Q3 2020 Diamondrock Hospitality Co Earnings Call
Ladies and gentlemen, today's conference will pick any one minute. Thank you for your patience and please continue to standby.
[music].
Welcome to the Diamond rocks third quarter 2020 earnings call I will now hand, the call over to Miss Bryony Glenn. Please go ahead.
Thank you Tiffany good morning, everyone welcome to Diamondrock third quarter 2020 earnings call before.
Before we begin let me remind everyone that many of the comments made on this call are considered forward looking statements and not historical fact.
As described in our filings with the SEC. These.
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.
With that I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.
Good morning, and thank you for your interest in Diamondrock.
Since our last earnings call, we have made outstanding progress on multiple fronts.
I'll highlight just for.
First we increased our total liquidity and decreased our total debt to really successful preferred equity offering.
Second we reduced our monthly burn rate Cigna.
Significantly, beating our prior expectations.
Third we reopened five additional hotels.
And fourth.
We struck a sweeping deal with Marriott that not only increase the navy of our portfolio by $50 million.
But distinguishes die rocks portfolio as the lease encumbered by long term management agreements.
Among all full service public lodging Reits.
Now, while we have made good progress and remain optimistic about the future of travel the pandemic. We're living through has obviously created tremendous dislocation in near term demand.
In the third quarter there were some encouraging.
Early signs of a recovery in travel demand.
The relative bright spot has been in leisure travel.
Which of course is elective travel.
Guests have been checking into the drive to resort to him rock is known for.
In contrast business travel and group business demand has only marginally improved and is likely to remain very constrained until there is a healthcare solution such as a vaccine effective therapy or a massive national testing program.
Interestingly, we are seeing signs of pent up demand. So we believe there is a chance for a meaningful snapped back on the other side of the healthcare solution.
Personally this is my fourth downturn and we know how to manage through these environments.
That experience is why Diamondrock has always embraced a low leverage and conservative balance sheet strategy.
We currently have more than enough liquidity.
To carry the company until such time as we are cash flow positive once again.
History shows that travel demand always eventually surpasses the peak of the prior cycle.
And we remain optimistic that this recovery ultimately will be no different.
But make no mistake.
This is the most difficult operating environment of modern times.
And requires almost herculean efforts to ensure guest and employee safety first.
While trying to preserve cash flow.
Accordingly, I want to acknowledge the efforts of everyone at our hotels and everyone on our team that has put in countless hours.
Although the environment required significant reductions in staffing.
We were able to soften the blow to hotel associates with nearly $8 million in severance paid out this year.
Rest assured that we are doing everything possible to be responsible fiduciaries.
And community citizens.
While making certain that Diamondrock is set up for future success.
Let's turn specifically to diamond rocks third quarter.
Hotel adjusted EBITDA in the quarter was a $17.4 million or loss.
A marked improvement from the $30.4 million or loss in the second quarter.
Corporate adjusted EBITDA was a $24.4 million loss.
As compared to $37 million loss in the second quarter.
Third quarter adjusted FFO per share was a loss of 22 cents as compared to a loss of 20 cents in the second quarter.
Two items worth noting with these results.
One.
They exclude $7.4 million in one time severance cost.
And to this.
This one's important adjusted FFO per share was negatively impacted by a non cash income tax valuation allowance.
Recognized in the quarter of $12.4 million or six cents per share.
In other words, our third quarter EPS AFFO would have been a loss of only 16 cents per share without that tax adjustment.
Moreover, in the quarter, we successfully reopened five more hotels and had nearly 90% of our rooms available to sell at the end of the third quarter.
To illustrate the progress.
That 90% figure.
Compares to just 58% at.
The end of the second quarter.
Furthermore, portfolio occupancy jumped over 1000 basis points from the second quarter to 18.6%.
Recall that we ended the second quarter with just 22 hotels open and operating.
We opened a 23rd hotel our lodge at Sonoma resort.
On the first day of the third quarter.
Those 23 hotels, so occupancy rise from 26% in July.
To 28% in August.
And finally.
31% in September.
In July we reopened two other hotels besides the lodge at Sonoma that included the Hilton Boston downtown.
And the Hilton Burlington on Lake Champlain.
Our decision to reopen hotels has been.
And continues to be.
Dynamic and data driven.
We reopened hotels, if we can lose less money doing so.
Based on this approach.
The data led us to keep three of our New York City hotels closed but.
But to reopen our two big box hotels the.
The Chicago Marriott and the Boston.
Waterfront Weston in early September.
Now as you'd expect.
Nightly occupancy is comparatively lower at these two big box hotels than the balance of the portfolio.
But a resilient base of contract business.
And aggressive cost controls has thus far confirmed that reopening was the right decision.
As you can see in the tables in our press release.
Which is on our website. If you have not had a chance to review it.
Hotels open and operating the entire quarter have delivered consistent gains in occupancy Revpar and total revpar.
For the entire portfolio.
Total revenue decreased 79% in the quarter.
As a result of an 81% decline in Revpar that was partially offset by a smaller decline in food and beverage revenue.
Total revenues were $50 million in the quarter.
As compared to just $20.4 million in the second quarter.
Over the summer more.
Monthly revenues showed steady progress.
Rising from slightly over $11 million in June.
To over $14 million in July.
To over $16 million in August.
And finally, reaching almost $20 million in September.
Encouragingly.
Revenue in October.
Looks to be coming in even a little bit better at over $22 million.
Okay.
Let's talk about profitability.
To maximize absolute profit our asset managers are working closely with our operators to aggressively drive revenue.
Implementing strict expense controls.
In the third quarter everyday.
Every department rooms, SMB and other saw material improvement in profitability as compared to Q2.
With sequential acceleration in flow through that surpassed internal forecast.
For example, the rooms Department margin rose from 45% in the second quarter to 64% in the third quarter.
Driven in large part by 25% sequential reduction in the cost per occupied room.
Over the course of the quarter, we saw the number of hotels, achieving break even profitability continued to expand.
In June we had 10 hotels generating positive gross operating profit or GLP.
And this figure rose to 18 hotels by the end of September.
Over that same period GLP margin moved from a negative 35% to a positive 9% margin as a testament to our ability to drive revenue while constraining cost.
On an EBITDA basis.
Six hotels in June were operating profitably.
And that figure rose to 10 hotels by September.
What you cannot see however.
As an additional 10 hotels were on average approximately $100000 from breakeven EBITDA in September.
Here's one other additional data point I think you'll find interesting.
If we exclude the two big box hotels, the Chicago Marriott and the west of Boston.
From the 27 hotels, we had opened in September.
The remaining 25 hotels collectively would have been within $200000 of break even EBITDA.
Clearly the portfolio is near a favorable tipping point for profitability and much of the source of that strength is diamondrock strive to resort portfolio.
Our resorts are performing very well and generated positive and growing EBITDA every month in the quarter.
Let me share with you a couple of highlights from just two of our resorts to give you an idea of the pockets of strength we are seeing.
The landing a lake Tahoe.
So a 19% increase in revpar over the third quarter 2019 with.
Within Aer of nearly $500 per night, and total revpar approaching nearly $560 per night.
EBITDA margins at this hotel.
Increased nearly 1400 basis points as compared to the third quarter in 2019.
The low barriers to sedona.
Saw a 21% increase in revpar over the third quarter and 2019.
With total revpar approaching nearly $675 per night.
Moreover, we are taking steps to ensure this success continues.
For example, subsequent to the quarter end, we completed a new Michael Mina restaurant in Sonoma as part of the larger ROI up branding of that resort from a Renaissance to an autograph.
The restaurant opened strong and in just the first month of operation generated nearly $325000 in revenue.
We also expect the restaurant to create a halo effect at that resort, which will allow us to increase room rates.
Another example of strength is likely to come from the almost complete renovation of the Barbary Beach House in key west.
Which will be done before year end.
This former Sheraton has been re imagined into a very special lifestyle boutique.
That is already getting rave reviews.
And we are optimistic about our ability to drive rate this winter season.
There are a number of other ROI projects recently completed or getting done throughout the portfolio.
But there isn't enough time on this call to get into detail on all of them.
Switching gears.
Let's look at each of our segments of demand in the quarter.
Leisure is unquestionably the strongest performing segment in the portfolio.
Resort portfolio performance increased strongly and steadily over the quarter.
From 36% occupancy.
And $141 in total Revpar in July.
To over 43% Oxy and nearly $191 in total Revpar in September.
A $50 per night jump.
For the third quarter.
HDR at our resorts increased 2.2% as compared to last year with September showing good strength and up 5%.
The resilience of rate at our resorts tells us price is not a gating issue in making the travel decision.
This is an encouraging data point that these same people will ultimately be prepared to travel when their employers feel comfortable letting them get back on the road.
As for business transient.
Our current thinking is that we will not see a material change until there is an announcement of a vaccine or broad distribution of a therapy.
For our portfolio. This is transient remains soft, but it did improve.
In the third quarter.
Business transient revenue and rooms more than doubled from their contribution in the second quarter.
In fact business transient rooms were 23% of total rooms sold in the third quarter.
Up from only 19% in the second quarter.
Similarly.
The group segment remains a relative soft spot.
Outside of social gatherings, such as weddings, we continue to expect that large corporate group events will be the final segment to recover.
Nevertheless, there are some encouraging data points to share with you.
The first data point is that Diamondrock Sol approximately 250000 room nights of leads generated each month during the quarter with most of the inquiries for 2021 and 2022.
Interestingly RFP conversion ratios to awarded business.
Our at near normal rates.
Also sports teams our plane.
Diamondrock has arrangements with seven professional football and baseball teams.
Several NC double a sports teams.
And even a PPA golf tournament.
Another good data point.
Is that according to see event September was the strongest month of RFP activity since March.
September volume is up 18% versus August.
And October is on pace for a strong performance too.
Seabed Asa reports that overall group rates are down approximately 5% to 10% in 2021.
But up.
5% to 10% in 2022.
Looking at 2021.
Rates are softer earlier in the year when uncertainty is the highest.
And quickly approach pre pandemic levels by late 2021.
Group rate integrity in RFP has been relatively more resilient in New York City.
Boston and Chicago than it has been in San Francisco.
Again, an encouraging trend given our geographic mix.
Before handing the call off to Jeff I did want to touch on our capital investments.
We held capex spending to $8.6 million in the quarter.
Which is inclusive of approximately a half a million dollars for Frenchmans reef.
Outside of life safety projects or emergency repairs.
Our primary focus remains conserving capital.
However, we did prioritize projects that can produce a near term earnings benefit and high return on investment.
These projects include the FNB repositioning initiatives at our hotels in Sonoma and Charleston.
As well as completing the conversion renovation at the Barbary Beach resort in key west.
We expect these investments will be measurable earnings contributors in 2021.
And the average IR are for these projects is expected to exceed 30%.
Before leaving Capex.
I did want to remind everyone that we have paused the reconstruction of Frenchmans reef.
Our current plan is to look for a joint venture partner for this project over the next year.
Before restarting construction in order to preserve our balance sheet capacity.
Now, let me turn the call over to Jeff Donnelly to discuss our balance sheet.
Thanks, Mark let me start by talking about our liquidity, we improved our liquidity in the quarter by nearly $71 million as a result of the successful for corporate offering preferred equity offerings.
The end of the third quarter, we had approximately $435 million total liquidity, including corporate level cash hotel level cash and Undrawn revolver capacity.
I'm pleased to report we are beating our original estimates from monthly cash burn rate and we continue to make significant gains.
Before Capex, our average monthly burn rate in the third quarter pro forma for the preferred dividend was $14.7 million this 14% better than the $16.8 million estimated in our early September investor presentation on a comparable basis let.
Let me walk through the sources of a 2 million dollar improvement.
The net operating loss at the corporate and Allied level was $10 million per month in the coronary as compared to our earlier estimate of $11.5 million a $1.5 million per month improvement owing among other reasons to improving topline strict cost controls and the decision to reopen additional hotels.
Debt service was $4.1 million per month in the quarter.
As compared to a prior estimated 4.5 million.
The three to $400000 per month savings as a result of forbearance that will that will reverse in the coming months.
The straight line capital expenditure budget in both cases is 3 million per month.
Including Capex, our total company burn rate was $17.7 million during the quarter and implies a cash runway through late 2022.
As Mark mentioned at the start of the call. We strongly believe that we have more than enough liquidity to carry us through to a point, where we are cash flow positive and that is why we took the step of issuing preferred equity last quarter. So that we would not be pressured into a common equity offering in the future.
As it relates to the outlook for our burn rate, we're not providing specific guidance.
However, remember that Q4 in Q1, historically see weaker demand levels and there is a risk that the recent increases in coated cases throughout much of the U.S.
Could lead to municipalities Rolling back the operating guidelines that have allowed us to reopen.
While we will continue to do everything within our power to minimize laws and maximize profitability I encourage you to consider the sequential revenue and profit growth could prove challenging in the next two quarters.
We updated our analysis of breakeven profitability and estimate that on hold the portfolio will achieve breakeven profitability at 25% occupancy on a gross operating profit basis.
40% on a net operating income basis.
About 500 basis points lower occupancy than our original or I should say our earlier estimates of breakeven occupancy.
The average daily rate assumed in this analysis is approximately 20% to 25% decline from 2019 levels.
Individual hotels can of course it varies from the average.
We ended the third quarter with $111 million of cash and over $300 million of Undrawn capacity on our revolver.
We executed a $119 million eight in a quarter percent series, a preferred offering in August and elected to use $50 million of the proceeds to pay down our revolver, which remain available to us and to maintain the remaining net proceeds from the offering in cash.
At the end of the quarter, we had $605 million nonrecourse mortgage debt had a weighted average interest rate of 4.2%.
And $500 million of bank debt comprised of $400 million of unsecured term loans and just under $100 million drawn on our unsecured revolving credit facility.
As you've heard me say many times in recent months, our debt composition and maturity schedule is perhaps our balance sheet greatest strengths.
In general banks are reluctant to commit new capital at this time and they are keenly focused on one curtailing over reliance on bank debt and to addressing 2020% to 2022 maturities without meaningfully impairing existing liquidity.
Not surprisingly these factors are the impetus for many travel and leisure companies entering the high yield bond market and we expect those conditions will remain a driver for capital markets activity in the industry in 2021.
For Diamondrock bank debt is less than 50% of our net debt and net debt is just 22% of our estimated replacement cost of our hotels.
We have just one mortgage maturity in early 2022, which has an extension option more.
More critically our revolver matures in 2023 in our term loans maturing 2024, and each has extension options to.
In short we are not seeking new debt capital commitments from our lenders at this time.
We believe these facts in combination with our strong liquidity and declining burn rate greatly improve the likelihood dominant can avoid the issuance of dilutive capital and pivot to often at the appropriate time.
With that I will turn the floor back over to Mark.
Before we take your questions I want to make a few comments about two events, we announced in the quarter and conclude with our perspective on the future.
In late August we announced a sweeping transaction with Marriott International that has several features.
Let me hit the highlights of that deal.
Most significantly we converted five of our managed hotel contracts to franchise agreements.
These conversions were completed in September and we have engaged the variety of leading third party managers that are uniquely suited to each asset.
In addition to the 50 to 100 basis point improvement in residual cap rate for the five hotels that generally nurse to franchise properties.
We believe the change will produce approximately $2 million of incremental profit on stabilized cash flows.
We've already started reaping benefits from the change as we consolidated finance and management roles in Alpharetta, Denver, Sonoma, and Charleston that will yield almost $400000 of annual savings.
The second biggest value creator from the deal is a new franchise agreement to upper end.
Vail Marriott resort to a luxury collection brand upon completion of the renovation next year.
As you recall, we had undertaken the renovation of this hotel to a luxury standard over the past few years and the lobby renovation next year is the final phase.
We expect to be done in late 2021 in time for the ski season.
Consistent with prior expectations, we estimate this repositioning that fail.
Could result in $3 million of incremental EBITDA, given the significant rate differential that exists today between the resort as a marriott and the luxury competitive set.
The third benefit of the deal is that we have the right, but not the obligation to convert the JW Marriott Cherry Creek.
To a luxury collection brand with a small renovation.
We are currently reviewing the ROI on this opportunity.
The final benefit to US is that we secured an explicit right to terminate the autograph collection franchise agreement Encumbering, the Lexington hotel for a termination fee.
We believe that this improves the residual cap rate of the property by greatly expanding the universe of potential buyers.
In the aggregate, we calculate that the sweeping agreement adds at least $50 million of net asset value to the dime rock portfolio.
No cash payment was associated with this agreement.
Instead Diamondback agreed to standard renovation scopes that will be completed over the next three to five years for the converted hotels.
Cost generally consistent with our normal internal expectations.
In addition, we provided franchise extensions at our west in DC and West in San Diego properties at market terms, ensuring that these hotels will remain dominant hotels in their respective markets.
The second announcement, we made in late August was the addition of Mike Hart Meyer to the board of Directors effective October 2020.
Mike is one of the most experienced lodging M&A bankers in the industry and we believe he will be a valuable unbiased voice in the boardroom to pursue options that maximize value for shareholders.
Turning to our outlook.
We saw improvement in the third quarter we.
We do not expect industry to significantly rebound until there is a healthcare solution to the pandemic.
Our current view is that at least one of the 11 vaccines in phase three trials could announce positive findings in the next 90 days with broad distribution by mid 2021.
This income.
In combination with improved patient outcomes and broader acceptance of safety protocols, such as social distancing and wearing masks.
Should lead to increasing travel activity and improving financial performance.
Once profitability is restored we.
We expect to see a handful of well capitalized lodging platforms pivot to exploit what could be an extended period of accretive investment opportunities.
Let me conclude the prepared remarks by saying that these are challenging times, but.
But we are prepared to meet them and determined to prosper on the other side.
We have a solid balance sheet to allow us to withstand the substantial downturn and then pivot to all sense at the right time.
We have great assets.
Strong industry relationships.
And an experienced management team that has successfully weathered numerous prior downturns over the prior 30 years.
On that note, we will now open up the call and happily take your questions.
Thank you and ladies and gentlemen, if you have a question Jessica.
Then one on your telephone keypad to withdraw your question seem pretty profit.
King.
One moment, while we compile kaneva okay.
Our first question is from rich Hightower with Evercore. Please go ahead.
Hi, good morning, everybody.
Good morning Rich.
A couple of questions here I was Marcos and treat.
By the additional comment that you might be looking for a joint venture partner for Frenchmans and I guess in the in the same context of not.
Wanting to issue common equity at current prices, you're still giving you would still ostensibly be giving up some equity in the project that's.
Thats worth something and there is a cost obviously associated with that new capital and so just help us understand maybe the cost of that equity contribution the dollars that you're envisioning how would you take on project level debt just some of the contours of what a deal might look like there.
Sure Rich I would say.
Our thought right now is that will engage a visor broker over the next year and go out and seek joint venture partner, which would essentially use their capital to fund the balance of the construction of the redevelopment.
And then share and economics.
Of the deal that's kind of our call our plan a now I think it could take a variety of structures and shapes. So it's probably premature to kind of speculate exactly what that will look like.
But but our thought is it probably makes more sense to use.
Someone else's capital for the reconstruction that will be that will be debt and equity.
Two events to share the the upside, but also share the risk in the balance sheet capacity.
As we move forward.
Okay and would you would you contemplate taking.
Some sort of a management fee or a promote or anything like that just as we understand some of those economics.
I think we're very open to whatever structure maximizes value for us. So it could take a variety of forms of hate to kind of lead you down one path because I think we're in flexible.
To make sure we can maximize profit.
Okay got it and just in.
In regards to the addition.
Mike Hart Meyer to the board.
No just the fact, you sort of called it out in the in the prepared comments is there anything that we should infer from that in terms of course.
Corporate strategies for Diamondrock in the.
In the in the time ahead.
Yes, I mean, I think the point, we're trying to make is that.
The board added sell and Thats really get great M&A experience and certainly as we look out over the next couple of years, we think well capitalized companies like us are going to be in good shape to create value and.
I want to make sure we have choices in the boardroom that that we're going to explore and be able to maximize those opportunities.
Got it thank you.
Search.
Thank you. Our next question comes from site Rollins with Citi. Please go ahead. Please go ahead.
Hi, Good morning expenses Satcon first meeting.
So it's about you touched on through business, a little bit, but one timers rebooking activity are you seeing and I guess more specifically what period are you seeing that activity.
And.
Sure. So group volume the leads is actually picking up as you would expect the the cancellation rates have declined but still there is not much group business.
For the balance of this year and the stuff that is booking early next year is pretty tentative. So the strength. We're seeing in Rebooking is really the second half of next year end and relieved 2022.
When people have more confidence that we'll be on the other side of the the healthcare crisis.
Okay. Thanks, and then on the we've seen a lot of the cost containment.
On our side as well as the brands is that changing anything from the brands fee structure.
That will help owners over the long term.
Yes, so thats a great question. So the brands have been I would say great partners overall and trying to figure out how we can minimize cost and go through this.
So while the franchise and management fees remained consistent theres a lot of other costs that are.
Allocated out to the properties.
That come under the umbrella of different terms Cup program services fees and other things and they've done I think a very good job of moving rapidly at the onset of this crisis too.
Reduced head count and reduce allocated cost out to us and.
We are seeing that in fact, they have either cut it by 50% in some categories eliminated or theyre going to have periods, where they're not going to charge it.
At all early next year, so I think our opinion as they're doing a great job and they are doing things that are benefiting the costs that are allocated out to our hotels.
Okay. Thanks.
Thank you. Our next question comes from Austin Wurschmidt with Keybanc. Please go ahead.
Great. Thanks, Good morning, everybody on one of the.
Circle back to the Frenchmans reef and your comments around seeking a JV partner.
Would you guys like to maintain control of.
The asset and curious what's holding you back from from just an outright sales and then also curious if this is a partnership that you think.
You would or you would consider additional investments.
Beyond just just the Frenchmans deal.
Yes, so there's a lot there so I would say we we think this is a spectacular piece of real estate and its opportunity we see a lot of upside in.
I think the the idea of the joint venture is that we can kind of.
However, kiki needed to a little bit in that we can bring selling in that can help use their balance sheet to finish the project and hopefully we can stay in for an equity position and realize some of what we think is going to be.
Great great upside over the next three or four years.
So thats the kind of impetus of going down that path I think for your kind of the second part of your question.
This probably isn't the ideal deal to do a broader joint venture we have had a number of inquiries from.
Institutions that have wanted to explore doing joint ventures to take advantage of distress debt up distressed hotel opportunities in this environment.
There might be something that's interesting, but those those folks probably are theres not a lot of overlap for people that want to do Caribbean development deals.
Got it understood and then just thoughts on an outright sale and it's just really just the upside that you talked about and you just wanting to maintain that as as EBITDA ramps over time.
Yes, we're flexible everything's for sales, so someone's willing to pay us a 100% of what we think the future value as we we would.
Gladly sell the hotel, but I think that in this environment.
We we believe that there is value there so we're likely to to maximize our view of value versus whats holding that pay us probably the way to do that is through a joint venture.
Got it and then I appreciate all the detail you provided and the thoughts on some of the near term ROI projects like you mentioned Barbary Beach, and some other SMB initiatives, but maybe focusing more on some of the larger projects you've outlined.
Frenchmans you mention is on hold and then you've got some restrictions I believe under the amended credit agreement. So how much of those nearly $40 million to $50 million of ROI spend you've specifically outline like.
Like adding keys at the landing or the Boston Hilton our targeted maybe for 2021 and how are you prioritizing some of those projects.
So we can.
For various better we had a lot of front end loaded ROI projects in this year, which got completed.
As the crisis was coming on so we did Worthington, we did a big project and created a celebrity chef restaurant, there we build out one the Charleston.
Just across the portfolio, we had a number of things that got completed right now the big focus is Barbary Beach House, which we think is a big opportunity that we're completing vale will be the number one big project. If you will from an ROI perspective in 2021.
And there is a variety of smaller projects, but big spend projects like this.
Additional keys, and Boston Hilton or the 17 additional keys at the landing.
Probably get pushed into 2022.
Got it thanks for the time.
[music].
Thank you. Our next question comes from Chris loan Count with Deutsche Bank. Please go ahead.
Hey, good morning, guys.
Wanted to drill down a little bit into the into the resort performance, which obviously was really strong, especially on the on the rate side.
When you when you think about slightly more normalized times and it will be great for you and for for the entire industry, but but I guess is there is there going to be a little bit of an offset I mean, I don't know if you've been able to drill down into your database to see if these customers were saying maybe on a Thursday and resort for $700.
Those are going to go back to.
I think $200 under corporate rate on a on a Wednesday, so not to nitpick I'm just curious if youve, if youve been able to drill down and see if some of these customers are.
Swap.
For for for leisure.
Yes, it's a good question I think overall in the resort portfolio and you can think about we have some neo.
Welcome medium size resorts that that usually have some group components that will probably offset as as demand comes but inevitably we are probably capturing people at at luxury resorts like with errors that otherwise would be flying to Paris or or go into lake Como or something.
30 night in Sedona, its $1400 a night that's a.
You know Thats, a traveler and go a lot of places.
I think we're optimistic that we are getting a lot of new customers that have never been to these resorts and we think that they are terrific experiences.
So I think the offset to when when the kind of Pandemics passed and people can go to more locations and so more people have been introduced to our resorts than ever before and I think they are having great experiences. So not only will they come back, but I will tell other people and theres kind of a multiplier effect on that so we're relatively optimistic that.
A lot of this business in this rate sticks even.
Even over the next couple of years.
Okay. That's that's.
Thats helpful and then on under.
New York now that you have the option to.
Out of the branding contract on the Lexington does that.
Potentially accelerate any any plans to go to market that are nowhere, where you guys see the the market for New York right now and also just your opinion on where the city is shaking out in terms of hotels closing and that potentially making assets like yours more attractive to longer term buyers.
Yes, New York's an interesting market I think New York stays bad.
It's really really bad for a little while and then at some point, it's going to turn and be really good.
Our concentration of real estate in in Manhattan is mostly in Midtown East there is negative supply in that market.
We've had two of our largest competitors either closed.
I guess two of close permanently.
And.
Third may close.
They were looking at negative 9% supply competitive supply for the Lexington at the moment so.
I think thats very encouraging the other really encouraging sign for US is the autograph now will be just about the only full service.
Marriott option in Midtown East now that the.
The flavors come off the murdy side, so as you can imagine the.
If we have a huge funnel very customers that will then.
Less options and Midtown East and hopefully that will drive outperformance of that hotel.
New York City opens up again.
But but listen between the next couple of quarters are going be they are going to be very difficult in New York like they are in San Francisco in some of these other markets and.
That's that's a world we're living in today, but I think were if you had a five year hold we're tremendously positive all in New York over that period Pacific Another side supply does get constrained, but in the next couple of quarters are going to be very difficult New York.
Okay very good appreciate all the detail thanks, Mark sure.
Thank you. Our next question comes from Luca Taglich with clean.
Thank you I just have one.
As time goes on and operators get a better handle on operating expenses.
Can you talk about the confidence level being able to operate more efficiently in a normal environment.
And maybe just touch on where those savings will come from.
Sure I mean.
Never never waste a good crisis as they say.
We are doing things that weve never done before we've combined jobs, we've never combined before we're running an efficiency levels low occupancy weve never never done before I think the brands are testing new models for distribution of allocated costs do we need all these cluster people can technology replace what we had before.
Sure.
It's a once in a generation opportunity to reinvent.
A lot of their programs right because if you if you.
If you.
Furloughed or laid off people you can really then restaff from rethink the whole model, which I know they are doing on the number of fronts.
So I think and they are incentivized to get their cost as well as possible remember their their whole business model is making sure that to delivering value. So people continue to sign up for their brands.
And in this environment they want their pipeline to stay they're going to have to continue to work on making that model as profitable as possible for real estate owners. So I think a lot of that sticks. There's a number of things that we're doing today that won't stick I mean, we can't close down the restaurants and not have any S&P at a full service hotel forever.
We can do things you know can we can we run all the FNB out of the what was the breakfast enclose the convert the fine dining restaurant I mean, there will be some of those changes, but we are certainly doing things that this environment that are not not sustainable, but im very encouraged that on the allocated costs, which has millions of.
Dollars to us a year that those will be reduced.
On the other side of this even when we were back to normalized cash flows.
Great. Thank you.
Absolutely.
Thank you and our next question is from Stephen Grambling with Goldman Sachs.
Steven Your line is open.
Hi, there so as you think about it thanks for taking the question as you think about the small resort property strategy that you've been executing on that how did this and seeing it really play.
Play out well you mentioned this comment about going on offense at some point it seems like valuations on that side of the.
The hotel space have been a little bit more resilient, so as you're thinking about continuing to execute on that strategy.
How do you position yourself as an advantage buyer.
And or do you feel like the resilience of the business is making you rethink what the appropriate valuation is within any process.
Good question so.
Couple of thoughts one is certainly this downturn has validated what we've been doing over the last number of years and buying small resorts were at seven of our last eight acquisitions.
And frankly, I wish our entire 100% reported a small resorts at the moment.
No. We're still bullish on resorts were still bullish that they are going to outperform there is less.
The stress certainly in that market.
But I do think we have enormous headstart, we've kept our entire acquisition team in place they have over the last four or five years have built a pretty pretty impressive database and relationships and a lot of these resort and resort will call micro markets like Sedona in Sonoma.
And late coasts, where I think we have a head start again, because we've been there and we've been building these relationships monitoring these.
These potential deals.
We're not going to get the same kind of discount to pre cove, it but frankly, that's because the values are still there I mean, the cash flow Hasnt had.
Hasn't gone down as much and the upside still remains so we still think that that will be the bulk of our external growth over the next several years.
Fair enough and one quick follow up just related to that.
Maybe I missed this in the opening remarks, but.
Select larger properties reopened a little bit later in the quarter and if I look at the dispersion of cash burn can you just elaborate a little bit more about how cash burn is different it has been different across the portfolio and also how that might evolve moving into the fourth quarter.
Sure and I'll, let Jeff jump in here too I mean, it's as you would imagine our small or smaller resort.
You'll have been the best.
And then as you get to the larger resorts at that rely on some group.
You know it kind of feels a little bit and then the the worst performing assets or the big box hotels.
So the bigger hotels, just theres no. There is no large group meetings happy in the United States.
And there is relatively big property taxes, and other fixed cost with those those box you. If they are closed. So those are the is the toughest burn rates, Jeff do you want to jump in.
Yeah, sure Hey, Stephen.
Stephen Yes, the thing I would add and maybe just to reiterate from Mark's remarks earlier in the call is a lot of our burn rate is really concentrated in our larger hotels as Mark said I think.
During the month of September for example, I think those three closed hotels, plus the Westin Boston Chicago.
Marianne just reopened in the quarter collectively those with the vast majority of our hotel level burn in.
Rough numbers, it was sort of $8 million of.
Burn probably 90% of that or if not more was really concentrated in those larger chunkier hotels.
I think the 25.
Other operating hotels, which are pretty heavy in the resort area collectively almost breakeven. So I think that's kind of interesting indication for how things are progressing it's hard to say, we'll hold that way each and every week or month as we move forward into the remainder of the year, but I think it shows the disparity there.
Great. Thanks, so much.
Thank you. Our next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, good morning.
I wanted to focus a bit more on your I guess your urban lifestyle or luxury properties like say the b.
The Palomar Phoenix, maybe even when fits in there.
You were acquiring or developing some of them. Some of these in a few years ago. We haven't heard you talk more about them recently is that still part of your strategy going forward.
These hotels have done relatively better than the larger big box will tell them and the urban markets.
Yes, a great question. So they are part of our strategy I would say that as we think about our external growth strategy. The focus still remains trying to get to 50% resorts in total so when we sit down and we look at our pipeline Thats still magnetic north on priorities.
But hotels like the emblem in San Francisco or the Glenn we still believe in local small or medium sized lifestyle hotels in those in those markets.
But as you think about our portfolio and portfolio rotation, we're more likely to sell urban hotels and buy more resource as we continue to reposition the portfolio I think that will drive outperformance over the next five to seven years, so still part of our strategy.
You know the big boxes are probably the least part of our strategy going forward.
We will not buy another big box hotel.
I just don't think that's where the outperformance is going to be going forward. So you'll see us much more committed to continued to focus on small resorts first.
And then urban lifestyle locals medium small lifestyle.
Lifestyle hotels in urban markets second.
Got it thanks, and I'll buy topic now.
Big box hotels, or I guess out of favor or but I mean, there are some companies. If we reach we're still investing in these properties. So could you maybe think you see yourself to selling some of these larger big box properties in the future events. It appears as they can go to that strategy.
Yes, Thats the short answer is we will continue.
And clearly that would be the fastest route to getting to some of our what we think is the kind of model portfolio allocation for diamondrock.
Through subtraction as well as addition, but yes, we're open to that I'm not sure now is the best time to celebrate Bucks hotel.
But as we kind of think about where do we want to be five years from now.
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Im not sure they'll probably shrink as a percentage of the company as we grow in any event.
We're not going to buy any more big boxes, and we only really have the two and we liked them.
But at the right price, we would certainly be sellers.
All right. Thank you.
Thank you and ladies and gentlemen. This concludes today's can you and I am proud ma'am. Thank you for participating have a great. Thanks, everyone.
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