Q3 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily.
Ladies and gentlemen, today's conference is scheduled to begin shortly please katrina standby. Thank you for your patience.
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Ladies and gentlemen, thank you for standing by welcome to the Diamondrock Hospitality Company third quarter 2019 earnings conference call at this time, all participants' lines or remote listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session you would need to press Star then one on your telephone.
Please be advised that todays conference call is being recorded if you require any further assistance. Please press star then zero.
I would now like to have the conference over to the speaker today.
Quick senior Vice President Treasurer.
Thank you Howard and good morning, everyone welcome to Dine in rock third quarter 2018 earnings call before we begin I'd like to remind everyone that many of the comments made today are considered forward looking statements under federal Securities laws.
As described in our filings with the FCC. These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments 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.
With that I'm, please to turn the call over to Mark Brugger, our President and Chief Executive Officer.
Good morning, and thank you for your continued interest in Diamondrock.
We're pleased to report solid operating and financial results for the third quarter.
Before I get into the results I'd like to first provide an overview of the economic and industry backdrop.
After which I'll turn the call over to our new Chief Financial Officer, Jeff Donnelly, who will provide additional color on the portfolio performance.
As well as a balance sheet review.
I'll, then conclude the prepared remarks with commentary on guidance.
And our outlook for the future.
The current economic expansion continues to set records for duration.
But the cloud of uncertainty around the political landscape and trade environment.
Creating a pause.
Business fixed investment.
Tempered the near term outlook for growth.
Encouragingly.
Corporate profits continue to see.
I'd gains.
Unemployment rates remain exceptionally strong.
This is fueling outsized disposable income and personal consumption growth.
We believe these factors should continue to benefit our destination resort hotels.
It helps support our portfolio results.
Until the cloud of uncertainty clear.
This is consumption can hopefully re accelerate.
Lodging industry fundamentals were muted in the recent quarter.
According to STR revpar growth in the U.S. overall for the third quarter was up 0.7%.
This growth was uneven.
With the top 25 markets declined 18.4%.
And all other markets registering a 1.3% growth.
Importantly demand continues to be healthy in the major markets.
Increasing 2.3%.
Versus 1.6% growth in all other markets.
Well the man with superior in the top 25 markets.
Underperformance of Revpar growth in the top markets was primarily attributable to new hotel supply.
As these markets are the most desirable for investors.
Our first and lenders.
Rooms available on the top 25 markets increased by 2.6%.
Which is nearly 100 basis points higher than the supply growth in all other markets.
We expect that these supply pressures will persist into next year for many urban markets.
The many destination resort markets.
Very low or no supply.
I'm Iraq's third quarter profits were modestly ahead of prior guidance.
This positive result was made possible by the hard work over asset managers and operators.
We delivered very solid performance in the face of a challenging operating environment.
The portfolios relative performance.
It was very good.
We gained share at over two thirds of our hotels.
And the portfolio reported a 1.6% increase in comparable Revpar.
This revpar growth exceeded our aggregate competitive set by over 400 basis points.
Even more impressively.
Comparable total revpar increased a robust.
0.1%.
Thanks excellent growth in outside the room spend by groups.
As well as the success with other revenue sources.
Third quarter, adjusted FFO was $55.3 million.
Adjusted FFO per share was 27 cents inline with our expectation.
Third quarter adjusted EBITDA.
With $67.5 billion.
Towards the high end of our guidance range.
Comparable hotel adjusted EBITDA margins.
Contracted 50 basis points in the quarter.
But it is important to note that margins contracted only 15 basis points, if we exclude the disruption from hurricane Dorian.
And the one time benefit from business interruption insurance proceeds.
Recognized for Sonoma in the comparable quarter last year.
This is a testament to the tight cost controls being implemented at our hotels.
We are proud of this result.
And looking to help the man segments.
Formed during the third quarter.
We saw solid increases in group business transient.
Group and business transient demand increased 2% healthy 3.5% respectively.
Driving similar increases in segment revenues.
Short term pickup in the group was less than the first half of the year.
But that was primarily because we had lots of groups already on the books as a result of strong group calendars in our market.
What's left only the least desirable gaps to fill.
We were happy to have sold more group room nights in the quarter than the comparable period.
Nevertheless, we are watching our fourth quarter piece closely.
There are less citywide events in our markets in that quarter.
Looking ahead.
Our booking pace for 2020.
Remains very strong and is currently up over 17%.
We want to recognize the talented sales teams.
Two most important group hotels.
The Chicago Marriott in Boston Westin.
Where our pace for next year as collectively up 30%.
As expected there was a small deceleration in or overall booking pace for 2020 from the and that the second quarter.
The change primarily related to shift at smaller hotels.
We're frankly group is less important to their overall performance.
Our resort portfolio shined in the quarter.
According to STR destination resort and Spa hotels were the strongest before me segments in the third quarter with Revpar up over 2%.
As compared to a 0.6% decline at urban hotels.
For Diamondrock, our destination resorts outperformed even this positive trend in the quarter.
Collectively our resort portfolio generated 2.2% Revpar growth.
And now piece there are markets by 290 basis points.
There are numerous success stories in our resort portfolio hotels like the Vail Mountain Marriott Lady Lake Tahoe.
And the Fort Lauderdale Beach resort among others.
But we want to highlight just two on this call.
Barriers to Sedona.
And then it cabana in key west.
Look better Sally, 5.2% Revpar increase in the quarter.
Pacing, it's competitive set by over 200 basis points.
Hotel EBITDA increased 9% in the quarter.
And the properties 2019 revenues and EBITDA, we're on track to be.
Our original underwriting at the time of acquisition in 2017.
By over 10%.
Abadaka banner.
They had a bad it continues to win awards.
Named number three on the list of the top 10 that hotels.
All of Florida by travel leisure last quarter.
The financial results were also excellent with 18% Revpar growth.
We expect both Havana, Cabana and look there's outperform next year as well.
Overall, we have strong conviction that our resort portfolio is a competitive advantage.
And.
Over time, we will increase our portfolio allocation to destination resorts.
Sure the capitalize upon what we see as a secular trend towards experience will travel.
We believe that these type of properties, where outperform the national average for the lodging sector for years to come.
I'll now turn the call over to Jeff for additional detail on our financial results and market commentary Jeff.
Thank you Mark and let me start by thanking you for placing your trusted me and thanking the entire Diamondrock family for welcoming meets Bethesda I feel fortunate to be a part of this team of warm passionate hardworking people.
Let me take this opportunity to express my gratitude to everyone. It diamondrock for their patients with my questions and receptivity to new ideas.
Before I walk through our third quarter income statement I want to remind everyone that comparable Revpar hotel adjusted EBITDA margins and other portfolio metrics. Our pro forma to include our 2018 acquisitions for all periods comparable results exclude Frenchmans reef and hotel emblem for the month of September .
Due to its renovation closure last year.
Third quarter financial results were modestly ahead of our internal expectations, owing to stronger total revenue growth.
On a comparable basis revpar increased 1.6% in the third quarter, driven by a 1% increase in average daily rate.
In a 0.4% increase in occupancy hurricane Dorian negatively impacted revpar by 40 basis points with most of the disruption experienced in Charleston in Fort Lauderdale, and to a lesser extent key west.
Third quarter revenue was 174.1 million or $1 million behind expectations, largely due to hurricane Dorian.
Non room revenue, However was 1.6 million ahead of expectations.
Even despite an estimated 400000 dollar headwind from Dorian.
Because of strong growth in our FNB outlets at hotels in Boston, Chicago Fort Lauderdale in Northern California, partially offset by the Westin San Diego, owing to softness in group at that hotel during the quarter.
According to STR over 60% of our Submarkets reported positive revpar growth during the quarter in over two thirds of our hotels outperformed their submarket and competitive set.
The largest outperformers were Vale.
Fort Lauderdale, and Phoenix, and the Underperformers were Burlington and San Diego.
For the outperformers.
Availed Marriott generated over 30% revpar growth compared to the prior year and outpaces competitive set by comparable amount.
Group and transient revenues were very strong owing to improved group sales initiatives and increased weekend leisure business that was limited by renovations in the prior year.
Vail Mountain is set to open November 15th.
We are encouraged by recent trends, but remain vigilant, whether recent modifications to redemption policies and Marriott envoy program could impact financial results in the fourth quarter.
The Westin Fort Lauderdale solve 4.8% increase in Revpar in the third quarter compared with 10% decline for its competitive set.
As we mentioned previously financial performance was negatively impacted by hurricane Dorian, but it nevertheless, outperformed because it remained open when many of its peers closed in anticipation of the storm.
The hotel Palomar in Phoenix.
Revpar increase 0.7% as compared to a 9.6% decline of the competitive set.
A sharp decline in the volume and quality of events at talking stick arena negatively impacted all transient channels in the quarter, but the well located Palomar was able to offset this impact was nearly 35% growth in group revenue and 20% growth in FNB sales.
After the two underperformers.
Par at the Hilton Burlington increased 2.6% in the quarter versus an 8.9% increase in the competitive set.
Often is was the result of an inability to replace onetime group business in the third quarter 2018, and the loss of an airline crew to a lower cost select service hotel nearby.
The Westin San Diego saw Revpar dip, 4.8% as compared to a 0.6% rides and the competitive set.
This was the result of an inability to replace a series of in House group events and the associated food and beverage revenue in the third in the third quarter 2018.
Group pace for 2020 is up six point since the end of the second quarter and we're exploring options to enhance the awareness and appeal of the FNB outlets to it to attract the daytime population.
From a segmentation standpoint group revenues increased 1.2% in the quarter based upon a 2% increase in rooms, 0.8% decline and HDR.
Partially due to weakness at the Westin San Diego.
Transient revenues increased 1.6% on a 0.1% increase in rose 1.5% increase in HDR.
Drilling deeper it was a business transient segment that was the real source of strength.
Generating 3.3% revenue growth on a 3.5% increase in rooms.
Total expenses grew 3.7% as a result of programs to reduce food cost.
Which improved margins by 30 basis points and initiatives that increased labor efficiency by 50 basis points.
Comparable hotel adjusted EBITDA was 73.4 million.
Total this met our internal expectations, but came as a result of slightly lower than expected rooms departmental profit that was offset by better than expected food and beverage profit as well as favorable variances in incentive management fees and property taxes.
Comparable hotel adjusted EBITDA margin declined 58 basis points from 2018, but the result is really better than the headline number because it was negatively impacted by two items first.
27 basis points from the recognition of business interruption insurance proceeds in the third quarter of 2018 for a fire related closure and Sonoma in 2017.
Second 16 basis points from Hurricane Dorian disruption in the quarter.
Adjusting for these two factors comparable hotel adjusted EBITDA would have declined 15 basis points.
Corporate EBITDA was $67.5 million slightly better than internal expectations.
Adjusted FFO was 55.3 million also ahead of internal expectations as the result of lower than expected interest rates.
Adjusted FFO per share was 27 cents inline with our prior expectation.
The balance sheet remains in great shape at September Thirtyth, Diamondrock had 26.7 million of unrestricted cash on hand, and 1.1 billion of total debt outstanding at a weighted average interest rate of 3.9%.
A weighted average maturity of 4.6 years.
Net debt to EBITDA is forecast to be 4.1 times at year end, assuming the midpoint of our new adjusted EBITDA guidance for 2019.
It is important to point out we receive no consideration for Frenchmans reef in this calculation.
We have plenty of capacity with $325 million available on or $400 million senior unsecured credit facility.
We also received a 40 million dollar commitment for additional insurance proceeds in November from our ensures that Frenchmans reef.
Portion of those funds, we expect to used to pay down to 75 million dollar balance on the facility.
We also continued our share repurchase activity in the third quarter, we repurchased 300000 shares of common stock at an average price of $9 in 96 cents per share for a total purchase price of $2.8 million.
We have repurchased 7.8 million shares at an average price of $9.58. Since we commenced our repurchase program in December 2018.
We have $175.2 million of remaining authorized capacity under our $250 million repurchase program.
We intend to be opportunistic about future share repurchases.
Finally, diamondrock announced a dividend of 12 and I have centsper share that was paid on October 11 to shareholders of record as of September Thirtyth.
I will now turn the floor back over to you.
Thanks, Jeff.
Turning to guidance.
We are making the following revisions to our full year 2019 guidance.
Revpar growth is now expected to be flat up 75 basis points.
From prior guidance of flat to up more than half percent.
Total revpar.
Growth is raised to 1% to 2.5% from flat to up two and half percent.
Adjusted EBITDA is now expected to be in the range of 256 million.
The $260 million.
From the prior range of 256 million to $265 million.
Adjusted FFO per share is being raised to a new range of one dollarsthree to $1.85.
One cents per share increase.
The midpoint from the prior guidance range of one dollar a one to one dollar o'five.
The primary reason that is driving or more conservative outlook for the top end revpar growth.
Is that while moderating trends are playing out as we expected at the time of the prior earnings call.
The more optimistic scenario for the high end up prior guidance.
Now less likely given the lack of acceleration business transient demand generally.
Accordingly.
We are maintaining the bottom end of prior revpar guidance, well adjusting down the top end.
Adjusted EBITDA.
Was revised to take into account the new Revpar range.
As well as the approximately $1 million of impact from Hurricane Dorian.
And about another million dollars of impact from P., Genies unscheduled power outages in California.
Which affected our Sonoma and Sausalito hotels in October .
All of our California hotels are currently open and operating at full capacity.
At our new guidance assume stable power delivery for the balance of the year.
Despite these impacts we are able to maintain the bottom end of the prior adjusted EBITDA guidance range of $256 million.
While appropriately adjusting down the midpoint of the range by $2 million.
On a positive note.
Total Revpar remains a good story and we were able to raise the bottom end of our total revpar growth outlook.
Despite the reduction in the top end of guidance for rooms Revpar growth.
This is a testament to the great efforts of our asset management team and operators working side by side to implement numerous programs to drive other revenue streams.
Our adjusted FFO per share guidance.
Also raised at the bottom end.
Because of interest expense savings.
Stemming from both the on forecasted receipt of additional insurance proceeds related to Frenchmans reef.
That will be used to pay down borrowings on the revolver.
As well as lower overall borrowing cost.
We diamondrock.
When you to seek out ways to drive shareholder value for you regardless of the economic environment.
With a focus on five areas.
One resorts.
As I said earlier, our research shows that there is a strong secular demand.
For experience with travel that to drive outperformance for years to call.
We believe destination resorts.
Particularly in geographically constrained areas.
Fees lower supply growth and lower expense pressures.
In the top 25 urban markets and the overall industry.
Two ROI projects.
We have identified $90 million significant ROI projects that we believe will generate incremental $17 billion to $19 billion of EBITDA.
In total that's about 79 cents per share of incremental value over the next few years.
Additionally, we are optimistic that we can grow this pipeline of ROI projects in the future as we continue to uncover new opportunities.
Three.
Relaunching French.
We will relaunch frenchmans reef as two distinct resorts.
Frenchmans reef Marriott resort and Spa.
And that no need beach autograph collection resort.
Reconstruction is well underway with a grand opening currently expected in the fall 2020.
Reopening the Frenchmans resort complex will be a strong differentiating driver to our earnings growth in 2021.
We believe these connected resorts to generate $25 million EBITDA at stabilization.
Which translates into a great driver of portfolio profit growth over the next several years.
For.
Opportunistic recycling.
We are exploring opportunistic sale of one or two assets to lock in attractive private market pricing.
Proceeds would be recycled for debt reduction.
Share repurchases or reinvestment.
Depending upon market conditions at the time.
A broker has been engaged any sale.
To be completed this calendar year.
It is our policy to not discuss sales until they are closed given the uncertain nature inherent in these processes.
Accordingly, we will not comment further at this time regarding disposition.
And five.
Asset repositioning.
To improve profit build shareholder value, we are pursuing several opportunities to change managers and continue our strategic transformation of the portfolio to be comprised of a majority of short term agreements.
We believe our proactive changes will provide a source of both outsized and navy and outsized profit growth for Diamondrock.
EBIT in in a challenging environment.
It is premature to announce specifics, but we do expect to have continued success on this front in 2020.
We believe these five focus areas, we'll continue to distinguished Iraq going forward.
And we are especially encouraged by or 17% plus group pace for 2020.
On that note, we'll now open up the call and take your questions.
Ladies and gentlemen, as a reminder to ask a question you need to press Star then one on your telephone to withdraw your question. Please press the pound.
Please standby, while we've compiled acuity roster.
Our first question or comment comes from the line of Anthony Powell from Barclays. Your line is open.
Hi, good morning, everyone and welcome Jeff.
Hi, Anthony Thank you.
Robin.
Question on.
Leisure and corporate you mentioned that your resorts are up over 4%. We also said business transient was good in the quarter what's what's.
We have a stronger segment right now if theres any kind of difference that and can you continue to see.
Short revpar growth.
Level.
Yes.
Okay, and kind of softer overall trends next year.
Yes, this mark so the destination resorts outperformed and it's really.
Going to track consumer sentiment to the consumers doing well, which means the resort business is doing well. So we expect that trend as follows the consumer sentiment index is up we would expect that are easier at that this issue resorts to continue to outperform the industry averages.
Business trends you had did look good in the third quarter, but I would say that's less about.
This is transient being good then mix shift.
We are the good group quarter, we were able to fill a fair amount available rooms with group, leaving less rooms to sell for business transient, which meant we were able to put in higher quality business trends. Yet. So we were able to wash out the lower rated business trends in putting some higher rated it wasn't.
It wasn't true that we were getting more rate from the same BT customer we were just mix shifting because of the group that power in the third quarter.
Got it thanks, and a lot of you're married up properties during the game share some of the urban markets are you seeing kind of.
Better traction on them, Bob would program and how is that going to impact. Your apart you think next year.
We're encouraged overall by the changes that variance making.
There are some lapping effect of some things that happened last year for some changes coming as well.
That we think are going to allow them to continue to gain share in the marketplace going into 2020.
Got it and you mentioned the Vale Mariador, you're talking about the off peak.
On peak redemption changes there that can impact the order.
We don't we started.
And we don't anticipate it to have an impact, but it's hard to know with no. One really can tell how about the shift off peak in peak.
How it will affect.
Festive in the fourth quarter, but.
But for the third quarter it it was consistent with prior year.
I would say we're excited about the concept of the.
Hi, low demand periods and having a flexible.
Redemption rate, we think that makes a lot of sense for the points would get multiple capture more business, but we don't have a history of how to play out and I understand the algorithms and making sure we get that right. There could be there could be a learning curve there as it gets implemented but ultimately it should lead to higher index and greater profits for the hotels.
Thank you.
Thank you. Our next question or comment comes from line of Austin Wurschmidt from Keybanc capital markets. Your line is open.
Hi, Good morning, everybody Mark with respect to your comments on changing your management agreements.
A shorter duration can you give us a sense of what the remaining term is.
On your in place agreements and what.
Types of termination payments that you would have to absorb in order to shorten that that term.
It's just a question. So if you look at what we've done in the portfolio over the last three to five years, we've transformed from what was 10 years ago almost 90%.
Covered by long term management agreement to acquire folded that rapidly becoming majority subject to short term agreements.
We've made recent changes.
The two roads properties on in covering those with a fairly small termination payment the unencumbering of.
Additional assets over the next couple of years, we think will come at a very minimal costs too.
Often making other considerations in that exchange.
Okay.
Fair enough. So separately I guess you with the comment about wanting to continue to grow the resort exposure I mean, it seems like with fees.
Asset sales that your that you discussed.
You'd be lightening up in your some of your existing urban markets can you give us a sense of what markets.
Feel like you're a little bit overexposed to today, and where are you still want to maintain kind of.
Some footprint longer term.
Yes, so we were over exposed to any 81 market right now so we'd like to be about 10%, everybody who were I think at Max 15% in any way one market.
So I don't think that the concentration or diversity is the driver, but we would like to sell some of our urban assets and either redeploy that into share repurchases.
Or redeploy that into resort acquisitions that have continued to be our bent on external growth for the foreseeable future as we redeployed capital.
And should we expect that you would still want to maintain your current exposure to group or that some of the larger group houses could be.
A source of proceeds in order to redeploy into the resort strategy.
Yes, we're not going to specifics of which assets we're thinking about monetizing.
But I'll just say, we're looking ones, where we think that there is an arbitrage between what we think to any views that asset and what we think the private market maybe won't pay for it.
We think that it's a good time to test the markets and to see if we can.
He said to exploit the public private gap in valuation per lot of these assets.
Understood. Thank you.
Thank you our next question or comment comes from the Lion share. These rose from Citi. Your line is open.
Hi, there.
I wanted just to ask on the expense side it looks like.
Year to date on the same store basis hotel expenses are almost 4% trending up and they.
Went up a little bit higher than that in that in the third quarter. Specifically just as we think about 2020 I mean is there any reason to think that.
3% to 4% range of cost increases would would change at all either higher or lower.
Yes. This is mark so the total expenses this quarter three seven.
Thats elevated because our as you know our total revenues were up over 3% with great FNB contribution primarily from banquets banquets, we pay people think with servers or higher on the wage scale. So drives up the expenses commensurate with that additional revenue so not surprising that that's a little bit elevated.
This quarter, our current forecast for the full year has total expenses coming in at 3% almost on the nose.
Next year, which is rolling up the budget on the expenses, but there will be ways wage pressure as we move into next year on both wages and benefits.
So we anticipate that it'll it'll be.
At least 3% as we move into 2020.
Okay, and then I just I think on your last call. So putting aside any proceeds from asset sales you talked about.
I think about $300 million of investment capacity, so maybe going from here I mean, you put a pause on repurchase activity.
Can you didnt seem more from the when you take your second quarter, calling you announced with repurchases in August .
Sort of your updated thoughts I guess around.
You have near term.
Uses of capital.
Well I think acquisitions are highly unlikely at this point.
We still believe that we're training the enormous discount to navy so share repurchases remained a very attractive.
Wait to capture that value for our shareholders.
To the continuing dialogue in the board wrote about when and how much to do.
But we're going to be optimistic and not telegraph that.
Okay. I mean was there a reason why you wouldn't it.
Continue to purchase shares over the course of the third quarter then or.
Well, we had authorization for a certain amount and then we had a board meeting that just occurred in the last two weeks. So weve regrouped at the board meeting to discuss the next actions on share repurchases.
Okay. Thank you.
Thank you. Our next question or comment comes from the line of Patrick shows from Suntrust. Your line is open.
Hi, good morning, Mark and Jeff.
Good morning, Patrick.
A couple of questions for you here one thing I found very interesting in your.
Earnings release and guidance was.
Your your total.
Sumit, you're a total margin guide going up and you touched briefly on.
Your asset managers and property managers, helping with that any any more specifics that you can give on that.
Sure, we thought something Weve that margin increase we've seen with other names and curious what the.
Shed some light on the secret sauce, but diamondrock.
Okay.
How do I take that one.
Sure.
Weve.
We continue to implement and focus on driving compliance on our food program.
We look at energy Holistically, we working out some additional water savings programs.
And bio bio digesters.
Small nickel and dime savings on waste.
Energy continues to come in our energy was down.
20 basis points I believe for the quarter on more rooms sold.
The labor piece is something we continue to focus on and measure on a on a weekly basis.
And then the goal is obviously that try to drive more revenue.
Which helps which helps reduce your.
As a percentage your cost and so we have a host of revenue initiatives smaller ones that we continue to push through.
Patrick I was just that.
It's just so that systematic across the portfolio and expense reduction on a couple of programs labors are most is our largest cost category. That's our number one focus because it's our largest cost categories. So.
Implemented new systems that technologies that a number of properties, which have allowed us to increase productivity.
That are scheduled to employees and to be more efficient pay less overtime with new efficiencies and there is new technologies that have been implemented as some of the properties, particularly the non brand operated properties that have allowed us to reduce.
Some of those labor inefficiencies and increase the profitability their food costs. Similarly, we have a program that we've been rolling out.
Over the entire portfolio. It's a program that Tom had brought with him from strategic when it came over.
And as you saw in our third quarter, we lowered our food costs improve margins there.
By implementing that and then energy probably the next category and adherence lot of nickels times in quarters, whether its thermostat or biodegradable machines that Texas that take care of the the waste from the kitchen.
It's a lot of smaller items on the energy front.
But we're always thinking about being better better members that community on the Green front, but also about how we can reduce our energy footprint and reduce cost on energy front and then there's a whole host of very very small things sit with Tom and his team of asset managers.
We're communicating what they're doing it the properties the discussions on some of the small cost items are.
Sometimes get lost when you talk about we're doing.
Hundreds of millions dollars revenue and their focus on things that save us $6000, but it's a 6000 dollar items as I think the general culture and attitude about expenses that permeate into the better cost controls generally.
Great.
I appreciate the color there and then just one.
Additional question here saw that you picked aim bridge.
For Frenchmans reef.
As opposed to save Marriott what what.
I'd like to your thoughts around that thank you.
Well, we remain big fans of area. They operate a number of our properties at this particular property, we thought that enbridge with their experience in the Caribbean and frankly, our personal relationships with the CEO Bainbridge in their their dedication of specific resources to position. This hotel success, where really the.
The right solution choosing the operator, they really have some terrific talented people that are experts on the Caribbean markets.
And they've made a commitment to dedicate a number of those resources almost exclusively to this property in a way that I think no one else could it given their scope and their desire to build the partnership with Tom Iraq.
Okay, great great. Thank you.
And Jeff Congratulations.
For joining Diamondrock I will save my detailed accounting questions on Contra revenue accounts and sales allowances to a two to your next June next call. Thank you I appreciate that Patrick Thank you.
Thank you. Our next question or comment comes from a lot of rich Hightower from Evercore ISI. Your line is open.
Good morning, guys.
Good.
Jeff it's equally good to Bury the hatchett, you're now that you're on the other side so.
[laughter].
Ill.
Yeah I of course.
So we've covered a lot of ground already but maybe just following up on Patrick's question on Frenchmans.
Now with respect to the manager, but with respect to the brand.
How many other brands were seriously in contention for the asset or assets as it were and maybe walk us through some of the other deciding factors that were you went with Marriott.
And of course autograph.
In the packets, there just sort of take us under the hood to the extent that use the chicken in a public forum like this.
Sure Rich so we had a essentially RFP process, where we went out to the brands. The big brands that you can imagine would do well in the Caribbean and can source a lot of business, particularly from the northeast markets.
It came down to a competition to three and then it was I'd say a hot competition between the final too.
There are number reasons ultimately that Marriott, we think will be the most successful brand there enough that the others arent very powerful but the established reputation of married out within the island carried a lot of brand equity at this particular property.
We think that their size of their system and the success at this hotels had within their system being proven on the redemption side.
I read a lot of weight.
And frankly Arnie is personal commitment to ensure success at the asset.
We thought made we thought made a big difference in.
Kind of setting yourself again for success at the property.
Okay.
That's helpful. And then maybe this is a question for Tom.
But just since it's been heavily in the news this week, what do you guys make of.
Google increasingly promoting its own travel content that the expense the OTA is and how does any of that impact diamond rocks revenue strategy.
Is this a meaningful the trend for for the rebates or is it does it really not that impact while at the end of the day.
The tell me about jump in this mark so rich we've actually been spending a lot of time on on digital local digital marketing and the cost of intermediaries and.
Listen Google as another intermediary in another person trying to take a total and our.
Cost of procurement on the customer it's something we need to be aware of I think the great advantage. We still retain is that we control what happens to the customer once they get to the front door in a way that we haven't given over to them the ability to pick the room and really customized service once all walks in the front door of the.
Of the JW Marriott or whatever the hotel may be.
So we're thinking about how we continue to differentiate and customize our service, but no I think we are well aware of it I think we need to be smart about what we give over to the googles from the Amazon's and.
And the apples and the Facebooks of the world over the next decade.
Probably the the person who loses isn't the hotel owner, it's really probably going to be the existing booties.
That are going to be cut out of the process. So overtime, we think that its.
Manageable, but we do think that the intermediaries will will change over time.
Yes, I mean any follow up from Tom on the topic. It's just it's really interesting when thats going to been.
At the forefront this week.
Rich competitions good.
You can't you you're not we're not you can't fight to lead it's hard to find out the best way to use it and leverage it.
The tools.
Tool, we have tools out there now to go direct to the customer social media is more important than it's ever been before.
How you how the hotels perform how they perform.
Theres their social score.
We continue to look at improving their lobbies approving sense of arrival improving customer experience.
That trip advisor ranking is critical.
Moved into quarter, our trip erected we took it from 60 360, Threerd percentile to 60, almost 66% tile heavy focus on improving our.
Our reputation of the hotels.
Mark spoke of.
Of our awards, but you think about some of the things we've been doing with trying to improve the guest experience that guest experience and sense of arrival and customer facing interaction well will certainly help us into Google channels and in in driving additional revenue and then it's just our job to control it and to monitor.
Right and get the right price, but you think that the Westin Fort Lauderdale nine out of 131, a trip advisor the loan a concept we put in is the number one Mexican restaurant in the third best restaurant in Fort Lauderdale, Nevada Cabanas won numerous awards. It would just 11 on coffee NASS readers' choice. The Palomar some of the change we made there at six.
In the southwest the readers' choice I am Sedona.
Keith on in the southwest for readers choice in Campinas.
Lot of the improvements we've made in.
Denver at the JW, all the renovation capital that hotels now Twentyth on Conde Nast reader choice.
For you awards in the Glenn is continues to perform well in that sector. It six though you can see where we are where we're allocating capital and how we're spending it is critical to the guest experience and as we approve those and improve the recognition and the placement of those hotels, the algorithms and will drive.
That up to the top of the list for Google and we'll take advantage of it where we can we like the independent hotels, because we can control.
We can control the business and we controlled going directly to the customer which gives us an advantage. When you. When you look at how Savannah Cabana has been performing against the comp set which includes the Hilton and Marriott Brent is it is outstanding because it's authentically relevant and when we can do that in our hotels and create that authentic relevance people will buy that and so.
The good news, it's another channel the good news, it's I think it's going to compete against Coty as competition will drive down pricing and I think in the end if we if we if we are strategic and how we handle that I think we should do we should do okay with it.
Awesome, Thanks for the color guys.
Thank you. Our next question or comment comes from the line of Thomas Allen from Morgan Stanley . Your line is open.
Hey, good morning, So what I do a simple average of the quarters.
Implies a fourq your revpar guidance is about down Twod up one is that right and then can you just talking about results in October and kind of how you're thinking about.
Things are an important November and December thank you.
Hey, Thomas this is Jeff.
You're correct in your math on fourth quarter that effectively in the vicinity of what.
The revpar would be for the fourth quarter implied by our guidance as far as October we actually don't have a good estimate at this time of our Revpar for October mainly because of some of the disruption that was caused in the quarter from.
The voluntary power outages out in California, but.
So we don't have anything else, we going out at this time.
Okay, and then just one thing I noticed on your balance sheet was that you all had twice over million bucks or cash corridor and.
Is that a new strategy.
Is that a one off saying and did that influence your buyback decisions.
Think about that going forward. Thank you.
So this is mark no we Turkey about $25 million is the minimum cash we try to use our revolver very efficiently keep our interest expense down we still think we've very conservatively $300 million of investment capacity.
At our current level of leverage.
So I wouldn't take the cash balances signaling anything one way or another other than we're trying to be efficient on our interest expense.
Helpful. Thank you.
Thank you. Our next question or comment comes from the line of Chris Woronka from Deutsche Bank. Your line is open.
Hey, good morning, guys and Jeff Welcome on Board.
Yes.
So wanted to ask about New York for a minute and kind of your.
Sure I think your four hotels, we I think you have mixed results kind of year to date, but overall I think in the aggregate you're down a little bit easy you still have a really long term positive view on that market or.
Do you think there are some secular impairments from.
No margin perspective, and maybe.
Right.
To answer based on kind of your select service assets versus the Lex.
Sure I'll take this because I think the long term for New York structurally looks pretty good so supply after we get through next year starts getting a lot better.
And we know that Theres, a number of hotels that they're talking about.
Taking out in covering that those hotels.
Turning down in building office towers, so, particularly on Midtown east the setup over the next five years, we think looks favorable we don't think next year is going to going to exceed the industry average.
But we do feel fairly confident New York will rebound.
Over the next few years and will be good work to be located.
Theres no doubt that we theres no doubt that we have expense issues, it's a union.
We have union hotels, let's say in this particular market, it's it's constructive in that.
Current contract goes through 2026.
And the cake or of.
Which growth is below 3%, but real estate taxes going up.
Just have gone up more than more than inflation over the last.
Forever really.
So there are there are the expense pressures similar pressures that you get into market like San Francisco.
But we do think once the supply.
Start to subside, which we think occurs after next year, we do think that the New York market will once again returned to healthier levels doesn't mean, it will return to prior peak, but we do think that will start exceeding national average growth rate.
It says we can get the supplier to control, which is probably the next 18 to 24 months.
Okay, Great and then.
I wanted stick on the cost topic, but what sort of portfolio more broadly do you guys had a lot of success in this kind of low revpar growth environment, but.
At some point, we hit a downturn I mean, what youve done today does that impair at all your ability to.
Take a step down in further cost reductions if you need to do something more more severe later.
Chris This is Tom we have as part of the process. The budgeting process. If you were really focused on.
Very focused on costs and contingency plans in case certainly in case. There is that there is a downturn we have we have opportunities to try to.
Reduce costs fixed costs, and certainly variable costs will go down so.
Does it get more challenging certainly gets.
Extended period of low revpar growth with low unemployment it certainly creates a challenging the challenge for the asset management team, but we.
We have a.
We have a roadmap and we have a plan and so what we will do is the implement that plan and will to whatever level that's required to try to maintain margins.
It certainly is well documented it's a tricky tricky time to do business with wage pressure low unemployment and then low revpar and the focus will continue to be costs, but we also up to find other ways to get other revenues and we have to find ways to drive incremental revenue and rate out of our properties and thats.
Yes.
That's that's what we'll do but we do have plans we have contingency plans in place for.
Revenue Revpar total revpar declines and we havent at different levels, and we have a plan to pull the trigger on on the different levels.
Okay.
Very good and then just on Frenchmans.
It's a sort of press of stabilized EBITDA target you guys put out there.
Is there any and I know that there's clearly give me some revenue upside but is the is there anything that's changed with the structure of how the properties operated or.
Is there more flexibility in some of the other ways that you staffers things like that.
Yes. This is mark Thompson can jump in here too so we're going to open.
With new FNB outlets that we didn't have before everything will be.
You know everything essentially that cat replaced from the hurricane will be new.
On the on stuff that was damaged previously so it gives us a very nice.
Product for the for the consumer so we think that Theres.
A lot of savings that come from having as the new infrastructure projects. So there'll be Natalie a better revenue, but we expect to have better profitability, because we'll have a new energy plan new water plants.
Other efficiencies that we didn't have before.
And.
Structurally we think we'll have better opportunity create creating two resorts to set separate pricing. So you won't you won't get the upgrade from up top down to the beach front.
We have two separate.
Two separate pricing plans nobody beach will have its own market strategy and sales deployment.
The Beach, we believe we'll be able to play in some luxury channels, which will drive incremental rooms that didnt exist before and will drive incremental rate.
And and then we have some additional revenue streams that we we will.
Retail leisure.
Services and activities that we believe will drive significant revenue increases outside the room there Chris as you know above the claim we've talked about before but the claim monies.
Time rocks going to invest over $50 million to enhance the property. So we expect to very strong return on our enhanced dollars.
Okay very good thanks, guys.
Thank you. Our next question or comment comes from the line of Michael both scenario from Baird. Your line is open.
Good morning, everyone.
Just on the.
Same topic, a frenchmans can you maybe give us your estimate of how much more capital that you need to spend or that you do expect to spend.
And then maybe explain why you did get that $40 million.
The commitment from the insurance companies, because I think I heard you say it was unexpected and then how might that impact any potential settlement payment you'll get down the road.
So.
Last one for so we're in litigation over the insurance claim with the trial date in January so as you can imagine we need to be.
Sets of though our discussion around for instance reef the payment is.
Small piece of what we think were owed.
They have an obligation.
We continue to adjust the claim although it to the trial date.
We didnt expect.
Did want to build in any expectations to receive any cash before that trial date piece. It really depends on their judgment, we're not going to get anything forced until we get to get to court.
So thats kind of the story on the cash I don't know that has an influence on whether we settle are not before we get to the trial, but we appreciate the cash certainly.
As.
Michael Grime your other parts of your questions.
And just how much more cash out the door that you think you'll have to spend.
So from above the claim were.
We're over well over $50 million of enhancements. So the majority of those are things like the Nnone Beach autograph collection, we think that Theres, a significant rate premium by extensively renovating those rooms, and taking them up quite a notch that theres well over $100 that rate.
Until but making that kind of investment broke bias. There are some SMB enhancements that we are doing on our.
Well in our.
On our dime, we think will will be great customer experience, but also help the ultimate performance of the hotel as well Theres a number of those but up but I think the number the number to think about as a number north of $50 million from the company going into this above the claim.
Got it.
Thanks, I sense, you probably don't want to go down this path, but I was going from more so that kind of gross.
Cash out the door for you guys just trying to figure out.
Potential balance sheet leverage impact between now and when a settlement is ultimately receive but.
We can discuss that offline further.
Just switching gears one more maybe for for time on the group side.
It seems like everyone is pursuing the group up strategy I know you guys have talked about it for a few quarters now I guess my question is do you sense of getting more competitive to capture incremental group because everyone else is trying to go after that same group how much more group is out there to actually get and then how are you guys change in your approach or if at all.
So we still think it makes sense to group up the defensive posture, given the moderation in business transient demand.
A lot of your success or failure and group and your ability to execute on that stretch it depends on the strength of your particular markets.
So in Boston and Chicago, we have good citywide it's going into 2020, so it's easier to execute on that strategy and we think actually.
Toms group was.
Hello, with Marriott those two properties has done a tremendous job and capture and a lot of in house group and really more than their fair share as we move into next year. So it looks like based on our pace in our ability to execute on it we're having success and have continued to have success on that front the group pace at the Boston.
Watson's up something like 40% for next year.
I think were up almost 25% in Chicago Marriott So.
I think the I think a lot of people have pursued a strategy because it makes sense and led to the weakness in business transient, but so far we continue to have success.
Despite the competition for those groups.
Thank you.
Okay.
Thank you. Our next question or comment comes from a lot of Dori trusting from Wells Fargo. Your line is over.
Thanks, Good afternoon, guys and welcome Jeff.
Hi, Eric.
Yes.
Hi.
Given the strong group pace for 2020, how should we be thinking about total revpar growth.
Versus revpar growth for next year.
You know Dori I think this year, we've actually had good success.
Obviously in our total Revpar growth I think has exceeded our rooms revpar growth by about 150 to 200 basis points I think next year as we think about that revenue mix I think we're optimistic that we can maintain that.
Pace for next year.
Yes, I think thats the way, we're thinking about it.
Okay.
The 90 million of ROI projects that you talked about.
How long do you expect it to take to generate incremental 17 to 19 million EBITDA.
Those projects that could be capital is extended its actually already been occurring 2019, 2020, and we think most of those projects will probably have about a two year ramp after that so I think you'll see this come folding into our numbers.
In 2020 2021 2022.
Okay. Thank you.
Thanks.
Thank you Im showing no additional questions in the queue at this time I'd like to turn the conference back over to Mr. Mark for any closing remarks.
We just like to thank everyone for participating in today's call and we want to thank you for your continued interest in Diamondrock have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.
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