Q2 2021 Diamondrock Hospitality Co Earnings Call
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I would now like to hand, the conference over to your Speaker today, Brianna Quinn Senior Vice President and Treasurer. Please go ahead.
Thank you good morning, everyone welcome to Diamond Rock hospitality companies second quarter earnings conference call and webcast.
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 am pleased to turn the call over to Mark Brugger, Our President and Chief Executive Officer.
Good morning, and welcome to our earnings call.
Second quarter financial results were very strong and significantly surpassed our internal expectations.
The <unk> portfolio benefited from several positive attributes.
<unk> won the portfolios over weighting towards experiential properties in resort locations.
To our best in class asset management, and 3 our ability to control cost by having the highest percentage third party operated portfolio of any full service lodging REIT.
This powerful combination enabled <unk> to generate $19.8 million of adjusted EBITDA and <unk> per share a positive adjusted <unk> in the quarter.
Demand increased in all travel segments leaves.
Leisure remains the strongest performance segment.
Group and business transient are now showing meaningful gains.
This is transient room revenues increased 173% from Q1 in the second quarter on.
On a 24% sequential increase in ADR to $195.
The clearest indication that business travel is increasing can be seen in the dramatic uptick in midweek occupancy.
<unk> doubled at our urban hotels during the quarter.
From 25% in April to 50% in June.
We expect an accelerating trend line of business demand in the fall and into next year.
The outlook for group is equally positive.
Incremental lead generation accelerated sharply in the second quarter with over 11000 leads for 1.7 million room nights.
That's a dramatic increase from the 7000 leads for 1.2 million room nights in the first quarter.
The 50% plus increase in leads is the strongest we've seen since the start of the pandemic.
And lead generation is now at 95%.
Pre COVID-19 first quarter 2020 levels.
The group set up for 2022 is good for our geographic footprint.
In the quarter, we converted 63% more definite group room nights with most of the activity for 2022 and beyond.
Positive sign meeting planer of meeting planner confidence is returning.
Yes.
We are excited to see that group rates are 8% higher in 2022 than they were in 2019.
Our 2022.
Is being boosted by the fact that many of <unk> key group markets have strong convention calendar next year like Boston, Chicago, San Diego, and Washington D C.
In addition to strong operating performance.
Which Jeff will discuss more of in a moment.
<unk> made great progress on internal and external growth initiatives that we are confident will drive outsized cash flow growth in 2022.
And increase net asset value.
I'll touch with just a few internal projects.
The lodge at Sonoma was re imagined into a luxury autograph collection resort over the last year with a new Michael Mina restaurant.
We expect our $10 million investment here will generate a 25% internal rate of return.
This resort has been a homerun for us with <unk>, increasing well north of $100 million over our total investments.
The major repositioning of our Vail resort is underway and will be complete in time for the upcoming ski season.
It will reemerge as a luxury collection hotel and will be named the height Vail resort and Spa.
We expect the resort will command a materially higher rate in peak season.
And generate several million dollars of incremental EBITDA starting in 2022.
The Jws Mary Denver will also be converted into a luxury collection hotel and be named the clear.
The conversion is expected to take place at the end of this year. So we can start benefiting in 2022.
Additionally, this fall we will convert our beachfront resort in key west to the only Margaritaville resort in the Florida keys.
Collectively our investment in these 4 repositioned hotels expect is expected to have an IRR of well over 30%.
Turning to capital recycling.
In the quarter, we successfully sold 2 hotels, the Lexington and Fritz for Threep per.
For total proceeds of $220 million.
Or a 5% cap rate on combined 2019 actual NOI.
We are recycling a portion of these proceeds into 2 great new acquisitions, both of which were off market and have the strategic characteristics that we're looking for.
Theyre fee simple real estate, there are unencumbered by both brand and management their experiential leisure oriented.
Both have significant ROI potential.
And they are accretive conservatively underwritten yields.
First off the Bourbon Orleans is located at the Best Street corner in the historic French quarter.
The number of hotels in the French quarter that are large fee simple and unencumbered can be counted on 1 hand, and they rarely become available.
A moratorium on new construction.
It means there will not be another hotel built in the French quarter.
The Bourbon was purchased at a low over a 7% NOI cap rate on 2019 results.
And we expect it will have a robust growth in 2022 with a return of Mardi Gras Jazz Fest and the NC double a final 4.
New Orleans will also benefit by being the host of the Super Bowl in 2025.
Moreover, we see enormous upside from professional management as it was owner operated and there are numerous ROI opportunities at this property.
We expect that the Bourbon was stabilized at an 8% NOI yield.
Our second acquisition is the Henderson Park in <unk>.
A luxury boutique resort in destin that sits on 1 of the most desirable beaches in Florida.
This resort is rated the number 1 hotel in destin on Tripadvisor because it provides guests such a great experience.
The resort was purchased at a nearly 7% cap rate on trailing 12 month NOI.
And the combination of bringing in professional management.
An enhanced revenue management strategies provides a clear path to at least 8% NOI yield.
Which is terrific for such an exceptionally high quality real estate.
This is our fourth oceanfront resort of Florida.
Our eighth waterfront hotel.
I'll now turn the call over to Jeff for more details on our results and balance sheet.
Jeff Thanks, Mark I'll start by highlighting Diamond rocks excellent liquidity, we finished the quarter with $639 million of total liquidity comprised of $193 million of corporate cash $46 million of hotel level cash and $400 million of capacity on our revolver.
<unk> Leverages conservative with only $1 billion of total debt outstanding against roughly $3.5 billion of hotels and resorts overall the balance sheet remains very strong.
Let's talk about investment capacity, we've been active on the acquisition funds and we expect to remain a disciplined acquirer of on strategy properties like those mark discussed earlier.
With the strength of our balance sheet and high liquidity, we estimate we have over $300 million of investment capacity today, while still operating within our long term leverage targets.
Looking at profit margins, we remain confident we will have stronger stabilized profit margins when we fully emerge from the pandemic to illustrate this point, let's look at the map on our resort portfolio total.
Total revenue at our resort hotel portfolio in the second quarter was $70 million. While this was $2 million better than the same period in 2019 Hotel EBITDA was nearly $7 million higher this exceptional profit flow through resulted in a 39, 3% resort portfolio margin in the second.
Quarter as compared to a pre pandemic margin of 35%.
My intent is not to suggest that the margin opportunity is as large as 880 basis points described here, but.
But to highlight that our asset managers and their partners at the hotels have thoughtfully reconsidered the operating model from top to bottom to grow revenues and enhance profit without detracting from the guest experience importantly, despite these tight cost controls our overall tripadvisor score once again showed sequential improvement.
So why do we believe diamond Archon stabilized operations operations at higher margins I want to emphasize the Domino Mark as distinguished from its peers in that all but 2 of our hotels are subject to short term management agreements. This means we have greater control over operations and you've already and are already seeing the benefit of that flexibility in our results.
<unk>.
Also don't forget we converted 6 hotels in 2020 from brand managed to franchise and that alone is projected to lead to 50 basis points of better portfolio wide margins and.
And finally added reduced above property charges, new labor models and increased use of technology and we believe we have the ingredients to outperform on stabilized margins.
Let me share a few success stories the lodge at Sonoma repositioning that Mark touched on earlier has been a big success the.
The project was completed on time and on budget and the resort increased revpar market share by over 20 points year to date versus 2019.
The landing resort Lake Tahoe is having a record year with Revpar up 44% year to date compared to 2019.
Our asset management team designed a new labor model for this boutique resort that has reduced labor hours per occupied room by 42% compared to 2019, while increasing room revenue 83%.
Our Barbary Beach House key West Resort is also having a record year and saw a 22.
<unk> and the market share this quarter compared to 2019 on a 91% increase in room revenue.
While we are on key west in case, you missed it or Havana Cabana resort was named by Tripadvisor as the number 1 most saved resort in both the U S and the world.
Of course all of this success is due to the combined hard work of our best in class asset managers working with hand selected operators.
As a result, our portfolio Revpar share was up nearly 4 points in the quarter over 2019.
This market share gain is even more remarkable when you consider the tight cost control overall.
Overall room department cost per occupied room was reduced to under $55 per night.
Or a 4.5% improvement from 2019.
This was driven by a 7.2% decline in total labor per occupied room in our open hotels as you can imagine we are very proud of what we've achieved in the second quarter.
Looking ahead.
<unk> is well positioned to continue our leading pace of growth.
Group revenue on the books for the second half of 2021 increased 10% in the quarter and is now 2.5 times greater than the first half of the year.
Group revenue on the books from 2022 increased 8% in the quarter and is 44% higher than the forecast for 2021.
Group rates on the books for 2022 are nearly $250 as compared to $2.20 in the back half of 2021.
Citywide room nights on the books for 2022 are up 5% compared to 2019, and our sixth largest urban markets Boston, Chicago Fort Worths, Salt Lake San Diego MDC has seen an 8% increase since the start of the year.
2023 is already on pace to match 2019, with the strongest growth in Boston Salt Lake City, San Diego and Phoenix.
We are also benefiting because of our very low exposure less than 1% to probably the worst urban market in the U S, which is downtown San Francisco, where return to office is low in convention room nights arent expected to approach 2019 levels until sometime after 2023.
Looking forward, we expect to continue to generate significant positive quarterly EBITDA and <unk> per share for the rest of the year cash.
<unk> burn is just so 2020.
The positive momentum in the portfolio can be seen in the change in quarterly revenues compared to 2019, which are rapidly improving on a sequential basis.
<unk> were 64% lower in Q1, an improvement of 50% lower by Q2 and.
Encouragingly during the second quarter monthly revenue as compared to the same period in 2019 improved from down 58% in April down 50% in May down only 41% in June July.
July was amazingly strong for the Diamond rock portfolio with Revpar down only 11, 8%.
Looking to the third quarter, we expect quarterly revenues to get even better we are projecting revenues to be about 20% to 25% greater than the second quarter.
G&A and total financing cost that is preferred dividends and interest expense will be roughly similar to the second quarter.
We recognize there is increased focus on the delta variant and some areas of the country have reinstated masked mandate, but we have yet to see an impact on our business.
As we have in the past we will stay close to these trends. Nevertheless, we remain cautiously optimistic on the pace of the recovery.
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 2 announced transactions strongly demonstrate that we are strategically repositioning the portfolio to lean in to our long held thesis that experiential and drive to resorts will outperform over the next decade.
While the acquisition market remains competitive we intend to target more opportunities consistent with our experience will drive to resort and urban lifestyle focus.
We are particularly focused and targeting in hotels that are synergistic with our existing hotels in markets like Sonoma day.
Phil Lake Tahoe in Sedona.
Let's talk a little more about the outlook.
Overall, we feel very good about the setup for <unk> or.
Our portfolio is well positioned to capture the continuing robust leisure demand as well as the coming rebounding group and business transient activity.
We think <unk> has 3 major competitive advantages versus many of our peers.
First our portfolio market exposure is favorable with our numerous resorts benefiting from the boom in leisure demand.
And our well located urban properties.
To expand on the group business transient trends as the second leg of the recovery kicks in.
Also the convention calendars in our most important group markets look very strong in 2022.
Second our best in class asset management is benefiting us in gaining market share through creative revenue management strategies.
Execution of ROI projects and enhanced profit improvement implementations.
Third and finally.
Our high weighting of third party terminal operating agreement gives us more control and ability to be creative of running the hotels.
The conversion of the multiple Marriott brand managed hotels last year will add rocket fuel to our margin growth over the next few years.
This concludes our prepared remarks.
We are excited about our future and see things improving more rapidly than on our last call.
We have a great portfolio, a great balance sheet and a great team to be able to deliver shareholder value.
Thank you for your continued interest.
And we are happy to take your questions.
As a reminder to ask a question you will need to press star 1 on your telephone.
Enjoy your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of jewelry, Keith Ken from Wells Fargo. Your line is now open.
Thanks, Good morning, everyone can.
Can you walk through the asset management opportunities that you see at Bourbon Orleans, and Henderson Park with New management in place.
Sure Let me start I'll start on Henderson Park, I'll turn it over.
Very excited about the Bourbon I'll turn that 1 over from Henderson park's pretty straightforward.
<unk>.
It's number 1 already on Tripadvisor to great experience.
It's a very it's been owner operated fairly unsophisticated rep.
Revenue strategy, where they just set 1 rate for the entire month.
And so we're going to put it variable.
Modern management brought in evolution due to take over management last week, and we will be implementing its sold out for the next 12 months, but we will be implementing.
Our best in class practices on revenue management, and so we think that we'll be able to without too much effort be able to move the rate just by putting in our.
Our usual revenue management strategies, there so that was relatively straightforward hotels in great shape, it's core.
Customers Love it.
Suburban Bourbon sits in the day plus location, but there is there is a lot more that we can do there.
It really kind of drive that 1 for Tom do you with Covid some of the opportunities that you see.
As Mark mentioned at <unk>.
Henderson really it's we'll do our rate efficiency model, it's kind of what we did in Sedona and all the other resorts looking at room types lead times.
And and basically trying to price it appropriately so theres just a lot of little opportunities in Henderson with rate. We think we can do that thats pretty easy lifting and then theres a fair amount of opportunity there's a lot of demand.
In that market.
And we think theres opportunities to enhance the food and beverage experience.
And drive more incremental value from from not only at the property, but property and on the beach, so that'll be that'll be the focal points there and then at Bourbon, it's very similar rate strategies.
Putting technology in place, where you can monitor behavior, taking advantage of <unk>.
Demand when when Theyre citywide.
<unk>.
And then we're looking at all the other opportunities in and around the space is amazing Historic ballroom.
With a history that we can certainly enhance and try to create more awareness I think that with all the website designed to be more nimble with with.
With the website user generated content on the website things that we can't do with branded hotels with the independent hotels, we can do so it gives us a lot of flexibility to enhanced pictures generate user generated content, which makes it more relevant.
Theres, a bourbon theres a host of host of things that we think.
There is opportunity and then we have some retail space is down on the.
Burbidge straight in and around there theres some unused spaces that are there.
Amazing spaces, and we're just we're still trying to evaluate what to do with them because they are that good like we have at Bourbon is a small little house with the outdoor patio and they use it right now for offices and Theres not a whole lot of used to it. So we're trying to say how do we monetize that we have a bar that sits on Bourbon Street.
Basically does.
De Minimis revenue and we think we can open that up and kind of do what we did and in Fort Lauderdale with Luna create an energized that whole space and drive revenue through so thats.
There's a lot of things so that's a story, but I think that covers it right.
Is there the ability to expand and increase room count at Henderson Park.
Sure.
Yes.
It's interesting you say that the site is zone for a 5 storey building and.
Debt that you can build a 150 rooms on the site that's not in our underwriting and certainly not our immediate plan but.
You can dramatically increase the size of the property by rebuild.
Okay.
Hugh if you separate your urban and resort hotels, where are you on demand.
Versus 19.
If you can compare April to July.
Through July.
Well, just midweek business transient and we talked about doubling the doubling the occupancy on Tuesday Wednesday to urban properties from.
From really April through the end of the second quarter. So we're at 50% or so on Tuesday, Wednesday said were seeing business transient come in.
Groups lagging a little bit and obviously leisure is above 2019 levels.
And then if you look at our obviously in our July numbers were down.
We are dramatically better in the in the urban demand were only down 30%, but that's 20 points higher than we were a couple of months ago.
And then the resorts are running of.
Above where they were at 19 and just looking at July to give you some context on some of the urban markets Im looking here Boston, we were running our 2 Boston hotels in July we're running.
89% and even the Convention Center Hotel, Boston Westin rents over 64%.
In Chicago, obviously, the urban market, we ran 73% at the Gwen.
Moving to 1200 room Marriott was running 58%.
So we're seeing we're really seeing the urban market starting to kick in as we're moving through.
Some are in entering into Q3.
Okay. Thanks.
Sure.
Thank you. Our next question comes from the line of Smedes Rose from Citi. Your line is now open.
Hi, Thank you.
Wanted to ask you mentioned that in the third quarter Youre looking for 20% to 25% increase sequentially in revenue.
Could you talk about maybe your margin expectations as well would you expect it to be the same as what you put up in the second quarter or are you continuing to kind of restart for having to pay higher kind of what are kind of around what we should look for total operating margin.
Yes, <unk> this is Jeff.
Yes, I would say that when you look out to the third quarter generally speaking I think our margin opportunity in the third quarter compared to the second quarter is going to be the same to slightly better maybe upwards of 200 basis points better sequentially.
Sequentially I think we're just trying to be realistic given that we're going into a period of time, where you're going to see some transition between leisure and business transient.
We're optimistic we're going to get a little margin improvement on a sequential basis.
Yes.
Mark.
I wanted to ask you a couple of more questions on your <unk>.
Transactions.
It looks like there's kind of a second lag potentially to the.
To the Destiny acquisition.
But I just wanted to understand a little bit more.
Behind making the acquisition of <unk>.
Hotel with 30 something room, so it doesn't really move the needle a lot for you I mean, I guess I mean, it looks like a good investment relative to your overall portfolio. It's certainly very small, but then bigger picture we've seen more activity from the public Reits.
In transaction, Mark and I'm, just wondering if there's anything in general that you think is bringing more attractive assets to market.
Sure. So let me answer.
2 part question. So on Destin. It is relatively small deal for us although proportion to to cut enterprise value you've seen some other companies doing things that are are relatively similar size.
The way we view it is it was a it was an off market deal. It gives us a foothold in a market that we think is 1 of the better markets in the United States.
And Rosemary Beach area.
Think has terrific fundamentals it has incredibly high various attributes will be probably nothing else built on the strip with beach.
So it has all the characteristics and frankly, it's not going to be the the value add that we have have changed your revenue management, Brandon, It's just not that asset management intensive so.
Those are all favorable for doing asset like that and we think it we think it gives us the ability to.
Leverage some what I'll call it nearby.
Nearby asset so we may be able to build upon this and then the ability with the entitlements the ability ultimately to do some of the bigger there that's not our plan a at all but 1 way to think about it if you could do 150 units. There basically we got the hotel for the land value and the hotel is free.
So it's a good opportunity we think it's additive to the portfolio, which gives us a foothold.
We think.
At our basis that we're we've already created value to you.
Second question I would say the overall environment remains incredibly competitive from hotels the stuff that's been broadly auctioned I can tell you we haven't come close to to winning because.
We just I think people are being maybe.
They are stretching on some of these deals where there's a lot of competition against <unk> 20 offers so it's a competitive environment.
Lot of people 1 owned hotel is private equity family office International buyers.
<unk> seen in the last 60 days at sea, an uptick of properties coming to market.
I think theyre getting drawn out by the the per key numbers on some of the particularly the resort assets.
And I think that there is just.
The bid ask spread is there is more certainty as the mass mandates went away in June and fundamentals got better I think that kind of the.
The buyers said now feels like a better time to be a seller.
So I think the environment, just feels better from that side and I think some of these some of these trades and some other assets are brought more buyers out of the woodwork. So all thats kind of in play right now.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from the line of Rich Hightower from Evercore. Your line is now open Hey, Mark.
Hey, guys.
Alright.
So mark I want to go back to 1 other 1 of your prepared comments.
Just wanted to confirm the $1.7 million.
Room night leads.
<unk> achieved during the second quarter is that is that a same store metric or is that not the same store metric and then also typically what what portion of bleeds get translated into actual stays and do you expect any changes in that ratio.
As things are maybe still a little bit choppy out there over the next few quarters.
Yes. So it is same store for clarification, and then you could see I mentioned in the prepared remarks.
Our close rate of 63% on the business. We're pitching I think the broader message is just to see the sequential improvement in the lead generation. So things are really taking off from a group lead standpoint, and others are for future periods.
So some of Thats, probably the bulk of its 2022 and even some 2023 booking activity makes up the bulk of what we're seeing but if you look at this event in major channels. We are seeing increases in group demand meeting planners theres a lot of pent up demand.
So I think all of that Directionally is very encouraging.
Our footprint for Convention Center calendar next year.
So adding to the volume a little bit because Chicago and Boston and some of these markets have calendars that are as good or better on room nights and there were 2019.
So that's going to get booked into our hotels.
Okay, great. Thanks for the clarification and then.
Just another question on <unk>.
A lot of the Capex the Diamond rock is.
Undergoing or completing and the various assets.
And the portfolio I guess as we think about the landscape of hotels that you are competing with that are probably heavily under capex at this point given what's happened over the last year and a half at what point do you sort of start to see those.
The benefits from all that spend showing up in your your index scores. Your trip scores how long of a time period would that normally take what are your expectations.
So if you step back to last year.
Made the strategic decision to pursue the high ROI Capex projects.
And positioned the balance sheet to do so so that's getting done and completed.
This summer into the fall and the idea was to position to see the results starting in 2022. So Sonoma got completed in June fail would get completed in November.
Conversion to Margaritaville in key West will occur by November the luxury collection conversion in Denver will be done hopefully the end of this year. So all of that we should see the cash flow and the returns really starting beginning.
Sonoma, we're already seeing it with a mark share gains, but youll see that really trickle into our start in Q1 of next year, you should see pretty meaningful returns on those capital investments.
Great. Thanks, Mark.
Thanks Rich.
Yes.
Thank you. Our next question comes from the line of Chris will Ronca from Deutsche Bank. Your line is now open.
Hey, good morning, guys.
Mark It sounds like the strategy is really kind of a focus.
Focus on leisure and well, we might take that to mean resorts it sounds like youre.
Open to leisure centric hotels in traditionally urban markets that so that could.
It will keep pretty much every most markets out there on the on the map is that does that correct.
It is.
We're not going to add we have sufficient in New York Chicago, Boston. So we are not going be additive in those markets.
San Francisco is red lined in our opinion for the next several years.
In markets that we're likely to expand in that or not while culture resorts are going to be more markets like Charleston.
That's a market that has some some business and some with Halloween and BMW, having a fairly large presence in that market, but also lends itself to be predominantly leisure. We think that those markets are going to outperform New Orleans, it's a French quarter, particularly its experiential market benefits from convention strong event.
Calendars.
We think that travel trends that are going to outperform are going to tend to be more experiential, whether thats urban or or.
Pure resorts.
Okay helpful.
Second question is you guys have obviously restored a lot of liquidity, but.
As we think about acquisitions going forward could you remind us where you are on ATM and is there a thought towards just kind of over <unk> acquisitions, even if you.
Theoretically could bring on property debt or or use cash or something like that.
Hey, Chris It's Jeff as we said at the end of the last quarter.
At that time to be at $112 million remaining on our ATM and that ATM program actually expires in August.
We said at that time, Youll see us replace that ATM program, so that'll be recharged effectively but I think technically today, it's 112 and you will see that go back up to a higher amount.
We do have the ability to acquire assets using debt, but right.
Right now we have been looking at recycling the proceeds from dispositions that we've made and so effectively using cash on hand.
They've been funded all cash or effectively all the equity.
Yes.
Okay very helpful. Thanks, guys.
Thank you. Our next question comes from the line of Patrick <unk> from <unk> Securities. Your line is now.
Hi, good morning, everyone.
Good morning, good morning.
So far this year you'd been running room margins in the mid 70% it sounds like <unk> might not be so different.
From a high level and I think this is true for.
Most of the hotel rates, how long how long can that line.
I think thats something that surprised many of us.
How you are pretty much back there on on room margins.
Sustainable or as we get into the lower leisure.
Season post Labor day. It does does that start to slip back and then the whole issue of.
Rising labor costs interest and your thoughts around that thank you.
Sure Patrick I'll take a shot so I guess for certainly into third quarter for the balance of the year, we see maintaining profit margins.
Recovery.
And we think that margins.
Gone through those type of why margins are good and why they may permanently be better on prior peak labor models.
For the industry the labor model has fundamentally changed from Evercore.
I had to go through something like this where we use zero based every single hotel.
And we've gotten rid of positions we have permanently changed.
We permanently changed.
Positions FTE counts.
As an industry so that benefits us technology is benefiting us mobile key less people at the front desk other sophisticated tools to monitor productivity above property charges from the brands at the branded hotels have been reduced so all those are helping margins.
What's going to be unique to us and what is already helping us is the conversion and comp to the brand managed hotels, the 6 of which we had last year. So given the example of 1 change at Salt Lake City.
Been able to reduce the managers from 18% to 11%.
And we think we can maintain it roughly at that level. So that's 39% less managers at that hotel. So you can imagine how that runs through in profitability and margins.
Not only now but as we kind of returned to prior peak too. So we're relatively optimistic on the margin front.
There clearly is a nationwide shortage of labor and we are dealing with debt like everyone else, but I think theres a lot of reasons to be optimistic on the on the flow through and maintaining margins.
Okay. Thank you good to hear your thoughts on the topic.
Thanks, Patrick.
Thank you. Our next question comes from the line of Michael Bellisario from Baird. Your line is now open.
Thanks, and good morning, everyone.
Good morning, Mark just.
I just wanted to go back to the acquisitions kind of high level. It looks like youre, assuming roughly a 7 cap or 7 caps that would go to 8 caps.
That much growth sales. So maybe 2 parts of why doesn't the stabilized cap the right number to target and then I know you gave some details about what's not in your underwriting, but how should we think about maybe the stretch yields that you guys think you could get to over time on these deals.
Yes.
You never want to over promise.
So I think stabilize the 8% is accretive growth NAV of the assets it creates value for our shareholders. I think it's if you can get to a need on high quality real estate, it's additive in the public company format.
I think Henderson is a fairly straightforward deal its irreplaceable real estate small it.
It is beachfront impossible to build in.
And I think by the time, we're done with it will be worth a lot more than we paid for it Bourbon to its got more creative aspects. We can we can employ to grow NAV. We haven't built in when we talk about that 8% yield we haven't built in a lot of things Tom was talking about the.
Changing the retail reconfigure in the F&B taken advantage of the separate buildings that come with the acquisition and turning them loose and the unique banquet and readiness wedding spots all of that would be incremental ROI to that 8%.
And so hopefully we are going to be better take Barbary Beach, we're looking at the key west.
Yes, that's an asset that is.
35% or more above our <unk>.
Our underwriting.
Yes put a 6 cap on that where I think our low silica total investment or yield on that this year. It will be something like 11, 5% on our total investment in net debt include being used for the conversion to the Margarita Bill So put a 6 cap on that number on $30.5 million. This year, that's like $225 million for now that we have 100.
Third $17 million basis.
So hopefully they'll be successful like that asset.
But I think we don't want to build in the ROI stuff when we talked to investors on the initial underwriting we'd rather communicate to you. What we think was pretty straightforward clear path to stabilize yield and then yes.
We approve and finalize ROI projects will communicate that to to the investment community.
Got it so it sounds like a kind of a baseline.
Mark higher from from now hopefully right.
That would that would be our hope yes.
And then just switching gears, maybe 1 for Tom can you help us get our arms around what you've seen for BT in the fall, where the special corporate bookings occurring and are you seeing the booking window extend at all at this point.
I got to tell you Mike.
We've seen a little bit of growth in BT, we went from like 5%.
We grew about 1 point a month in the second quarter up to about 7% the portfolio as a whole.
Across all of the all the hotels runs about 15% and then obviously in the.
Urban we're doing as much as 30%, 40% mid week.
When things are good so we're seeing a little bit of movement. It's really there is nothing in the future. There is no future pace that shows anything.
That shows that there is no.
No significant change at this point I think were still too far out and I think a lot of it is going to determine really come around to how does.
The kids go back to school, how do things how things play out in the fourth quarter. So.
But there are no indicators that things are.
Dramatically improving or going backwards right. So I think I think we're just monitoring yes. Mike. This is mark I would just add a couple of other things. So we did see mid week, increasing which is both leisure and BT as we mentioned on the in the prepared remarks, if we look at our July results for our major markets Chicago, New York, Boston, and we have a lot of hotels that are running 70 to 90 <unk>.
Sent midweek.
So thats encouraging and then if you look at travel policies, what's happened over the last 45 days, you've seen travel restrictions lifted at Pwc and the consulting companies and a lot of companies have lifted travel restrictions all of that portends well for <unk> as we move into the fall. So I think the reduced travel restrictions are incurred.
Jean <unk>.
Expectations.
And we look at like Delta Airlines CEO was and they have they are more pure data I would say that we do because a lot of our from 1 of the phenomena is happening now a lot of people are booking around their traditional special corporate.
So it's harder to for us to attract the business traveler, but they were saying it was 20% earlier this year, it's running about 40%.
Versus 19 levels and they hope it to be and based on what they are forecasting and seen in their systems.
Labor day, getting 60% plus of what it was in 19. So the trend line for encouraging we're extrapolating from that those data points that the airlines are seeing because they have better visibility because of the way people are booking around in the hotel business.
So I think thats encouraging but.
It's not like BT books for December right now so I can't give you definitive numbers, but the trend line seem like theyre going in the right way.
Thanks for all that.
Thank you. Our next question comes from the line of Anthony Powell from Barclays. Your line is now open.
Hi, good morning.
<unk> seen a lot of transactions in that space, but the ability for you on the Big box group side Whats your view on both values, there and investor demand for those types of assets.
Yeah.
Yes. This is mark so I'd say there is there.
There just aren't a for sale.
We just were at.
Video FERC recently, just looking at what's in the market I can't think of 1 big box.
Any broker has listed at the moment. So I think the general attitude. If you own big boxes is that it's not the right time to market group will come back I think people are pretty optimistic on the group front.
But it doesn't feel like it's the time to market that asset so with no trades in the market. It's hard to hard to give you a perspective on exactly where value is on the big boxes.
I suspect that this time next year, we will see group recover maybe a little bit better than people expected.
That will bring buyers and sellers together next year on those kind of assets.
You've talked about maybe marketing 1 of those at some point I'm guessing.
During the next few years when you consider that maybe that day.
If you were going to market a big box next year would certainly be a much better time and right now I think there's just more certainty and I think we're we're fairly optimistic on the group recovery scenario. So I think we wouldn't want to be premature in bringing any any large hotel to the market right now.
Got it and I guess on the acquisition side.
What's the total opportunity to talk with you kind of smaller resorts and maybe more.
Neither focused urban hotel.
And of those needs over the next couple of years and it takes a lot of them to replace sales.
<unk> on our Big box resort I'm, just curious what you see kind of the velocity details over the next few years.
Yes, I mean theres a lot of hotels that are worth between 50.
$50 million to $100 million of fitness category I think the.
The real advantage that we have as our team here Troy and his and his investment team have been.
Focused on this for over 5 years. So we built a pretty sizable database of about 50 will call micro markets.
<unk> of the world.
Park City Jackson hole, we know every hotel we've been talking to.
Many many of the owners for years now net.
How we're uncovering off market deals.
Looking at our internal pipeline. It has a lot of those a lot of those in there. So it would be 10 over the next couple of years sure.
There's plenty of them I think we have kind of unique.
Sites into that and we really wanted to be focused on doing off market unique deals and I think a lot of these auction deals as I mentioned, we just saw 1 debt is happening right now than we were.
$15 million shy of the winning bid and we thought we were.
We thought we were stretching.
So.
We want to create value with our acquisitions and I think continuing to focus on the strategy is the way that diamondback is going to create value when others may have to overpay in doing these auction deals.
Okay, maybe just 1 more quick 1.
Distribution costs for the small independent resorts the margins seem to be very strong. So it seems like you were able to overcome any.
<unk>.
These properties. So I'm curious how you are.
Sourcing customers that at all.
Our.
Havana Cabana currently.
Tom you would take that sure.
All the tools are in place for us to access customers, especially with a brand like Sedona, where there is brand equity and people had.
Relevant, but we use all the tools we use the otas we use.
A layered approach with regards to.
Luxury travel agents, we have a luxury travel agent strategy virtuoso segment share fine hotels on those type of resorts and then we have.
And then we don't have the brand piece.
Think about an independent hotel, we're not paying 10% from the.
For the brand, we're not paying all the brand.
Brand marketing fees and so we can allocate a portion of that and.
And attack and custom.
Customers directly right, we're not we focus we try to keep our portfolio focused on nothing in the aggregate, but only thing only specifically to our assets and so when we allocate dollars we're targeting our specific asset not a grouping of hotels like the brands do and so that gives us a lot of nimbleness.
Youll see in like Havana, Cabana, we just number 1 website in the nation saved.
Saved most saved most save website in the world and it's kind of funny, you say, how does the Havana Cabana key west become the number 1 <unk> website in the world and it's because we have the ability to take the user generated content and re target the customers and so people save it and they use it and they share with their friends and.
It's very powerful that independent hotels, and our sales and marketing team. We have all the resources on our team at Diamond Rock and we do it for ourselves versus Brian on the brands and I think that's a very powerful.
It gives us speed to market and it reduces our costs, which is why we like the independent hotel so much.
Thank you.
Thank you. Our next question comes from the line of Floris Van <unk> from Compass point. Your line is now open.
Thanks, Good morning, guys.
1 or 2.
Get your thoughts.
It's intriguing to us.
As competitors.
Have bought assets near your assets at high prices.
Mark maybe get your thoughts on.
First of all the value of your assets and also put that in perspective, how is the value of your of your of your net worth of the company's net worth I should say our NAV.
Changed since December when you when you issued some so a small amount of equity on your ATM, maybe if you can give some more thoughts on that that'd be that'd be great.
Sure. So let's take both parts of that so we did issue a little bit on the ATM last fall, but that was to position for the ROI projects. So that funded the vail repositioning that funded the Sonoma repositioning that funded the Margarita Bill conversion that's funding the luxury collection conversion Denver, so that that capital has been.
Spent or being completely spend right now and will position us for outsized growth in 2022, so that it wasn't really statement on NAV as much as we had a very high use.
<unk>, 30% <unk>.
On those projects and we thought that relative <unk> made a lot of sense.
As we look forward on acquisitions now.
<unk>.
And.
The use of capital.
And then NAV.
As far as our current state of value.
I think the Ltvs are going up.
I think if you look at our assets in markets like key West and you look at our markets and lakes Sonoma Sedona, where we've seen other trades.
Those assets now are breaking through that probably record pricing Barbary beach is worth more than $1 million of key Sonoma is probably worth $40 million, a key and that compares to basis that is.
Our basis in Sonoma is 200 and <unk>.
Roughly $270000 a key it's probably worth a $1 billion plus of chemo.
Barbara Beach, we're probably up 7.
70% from our basis.
So the entities with.
With these numbers that are getting paid by by others in the marketplace, it's increasing our NAV.
So we're always reevaluating, it's hard to it's always hard to know exactly where it is but.
The private markets are paying a lot more than the public valuations and there is a big disconnect right now between these valuations.
Okay.
Thanks, I appreciate that and I was actually.
Pretty.
Intrigued you made the comment that your returns on your key west assets.
Are in the double digits.
Obviously.
There is more to come on the rebranding to the Margaritaville.
If you were to back solve from your original acquisition cost I mean, how much value is being created and how much has the the value per key improved over the over your hold period.
So, let's say <unk> or Havana Cabana, there both double digit returns on our investments. So if you put a 6 cap on those.
So, it's mark and Thats kind of where things feel like Theyre trading down there.
Put Barbary beach from this year's numbers, it's something like $225 million versus the basis of 117.
I can't do the math from a habit, a 90% increase in value and about $1 million to a key.
Havana Cabana put a 6 cap on what we think will do this year that puts at about $90 million I think our basis is $55. So thats up.
60%.
<unk>.
And so.
Again, I think what we're seeing is a lot of our our thesis that we've been trying to articulate to investors over the last 5 years to 7 years, playing out right the trend lines in.
The high barriers to entry that Theres, no new supply and why do customers want.
The assets, we've been buying net particularly over the last 5 years to 7 years.
2 are really playing out and we're seeing massive increases in.
Those assets.
Thanks, Mark I appreciate it.
Absolutely.
Thank you at this time line I'm showing no further questions I would like to turn the call back over to Mark Gruber for closing remarks.
Thank you everyone for joining us today on our call and we look forward to updating you next quarter take care and have a great day.
This.
Today's conference call. Thank you for participating you may now disconnect.
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