DiamondRock Hospitality (DRH) Q2 2025: Out-of-Room Spend Hits $160 High, Offsetting Resort RevPAR Drag
Out-of-room revenue reached a new quarterly high, providing a crucial buffer as resort RevPAR declined and urban hotels outperformed expectations. Management’s disciplined cost control and capital allocation, including opportunistic buybacks, signal a focus on per-share free cash flow growth amid a mixed demand backdrop. Guidance holds steady, with an eye toward 2026 group pace acceleration and value-creation levers from renovations and asset repositioning.
Summary
- Urban Strength and Cost Discipline: Urban hotels outperformed while expense management offset margin pressures elsewhere.
- Capital Allocation Focus: Share repurchases and targeted renovations prioritized over new acquisitions, reflecting valuation discipline.
- 2026 Setup Emerges: Group booking pace and ROI projects position DRH for stabilization and potential upside next year.
Performance Analysis
DiamondRock Hospitality delivered a quarter marked by strong out-of-room revenue growth, disciplined expense control, and a clear divergence between urban and resort portfolio performance. Urban hotels, accounting for just over 60% of EBITDA, achieved 3% RevPAR growth, with food and beverage (F&B) revenues up over 5% and margin expansion when excluding a Chicago property tax spike. Resort properties, by contrast, saw a 6.3% comparable RevPAR decline, hampered by the delayed opening of the Cliffs at La Berge in Sedona and softer Florida resort demand, though out-of-room spend per occupied room rose 6.7% in those markets.
F&B profit outpaced revenue, rising over 6% on a 3.1% revenue gain, driven by menu engineering, portion control, and refined outlet hours. Operating expenses rose just 0.7% (excluding the Chicago tax), reflecting tight cost controls even as wage and benefit costs increased 3.1%. Hotel EBITDA margins would have expanded 30 basis points without the tax impact, but contracted 97 basis points as reported. Free cash flow per share climbed 4.5% year-over-year, illustrating a focus on per-share value creation.
- Urban Portfolio Outperformance: Urban hotels delivered the best RevPAR and F&B growth, cushioning portfolio-level results.
- Resort Drag and Sedona Delay: Resort RevPAR fell, with the Sedona renovation delay a key headwind, though out-of-room revenue partially offset declines.
- Expense Management: Excluding property tax volatility, operating costs were tightly controlled, supporting margin resilience.
Group revenue pace for 2025 remains up 1% year-over-year, with a notable re-acceleration in July and a strong 12% group pace for 2026, setting up future tailwinds.
Executive Commentary
"We believe REITs that drive among the strongest earnings and free cash flow per share growth should be rewarded with leading total shareholder returns... To achieve this end, the following is what you should expect from DiamondRock: recycling out of low free cash flow yield hotels into higher yielding investments, capitalizing on opportunities to dispose of assets where buyers see greater value than we do, reinvesting in our assets when and where outsized ROIs exist, not just outsized RevPar growth, thoughtfully stretching the renovation lifecycle, especially when asset quality and operating performance do not warrant refreshment, and reinvesting in ourselves through share repurchases when a valuation disconnect exists."
Jeff Donnelly, CEO
"Excluding a larger than expected property tax increase in Chicago, our operating expenses increased only 0.7% on 1.1% revenue growth, with wages and benefits increasing 3.1%... Factoring in the portfolio's full 2.6% expense growth, hotel EBITDA margins contracted 97 basis points. However, excluding the Chicago tax increase, margins would have increased 30 basis points."
Brian E. Quinn, CFO
Strategic Positioning
1. Capital Allocation Discipline
Management continues to prioritize capital recycling and share repurchases over new acquisitions, citing cap rate spreads and a persistent valuation disconnect. The recent upsizing of the unsecured credit facility to $1.5 billion and the aggressive buyback of 3.6 million shares year-to-date (at a nearly 10% cap rate) underscore this approach. Asset dispositions are expected to be more active in the next 12 to 24 months, with proceeds likely directed toward high-ROI internal projects and further buybacks.
2. Internal ROI Projects and Asset Repositioning
Renovations, particularly at the Cliffs at La Berge in Sedona, are central to DRH’s value creation strategy. The $25 million project is expected to deliver a stabilized yield above 10%, with transient and group bookings already accelerating post-opening. Management views compact, high-impact renovations as the most suitable for a public REIT, avoiding large, multi-year repositionings. Upcoming franchise expirations, notably at the Westin Boston Seaport, present further opportunities for value creation via reflagging, deflagging, or sale.
3. Portfolio Mix and Demand Signals
Urban hotels are driving near-term stability, while resorts face ongoing demand normalization. Management highlights the portfolio’s premium positioning, with the second-highest occupancy and ADRs over $300 among peers, and industry-leading F&B margins. Group business, which makes up about 30% of revenue, is showing early signs of stabilization and re-acceleration for 2026, with Boston standing out due to a robust citywide event calendar next year.
4. Cost and Capital Efficiency
Expense and capital discipline remain central to DRH’s competitive edge. The portfolio boasts the lowest G&A per hotel among peers (almost 40% below average) and spends 20% less per key on CapEx. This efficiency supports free cash flow growth even in a subdued RevPAR environment.
Key Considerations
This quarter’s results highlight the tension between top-line normalization and bottom-line value creation, with DRH leveraging its urban strength and capital flexibility to weather sector headwinds.
Key Considerations:
- Out-of-Room Revenue as a Buffer: High-margin out-of-room spend, especially in F&B and ancillary services, is offsetting RevPAR softness and could be a sustainable margin lever.
- Urban/Resort Divergence: Urban portfolio resilience contrasts with ongoing resort normalization, requiring careful asset management and selective capital deployment.
- Asset Recycling Pipeline: Management expects more active dispositions, but timing is sensitive to market volatility and buyer confidence.
- Group Demand Recovery: Group booking pace for 2026 is a positive signal, but conversion rates remain a watchpoint in an uncertain macro environment.
- Buyback Opportunity: Repurchases at a near 10% cap rate are highly accretive, but must be balanced against potential preferred share redemptions and future investment needs.
Risks
DRH faces ongoing risks from macroeconomic uncertainty, property tax volatility, and the pace of demand recovery in resort markets. Federal policy shifts and potential changes in foreign investment taxation have already disrupted asset disposition timelines, and competitive pressure for group business remains high. Expense control is vulnerable to local tax and wage shocks, and the sustainability of out-of-room revenue growth is not assured as consumer behavior normalizes.
Forward Outlook
For Q3 2025, DRH guided to:
- Portfolio RevPAR decline in the low single digits, with August facing the toughest comparisons.
- Expense growth expected to remain low, supporting margin protection.
For full-year 2025, management maintained guidance:
- RevPAR growth of negative 1% to plus 1% (unchanged).
- Total RevPAR growth now expected to outperform RevPAR by 50 basis points (up from prior in-line assumption).
- Corporate adjusted EBITDA range of $275 to $295 million (midpoint raised $2.5 million).
- FFO per share range of $0.96 to $1.06 (midpoint up $0.01).
- CapEx unchanged at $85 to $95 million.
Management emphasized:
- Group revenue pace for 2026 is up 12%, with Boston as a key driver.
- Liquidity from the upsized credit facility supports ongoing buybacks and operational flexibility.
Takeaways
DiamondRock’s quarter demonstrates the company’s ability to extract value from its existing portfolio through disciplined capital allocation, operational efficiency, and a focus on per-share free cash flow growth.
- Margin Resilience: Out-of-room revenue and cost controls are cushioning margin pressure, even as resort RevPAR remains under pressure.
- Capital Flexibility: Opportunistic buybacks and a clean balance sheet provide flexibility to navigate market volatility and pursue high-ROI projects.
- 2026 Tailwinds: Group pace acceleration and the full integration of Sedona renovations set up a more favorable operating environment for next year.
Conclusion
DiamondRock Hospitality is navigating a mixed demand environment by leveraging urban portfolio strength, disciplined expense management, and capital allocation focused on per-share value creation. With guidance unchanged and future group bookings accelerating, DRH is well-positioned for stabilization and potential upside in 2026, though risks around demand normalization and local cost pressures remain.
Industry Read-Through
DiamondRock’s results underscore a broader industry trend: urban hotels are leading the recovery, while resorts face normalization and tough comps post-pandemic. Out-of-room spend, especially in F&B and ancillary services, is emerging as a critical lever for margin protection across the sector. Expense discipline and asset recycling are increasingly important as transaction markets remain slow and valuation disconnects persist. For lodging REITs and hotel operators, capital allocation discipline and operational efficiency will be decisive in driving shareholder returns through the current cycle.