Q3 2021 Diamondrock Hospitality Co Earnings Call

November 5, 2021

Good morning, everyone and welcome to Diamond Rock Hospitality third quarter earnings Conference 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.

The third quarter was a strong one for Don Rock hotel profits hit their highest levels since the inception of the pandemic in fact hotel Revpar was within 20% of the comparable quarter in 2019 with 12 of our 31 hotels actually exceeding the comparable quarter.

<unk> in 2019, and five hotel setting all time highs.

The strength of these results exceeded our internal expectations.

Our portfolio benefited from its geographic footprint and a concerted effort by our team to maximize the benefits from the research it's in travel demand.

Our portfolio took nearly 13 100 basis points of Revpar index from our competitors in the third quarter.

Moreover, having the industry's highest percentage of full service hotels with short term management agreements also play to our advantage in managing cost and driving profit flow through.

In total this powerful combination enabled <unk> to generate a healthy $38 9 million of adjusted EBITDA and 10 cents of positive adjusted <unk> per share.

In the quarter, we saw travel demand increase in all travel segments with leisure, leading the way. Additionally group and business transient also showed meaningful acceleration.

There were some real positives for business travel trends in the quarter.

We saw <unk> revenue jumped.

84% of the comparable 2019 levels with occupancy up 26 percentage points over the second quarter.

Encouragingly Biz.

Business transient ADR was just 1% below Q3 19 levels.

The outlook for group is equally encouraging.

The generation in the third quarter grew to over 12400 leads representing over $2 1 million future room nights.

July was the best month for lead volume with over 750000 room nights.

While the Delta variant that emerged late summer led to a drop off in activity in August.

Meeting planners appear to have shrugged off the headlines.

As production snapped back close to July piece by September.

In addition to strong operating trends.

Jeff will discuss in a moment.

<unk> continues to make tremendous progress on internal and external growth initiatives to drive outsized cash flow growth in 2022.

Let me highlight a few of the bigger ROI projects.

Our Vail resort is finishing a $40 million repositioning.

By the end of this month, the resort will be relaunched as the height Vail resort and Spa, a luxury collection hotel.

The repositioned resort is expected to generate several million dollars of incremental EBITDA.

Our Barbary Beach key West resort will also complete its conversion in November.

It will be relaunched as the only margaritaville resort in the Florida keys.

We expect the repositioning to allow us to push average rate by $15 and to generate several million dollars of incremental retail and bar sales.

The last ROI project I'll highlight is in Denver.

Where we are underway with the up branding of the J W. Marriott to a luxury collection hotel to be named the Cleo.

This one should be completed in the first quarter of 2022.

These ROI repositioning are expected to deliver irr's north of 30%.

As you might have guessed, we're big believers in these type of projects.

And our past success gives us great confidence.

As a testament to <unk> track record.

I am proud to announce that the Gwen was named an <unk> Nast Traveler's 2021, Reader's Choice Awards.

The number one hotel in Chicago and number eight in the world.

The highest ranking of any REIT owned hotel.

In addition to the Gwen Condi NASS also recognize several of our other outstanding hotels.

Including Kabbalah point in Sausalito.

Both of our hotels in key west and the <unk> resort in Sedona, Arizona.

As a final comment on ROI repositioning all.

I'll just mention that we are working on several other up branding opportunities within the portfolio.

We hope to share those with you in coming months.

Let's turn to acquisitions and dispositions.

We have been active in upgrading and focusing the portfolio.

In the third quarter, we successfully recycled proceeds from our second quarter dispositions.

Our two new acquisitions are the Bourbon hotel in the French quarter of New Orleans.

And the Henderson Park.

A beachfront resort in Destin, Florida.

These acquisitions align with our strategy to focus on hotels that resonate with today's traveler today's traveler as they are experiential and leisure oriented lifestyle hotels.

I am pleased to announce at both hotels are forecasted to exceed our underwriting for 2021.

In fact, the <unk> Beach resort that.

That deal is now tracking to be an eight 8% cap rate on 2021 NOI.

While this is great we.

We are not resting on our success.

We are actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets.

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 $538 million of total liquidity comprised of $67 million of corporate cash $71 million of hotel level cash and $400 million of capacity on our revolver.

Leverages Conservative with only 1 billion of total debt outstanding against roughly $3 $5 billion in hotels and resorts overall, the balance sheet remains very strong.

As Mark mentioned, we expect to remain active but disciplined acquirer of on strategy properties, we have over $300 million of investment capacity today, while operating within our long term leverage targets.

Let me share a few success stories in our portfolio this quarter.

Mid week occupancy at our urban hotels was up 26 percentage points over the second quarter.

The up branding of the lodge at Sonoma to the autograph collection has been very well received since completion early in the third quarter total Revpar is nearly $460 a night with ADR up over $100 a night from the second quarter.

Third quarter, ADR is 22% higher than 2019, whereas prior to renovation ADR was 4% below 2019.

<unk> has exceeded our expectation and the largest expected to meaningfully exceed our budget for 2021.

The Hilton Burlington generated one of the three biggest upsides to budget during the quarter on strong revpar and margin gains.

Average daily rate was over $300 per night and among the 10 best in the portfolio.

For those who have never been Burlington is a terrific college town that is quietly evolved into a foodie destinations anchored by some of the highest rated craft breweries in the United States.

Our pair of hotels in key West continued to deliver strong performance with third quarter EBITDA margins 3000 basis points above 2019 levels.

I must recognize the Henderson park in our newest acquisition for beating our underwriting with the third highest total revpar in the quarter $777 eight triple Sevens.

Third quarter would have been even better if not for the impact of wildfires in northern California, which forced a six week closure at the landing at Lake Tahoe and resulted in $1 $8 million of lost profit.

The resort is fine and back open now.

Filed an insurance claim and hope to collect loss profits in coming months.

As for our Bourbon Hotel I should note that while hurricane items did impact New Orleans, we were fortunate not to have any material damage.

In fact, our team quickly restored power to the Bourbon Hotel one of the first hotels back online in New Orleans.

Wowing us to Opportunistically book first responders, we expect to beat original underwriting here for 2021.

Let's talk about profit flow through in labor costs.

Third quarter wages and benefits were 34% of revenue just 50 basis points higher than 2019, owing to a 2% improvement in man hours per occupied room.

Despite slightly higher overall labor costs, our asset management team and operators were able to develop several creative offsets to maximize overall profitability by optimizing revenue management for the labor environment.

This is how we held gross operating profit flow through at a constant at 45% in the third quarter versus the second quarter and why comparable third quarter Hotel EBITDA margins were up over 300 basis points from the second quarter.

We think this is a great result in this environment.

Turning to group our geographic footprint is a real advantage for group trends in 2022 and beyond.

Group revenue on the books for 2022 increased 14% from the second quarter, an acceleration from 8% in Q2.

Group revenue on the books for 2022 is now nearly 50% above the forecast for 2021.

Group rates for 2022 or $50, a night higher than 2021 year to date.

Owing to the fact, many of Diamond rocks key group markets like Boston, Chicago, San Diego in Phoenix have strong convention calendars next year.

Across the entire portfolio citywide room nights for 2022 increased 7% from the second quarter.

And compared to 2019.

Citywide room nights for Boston, Chicago, and San Diego collectively are up 3% in 'twenty, two and up 5% in 2023.

With that let me turn the floor back to Mark for concluding remarks.

Thanks, Jeff.

Before we take your questions I wanted to touch on our ESG performance and discuss our outlook.

Recently <unk> was again named the hotel sector leader by grasp.

And number one among all lodging REIT peers.

Being a good corporate citizen and aligning these objectives with our business as a high priority for Diamond rock.

I want to thank everyone on our team whose dedication made this achievement possible.

Let's turn to <unk> set up for 'twenty, two and beyond.

We think <unk> has four major competitive advantages over many of the peers.

First.

Our portfolio market exposure is uniquely favorable in three ways.

We have numerous resorts benefiting from the boom in leisure travel.

Our well located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in.

And our group recovery should be above industry average.

Cause of our geographic footprint with the convention calendars in our most important group markets all very strong through 2023.

The second advantage, we have is the multiyear benefit farmer hotels that have recently completed repositioning.

Such as the lodge at Sonoma.

The highest fail Margarita Bill key west and the Clio Denver.

The third advantage.

As our industry, leading percentage of third party terminable operating agreements.

This gives us more control and ability to manage costs in many of our peers.

This benefit is amplified by last year's conversion of nearly 20% of our portfolio for Marriott brand management.

Which should add over 50 basis points of portfolio margin expansion alone.

The last advantage I'll point out is our best in class asset management team's ability to implement strategies to gain market share.

There is no better evidence than stealing nearly 1300 basis points of share last quarter.

I will conclude the prepared remarks by saying that we are excited about our future and see things improving more rapidly than on our last call.

At this time, we're happy to take your questions.

Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish Jim move yourself from the queue. Please press the pound key.

And our first question comes from the line of Rich Hightower with Evercore. Your line is open. Please go ahead.

Hey, good morning, everybody.

Good morning Rich.

Good morning, So I'd like to go back to.

The sort of acquisitions environment for Diamond Rock and you did make some references to this in the prepared comments, but just in terms of the deals you are looking at currently.

The ones that you've transacted on the ones that you've maybe passed on or didn't it didn't quite make it to the final round I mean, just give us a little more color on some of the differences.

Within that pool of assets at this point.

Sure. It's mark So we said the prepared remarks, we're comfortable at about $300 million of balance sheet capacity towards acquisitions I think currently.

The history of this year I think we've lost every bid.

In our broker deal this year.

Because there is a ton of capital chasing hotels. So it is a highly competitive environment every private equity firm is chasing hotels. They liked the recovery story.

Some other Reits have stretched much.

Much more than we would have on certain acquisitions with just different assumptions at outlooks.

Currently we have five written offers out.

For most of those are off market deals I think of those five four resorts. One one that's not our resorts have a kind of a unique lifestyle market.

But we're spending most of our time on off market deals, but it is a very competitive marketplace and try to use our relationships and some times different.

Provisions for the properties repositioning to try to do deals that makes sense for our shareholders.

Okay. Appreciate the color there and then maybe Jeff just to go back to the comments on group I was sort of furiously typing and I think I missed a couple of points, but are you able to kind of balance where.

Group booking pace for 2022 is at this point as compared to Q standpoint in 2019.

Yes.

Our pace for 2022.

Compared to <unk> 19 is down about 25%.

From where it was at that time.

Does that useful.

That is useful thank you.

Yes.

Yes, rich I would say.

I'm sorry, let me tag out before he takes the next call or just on the group the convention calendars for our properties, whether it's we're relatively constructive last next year is Chicago and Boston are two most important markets Chicago has $1 $2 5 million citywide room nights scheduled for 2022, which is actually a 100000 more than 19.

And Boston has almost exactly the same number of room nights for.

For next year as it did in 19 Phoenix is ahead of 19, San Diego's within 5% of 19 Dcs above that's.

But as Alex City solid so.

We see things really pick it up particularly after the first quarter of 2022, and we think our footprint is going to be an advantage for <unk> next year, so with that happy to take the next call.

Okay.

And our next question comes from the line of Jimmy <unk> with Citi. Your line is open. Please go ahead.

Alright. Thanks.

Mark I wanted to ask you obviously a theme this year its been a rebound in future easier resort property is doing better significantly better than what they saw at 19.

How much do you think that can continue over the next couple of years do you think operators just sort of realize we can have better pricing power here and we're not going back and even if it means maybe slightly lower occupancies or do you think.

It kind of settles down and revert back to kind of.

Pre.

The pre Covid world.

It's a great question Smedes.

Our view I guess is there.

Multi layers, but we think a lot of it is sticky.

Some some inevitably as the world opens up particularly at the very high end people paying over $1000. A night can clearly go anywhere and so as Murphy coast in Italy opens up in the south of France inevitably some of Thats going to leak out, but I think people have permanently valued leisure higher I think.

Bits of retraining on what the rates are a lot of these properties and I think the work from anywhere environment, particularly is going to create.

Thats Thursday through Sunday will.

Arrived Thursday leaves Monday.

And it will create periods of travel just didn't exist before people can fly in from the east coast to go to Sedona.

For a four day stay that Couldnt have done that if they had to leave Friday night and come back Sunday night. So I think a lot of it stays I think you've got to be careful because I think different levels will be stickier than others, but I do think theres, a retraining what the acceptable prices.

For resort and I do think that there'll be changes in the kind of the paradigm that will allow allows us to.

To remain.

Okay and then.

Jeff I just wanted to go back to your comments on <unk>.

Labor.

<unk>, maybe you could parse that out a little bit but could you just I mean just.

Could you maybe just talk about increases I guess, an hourly worker wages that have been.

Brad mentioned on some other calls and it sounds like there's definitely been some upward movement, maybe you guys havent seen that or you just kind of speak to that a little bit.

Yes.

There's a few factors going on I think there have been some small increases in wage rates around the country and we've been trying to be creative in and managing that either by providing some incentives to employees in terms of attracting new labor.

Such as benefits that Youll get bonuses, if you recruit your friends things like that but also.

Are you providing incentives that are more tied to revenue production for example on a restaurant if restaurants achieve certain levels of revenue production in a week or a month, there's sort of a tip pool. If you will that gets split among employees.

Better modulate our labor costs relative to the revenues.

Yes, so I would say there's a couple of factors going on another one actually is somewhat the mix of labor I would tell you that.

You've pared back head count in last year in some situations youre going to have your your less experienced employees that maybe were furloughed or laid off in that left you with some of the euro more experienced employees, who had higher wage rates. So when you think about the mix and labor costs year over year, its going to optically it looks like your wage rates are rising, but that's not necessarily.

The sole driver of their I don't know Tom if you have any other comments or no.

Okay. Thank you guys.

Thank you and our next question comes from the line of Dori Kesten with Wells Fargo. Your line is open. Please go ahead.

Thanks, Good morning, when you look at the improvement in midweek demand in your urban markets can you call out markets that are leading and lagging and then and just had and corporate rates trends July to October.

Hi, Duane this is Tom.

The market's very.

A little bit anemic on that side, but Chicago is a standout the Gwen.

18% of our rooms at the Gwen and the quarter, where we're BT that was really significant growth compared to the set which is about six 5% and we've seen production out of.

I mean producers in the quarter had been the usual suspects Deloitte price Waterhouse Cooper, Ernst and young Boston consulting so the consulting.

Groups are coming back and Thats very positive and the question is how fast do they come back.

We certainly believe once we get into Q1 of 2020.

Two when we get through that and all the vaccines get done we believe that we should see a real big spike up in business activity business Transit activity. We are also seeing a lot of short term pharmaceutical group and if you. If you think about it back in the nineties pharmaceutical drove the hospitality business trading pharmaceutical trading partners.

Pharmaceutical business and we are seeing across the portfolio a lot of activity on the pharmaceutical side, which is very positive.

I think that's just the nature of what's going on in the world right with all the drugs in the training and the rollout so it's really a positive.

Story.

Yeah, Brian let.

Let me just add on to that a little bit if I could I mean, we saw the biggest gains in market share in our portfolio in Boston, Chicago, and New York in the third quarter, which are clearly more business transient driven and then if we just look at current trends.

Just looking at our October results, our Boston hotels ran 89% and 84% occupancy in October.

And the Chicago, Gwen, which Thomas noting that 78% in October.

And the New York Hotels ran a couple of months, 90% occupancy. So we're seeing some pick up.

As Rachel a challenge in some of some of the business that we're picking up but clearly there are signs of life in the BT I don't think its going to be off roaring until we're into 2022.

But it was more encouraging in Q3 than Q2.

Okay.

And when you did.

The two recent acquisitions that theyre exceeding initial underwriting.

What were your initial expectations for the year and where are they now.

And does that upside is on the top line or cost savings.

It's different the two differ.

So Henderson Park.

Wildly outperformed our October expectations.

The leisure was better the rate was $100 higher than our underwriting for October.

And that's making the difference in the net.

Only regret is I wish that hotel is bigger, but it's been a home run for us So far may have been.

Our cap rate for a super high quality.

Well resort.

New Orleans was different obviously, there was a hurricane with hurricane either that blew through there we were fortunate.

That we were the first hotels to get power back and our team I think did it just exceptional job of securing the first responders and kind of sucking up that business.

And then as we kind of move through the year, that's obviously gone now but the experiential.

Aspects of New Orleans, and it's still it is.

Still challenging in that market, but.

But it's kind of tracking as we expected. So I think we got a little bump from the first responders and they were kind of tracking in Q4 versus our underwriting expectations.

Yeah.

Okay. Thank you.

Thank you and our next question comes from the line of Austin, where Schmidt with Keybanc. Your line is open. Please go ahead.

Great Good morning, everybody.

Given kind of your view on the stickiness of the leisure traveler and some of these ADR trends.

Are you underwriting the current paradigm for these five acquisitions or what level of conservatism I guess are you assuming.

It's different in different markets. It's a great question, it's when we talk a lot about.

As a general rule, we're looking at 19, we're seeing how much. It has increased since 2019 and then generally we're seeing it's peaking in 'twenty, one and we will give back some of the what I'll call the peak heinous.

Right now from the Covid, but we will maintain substantially higher than 2019, that's our typical resort underwriting.

Some of the market, depending where they are coming to coming from and how affluent travelers are we think it's stickier.

Clearly the Super high end ones that traveler just has a lot more options. They were the ones who are go into Europe last year.

It's probably going to face some that had been really change on price domestically, that's probably the face a little more pressure than the key west resorts for instance.

So we're trying to trying to be thoughtful market by market.

Customer.

What kind of customers coming to that particular resort.

But we certainly think its substantially higher than where these resorts leveled off in 2019.

Very helpful and then to the extent you hit on one or more of these deals presumably you won't want to spend the entire $300 million.

Without maybe having something else lined up so what's sort of the most attractive source of funding today, our <unk> unit to consideration.

Any assets that you have got kind of teed up and waiting to the extent that it looks like you are.

Going to move forward with.

One or more of these deals.

So nothing is enormous I mean, so we have fiber in bids out I think the totality of this $5 $350 million, so nothings nothing to giant within the in the pipeline, we're sitting on substantial cash and we have the revolver to help though we have talked to you about Ot units.

But we're trading we believe below NAV, so we have to figure that out and adjust the purchase price accordingly.

But the tax advantages can be substantial for a seller. So we have had some of those conversations Jeff do you want to have a little more about sources.

Yes, I think you hit the nail on the head I think immediately we would probably be using that cash on hand that we have and as Mark said, we have pretty abundant capacity to fund the acquisitions, even though ones that we're looking at assuming we hit on every single one.

Beyond that I think.

I guess all options are open, but we're pretty stingy about equity issuance at prices that are below NAV.

No. That's helpful. Thanks for the time.

Okay.

Thank you and our next question comes from the line of Danny Assad with Bank of America. Your line is open. Please go ahead.

Hey, good morning, everybody.

My question is on the so your non room revenues right. So like specifically like the other revenue component that's not F&B.

It's approaching 2019 levels pretty rapidly at this point well make much quicker than that.

Like your Revpar and so I guess my question is can you just help us understand some of the bigger drivers of that component and its sustainability into the coming months and quarters.

I'll, let Tom handle this question because it's really a testament to all the things he has been doing particularly on the resort focused in the resorts have a lot of ancillary income so successful implementation of resort fees and really the F&B programs have been a large contributor one of Tom's true skills is funding.

Every lever to find ways to create revenue sources.

Hotels.

Ill turn it over to you as to what really is a testament to what you can do it.

Once again.

How do we maximize revenue per square foot and hotel once we have them captured.

The mix is different certainly with heavy heavy occupancy and usage on the leisure side, they're there and when they are there we how do we how we maximize the spend and target them. So resort fees other incremental fees services partner partnering with.

With vendors packaging are all are all things that we're thinking about when we look at when we look at revenue.

Look at Revpar at how do we maximize our our ADR and our <unk>.

Revpar. We also look at if we're 120% of rate wise and every one of our other categories in the hotel, 120% everything in the property needs to be yielded so food and beverage parking services.

<unk> everything should be yielded based on based on demand. So a saturday spot pricing should be different than a tuesday, and so when we take that approach and your yield everything those incremental those incremental.

Revenue streams actually add up and then when we've been the benefactor of cancellation fees and focusing on other revenue streams as well as room rental and where we can get it. So I think it's just it's a team effort and we're happy with the results.

Awesome and just as my follow up is actually on something that Jeff was talking about earlier that Jeff Your comment about group pace in 'twenty, two being down 25% versus 19 do you know off the top of your head what that number would have been call. It 90 days ago.

I don't have it with me I'm looking at Tom if he might have it.

We had we had.

About 300000 group rooms on the books 90 days ago and now we have about 350000 group rooms on the books for 2022, So we had some.

Very positive movement, we had really strong prospects or prospects, our lead and our prospects for the quarter were strong as we've seen in the last probably eight quarters. So.

We really were really feeling pretty good about that and then.

And when you when you compare that to.

For <unk>, because we're comparing against and 19 were around 400000 rooms, and we jumped up about we picked up about 70000 rooms quarter over quarter at 19, So our GAAP. Our GAAP is worth close where we picked up roughly 50000 versus versus 70000. So we're in the ballpark.

Yes.

Got it okay. Thank you.

Yes.

And our next question comes.

That's okay Daniel.

Our next question comes from the line of Michael Bellisario with Baird. Your line is open. Please go ahead.

Thanks, Good morning, everyone.

Good morning.

Tom a question for you.

As your hotels are signing new group business in new BT contracts today.

What are you seeing in terms of changes that might be made to those contracts and what are or aren't.

Meeting and travel planners asking for today.

Yeah.

It's that can interesting one we've been a lot more aggressive in how we look forward at watching the contracts. So if historically speaking we watched a contract by 20% we're seeing as we look forward into 'twenty two that's what let's wash it by 50% to be more conservative.

Certainly the management companies have their terms and their standard contracts and that's what they that's what they use we obviously want to make sure that those those clauses and contracts stay consistent.

We have seen a lot of shifts over the last couple of years right. When you start moving contracts one year and then move it again another year because.

Ill cover doesn't break.

The contracts, we have to be cognizant of the fact that they get.

There are.

Getting a little bit looser on attrition clauses and we actually do.

We actually are the team does contract on it. So we actually go out to all of our properties and started to look for that group contracts and new contract audits to make sure that the contracts aren't toothless and that we're protecting certainly is protecting shareholders and protecting future pace. So that's a priority for us we are monitoring it and then certainly it's market by market.

A big company at AT&T comes in and says this is our terms take or leave it you really have to make a decision. It's a business decision at that point and the contract. The terms of the contract do you want the business really not one <unk>.

Not want the business so it's a.

It's an ebb and flow and I think.

I think the good news is we're paying attention to it and we're aware of it and we're trying to make sure that we minimize our risk going forward.

Got it that's helpful. And then just in terms of group cancellations that might've occurred during the third quarter what was the total there and then for what periods where those.

Groups canceled or maybe even re bookstore.

Yes, Mike.

This is Jeff we had about $7 million of group revenue that was canceled.

Early in the third quarter related to Delta variance I think more than.

Half of that I think it was re booked into 2022.

In different periods.

I think there was a small amount of cancellation and attrition income that was collected I think.

Off the cuff I think it was about one or 2 million $2 million that was canceled that was collected.

<unk>.

During the quarter so yes.

We've done a very good job at.

Making sure that we can.

Reschedule those bookings.

We're seeking cancellations and trying to push that revenue off into 2022.

We had about 35000 group rooms cancel.

And we moved about 15000, so about 50% of those rooms, we shifted into the future, which is great and then we collect about $2.6 million in cancellation fees. So it's.

Once again, it's a priority.

The business and so we have to pay tax.

Helpful. Thank you.

Thank you and our next question comes from the line of Christopher Glynn with Green Street. Your line is open please.

Thanks, Good morning, everyone.

I wanted to go back to the favorable citywide calendar that you mentioned in Boston, Chicago and several other markets first I'd be curious to understand how youre thinking about those markets on a longer term basis, and then secondly, just given the favorable backdrop next year does that maybe provide you sort of a window of opportunity to sell into.

That strength and redeploy capital elsewhere.

It's a great question.

I think short term, we're pretty constructive on all of those markets I think we're particularly constructive on markets like Phoenix and Salt Lake City.

Boston, we really like our two hotels in that market, we like our locations the quality of those assets.

Chicago is a market that probably over time, we would look to shrink our exposure to given that it's always had supply challenges and it's much more rate sensitive.

In a market like Boston, So yes, it could provide some opportunity when cash flows are returning to potentially reduce some of that exposure and as as we articulate the prepared remarks, we continue our strategy that we've had for the last seven or eight years of moving more into these lifestyle experiential properties in submarkets like Sedona and Huntington Beach.

As in sales and.

So selling something like a Chicago asset would certainly be consistent with executing on our long term strategy.

I appreciate the thoughts.

Thanks for the question.

Thank you and our next question comes from the line of Bill Crow with Raymond James Your line is open. Please go ahead.

Yes, thanks, good morning.

Maybe Tom for you Tom.

Talking about the shrink to BT travel in Chicago and Boston.

There is still seasonal factors at work right. So we're we're now.

Remember.

90.

90 days from now are we going to be talking about.

The lack of business travel in those markets because of seasonal factors and just how do we think about kind of the fourth quarter rolling into the first quarter.

Yes, it's going to it's going to be consistent and flat.

Yes, as you said bill it.

We're getting into seasonality. So we certainly see the slowdown in Q4 and Q1.

That's why I said earlier in my comments I think Q Q2, and Q3 2020 really expected.

Spike up.

And we're still going through that negotiation process now with the big brands right Marriott Hilton and all our managers are actually looking looking at 2022 rates and how we're going to be so.

It's hard to know, but my point earlier was it was more of a micro market on Chicago.

We saw positive movement in positive activity versus the market.

So.

If you can provide the service and you have the quality you could get we believe we can get outsized performance versus that it doesn't mean that it's.

It doesn't mean that it's coming back at significant levels, but we are outperforming our peers and that's that was the point I was making.

I'll just I'll just pile on that I think we see the recovery in business transient related to it's not a Q4 story in mid 'twenty. Two story I think we're optimistic frankly them. There are some good things going on.

This morning's announcement about tax love at Pfizer a pill.

As a real positive.

I think even more importantly, this week's announcement about the January 14 for the Osha requirements for two covers two thirds of the workers United States.

It's kind of potentially provide the what we'll call. It the magic date for C suites to tell their employees, it's safe to get back on the road, it's safe to get back to your office. This is kind of the magic politically acceptable day in.

Corporate America and that could be the real pivot point for business transient travel and so this January four state could.

We can look back six months from now.

What are we going to say what's important fault.

<unk> points in the recovery.

I think January 4th could be the one for PT that really starts to shift in mentality and activity in the United States.

I hope so I hope, so hey, Jeff just.

Modeling question.

Tax lines.

And a little bit of noise this quarter Im wondering what youre thinking going forward.

Yes.

Short answer is there was a little bit of a switch there as you know.

We effectively are trying to accrue for income taxes on an annual year target. If you will based upon how.

Our outlook is changing and we swept switched from an income tax benefit in Q2 to an income tax expense in Q3 on a full year basis. I think we're looking for income tax in the fourth quarter to be about $500000.

<unk> expense in the fourth quarter, so a little less than we saw in the third quarter.

<unk> figure, but I think that's how you should be thinking about it in the fourth quarter line.

Great. Thank you.

Yeah, so year to year to date I think it's about one to one $5 million of cash that's cash of cash cash income taxes.

Thank you and our next question comes from the line of Stephen Grambling with Goldman Sachs. Your line is open. Please go ahead.

Hi, Thanks, I know you referenced trading below NAV I'm curious, if you've actually kind of set the bar on where you estimate NAV is and how that has evolved over the past quarter and then as you referenced private equity has been very active I'm curious to hear what seems you are seeing and where they are focused and how that may even influence going forward.

Sure.

The second question first.

So interesting there is a ton of private equity chasing hotels and I think the.

It's the traditional.

Traditional players whether thats.

Okay salaries upon her or Blackstone, but I think the interesting dynamic and theyre getting financing I know we bid against.

So one of the largest p/e firms on a on a resort, but they were getting financing I think 65% LTV at L plus 180.

So that's that's pushing up pricing as well to.

The debt markets for cash flow and hotels is really robust.

Firms can take advantage of that.

But I think the pricing change I think was interesting dynamics as these.

These rights at Blackstone and.

Starwood and others have created that are aging I think we're just between the two of those are 253 $3 billion a month.

And they are putting away so they're putting away kind of on a permanent basis.

Right.

Five <unk>.

$5 to $10 billion $10 billion of real estate.

And as things go into that we'll call that lockbox Theres, just less product on the market, which makes everything more valuable that's still out there.

And you look at the the reference points of hotels versus multifamily industrial and other choices in the real estate food group.

And hotels simply haven't compressed, but the other the other sectors.

So I think they are.

Our view is NAV is increasing for hotels and that there is potential for it to increase more.

Both on an absolute basis.

<unk> ability and on a relative basis versus the other asset classes out there. So we continue to <unk> every quarter.

We've consistently for a number of quarters now has gone up pretty substantially.

Our NAV has increased in the last three to six months.

We do spend a lot of time thinking about the NAV is you never really know until you go to market.

But I'll tell you every time, we lose one of these bids we realize our <unk> internally is too low, but we haven't published maybe we havent.

In a long time since the onset of the pandemic.

Continue to look at that and we'll think about publishing that but we'll be very thoughtful before sharing them.

Fair enough and then maybe an unrelated question as you've moved the mix to more independent lifestyle hotels and changed a lot of the terms in terms of the management contracts does that change.

I guess, how you would maybe think about M&A.

For more of like portfolio properties in <unk> thinking about consolidation within the broader REIT space.

Yes, I mean, I think we've worked really hard to build something that's very unique in the public markets. There's no. Other public company combine the full service sector that has as many short term terminable management agreements, we think that on exit that's probably worth 10% more on Navy 50 to 100 basis points and exit cap.

Right. So we think that there's a story to articulate about why we should have a higher valuation multiple there.

And so I think we and frankly, it's just.

It's more enticing for a lot of reasons.

To have control more control over the independent operators.

I think as we think about M&A opportunities. We think the this model is a more liquid higher value model.

But it is something you could price as you look at other companies right. I mean, it is something that you can think about and put into the into the pricing, but we really like where we've got until we've spent a lot of time getting here.

But nothing's off the table.

Awesome. Thanks, so much.

Thank you and our next question comes from the line of Chris.

One with so.

Deutsche Bank. Your line is open. Please go ahead.

Okay.

Yes.

Good morning, guys.

I guess question for Mark and it's kinds of bolt onto that last question, but maybe taking a slightly different direction, which is mark youre seeing the public REIT.

Get a little bit more active I think overall buying buying hotels, and just talked about private equity pricing and how much capital to raising them.

Disconnect between public and private pricing. So the question is from it from a high level industry standpoint, do you think this makes <unk>.

<unk> public M&A more is there more of a.

More and more compelling reason to do that and then just thinking at a very high level.

Well listen, we're not scared of private equity or fiduciary for our shareholders. We'll always do what's right and if that means we get a big offer and sell the company to premium it's certainly something.

Did the right thing to do for shareholders the merge to avoid that.

Would not be a strategy we would employ.

Were fine doing what's right for shareholders.

I would probably want to get full value certainly for the company. If we went down that road.

I think mergers and the public public to public makes sense if you can.

Particularly at a clear strategy after the merger and you clearly articulate that you didn't pay too much and thats. It savings from the G&A is probably life out 85% of the the G&A of the target company you put a multiple on that and you say okay on the other side of this between G&A savings and other synergies I think it's.

A clear strategy in the stock price should be higher that's fine, but we're in a space that bigger hasnt proven by itself to create value.

So we don't buy into that thesis, but certainly if you could do something where the math works you could come out the other side from a combined company with a clearly articulate strategy, that's something we should look hard at.

Okay.

Very good and then.

Yes, I guess the other question would be Diamond rock has always been a pretty like to keep the structure pretty simple right. You guys have been one of the easier companies to follow and analyze and understand.

We have seen some of your peers go a little bit more down the JV route and is that something you guys would consider if there was just hypothetically a larger.

It's public or private or some kind of portfolio or are you willing to kind of step outside of those bounds a little bit and do something a little bit nontraditional for for Diamond rock.

Hey, Chris It's Jeff.

I think you can never rule that out, but I do think we like the simplicity and the control that comes from holding owning our assets.

Having joint ventures can be complicated from a.

Our balance sheet standpoint, and from an underwriting standpoint from your perspective or from investors perspective, So I would never preclude us from.

Entering into an attractive investment.

Joint venture was necessitated but I think our preference is to wholly own our assets and really kind of keep a clean balance sheet and control.

Sure.

Okay very good I appreciate the thoughts thanks, guys.

Thank you and our next question comes from the line of Anthony Powell with Barclays. Your line is open. Please go ahead.

Hi, Good morning first question on pricing, we've seen obviously very strong pricing.

<unk> and resorts does that change how you approach pricing next year for business transient and group is there more of an opportunity to tick up.

Pricing in those segments or are you more interested in just kind of feeling the hotels with those customers.

It's a great question I think let's take the three segments. So leisure like this this festively coming up I almost think we can't charge enough.

I mean, there is there is a lack of ability and there's just tremendous demand for those so I think we should push even harder than we have been pushing on pricing. When we look at business transient I think it is really encouraging in the third quarter, we were within 1% business transient rate from Q3 2019.

The.

It's really not a rate game, it's as.

As the company comfortable getting people on the road or RSA, it's not like we'll put them on the road or 10 Bucks cheaper.

So I think we've.

We have adopted the philosophy of instructor or hotels that this is a safety issue. If you will for for them not a pricing issue and discounting doesn't get you any more rooms, so hold rate and I think generally thats pervasive.

Kind of viewpoint and philosophy.

The hotel industry, so I'm relatively optimistic on pricing for <unk> now, we're going to have some mix shift next year.

Do want to put heads in beds, so will we take.

More of the lower rated BT mix.

Mix to fill it.

Ultimately leads to a more profitable yes.

<unk> returns will start yielding that stuff out.

So we're not trying to discount to get BT and we will have to have some mix shifts so youll see some deterioration.

But again I think it.

The safety issue not a pricing issue and then a group our group right now I think we're looking at 2022, even though we're down in room nights were actually up almost 2% of rate.

Again with the same philosophy that these groups are meeting its not theyre not going to meet its $10 cheaper to meet your hotel they like the space. They haven't met in two years, sometimes three years and they need to get together.

And also when you think about especially from the corporate side everyone's at record profitability in the United States.

It's not like the the CFO or sitting there at Pfizer, Procter and Gamble and say no things that these are tough times, we really need to cut the travel budget and training budgets, they're saying we need to grow our revenue.

Terrific profitability, we need to get training, we need to hire people, we need to take care of our associates we.

We need to get them together.

So I think all those things play pretty favorable into rate integrity next year, but I do want to indicate there will be mix, we are going to have to layer in some of that lower rated BT and then yield a back out as things get stronger and stronger. So you will see that phenomenon in 2022.

Got it thanks, and going back to the NAV question.

Do you have more clarity on the value of it let's say.

Urban business transient focused hotels in urban group hotels.

There had been fewer transactions and those types I'm curious what you're seeing.

In value for those properties.

Yes, I'd say it varies by market.

It can be.

It depends what you call it urban market too like Austin up.

Great and NAV versus whereas 19 in a market like Chicago is probably down.

10%.

So, but these these urban markets.

I think it's a little wait and see from the buyer's perspective.

There is clearly appetite and people that want to play that thesis, but you need better trailing cash flows that the private equity folks can get better debt and then youll see <unk> recover more rapidly than the urban markets. So we anticipate that the gap starts shrinking over the next 12 months as you start seeing cash flow, it's really return and the urban market.

It's because the financing just gets better which makes it the acquisition work.

A larger pool of buyers.

Okay. Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Mark Brugger for any further remarks.

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

This concludes today's conference call. Thank you for participating you may all disconnect everyone have a great day.

Okay.

Yes.

Okay.

[music].

Yes.

Good morning, everyone and welcome to Diamondback Hospitality third quarter earnings Conference 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.

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.

The third quarter was a strong one for Donna rock hotel profits hit their highest levels since inception of the pandemic.

Fact hotels Revpar was within 20% of the comparable quarter in 2019 with 12 of our 31 hotels actually exceeding the comparable quarter results in 2019, and five hotel setting all time highs.

The strength of these results exceeded our internal expectations.

Our portfolio benefited from its geographic footprint and a concerted effort by our team to maximize the benefits from the resurgence in travel demand.

Our portfolio took nearly 1300 basis points of Revpar index from our competitors in the third quarter.

Moreover, having the industry's highest percentage of full service hotels with short term management agreements also play to our advantage in managing cost and driving profit flow through.

In total this powerful combination enabled <unk> to generate a healthy $38 $9 million of adjusted EBITDA and 10 cents of positive adjusted <unk> per share.

In the quarter, we saw travel demand increase in all travel segments with leisure, leading the way. Additionally group and business transient also showed meaningful acceleration.

Yeah.

There were some real positives for business travel trends in the quarter.

We saw <unk> revenue jumped.

To 84% of the comparable 2019 levels with occupancy up two six percentage points over the second quarter.

Encouragingly.

Business transient ADR was just 1% below Q3 19 levels.

The outlook for group is equally encouraging.

Lead generation in the third quarter grew to over 12400 leads representing over $2 1 million future room nights.

July was the best month per lead volume with over 750000 room nights.

While the Delta variant that emerged late summer led to a drop off in activity in August.

Meeting planners appear to have shrugged off the headlines.

As production snapped back close to July pace by September.

In addition to strong operating trends.

Jeff will discuss in a moment.

<unk> continues to make tremendous progress on internal and external growth initiatives to drive outsized cash flow growth in 2022.

Let me highlight a few of the bigger ROI projects.

Our Vail resort is finishing a $40 million repositioning.

By the end of this month, the resort will be relaunched as the height Vail resort and Spa, a luxury collection hotel.

The repositioned resort is expected to generate several million dollars of incremental EBITDA.

Our Barbary Beach key West resort will also complete its conversion in November.

It will be relaunched as the only margaritaville resort in the Florida keys.

We expect the repositioning to allow us to push average rate by $15 and to generate several million dollars of incremental retail embar sales.

The last ROI project I'll highlight is in Denver.

Where we are underway with the up branding of the J W. Marriott to a luxury collection hotel to be named the Cleo.

This one should be completed in the first quarter of 2022.

These ROI repositioning are expected to deliver irr's north of 30%.

As you might have guessed, we're big believers in these type of projects.

And our past success gives us great confidence.

As a testament to direct track record.

Proud to announce that the Gwen was named an <unk> Nast Traveler's 2021, Reader's Choice Awards.

As the number one hotel in Chicago and number eight in the world.

The highest ranking of any REIT owned hotel.

In addition to the Gwen <unk> also recognize several of our other outstanding hotels, including Cavallo point in Sausalito.

Both of our hotels in key west and the <unk> resort in Sedona, Arizona.

As a final comment on ROI repositioning.

Just mentioned that we are working on several other up branding opportunities within the portfolio.

We hope to share those with you in coming months.

Let's turn to acquisitions and dispositions.

We have been active in upgrading and focusing the portfolio.

In the third quarter, we successfully recycled proceeds from our second quarter dispositions.

Our two new acquisitions are the Bourbon hotel in the French quarter of New Orleans.

And the Henderson Park.

A beachfront resort in Destin, Florida.

These acquisitions align with our strategy to focus on hotels that resonate with today's traveler today's traveler as they are experiential and leisure oriented lifestyle hotels.

I am pleased to announce at both hotels are forecasted to exceed our underwriting for 2021 and.

In fact, the Destin Beach resort that deal is now tracking to be an eight 8% cap rate on 2021 NOI.

While this is great.

We are not resting on our success.

We are actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets.

I'll now turn the call over to Jeff for more details on our results and balance sheet Jeff.

Leverages Conservative with only 1 billion of total debt outstanding against roughly $3 $5 billion in hotels and resorts overall, the balance sheet remains very strong.

As Mark mentioned, we expect to remain an active but disciplined acquirer of on strategy properties, we have over $300 million of investment capacity today, while operating within our long term leverage targets.

Let me share a few success stories in our portfolio this quarter.

Mid week occupancy at our urban hotels was up 26 percentage points over the second quarter.

Third quarter, ADR is 22% higher than 2019, whereas prior to renovation ADR was 4% below 2019.

<unk> has exceeded our expectation and the largest expected to meaningfully exceed our budget for 2021.

The Hilton Burlington generated one of the three biggest upsides to budget during the quarter on strong Revpar and margin gains average daily rate was over $300 per night and among the 10 best in the portfolio.

For those who have never been Burlington is a terrific college town that is quietly evolve into a food destination anchored by some of the highest rated craft breweries in the United States.

Our pair of hotels in key West continued to deliver strong performance with third quarter EBITDA margins 3000 basis points above 2019 levels.

I must recognize the Henderson park in our newest acquisition for beating our underwriting with the third highest total revpar in the quarter $777 eight triple Sevens.

Third quarter would have been even better if it if not for the impact of wildfires in northern California, which forced a six week closure at the landing at Lake Tahoe and resulted in $1 $8 million of lost profit.

The resort is fine and back open now.

Filed an insurance claim and hope to collect loss profits in coming months.

As for our Bourbon Hotel I should note that while hurricane items did impact New Orleans, we were fortunate not to have any material damage.

In fact, our team quickly restored power to the Bourbon Hotel one of the first hotels back online and New Orleans, allowing us to Opportunistically book first responders, we expect to beat our original underwriting here for 2021.

Let's talk about profit flow through in labor costs.

Third quarter wages and benefits were 34% of revenue just 50 basis points higher than 2019, owing to a 2% improvement in man hours per occupied room.

Turning to group our geographic footprint is a real advantage for group trends in 2022 and beyond.

Group revenue on the books for 2022 increased 14% from the second quarter, an acceleration from 8% in Q2.

Group revenue on the books for 2022 is now nearly 50% above the forecast for 2021.

Group rates for 2022 or $50, a night higher than 2021 year to date.

Owing to the fact, many of Diamond rocks key group markets like Boston, Chicago, San Diego in Phoenix have strong convention calendars next year.

Across the entire portfolio citywide room nights for 2022 increased 7%.

From the second quarter.

And compared to 2019.

<unk> room nights for Boston, Chicago, and San Diego collectively are up 3% in 'twenty, two and up 5% in 2023.

With that let me turn the floor back to Mark for concluding remarks.

Thanks, Jeff.

Before we take your questions I wanted to touch on our ESG performance and discuss our outlook.

Recently <unk> was again named the hotel sector leader by grasp and number one among all lodging REIT peers.

Being a good corporate citizen and aligning these objectives with our business as a high priority for Diamond rock.

I want to thank everyone on our team whose dedication made this achievement possible.

Let's turn to Diamond <unk> set up for 'twenty, two and beyond.

We think <unk> has four major competitive advantages over many of the peers.

First.

Our portfolio market exposure is uniquely favorable in three ways.

We have numerous resorts benefiting from the boom in leisure travel.

Our well located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in.

And our group recovery should be above industry average.

Because of our geographic footprint with the convention calendars in our most important group markets all very strong through 2023.

The second advantage, we have is the multiyear benefit farmer hotels that have recently completed repositioning.

Such as the lodge at Sonoma.

The highest fail Margarita Bill key west and the Clio Denver.

The third advantage.

As our industry, leading percentage of third party terminal operating agreements.

This gives us more control and ability to manage costs in many of our peers.

This benefit is amplified by last year's conversion of nearly 20% of our portfolio for Marriott brand management.

Which should add over 50 basis points of portfolio margin expansion alone.

The last advantage I'll point out is our best in class asset management team's ability to implement strategies to gain market share.

There is no better evidence than stealing nearly 1300 basis points of share last quarter.

Ill conclude the prepared remarks by saying that we are excited about our future and see things improving more rapidly than on our last call.

At this time, we're happy to take your questions.

And our first question comes from the line of Rich Hightower with Evercore. Your line is open. Please go ahead.

Hey, good morning, everybody.

Good morning, Rich good morning.

So I'd like to go back to.

The sort of acquisitions environment for Diamond Rock and you did make some references to this in the.

The prepared comments, but just in terms of the deals you are looking at currently.

The ones that you've transacted on the ones that you've maybe passed on or didn't it didn't quite make it to the final round I mean, just give us a little more color on some of the differences within that pool of assets at this point.

Sure. It's just mark So we said in the prepared remarks, we're comfortable at about $300 million of balance sheet capacity towards acquisitions. I think currently tubular history. This year I think we've lost every bid and a.

In our broker deal this year.

There's a ton of capital chasing hotels. So it is a highly competitive environment every private equity firm is chasing hotels like the recovery story.

And some other Reits have stretched.

Much more than we would have on certain acquisitions with just different assumptions that outlook.

Currently we have five written offers out.

For most of those are off market deals that gives us $5 for our resorts one one thats not our resorts have a kind of a unique lifestyle market.

But we're spending most of our time on off market deals. This is a very competitive marketplace and try to use our relationships and some times different.

Visions for the properties repositioning to try to do deals that makes sense for our shareholders.

Okay I appreciate the color there and then maybe Jeff just to go back to the comments on group I was sort of furiously typing and I think I missed a couple of points, but are you able to kind of balance where.

Group booking pace for 2022 is at this point as compared to the standpoint in 2019.

Yes.

Our pace for 2022.

Baird to 19 is down about 25%.

From where it was at that time.

Is that useful.

That is useful thank you.

Yes, rich I would say.

Yes.

I'm, sorry, let me tag up before we take the next call or just on the group the convention calendars for our properties, whether it's we're relatively constructive.

Next year, Chicago, Boston, our two most important markets Chicago has 125 million citywide room nights scheduled for 2022, which is actually 100000 more than 19, and Boston has almost exactly the same number of room nights.

For next year as it did in 19 Phoenix is ahead of 19, San Diego's within 5% of 19 Dcs above.

Salt Lake City solid so.

We see things really pick it up particularly after the first quarter of 2022, and we think our footprint is going to be an advantage for <unk> next year.

With that happy to take the next call.

<unk>.

And our next question comes from the line of Ross with Citi. Your line is open. Please go ahead.

Alright. Thanks.

Mark I wanted to ask you obviously a theme this year its been a rebound in leisure easier resort property is doing better significantly better than what they saw in 19.

It kind of settles down and revert back to kind of.

Pre.

The pre Covid world.

No. It's a great question Smedes.

Our view I guess is there.

Multi layers, but we think a lot of it is sticky.

That summary training on what the rates are a lot of these properties and I think the work from anywhere environment, particularly is going to create.

Thats Thursday through Sunday, they'll arrive Thursday leave Monday.

And it will create periods of travel it just didn't exist before people can fly in from the east coast to go to Sedona.

Yes for a four day stay that Couldnt have done that if they had to leave Friday night and come back Sunday night.

So I think a lot of it stays I think you've got to be careful because I think different levels will be stickier than others, but I do think theres, a retraining what the acceptable prices.

For resort and I do think that there'll be changes in the kind of the paradigm that will allow a lot of this too.

To remain.

Okay and then.

Jeff I just wanted to go back to your comments on <unk>.

Labor.

<unk> credits, maybe parse that out a little bit but could you just I mean just.

Could you maybe just talk about increases I guess, an hourly worker wages that have been.

Brad mentioned on some other calls and their conflicts has definitely been some upward movement. Maybe you guys havent seen that or can you just kind of speak to that a little bit.

Yes.

There's a few factors going on I think there had been some small increases in wage rates around the country and we've been trying to be creative in and managing that either by providing some incentives to employees in terms of attracting new labor.

Such as benefits that Youll get bonuses you recruit your friends things like that but also.

Providing incentives that are more tied to revenue production for example on a restaurant if restaurants achieve certain levels of revenue production in a week or a month there is sort of like a tip pool. If you will that gets split among employees.

Better modulate our labor costs relative to the revenues.

Yes, so I would say there's a couple of factors going on another one actually is somewhat the mix of labor I would tell you that.

You've pared back head count in last year in some situations youre going to have your your less experienced employees that maybe were furloughed or laid off and that left you with some of the euro more experienced employees, who at higher wage rates. So when you think about the mix and labor costs year over year, its going to optically it looks like your wage rates are rising, but that's not necessarily.

The sole driver of their I don't know Tom if you have any other comments or no.

Okay. Thank you guys.

Thank you and our next question comes from the line of Dori Kesten with Wells Fargo. Your line is open. Please go ahead.

Yes.

Yes, sure Hi, Jerry this is Tom.

The market's very.

A little bit anemic on that side, but Chicago is a standout the Gwen.

18% of our rooms at the Gwen and the quarter, where we're BT that was really significant growth compared to the set which is about six 5% and we've seen production out of.

Producers in the quarter had been the usual suspects Deloitte price Waterhouse Cooper, Ernst and young Boston consulting so the consulting.

Groups are coming back and Thats very positive and the question is how fast do they come back.

Certainly believe once we get into Q1 of 2020.

Pharmaceutical business and we are seeing across the portfolio a lot of activity on the pharmaceutical side, which is very positive.

And I think that's just the nature of what's going on in the world right with all the drugs in the training and the rollout so it's.

Really a positive.

Story.

Yes, sorry.

Just looking at our October results, our Boston hotels ran 89% and 84% of occupancy in October.

And the Chicago, Gwen, which Thomas noting that 78% in October.

The New York hotels ran a couple of months to 90% occupancy. So we're seeing some pick up.

Rachel a challenge in some of some of the business that we're picking up but clearly there are signs of life in the BT I don't think its going to be off roaring until we're into 2022.

But it was more encouraging in Q3 than Q2.

Okay.

When you.

The two recent acquisitions that they are exceeding our initial underwriting.

What were your initial expectations for the year and where are they now.

And does that upside is on the top line.

<unk>.

It's different the two differ diff properties, So Henderson Park.

Wildly outperformed our October expectations.

The leisure was better the rate was $100 higher than our underwriting for October.

That's making the difference in the net.

Only regret is I wish that hotel is bigger, but it's been a home run for us So far may have been.

Our cap rate for a super high quality.

We will resort.

New Orleans was different obviously, there was a hurricane with hurricane neither that blew through there we were fortunate.

We were the first hotels to get power back and our team I think did it just exceptional job of securing the first responders and kind of sucking up that business.

And then as we kind of move through the year, that's obviously gone now but the experiential.

Aspects of New Orleans, and it's still it's still challenging.

And that market, but.

But it is kind of tracking as we expected. So I think we got a little bump from the first responders and they were kind of tracking in Q4 versus our underwriting expectations.

Yeah.

Okay. Thank you.

Thank you and our next question comes from the line of Austin, where Schmidt with Keybanc. Your line is open. Please go ahead.

Great Good morning, everybody.

Mark given kind of your view on the stickiness of the leisure traveler and some of these ADR trends.

Are you underwriting the current paradigm for these five acquisitions or what level of conservatism I guess are you assuming.

It's different in different markets. It's a great question, it's when we talk a lot about.

Right now from the Covid, but it will maintain substantially higher than 2019, that's our typical resort underwriting.

Some of the markets, depending on where they are coming to us coming from and how affluent travelers are we think it's stickier.

Clearly the Super high end ones that travel or just has a lot more options. They were the ones who were go into Europe last year.

It's probably going to face some although they've been really change on price domestically, that's probably the face a little more pressure than the key west resort for instance.

So we're trying to trying to be thoughtful market by market customer.

What kind of customers coming to that particular resort.

But we certainly think its substantially higher than where these resorts leveled off in 2019.

Very helpful and then to the extent you hit on one or more of these deals presumably you won't want to spend the entire $300 million.

Without maybe having something else lined up so what's sort of the most attractive source of funding today, our <unk> unit to consideration.

Any assets that you have got kind of teed up and waiting to the extent that it looks like youre going to move forward with.

One or more of these deals.

So nothing's enormous them until we have fiber in bids out I think the totality of those five is about $350 million. So nothing's nothing's giant within the in the pipeline, we're sitting on substantial cash and we have the revolve rate, though we have talked to you about LP units.

But we're trading we believe below NAV, so we have to figure that out and adjust the purchase price accordingly.

But the tax advantages can be substantial for a seller. So we have had some of those conversations Jeff do you want to talk a little bit more about sources.

Beyond that I think.

I guess all options are open but.

We're pretty stingy about equity issuance at prices that are below NAV.

No. That's helpful. Thanks for the time.

Okay.

Thank you and our next question comes from the line of Danny Assad with Bank of America. Your line is open. Please go ahead.

Hey, good morning, everybody.

My question is on the so your non room revenues right. So like specifically like the other revenue component that's not F&B.

It's approaching 2019 levels pretty rapidly at this point only well make much quicker than.

Like your Revpar and so I guess my question is can you just help us understand some of the bigger drivers of that component and sustainability into the coming months and quarters.

I'll, let Tom handle this question because it's really a testament to all of those things. He has been doing particularly on the resort focused in the resorts have a lot of ancillary income so successful implementation of resort fees and really the F&B programs have been a large contributor one of Tom's true skills is funding.

Every lever to find ways to create revenue sources.

Hotels.

Now I'll turn it over to you as to what really is a testament to what you can do it.

Once again.

How do we maximize revenue per square foot and hotel once we have them captured.

With vendors packaging are all are all things that we're thinking about when we look at when we look at revenue.

Look at Revpar at how do we maximize our ADR or <unk>.

Revpar. We also look at if we're 120% of rate wise and every one of our other categories in the hotel, 120% everything in the property needs to be yielded so food and beverage the parking services.

Awesome and just as my follow up is actually on something that Jeff was talking about earlier.

Jeff Your comment about group pace in 'twenty, two being down 25% versus 19 do you know off the top of your head what that number would have been call. It 90 days ago.

I don't have it with me I'm looking at Tom if he might have it.

We had.

About 300000 group rooms on the books 90 days ago and now we have about 350000 group rooms on the books for 2022, So we had some very.

Very positive movement, we had really strong prospects or prospects are leading our prospects for the quarter were strong as we've seen in the last probably eight quarters. So.

We really we're really feeling pretty good about that and then.

And when you when you compare that to.

For 19, because that's when we're comparing against and 19 were around 400000 rooms, and we jumped up about we picked up about 70000 rooms quarter over quarter and 19, so our GAAP. Our GAAP as we are close we picked up roughly 50000 versus versus 70000. So we're in the ballpark.

And yes.

Got it okay. Thank you.

Sure.

And our next question comes.

That's okay.

Our next question comes from the line of Michael Bellisario with Baird. Your line is open. Please go ahead.

Thanks, Good morning, everyone.

Good morning.

Tom a question for you just as your hotels are signing new group business.

BT contracts today.

What are you seeing in terms of changes that might be made to those contracts.

And what are or arent.

Meeting and travel planners asking for today.

That's an interesting one we have been a lot more aggressive in how we look forward at washing the contracts. So historically speaking we watched a contract by 20%, we're saying as we look forward into 'twenty two that's what let's wash it by 50% to be more conservative.

We have seen a lot of shifts over the last couple of years right. When you start moving contracts one year and then moving it again another year because it does cover doesn't break.

The contracts, we have to be cognizant of the fact that they get.

There are.

It was getting a little bit looser on attrition clauses and we actually do audit we actually the team does contract audits.

Actually go out to all of our properties and started to look for that group contracts and new contract audits to make sure that the contracts aren't toothless and that we're protecting certainly is protecting shareholders and protecting future pace. So that's a priority for us we are monitoring it and then certainly it's market by market.

If a big company at AT&T comes in and says this is our terms take it or leave it you really have to make a decision. It's a business decision at that point and the contract. The terms of the contract you want the business, we do not want or do you not want the business. So it's a.

It's an ebb and flow and I think.

I think the good news is we're paying attention to it and we're aware of it and where we.

We're trying to make sure that we minimize our risk going forward.

Got it that's helpful. And then just in terms of group cancellations that might have occurred during the third quarter. What was the total there and then for what periods where those.

Groups canceled or maybe even <unk>.

Yes, Mike.

Jeff we had about $7 million of group revenue that was canceled.

In the third quarter related to Delta variance I think more than half of that I think it was re booked into 2022.

In different periods.

I think there was a small amount of cancellation and attrition in continental collected I think.

Off the cuff I think it was about one or 2 million $2 million that was canceled that was collected.

During the quarter so yes.

I think we've done a very good job of it.

Ed.

Sure that we can reschedule.

Reschedule those bookings.

That we're seeking cancellations and trying to push that revenue off into 2022.

We had about 35000 group rooms cancelled.

And we moved about 15000, so about 50% of those rooms, we shifted into the future, which is great and then we collect about $2.6 million in cancellation fees.

Once again, it's a priority the nature of the business and so we have to pay tax.

Helpful. Thank you.

Thank you and our next question comes from the line of Chris <unk> with Green Street. Your line is open please.

Thanks, Good morning, everyone.

So that strength and redeploy capital elsewhere.

It's a great question.

I think short term, we're pretty constructive on all of those markets I think we're particularly constructive while markets like Phoenix and Salt Lake City.

Boston, we really like our two hotels in that market, we like our locations the quality of those assets.

Chicago is a market that probably over time, we would look to shrink our exposure to given that its always that supply challenges and it's much more rate sensitive.

In a market like Boston, So yes. It could provides an opportunity when cash flows are returning to potentially reduce some of that exposure and as as we articulate the prepared remarks, we continue our strategy that we've had for the last seven or eight years of moving more into these lifestyle experiential properties in submarkets like Sedona and Huntington beaches in Vail.

<unk> and.

So selling something like a Chicago asset would certainly be consistent with executing on our long term strategy.

I appreciate the thoughts.

Thanks for the question.

Thank you and our next question comes from the line of Bill Crow with Raymond James Your line is open. Please go ahead.

Yes, thanks, good morning.

Maybe Tom for you.

Talking about the shrink to BT travel in Chicago and Boston.

There is still seasonal factors at work right. So we're we're now.

Remember.

90 days from now are we going to be talking about.

The lack of business travel in those markets because of seasonal factors and just how do we think about kind of the fourth quarter rolling into the first quarter.

Yes, it's kind of it's going to be consistent.

Flat.

Yes, as you said bill it.

We're getting into seasonality. So we certainly see the slowdown in Q4 and Q1.

That's why I said it earlier in my comments I think Q Q2, and Q3 2020 really.

Spike up.

And we're still going through that negotiation process now with the big brands right Marriott Hilton and all our managers are actually looking looking at 2022 rates and how we're going to be so.

It is hard to know, but my point earlier was it was more of a micro market on Chicago.

We saw positive movement in positive activity versus the market.

So.

If you can provide the service and you have the quality you could get we believe we can get outsized performance versus that it doesn't mean that.

It doesn't mean that it's coming back at significant levels, but we are outperforming our peers and that's that was the point I was making.

I'll just I'll just pile on that I think we see the recovery in business transient related to it's not a Q4 story into 'twenty. Two story I think we're optimistic frankly I mean, there are some good things going on.

This morning's announcement about tax love at Pfizer pill.

That's a real positive and I think even more importantly, this week's announcement about the January 4th gate for the Osha requirements for to cover two thirds of the workers the United States.

Potentially provide the what we'll call it the magic date for C suites to tell their employees, it's safe to get back on the road, it's safe to get back to your office. This is kind of the magic politically acceptable.

Corporate America and that could be the real pivot point for business transient travel and so this January four state could.

We can look back six months from now what are we going to say it was an important.

Fulcrum points in the recovery.

I think January 4th could be the one for PT that really starts to shift in mentality and activity in the United States.

I hope so I hope, so hey, Jeff just.

Quick modeling question.

The tax line.

Create a little bit of noise this quarter Im wondering what youre thinking going forward.

Yes.

Short answer is there was a little bit of a switch there.

We effectively are trying to accrue for income taxes on an annual year target. If you will based upon how.

Our outlook is changing and we swiftly switched from an income tax benefit in Q2 to an income tax expense in Q3 on a full year basis. I think we're looking for income tax in the fourth quarter to be about $500000.

<unk> expense in the fourth quarter, so a little less than we saw in the third quarter.

<unk> figure, but I think thats, how you should be thinking about it in the fourth quarter line.

Great. Thank you.

Yes, so year to year to date I think it's about one to one $5 million of cash that's cash of cash cash income taxes.

Thank you and our next question comes from the line of Stephen Grambling with Goldman Sachs. Your line is open. Please go ahead.

Hi, Thanks, I know you referenced trading below NAV I'm curious, if you've actually kind of set the bar on where you estimate NAV is and how that's evolved over the past quarter and then as you referenced private equity has been very active I'm curious to hear what seems you are seeing and where they are focused and how that may have an influence and maybe going forward.

Sure.

The second question first.

Interesting there is a ton of private equity chasing hotels and I think the.

It's the traditional traditional.

Traditional players whether thats.

Okay salaries upon her or Blackstone, but I think the interesting dynamic and theyre getting financing I know we bid against.

So one of the largest PE firms on a on a resort, but they were getting financing I think 65% LTV at L plus 180.

So that's that's pushing up pricing as well.

The debt markets for cash flow and hotels is really robust.

P firms can take advantage of that.

But I think the pricing change I think was interesting dynamics as these.

These rights that Blackstone and.

Starwood and others have created that are aging I think we're just between the two of those are 253 $3 billion a month.

And theyre, putting away, so they're putting away kind of on a permanent basis right.

Five.

$5 million to $10 million $10 billion of real estate.

And as things go into that we'll call that lockbox Theres, just less product on the market, which makes everything more valuable that's still out there.

And you look at the the reference points of hotels versus multifamily industrial and other choices in the real estate food group.

And hotels simply haven't compressed, but the other the other sectors.

So I think they are.

Our view is NAV is increasing for hotels and that there is potential for it to increase more.

Both on absolute basis.

Availability and on a relative basis versus the other asset classes out there. So we continue to <unk> every quarter.

Consistently for a number of quarters now has gone up pretty substantially.

We think our NAV has increased in the last three to six months.

We do spend a lot of time thinking about the NAV is you never really know until you go to market.

But I tell you every time, we lose one of these bids we realize our entity internally is too low.

But we haven't published entity we haven't.

Long time since the onset of the pandemic.

Continue to look at that and we'll think about publishing that but we'll be very thoughtful before sharing them.

Yes.

Fair enough and then maybe an unrelated question as you've moved the mix to more independent lifestyle hotels in and changed a lot of terms in terms of the management contracts does that change.

I guess, how you would maybe think about M&A.

For more of like portfolio properties in <unk> thinking about consolidation within the broader REIT space.

Yes, I mean, I think we've worked really hard to build something that's very unique in the public markets. There's no other public company combined full service sector that has.

Many short term terminable management agreements, we think that on exit that's probably worth 10% more on their own NAV right 50 to 100 basis points and an exit cap rate. So we think that there's a story to articulate about why we should have a higher valuation multiple there.

And so I think we.

And frankly, it's just.

It's more enticing for a lot of reasons.

To have control more control over the independent operators.

I think as we think about M&A opportunities. We think the this model is a more liquid higher value model.

But it is something you could price as you look at other companies right. I mean, it is something that you can think about and put into the into the pricing.

We really like where we've got until we've spent a lot of time getting here.

But nothing's off the table.

Awesome. Thanks, so much.

Thank you and our next question comes from the line of Chris.

One with Deutsche Bank. Your line is open. Please go ahead.

Sure.

Yeah, Hey, Hey, good morning.

Hey, guys.

I guess question for Mark and it's kinds of bolt onto that last question, but maybe taking a slightly different direction, which is mark <unk>.

Seeing the public REIT.

Get a little bit more active I think overall buying.

Adding hotels, and just talked about private equity pricing and how much capital to raising them.

Connect between public and private pricing. So the question is from it from a high level industry standpoint.

This makes.

Public public M&A more is there more of a.

More and more compelling reason to do that and then just thinking at a very high level.

Well listen we're not scared of private equity and we will we're fiduciary for our shareholders. We'll always do what's right and if that means we get a big offer and sell the company to premium that's certainly something.

Did the right thing to do for shareholders the merge to avoid that.

It would not be a strategy we would employ.

Were fine doing what's right for shareholders.

I would probably want to get full value certainly for the company. If we went down that road I think mergers and the public public to public makes sense. If you can.

Articulate a clear strategy after the merger and you clearly articulate that you didn't pay too much and thats. It savings from the G&A is probably wipe out 85% of the G&A of the target company.

A couple on that and you say, okay on the other side of this between G&A savings and other synergies I think it's clear.

A clear strategy and stock price should be higher that's fine, but we're in a space that bigger hasnt proven by itself to create value.

So we don't buy into that thesis, but certainly if you could do something where the math works you should come out the other side from a combined company with a clearly articulate strategy, that's something we should look hard at.

Okay.

Very good and then.

<unk> seen some of your peers.

A little bit more down the JV route and is that something you guys would consider if there was just hypothetically a larger.

Public or private some some kind of portfolio are you willing to kind of step outside of those bounds, a little bit and do something a little bit nontraditional for for Diamond rock.

Hey, Chris It's Jeff.

You can never rule that out, but I do think we like the simplicity and the control that comes from holding owning our assets I think having joint ventures can be complicated from a.

Our balance sheet standpoint, and from an underwriting standpoint from your perspective or from investors perspective, So I would never preclude us from.

Entering into an attractive investment.

Joint venture has necessitated but I think our preferences to wholly own our assets and really kind of keep a clean balance sheet and control.

Okay very good I appreciate the thoughts thanks, guys.

Yes.

Thank you and our next question comes from the line of Anthony Powell with Barclays. Your line is open. Please go ahead.

Hi, Good morning first question on pricing, we're seeing obviously very strong pricing on <unk>.

Leisure and resorts.

That changed how you approach pricing next year for business transient and group is there more of an opportunity to tick up.

Pricing in those segments or are you more interested in just kind of filling the hotels with those customers.

It's a great question I think let's take the three segments so leisure.

This festively coming up I, almost think we can't charge enough.

I mean, there is there is a lack of ability and there's just tremendous demand for those so I think we should push even harder than we have been pushing on pricing. When we look at business transient I think it's really encouraging in the third quarter, we were within 1% business transient rate from Q3 2019.

The.

It's really not a rate game.

As the company comfortable getting people on the road or RSA, it's not like Oh, what we'll put them on the road or 10 Bucks cheaper.

So I think we've adopted the philosophy of instructor or hotels that this is a safety issue. If you will for for them not a pricing issue.

Discounting doesn't get you any more rooms, so hold rate and I think generally that's pervasive kind of viewpoint and philosophy of.

The hotel industry, so I'm relatively optimistic on pricing for BT now we're going to have some mix shift next year, we do want to put heads in beds. So will we take.

More of the lower rated BT.

Mix to fill it.

Ultimately leads to a more profitable, yes, and then as demand returns will start yielding that stuff out.

So we're not trying to discount to get <unk>, we will have to have some mix shifts so youll see some break deterioration.

But again I think it's too.

The safety issue not a pricing issue and then a group our group right now I think we're looking at 2022, even though we're down in room nights were actually up almost 2% rate.

Again with the same philosophy that these groups are meeting its not theyre not going to meet these that's $10 cheaper to meet your hotel they like the space. They haven't met in two years, sometimes three years and they need to get together.

And also when you think about especially from the corporate side everyone's at record profitability in the United States, It's not like the the CFO or sitting there at Pfizer, Procter and Gamble and say no things that these are tough times, we really need to cut the travel budget and training budgets. They are saying we need to grow our revenue.

Terrific profitability, we need to get training, we need to hire people, we need to take care of our associates, we need to get them together.

So I think all of those things play pretty favorable.

Two rate integrity next year, but I do want to indicate there will be mix, we are going to have to layer in some of that lower rated BT and then yielded back out as things get stronger and stronger. So you will see that phenomenon in 2022.

Yes.

Got it thanks, and going back to the NAV question.

Do you have more clarity on the value of it let's say kind of urban business transient focused hotels in urban group hotels.

There had been fewer transactions and those types I'm curious what you're seeing.

In value for those properties.

Yes, I'd say it varies by market.

It can be.

It depends what you call it urban market too like Austin up.

Great and NAV versus whereas 19 in a market like Chicago is probably down.

10%.

So, but these these urban markets.

I think it's a little wait and see from the buyer's perspective.

There is clearly appetite and people that want to play that thesis, but you need better trailing cash flows that the private equity folks can get better debt and then youll see it recover more rapidly than the urban markets. So we anticipate that the gap starts shrinking over the next 12 months as you start seeing cash flow, it's really return and the urban market.

It's because the financing just gets better which makes it the acquisition work.

Larger pool of buyers.

Okay. Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Mark Brugger for any further remarks.

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

This concludes today's conference call. Thank you for participating you may all disconnect everyone have a great day.

Q3 2021 Diamondrock Hospitality Co Earnings Call

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