In the 20 years since its nearly $300 million IPO, DiamondRock Hospitality Co. (NYSE: DRH) has maintained a relatively small but mighty presence in the hospitality industry. The REIT has evolved from a seven-property, Marriott-focused REIT to a geographically diverse portfolio of 36 branded and independent properties, in urban and resort markets, with a market capitalization of approximately $2 billion.
In the company’s latest annual report, CEO Jeff Donnelly underscored the REIT’s philosophy when it comes to scale: “We are not collectors of hotels and bigger isn’t better. Better is better and if we can be better, then perhaps we can be bigger.”
DiamondRock’s 2024 revenue totaled $1.13 billion, up 5.1% from the previous year. In an interview with REIT.com, Donnelly said that adding to the portfolio hinges on growth in funds from operations per share, which rose 8.6% in 2024. If DiamondRock can boost its earnings, Donnelly said, “we’ll be able to get our valuation up to a level where we can begin to more attractively raise money to buy more assets.”
Donnelly added that DiamondRock isn’t fixated on owning a certain number of properties. The REIT will consider a measured expansion to achieve economies of scale and attract more large institutional investors.
Recycling Opportunities
In the near to medium term, Donnelly would expect DiamondRock to be more active in recycling capital, utilizing the disposition proceeds of lower free cash flow yielding properties to in turn invest in higher yielding properties, fund renovation projects, and/or repurchase its undervalued shares.
Recently, the REIT sold the 410-room Westin Washington, D.C. City Center and used the $92 million proceeds to: acquire the 245-room AC Hotel Minneapolis Downtown for $30 million; renovate The Cliffs of Sedona and integrate it with the neighboring L’Auberge de Sedona in Arizona for $25 million; and repurchase over $45 million of its common shares.
Donnelly views the purchase of the Minneapolis hotel as an opportunistic move. DiamondRock bought the property for about half of its development cost, he said, at “a really attractive long-term free cash flow yield.” Minneapolis is “a great city that’s home to 17 Fortune 500 companies— that’s more than Boston or San Francisco.” The city has been slow to recover from the pandemic, he noted, but return to office is “quickly regaining momentum in the city.”
In Sedona, its largest capital project, the integration of The Cliffs and L’Auberge includes adding a hillside pool, creating additional outdoor event space, and renovating The Cliff’s guestrooms. The REIT bought the two properties in 2017 in an off-market deal valued at $97 million. Sedona is a special “bucket list” destination for travelers drawn by the colorful sandstone mesas, hiking, and spiritual pursuits.
“I think there’s more opportunities to continue doing this type of recycling,” said Donnelly, who was promoted to CEO in 2024 after five years as DiamondRock’s CFO. If DiamondRock’s recycling approach keeps succeeding, Donnelly foresees the REIT being a net buyer over time rather than a net seller.
Donnelly pointed out that hotel buyers too often place an investment theme over investment return, obsessing over owning large or luxurious hotels. “It’s not that we don’t like those,” he said, “but we are here to maximize shareholder returns, nothing else, so there are situations when selling a core holding and reinvesting the proceeds in our own shares is superior to a new purchase.”
Skating to Where the Puck is Going
As for expansion opportunities, DiamondRock seeks properties in underserved or emerging destinations, or leisure-oriented markets with no locked-in branding and favorable labor costs, he said.
Also importantly, over 90% of its EBITDA is generated in markets with no hotels opening in the next few years, which acts as a protection for its own occupancy and rate growth.
Donnelly said other facets of DiamondRock’s growth plan include:
- Maintaining low leverage, which enables flexibility for all-cash deals and consistent capital improvements.
- Avoiding high-risk, large-scale renovations that disrupt operations and rarely provide adequate returns to public shareholders.
- Focusing on fee-simple properties that enable DiamondRock to own, rather than lease, the land where a hotel or resort is located. “Having more control over your future is valuable and one way we reduce risk,” he said.
- Minimizing exposure to long-term management contracts, thus maintaining flexibility and contributing to cost and capital efficiency. Over 90% of DiamondRock’s hotels are operated under short-term, cancellable management agreements.
- Remaining agnostic to branding. “Travelers are not necessarily looking for a one-size-fits-all option” with respect to lodging choices, he said. Operating an array of independent hotels enables DiamondRock to cater the positioning of each hotel to its market or customer segment. “They want something unique and different.”
Donnelly believes the long-term outlook for the U.S. lodging industry is the strongest he’s seen in his career, thanks to negligible new supply growth, many undercapitalized competitors and competitive hotels, and a powerful demographic wave fueling robust secular demand for experiential travel.
DiamondRock has exceptional flexibility to execute its capital allocation strategy because of the company’s low financial leverage and lack of encumbrances on the portfolio. “Our relentless focus on driving earnings per share is how we will maximize our shareholders’ return on their precious capital investment,” he said.
In this anniversary year, and beyond, “watch as DiamondRock skates towards where the puck is going, not where it has been,” Donnelly added.
Related Content:
- Jeff Donnelly sat down for a video interview at REITweek 2025.