Q1 2021 Diamondrock Hospitality Co Earnings Call

Good day, and thank you for standing by and welcome to the Diamond Rock Hospitality first quarter 2021 earnings release at this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session and you'll ask a question simply press star one on your telephone please be advised.

For today's conference is being recorded if you require any progress. He says please press star zero and I will now hand, the conference over to your speaker today, Brian and clean. Please go ahead.

Good morning, everyone and welcome to Diamond <unk> first quarter 2021 earnings call before we begin. Please note that many of the comments made on today's call are considered to be forward looking statements under federal.

Securities laws.

As described in our filings with the SEC. These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from 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 pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning, and welcome to our earnings call.

One year ago almost to the day, we hosted our first earnings call near the inception of the pandemic and here. We are now rapidly returning to profitability.

What a difference a year mix.

With over 55% of adults and the U S. Having received at least one vaccine shot we fully expect a strong return of travel demand throughout the balance of the year and setting up for a major increase in all segments of hotel demand and 2022.

For <unk>, let me highlight three areas, where we have made significant progress since our last call.

One hotel profits are up and fact portfolio GOP was positive every month and the quarter co.

<unk> NOI and EBITDA were nearly breakeven and February and clearly profitable and March.

And April Revpar for our open hotels increased and amazing 1000% to 113%.

Two.

Reduced burn rate was impressive.

Our low monthly <unk> burn rate was 44% lower than our closest peers and only $914 per key.

And three we executed on strategic dispositions.

We transacted on for instance, reef and we signed a contract to sell the Lexington and <unk>.

Collectively these dispositions will accelerate our transition towards a predominantly experiential drive to resort and urban lifestyle hotel portfolio.

And looking at the first quarter.

Mark had total revenues of $72 $9 million.

Total portfolio occupancy for the quarter, including closed hotels jumped five percentage points compared to the prior quarter to 26, 9%.

Due to a favorable portfolio mix and strong asset management <unk>.

<unk> adjusted EBITDA loss was held to only $2 $6 million.

Which was a 65, 8% improvement over the prior quarter.

Adjusted EBITDA for the company contracted only $9 6 million a.

A 35% improvement over the prior quarter.

In March.

We experienced revpar growth of 11% and.

And generated positive hotel adjusted EBITDA of $4 million.

Digging deeper into first quarter results.

We'll see that collectively our open hotels were profitable over the entire quarter generating $21 $5 million of GOP and.

And $6 $7 million and hotel adjusted EBITDA.

Our resorts were on fire.

They generated $18 $1 million of hotel adjusted EBITDA profit at a 35% margin.

Which was 930 basis points higher than the first quarter of 2020.

And remarkably.

84 basis points ahead of even 2019.

Conversely, our urban hotels were responsible for a $26 million hotel EBITDA loss and the quarter <unk>.

All of which $9 3 million was attributable to our for closed hotels.

It is important to note that we had 26 hotels.

Comprising 75% of our rooms opened throughout the first quarter.

Subsequent to quarter, and we reopened our Chicago Marriott and Hilton Garden Inn Times square.

At this point, we have only two closed hotels.

The Lexington, and the courtyard fifth Avenue.

Turning to demand segments.

All segments improved sequentially and the first quarter.

Leisure was the star and <unk> unique focus on experience will drive to resorts and urban lifestyle hotels has been a source of strength.

And the first quarter leisure revenue increased 31% from the fourth quarter of 2020.

Driven by 16% increase and room rates.

Looking ahead, we expect similar strong demand patterns to persist this summer.

Turning to the group segment.

We are seeing clear and proven activity and are optimistic that these trends will continue and the second half of 2021.

While our group room revenue with just 8% of our total room revenues and the quarter.

And did see group revenue increase and impressive 65% from the fourth quarter.

Group booking activity continues to accelerate.

And the first quarter, we had 7200 leads.

Representing one 2 million room nights.

This is a 65% increase and leads with a corresponding 71% increase and room nights compared to the fourth quarter.

As a point of comparison lead volumes for Diamond rock are 61% of pre pandemic levels.

And well ahead of the seabed industry average of 55%.

Overall, we are very encouraged that group demand is rebuilding.

And as we will discuss later, we believe <unk> is uniquely positioned to benefit and 'twenty 'twenty two.

Yes.

Business transient demand is still a small contributor but like group it is unquestionably moving and the right direction.

And the first quarter, our business transient room volume was up 25% sequentially from the fourth quarter.

We expect business transient demand will be much stronger by the fourth quarter.

But until then improvement will be gradual and likely follow returned to office plans.

There are numerous encouraging data points.

He's like Apple Bank of America, and the Amazon and expect to bring employees back to the office over the coming months.

Moreover, heavy travel buyers such as Deloitte have approve their 5000 partners for travel and Boston Consulting a center and Pwc company are either resuming travel we're expected to revised travel policies and Mei.

Now I'd like to focus on the success, <unk>, CAD and cost containment and Opportunistically maximizing profitability.

This was a result of a lot of hard work on the part of our asset managers and operators.

On the revenue side and the team did a great job finding new revenue streams.

Standout areas included resort fees parking income rental income and the gift shop, our business Center.

Collectively these four areas comprised over 80% of other income and these revenues are down only 4% compared to the prior year at our open hotels.

Cost controls were tight.

Overall.

Rooms, and cost per occupied room for CP or improved to $59 from $69 and the prior year.

14%.

Which helped drive our rooms department margin to 72, 6%.

Drawn 450 basis point improvement.

This excellent CPE or improvement.

Was driven by greater efficiency with total man hours worked per occupied room, improving six 5% at our open hotels as compared to 2020.

As a result total labor cost at our open hotels improved 280 basis points from the comparable period.

We had similar success and food and beverage total covers increased 19% over the fourth quarter.

Even with this increased business, we were able to reduce associated labor food and beverage cost.

The result is that and the first quarter, our restaurant room service and lounge outlets collectively generated $1 5 million more profit than the fourth quarter with a flow through of over 40%.

As we emerge from the crisis, we are confident that we will be able to have stronger stabilized profit margin for the entire portfolio.

We believe we can do that without harming the guest experience.

In fact, despite our tight cost controls our tripadvisor scores continue to edge higher for our hotels.

And to illustrate the point about being able to deliver even better margins.

Our resorts generated Q1, EBITDA margins that were 84 basis points higher than 2019, and Thats a lower revenue.

Let me highlight.

Late a few outstanding performances in the quarter.

The Vail Marriott really delivered with margins, improving 390 basis points to produce over $6 million of EBITDA.

<unk> saw a 25% increase and Revpar driven.

Driven exclusively by big rate growth.

Total revpar surpassed $800 per night.

And EBITDA margins increased a whopping, one and 250 basis points and the quarter.

And our key west resorts remained consistent great performers.

Combined total Revpar for Barbary Beach, and Havana, Cabana was up five 1% over 2019 draw.

Driving a better than 300 basis point increase and combined EBITDA margins.

Now, let's transition to talk about our capital investments into the hotels.

Our focus remains price.

Prioritizing projects that can take advantage of the reduced disruption and produce high returns and.

We spent $12 million on capital expenditures and the first quarter with the bulk of that on the repositioning of the lodge at Sonoma and Vail resort.

We project, our total capital spend in 2021 will be around $55 million.

Okay.

Before I turn the call over to Jeff I want to talk about our focus on ESG.

Particular note the steps <unk> taken over the past few quarters to refresh the board.

I want to extend my gratitude to our two retiring directors Laurie Mckelvey and Gil Ray.

We have benefited from their hard work and guidance for many many years.

So what I take this opportunity to welcome to the board our newest director to bottom solid Chihuahua.

She comes with a wealth of construction and design experience and I know will be additive to diamond rock.

And late 2020, we also added Mike <unk> to the board.

Mike brings extensive M&A and investment banking experience to the boardroom.

Strong governance is a cornerstone of our ESG initiatives.

And the board refreshment ensures that we maintain a fresh and diverse perspective as we move the company forward Jeff.

Thanks, Mark let me begin by focusing on one of our great strength the balance sheet. The balance sheet is in great shape. We finished the quarter with $437 million of total liquidity comprised of $100 million and corporate cash on hand, 300 million and capacity on our revolver and $37 million and working capital at the.

Property level.

Our debt and strategically split between mortgage and corporate debt.

$594 million of nonrecourse mortgage debt at a weighted average rate of four 2% and $500 million of bank debt comprised of $400 million and unsecured term loans and $100 million on the unsecured revolving credit facility bearing interest at a blended three 5% rate.

Additionally, our debt as well ladder just for percent of our total debt matures before the end of 2022 that is the mortgage on the Salt Lake City Marriott.

While we're on Salt Lake City. After several attempts we were successful in obtaining a long term extension of the ground lease for the Salt Lake City Marriott.

We extended the ground lease by 50 years from the 35 years remaining for a new total term of 85 years. This will substantially enhance the value of the hotel, while giving us the flexibility to obtain new financing or sell a hotel if the timing or rate.

We have $112 million of capacity under our ATM unchanged from the fourth quarter to preserve the availability of the program, we will renew our ATM before it expires and the third quarter.

Let me turn to our cash burn rate a point of pride for Diamond rock given the current challenges.

We beat our internal expectations during the quarter, our monthly cash burn for hotel NOI and corporate G&A combined average $3 $7 million per month blowing past the prior loss estimate of eight to $8 5 million we provided in February.

The total burn rate for the company was $13 9 million and included about $5 $6 million per month for debt service and preferred dividends as well as for $6 million per month for average capital expenditures.

This also was well ahead of prior guidance of 17 $5 million to $18 million per month.

Looking to Q2, we expect the total company burn rate will range between 11 and $13 million per month, and it is likely to turn positive and the back half of the year.

Okay with a great balance sheet and improving cash flow, let's talk about diamond rocks plans to transition to offense.

We have enormous capacity to acquire new hotels.

Several buckets that provides us dry powder before I get into those I would like to point out that unlike some of our peers our bank covenants do not limit our ability to raise junior capital for.

First bucket of investment capacity stems from the $200 million of junior capital, we raised last year.

The second bucket is net proceeds from asset sales.

We have approximately $220 million sold or under contract and the bank facility allows us to redeploy over $500 million of dispositions into new acquisitions. So between these two buckets.

We have the potential for over $700 million of new acquisitions without ever going back to the equity markets.

I'd also note that our bank agreements provide a final bucket of $105 million for ROI projects ground lease buyouts and other such investments in total this is substantial capacity relative to the size of our portfolio.

Before I hand, the call back to Mark I want to point out another area, where we have exceeded our expectations. The portfolio was near breakeven hotel EBITDA and February on a 65% decline and Revpar.

Early in the pandemic, we estimate it to be breakeven at a 57% decline and Revpar all else equal we've learned we breakeven and occupancy of about 800 basis points lower than originally believed the team is really hitting on all cylinders with that I will turn the call back over to Mark.

Thanks, Jeff before we take your questions I wanted to touch on our recent transactions and our outlook.

The two announced transactions strongly demonstrate that we are strategically repositioning the portfolio to lean in to our long held thesis the experiential hotels and drive to resorts will outperform over the next decade.

First the pending sales of Lexington Hotel, we will reduce our overall urban exposure spin.

Specifically it will reduce our new York city exposure by more than 50%.

And the hotels under contract for $185 million, which represents a six 3% cap rate on 2019 NOI.

And a five 8% cap rate on 2018 NOI.

We received a nonrefundable $5 million deposit and the transaction is expected to close before the end of the third quarter.

In short.

This sale allows us to right size, our New York City exposure at an attractive price.

The second transaction involves the French and reached development and the USPI.

On April 30, we successfully completed a transaction and which we received $35 million and cash plus a contingent participation and the hotel's future profits.

This profit participation has the potential to be worth tens of millions of dollars if things go right.

As many of you know for instruments has been a long saga.

Hotel was essentially destroyed by sequential Hurricanes in 2017, and after a long battle with the insurance company, we received nearly $240 million and insurance proceeds.

This transaction does a number of positive things for us.

One it eliminates all future funding obligations.

Thus freeing up more than $200 million.

The investment capacity for acquisitions with more immediate returns.

Two it allows us to receive cash now as well as part of the upside and.

And three it eliminates the company's Caribbean hurricane risk, thereby making <unk> and even better risk adjusted investment option.

These two transactions really helped to fuel our ability to go and the offensive.

We intend to target opportunities consistent with our experience will drive to resort and urban lifestyle focus.

We have a particular focus on hotels that are synergistic with our existing hotels and markets like Sonoma.

Dale Lake Tahoe and sit Dona.

Stay tuned as the year goes on.

Let's talk about the outlook.

Overall, we feel very good about the setup for Diamond rock.

Our portfolio is well positioned to capture the continuing robust leisure demand as well as the coming rebound and group and business transient activity.

Importantly.

Profitability of our hotels is rapidly returning based on our current forecast our second quarter Hotel EBITDA is likely to come and near breakeven.

This significantly surpasses our prior expectation provided back in February.

As we look out to the third quarter, we believe that we can be profitable at the hotel EBITDA and.

And corporate EBITDA level, as well as a recovery and group and business transient continues.

Turning to 2022.

The setup for <unk> group business is very encouraging.

Recall that prior to the onset of the pandemic <unk> had a very strong 2020 group piece.

Much of that has been pushed into 2022.

In fact recent lead generation for 2022 continues to accelerate and citywide room nights on the books and our biggest group markets Boston, Chicago, DC and are already up eight 6% over 2019.

It is still early but we are very optimistic that our group pace for 2022, and really distinguish us next year.

Also we expect 2022 results will be substantially benefited by a high ROI projects.

We now have seven repositions, either underway or under evaluation for this year.

Including the operating at Vale Cherry Creek and Sonoma.

Hope to reveal more repositioning stories as the year progresses.

Finding these value creation opportunities is truly an obsession of diamond rock.

This concludes our prepared remarks.

We are excited about our future and emerging from the crisis has and even better and more dynamic company.

We have a great portfolio, a great balance sheet.

And a great team to be able to deliver outstanding shareholder returns.

With that we'd be happy to answer any of your questions.

Thank you and sorry, 90 day, ladies and gentlemen that is star one to get in the queue to withdraw your question simply press and the hash key.

And by while we compile the Q&A roster.

Our first question is for me.

And with Citi. Your question please.

Oh, Thanks, good morning.

Yes.

And I just wanted to ask you a little bit about sort of to think that when you think about.

The pace of recovery and the first was.

And maybe what are you seeing on the labor cost side.

And on the ability to refill.

John and get people to come back and then second is as Youre booking.

More on the corporate side, and I guess, particularly corporate groups do here for the feedback that corporate sales too.

Reduce overall expenditures or having enjoyed and that sort of essentially no travel budgets and whats your sense of their willingness to kind of start ramping goes back up.

Thanks.

Sure. This meets its mark good morning.

So is.

As for both excellent questions on the Labor front, yes, I think what we're seeing across if you look to John's reported even this morning, the bulk of the pickup was in hospitality and.

Leisure oriented jobs. So yes, there is a there's a rush on for rehiring folks.

There is a big pool of people out there that were unfortunately laid off and this but somehow.

Some have found other jobs and other works somehow people have issues, where they need to stay home and care for children and other issues.

And.

Eric as we emerge out of it so we're having a different experiences and different markets. We pride ourselves that generally we are excellent employers.

But I.

I would say, it's a mixed bag, depending on the market and how tight the labor markets are there we are having to incentivize and some markets to get employees to come back but.

But we have a good handle on it and remember and a lot of our markets were.

Very.

Very good job. So if you take New York City for instance.

And as hotels.

The overall package for housekeepers, something like $80000.

And with all the benefits so you compare that versus the alternatives, it's still a very attractive channel, but we're clearly like our like our other other folks and the industry and markets like Florida, it's very challenging to get workers, but we're we're on it and we think we have good action plan to.

To your second question on corporate rates.

So far that with the with the we'll call it the frequent travelers and consultants and bankers and stuff.

Rates for.

Going into next year, I think are going to hold relatively steady and still very early so so far it's been.

And our mantra of kind of holding to look for.

Pre pandemic rates.

And we think that debt that's feeling continue travel budgets havent been adjusted.

But I think as we move into really the fall and post labor day.

We will see a need for corporate America to get back on the road. So little early to tell what's going to go on there with the customers everyone's looking at this everyone's trying to figure it out right now.

But I think we subscribe to the school that people are going to EBITDA on the road to do business.

Ben it's been over a year.

By personal anecdote I have done five business lunches and the last probably two weeks.

And for folks that I would normally see quarterly but there still.

Okay and vaccine, they're getting back on the road as they need to see their customers.

So I think.

I think rates are going to hold relatively flat to pre pandemic levels.

And the business corporate side, we'll have some people will have to adjust for.

And then we will I think this fall, we'll really see folks get back out there and <unk>.

These need to adjust for travel budgets according to assist.

Necessity of running their businesses.

Okay, great. Thanks for the color.

And.

Thank you. Our next question comes from Rich Hightower with other car question. Please.

Hey, good morning, everybody.

Mark you may it may have been on my side, but I think you cut out a little bit earlier, when you were describing.

And the portfolio concentration and urban upon sale of deluxe and maybe if you don't mind just carry that through to what the shape of the entire portfolio might be what the splits are across the different segments I guess pro forma for both <unk> and for instruments to get online.

Sure. So post those two transactions for about 40%.

All called true drive to resorts and lifestyle type markets.

And our goal and strategic goals. We've stayed for last several years is to get over 50% and probably drive closer to 60% ultimately so freeing up the Frenchman capital.

Although debt, that's certainly that location and that market is a lot of merit, we think freeing up that $200 million and then other $105 million.

<unk>.

We will really help accelerate our ability to distinguish ourselves and execute on that strategy.

Okay, Yes.

And then just to just to kind of pick up on that idea.

It seems like uncertainty leisure heavy markets, even today and I'm thinking maybe of key West is a good example, you are running at or above.

Pre COVID-19 run rates in many cases and so as you are underwriting some of those future deals along those lines and in that particular segment.

What are the diamond rocks underwriting expectations generally in terms of the progression back to peak above prior peak over what time and then how would you estimate that the market.

Similarly underwriting.

So I guess, it's a nuanced answer because every every market every resorts a little bit different so.

To kind of give you two different ways. We're looking at the world. So I guess overall, we believe that we are on the cusp of continued leisure outperformance rate the feeling for personal savings rate and the desire for people to get out there and.

The sharing of experiences over social media, we just think it all adds up to new record levels of leisure travel next several years. So we subscribe to that overarching trend and that we believe the data back setups.

And different hotels, it is going to perform differently.

If you look at our other.

Other Fort Lauderdale, West and for instance, terrific on the Beach front terrific hotel for the rooms, but it's got a great group platform as well.

So that one we would expect it's.

And thats below prior prior.

Prior peak numbers, we expect his group kind of layers and there to boost the transient debt, we will see that really accelerated we would underwrite and asset assuming that the group comes back in there and therefore, we could push the transient rate because we could squeeze squeezes rooms down.

And a let's say 150 room hotel and key West we think it's pretty durable there.

We would expect debt to continue so we wouldn't expect that to pull back now we wouldn't expect it the same kind of year over year growth that we've experienced for the last 24 months, but.

But we think those markets are very durable and that the leisure trend overall kind of wave. If you will based on the data will continue so we'd be we'd be pretty encouraged clearly the market is.

Is valuing durable income and leisure assets more right they've proven through the last.

For the last two cycles to be the most durable investment options. So when you think about discount rates they should bear a lower discount rate. So we remain ops kind of.

Optimistic.

Optimistic and I think the overall market. We all have a lot of the similar data, we probably have a little bit more conviction and some but it's shown that those are more valuable assets and the market is pricing them accordingly.

Okay. Thanks for the thoughts.

Thank you. Our next question comes from Dori Kesten with Wells Fargo. Your question. Please.

Thanks, Good morning, guys.

Can you walk us through the process you went through on Frenchman.

Level of interest was to partner with you versus acquire the asset and just.

And how you were thinking about valuation.

Sure Great question, So we engaged a.

A global brokerage firm to go out and canvas to a global marketing campaign.

We received a I'll tell you a higher level of interest and we expected. We had 10 offers and we went out and said we would we're flexible we want to get the resort rebuilt.

We believe it's a great asset and we'd like to stay and for for some of the upside but eliminate the funding obligations for these kinds of criteria. We received 10 I believe 10 written offers.

And from various.

Various groups from developers to household name private equity firms.

But there is a high level of interest we did a series of round of bids.

And the credibility and and.

Enthusiasm.

The ultimately the winner winning bidder stood out they shared our vision for the asset they were committed to getting restarted very quickly.

We believe they have the ability to execute well and the relationships with the local government.

To get it done so based on certainty of execution and alignment and made the most sense to go with this particular offer.

We think it's going to be a good deal for them for US we think it's a good deal.

Basically if you kind of think about the <unk>.

And that.

And basically with the with the $240 million from insurance proceeds and the $35 million. We received on April 30.

We get close to.

Back to the value that we had in 2017.

And then the profit participation.

As all upside from there.

And Thats likely things go right, that's likely to be worth.

So substantial amount of money. So we think the results. Good we think it's a good deal for a buyer we think it's a very good deal strategically for us.

And free up that capital to reinvest now we think will really pay off for our shareholders.

Okay. Thank you.

Thank you. Our next question comes from Chris <unk> with Deutsche Bank. Your question. Please.

Hey, good morning, guys.

Mark It sounds like you're definitely pivoting more into more acquisitions of <unk>.

Leisure oriented stuff and and give you credit for kind of B and early on that and many years ago.

But the question is obviously there is a lot of capital out there right looking for.

More stuff and not all of it is necessarily a smart or as disciplined as you. All are so so how are you going to find these acquisitions.

Is it something that just has to have a value add asset management opportunity on the backend or something else.

Yes, and I think we have three.

Re advantages and the marketplace.

So it's relationships expertise and synergies.

And our relationships.

As you know quarter after quarter, we've been talking about this thesis for for several years and so our investment internal investment team and really the whole management team has relationships with.

And many many owners of these kind of assets, we've been talking to for years and so we built relationships, we build context rebuild trust.

So we think we probably have broader deeper relationships and these kind of assets and any other public lodging REIT. So relationships are important, especially since we're trying to do off market transactions.

And then we have expertise so we've been doing more of these our team and our asset managers are very adept at finding other revenue streams and understanding the revenue upside and these kind of assets and so I think that gives us a real edge and our ability to underwrite them and ultimately execute on that once we buy them.

For the third advantage, we have of synergies because we are and many of these micro markets, whether thats fail or sedona, Sonoma or Lake Tahoe.

And the ability to have relationships with other markets, but also when we can find and asset by hopefully off market and there we have synergies right. We can have one GMO for both properties. We can cut out one director of revenue on sales for there's just a lot of synergies, especially when you're talking about smaller assets those synergies can be very powerful and.

And the return profile. So we think those relationships expertise and synergies give diamondback and edge as we execute over the next couple of years.

Okay very helpful. Thanks, Mark.

Sure.

Our next question comes from Michael Bellisario with Baird. Your question. Please.

Good morning, everyone.

Mark just.

Back to the lax.

What are the risks to closing this deal and getting across the finish line. It seems like a longer than normal closing Perry and you guys have lined up.

Sure. So it's a it's a.

A well known and wealth financing.

<unk>.

Higher.

It's a $5 billion non refundable deposit theyre actually posted a second deposit and the coming weeks to increase that amount.

And the timing.

Timing is due to the way their endowment funds are coming in.

So they're all set.

We had a lineup to closing sequentially with the way they're funding works so.

I have high confidence, they're going to close there is nothing in life is guaranteed but we have we have the substantial deposit.

And they are enthusiastic about the deal they have a.

They've raised money around.

New York, New York thesis, Theyre enthusiastic and big believers in the rebound and New York City, that's that's kind of what they're investing for.

So we take this asset lines up very well and third what their vision thesis is so we feel good about it but the only contingency.

They have a non refundable deposit.

And so.

And the confidence builder and we know it's consistent with how they price their money and we know it's very credible buyer.

Got it and then just the timing of the sale I know you've been pursuing and for a while but how.

How much of your motivation here is assets specific versus any change you might add and your broader view of New York City going forward over the next three to five years.

Yes, I mean, New York City is still the number.

<unk> city, and the United States got a lot co.

And we just think there is a lack of visibility right now you could certainly argue the bull and bear case, and New York City, We believe.

There are about 20000 hotel rooms under construction and the market right now.

Top two supply market and the U S.

But theres a number of reasons, particularly and Midtown east to be encouraged and excited.

So we think just this opportunity allowed us to reducer and your exposure we remain three select service hotels, which we think is a smart place to play that market and.

It allows us to accelerate our overall strategic goals of getting into more drive to resorts.

And so it just seemed like the right time to pivot.

And the marketplace given a lack of clarity we are maintaining a allocation to new York and just a lower allocation as we move forward.

Got it and then just one more quick one for me on infringement and maybe could you provide any details on what needs to occur there for you to be and the money.

On the earn out in terms of hurdles and then what's your base case for timing of this potential payout.

Yes, and Theres a lot of factors that go into it so the construction costs and the basis and the asset there'll be the ramp up time line.

We have the similar underwriting as the as the.

As their partner on this or that person about it.

So it probably if I had a guess and this would be a guess it'd be about for five years.

Till they until they move too.

To kind of realize all of their equity value on the assets.

And the way the accounting works is we revalue. It every quarter and we think it's certainly more or like we are just not recognizing the gain as we move for us.

There is hurdle rates and it's an IRR hurdle rate to them and there is a very complicated waterfall, where we get 100% at one level and then 20% after a certain other threshold, but we have a series of confidentiality agreements around.

And the particulars of that.

Helpful. Thank you.

Our next question comes from the line of Anthony Powell with Barclays. Your question. Please.

Hi, good morning.

Performance was great.

And the urban hotels.

And it's burn cash again and.

And look forward to the summer and the fall.

What's the what's the prospect for loans hotels, and get back to breakeven and they get back to breakeven with the leisure demand.

Ladies and reopened and do you really need that BT and group.

To come back for them just to get to breakeven.

Anthony This is Jeff it's going to vary a little bit by hotel and by market, but I would tell you that and we are seeing increasing.

Occupancy on the weekends and our urban hotels throughout first quarter and it looks like that.

And the second quarter I do think ultimately to drive meaningfully.

And profitable in the back half of the year, you are going to need to see some level of BT and and group come back and the third and fourth quarter is really what our expectation is.

Got it and maybe shifting gears to the acquisitions you've talked more about.

Buying other hotels and your time.

And these are markets, where there was a bit new.

Just curious more disclosure on that and would you consider getting into different guys resort.

And resort markets or actual resort markets and the future.

And at this mark so on the acquisition. It's obviously, we have a leg up and the existing markets, where and we like them and Thats why we bought hotels and those particular micro markets.

We think we have a leg up with synergies and we have deeper relationships and many of these markets, where we've targeted overall and I was just going back and look and our strategy to echo and external growth. We have about 50 micro markets targeted throughout the U S.

And so it's other markets like Jackson hole and things that you would think have similar characteristics to the markets were and now.

So no we're not we're not wedded only to the markets, where and we are.

<unk>.

Other opportunities we are concentrated if you've looked at kind of our deals sheet.

It is primarily off market deals.

We do think the pricing has gotten ahead of itself and some of these fully marketed deals. So we're spending the bulk of the 80% of our energy on off market deals.

Not that we Couldnt do a marketed deal and maybe have a different twist, but primarily our energies are dedicated to off market transactions Troy do you have anything to add to that.

Yes, and I agree with that market, we do have some advantages and markets, we're already and but there were always scouring force for the next growth market that we think has maybe some built and barriers for development and that we're seeing characteristics of increased demand.

So I don't like to talk too much publicly about markets. We're looking at but I think those are the characteristics.

And what are the seller's motivation and even market for especially for off market transactions, I mean, theoretically become mark and get higher and higher pricing.

Why and why are these transactions being held off market.

Sometimes they have been held and families for a long time they look.

Look at possibly.

Tax consequences of holding longer.

And every one of these deals sort of has different types of characteristics diverse partnerships.

And things of that nature.

Yes, I'm trying to say right now Anthony.

Two of the deals that pop up that were looking at its partnerships, where you have for sensitivity between one part of it probably is more inclined to sell and another who is not.

There's complications so doing a.

And doing a tailored deal that meets their needs very quietly.

And as often and better for them to execute tended to do something that.

And they fail and if they do for a marketed deal.

And they create a for noise if you will.

And that they don't want.

Okay understood. Thanks.

Thank you. Our next question comes from Florida and spend it with Compass point your question. Please.

Good morning, guys. Thanks for taking my question.

Wanted to.

Talk about obviously the sale of the Lex.

It's going to increase your your resort exposure.

It sounds like the acquisitions, you're contemplating are going to increase your resort exposure.

Do you have a do you have a.

What percentage of your portfolio that you want to be will you be a pure play.

Are you <unk>.

<unk> and potentially exiting out of your remaining urban hotels as well.

Yes, good question.

And we're currently at 40% will co resort and lifestyle drive to markets.

We'd like to get that certainly the 50%, which could do relatively easy with the.

So we have now and <unk>.

Ultimately, we probably end up between 50 and 60, we think that will distinguish us among all the other investment choices, but we do like the the three legs of lodging still we do like having BT and some group and there is things over an extended cycle things do move.

Different time, so we would never want to be I think vulnerable to some of those movements. So we'll keep a diversified portfolio.

But clearly when investors are thinking about their options. We wanted to distinguish ourselves for having more of these drive to and leisure markets and then the other factor that were.

Really focused on is having a unencumbered by management portfolio. So today.

And with exception of two hotels basically we have terminable at will.

Agreements and all of our properties for management and that gives us the ability to execute better on asset management, we think it gives us higher exit value or lower cap rates.

I think some day results on the success of our asset managers are very talented but they have more control over the properties, where they can they've terminal financing agreements as managers, we will do what we think is and the best interest for the property and we have great alignment.

Also with the brand management they do what they think is best sometimes we agree and sometimes we don't but it's certainly harder to to get them to do everything that you think is the right thing to do for the property.

Thanks, Mark maybe one follow up in terms of your sort of your stabilized.

EBITDA I know youre, not nobody's, giving guidance right now for this year for next year, but but.

The cost reductions and everybody talked about and that you alluded to.

Are you thinking somewhere between 1% and 2% of your of your cost base.

It should be eliminated.

Once once everything settles down.

At Florida. This is Jeff I think the way we've been thinking about it is the transaction and we did with Marriott and converted our hotels from.

Managed to franchise is unique to us of about 50 basis points improvement and our and our EBITDA margins on a 2019 pro forma basis, and then beyond that I think as Mark made a comment in his remarks.

When we look at our open hotels are I believe our resort hotels and this quarter versus 2019 on on lower revenue, we had about 80 basis points better margin. So.

I think we look at those as indications about where.

Cost reductions and margin improvement can go and the future and.

And I said, it sort of 50 basis points on top of whatever the industry can generate at the hotel level.

One point I would make is that I recognize on our call and other calls people have asked about labor.

Labor I actually think there is an opportunity to the extent there are and some markets are and some situations shortages of labor. It does give rise to the opportunity to redo the labor model.

And those situations, whether it's from the usage of digital check in or again, changing customer behavior around room cleaning and and things of that nature. So I think we're encouraged on that front.

Thanks, Jeff.

Thank you and next question comes from Chris Darling Green State Your question. Please.

Thanks, Good morning, everyone.

Just wanted to go back to New York for a minute and I'm wondering if you have a view on the city's proposed zoning amendment that would require a special permits to construct a new hotel and the city.

And where that the past I'm wondering if that changes sort of your long term thinking about your remaining hotels from the market.

Yes, it's a great question so.

Let's look at the facts of the Emlen zone, So were rezoned with a similar special permanent requirement and I think since that past.

Two years ago Theres been virtually no new building permits pulled within those.

So if they adopt something similar for the entire city, which is the proposal and.

And the legislation that's moving through right now we would expect that it would have a.

A significant impact on.

Supply after all the stuff that's permitted it gets done and so youre talking about 20000 rooms under construction plus there is a lot of other.

Permits that can be pulled before the new low we go and so I think it means that the long term prospects for New York look brighter because of the kind of supply constraint from new legislation.

But that's not going to impact and supply over the next 36 months to the facility to pull through that.

But I think it's very easy to build a more bullish case for New York over the five to 10 year horizon, It's really that 10 year horizon.

But we'll have to work through the existing supply that's under construction now.

Got it I appreciate the color.

Thank you. Our next question comes from Austin, <unk> with Keybanc Your question Paul.

Great. Thanks, guys good morning.

The pool of qualified bidders for the St and was maybe versus other periods that you've shopped and hotel and and are you able to move forward with and acquisition today or would you have to wait until the Lexington closed.

Based on.

Whats in your.

Amendment to your credit agreement.

So Geoff maybe you Geoff maybe you want to answer the capacity question and then Troy will shift over to you and just talk about the marketing process and what do you think about the from the level of interest and New York assets for the moment for sure yes, often to answer to your question I mean, we do have capacity, obviously, it's a function of the asset size that you'd be and we would be considering but we do have the capacity to move ahead.

And with an acquisition before the.

For the Lexington were to close.

Yes.

And so we like.

And with <unk>, we engaged our international broker and did a full marketing on Lexington and back in the fall and.

Early winter this year and we had some good interest.

Say, there was a half dozen and sort of qualified bids that we worked our way through and.

And to get to this one.

I mean theres not there was not sort of an oversubscription to New York acquisitions, and a middle of a pandemic, but we were pretty pleased with the number of interest and this particular property. So I think it was a good execution.

Got it appreciate that and then just on ADR. So I'm curious, how you think ADR trends over the next several quarters.

And as these additional hotels reopen because.

You guys did see a modest increase and ADR versus last year and 2019 for the overall portfolio, even though when you kind of look at the individual buckets and the 26 open hotels and the floor that were closed or partially opened for the period were down.

Versus those those two periods on a standalone basis.

So I guess, there's a little bit of a mix factor that's going on right now so how do we think about that trend over the next few quarters.

Tom you would hope up rate trends that you're seeing at the properties for sure.

I think when we look at obviously the big driver over the next several quarters will be group and corporate BT and that comes back our group pace for 2022, our ADR is up.

Prior year and two we're actually measuring off from 2019, where we were and 19 going into 'twenty, just like where we are now in 'twenty, one going into <unk> into 'twenty two the citywide pace is very strong across our major markets.

And in Boston and once again.

It's almost in line with where we were 19 going into 'twenty, which was a record year.

At about almost 380000 rooms and at that point.

And 19, we had 400000, so we're close Chicago is flat to what it was in 2021 compared to 19 going into 'twenty. So those are two really good indicators and and.

And that that will help.

And if those conventions actualized that'll help the demand and.

Lift up transit and those markets, it's really going to be a function of.

The corporate business coming back and then and maintaining those rates, which we believe we can and right now our rate is up for 2022, and then and then really the leisure stuff the transient and leisure stuff will it is getting a case by case market by market we have.

From unique tools and pricing strategies and the way, we look at rate efficiency and those markets by room type by lead time by category by by segment.

We understand the buying behavior and then we actively target markets that are looking.

Based on the data so it's.

I think the leisure side is going to continue to do well.

And even if it even if it pulls back a little bit we're confident to maintain rates.

And we'll maintain rates so I think we're in a good position.

See right to see rate growth. The one thing that we can't really.

I understand is the corporate.

Business transient and the urban markets once again.

The technology the trip bands of the World as rates go down and those markets.

Computer and obviously you can just switch rates and so all it takes a few bad apples and our market start dragging that those rates down on the on the big accounts.

That will be what we'll be monitoring and looking at and how to defend against that just make sure where we are.

We're focused on static static rates versus dynamic rates and markets that are oversupplied and maybe our softer so that we can maintain a base and rate and then everything else is.

There's no advantage to discounting rates. So I think what we're paying attention to it we have a we have some really good tools that we use and I think and we provide a lot of guidance. So.

We're confident we can maintain rates. Thanks, Tom a couple of other comments. So I think we're seeing good rate integrity with our corporate accounts there is going to be some mix issues as we get back to.

Hi Act to levels, where we can really control the mixed shift within the properties.

And so youll see that the mix gets better as we move through the next 12 months that will help the rates and the short term, though I would note. We're all focused we are focused primarily on profit here. So we'll be reopening.

Some of our closed hotels with two John over the last couple of weeks, so that will lower ADR, because and the mix and reopened hotels.

But.

Still means more profit and that's we're all about profit and getting too.

Good and higher levels of dollars coming coming to the Bottomline.

Got it all very helpful. Thank you.

Thank you. Our next question comes from Patrick calls with choice Mechanicals for your question. Please.

Hi, good morning.

Earlier, you had mentioned.

And action plan too.

Higher employees does that action plan include raising wages. Thank you.

And then I have another question.

Yeah, Patrick this mark and <unk>.

And some markets its going to be some wage adjustments. There is there is only so much we can afford and our model. So we think the labor for many markets is still good and Submarkets is very tight submarkets, we've had to provide incentives to get people to come back.

I would imagine and this fall as the unemployment called Super enhancements burn off after September that's when our demand should really be searching so there'll be some overlap and.

And of improving incentives for people to get back to work just what we're going to really see them and the fall yeah, but we pulled out we're being creative and pulling out the stops.

But there is some wage pressure in certain markets.

Okay. Thank you and then I guess since COVID-19 began last March.

What would you say is your.

Related.

Deferred capex.

To this point thank you.

And.

Patrick So the good news for <unk>, as we want and with the most of the renovated portfolio. So if you look at our percentage of revenue over the prior three and five year periods versus the peer set.

It was running between.

And at 12% to 14%.

We invested heavily in our portfolio, we have very very little we'll call it deferred maintenance going into this and then we continue to invest and the reposition of our properties some room to reduce that would've happened got pushed a year or two but.

For better or worse, there wasn't a lot of wear and tear and some of our urban hotels over the last 12 months.

Does that makes sense and really isn't.

Didn't didn't lead to any accumulation of.

Deferred maintenance and then if you look at our five year Capex plan going forward, it's pretty normal levels, there's not a there's not a buildup.

For these properties, we're in good shape going into this event.

Okay. Good to hear thank you.

Thank you and our last question comes from Bill Crow with Raymond James and your question. Please.

Good morning, guys.

I'll go back to the Labor question and Jeff Your discussion about the ability to kind of.

Redefine what labor is needed and hotels.

Isn't there a caveat to this discussion that you.

You can do that as long as the guests don't start to complain and we heard yesterday on another call and guest satisfaction scores are starting to reflect some of the labor shortages and the hotels how do you.

Thinking about balance sheet.

And the staffing model with what guests are used to.

Yes, so bill.

We're super focused on guest satisfaction and if you look at our Tripadvisor scores for overall portfolio and they've actually increased despite tight cost controls.

Year to date. So we're encouraged by that I think it depends a little bit on the kind of hotel.

You have about your ability to satisfy your customers even with more restrained.

Our labor models.

But we're very focused on that I think it's more problematic for different assets and we generally own.

But we're we're feeling good that our operators worked with our asset management teams have been able to raise tripadvisor scores.

<unk> very tight labor models, Tom do you have additional color you'd like to add.

Hey, Bill I.

I would say that the heavy focus really look we're going to have to the people that actually doing the work, we have to adjust and adapt and create incentives.

The goal is to create incentives that reward behavior and not just elevate everyone's wage and try to credit credit incentives for when the business is good and when the business gets a little soft that comes down. So we're looking at basically incentives across all.

And all of those markets and then I think the bigger thing that we've seen is FTE creep fixed FTE creep, we've established baselines for the portfolio at occupancy levels right.

Looked at every type of fixed position, if its a greener supervisor and manager back of house accounting administrative where those are all in my mind fixed ftes and our mind that fixed ftes. So we've created a benchmark for all of our hotels and then we're tracking those every month and we're making sure that debt.

And the positions that add value and improve customer experience and touch the customer those ones are the ones that go back first and drive revenue and the ones that maybe aren't as necessary and they are just kind of FTE creeps over the last for five years. Those are the ones that we're going to really pull back on and that's the focal point and Thats, a big part of it that truthfully.

The people that do the work.

Net debt.

We can't we have to there is no way to around getting those.

For those people they are critical to our success and to the guest experience.

Alright.

Okay.

Thank you all.

Thanks Bill.

And.

And this concludes our Q&A session for today I will turn the call back to Mike for their for his final remarks.

Thank you everyone and we appreciate your continued interest and <unk> and we look forward to updating you on our next quarterly call have a great day.

Thank you and this concludes today's conference call. Thank you for your participation and you may now disconnect. Good day.

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