DiamondRock Hospitality Company (DRH) Q3 2026 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company Third Quarter 2026 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 first speaker today, Briony Quinn, CFO. Please go ahead.

Thank you. Good morning, everyone, and welcome to DiamondRock's Third Quarter 2026 Earnings Call. Joining me today are Jeff Donnelly, our Chief Executive Officer; and Justin Leonard, our President and Chief Operating Officer. Before we begin, I would like to remind everyone that many of our comments today are 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. We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings press release. We are pleased to deliver another quarter of strong operating performance. Comparable RevPAR increased 6.6%, total RevPAR increased 6.5% and hotel adjusted EBITDA increased 12.5% or nearly twice the rate of revenue growth. Strong revenue growth, combined with disciplined expense management drove 166 basis points of margin expansion, our third consecutive quarter with more than 100 basis points of growth. Corporate adjusted EBITDA was $84.8 million and adjusted FFO per share was $0.32, representing year-over-year growth of more than 7% and 10%, respectively. On a comparable basis, excluding last quarter's property tax appeal benefit, trailing 12-month free cash flow per share, defined as adjusted FFO less capital expenditures, increased 27% to $0.83. That growth demonstrates our strong conversion of revenue into free cash flow. Starting with the top line, RevPAR growth benefited from a 200 basis point increase in occupancy and a 3.8% rate improvement. Last quarter, our RevPAR outperformance relative to expectations was driven entirely by transient demand. This quarter, the contribution broadened. Approximately 30% of the outperformance came from short-term group pickup with the remaining 70% coming from Transient. Transient revenue increased 8.3% and business transient was particularly strong, increasing nearly 12%. Group revenue increased 1%, which was approximately 200 basis points better than our pace entering the quarter. Group room nights declined modestly, but a 2.8% rate increase more than offset the volume decline. Our sales team successfully captured incremental short-term demand during the quarter, led by Cavallo Point, Chicago Marriott, Westin Boston, Courtyard Midtown East and The Gwen. On-property spending remained healthy. Food and beverage revenue increased 7.1% with similar growth in both outlets and banquets. Importantly, SMB contribution per group room night increased more than 9%, reflecting a favorable mix shift toward higher spending group customers, particularly at our luxury resorts. Higher-income consumers continue to prioritize travel and experiences, and we are capturing that spending both in the room and across our properties. The average guest bill exceeded $440 per night this quarter, while our 5 highest ADR hotels averaged more than $1,300 per night. Over the last year, on a renovation-neutral basis, hotels with ADRs above $300 generated approximately 370 basis points more RevPAR growth than the remainder of the portfolio. That performance spread has expanded sequentially in each quarter this year. We expect our higher-rated hotels to continue leading portfolio growth through the remainder of this year and into 2027. Total expenses increased 3.9% during the quarter. That was higher than we expected in absolute dollars, but the variance was largely driven by stronger business volumes. Food and beverage revenue also exceeded our expectations and carries a lower incremental margin than rooms. Even so, our teams converted the additional revenue efficiently. F&B profit increased approximately 15% or more than twice the rate of revenue growth, and the departmental margin expanded more than 200 basis points. Wage inflation remains the largest operating cost pressure. However, our teams offset much of that pressure through productivity gains. Over the trailing 12 months, our properties achieved a 4.2% improvement in labor hours per occupied room. Year-to-date, our comparable RevPAR has increased 5.4%, while total expenses have increased 2.2% before the benefit of last quarter's property tax appeal. That favorable spread is translating directly into earnings and reflects the operating leverage we have built across the portfolio. For the third consecutive quarter, RevPAR growth at our resorts outpaced that of our urban hotels. Resort RevPAR increased 8.4%, driven almost equally by rate and occupancy growth and resort hotel adjusted EBITDA increased 19%. Over the trailing 4 quarters, resort hotel adjusted EBITDA margin has expanded an impressive 275 basis points. That consistency reflects broad-based growth and strong expense conversion across our resort portfolio. Several of our resorts delivered double-digit RevPAR growth this quarter, while key group business at our luxury resorts also supported strong non-room revenue, particularly at Cavallo Point and Henderson Beach Resort. Our urban portfolio also delivered strong results with RevPAR increasing 5.8%. Over the last 2 quarters, occupancy at our urban hotels has increased nearly 200 basis points alongside consistent rate growth of 3% to 4%. That improvement reflects the acceleration we have seen in Business Transient travel. The strongest RevPAR growth at our urban portfolio came from our 2 Chicago hotels, Hotel Emblem, The Dagny as well as our recently renovated Palomar Phoenix and Courtyard Midtown East. Before I talk about the balance sheet and our updated guidance, I'll make a few comments about our group segment. The longer-term trajectory of our group revenue remains particularly strong. On a same-property basis, year-to-date group revenue is 17.5% above 2019 levels with group rates more than 25% higher. Importantly, every hotel we have owned continuously since 2019 has achieved a higher group rate with increases at some hotels approaching 50%. That pricing power has continued into 2026 with group rates increasing 3% to 4% in each quarter this year. Looking ahead, group pace is strongest in the fourth quarter of 2026 and the second and third quarters of 2027. While overall pace for the next 4 quarters is approximately in line with the prior year, the first quarter of 2027 represents our largest opportunity for additional pickup. Turning to the balance sheet. Our capital structure remains simple and conservative. Our earliest debt maturity is in 2029. All of our debt is fully prepayable and our leverage profile remains among the most conservative in our peer group. That gives us substantial capacity and flexibility to pursue acquisitions, invest in our hotels and return capital to shareholders. We put each of those avenues to work this quarter. On October 1, we acquired the Bellmoor Inn & Spa for $31 million with cash on hand. During the third quarter, we began the lobby renovation at the Westin San Diego Bayview, and we increased our quarterly common dividend from $0.09 to $0.11 per share. Jeff will discuss the acquisition of the Bellmoor in greater detail during his remarks. We ended the quarter with net debt to EBITDA of 3x, providing meaningful capacity relative to our long-term leverage target. For perspective, one additional turn of leverage represents approximately $500 million of incremental investment capacity. I'll conclude with our increased 2026 guidance. We now expect RevPAR growth of 4.75% to 5.25%, an increase of 175 basis points at the midpoint. We expect total RevPAR growth to be within the same range. Adjusted EBITDA is now expected to be in the range of $322 million to $327 million and adjusted FFO per share between $1.24 and $1.26. Based on anticipated capital expenditures of $75 million to $80 million, our raised guidance implies 25% growth in free cash flow per share. I'll now hand the call over to Jeff.

Thanks, Briony, and thank you all for joining us this morning. We delivered another strong quarter, and I am incredibly proud of our DiamondRock team and the property teams and our management partners who delivered these results. Total revenue growth of 6.4% converted into approximately 19% growth in free cash flow per share. That is exactly what DiamondRock's strategy is designed to do. Convert revenue growth into hotel EBITDA growth and ultimately into higher free cash flow per share. The model is straightforward: get more out of the hotels we own, invest where the returns make sense and recycle capital when we see a better opportunity for it elsewhere. There is no single path to earnings growth. Our job is to find the best path for each investment. Since mid-2024, our portfolio has achieved the strongest comparable hotel EBITDA growth among our peers on a steady-state portfolio. Most of that growth has come from the day-to-day execution of our property teams in conjunction with our asset managers. But every hotel is different and ownership is about determining the best path to create value from each asset. Sometimes that is better execution. Sometimes it is a new manager, a different brand, targeted capital investment or a combination of several of those levers. Let me give you 4 examples. Cavallo Point is a great example of what consistent execution can compound into over time. Since our first full year of ownership, EBITDA has increased almost 55%, not because of any one major initiative, but through numerous small improvements that compounded year after year. That continues today. Year-to-date, RevPAR is up more than 25% and margins have expanded by almost 600 basis points. At The Lindy, the catalyst was a management change. We converted the hotel from brand management to a franchise agreement and transitioned management to a third party. Since 2019, the EBITDA margin has expanded 675 basis points. In fact, The Lindy is on pace to finish 2026 with the third highest margin in our portfolio. Today, nearly all our hotels are third-party managed, giving us meaningful flexibility to change operators when we believe there is a better path to earnings growth. We use that flexibility selectively, but the ability to change operators when warranted is an important competitive advantage of our ownership model. The Dagny illustrates a different form of optionality; brand strategy. When the franchise agreement expired in 2023, we reviewed numerous alternatives, including retaining the existing brand, changing brands or going independent. We chose independence because we believe the hotel's location, mix of business and leisure demand and distinctive design could capture as much or more demand than a branded hotel while giving us greater control over revenue strategy and reducing the fully loaded cost of the brand. That trade worked well. One source of upside beyond our original underwriting has been group demand. Group revenue has more than doubled since 2019 and year-to-date EBITDA is up 23%, and there is more to come. Over the next decade, we will have 10-similar franchise decisions across the portfolio, including 2 in the near term at the Kimpton Shorebreak Huntington Beach and the Courtyard Denver. Each one is an opportunity to reconsider the economics of the hotel and choose the path that creates the greatest long-term value. Finally, L'Auberge illustrates what targeted capital investment can accomplish. One year ago, following renovations, we integrated our 2 Sedona properties into a single resort. In the trailing 12 months, revenue has increased 23% and hotel EBITDA has increased 58% as compared to pre-renovation performance in 2023, driving margin expansion of more than 820 basis points. The investment is now tracking above a 20% yield on cost, and we still don't believe the hotel is fully stabilized. 4 hotels and 4 different paths to earnings growth. Cavallo demonstrates how consistent execution can compound over time. The Lindy shows the value of management flexibility. The Dagny demonstrates the opportunity created by brand optionality and L'Auberge shows what targeted capital investment can accomplish. The point is that there's no single playbook for creating value from a hotel. Our advantage is having the internal DNA to create that value and the flexibility to choose the right path. We apply that same lens to both the portfolio we own and every prospective acquisition we evaluate. That is what we mean by optionality at DiamondRock. Now, the more earnings we generate internally, the more capacity we have to pursue opportunities externally. On October 1, we acquired The Bellmoor Inn & Spa, an independent luxury resort in Rehoboth Beach, Delaware for $31 million funded with cash on hand. The Bellmoor fits squarely within our investment strategy, an attractive initial yield, a market with meaningful barriers to entry, affluent drive-through demand and identifiable opportunities to grow earnings. Following our planned off-season capital improvements and asset management initiatives, we expect the hotel to stabilize at a 9.5% yield. That is a compelling return for an asset of this quality in this market. We continue to be active on both sides of the transaction market. On the disposition side, we are still working towards the transaction discussed last quarter. For acquisitions, our standard has not changed. We will pursue opportunities where we believe our platform can create a path to growth and pass when pricing moves beyond our underwriting. I'll finish with a few thoughts on our perspective on 2027. At the industry level, we see a constructive setup heading into next year. The economic backdrop remains supportive, including strong forecasts for nonresidential fixed investment, while higher income consumers continue to prioritize travel and experiences. The holiday calendar will again support long leisure weekends while creating greater weekday availability for group and business travel. Importantly, new supply remains scarce in the upper upscale and luxury segments. But what gives us additional confidence in 2027 is not simply the industry backdrop. We can already identify several DiamondRock-specific drivers of earnings growth. First, several million dollars of additional earnings potential remains at our recently renovated hotels as they continue to stabilize. Second, special sporting and entertainment events will create incremental demand across many of our markets. Third, our renegotiated franchise agreement at the Westin Boston Seaport will improve the economics at our second largest EBITDA contributor. Fourth, 2027 will be our first full year of ownership at the Bellmoor. And finally, we entered the year with an expense structure that has consistently supported strong conversion of revenue growth into earnings growth. Over the last few years, our hotels have generated the lowest expense growth among our peers. We believe the structure of our portfolio, combined with the focus of our asset management team positions us to continue converting revenue growth efficiently into earnings growth. None of these earnings growth opportunities require us to make an aggressive assumption about industry growth. They come from converting more of every revenue dollar into earnings. There was one other opportunity beginning to emerge, technology. AI-driven referral traffic remains an emerging channel and is growing quickly, especially at our independent hotels. We are also testing AI across reservations, group leads, suite upselling and guest requests. And just as many of us are using AI in our daily work, our hotel teams are using it to streamline repetitive tasks and free up time for higher-value activities. AI is creating new ways to improve both revenue and productivity. The objective is simple. Automate low value-add activities while allowing our hotel teams to spend more time delivering high-value personalized service to our guests. If we get that right, the opportunity is higher revenue, better service and greater productivity. What I like about our position entering 2027 is the breadth of opportunities already in front of us. More than 2 years into DiamondRock's new strategy, we have established a track record of growing hotel EBITDA and free cash flow per share through multiple paths. We have a stronger portfolio, a flexible balance sheet and identifiable opportunities to grow earnings from the hotels we already own. Our job is to keep finding the best path to create value at each hotel and allocate capital where it generates the highest return. That is the playbook, and it is working. Thank you for your time this morning. We are happy to answer your questions.

[Operator Instructions] Our first question will be coming from the line of Chris Woronka of Deutsche Bank.

Jeff, I was hoping to maybe follow up on a point you just raised in the prepared comments. Kind of talked about technology, AI specifically. And the question is really, you mentioned independents or maybe a little bit ahead of the curve on using it. As it goes down to the -- maybe to the brand level, is that ultimately going to create possibly opportunities for lower brand fees as the brands would presumably want or need to pass through some of those savings? How do you think that kind of unfolds over the next several years? And then I have a follow-up.

Yes, that's the $64,000 question. And I'll take a quick stab and if Justin wants to join in, he can, too. I mean I'd like to believe that at a very high level, more competition will result in lower fees over time. I actually wonder if there will be opportunities that you have sort of these B2B players that emerge that will connect hotels directly into the LLMs and effectively provide a cheaper tollway, if you will, for independent hotels, and that could be a source of fee reduction. On the brand side, I haven't seen it thus far. That could happen. I think there's a lot of players in this from OTAs and brands and what have you that are trying to figure out a way to make travel distribution more profitable for them and at the same time, like maybe take more share. So I'd like to believe that owners are going to be the net beneficiary of this, and we would see it through our -- effectively our RevPAR.

Yes. I don't think we've necessarily thought about it in terms of lower fees from the brand specifically. I think we probably lean more towards it's a bigger opportunity for the independents just given that they have a higher customer acquisition cost, a higher portion of their segmentation that comes from what's essentially an OTA duopoly. And we think that the opportunity to drive direct bookings is significantly larger on the independent side. So I think a combination of more direct bookings and hopefully more entrants into a kind of wider booking funnel will just generally drive down customer acquisition costs globally.

Okay. Super helpful. And then as a follow-up, Jeff, I think you've also alluded to you keep acquisition and of course, disposition opportunities on the map and you recently announced an acquisition. But as you think about both sides of it going forward, do you see more opportunity to acquire kind of these independents like you just did? And on the flip side, is it more -- would you, in theory, be more likely to sell a branded hotel, all else being equal, which I understand it's not, but just your thoughts on -- current thoughts on brand versus independent in light of all these other factors that we've kind of discussed.

Yes. I mean I would say on the acquisition side, I mean, we certainly look at just about everything that's out there, whether it's branded or it's independent. It's not necessarily required that it's one or the other. We're just trying to look for transactions that we think we can add value to over time. So we do continue to look at that in the marketplace. I think the circumstances that we were seeing in Q3 where at least momentarily, interest rates were looking a little lower at the early part of the quarter. And just the continued good RevPAR growth, I think it had brought more people to the market as willing sellers. So I think it's brought more inventory out there. I expect it will increase as we come into 2027, just simply because you're at a point in the year where more likely than not if someone is a seller, they were trying to close by year-end. So you -- I think there's a tendency to sort of hold dispositions into the new year. On the disposition side, I would say the same thing. We're not necessarily looking to only sell branded assets or avoid selling independents. It ultimately comes down to what someone will pay us for it. I think everything has a price that we'd be willing to sell. And I think it's particularly compelling to us if we're able to sell and then recycle into a new asset that we think has better growth. We see that as a really attractive accretive trade.

And our next question will be coming from the line of Michael Bellisario of Baird.

Jeff, I want to ask you on 2027, and I think it's a fair game because you can see so clearly now. But I was hoping to focus on expenses and just sort of what's your initial thinking there for next year? And then sort of how do we think about the year-to-date expense growth this year being so low and sort of what's embedded in the 4Q step-up? And is that indicative of anything looking out to '27.

Yes. I mean in broad brushes, and I can let both Briony and Justin kind of chime in on the different segments. But on, I guess, broad brush, I would say there's no specific areas that are really big standouts for next year. I think if there was one, it's probably benefits at the property level, and that's almost always been the case. I think it's the case of just about every employer out there, but benefits continue to be one of our bigger increases. But I would say, obviously, expenses are going to fluctuate with occupancy. And to the extent we get more occupancy gains, you'll see those move with them. But I think what you're looking for is sort of outside of that. I don't know if you feel like wages or. . .

I think some of our success this year is we've really leaned into productivity enhancements throughout the properties. And while we don't think we're necessarily done, we've definitely probably harvested some of the low-hanging fruit. And I think some of those productivity enhancements will be a little bit harder to achieve as we roll into the next year. There are a few other things that are probably giving us higher than inflationary cost pressures. Jeff mentioned benefits. Utilities is another one that I think everyone in the real estate business is just generally struggling with. But a lot of our expense growth and the elevation of our expense growth as we move through the year was just given the increase in revenue and also where it fell. I mean Food & Beverage, we were really happy with our success, but it's our lowest margin business. So increased Food & Beverage revenue when it's growing higher than sort of revenue run rate in general, we're going to have elevated expense growth.

And our next question will be coming from the line of Patrick Scholes of Truist Securities.

Jeff, things really do look really, really good for at least the next several quarters. My natural skepticism always asks, how does this go wrong? Where can things get screwed up? And I'd have to imagine you folks are not about to do some or blindside us with some big dilutive trophy type of acquisition that would hurt sentiment and AFFO per share growth. But maybe this is the question is what keeps you up at night here? And how is it not going to be a bright sunshiny day? So thank you.

I've never heard so many quotes about our old music.

That's an earworm song there we heard for about half an hour, so. . .

No, I would -- what keeps me up at night? I'm not sure it's the right answer or phrasing. But I mean, I think it tends to be more macro than anything else. I don't think there's anything really specific in our portfolio because when you look at us, I mean, we have conservative leverage. I really like how we are positioned. We truly have a lot of flexibility, I think, in our portfolio in order to oversee operations there. just it's like the nuances that I think sometimes get overlooked, like we don't have property level debt that's coming due. We just have a lot of flexibility around our assets. So there's nothing I would say that's within DiamondRock that sort of keeps me up at night. I think it's just more of the macro environment. And we talked about it in our remarks, but Q3 was probably one of the more surprising quarters for me this year just simply because the demand has been fairly broad-based. It's -- you see it across Transient, Business Transient and Leisure Transient, even group inflected in what was supposed to be a relatively soft quarter for us on group because of a difficult comparison. So the prior year numbers. So I would say that the results this quarter continued to be strong and particularly towards the end of the quarter and has continued into the fourth quarter, and it doesn't feel like that's abating. So it does feel like there's some very good trends.

And our next question will come from the line of James Feldman of Wells Fargo.

This is Connor on with Jamie. On the 4Q RevPAR, it looks like the guide implies a deceleration to around 4% from 6.6% in 3Q. Can you provide any additional details on October pace? And anything that really stands out in November, December driving this implied deceleration?

I was going to say that actually, I think our guidance for the -- for total RevPAR for Q4 is about 4% to 6%, I believe, is what the math kind of breaks out to be. The fourth quarter is not an equal contributor. It's a relatively small quarter. So I think when you look at on a total RevPAR basis, it's about 4% to 6%. And I would say that since we came up with that guidance, our October results came in a little bit better than we were expecting. So the trends continue to look good, as I said, going into October or going into the fourth quarter.

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

I also wanted to ask you just a couple of questions about next year. We probably -- we try to stay away from modeling each hotel out, but you do have 2 outsized contributors in Chicago and Boston. And I just was curious if maybe you could talk a little bit about what you're seeing specifically at the Marriott Marquis in Chicago. And then also, you mentioned improving economics at your Westin in Boston. And maybe you could just -- can you sort of maybe quantify that a little bit of what the contract does to help you?

Yes. I mean I'll say that our pace at Chicago Marriott and group is a very big driver at the Chicago Marriott, and it is our largest hotel. Our group pace is up, I think, mid- to high single digits in 2027 and continues to look good even thereafter. So I think Chicago is performing very, very well. That property continues to be really a shining star in that market. You're right, for the Westin Boston, we did renegotiate the franchise agreement. That new agreement starts January 1. It's a pretty significant savings. We actually cannot get into the details of the contract publicly, but it will be a pretty chunky savings in our franchise fees at that hotel that you will sort of see immediately in the first quarter.

And our next question will come from Duane Pfennigwerth of Evercore ISI.

This Peter on for Duane. Jeff, I just think we'd like to dive in a little bit more on the BT performance for the quarter and what drove that. And I think bigger picture, in the example of converting an independent asset in an urban environment, which it sounds like you could consider doing that at a few more properties around the portfolio. How does the BT composition change from a branded to an independent or the BT mix of sales? And just wondering kind of how you backfill BT traffic that comes from having a flag.

It's a good question. I think it's going to vary with every asset, but let me -- I'll give that some thought. I mean I think the first part of your question was just how we performed in the third quarter. I think overall Transient, both Leisure and Business Transient was up about 8% in the quarter. Group was up, I think, low single digits, about 1%. We were originally expecting it to be a little softer than that just because we had a very good result last year. So group sort of inflected to the positive. Within Transient, Business Transient was up about, I think, 12%. Some of that is due -- simply the fact that you have availability because we had some holes in our group calendar, you just have more availability to fill it in with Transient. So I think that's part of the reason why that was so outsized during the quarter. But as far as like when we transitioned Dagny, I'm just trying to think, that hotel has continued to do very well. And I think our share of Business Transient, like particularly midweek demand remains robust. I don't think we're necessarily reliant on the prior brand to be driving that.

I think it as an independent, it just takes a little bit longer to sort of build that segmentation, right? You have to build your own brand identity. especially for repeat customers to market. We've been able to get back to pretty close to segmentation that we were doing at Hilton through BT at Dagny. It just it took us a few years for people to understand the brand and understand the quality of the product in order to build that allegiance with the customer.

And our next question comes from Austin Wurschmidt of KeyBanc Capital Markets.

Just going back to the expense side of the business. You mentioned that you've harvested a lot of those expense savings or kind of enhancement opportunities, yet still dealing with some headwinds around benefits and utilities. I guess what comfort level do you have that you can sustain some of the margin expansion you've enjoyed this year? Or do you think that, that starts to -- is maybe at risk of slowing a bit just given how strong I think you said 3 quarters over 100 basis points now. Just curious what your thoughts are looking into next year.

Yes. I mean I think, Austin, that we'll be able to hold on to sort of our relative margin benefit versus our peers. I think we've gained a lot of ground there and have a pretty decisive spread versus a lot of the other peers. So I don't foresee partially because of some just structural differences in the portfolios that people will have an ability to kind of catch up on this. I think the point was just the rate of growth at which you can improve your margins might not be the same as it was in the past 12 or 24 months since we began sort of clipping away at some of the low-hanging fruit.

And our next question will come from the line of Logan Epstein of Wolfe Research.

Just one going back to group pace. You mentioned that group pace was strongest in the fourth quarter this year than in 2Q and 3Q in '27. Just curious if you can talk about any specific hotels that are driving the strength other than obviously, the Chicago Marriott sounds like it's one of them. And if there's any holes you're working on to fill at other hotels with some opportunity that you mentioned to pick up in the first quarter?

Yes. I mean -- maybe Justin can comment on specific hotels. I would say, like overall for 2027, like when you look at our quarters, like I think our strongest quarters, which tend to be Q2 and Q3, we're seeing mid-single-digit growth in those periods, but there's still room for improvement. You're right, in Q1 and Q4. I think next year, there's a renovation going on at one of our group hotels, and there's a convention center actually at another that's also undergoing some renovations. And I think that's going to cause our normal group pace to be maybe 100 or 200 basis points below what it would otherwise be. But given the momentum that we are seeing in Transient, I think we're pretty comfortable that some of those displaced group rooms can be backfilled with Transient just as we saw in the most recent quarter. Like you're right, Chicago continues to be one of the big drivers for next year. And I think San Diego is another one where it has a pretty good citywide calendar as well.

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

Going back to capital allocation in terms of potentially playing offense in a bigger way going forward. To date, you've acquired a couple of small hotels with available cash. Where is your head at in terms of looking at chunkier deals where you might potentially want to access the equity market as a source of financing?

It's a good question, Chris. I would say, frankly, most chunky deals that we've seen have been very low cap rates. So -- and one of the things that we do get consideration, too, is at least it depends, I guess, on how you define chunky, but we're not really looking for trophy assets. The ones that tend to command the very low cap rates, and they tend to be the $300 million, $400 million, $500 million type single assets. That's not really what we sort of go after. But while we watch everything in the marketplace, we just don't think we're competitive for that and ultimately just try to continue to maintain a focus of looking for transactions that are going to be FFO accretive at sort of maintaining our conservative balance sheet.

Okay. Understood. And maybe switching gears. Hoping you could elaborate on the recent results and the near-term outlook at a few of your more impactful resort properties. I'm thinking Sedona, Cavallo Point, Vail, Westin, places like that. And you've had some real success in these areas. I think at times, it can be challenging to appreciate the level of upside that still exists as we think about '27 and beyond. So any incremental thoughts there would be helpful.

Yes. I mean I would say L'Auberge de Sedona is for one. It's had certainly an incredibly successful run. I think a lot of that is because of certainly the renovated rooms at what was formerly known as The Orchards commanding a higher price. Then we have the sort of the new feature in between sort of like a bar and pool that sort of joins the 2 properties together that I think are driving success. But I think longer term, there's the opportunity for that hotel, which is effectively now twice the size as it once was to sort of tap into more group business. It historically had some group business, but it tended to err more on the side of weddings and sort of social groups. And we do have more corporate group there. And I think the hotel over time will get better at learning what that cadence is as they begin to market that more. And so there's opportunities to sort of yield manage that hotel a little bit better. Cavallo, I think there's -- you're seeing continued growth out of the San Francisco market, which I think is beneficial. That's a hotel that benefits from a lot of midweek group on weekends, certainly from sort of regional consumer demand. There's other venues within that property that we can sort of bring into service that over time, whether it's more meeting space or other outlets or potentially even down the road rooms that I think can continue to drive that hotel.

Our next question will be coming from the line of Sydney Rome of Barclays.

I was wondering on the Bellmoor acquisition, what specifically gets you from the 8.6% initial NOI yield to the 9.5% stabilized yield? And is there any incremental capital investment that's required? And what's the expected time line to achieve stabilization?

It's a good question, Sydney. I think some of it is just going to be sort of our operating eye on our best practices in asset management and where we think we can be running that property a little bit more efficiently, both on the revenue management side and how we come up with different room types and how they are priced. There's aspects there. I think the other part, and these are not big dollars, but we do think there are opportunities to put, I guess, I'll say, a cleaner touch on some of the common areas there that maybe we can make them more appealing to the hotel and maybe even sort of revenue-producing opportunities as well.

[Operator Instructions] Our next question will be coming from the line of Stephen Grambling of Morgan Stanley.

Maybe tackling the AI kind of question from a different angle. Just given the flexibility with your managers, I'm sure you've seen the good, the bad and the ugly kind of across execution. Curious if you're seeing any material change in execution by managers as maybe they're taking different approaches to implementing technology or even as you may have the opportunity to implement your own technology to evaluate them better?

I think we definitely are seeing kind of differing paths of adoption between our independent managers. And I think that's one of the things we like about sort of the diverse array of people that we have relationships with in our operating portfolio is we really get to see a lot of different approaches to the same issue and then adopt best practices across the portfolio. So we are trying a number of different things through a multitude of different partnerships. Some of those are manager-led. Candidly, some of those, we've sort of forced down on some of our independent managers. I think the brands are very focused on AI implementation, but they are looking for brand-wide adoption. So what they can implement across the entirety of their portfolio takes a lot longer to develop. And I think what we've been able to test on a property kind of property-specific implementation has given us a bit of a lead in that front. So it's still a bit early days, but we are seeing some success with a few of our independent managers on some of the content deployment stuff that we're reaching out and some of the sort of first touch customer technology that we're using to supplant some of our property labor.

And maybe a quick follow-up on that. I mean, do you generally find that there's been greater implementation and/or execution in that performance for more leisure-oriented or more corporate or urban markets rather than trying to focus on brand versus independent?

I think it's more impactful on the resort side. I mean we're utilizing the same technique throughout the portfolio, in particular, making sure that all of our websites are crawlable and putting out content that we think is appropriate and that the LLMs can find. But we're seeing more penetration on the resort side.

And I would now like to turn the conference back to Jeff for closing remarks.

Thank you, everyone, for joining us today, and have a good rest of the week.

And this concludes today's program. Thank you for participating. You may now disconnect.