Q4 2021 Diamondrock Hospitality Co Earnings Call
Good day, and thank you for standing by and welcome to the Diamond Rock Hospitality fourth quarter 2021 earnings release Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone. Please be advised today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Brian Quinn Senior Vice President and Treasurer. Please go ahead.
Thank you good morning, everyone welcome to Diamond <unk> fourth quarter 2021 earnings call.
With me on the call today are Mark Brugger, our President and Chief Executive Officer, and Jeff Donnelly, Our Chief Financial Officer before we begin let me remind everyone that many of our comments today are not historical facts and are considered to be forward looking statements under federal securities laws.
As described in our filings with the SEC. These.
These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed or 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.
Mark.
Thank you again for joining us today for <unk> earnings call.
In 2021, we saw travel demand dramatically rebound shortly after the Nashville masked Mandy recommendation was lifted in may.
In July our portfolio recovered, 91% of its 2019 total revpar and in December we recovered nearly 99%.
The emergence of new COVID-19 variance during 2021 date for a choppy recovery.
The undercurrent pushing the wave of travel demand is clearly strong.
National numbers on Covid infections are rapidly declining once again.
States are relaxing mass mandates.
And more workers are returning to the office.
If trends continue we estimate that the travel recovery timeline was delayed just a few months from omicron.
As we look ahead, we remain very confident in the future of travel and the brisk return of pent up hotel demand.
<unk>.
Fourth quarter and full year 2021 hotel results significantly exceeded our initial expectations.
One factor among many stands out as a testament to the creativity and success of our team.
In 2021, the portfolio generated nearly $2900 per key of a <unk>.
According to consensus estimates that is over $3 five times more than the average for the five largest full service rights.
Our focus on driving cash flow is the culmination of strategic decisions our market exposure.
Balance sheet structure.
And the innovative sales strategies and tight cost controls implemented by our operators and partnership with our leading asset management team.
The company's results more closely in the fourth quarter, we were able to drive revpar up 232% over the prior year.
Which is just $13, 8% below 2019.
Moreover, on a comparable basis to 2019, the monthly progression of total Revpar was down 18, 9% in October .
Down 17, 1% in November .
And down just one 5% in December .
These rebounding levels of Revpar allowed <unk> to generate fourth quarter hotel adjusted EBITDA of $43 1 million.
And <unk> of nine <unk> per share.
While the industry in 2021 started seen a recovery in business transient and group bookings.
Which Jeff will discuss in more detail in a moment.
Positive results for the fourth quarter and the full year were powered by <unk> large portfolio of drive to resorts.
Several resorts achieved record breaking room rates in 2021.
And we are seeing this trend continue.
Even compared to 2019, our resort portfolio had positive full year revpar with revpar, increasing almost 24% in the fourth quarter.
In fact.
Dozen of our resort and lifestyle hotels beat 2019, revpar levels last quarter.
Led by properties like the Henderson Beach resort.
The bears to Sedona.
Third sedona.
The height Vail Mountain resort.
The lodge at Sonoma.
Our two key west resorts and the Kimpton short break.
These good results were largely the product of a decision we made several years before the pandemic to pivot and focus our external growth on drive to resort and lifestyle hotels.
Since that pivot, we have completed more than $1 billion in transactions to assembled a portfolio that today defines diamond rock.
We acquired Havana Cabana key west.
Western four allowed Lauderdale Beach resort, the Kimpton short break.
<unk> key west the Kimpton, Phoenix, Palomar La bears to Sedona.
Orchard Sedona.
Landing Lake Tahoe Kabbalah appointed Sausalito.
And our most recent acquisitions the Bourbon Orleans in the French quarter.
<unk> Bay in the Florida keys.
And the two Henderson Beach resorts.
We remain all in on our thesis that superior profit growth can be achieved from experiential resorts and lifestyle hotels.
Going forward, we intend to exclusively focus our investments on similar assets.
While opportunistically recycling noncore branded urban hotels to fund and accelerate our strategic direction.
Okay.
A critical point of differentiation for <unk> from our peers, which is often overlooked is that in the past few years <unk> portfolio has truly transformed and another important way.
It has gone from over 80% of the portfolio being encumbered by long term brand management agreements.
Today less than 10%.
In other words today only two of our 33 hotels are subject to long term management agreements.
We believe that this gives us a huge competitive edge and controlling expenses at the hotels.
And increases NAV.
At the hotels by over 15% on average.
Cause unencumbered hotels can generally be sold for a 100 basis point cap rate premium versus encumbered hotels.
No other public full service lodging REIT has executed this transformation or has less brand managed hotels.
As we continue our external growth initiatives, you should expect more of the same on asset selection and direction.
Okay.
In 2021, we stay laser focused on our strategic transformation as the team executed on dispositions and acquisitions to keep <unk> out ahead.
In total we sold $220 million of hotels at a five 3% cap rate on 2019 NOI.
And probably a much lower cap rate on 2022 NOI for those hotels.
And what do we do with that freed up investment capacity.
We reinvested the proceeds into four independent experiential properties totaling $293 million at a seven 5% cap rate on 2022, budgeted NOI and ramping to an 8% or better stabilized yield.
We estimate that last year's disposition acquisition change alone will add well over $20 million of incremental EBITDA to our 2022 results.
In fact, the two mid year acquisitions.
Bourbon Orleans, and Henderson Park in.
We're ahead of initial underwriting in 2021.
With Henderson Park in delivering a 9% NOI yield.
In December we acquired Henderson Beach resort, a luxury property with enormous upside.
And we've kicked off 2022 with the acquisition of the Tranquility Bay resort in the Florida keys at an 11% trailing NOI cap rate.
How do we find these great deals in a competitive marketplace.
Mostly because we don't rely on brokers.
Rather we have spent years building relationships with owners of on strategy hotels in micro markets like Sedona and Destin Beach.
That fall outside the mainstream.
Off market transactions provide the time to solve the seller's partnership debt or legal issues to our benefit.
We are optimistic we can close a similar volume of transactions in 2022.
In fact, we are actively working on four deals right now at some stage of evaluation half of those are off market through longstanding relationships.
While we have been executing on external growth.
We're also intensely focused on creating value at our owned portfolio through repositioning.
In 2021, we completed the repositioning of the lodge at Sonoma.
The highest fail mountain resort and the Margaritaville key west.
The returns on these investments are projected to be a big catalyst to our 2022 earnings.
Here's a powerful fact.
These three reposition resorts are budgeted to collectively increase profit by $12 million in 2022 over 2019.
That's more than a 50% increase in profit versus pre pandemic levels as a result of our efforts and strategic locations.
And we are not close to being done.
We have two more repositioning and rebranding is happening in the first quarter of 2022.
And behind that there.
Our two more ROI conversions underway that will debut in 2023.
We consider the ability to identify and successfully execute these high ROI projects as a key part of the <unk> value proposition.
Yes.
Now I'll turn the call over to Jeff to discuss operations in more detail and to review the highlights of our balance sheet strength Jeff.
Thank you Mark we finished the quarter with $441 million of total liquidity comprised of $39 million of corporate cash $93 million of hotel level cash and $310 million of undrawn capacity on our revolver.
Leverage remains conservative with only $115 billion of debt against over three 5 billion.
Of resorts and hotels.
We have no debt maturities in 2022.
Earlier this month, we amended our credit facility to obtain additional covenant waivers and extend our relaxed covenants to a final testing date of August 2023.
Moreover, we increased our gross potential acquisition capacity to $550 million. There was no change to our pricing grid from this modification.
Let me turn to more detail on our operating results fourth quarter results were sharply ahead of our original forecast total revenues and a hotel adjusted EBITDA or $190 million and $42 $7 million, respectively, beating our original expectations by $20 million in revenue and over $5 million and hotel adjust.
The EBITDA.
Profit flow through was excellent hotel adjusted EBITDA profit margins were 22, 5% and over 40 basis points above our forecast.
The 12% upside to rooms revenue was driven primarily by stronger than expected average daily rate, partially offset by softer than expected occupancy from last minute cancellations from the emergence of <unk>.
The rate driven upside pushed room profit margins over 200 basis points above forecast.
F&B and other revenues were also 12% above expectations, but food inflation and labor pressures constrained F&B margin to 24%, which was below original expectations.
Resort revenues were $85 million in Q4, 'twenty, one or $13 million ahead of 2019.
Resort total Revpar was 18% ahead of 2019 levels and resulted in hotel adjusted EBITDA margins of 30%.
240 basis points stronger than 2019 for.
For the full year resort revenues were $286 million matching 2019. The story here is hotel adjusted EBITDA margins were over 380 basis points higher on similar revenue.
Urban hotels improved during the year, but remained well below 2019 levels.
<unk> hotel revenues were $105 million in the quarter with total revpar, 30% below 2019, leading to margins of 16%.
For the full year urban hotel revenues were $281 million down $333 million or 54%, resulting in a 90% decline in hotel adjusted EBITDA and a low 6% margin clearly there is significant opportunity for recovery in 2022.
Business transient continued to show slow improvement during pockets of the fourth quarter, but plans for a more ambitious returned to business travel in January did not come to fruition.
Due to the spike in AUM across.
The business, we are seeing is mostly from.
December .
In January we have seen an encouraging trend that bodes well for 2022.
Sales lead volume and lead to room nights, even despite the impact of omicron were up 5% and 33% respectively as compared to the average month in the first and the fourth quarter.
This means January points to a Q1 'twenty two sales lead paste that meets or exceeds Q1 'twenty.
February is showing continued improvement clearly a sign of good things to come.
Citywide room night activity in our major urban markets remained strong in.
In 2019, Boston Convention centers generated 349000 room nights and they currently projected 330000 room nights in 2022.
And 438000 nights and 2023.
Chicago generated $1 1 million nights in 2019 and is expected to generate $1 2 million room nights in 2022, and already has $1 1 million nights on the books for 2023.
Collectively the convention centers in Boston, Chicago, San Diego, DC, and Phoenix have as many citywide room nights on the books in 'twenty, two and again in 2023 as they had in 2019 and booking activity is poised to accelerate in April .
Leisure demand is off the charts leisure comprised 50% of our room revenues during the quarter compared to 38% in Q4 19.
Compared to Q4, 19 leisure segment room rates were nearly $290 up 19% over 2019 on a 7% decline in rooms. This is an acceleration from quarters earlier in the year.
Performance of our recently upgraded resorts as well as our advanced bookings in key leisure markets leads us to expect continued robust strengths in this segment.
Yes.
Overall profit portfolio profitability was significantly aided by operating efficiencies due to a number of efforts put in place by our teams.
Occupancy was 30% lower than full year 2021 than in 2019, but our hotels managed to hold cost per occupied room to just a 4% increase resulting in our rooms margin of 74, 4%, which is only 100 basis points below full year 19.
Hiring training and retaining high quality associates is perhaps the greatest challenge for our hotels.
U S. Labor force participation has been sluggish to recover due to a combination of temporary and structural factors.
Columnist expect people to return to the workforce in the second half of 2022.
To maximize efficiency, our hotels have provided dynamic and incentive based compensation structures. During this hopefully temporary tight labor market.
Some competitors have been more inclined to make permanent changes.
To remain competitive our hotels may ultimately need to make some adjustments.
Based on our current data we are adjusting our outlook for long term margin expansion potential for U S full service hotels.
While increased productivity better labor models and more efficiencies from brands will help improve stabilize margins rising base wage and benefits costs will likely offset some of that improvement. Accordingly, we now see the long term margin improvement potential for U S. Full service hotels to be in the range of flat to 100 basis points.
50 basis points lower than our prior estimate.
We believe Diamond rock has an added advantage over our peers. The six managed to franchise conversions provide approximately 50 basis points of long term margin enhancement that is unique to diamond rock, Hence, we think diamond rocks margins have the potential to be 50 to 150 basis points above prior levels.
Once demand is fully recovered.
Looking to the future, we do not have sufficient clarity today to provide full year earnings guidance for 2022.
However, we do believe our U R unique segmentation geographic footprint recent rebranding in acquisitions and other beneficial portfolio enhancements will collectively drive robust revenue and cash flow growth.
We expect our resorts will continue to deliver strong revenue and margin performance and our urban hotels have significant upside potential as we move past omicron and corporate travel demand follows a return to office.
Omicron resulted in $17 million of group cancellations of which approximately $13 million occurred in Q1 and much of it early in the quarter.
As a result of omicron, we expect the change in total revenue and hotel adjusted EBITDA margin as compared to 2019 will be softer in Q1 than in Q4.
Preliminarily January total revenues were down 23% compared to January 2019, Encouragingly February is looking better and early indications point to an acceleration of these trends into March.
With that let me hand, the floor back to Mark.
Thanks.
As Jeff mentioned, the travel trends are clear and the desire to travel is certainly robust.
As you look at 2022 and beyond we are confident that diamondback has competitive advantages.
I'd like to just highlight a few before opening the call for your questions.
First our drive to leisure focus.
The world is positioned to embrace a more hybrid work structure, which lends itself to increased leisure travel.
Our leisure focused destination resort in urban lifestyle hotels are prime beneficiaries of this trend they were strong performance in 2021, and we expect this strength to persist.
Second acquisitions.
Acquisitions.
We successfully executed four on strategy acquisitions in the last year alone with strong initial yields of seven 5%.
And that we have an active pipeline of deals.
Third upper.
Branding.
The operating in 2021 of the Lodge at Sonoma, The Hyatt Vail Mountain resort and the Margaritaville key West will power of those resorts to collectively grow EBITDA over 50% from their 2019 levels.
Fourth balance sheet.
We have a great balance sheet with low leverage and ample capacity to continue aggressively leaning in to our strategy to assemble a unique portfolio of resorts and lifestyle hotels.
Fifth group setup.
Our footprint is good for 2022.
Group revenue on the books at our two most important group hotels.
Western Boston and Chicago Marriott is three times more than in 2021.
I will note that we are fortunate to have less than 1% of our rooms in the troubled San Francisco market.
Sixth.
Management conversions.
We converted six brand managed hotels to franchise hotels in 2020.
That will ultimately boost portfolio profit margins by 50 basis points over pre pandemic levels.
And decreases.
<unk> by 15% at those six properties.
And the final competitive advantage for <unk> that I mentioned.
As ESG excellence.
We were once again ranked number one by <unk> as hotel listed sector leader.
And awarded ESG Prime status by ISS.
A designation held by the top 5% of the real estate sector worldwide.
If he or she is important to you as it is to US <unk> is a leading choice among all public lodging Reits.
To wrap up.
We are still in the very early stages of an emerging travel recovery with significant pent up demand.
And with that backdrop, we are confident diamondback has the portfolio.
The strategy and the balance sheet to continue to distinguish itself in 2022 and going forward.
Yes.
At this time.
We'd like to open it up for your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question Chris Lebowski. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Smedes Rose from Citi. Your line is now open.
Hi, good morning.
I wanted to ask you just.
Some clarification on the groups.
You talked about and I was just wondering just to put it in context or you will just to say for 2022 kind of what percent of.
Group nights on the books relative to say 2018 going into 19, and maybe 2017 going into 19 Cook thinking about 'twenty, two and 'twenty three.
The only grab that one sure.
Currently on the books, we're about we're about 29% behind 2019 on room nights.
Right.
Rates about flat.
The new bookings that are coming in we're seeing increased increase rate as new bookings come in so it's been.
We're about as you said we're about.
About 100.
65000, behind where we need to be for the full year and historically, we picked up about 250000 rooms in the year for the year.
So we feel pretty good about where we are right now with the pace for the portfolio and then.
As I mentioned historically, we pick up about 250000 group rooms in the year and we need to get about another 165000 in the year for the year to make our currently projected numbers. So that we're I think we're in a good position.
Okay. Thank you.
Hi.
Mark I wanted to ask you to just as you look at the performance of urban hotels, it looks like Youre starting to.
Yes, a little better I mean do you have any thoughts on how is it critical that folks return to the office.
And I wonder for urban hotels to really start to.
Sure.
Perform much better or do you think that they can gain.
Positive traction even if even if we don't.
Really have to go back to the Opex the way that we did pre pandemic.
So because it's a good question I think there is going to be a correlation between return hybrid lowered a masked mandates and obviously declining COVID-19 numbers.
It's not necessarily that people need to be in their office to business travel, but I think those things will correlate towards businesses, who are seeing this now getting people back on the road and being comfortable approving corporate travel, but it's going to be a little different this year, we'll see some of the traditional stuff come back as people are returning to office, but also there has been a two year hiatus on <unk>.
<unk> team meetings building culture, I think as you talk to as we do our base corporate customers. What they are saying is EBIT for an hybrid that probably means we need to get our small teams together more we need to focus on culture. How are we going to conduct business. If we have less people in full time some of that's going to facilitate travel didn't exist before.
Sure and then I think theres assets. This pent up demand of people that haven't been together in over two years that need to see their clients' need to get those groups together.
So I think that Youll see this kind of burst as we move through 2022 based on those.
Yes.
Okay.
Okay, and then just last one I'm just wondering could you have a sense of where regional benefits will track in 2022, 1% with respect to increase that line.
Yes, we're seeing wages probably in the four to five 5% range in 'twenty two benefits are still coming in but.
Somewhere in that range for this year was a little higher than we would have projected at this time last year for 'twenty, two and Thats kind of the revision, where we think the peak margins come out on the other side of this that Jeff was referring to in our prepared remarks.
Okay.
Alright, thank you.
Okay.
Thank you. Our next question comes from the line of Austin Awash Smith from Keybanc. Your line is now open.
Yeah. Good morning, So Mark you referenced kind of Diamond rock set out on a strategic shifts seven years ago, which has continued to evolve.
Recognizing it's probably constantly evolving but I guess what are the biggest opportunity or changes that lie ahead that maybe could continue to expand upon the margin opportunity in gist.
Strategic goals for the company moving forward.
Yes, it's going to be more of what you saw last year. So it's going to be selling these branded are for properties and moving more into these.
Well I'll call medium sized lifestyle hotels, and lifestyle markets and whether Thats, a true resort market like Henderson Beach or Charles.
Our New Orleans.
We're going to continue to go into those markets are generally higher rated hotels.
And frankly, they have more levers to push.
And really where we can apply our creativity, whether it's Vivian Howard restaurant Charles to enter the Michael Mina restaurant and.
Sonoma.
Repositioning resorts in very creative ways that can drive incremental revenue, we just see a lot more revenue potential at those kind of hotels.
You can see in our portfolio. When you go through the property specific results that the resorts have really allowed us to really use all the tools in our tool belt to.
To drive revenues and profitability. So we're going to continue to focus on those kind of hotels going forward.
Got it and then you discussed though that there may be some given the lag in the urban recovery there may be potential for urban hotel performance.
A little bit more significant upside it sounded like but.
I think Jeff you mentioned also as an acceleration in performance in the resort assets and even though you're not giving guidance can you just give us a sense of how you think revpar and margins relative to the 19 between those two groups could perform in 2022, just broad ranges or where you see the most opportunity.
Yes.
Jeff you want to take that yes, Austin I mean, we're not going to give full year numbers for 2022 by segment, but I think right now thats still.
Sure.
Influx to some degree, but I think where do you think about margin upside obviously is going to be significantly greater.
The urban side of the portfolio just because they are coming off such a low base of revenue that I think youre going to see much greater flow through at the margin of dollars coming in from revenue flowing to the bottom line is as demand comes back on the resort side, they're performing very well they are actually at a very high level of profitability and strong revenue production.
That's not too.
The Hino Underminer are.
Look down upon our resort portfolio Theyre doing very well, but I would say from this point forward probably more of a $1 upside is going to fall to our urban portfolio.
And so was the rate improvement for the overall portfolio, which was seemingly more urban assets you saw December it seemed to be sticky in January .
Should we just assume that that kind of continues.
As sort of the midweek corporate travel starts to Reaccelerate again potentially.
Potentially over the next month or so.
Yes January from Omicron, Youll see a pull back and we talked about our January numbers and then we think in February we start accelerating each but the ADR I guess, the ADR is the plus 20% or so on ADR and then you kind of solid I think again in December relative to what October and November did.
Whereas resort relative to 19 was sort of stable. The overall portfolio saw a pretty significant leg up in ADR and I'm. Just curious if that is attributable to the urban hotels and the sustainability of that kind of sequentially through the year.
It's both I mean in the fourth quarter. We saw obviously the resorts were on fire as we've talked about that in the urban markets. We saw is really driven more by leisure that it was mid week, we saw the Thursday through Sunday business.
Driven by leisure and the urban properties as well in the fourth quarter. So that will that will lessen a low in January at the urban hotels, and then Youll see a acceleration with the return of Btn group as we move particularly into the second and third quarters of this year.
Yes, that's what I was wondering alright very helpful. Thank you.
Thank you. Our next question comes from the line of Anthony Powell from Barclays. Your line is now open.
Hi, Good morning, I guess question on the long term margin I guess discussion.
Started.
You are seeing more wage inflation, which I guess has resulted in a 50 basis points decline, but there is also inflation in room rate. So I would've thought that maybe cancel each other out so I'm just curious how you think.
Power.
Over the long run and how that relates to the margin expansion.
This is mark I'll start it off and then maybe kick it over to Jay.
Jeff or Tom to add on to it. So we're still saying we think margins on the other side of this versus prior peak are going to end up better and thats from productivity and labor model and frankly, a lot of learnings that we have from going through the worst downturn in the history of the industry. So we're still constructive on where margins are but wages are wages are higher than we would have anticipated a year ago.
They are not I think a lot of the things that have caused them to go up now.
Now getting better as we move through the year as more people return to the labor workforce.
But they are they are a little higher than we thought so we kind of adjusted R.
Our estimates to reflect that but I think if <unk> ends up at 50 to 150 basis points better off.
Prior peak margins I think that's a pretty remarkable result, and we're still very positive about that.
So I guess Martin I guess wages are higher but.
R&D your room rates are also going to be higher than you thought or is that still are you a bit more cautiously here given kind of urban recovery and whatnot.
Now, we still feel very good about the right side of it.
Got it.
That would get us to the 150 basis points of margin expansion with others out of this.
Okay, Alright, I guess switching gears maybe to transactions.
The resorts have done well since you bought them are you seeing sellers increase there.
Pricing net pricing expectations, given kind of just the overall strength.
And the resort markets.
Others have seen.
Yes, it's a highly competitive market people are people like resorts. They are probably on a risk adjusted basis still the preferred investment by us and by others.
And the cash flows have been excellent and we think that a lot of that.
Sticky.
So the prices on those hotels have increased.
In the urban hotels I would suspect as the year goes on to trailing cash flows will get stronger the debt markets for those kind of hotels will improve and you'll have more and more private equity and others want to return to our hotel.
The cycle.
So that probably becomes a more and more active market and those prices probably rise as we move through the next 12 16 months.
Okay alright, thank you.
Yes.
Thank you. Our next question comes from the line of Rich Hightower from Evercore. Your line is now open.
Hey, good morning, guys.
So mark you laid out sort of a tantalizing comment in the prepared comments.
Terms of an exclusive focus on resort and leisure assets going forward.
So one I just wanted to confirm that that is indeed, the plan forever going forward into the future and then as far as the.
Recycling efforts in terms of selling the urban assets eventually whats the timing on that and what are the gating factors I think you mentioned a couple earlier, but besides basically.
Sure.
Cash flow improving from the currently depressed period for operations at those hotels.
Sure. So yes, I mean, we want to make clear to investors that we do have a clear strategy and we continue to try to differentiate our story from other stories in the marketplace by buying.
The hotels that we have been buying for the last seven years and that's going to continue to be the kind of hotels that we buy for it going forward I don't know about forever.
Clearly that's the trend line that we think will outperform for the next several years and that's where we want to allocate our investments going forward.
We do have a number of urban hotels, we think we have some terrific gateway hotels, but we will probably reduce that exposure as we go forward and used proceeds from some of those sales to fund.
The strategic direction that we're taking the company.
As far as timing on some of the urban sales I would say it feels a little early at the moment I do think that the pricing and the kind of the competitive marketplace for bids on those will improve as we move through the year trailing cash flows as I mentioned and you reiterated is going to get better as the.
Financing markets will get better as the trailing cash flows get better.
As we move towards later in this year and early next year, we will we will get.
Okay more full pricing for those kind of assets right.
Right now.
Yes that makes sense and maybe just a broader question on leisure, but I think a lot.
What a lot of us are trying to figure out in terms of the underwriting on such assets obviously.
Sorts of extremely strong pricing power in 2021, and it sounds like the same is going to be true in 2022, but as we think about.
Lapping sort of the extraordinary stimulus in the economy.
Last year, as we think about international markets and borders reopening and obviously there is a given or take there, but how do you sort of underwrite.
Against those potentially opposing forces as you think about what stabilized.
Operations at.
U S resort property would look like not just this year, but beyond.
Yes, it's a great question I think for 'twenty, two we feel very confident that we're seeing the advanced markets are incredibly strong throughout all of 2002.
I think theres a couple of observations we have this internal debate as well one is a lot of the shoulder seasons.
Resorts have kind of I think permanently changed to be strong people can work remotely. So in Henderson beach or Vale, what used to be shoulder season, they're just much stronger and that's a permanent change I think from the hybrid work structure and that will improve full year revpar at those resorts and then I think you have to discovery.
Our la Mers to Sedona, you have a whole new set of people that have seen it.
Talk to their friends about it discovered it I think that's permanent and will have a lot of return business at those kind of resorts.
We've retrained the customer.
And so we're relatively bullish on the stickiness of this right.
But time will tell I mean, there will be some leakage out as clothing reopens.
Europe kind of reopens.
Some of this but we think these drive to resorts domestically are permanently and much higher baseline going forward.
Got it thank you Mark.
Thanks Rich.
Thank you. Our next question comes from the line of Chris well Ronco from Deutsche Bank. Your line is now open.
Yeah, Hey, good morning, guys.
Wanted to see if we could maybe get a sense for what the cost how the cost structures differ.
Across our resort portfolio versus your urban portfolio at a high level.
Not into any individual market or anything just trying to figure out if.
The wage inflation that you've seen us.
Is there any between is there any big difference between those two categories. One that could still is there still risk that they need to catch up or do you think we've got the wages.
Do you think we're at a level, where they can stabilize across all the segments.
Tom Your closest that lets you go ahead sure.
Yes.
We think when we look at our resort portfolio.
Yeah.
Profit margins right.
We believe this year projects out to be somewhere around 41% as compared to about 39% in 2019, we continue to.
The interesting thing about labor and the resort markets as they've always been challenged right typically resorts are.
Housing costs are expensive so we've always had.
The need for.
<unk> and additional labor and managers kind of.
Doing multitasking, but I think as we look forward into coming out of Covid. What we've learned is we can complex with technology a lot of positions we have.
Turning to look across the portfolio for example, I'll give you. One specific example, we have a lot of luxury hotels, you pick them all and we look at looking at the luxury travel agent in the travel market.
And targeting the virtuoso is of the World, We said why do we need.
Our specialist that targets those those those travel agents and every hotel cluster that position, let's put it over all of our luxury hotels, regardless of brand regardless of manager. So will take we'll take one specialized high performer and spread that individual over 10 properties and that that individual represent all of our hotels regard.
Of of location. So those are the type of things that we've we've evaluated and those are the type of things that are working as we move forward.
They are sticky theyre going to stay.
When you look at our total management fixed management positions.
We're down about 100 fixed ftes from 19, and we believe that that sticks out that's a budgeted number where we think we land for the portfolio. So I think the fixed piece is what we're working on.
And then.
As mentioned earlier, we got to drive the revenue right.
We can't save our way to do it we can't save our way to profit. So we're going to drive revenues. We continue to look at ADR, we continue to perform and when we look at the our resort portfolio.
Another example, our rates about $270 19 were about 350 in 2022 and.
The biggest driver of Q4 profit the ADR was up $76 and our resorts.
For the resort portfolio in Q4.
ADR was up 38% in Q4, so it's working our pricing our strategies our revenues.
Our investments in restaurants.
We're up about $11 million to $12 million in incremental revenue in our investments in our restaurants. So it's really a focus of the bottom and also the top.
I'll just add on the wages.
So I think generally our wage increases bring us to fully up to parity.
At our properties this year.
The second leg up.
To be competitive in the marketplaces.
Some of the markets it varies by market and market like New York City still has a multi year collective bargaining agreement ahead of it so wage increases are.
Arent going to be as dynamic in a market like that these are already fixed by long term contract.
And then the other markets, we think we're in pretty good shape with where we've adjusted.
Wages this year and as Tom mentioned, the resort markets particular, Ob easier too, we think adjust the rates to more than make up for the wage increases at this particular property.
Yes.
Yes, thanks, guys.
Super helpful. I appreciate all the color follow up is on.
Mark some of the B leisure business you talked about.
I guess is there may be no clean way to answer this but.
Are we sure that we're not going to be double counting kind of returned to office right in some of the maybe Dave week Monday, Thursday Friday stuff that people made it can't be two places at once maybe they're back in the office more theyre not at the resort Monday, or Friday, or if theres any way you've looked at your customer data and try to figure out if people are.
Going on a corporate code on during the week is there any way to just think about that at a high level.
Yes, that's a good question and we've talked about that internally.
I think the right answer is we don't think the risk is that high because we think the pie is going to expand so much. So theres. So many people that haven't been on the road in the last two years that the overall pie is going to be bigger so the leisure.
Go to Chicago, and you're going to stay over Sunday night.
And your and earlier stay late.
And works for their hotel room and enjoy the city maybe with your you are so you can look at other maybe not.
We just think that trend is going to persist in the pie is just so much bigger with the pent up demand of travelers that are I hit the road.
That is even if some of the leisure folks that have been on the road last year kind of offset the bigger pie is going to more than overwhelm that double counting impact. If you will but we don't have a great way to track.
At the moment.
Okay fair enough thanks, guys.
Thank you. Our next question comes from the line of Michael Bellisario from Baird. Your line is now open.
Thanks, Good morning, everyone.
I just want to go back to the margin comments, one more time and I know youre using a broad brush there, but maybe can you provide any color on how you see the range in terms of margin expansion how that might differ.
Sort of talk about resorts, but resorts versus urban encumbered versus unencumbered hotels, because your portfolio today is not necessarily like the average U S. Full service hotels that you are kind of quoting there for that range.
Yes.
Mike I would say I really don't want to get into giving full year guidance, but maybe I can circle back with people later I do think the opportunity for the upside is going to be much greater from the urban hotels, just simply because they ended up finishing the last year is materially lower than our resort hotels are resorts. I think you finished the year 2021 with margins about 300 basis point.
It's better than they were in 2019, whereas the urban hotels were dramatically lower.
We're going to be providing some updated information as we go into the upcoming conferences and additional color I can provide you guys at that time it up off the cuff I don't have the figures handy to share with you.
Yes.
My question was more on the long term target range you guys gave not the not the 41% and 39 for the resorts.
Are there are there puts and takes.
At urban suburban urban resort.
Yes.
Where do you guys differ versus the average kind of broad brush range that you guys just provided.
So a couple of observations on there the 50 basis points of portfolio expansion for the brand manage conversions those six hotels are primarily urban hotels.
So that will repeat represented an urban.
Urban portfolio the resorts, we think stabilize at much higher rates.
Do you expect to flow through and the profitability ultimately to settle out at a higher level at those so there's more opportunity within the resort portfolio to stabilize at higher post pandemic margins and pre pandemic margins. So that's the greater opportunity on average.
Got it helpful. And then switching gears just on Capex can you maybe talk about plans in Burlington in Sedona, and then I think maybe more importantly, how are you balancing increased capex spending and then likely renovation disruption at these better performing properties this year.
Yeah. So.
Sure.
So I guess, we're super excited about what we completed in 'twenty, one that was a big year for us with those three conversions, we have two conversions happening in the first quarter of this year, which aren't terribly capital intensive, but we'll probably 10.
$10 million or something to get those done.
And then the big ones that we have coming up over the next.
Let's say 18 months will be the Boston Hilton.
Burlington, Hilton, which were hoping to convert to a curio next year.
And then the repositioning of Orchard.
<unk>.
The seasonality of the Boston Hotel will allow us to really keep disruption to a minimum there.
<unk> will have some but we'll try to seasonally slow and it's a relatively small asset on the overall portfolio. So we think that that's very manageable.
And Burlington, we can do off season as well so.
We're not anticipating significant disruption from our capital programs in 2022.
Thank you.
Thank you. Our next question comes from the line of Chris Darling from Green Street. Your line is now open.
Thanks, Good morning, just.
Going back to those ROI projects that you just talked about and maybe any future projects in the pipeline can you discuss the impact of any of that construction cost increases in snacks in the supply chain may have had.
Has it caused you to perhaps delay or maybe even rethink the viability of any projects at all.
While we completed a number of those repositioning in mid to late last year, and there were supply chain issues and.
We navigated through them.
Fortunately most of these are really.
Repositions with <unk> and no work and those kinds of things they are not building a new building.
To be the bigger issue on the supply chain.
Issues.
Going forward when we look at what we will have two converted this quarter. So those are those are cost out in good shape and then as we're looking forward to orchard than Burlington in Boston Hilton.
We think we have good preliminary pricing and from general contractors on most of it again most of the cost.
The overall cost is going to be <unk>, which isn't that big of an issue is getting.
<unk> workers and doing some new build so we think we have it under control.
We will have like everyone will have some issues on lighting and other components I'm sure that we'll have to make sure. We're doing more advanced work in ordering things probably two to three months earlier than we would.
And what I call, a normal times, but the the advanced planning that we're doing and having enough lead time should help us mitigate the supply chain issues and then on the costs. The nature of our work should lead to our ability to control those costs and a relatively efficient manner.
But there clearly has been some cost increase.
But we think we have that reflected in our current estimates.
Okay understood I appreciate those thoughts and then just one more now that you have control of the Henderson Beach resort does does that in any way kind of change how you view the opportunity to densify the Henderson Park in down the Street.
Yes, so we have the ability on the Henderson Park and as you know too.
Develop a tower beachfront tower on that we don't currently just Bob Henderson resorted in December so, we're still getting our arms around that opportunity but.
So the game plan for 'twenty two it's just there's a lot of low hanging fruit at Henderson resort.
It's to make sure we've kind of picked all of that low hanging fruit and then down the road, we always have the opportunity to do development, but it's not on the near term hit list for us.
Got you. Thank you.
Thank you. Our next question comes from the line of Floris Van <unk> from Compass point. Your line is now open.
Good morning, guys.
Wanted to change tack, just a little bit obviously talk about the balance sheet here.
Youre pretty decent position, Jeff maybe if you can touch upon how closer are you guys. I know you guys just got the extension, but how close are you from emerging.
From the Covenant waivers is there an opportunity there.
Starting in the second quarter, you could be free and clear and what implications would that have on on dividend payments going forward.
Yes, it's a good question Floris I mean, obviously, it's a function of how well our performance and specifically how else specific hotels perform as we move through the year, but.
I would say our internal projections today, we would say that we can be in compliance with our covenants in the middle of the year. So I.
I do think we're on a good trajectory on that point.
As far as the advantages that come I would tell you that I think that one of the greatest points of flexibility is that you end up with a lot more flexibility on how you are allocating your capital whether its recycling assets acquisition capacity is really the flow of funds and.
Yes.
The capital you raised in which you can use it for I think that's very valuable as far as dividend payment.
Payments that will ultimately be I'll defer to mark on that but I think that's ultimately going to be at the decision of the board.
From our standpoint, right now I think we have a really attractive uses of capital in our portfolio for ROI projects and some of the acquisition opportunities that we're looking at.
And from a practical standpoint, we have net operating losses.
Effectively.
Allow us to not have to pay a dividend effectively we could but.
We expect that we will be obligated to pay a material dividend this year.
And then if I can follow up.
I was just looking at the EBITDA contributions from some of your.
EBITDA contributions for some of your hotels in the fourth quarter.
Couple of things, which which struck me obviously Margarita Bill has been a huge winner.
For the year, you had like almost 14 million of EBITDA and this had $5 million.
19.
Does that make you think about other potential Margarita go conversions and then also maybe you can touch upon the Worthington Fort worth which is.
It seemed like it had almost all of its EBITDA coming in the fourth quarter was there some anomaly there or was there anything else going on.
How should we think about that hotel what should be the run rate going forward.
Yes.
So first maybe I'll start with the Margaritaville and then turn it over to Tom to talk on the Worthington. So Margaritaville key west. It's it's been terrific. It's the highest rated margaritaville in their system.
So Jimmy Buffett there.
Tuesday of this week, taking pictures with guests and had very favorable comments on our resorts that were.
That.
So yes, we would do more margaritaville that market also is the <unk>.
Can't imagine there is a better market to do a margarita build in key west.
But we've been very pleased with our partnership with them.
We're pleased with the results and we think we'll be able to do.
Set records on rate and F&B sales in 2022 there.
So far so good.
We're pleased with the partnership there.
For Worthington I'll, let Tom speak on kind of the trend towards the fourth quarter was the strongest quarter there sure.
Sure. Thanks Mark.
Where they can vary.
Very simply two things, we actually had groups in.
A pretty active group.
Season for the for the for the hotel a fair amount of activity with the colleges in games and so on.
And then the repositioning of the lobby and the Toro to a restaurant in the lobby generated about $3 million in revenue.
And.
Certainly.
That was partially due to a lot of holiday events in the in this space So really two.
<unk> group and then the investment in the tour to a restaurant that drove performance.
The hotel.
And in that sense.
Sustainable run rate, you think going forward.
Yes, listen we did a we had a pretty strong rooms, yes.
Rooms flow through was about 85% and food and beverage flow through was about 50% when the when the business. If the grip comes back like it showed in this market.
Flow throughs and the margin will be just fine I mean, we're still down we're projecting a down about $93 million in banquet.
Food and beverage for the portfolio.
In 22 versus <unk> 19.
Once it once the group comes back.
Banquet revenues as our <unk>.
Highest.
Margin right. So as that comes back our margin and our profitability and our flow through should be should continue to improve so there's certainly runway there yeah I would just add that just on 22 expectations. We expect worthington year over year versus 21 would be one of our strongest performers.
Thanks, guys.
Thank you. Our next question comes from the line of Stephen Grambling from Goldman Sachs. Your line is now open.
Hi, Thanks, I guess, a couple of questions on the M&A environment first given the strength in the lifestyle leisure transaction market. How do you think that's impacted your NAV versus pre pandemic and I know you mentioned youre more focused on ROI and she also potential acquisition targets as well, but what would make.
Buy back perhaps more interesting as an alternative and then second are you seeing any or expecting any impact on rising rates on the financing market at this point, whether for purchasing existing assets or even broader hotel development.
Okay. A lot there. So we think M&A will be active this year the hotels on a relative basis still remain a very interesting asset class and we're getting a lot of.
There's a lot of chatter in the marketplace on AAV to enter your questions one at a time.
Our resorts on average are probably up more than 20% versus pre pandemic levels some much more than that.
So they clearly had the biggest increase in NAV, so urban hotels are flat to down.
I would expect the urban to recover as the cash flows recover people gain more confidence in the BT and group returning as we move through 'twenty two financing, we're not seeing that significant change in financing rates Theres a lot of.
Active available debt for hotels, the bigger challenge is getting the trailing cash flow. So you can get the loan.
The value of proceeds that are required to.
To get an active market for these urban hotels. So I think it's going to be less about rate on driving the urban hotels and more about the return to cash flow. So people can get the leverage levels that they need to create the liquidity of that market.
And then perhaps as a quick follow up given how efficient you are there.
I guess would you be willing to consider the some of the.
Portfolio comes out of the gates here that could be in the market.
It wasn't just focused on resorts or is that just too much of a headache to get through some of the urban stuff that could come with some of those.
I guess I could.
To give you an invasive answer it depends so if we had a portfolio that we loved and it had.
Five resorts in two urban hotels that wasn't necessarily a deal killer, our preference probably would be to partner going into that but that would mean, we wouldn't do that deal. So there is a couple of portfolio deals that are on the market now we're looking at them.
We wouldn't do something that would significantly change the strategic direction that we're headed now but if it is complementary and had a couple of deals that were not exact fit but we are still quality that would be a portfolio that we'd be interested in looking hard at.
Awesome. Thanks, so much.
Got it.
Thank you at this time I am showing no further questions I would like to turn the call back over to Mark Gruber for closing remarks.
Thank you everyone. We appreciate you tuning in for our earnings call today, and we look forward to updating you on our next quarterly call.
Yes.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
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