, but those are quite often very premiumly priced.

Yes. The middle I was going to say the middle part of my question cut out. It was also a follow-on about sort of CapEx within that same context, how do you think about the returns and 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. So how does it inform the CapEx program as well. Sorry if that wasn't clear.

Yes. That's what I was going to add, Rich, is that unfortunately, you don't always spend the same amount of capital on the luxury hotel or something that is true luxury. I would say that some of the properties we have that are very high rated, I wouldn't necessarily describe them as 5-star hotels. I mean, in some ways, they're 4.5, and I know that's a subtle distinction, but I think it's an important 1 because you don't spend the same amount of CapEx on luxury hotels. I think some of the brands that folks are certainly familiar with out there, when you look at their operating margins and what their CapEx is, there's sort of very low return on investments historically.

And so you're trying to find situations, and I think this is where being independent in some of those hotels is more critical because where you can drive the CapEx to where you think it is more critical to driving rate and profitability and trying to maintain someone else's standard. So I think when you look at the margins on our higher rated sort of more luxury resorts, they're quite high relative to maybe what you might see from some of our peers who have branded luxury hotels.

Makes a lot of sense. And if you don't mind, a second question, just to go back to the Westin Seaport franchise renewal -- and obviously, DiamondRock was in a position to get what sounds like a pretty good outcome maybe relative to some other competitors who would be going through a similar process. But if we were having the same conversation or the same situation 5 or 10 years ago, would the outcome have been equivalent to what you guys have achieved here? Or does something about it imply any sort of change in the balance of power between the brands and owners or more sophisticated owners. Just walk us through the evolution there.

Yes. I mean I guess I think maybe Justin and I can both chime in on this. I guess for my take, I think I guess I'd responded to the standpoint of I think today's management team probably thinks about that a little bit differently than the past. I think we tend to look about how we are creating those flexibility at the asset level and where we can ultimately sort of create value, whether -- whether that shows up in cash flows or whether that shows up and maybe a future value of that hotel.

So necessarily having 1 particular structure and other like franchised or managed or accepting key money, what have you. I think maybe the -- our prior management teams might have thought about it differently than today. We were just looking, as I said, more for flexibility and really didn't see the need for key money.

Yes. But I think to get to your question, given, I think, as everyone on the line knows, the brand focus on net unit growth and the difficulty they're having in sort of prompting incremental development. I would say that it has definitely gotten a bit more friendlier on the owner side. We had a very large audience of potential brands that was interested in the hotel. And I think the inducement that they -- if you're comparing to 10 years ago, are definitely better than what you would have achieved. I mean it's not double, but is it 15% or 20% better from an owner perspective, I think that's probably a fair assessment.

And our next question come from the line of Chris Darling from Green Street.

Circling back to the CapEx discussion and the remaining value creation opportunities across the portfolio, whether it be franchise expirations, ROI projects, -- is anything more actionable in the near term, assuming continued fundamental strength across the industry and your portfolio? Just wondering sort of in your mind how flexible you intend to be as it relates to the 5-year CapEx plan.

It's a great question, Chris. I would say that there are projects that are actionable. I mean, I'm not committing to it today, but we continue to look at timing and scope about whether or not Chico can work and pencil for us with the returns that we want. -- there's actually projects that are very small that we look at that are within properties, whether it could be back of house type work or energy savings type work that is not necessarily getting advertised so they can be sort of small projects with good returns. So there's a lot of it that's actually already embedded in our spending.

But I would tell you that I not -- I guess, don't expect maybe that year angling is that you presume that, that CapEx number is going to swing around a lot. We've actually spent a lot of time diagraming out every potential product over the next 5 years for all of our hotels and trying to phase them in a way that we can make that sort of a consistent figure and have things done on time at a level that's sort of impactful to the property at the same time, too. So the intent there is to sort of derisk our future earnings volatility at the margin, and it's something that we're going to try hard to stick to.

Okay. I can appreciate that. Helpful to hear. And then just as a follow-up to some of the discussion around the consumer. Just hoping you can elaborate on what you're seeing in out-of-room spend and how things have trended relative to expectations? Any other insights maybe just a double-click in terms of what you're seeing as it relates to the health of the consumer, whether it's broad-based or truly that high-end consumer strength relative to sort of mid or lower end?

Yes. I think we continue to see in first quarter, you can see from the release, out-of-room spend continues to accelerate at a faster rate than RevPAR we've seen in the hotel. So we continue to see the ability once we get the customer on property to get them to spend in different ways. And it's to a myriad of different things, whether that -- we have a number of spots throughout the portfolio that performed particularly well. I think 1 of the thing we were encouraged by is what we were able to do in food and beverage this quarter, given that it was a down group quarter. So I think both from a revenue perspective and particularly from a profitability perspective, -- we saw some nice lift in the outlet throughout the portfolio that was able to drive increased to beverage profit even when we had banqueting catering that was slightly down.

So we do continue to see a customer. Once they're there, that continues to spend freely. And I would say, frankly, throughout the spectrum, not necessarily just at the high end. I think we saw that in all of the sort of ADR tiers throughout the portfolio.

And our next question will come from the line of Ben -- sorry, Ken Billingsley from Compass Point Research.

I just wanted to follow up. World Cup, I believe you said it's 20 basis points that you have in RevPAR. Is that correct?

Yes, that's right.

Given just kind of the shift that's going on there, are you seeing that this is becoming maybe less of an international event and shifting to more domestic? And then with that, -- it seems like it's also becoming more of a luxury event. And typically, in the past, have you seen last-minute booking being successful when there's an opportunity for people to go to these kind of experiences that are typically higher ticket cost?

I mean we'll probably all have views on this. I would say there's not much of a great precedent for this occurring in the U.S., I guess, -- but I do understand like the initial ticket prices have certainly been high. I personally wonder whether that has given some pause to people's desire to attend. Ultimately, I don't think we're going to be seeing empty stadiums out there. I do think they will get filled. So it leads me to believe that maybe folks who are speculating on the tickets early on will end up having to capitulate you'll find a market clearing price for folks to go to the games.

As far as the demand, I don't know what the original expectation was, but I think just some of the anecdotes we've had from various cities that will kind of meet with hotel councils and sort of share with the data. I think it's been about 1/3, 1/3, 1/3 between international demand for the tickets, domestic demand and local demand. So my takeaway out of that is about 60-odd percent or 2/3 of the tickets are being consumed by people who will ultimately require a hotel room. But time will tell as we get closer.

[Operator Instructions] Our next question will come from the line of the floor is van Dick June from Ladenburg Filmon.

This is Land on for Floris. Can you talk about how you reserve for potential bonus payments to third-party operators this year?

Like the payments to folks at the hotel level like to the extent that performance is better, yes. I think we -- generally, bonus thresholds are multi-tiered throughout our properties, although a lot of the actually have a gatekeeper around financial performance and financial performance relative to budget. So that is 1 of the upticks that we actually saw in labor cost 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. But it is something that we track on an active basis just to make sure that we're actively accruing appropriate amount of incentive compensation for the performers that we have that are outperforming expectations.

Yes. So it's an important distinction because I think accruing for it sort of, again, mitigates risk that compared to hotels that don't accrue for it, there can be a year-end lack of a better word, surprise on the labor expense side that there's a true-up on bonuses that are owned at year-end. So we accrue throughout the year.

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

Thank you, folks, for dialing in. I know it's been a busy week for folks, but I look forward to seeing you soon, and 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.

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company Fourth Quarter 2025 Earnings Conference Call. [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, Brian Quinn, Executive Vice President and Chief Financial Officer. Please go ahead.

Good morning, everyone, and welcome to DiamondRock's Fourth Quarter 2025 Earnings Call and Webcast.

Joining me today is Jeff Donnelly, our Chief Executive Officer; and Justin 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 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 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 we finished 2025 ahead of our most recent guidance estimates. For the full year 2025, we delivered corporate adjusted EBITDA of $297.6 million and adjusted FFO per share of $1.08. Our free cash flow per share, defined as adjusted FFO less CapEx was $0.69, a 6% increase over 2024 and a 22% increase since 2023.

Full year comparable total RevPAR grew 1.2% and comparable hotel adjusted EBITDA grew 1.1%. Turning to the fourth quarter. Corporate adjusted EBITDA was $71.9 million and adjusted FFO per share was $0.27. Comparable RevPAR declined 30 basis points in the quarter, slightly exceeding our expectations. The fourth quarter represented our most difficult comparison of the year with RevPAR growth of 5.4% in the fourth quarter of 2024.

Against that backdrop and the impact of the federal government shutdown in the quarter, we are certainly pleased with the portfolio's performance. Occupancy declined 130 basis points year-over-year, while ADR increased 1.6%. By segment, business transient revenue led the quarter with 2.5% growth, while group revenue declined 1% and leisure transient revenue declined 2.5%.

We are particularly proud of the results achieved by our recently renovated assets, including the Cliffs at L'Auberge, now fully integrated into L'Auberge de Sedona and the Kimpton Palomar Phoenix. In addition, our hotels in Destin, the Greater San Francisco market, New York and Denver delivered standout results. Out-of-room spend proved more resilient than we anticipated. Total RevPAR increased 0.6%, representing a 90 basis point outperformance relative to RevPAR. This strength was concentrated in our resort portfolio, where out-of-room revenue per occupied room increased nearly 7%, the strongest quarterly growth of the year. Notably, out-of-room revenue per occupied room at our resorts accelerated sequentially throughout 2025 from 4% growth in the first quarter to nearly 7% growth in the fourth quarter. Food and beverage was a bright spot again for the third consecutive quarter. Food and beverage revenues increased 1.4% with banquets and catering up over 2% and outlets up 0.5%. Food and beverage margins expanded by 120 basis points, aided by just a 50 basis point increase in labor costs.

In practical terms, food and beverage profits increased by over 5% on just 1.4% revenue growth. Additional contributors to out-of-room revenue growth included spa, parking and destination fees, each of which increased in the mid- to high single digits, partially offset by slightly lower attrition and cancellation fees. Turning to portfolio segmentation. Our urban portfolio, which accounts for 62% of annual EBITDA, delivered 0.3% RevPAR and total RevPAR growth in the fourth quarter. November was the softest month of the quarter when the impact of the federal government shutdown was most pronounced. The strongest RevPAR growth among our urban hotels was achieved by the Hotel Emblem San Francisco, the Denver Courtyard, Kimpton Palomar Phoenix and Courtyard Fifth Avenue, all of which posted double-digit gains.

At our resorts, RevPAR declined 1.8%, while total RevPAR increased 1.1%. We remain optimistic about the trajectory of our resorts in aggregate as the fourth quarter experienced the lowest year-over-year RevPAR decline among all the quarters. In fact, resort RevPAR would have been positive, but for the renovation displacement at Havana Cabana and below average snowfall in Vail, which impacted the heights.

During our third quarter call, we noted the material spread in RevPAR growth achieved between properties with rates over $300 versus those under $300. In the fourth quarter, that spread widened with a 580 basis point spread in RevPAR growth between the 2 rate groups and a 1,230 basis point spread in EBITDA growth. On the expense side, total hotel operating expenses declined 0.5% in the quarter, resulting in an 82 basis point expansion in hotel EBITDA margin. This margin improvement was the largest quarterly gain this year, yet it was on our lowest total RevPAR improvement of the year.

Wages and benefits, which represent nearly half of total expenses, increased just 0.6% in the quarter, reflecting continued productivity gains. This is a testament to our asset management team working closely with our operators to ensure we rightsize expenses for this operating environment. Before turning to the balance sheet, I will make a few comments on our group segment. Group room revenues declined 1.1% in the quarter, with rates up 2.6%, but room nights down 3.6%. The federal government shutdown disrupted our typical cadence of short-term group pickups in November, contributing to the fourth quarter demand headwind.

Looking to 2026, we entered this year with $149 million of group room revenue on the books. This is the same as 2025, which was a peak for DiamondRock, but we expect more in the year for the year pickup from a greater volume of tentatives and leads. Although cancellations from East Coast winter storms in January and February, limited snowfall in our ski markets and a slower start to the year in Chicago have put downward pressure on our first quarter pace, we are confident we'll see improving prospect conversion to firm group business.

Turning to the balance sheet. On December 31, we redeemed our Series A redeemable preferred shares, utilizing cash on hand. Net of lower interest income, that capital allocation decision will generate a $0.03 tailwind to our FFO per share in 2026. Following the amendment of our senior unsecured credit facility in July, repayment of our last piece of outstanding property level debt in September and the redemption of our preferred shares, DiamondRock's capital structure is exceptionally simple.

We have 3 fully prepayable term loans are not encumbered by secured debt, have no joint ventures or off-balance sheet encumbrances. And with extension options, we have no debt maturities until 2029. Inclusive of interest rate swaps, 70% of our debt is floating rate, which we believe is appropriate in order to take advantage of the declining interest rate environment. We paid a common dividend of $0.08 per share in each quarter of 2025 and a sub dividend of $0.04 per share in the fourth quarter, equating to an annual FFO per share payout of 33%.

Our payout percentage is below our historic levels as we continue to utilize our net operating losses to offset our taxable income in line with our capital allocation strategy. For 2026, we expect to declare quarterly dividends of $0.09 per share with the potential for a fourth quarter sub dividend depending on full year results. In 2025, we utilized our free cash flow to repurchase 4.8 million common shares at an average price of $7.72 per share and an implied cap rate of 10% on consensus estimates.

We continue to view share repurchases as a highly attractive use of capital in this environment. I'll wrap up my comments with our 2026 guidance. We expect 2026 RevPAR growth of 1% to 3% and total RevPAR growth 25 basis points higher. We expect adjusted EBITDA to be in the range of $287 million to $302 million and FFO per share to be in the range of $1.09 to $1.16.

In addition, we expect to spend $80 million to $90 million on capital expenditures this year, which Jeff will detail in his remarks. Based upon the midpoint of our guidance, this would imply a 4% increase in our free cash flow per share in 2026. The first quarter will be our toughest comparison of the year, and we expect first quarter RevPAR to be essentially flat to 2025. Taking this into account and the weighting of special events in the second and third quarters, you should expect our first quarter 2026 EBITDA and FFO as a percentage of the full year to be below the percentage we realized in 2025.

With that, I'll turn the call over to Jeff.

Thanks, Brian, and thank you all for joining us this morning. On Wednesday, the company announced that our Chairman, Bill McCarten, will not be standing for reelection and will retire from the Board in late April at the conclusion of his term. Bill founded DiamondRock almost 22 years ago, served as our first Chief Executive Officer and has provided the steady, thoughtful leadership this company needed throughout its evolution. His judgment, perspective and commitment to doing what is right for shareholders have left an enduring mark on DiamondRock, and he will be deeply missed by all of us. With Bill's retirement, the Board has selected Bruce Wardinski to serve as DiamondRock's next Chairman. Bruce has been a member of our Board since 2013, and for most of his tenure, he has served as our Lead Independent Director.

He has a deep understanding of the lodging industry and brings a history of creating value for shareholders across the numerous companies he has led and later sold. I have worked closely with Bruce for many years and look forward to partnering with him as we continue to execute our strategy and create long-term value for our shareholders. 2025 was an exciting year for DiamondRock. We celebrated our 20th year as a publicly traded REIT. We achieved a company record FFO per share of $1.08, and our shares outperformed the peer average by over 1,300 basis points.

Those results reflect the hard work and discipline of the DiamondRock team and our partners, and I am proud of what we have all accomplished together. Less than 2 years ago, we introduced DiamondRock 2.0 with a simple but deliberate strategy, drive outsized free cash flow per share growth and total shareholder returns will follow. That playbook works across other sectors, and we believe lodging should be no different. The lodging REIT sector is inherently more complex than other real estate classes between owner, operator, often franchiser and sometimes ground lessor, there can be many cooks in the kitchen.

We believe it's important to remember who owns the kitchen. We are the stewards of your capital, and we take that role very seriously. Disciplined capital allocation is our most important responsibility for it is the foundation of total shareholder returns. We invest capital into our assets when underwriting supports appropriate risk-adjusted returns. We acquire assets when they enhance free cash flow per share, and we sell assets when their ability to be additive to our free cash flow per share growth is at risk or when a buyer's view of materially exceeds that of our own. Discipline matters on all 3 fronts.

Accordingly, today, I will present to you our 5-year capital expenditure program and update you on our intentions to recycle capital within the portfolio in 2026. First, let's talk about the CapEx program. We believe our capital expenditure program is a key distinction and a critical reason we are a free cash flow per share growth story and not a short-term RevPAR headline story. What distinguishes our intentional approach is the stability of our well-planned spending and an appropriate level of total investment.

These 2 key differentiators increase certainty for shareholders, generate solid risk-adjusted returns and supports our hotel's outsized RevPAR index scores and strong EBITDA margins. Over the next 5 years, our CapEx program will annually equate to 7% to 9% of total revenues, not 10% to 11%, which is the peer average and certainly not the mid-teens several have been spending, but 7% to 9% or about $80 million to $100 million per year for the next 5 years.

In absolute dollars, the difference in the capital we are spending versus what we would be spending at the peer average rate is cumulatively over $100 million or $0.50 per share. That is not an amount we are underinvesting, rather, that is the increment we do not believe provides an appropriate risk-adjusted return and therefore, will be redirected to where we see superior returns. As fiduciaries of your capital and shareholders ourselves, that is paramount to us. We expect to undertake 4 to 5 meaningful renovation projects annually, and the remainder of the portfolio will benefit from more focused improvements. To be clear, our portfolio has improved steadily and throughout and thoughtfully every year to support or enhance competitive positioning.

Consistent with the past, improvements are managed to maintain earnings disruption to about $2 million to $4 million per year. You will hear us say repeatedly, as owner, we are best positioned to determine the optimal balance between operating performance, capital expenditure magnitude and timing and value creation. We believe DiamondRock has found that right balance. Through the experience and integrated work of our in-house design and construction team and asset managers, we have determined that our hotels on average do not require full renovations on the rigid 7-year cycle.

Each asset's value, age, relative performance, profitability, prior renovation quality and the care provided by our operating partners all matter. When renovations are determined to be the best course forward, cost discipline is paramount. Every improvement is evaluated through its impact on productivity and profitability, and every fixture and finish is scrutinized for cost, durability and necessity.

Our Kimpton Palomar Phoenix is a clear example of an appropriately timed and rightsized renovation. The hotel was 9 years old when we undertook its first renovation in 2025. It was well built, well maintained by our determination its competitive positioning within the downtown market would be enhanced through investing just over $20,000 per key. We completed the renovation in the third quarter. And by the fourth quarter, EBITDA has increased nearly 20% with a 15-point gain in RevPAR index by December.

That is the balance of an appropriate capital investment and resulting operating performance gain at work. This does not mean we shy away from ROI projects. To the contrary, we believe ROI projects can be among the very best risk-adjusted use of capital to drive long-term earnings growth, provided returns are conservatively underwritten and time to stabilization is defendable. ROI projects are included in our 5-year CapEx plan, and we are excited about what is ahead.

Our next project will likely commence in 2027, and we will share more in the coming quarters. Our projects are appropriately scaled. We prefer to hit singles and doubles because as in baseball, getting on base is far more important to winning than striking out chasing the occasional home run on a riskier large, complicated multiyear project. That philosophy is reflected in our most recently completed ROI project at L'Auberge. We hosted the majority of our covering analysts in early December, and we're thrilled to show off the integration of the 2 properties into 1 unified luxury resort, a new elevated pool and F&B experience and expanded event space overlooking Sedona's iconic Red Rocks.

In its first quarter subsequent to the completion of the renovation, L'Auberge delivered 15% RevPAR growth and over 25% EBITDA growth, reflecting its top line tailwinds and efficiency gains of operating as a single integrated resort. It is still early, but results are ahead of our expectations. And based on booking pace, we remain comfortable the product will achieve at least a 10% yield on cost at stabilization. On to capital recycling. The transaction market is showing signs of improvement. Higher quality single assets and portfolios are coming to market, buyer and seller expectations are moving towards a more rational equilibrium and debt capital is available at attractive pricing. The acquisition strategy of DiamondRock 2.0 is straightforward. We are looking for situations where we believe we have the fundamental backdrop and asset level flexibility to create value. Basis is critical. In an AI-enabled economy, we expect demand will increasingly favor assets that deliver authenticity, emotional connection and differentiated experiences with irreplaceable travel. We prefer supply-constrained markets. We prefer to avoid ground leases because asset value transfers to the ground lessor, not unlike a leak in a boat. And we prefer to partner with independent operators and lean into situations where our best-in-class asset managers can meaningfully drive free cash flow growth. We have nothing to report at this time, but we remain active underwriters as our team is always cultivating opportunities through our extensive network of independent owners. That said, it is increasingly likely that DiamondRock will be a net seller of hotels in 2026. Early last year, we were engaged in active discussions around the potential disposition of several DiamondRock properties, largely driven by inbound interest. The uncertainty introduced by Liberation Day understandably paused many of those conversations. Over the past 6 months, however, most of those discussions have resumed. To be clear, we do not expect every asset under review will be sold nor do we feel any pressure to sell. The breadth of interest has been wide, spanning both smaller and larger assets across urban and resort markets. We will only transact when doing so advances our strategy to drive incremental value through increasing free cash flow per share over the medium to long term. Our shares currently trade over a 9% implied cap rate. At this time, we believe our shares are the best use for recycled capital. Turning to our view on 2026.

Multiple forces are aligning in our favor. We should benefit from easier year-over-year comps following Liberation Day and the 43-day federal government shutdown in 2025 as well as a holiday calendar that is more favorable for incremental business and leisure travel. Our portfolio is well positioned in markets expected to participate meaningfully in the country's 250th anniversary celebrations and aligns closely with FIFA's World Cup games, incrementally so as the tournament progresses. In addition, we expect to benefit from outsized renovation tailwinds from L'Auberge de Sedona, Havana Cabana and Kimpton Palomar Phoenix, while not experiencing material renovation disruption in 2026. Finally, our higher-end portfolio continues to benefit from the resilient spending patterns of affluent customers who have experienced disproportionate wealth gains in recent years and remain avid travelers. Spring break demand is developing favorably, supported by solid rate growth across a broad range of our urban and resort hotels. With respect to FIFA World Cup and July 4 bookings, we have some early observations. For World Cup, we are seeing impressive rate growth in our host markets, but it is still very early. We will have more clarity on pace by our next earnings call as most transient bookings are likely to occur 30 to 60 days out. Turning to the 250th anniversary of the United States on July 4, rates for the holiday weekend are 20% higher than last year. While major urban markets such as Boston and New York are typically top of mind for these celebrations, the strength we are seeing today is actually coming from our resort portfolio.

We view 2026 as an exciting time for our hotels, but we have provided a RevPAR and total RevPAR outlook that we deem to be appropriate and measured, given the inherent uncertainty of the macroeconomic environment. As we think about our guidance, greater confidence lies in what we can control, converting top line performance into FFO per share and free cash flow per share growth. We do that through disciplined expense management aligned with the demand environment, a balance sheet positioned to benefit from declining interest rates through floating rate debt exposure and a highly disciplined capital expenditure program.

In 2025, with just 0.4% RevPAR growth, our FFO per share increased 4%, and our free cash flow per share increased 6%. Said differently, our FFO per share margin was over 350 basis points better than our full-service peers in 2025. Based upon the midpoint of the guidance Brianie provided earlier, in 2026, we expect our RevPAR to increase 2% and our FFO and free cash flow per share to increase approximately 4%. We were among the very few full-service lodging REITs in 2025 to deliver free cash flow per share in excess of 2018. We view the relative TSR performance of our shares in 2025 as a validation of our strategy. With continued discipline and execution, we believe the momentum we built in 2025 is repeatable in 2026. Momentum matters because at DiamondRock, we believe excellence compounds.

Thank you for your time this morning, and we are happy to answer your questions.

[Operator Instructions] Our first question comes from Smedes Rose with Citi.

I wanted to ask you maybe a little bit more about your thoughts around the pace of labor and benefits, just overall wages in 2026 at the property level. And then I don't know if you can share anything about how you're thinking specifically about your New York exposure given the upcoming contracts in midyear.

Yes. Our guidance, the midpoint of our guidance implies that labor costs will be up around 3% next year. And that's inclusive of, as you mentioned, the contract renewal in New York. We have 3 limited service hotels in New York, and that represents about 7% of our overall labor costs, so that will provide a little bit of pressure in the back half of the year. As [indiscernible] this year, our labor costs were up a little over 1%, essentially flat in our resorts and up about 2.5% in our urban portfolio.

And a lot of the segment labor for us is really coming productivity. So I think while we're continuing to try to find incremental ways where we can get less our work throughout the portfolio. I think we found a lot of probably some of the lowest hanging fruit. So that's why we think our guide in terms of total labor cost is probably going to increase this year.

Okay. And then I just wanted to ask you, Brian, I guess from your remarks about first quarter RevPAR, it sounds like that might be the weakest for the year. It's kind of in line with what we're hearing from a lot of other companies. But anything you can provide on sort of the cadence of earnings through second through fourth quarters?

Yes, you're right. First quarter will be our toughest for the reasons I mentioned in my remarks. I think when we think through the remainder of the quarters, our group pace is sort of weighted between the growth in second and fourth quarter. We have a little bit of a headwind in the third quarter with respect to our group pace, but we think, obviously, transient should more than offset that in the third quarter given the special events that are happening. .

Our next question comes from Cooper Clark with Wells Fargo.

And I appreciate that Weston Seaport earnings impact may be more of a 2027 event. But just curious how we should be thinking about that franchise expiration this year within the context of some of your prepared remarks and what possible outcomes are on the table that we should be considering?

Sure, Cooper. I think we still haven't come to what, finalized contractual deal on that. But we have been pleased with the level of interest that we've gotten from multiple brands and frankly, the flexibility around both contract term, stabilized fees and termination clauses. So I think as we continue to work through that, we'll keep everybody apprised. But we think we have a pretty interesting option on the table that we're sort of working towards finalizing.

Okay. Great. And I appreciate the color on the World Cup and recognize it remains early with respect to the 30- to 60-day window you spoke to in the prepared remarks, just curious if you could provide some additional color on the RevPAR lift currently embedded in guide from World Cup demand. and what you're seeing kind of quarter-to-date on the World Cup as it relates to some of the rate strength you spoke to group booking trends or maybe markets or specific assets where you're already seeing an outsized impact?

Yes. I would say the amount that's been embedded in our guide is about 20 basis points when we look at how we structured our 2026 guidance. I would say that -- what we're seeing at the market level, is there is decent strength in the rates, you're just not seeing the volume of room nights come into play yet. It's still early, and that's why we think that you'll begin to see some acceleration when you're about 30 to 60 days out from the event. So it's -- I'd love to give you more color. But at this point in time, that's what we're seeing to our hotels.

Our next question comes from Michael Bellisario with Baird.

Can you dig into any out-of-room spend of performance a little bit more, I guess sort of 2 parts. Just one, why shouldn't you be able to do more than 25 basis points on total RevPAR above RevPAR? And then sort of related to that, any update on whether you're still in a group up strategy and if you're seeing any change in booking windows for either group and transient.

I mean, I think, Mike, we're cautiously optimistic we can continue to move the needle, but I think it's also just partly run rate, right? I mean we look at sort of what the run rate of out of group spend has been. And so it's not that we're saying that's necessarily going to decelerate. But if the sort of the underlying RevPAR accelerates relative to what we saw last year, that stayed stable, then the margin contracts. .

And then anything on group booking window?

In terms of the booking vendor for groups, I mean, I think last year, frankly, it was a bit of a struggle a deliberation day. You didn't see as much conversion of leads into firm contracts. I'm optimistic that as we move through this year, we'll see a little bit of a recovery there. Because when you look at our sort of leads and tentatives for this year versus last year were up about 10%. So I'm encouraged that we'll continue to see good growth on the group side.

Yes, I think that's right because we really saw -- as you might imagine, have a pretty significant drop off in leads when we got to April of last year. So as we progress through the year, we think those stats will continue to get better just in terms of the margin of lead volume over the same time last year. .

Our next question comes from Chris Woronka with Deutsche Bank.

First one, Jeff, you've talked about some, I guess, Divorock-specific wins on kind of CapEx and part of that is working with your brand partners, I'm curious as to whether you have kind of any -- what you might have on the agenda for '26 in that sense of whether it continues to skew a little bit more towards more smarter CapEx or whether maybe there would be some operational things that you're hoping to accomplish with them as well.

I mean, it's a couple of fronts, Chris. I would say that, as Justin mentioned, as it relates to like the Westin Seaport, for example, I think there's a situation that you won't see the results of that in 2026.

But I think in 2027, I think we're optimistic that if we're able to bringing that deal to conclusion, I think it will be beneficial to that hotel and I think it can be felt by Dominach overall next year. So I think those wins certainly are out there, but they don't happen necessarily as frequently. We have a lot of control over our hotels at the operating level just because they are largely third-party managed. So I think that's throughout the year. I would say on the CapEx side, it's probably where we have that sort of larger success because the brands, whether they're franchised or managed. They do have standards for what they want their hotels to be like. And I think that's where we really distinguish ourselves versus the marketplace and just really value engineering those and making sure that the expenditures that we make are sort of appropriate for each hotel and not necessarily the same for all hotels, if that makes sense. Does that help?

Yes. That's super helpful. And then as a follow-up, is there any -- can you maybe share with us what might be embedded in your guidance for kind of ramp-up of recent recently completed rent. So I guess, Sedona, I think Phoenix maybe even Armanino, -- is there any lift much less expected this year? And then as we think the '27, do you think the the potential lift from things you're finishing in '26 is more or less than what you lift you're getting this year in '26?

Yes. I mean really the one that we've called out is Sedona. It's about 25 to 50 basis points in the year for RevPAR growth. There will be some benefit. I don't have a specific number for you, but for Havana Cabana in the fourth quarter because we ended up accelerating some work at that property that we had anticipated in future years.

And just taking advantage of the opportunity of the softness that we were seeing in Florida during the summer to do some of that work in the third quarter and fourth quarter that you can see it in the disruption of the property's EBITDA. We had probably 60% of the rooms out of service in that period of time. So there will be some recovery of that EBITDA as we get into the back half of this year, right? I apologize, I don't have a specific percentage for you, but I think it will be $1 million or $2, I guess.

I think that's right. And we sort of scheduled out our '26 renovation projects to kind of line up with the timing of the projects we did in 2025. So if you think about sort of the year-over-year, some of that disruption that we'll have in '26 might sort of offset some of the gains that we have from headwinds from '25.

Our next question comes from Duane Pfenigwerth with Evercore ISI.

Your commentary on the transaction markets is encouraging. It sounds like you're much more -- maybe more optimistic on the sell side but may be neutral on the buy side. Correct me if that premise is wrong. And I just wondered, in terms of acquisitions, is that a function of the quality of what's on the market or pricing?

That's a good question. I think that's a fair characterization. I think we're more inclined to be sellers at this time? And I just think the reason for the neutrality, I guess, on acquisitions is that right now, our shares look to be a better investment than the options that we see out there. I think a lot of the deals that are coming to the market, and this is very early on and in the last, say, 2 to 3 weeks, they tend to skew towards very large luxury assets.

So from a ticket price and size and pricing. It's just -- that doesn't necessarily align with what we chase. But I think if a type of asset that's going to end up setting some favorable comparisons in the marketplace, and I think begin to provide the market with some visibility on where asset prices are.

That's helpful. And then just -- maybe you could play back just a payoff of the preferreds. What are the net impacts to the P&L and cash flow? And is there any -- as you look at your capital structure, it feels pretty clean at this point. Is there anything left to kind of higher cost to pay down that would compete favorably with buyback.

No big pieces of capital out there that are competing with buyback. I would say one of the reasons that we looked at it, and Brian can give you some of the pieces that drive the earnings impact that we see from this. But One of the reasons that we looked at that is that was an opportunity to invest almost $120 million is effectively a 8.25% yield. Share repurchases were certainly competitive with that, but the ability to get that much stock in such a short period of time can be difficult. So this is 1 where we thought it cleaned up our balance sheet a little bit more, and it was an efficient use of just removing a costly piece of capital...

Yes, when you offset the -- we obviously had some significant cash balances that we held for a portion of the year last year. So when you offset sort of the lower interest income in '26 with the benefit of paying off our preferred that provides about a $0.03 tailwind to FFO per share this year. .

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Jeff, just going back to your comments specifically about the improving kind of debt capital availability cost. I thought that was particularly interesting given sort of the varying size of hotels you've discussed selling on prior calls, I guess does that comment really open the door for potential larger sales this year? And just given the maturity profile, I think you said nothing coming due until 2029 or or so what is sort of the intended use of proceeds and how much really do you think you can do from a share repurchase perspective.

Yes. A thoughtful question. I would say that I think it's beneficial, but you are getting some declines in rates, but also I think lenders are early days, but beginning to get a little more aggressive on proceeds. And that's what I think is going to be beneficial because if you look in the last year or 2 when interest rates were more volatile and frankly, a little bit higher, it was hard to get some spread between your borrowing cost and the ultimate price that someone was purchasing at.

So now that you're getting some of that spread, I think it's providing some positive leverage to investors out there. And that's what I think is going to be helpful provided there aren't any other unforeseen macroeconomic events to maybe facilitating some dispositions. As I mentioned, I think our shares are appealing right now. It depends on the size of the disposition. I think if something was very large, again, it depends on pricing and what have you. But I think our inclination is to lean into share repurchases. But it's something that you have to make it determine that at that time.

I appreciate the thoughts there. And then just going back to the Cliffs at L'Auberge. You've talked about this 25 to 50 bps tailwind this year. Can you just remind us, is that just getting back the disruption that you saw at that hotel last year? And then in the spirit of flow-through being more impactful what does that imply from a hotel EBITDA perspective in terms of what was lost last year, but what do you anticipate to get back in 2026?

Yes, I was going to say like we look at that as an investment that will ultimately provide sort of north of a 10% unlevered yield on our investment. So the idea is that when it stabilizes, call it 2, 3 years from completion, that we will earn more EBITDA than we were earning before. It wasn't just an investment to sort of disrupt and then recoup what we had just lost.

I don't have off the top of my head, the -- yes.

I think round numbers, we went about $1 million in EBITDA backwards last year. And I think from an independent resort perspective, it usually is a multiyear stabilization process. So my gut is we get 2% to 3% of that back this year. So we'll see the 1% to 2% of incremental and then kind of continued progression along that trend line for a few years.

And then just following back if I can squeeze in 1 more related. That hotel had a pretty material outperformance. I think it was in 2022, certainly a unique period of time. But is it possible from a stretched goal perspective that you could get back to that level with some of the efficiency gains as well as ADR upside that you've highlighted? .

Yes. I think that's certainly possible. I would -- it's hard to appreciate unless you're standing there, but I think that because of those 2 hotels -- they were adjacent but fairly different in their quality level that I think now unifying them, it really opens up the opportunity for that hotel down the road to sort of bring in more group events and different types of guests than it had before. because of its increased scale.

[Operator Instructions] Our question comes from Rich Hightower with Barclays.

I got a little nervous thinking ahead in STAR One. So Jeff, I want to go back to your thoughtful ruminations and where it sort of fits into the longer-term plans for DiamondRock. And I think even going back toward the COVID, you think about why hotel REIT stocks generally never went up over long periods of time. I think CapEx is a big part of that. So now that you've sort of rethought what that strategy should be for the company, I mean what do you think a sustainable, absent major macro disruption sort of return on equity profile should be for a hotel REIT. And how do you expect to get there?

You mean like a levered return on equity.

Levered return on equity, cash flow return to equity owners in the company.

The way we framed it to our Board, and maybe I'm not precisely answering your question, but I think the responsibility that we have in order to outperform is that we need to be effectively surpassing what I was calling sort of the growth in the yield like FFO growth and dividend yield combined to sort of a loose proxy of of total return.

We have to be beating the broader equity REIT average, probably about 200 basis points. As a sector in order for people to feel that there's a reason to be looking at lodging vis-a-vis other sectors. I think if you look over periods of time, probably at any of the -- like your or any other of the, I'll call it, comp sheets out there. I think a lot of the equity REIT historically, you're providing sort of a 6% to 9% sort of combination of FFO growth and dividend yield, and I think we have to be above that range as an industry and for us within it, leading that in order to be attracting capital.

I think that's helpful. And I guess maybe just to follow up on one element there. Brian, you mentioned you still got some NOLs to burn off before increasing the dividend payout. So what does that schedule look like? And when do you sort of revert to, I guess, a more normalized payout ratio?

Yes. I mean the goal is for us to sort of spread those NOLs out as long as we possibly can. So that's sort of the trajectory of being able to sort of steadily increase our dividend over time versus maximizing our NOLs over the next year or 2 and then having to have this big spike in a dividend payout. So I would anticipate, given our strategy, that it'll probably take another 3 to 4 years before we fully burn off those NOLs. .

Our next question comes from Christopher Darling with Green Street. .

Jeff, you spoke about the bifurcation in consumer trends, how that's been benefiting DiamondRock as well as other high-end owners. What's your forward-looking view as it relates to this dynamic, do you think that relative strength at the high end will persist for the foreseeable future? Or do you envision more of a broad-based recovery unfolding throughout the industry?

Yes. I would say it's -- I think when you look at it, it's hard to base upon just our portfolio because in the grand scheme of things, we have 35 assets. We're not representing a huge swath of the economy. But I do feel like that affluent consumer is going to continue to be a spender. My sense is that despite the volatility in the stock market, there's been a lot of wealth created and I don't see that disappearing very quickly. .

I think there's been some other headwinds on the economy in terms of like international inbound travel that necessarily won't change on a dime, but I think if you think over the next 2, 3 years, I'm hard-pressed to see how it continues to erode. So I'd like to think that that sort of more well-heeled traveler will continue to improve. The lower level -- we don't have a great visibility on candidly. I think there's certainly a lot of pressure on consumers. But I think that's where politicians certainly seem to be more intently focused. I but honestly, it's like that's a little outside my take rate to predict easily, but I'd like to believe that there are some tailwinds there down the road. .

Okay. That's helpful thoughts. And then maybe just more broadly, can you speak on the state of business transient travel, how that segment has sort of progressed and your expectations for the coming year? And maybe within that answer, you could touch on government travel specifically, whether you see that segment as a tailwind or a headwind this year? .

Like BT, I think late last year, we were seeing sort of mid-single-digit growth. I think our expectation for BT is somewhere around that level. So it feels like it's holding in fairly well and delivering sort of consistent growth. On the government side, we don't do a tremendous amount of government business. It's very, very low single-digit contribution. I don't know, Justin, if you have anything else to add on those 2?

Yes. I mean, I would say in the 2 in some cases, depending on the markets are somewhat interclined, right? And so we actually see -- if you go to like a San Diego, you'll see a drop-off in BT during the government shutdown period because a lot of that business is government contract related. So we're hopeful with a little bit more normal kind of a little more stability in our government and kind of government budget process that some of the BT falloff we saw last year that sort of averaged us down to that mid-single digits will abate, and we'll be able to continue that trend line or better.

Our next question comes from Patrick Scholes with True.

Jeff, regarding your 5-year plan for lower CapEx, I'm curious, I assume you've probably run it by your property managers or franchisors. And if so, any difference in the type of feedback that you're getting or pushed back, say, versus the major brands versus the independence in your portfolio for that lower level of CapEx.

Yes. I guess I would say that when you think about the hotels, I mean, they're independent, we don't really have to run it by anybody. That's what we want. It doesn't matter. I mean now that said, we do have folks managing those hotels, and we always want their feedback on whether or not we're spending appropriately. And as it relates to franchise or manage. I don't know, Justin, if you want to chime in, but we do look at brand standards. You see those -- their guidelines effectively, and you're trying to manage to timing the expenditure and the magnitude.

And as I talked about in remarks, like emulating the design standard, but you don't have to do it precisely with the exact nightstand or the exact lamp that they want. There's ways that you can sort of value engineer that and sort of deliver the the refining experience that they're looking for, but do it more cost effectively rather than just strictly following their literal blueprint, if you will.

Okay. So just curious, if any of the major brands gave you a -- you don't have to lift them by name, but in a particular difficult time. Obviously, sometimes in this industry, we know there's different interests of different parties. So I'm just curious about that. .

No, just I would say they're always happy when you're offering to spend more.

Yes. I think we're just focused on being treated equitably amongst the entire spectrum of owners. I think in today's world, especially as the transaction volume has fallen off, and there are a lot less change of control bits being executed. I think historically, given the public companies aren't single asset levered typically, and they have a lot of capital. There often is more focused or reliance upon them to maybe renovate in a greater amount or sort of quicker succession than what the private owners do.

And I think we're just sort of focused on being a franchisee like everyone else in the universe and sort of doing things on a similar cadence to the overall hotel investment market.

Okay. And then maybe a little more granular, just a follow-up question. Maybe just a specific, say, world real hotel example of if you were investing 6% versus 10 or 11 previously. That might be a real example of, hey, this is something that if we were at that prior level of CapEx we would have done today, we don't think we need to do it something specific.

I think it's like Palomar and Phoenix would be an example. I think it really goes down candidly into the minutia like as opposed to coming in and saying, we're doing a rooms renovation, we're essentially going to start over, replace everything. I think Fenics a good example where we kind of looked at corridor carpet as an example, tea, we don't really feel like this needs to come out, existing wall vinyl in the room aesthetically works with what we're doing. I think maybe one piece of furniture, we capped. It's not really kind of car launched throughout the portfolio, but I think it's really just assessing what's the utility of the existing stock and making sure that we're only touching the things that need to be touched as opposed to just holistically changing everything every time we go in and do a renovation. .

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jeff Donnelly for closing remarks.

Thanks, folks, and we look forward to seeing you on the road, and we'll be certainly meeting with many of you at the Citigroup Real Estate Conference next week. Safe travels. .

This concludes today's conference call. Thank you for participating. You may now disconnect.

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to Briony Quinn. Please go ahead.

Good morning, everyone, and welcome to DiamondRock's Third Quarter 2025 Earnings Call and Webcast. Joining me today is Jeff Donnelly, our Chief Executive Officer; and Justin 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 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 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.

Turning to our results. Corporate adjusted EBITDA in the third quarter was $79.1 million and adjusted FFO per share was $0.29, each ahead of our expectations. Free cash flow per share for the trailing 12 months, defined as adjusted FFO less CapEx, increased approximately 4% to $0.66 per share.

Comparable RevPAR declined 0.3%, exceeding our expectation of a low single-digit decline with each month of the quarter performing slightly better than expected. RevPAR outpaced both our weighted average STR class and our comp sets in the quarter.

Occupancy was flat year-over-year and ADR declined 0.4%, both again slightly better than expected. Looking at our revenue segments, business transient led the way this quarter with almost 2% growth, while leisure transient declined 1.5% and group room revenue declined 3.5%.

All year long, we had been highlighting the difficult group comparisons our portfolio would face in the third quarter, largely due to last year's Democratic National Convention in Chicago in August as well as fewer city-wide conventions in Boston. Despite this headwind, both of our hotels in Chicago were able to drive RevPAR growth in the quarter.

Despite the slight decline in RevPAR, our out-of-room revenues increased 5.1%, resulting in total RevPAR growth of 1.5%. Total RevPAR grew in both our urban and resort portfolios.

Food and beverage was once again a bright spot, both on the top and bottom line. F&B revenues increased 4%, with banquets and catering up almost 8%, while outlets were down modestly. Last quarter, we highlighted that our food and beverage margins expanded by 105 basis points. This quarter was even stronger with F&B margins expanding by 180 basis points, aided by our continued efforts in reengineering menus and focused staffing.

Other contributors to the increase in out-of-room revenues in the quarter included spa, parking and destination fees, which were each up over 10%.

Total hotel operating expenses increased 1.6%, resulting in only a 3 basis point EBITDA margin contraction and hotel adjusted EBITDA growth of 1.4%, which to date is an industry-leading result. Wages and benefits, which represent almost half of our total expenses, increased to just 1.1%.

Now to highlight the resorts of our urban hotels and our resorts for the quarter. Our urban portfolio, which accounts for over 60% of our annual EBITDA, achieved RevPAR growth of 0.6% in the quarter. Total RevPAR growth was 150 basis points stronger at 2.1%. As expected, August was our softest month and September was our strongest with 6.1% RevPAR growth, showing gains in both occupancy and rate.

The strongest RevPAR growth in the quarter was achieved by our hotels in Salt Lake City, New York, Atlanta and Chicago, which helped to offset some of the renovation disruption at the Palomar in Phoenix.

Turning to our resorts. RevPAR declined 2.5%, but total RevPAR increased 0.4% on 4% growth in out-of-room revenues. Excluding our Sedona hotel under renovation and Havana Cabana, where we made the decision to accelerate a capital project during a lower occupancy period, resort RevPAR declined just 0.4% and total RevPAR increased an even stronger 1.7%.

We continue to see a bifurcation in resort performance with the higher ADR resorts outperforming those with lower ADRs. We expect that performance variance will continue to benefit our luxury resorts for the foreseeable future.

Although the top-line trends of resorts have received elevated focus, we believe it is most important to focus on bottom-line results. Despite a 2.5% decline in RevPAR at our resorts this quarter, EBITDA margins expanded by over 150 basis points with wages and benefits flat and total expenses down 1.5%.

Said differently, our resorts made more money in Q3 '25 than they did in Q3 '24 on roughly the same amount of revenue.

Before turning to the balance sheet, I'll make a few additional comments on our group segment. Group room revenues across the portfolio declined 3.5% in the quarter, with room nights down 4.5% and rates up over 1%.

We faced tough comparisons, particularly in August. However, our hotels were quite successful in converting short-term leads to in-house groups. During the quarter, we booked 38% more groups for the balance of the year than we did the same time last year.

Looking to 2026, our group pace is up in the mid to high single digits, and we entered the fourth quarter with almost 60% of our 2026 group revenue on the books, on pace towards the 70% we typically start with each year.

Moving on to the balance sheet. Early in the quarter, we successfully refinanced, upsized and extended the maturities under our senior unsecured credit facility, the proceeds of which were used to pay off our last 2 mortgage loans. Our portfolio is now fully unencumbered by secured debt. All of our debt is fully prepayable without fees or penalties and with extension options, our earliest maturity is in 2029.

Importantly, we have recast all of our debt to market rates, thus eliminating the overhang of below-market maturities on our FFO per share growth for the next several years.

Inclusive of interest rate swaps, 30% of our debt is fixed rate and 70% is floating rate, a notable advantage in this declining interest rate environment.

We have paid a quarterly common dividend of $0.08 per share to date this year and expect to declare an additional stub dividend for the fourth quarter. At the midpoint of our updated guidance, our current dividend to FFO per share payout is approximately 30% as compared to just under 50% in 2019 as we continue to utilize a portion of our net operating losses to offset our taxable income.

During the third quarter, we utilized our free cash flow to repurchase 1.5 million common shares at an implied cap rate of approximately 9.7%. Year-to-date, we have repurchased 4.8 million common shares for $37 million or $7.72 per share on average. We anticipate ending the year with over $150 million of cash on hand and continue to view the repurchase of our common shares and/or the redemption of our 8.25% Series A preferred shares to be highly attractive uses of capital in this environment.

Before turning the call over to Jeff, I'll wrap up my comments with our updated 2025 guidance. We are maintaining the midpoint of our RevPAR and total RevPAR guidance while tightening the ranges. This revision implies a slight decline at the midpoint in the fourth quarter.

However, in light of the continued success our team is having controlling expenses, we have raised the midpoint of our adjusted EBITDA guidance by $6 million to $287 million to $295 million and raised the midpoint of our adjusted FFO per share guidance by $0.03 to $1.02 to $1.06.

With that, I'll turn the call over to Jeff.

Thank you, Briony, and thank you all for joining us this morning. I want to start by congratulating our hotels and our team at DiamondRock for their hard work and ingenuity to deliver another quarter of results that exceeded expectations.

In the last month, our portfolio has been awarded several prestigious honors, a handful I'd like to share here. Cavallo Point was recognized with 2 Michelin keys, The Gwen was honored with 1, and Lake Austin Spa Resort was again named the #1 destination spa in the United States by Conde Nast. Well earned, and congratulations to the teams for these rare achievements.

While we have unwavering pride for every Diamond Star TripAdvisor rank and top meeting hotel honor and the demanding work that goes into delivering the service to earn those awards, our North Star at DiamondRock remains driving outsized free cash flow per share.

To us, it is simple. We are in the business of making money for our investors, and driving outsized free cash flow per share growth has, over time, historically resulted in outsized total shareholder returns. The accolades are not the end game, but they are an aspect of delivering on our promise to shareholders.

At DiamondRock, we strongly believe in the alignment of interests. So 100% of our officers' performance-based long-term equity incentive awards are tied to relative total shareholder returns and common equity is a component of every employee's compensation.

We believe in being efficient with our shareholders' money. And in that regard, our G&A per owned hotel is nearly 45% below our peer average. It's one of the many ways we work to preserve capital.

I'm going to focus my comments today on the strategy behind our differentiated CapEx program, the current transaction environment and how we intend to participate in it, our view on the remainder of 2025. And lastly, I will provide some context around our outlook for 2026.

The strategy behind our CapEx program has become a key discussion point with investors and analysts as they lean into what differentiates DiamondRock versus our peers. Between 2018 and 2024, we executed 4 strategic upbrandings, 2 unbrandings and 9 life cycle renovations, yet spent approximately 9% of revenues on CapEx.

In the last 3 years, we have spent just 7% of revenue on CapEx, while peers have spent 10.5%, an over 300 basis point spread. In dollar terms, that difference is over $100 million or almost $0.50 per share on our stock.

We are often asked how we can target annual CapEx spending at 7% to 9% of revenue when our peers repeatedly choose to spend 10.5% to 11% of revenue and some even up to 14%. First off, with only 5% of our hotels brand managed, we have a competitive advantage of exerting more control over the scope and timing of renovations. As owner, we are in the best position to determine the balance between operating performance, value creation and capital expenditure, not the brand manager. We are making capital decisions that will drive our outperformance and maximize our total shareholder return.

They are playing a different game. They're paid off the top line, understandably focused on brand standards, but less concerned with an owner's ROI.

So how is it we keep our CapEx spending so efficient? It's important to mention that hotel brands typically mandate room renovations every seven years. We work hard to elongate that cycle and reduce the cost of renovations when undertaken.

How do we elongate the cycle? Strong RevPAR index and bottom-line profits evidence your product remains competitive. Performance matters. With it, we can justify a lighter and less frequent renovation. An extra 2 years on our renovation cycle is a 28% reduction in our average annual expenditures.

How do we reduce the cost of a renovation? Our hotels on average are newer, so they're more code compliant with fewer surprises behind the walls. Our internal design and construction team plans our renovations at least 2 years in advance to target precise timing to minimize profit disruption. The longer planning window gives us time to fine-tune and negotiate the scope. Supply chain is monitored. We analyze how improvements can increase labor productivity and boost profitability. Every single fixture, surface covering and piece of furniture is reviewed for their cost design and durability. We assess what components can be kept and what can be refined.

Our Kimpton Palomar in Phoenix is a prime example. This is the #1 hotel in the downtown market, and we recently completed the hotel's first room renovation since opening in 2016 at a cost of just $21,000 per key, and it looks terrific. In our view, if the asset still looks fresh, competes effectively and is operating efficiently, then we do not need to renovate every 7 years. It's simply not a prudent use of our shareholders' capital to play a role in someone else's design war.

To be clear, we are not anti-brand. Branding is a choice. And in the right circumstances, brands deliver exemplary performance. Instead, I would say we are pro flexibility.

The way we have chosen to invest in our portfolio preserves capital for investment and has translated to FFO per share and free cash flow per share outperformance. Based on the midpoint of our raised guidance, our 2025 free cash flow per share would be 2% above our 2018 level, while peers averaged 30% below.

Now this isn't to say that we don't like a strong ROI project. We do. They can provide a great risk-adjusted return. Take our recently completed The Cliffs at L'Auberge, which is now fully integrated into our adjacent property, L'Auberge de Sedona. In the first full quarter post renovation, The Cliffs realized a 65% ADR increase.

As we look more broadly at the market, we are incredibly pleased to see that The Cliffs' RevPAR Index increased to over 130 from a level of 108 last year. Importantly, over that same period, L'Auberge de Sedona maintained its RevPAR index at over 160 within its own luxury comp set. Meaning one hotel is not taking from the other, but together have become one stronger integrated resort.

The group sales team at L'Auberge has been busy. The group revenue pace is up approximately 25% in the fourth quarter and up 55% in 2026. Standardizing product quality and combining the hotels has created a stronger group channel than either hotel enjoyed on its own.

As a reminder, we spent $25 million on this renovation and remain quite comfortable this ROI project will achieve a 10% yield on cost at stabilization. We are hosting a tour of the integrated L'Auberge ahead of Dallas REIT World, and we look forward to showing those in attendance what a DiamondRock ROI project looks like while experiencing the unparalleled hospitality of L'Auberge.

With respect to the transaction environment, we continue to underwrite acquisition opportunities, mostly group-oriented hotels, urban select service hotels and resorts. While we had our eye on a few potential candidates this past quarter, we did not feel the ultimate pricing was defendable after considering realistic CapEx needs versus where our shares are trading.

In general, we see upper upscale resorts with asking cap rates in the 7% to 9% range, but inclusive of near-term CapEx needs, the all-in cap rate was closer to 5% to 7%. Similarly, the ask for luxury hotels remains in the 5% to 7% range or about 4% to 6% all in. At that pricing, our strong preference is to reinvest in the luxury and upper upscale hotels DiamondRock already owns through share repurchases.

On the disposition side, we continue to have active conversations around the disposition of a handful of our assets, and we expect to remain active in the market in the coming year. We have nothing to share at this time, but we believe we will see elevated capital recycling in the next 12 to 18 months compared to our history.

Now to our outlook for 2025, as Briony noted, we are raising the midpoint of our adjusted EBITDA guidance range by 2% and raising the midpoint of our FFO per share guidance by 3%. Our new guidance reflects our better-than-expected results in the third quarter and a slightly moderated expectation for the fourth quarter, predominantly due to the impact of the federal government shutdown.

To look forward, it helps to look back at how we got here. We knew about a year ago that our third quarter comp would be difficult, and we aggressively worked to chip away at that deficit. Heading into the third quarter, our group revenue pace was down 9.6% from the prior year, yet we exited the quarter around 600 basis points better. Our operators pushed hard to drive profitable short-term group business. On the transient side, our revenues were essentially flat and in line with our expectations.

Making our way to the bottom line this past quarter, I was incredibly pleased with the results our operators and asset managers delivered. Our team is driven to be innovative in their efficiency and productivity efforts, and we were successful in that execution once again.

When you look back at our fourth quarter last year, you will note our RevPAR and total RevPAR were up in the mid-5% range, making the fourth quarter our toughest revenue comparison of this year.

Our playbook for Q4 remains the same as it was in the third quarter, identifying new strategies to drive revenues and grinding away to realize expense efficiencies. It's our team's tenacity from DiamondRock asset managers to our hotels teams that results in exceeding expectations and driving free cash flow per share.

The federal government shutdown has increased uncertainty with respect to short-term group pick up, attrition and on-time transient guest arrivals. In this regard, we have seen our group revenue pace for the fourth quarter take a small step backwards from October to November.

As I mentioned earlier, we have slightly moderated our fourth quarter forecast and our 2025 guidance to recognize that the impact of the shutdown is building. Our guidance assumes the shutdown is resolved in short order and travel resumes its normal cadence.

Looking ahead to 2026, it is difficult not to be excited about the trajectory of the lodging industry and specifically for DiamondRock. The industry's tailwinds are well known at this point with easier comparisons created by Liberation Day, the country's longest federal government shutdown, the holiday calendar, the United States' 250th anniversary and an improvement in net inbound, outbound international visitation.

I'd like to take a few moments to focus specifically on tailwinds unique to DiamondRock. First, our renovations this year are expected to negatively impact our 2025 RevPAR growth by approximately 75 basis points, creating a built-in tailwind to start 2026. We have previously highlighted our expectation that the ROI project at The Cliffs at L'Auberge should drive an incremental 25 to 50 basis point RevPAR tailwind in 2026 on its way to a 10% yield on cost.

Second, we have the highest exposure to FIFA World Cup games based upon the importance of games per our recent analyst report. We expect compression around these games to be material and create a compelling rate story for DiamondRock next summer.

Third, in 2026, we have a solid base of group and contract business, which typically accounts for 35% of our total demand, with group pace up in the mid to high single digits. We expect to be able to tell you our hotels achieved new highs for group revenue sequentially in 2024, 2025 and 2026.

Top line growth does not mean much unless it makes its way to the bottom line as free cash flow. We are among the very few full-service lodging REITs to achieve free cash flow per share growth since 2018, and we expect to widen that disparity versus our peers next year.

2026 is around the corner, but there's still much work left to do in 2025. We look forward to seeing many of you at conferences and tours over the next few months to update you on our progress.

Thank you for your time this morning, and we are happy to answer your questions.

[Operator Instructions] Our first question today will be coming from the line of Cooper Clark of Wells Fargo.

It seems like you continue to make really strong progress on the expense side as cost controls continue to be a major focus for the sector. Could you speak to how much of this is driven by head count reduction? And if we should expect continued momentum on the expense control side into '26?

Sure, Cooper. It's not necessarily head count reduction per se, although we have made some success on the contract labor side. It's really just been a persistent company-wide focus on finding additional productivity throughout the portfolio and finding ways where we can get our existing employees to be more efficient, which translates to less hours worked.

So there's not one silver bullet there. It's, frankly, just a lot of blocking and tackling from the asset management team and from our operators. But simple things like just reducing front desk staffing during a 3-day group event when we have no check-ins and checkouts even though the hotel is full, those little things can cut hours work by a point or 2, and it really go a long way to mitigating year-over-year wage increases.

Okay. Great. And then I guess as we think about some of the further value creation within the portfolio, how are you thinking about some of the recent or upcoming franchise expirations? And what are some of the options you're considering to maximize value there?

This is Jeff. There's a few options. I'll let Justin refer to the Westin Boston. But there's a couple of situations that we have where our Kimpton Shorebreak in Huntington Beach, technically, that contract has expired. We have options to terminate upon sale in Phoenix. And I think in about 2 years, our Courtyard, which in Denver, which is really kind of a lovely building, it's a historical building that it's in, there will be flexibility there as well.

So we look at all situations, Cooper, I mean, I think there will be some where there could be upbranding scenarios. There's some where maybe it's just better as an independent or sticking with the flag that we have. So we're really kind of looking at what drives the best return for us over time. But I don't know, Justin, do you want to kind of talk about.

I mean I think in Boston, specifically where our franchise agreement is up at the end of next year, we're in the middle of running a brand RFP process with most of the major brands. I think we've been very positively impressed with the amount of interest. It's just very difficult for brands to get that kind of distribution in a major Northeast city attached to the convention center. So we're going to continue to evaluate the best option for shareholders going forward and whether that's a significant amount of inducements upfront or trading that in exchange for kind of lower run rate fees over the duration of an extended franchise agreement.

And our next questions come from the line of Michael Bellisario of Baird.

Just want to stick with your CapEx theme. Just what projects looking out to next year on the docket, anything that would be disruptive or offset the 75 basis points of tailwind that you expect to recapture from this year's projects?

No, nothing that stands out. Frankly, we always have projects going on. And I think pretty consistently, we've had about $2 million to $4 million a year of EBITDA disruption. And I think going forward, looking at 2026, I think it's going to be a very similar number.

For example, our Courtyard Midtown East will have some renovation work done in the first quarter, but that's going to be comping against renovation work we did also in the first quarter at the Hilton Garden Inn in New York.

So I don't think there's going to be any unique noise or cadence change to renovation impact in 2026. I think it will be a pretty clean year.

Okay. Understood. Helpful. And then just on your disposition comments, it sounds like you're going to be highly likely a net seller. So as you sit here today, do you take those proceeds? Do you lean into share repurchases? All else equal, do you build cash? Just kind of help us think about the earnings power and per share impacts looking out 12 to 24 months.

Yes. It's a great question. I mean share repurchases are very compelling at this level. I think it's reasonable to assume that some component of it will go there. It's hard for me to forecast in the future what opportunities may be out there. But I think there's -- it's likely that share repurchases will be a beneficiary. I think it's possible that some could go into other assets if we can find situations where we see better growth and better yields because it's potentially a lot of capital that could be recycled down the road. It's hard to predict the timing and magnitude of dispositions. But again, we're always trying to find a way to maximize our earnings growth going forward and make sure that we're not sitting on too much cash for too long. I think that doesn't serve our shareholders well.

And then just one follow-up there in terms of disposition candidates. Is it -- do you think of more opportunistic asset sales? Or would it be more older properties, lower RevPAR, ones that are in need of CapEx? And that's all for me.

Yes, it's a good question. It's a mix. We've had some unsolicited interest in assets that if it's at a compelling price, we would certainly consider it. And there's others that we're targeting for disposition that we just don't think are a good fit for us going forward. So it's honestly kind of a mix of assets that we're looking at.

And our next question will be coming from the line of Smedes Rose of Citi.

As you emphasize your ability to drive margin in a relatively flat RevPAR environment is impressive. And I just wanted to ask you, just in general, how are you thinking about just the pace of labor costs for 2026? What's kind of built-in and presumably, you can continue to find efficiencies? But what do you think just wages and benefits could pace at that?

I think we're probably not going to see the same 1% that we've been able to achieve, I think, on a year-over-year basis as we start to comp some of the efficiency gains we found this year. But we don't -- outside of New York, which rolls in the middle of the year, we don't have any significant union exposure in terms of fixed labor bump up that we're necessarily worried about. And I think we're now kind of turning our focus away from line level labor and more to administrative and sales labor. I think that's become a big focus of every company.

It's just as you sort of lean into additional efficiency tools in the forms of AI, how do we make more streamlined processes that may allow us to use a little bit less labor overseeing the assets on an asset level basis. So the hope is that maybe that can mitigate some of that what would otherwise be probably 2.5% to 3% growth and some of the middle of the P&L efficiency can continue to drive less than run rate on the wage side.

And then, Jeff, you mentioned that you have a solid exposure to FIFA next year. How are you guys, I guess, positioning yourself into that? Are you selling room blocks into FIFA games? Or how are you sort of looking to take advantage of that?

I think it really depends on the market. I think we're being very cautious with it, candidly, until we see the actual teams that drop for the particular locations. I think we're well aware that if we get Cote d'Ivoire versus Qatar, it's probably not going to be the demand generation that Germany against Argentina might be.

So I think it's -- in the short term, we're just -- we are in some of the blocks. We frankly haven't put them in a lot of our pace numbers. If they are, they're in there pretty heavily washed. And I think once we see the team grouping develop, we'll have a better sense of what the real compression is going to be.

Our next question will be coming from the line of Austin Wurschmidt of KeyBanc Capital Markets.

Just going back to your comment, Jeff, on elevated capital recycling. I guess, can you provide a range for the number of hotels or maybe a dollar amount that you're considering? And then given the comments or the cap rates that you cited, do you think that you can effectuate the capital recycling in a neutral or accretive manner? Or is this something you'd be willing to kind of sacrifice near-term earnings dilution maybe for a better growth profile?

That's a good question. I don't have a great answer for you because there are some assets that we have -- and we've talked about them in the past that candidly kind of skew to the smaller side, and there's some that we've talked about in the past that are very large and very chunky. So it's just -- it's difficult to give a number that I think would be beneficial for you. But in the past, we've kind of talked about there's sort of 2 to 3, 2 to 4 assets that we've looked at. But as I mentioned, there is some interest in -- unsolicited interest in some of our what I would describe as core assets as well. And it's just a function of whether or not we can achieve pricing there that would work for us. So I don't have a specific number for you, but we're trying to be opportunistic about execution.

As far as recycling, that's our intent is to try and do this in a way that is an accretive manner to shareholders. That would be beneficial to us, particularly when you think about it is, as I mentioned before, like the capital costs that you're effectively selling off versus those that you're taking on with the new asset. So it's fully intended to be accretive to our earnings story as opposed to dilutive in the name of quality.

That's helpful. And then, I mean, would you expect kind of this recycling to change the profile of the company in any way by either business segment or exposure? Is that the intent?

It could be the outcropping of it, but I wouldn't describe it as material -- well, I wouldn't describe it as material. I mean we've talked in the past about Chicago Marriott as being a potential disposition. I mean it's our single largest asset.

So to the extent we are successful in some time frame of selling that asset, it would certainly shift our geography and some of our exposures. But again, it sort of hinges on whether or not those come to fruition. So that's why I say it can -- it's hard to say definitively.

Got it. And then just last one. I mean, within the resort portfolio, I was curious, what percent of the EBITDA would you characterize as kind of high ADR that you said is performing much better? And how wide is the performance variation between kind of those 2 buckets of high ADR versus low ADR assets? That's all for me.

Thanks. We've done sort of an analysis where we had looked at properties that had RevPAR that was sort of -- or ADR north of $300 versus below $300. And I think the gap between those 2 was about 500 basis points. So it's been a pretty wide bucket.

And I'm just eyeballing this like in the third -- in just our resorts, if that's the bucket that you're looking at. I think if you look like in the third quarter, for example, I think our luxury resorts were about 60% of the resort EBITDA just among all resorts.

The next question we have is coming from the line of Chris Woronka of Deutsche Bank.

I guess, Jeff, on the resource side, you guys have had, I think, overall, slightly better experience this year than several of your peers. And I know a lot of that credit goes to your operations team and your original site selection. But the question is kind of do you think there's something about the resorts you have collectively, whether it's size or specific market or segmentation that's allowing them to outperform?

And secondarily, are you seeing -- have you seen or are you seeing any changes in booking windows or sourcing or pricing or anything like that at those resorts?

Yes, I'll take a stab. And if Justin wants to chime in, he can as well. I guess one of the observations I would make is that in a lot of cases, we are sort of the best game in town. Whether you think about sort of Sedona or Destin or Tahoe or Sausalito or what have you, some of these markets that are candidly don't fit the bill of being in Orlando or more sort of top 10, top 20 market. I think it's beneficial to be not only sort of maybe the only game in town or the best game in town, but it's really sort of a unique destination and it's not as competitive, I would say, that's one thing. I don't know.

I mean I think the other thing that's worth looking at is we talk a lot about differentiation amongst our resorts, but our resort ADR over the course of the year in totality is roughly $400. Like we just don't have a lot of lower-end exposure to the resort space.

I think seasonally, like we -- our exposure to sort of the mid-price customer is like August and South Florida. It doesn't mean that those hotels are necessarily mid-priced hotels. It's just there's a moment in time where we kind of cater to a different part of the population. But I think in the aggregate, we kind of have a higher-end resort exposure, which has done better given what we've seen kind of the differentiation in economy.

Okay. Fair enough. And just as a follow-up, you guys have -- I think it's 3 assets in New York City, and I think 2 of them are doing pretty well year-to-date. I'm not sure if there's a renovation at the third one coming next year.

But the question would be, we've obviously seen an election result, and I'm curious as to whether you guys, yes, adding the benefit of seeing what's going to happen, does it make you more or less bullish on New York?

And secondarily, do you have any kind of contingency plans in place should there be -- should things get a little less calm in New York? Not saying I expect that, just I'm sure it's something you guys give thought to from a planning perspective.

It's a good question. I guess I would say my initial reaction is I'm not sure how much is going to affect things. I understand that there's a lot of -- on both sides, there's always a lot of campaign promises made, but not all of them can be realized either.

So yes, we'll see what comes to pass. I mean, hopefully, it brings sort of more energy to New York City going forward. I'm not sure that's really going to change as sort of a financial capital for the world. But -- and a lot of what's being discussed there, I'm not sure how directly it impacts us. But fortunately, we're in a position where we're very nimble. I mean, again, these are all sort of third-party managed franchised hotels. We can be very flexible and pivot well. And I think being all-select service provides some advantages to us as well.

[Operator instructions] And our next question will be coming from the line of Duane Pfennigwerth of Evercore.

Just on your group commentary, maybe you could remind us if your target mix has changed at all, if the target for next year is different maybe than it has been in years past?

And then the profile of your groups, corporates versus social, average group size, any industries that might stick out from a recovery perspective? Obviously, it's a little bit more complicated at the moment with the shutdown. But clearly, given the change that you kind of came into 3Q with, with your commentary about pacing on 2026, any industries or types of groups that stick out in terms of that recovery that you were seeing?

Facetiously, I want to say those that pay the most. But no, I would say like from a mix standpoint, I mean, I don't expect any dramatic changes as we go into next year. I mean, oftentimes, hotels are always well served by having as much group on the books as possible, generally speaking. But I don't expect there will be a dramatic change. I'm trying to think about it as industry groups. I mean we don't have a lot of government, for example. I think we've always kind of estimated that it's about 2% of our overall business and within our group segment. So I don't think that's going to change. And if it does, it probably goes lower.

But I'm trying to think other industries, it's pretty broad-based. I mean we're not just social group that we have, but in the corporate side, it's across different industries. We do financial services off-sites in Sedona. We do sort of tech sector off-sites in Sausalito. And certainly, in Boston, we participate in all the citywides that come to that convention center. That's a big chunk of that demand. Yes, it's all sorts of things. Like Western Fort Lauderdale, there's a boat show. So I don't see a lot of those types of businesses or the pieces of business is changing year-to-year at this point, so.

Okay. And then maybe just for my follow-up, you gave some industry tailwinds from a comps basis. You gave some portfolio-specific tailwinds. Any -- would you venture a guess in how that adds up to a specific initial look on 2026 RevPAR?

No. We're actually just early in the process of doing budgets truthfully. So I appreciate the ask, but I don't want to hazard a guess at this point.

All right. We'll try and read between the lines here.

Our question will be coming from the line of Kenneth Billingsley of Compass Point Research.

So a question is, I know you talked about RevPAR growth doesn't matter if you can't get it to the bottom line. And just looking at this quarter versus last, F&B and other revenues as a percentage of total revenues was up about 120 basis points. Is there an expectation that you can continue to increase revenues from them?

And part 2 of that is, are you able to control the expenses? Are the margins better on that, so we'd actually see an increased flow to the bottom line?

It's a good question. I think earlier in the year, we really began an initiative to be constantly reworking menus, staying on top of menu pricing just given the volatility of what was going on in food costs. So I think that's one of the reasons why we've continued to benefit this year through better F&B production, whether it's outlets and banquets.

I'm not going to say that it goes on forever that you can always be growing your F&B better than your room revenue for years and years and years. But near-term, it's something that we're working on, and it's something that you can adapt very quickly. So I'm optimistic that we'll continue to have some success there.

In particular, this quarter, the reason why you see the uptick in the percentage of F&B was really just the function of us having a lot more in-house group this quarter as compared to last quarter when it was more citywide based. So there's a lot more group contribution this quarter in our F&B.

And then also on the other line, kind of what all, parking and maybe some other things -- be careful about what we mentioned. But what are some of the things that are included in other that don't have additional expenses associated with them or increasing expenses?

I mean I think other for us is predominantly parking. We have a fairly significant spa business at 3 to 4 hotels. And so we saw a nice uptick double digit on our spa revenue and then the other that falls in there are just resort and destination fees.

So I think the nice thing about all of those revenue streams is they tend to also be non-commissionable. So the costs associated with them are pretty much fixed. So if we can move parking $5, for instance, or we can move the cost of a spa treatment up $10, most of that does flow to the bottom-line. It doesn't really change the cost model of providing the service.

And our next question will be coming from the line of Chris Darling of Green Street.

Just hoping to get your bigger picture thoughts around the steep NAV discounts at which lodging REITs trade, you and your peers, potential privatizations. Do you think there's an appetite for large-scale portfolio transactions today? And if not, do you think that might change going into next year as some of the tailwinds you mentioned ultimately come to fruition?

Yes, it's a good one. I think there is an appetite. I think for a while there earlier this year, it probably had a little bit of a pause. I think it's coming back because I think there's an expectation that RevPAR growth is going to be stronger next year. Interest rates are coming lower. So it feels like probably a better environment where they could sort of strike and get the growth that they need to sort of drive the returns that private equity would need if you were looking for those types of situations.

The only thing I would just caution, and I say this to everybody is that ultimately, a lot of that math works where you can drive financing on assets. And for financing, you need cash flow. Effectively, it's very hard for people to kind of underwrite assets in markets where cash flow is not recovered. It's one of the struggles even we have when we look at some of the markets.

For example, like on the West Coast, where you can have RevPAR recovering but assets still losing money. That's very hard from a pricing standpoint. And I would say that applies to public companies, too. So it's just something to note, I guess, I would say.

At this time, I'm not showing any more questions in the queue. And I would like to turn the call back to Jeff for closing remarks. Please go ahead.

Well, I appreciate everybody joining us today, and I look forward to seeing all of you at Nareit. Thank you.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.