Q2 2023 DiamondRock Hospitality Co Earnings Call

August 3, 2023

Okay.

Yes.

Thank you.

[music].

Thank you for standing by and welcome to the Diamond Rock Hospitality Company second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

Ask a question at that time, Please press star one on your telephone.

As a reminder, this call is being recorded.

Now I'll turn the conference over to your host MS. Briony, Quinn Senior Vice President and Treasurer of Diamondback Hospitality. Please go ahead.

Thank you Valerie good evening, everyone welcome to Diamond <unk> second quarter of 2023 earnings call and webcast before we get started let me remind everyone that many of our comments today are not historical fact and 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 expressed in 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'll turn the call over to Mark Brugger, our president and Chief Executive Officer.

Okay.

Thank you for joining us today for <unk>.

Our earnings call.

Local travel demand remains strong TSA throughput in the quarter with 99% of 2019 levels and hotel stays in the United States. This year are expected to surpass and Youll pandemic record of $1 3 billion group.

Diamondback has been during the recovery and later well discuss why we are well positioned to hold and expand our sector is to come.

Against the favorable industry backdrop, however, the slowing macroeconomic environment is weighing on the pace of recovery such as travel.

And the redistribution of leisure travel from competition from cruise lines.

International at this destination.

It is impacting domestic leisure oriented properties.

In our view some of these adjustments our adjusted momentary events, but they were a headwind in the second quarter and will remain a headwind until later this year.

However, we are seeing in.

The emerging new baseline of travel demand that it's more weighted towards leisure travel than in the past.

In industry growth will build upon this foundation going forward after firming up its new normal in 2023.

<unk> competitive advantage remains the high quality portfolio of hotels and resorts that we have curated deeply resonate with the desires of todays travelers.

Measured by full year revenue.

Our portfolio was approximately 60% urban at 40% resort.

The 'twenty urban hotels were tailored to be the hotel of choice for the business group and leisure travelers in their respective cities.

The 16 irreplaceable experience for resorts are each in special destinations and in many of these markets <unk> has been the first mover among the hotel Reits.

Perhaps our portfolios most distinguishing feature.

That almost 95% of our hotels are unencumbered by long term management contracts, which gives us greater control over the operations at the properties.

And a premium valuation upon sale.

All of these portfolio advantages enabled <unk> to deliver modestly positive positive revenue growth to achieve all time record revenues in the second quarter.

Our hotels outperformed their competitive sets with.

With Revpar penetration, 112%.

Which represents a gain of 290 basis points from 2019.

Overall total revenues in the second quarter were $289 million.

We're nearly 1% ahead of 2022.

Hotel adjusted EBITDA in the second quarter was $93 6 million.

Which was $3 2 million ahead of 2019.

Results were held back by the onetime impact of disruption stemming from upgrades at the Salt Lake City, Marriott and the former Hilton Boston.

Combined with a small electrical fire that closed the Hilton Garden Inn times square for one week during the quarter.

Okay.

Let's look a little closer at the trends we saw.

At our urban hotels.

Year over year Revpar was strong.

Up seven 9% in the second quarter, Mark first time this cycle that quarterly Revpar for our urban hotels exceeded 2019.

The group segment at the urban hotels performed well.

We're in solid results at our two largest urban hotels, the Chicago, Marriott, which increased year over year Revpar 22, 8%.

And the Boston, Westin, which increased year over year Revpar by 11, 7%.

In total portfolio group room nights increased four 6% as compared to the second quarter of 2022.

We are benefiting from having well maintained hotels and a favorable geographic footprint.

But importantly, there's even more opportunity after this year.

Second quarter group room nights were still 11, 1% behind 2019, and we project that there remains 67000 group room nights of opportunity after 2023 to just hit prior peak.

We want to emphasize that we are very encouraged by the 2024 group bookings for our hotels.

2024 group revenues on the books.

Is up almost 28% led by strong convention calendars in many of our most important urban markets.

Business transient was more mixed in the second quarter, but demand varies significantly by market.

There was good strength in cities like New York, but continued weak demand in places like San Francisco.

Midweek business transient occupancy at our urban properties increased 170 basis points in the second quarter versus the comparable period last year.

Our trio of select service hotels in Manhattan, where starts in the second quarter as strong business transient demand push revpar above 2022, and eight 4% over 2019.

Even with the impact of the one week closure at our Hilton Garden Inn.

However, we want to point out that BT comparisons became more difficult for the industry in the second quarter.

So the rate of improvement appears to be moderating a bit for BT.

Longer term, we believe an expanding economy will allow business transient demand to eventually recover to the 2019 peak, but it will require a few more years to get there on a nominal basis.

Okay.

For our resort portfolio second.

Second quarter, Revpar was up nearly 32% over 2019, but down 13% compared to last year.

While leisure travel for Americans is likely to hit a record this year.

Unfettered access to international destinations and cruise lines in a post pandemic world is redistributing some of that demand.

As evidence of that trend the number of Americans traveling outbound from the U S to international destinations.

<unk> is projected to be up nearly 20% over last summer.

And cruise lines, we're seeing big year over year bookings.

We began experiencing the impact of this redistribution late last year and we.

We expect leisure patterns to approach their new normal comparisons later this year.

We are already seeing signs this summer of stabilization at our resorts in Sonoma Sausalito and Vale.

In fact, the booked revpar to avail resort for this coming December is up 24% versus the same time last year.

And while the impact from this year's redistribution of leisure is leading to some near term pullback there.

Destination resorts remain the clear winner since the start of the pandemic and we remain confident that resorts will enjoy the strongest new normal secular travel patterns and lodging.

Due to a number of powerful factors.

Let me touch on a few of those.

One hybrid work as a game changer.

There have been two <unk>.

$2 7 billion days of locational flexibility created post pandemic.

It's more than two times the number of annual hotel stays in the entire U S.

And this locational flexibility will disproportionately benefit leisure properties.

Two people continue to value experiences more than things, partially powered by the phenomenon of social media sharing.

Three demographic changes are powering leisure with the wave of increasing travel by millennials and baby boomers.

By the end of the next decade, there will be nearly 40 million more people either in active retirement or starting a family then there was a decade ago.

The wonder lessor boomers is often underestimated.

And for one of the most powerful reasons behind our conviction in the bright future for resorts is that there is a fundamental supply imbalance with the limited number of resorts in the U S.

And this imbalance will persist because of the often insurmountable barriers to build new product and most resort markets.

<unk> was early to recognize and exploit the long term outperformance trend in resorts by its early allocation to this segment.

And just the second quarter alone our resorts had revpar increased 32% over 2019.

And hotel adjusted EBITDA up 47%.

That's a lot of NAV growth.

Turning to internal growth, we believe that <unk> has a competitive advantage from the large number of impactful ROI opportunities within the portfolio.

These projects will continue to drive cash flow and increase in EV.

And the last 24 months alone we have completed the conversion and upper ending up.

The highest sale to a luxury collection.

The hotel Cleo Denver to a luxury collection.

The Sheraton key west to a margaritaville.

And the lodge at Sonoma to an autograph collection.

Those four hotels alone generated collective Revpar increase of 33, 1% over 2019 in the second quarter with hotel adjusted EBITDA up 65, 3%.

And this is just the start.

For example, just a few days ago, we announced the successful conversion of the <unk> in Boston.

Which marks our 14th independent hotel.

The <unk> is projected to grow EBITDA by $3 million next year and ultimately double this year's EBITDA with stabilized EBITDA approaching $17 million.

Ali <unk>.

Activity underway with more ROI repositioning such as the Hilton Burlington to a lifestyle resort to be named the hotel Champlain, a curio collection hotel to be completed early next year.

And the Bourbon Orleans repositioning to a premium urban lifestyle resort in the French quarter of New Orleans to be completed well before the Super Bowl and Margarita in early 2025.

Behind these diamondback is a large pipeline of opportunities there is a repositioning of the orchards in sedona.

There is the potential expansion opportunity to lay cost an spa resort and there is the ability to add almost 20% more keys at the <unk> resort in Lake Tahoe.

These are just a few examples of the many projects to come so stay tuned.

In total since 2021, we have completed or will soon complete $58 billion of ROI repositioning at 16 of our 36 properties.

The benefit of these projects often play out for several years. So we expect to continued market share gains and increased profit from these efforts for some time to come.

That's a good transition to give you an update on the acquisition market.

We have been working diligently to find more of the transactions that have worked so well for us.

Owner operated experiential hotels.

Deep destinations.

We've been focusing on these destination markets for the better part of a decade and have a first mover advantage.

We also have a deep understanding about unlocking value at these types of properties, which puts us in a great position to create value. When we can provide these type of properties loops.

As we said last call any deal we would do this year would have to be something we really love.

Well without one small deal that fits the bill the Chico Hot Springs Resort and Paradise Valley Montana.

This independent resort has been owner operated for a century.

This is a resort with a deep history, a fiercely loyal following and is a treasured part of the local Montana community, which we are very respectful of preserving.

We are buying the resort at an eight 1% NOI cap rate and we projected to stabilize at north of a 10% NOI yield as it benefits from our best practices and a modern revenue management system.

The prior owner operator, typically set rates just once per season did not adjust rates based on demand and regularly et cetera reservations two to three years in advance at current rates.

Most of the reservations, we'll still we're still made over the phone because theres no GDS system or modern booking tools in place.

Encouragingly year to date through the end of the second quarter Revpar increased eight 7%.

In addition to the benefits related to booking practices. There are also a number of opportunities to add value with various enhancement projects on the 153 acre hotel site.

Chico has a special place and a special opportunity and is representative of the type of investments we seek out.

With that let me turn it over to Jeff.

Thanks Mark.

I apologize for our operators technical difficulties earlier I understand there might be some call quality issues that we're working to resolve.

As I mentioned in our last earnings call Q2 was set to be a challenging quarter given difficult comparisons on both revenue and expense.

I want to start by breaking down the year over year changes to revenue and EBITDA to give you a little more insight into the portfolio and help us comparability to peers all of the statistics I will discuss are on a comparable basis.

Portfolio Revpar increased 5% and total revenue increased <unk>, 9% in the quarter. This breaks down to a seven 1% increase in total revenue for our urban hotels, and an 8% decrease for our resort portfolio.

Our urban hotels were nearly flat to 2019 down just <unk>, 7%, but our resorts were a robust 33% higher.

Broadly speaking, Florida continues to exhibit the same year over year trend we've discussed since late last year.

If we excluded all seven of our Florida hotels, a few of which were up year over year in the quarter.

Revpar for our non Florida hotels increased three 7% and total revenue increased three 3%.

We had a few sources of disruption and displacement during the quarter.

Elton Garden in times square was closed for a week in June due to a minor electrical fire originating from an MVP repair.

We also experienced some disruption from the completion of the rooms upgrade at the <unk> in Boston and the Salt Lake City Marriott.

Collectively these events shaved about 50 basis points off our revenue metrics for the quarter, implying revenue growth would have been one 5% for the entire portfolio and closer to 4% for the non Florida portfolio.

Switching to EBITDA hotel adjusted EBITDA was $93 6 million out of 32, 4% margin was 381 basis points below Q2 last year, but only 178 basis points below 2019.

Adjusted EBITDA was $85 8 million.

Comparisons were particularly difficult this quarter and they were made even more challenging by two events. The disruption mentioned earlier and property tax refunds achieved last year from several appeals.

Can you break down the bulk of the $10 billion variants and hotel adjusted EBITDA versus last year.

Disruption shaved about $1 million from EBITDA in the quarter and the property tax refunds. We received in Q2 of last year for prior periods created $2 5 million dollar headwind in Q2 of this year.

Importantly were it not for these two factors we estimate our hotel adjusted EBITDA margin would be 100 basis points higher than our adjusted EBITDA would have been a little better than $89 million or ahead of consensus.

Continuing with the bridge our insurance policies renewed on April one so our Q2 results reflect the full impact of significantly higher premiums with this expense up more than $2 million for 2022 in the quarter.

Finally wages and benefits were up six 4% year over year of $5 1 million.

These costs were partially offset by aggressive asset management initiatives that generated incremental.

From other income items such as parking.

I must commend our asset managers here at Diamond Rock and our third party managers at the properties for their exemplary performance during what was expected to be a difficult quarter.

Okay, let's transition to talking about capital allocation, we prioritize capital towards the highest IRR opportunities on a leverage neutral basis.

Constantly evaluate internal ROI projects, which generally have yields above 20% common and preferred share repurchases and finally external growth opportunities.

Mark already spoke to several of our ROI projects as well as the very special deal in Montana, We announced.

In the quarter, we repurchased 262000 shares at an average price of 767 per share for a total of $2 million.

In the past 12 months, we've repurchased over one 9 million shares or nearly 1% of our float for approximately $14 $7 million or $7 77 per share.

Our purchase price equates to approximately a 10% capitalization rate.

We are exploring disposition the proceeds of which can be used to fund additional repurchases future repositioning or external growth.

Regardless of the ultimate capital allocation, we will remain opportunistic on all fronts.

We remain committed to having a strong flexible balance sheet, we have low leverage as demonstrated by our trailing net debt to EBITDA ratio of three six times.

We have about $75 million of mortgage debt maturing in the next 18 months, a small mortgage on our courtyard Midtown east in Manhattan.

Our liquidity is very strong at 600 million or 30% of our market cap consisting of over $200 million of corporate and hotel level cash plus a fully undrawn $400 million revolver.

It remains difficult to provide guidance in a range that we feel is useful so let me walk you through some thoughts on the balance of the year.

First on revenue group demand is solid in Boston, San Diego, and Washington, D C, but Chicago, our biggest group market was materially stronger than the first half and we expect it will be in the second half of the year.

Business transient gains are leveling off visibility is short, but we are hopeful we can see some pick up after labor day as more people return to the office.

Leisure demand continues to reset to a new normal well ahead of 2019, but a little behind 2022, and this normalization may play out the remainder of the year.

Taken together.

Outlook is in line with the demand we saw in the second quarter that resulted in nearly 1% revenue growth, but the back half of 2023 has a slightly more difficult revenue comparison.

I mean, the two remaining quarters the fourth quarter was currently poised to finish stronger than the third quarter.

One final note.

The renovation and repositioning our projected to negatively impact second half total revenue growth by roughly $4 million or an additional headwind.

115 basis points per quarter on Revpar for.

For the full year that impact is expected to be $8 million or a little over 100 basis points.

Switching to expenses cost controls remain a priority on labor costs, our largest single expense. We are fully staffed and we expect the wage and benefit cost increases should level off at the increases seen in Q2.

Property insurance and property taxes are ultimately tied to factors like inflation recovery of income market values and replacement cost.

Simon Rock has been a leader in returning to and exceeding prior peak performance. So naturally we're among the first to see revenue and value dependent costs moving up.

I suspect our peers, we'll eventually see the same.

The cost of our property insurance is increasing $9 million on a full 12 month period, beginning with our renewable on April 1st.

Second quarter fully reflected this new cost, which I mentioned in my bridge earlier was a greater than $2 million increase in the quarter.

Property tax comparisons will also be a headwind in the second half of 2023, we successfully negotiated a $9 million.

Abatements for prior periods in Chicago that we received in the second half of 2022, but these will not repeat this year.

All else equal, we expect the year over year property tax and property insurance increases.

Impact second half hotel adjusted EBITDA margins by approximately 270 basis points compared to the second half of 2022.

We do not expect tax headwinds in 2024.

Finally for full year 2023, we expect our corporate overhead to be $32 5 million preferred dividends are just under $10 million and debt service costs will be about $63 million and with that let me turn the call back to Mark.

Thanks, Jeff.

Ill conclude with a few thoughts on why we remain constructive on travel generally and <unk> specifically headed into 2024.

For the industry overall U S travel is projected to hit a new record next year with occupancy up more than one 3 billion hotel nights.

The leisure segment in the U S next year, we'll habits adjustment to the new normal behind it and can resume its long term trend line of outperformance.

And U S industry fundamentals should benefit over the next three to five years from constrained hotel supply as high construction cost and high borrowing cost limit the viability of many new projects.

For <unk>, we have room to run.

Urban and resort properties, just get back to prior peak occupancy that is worth $54 million in incremental revenue.

Group room nights and associated spend just get back to 2019 levels that alone is worth $30 million in incremental revenue.

ROI projects lawsuit, we continued to pay off for example, the <unk> Boston repositioning. This year is projected to grow profits, 35% in 2024.

It is up about $3 $5 million.

And importantly for Dime rock, we are excited about our group prospects for next year.

Roop revenue pace is up a terrific 28%.

Our hotels in Boston, Chicago, San Diego, Washington, DC, and Phoenix generate nearly 45% of our urban hotel EBITDA.

Currently these markets have three 2 million citywide room nights on the books for 2024. This is 10% or 300000 room nights more than in 2019.

So we're obviously encouraged by group trajectory in 2024.

As you can tell.

We remain positive on the future travel.

Travel is one of the most highly valued assets in our society and around the world.

And we believe that <unk> is well positioned for this cycle with a high quality portfolio, our focus strategy and ample liquidity to move opportunistically.

At this time, we would like to open it up for your questions.

I would ask.

Just if I could summarize I know theres been some technical difficulties. So we will 8-K the transcript.

Of this call.

Thank you.

Again, ladies and gentlemen, I'd like to ask a question. Please press star one on your telephone.

Again to ask a question. Please press star 111 moment please.

Our first question comes from the line of Duane <unk>.

Your line is open.

Ryan are you there.

Hey, sorry, I didn't hear the name May call, but nice nice to speak with you.

Alright, sorry for the issue.

No no worries.

Can you help us maybe size the year over year impact you'd expect from the ROI projects that are underway this year.

And the acquisitions that you've completed this year, what could look what could that look like on a year over year contribution basis into into 2024.

Hey, I'm, just thinking about it and the answer for that is a $500 up in our head.

Suspicion is it's going to be a few million dollars from the acquisitions when you think about.

All the acquisitions that were effectively closed in this year, because we have Chico, obviously, which just happened.

Secondly, late last year, we had like Austin.

Maybe going back that far and then than this year.

So have some of the ROI projects that are kind of come in I think it would be another few million dollars on top of that there'll be some offsets this year.

Duane I mean as I mentioned.

Dag me in Boston was probably about $8 million of disruption, but then next year I think you should see a good chunk of that begin to reverse.

Yes, but if I had to show up in a couple a couple of pieces here. So the designee and Chico probably the easiest one strip ratio. So we said on <unk>. We expect the revenues next year to be up at least $3 $5 million of probably $3 million in EBITDA year over year, when Chico, which is our acquisition. This year, we expect it to do north of $3 3 million and EBITDA in 2024.

And therefore, the disruption obviously the disruption from the one week closure at Hilton Garden Inn, we expect to get 100% of that back next year and that's Salt Lake City was a rooms rooms renovation that we would expect that to all return in 2024 as well the diagnostic which we gave specific numbers on will take probably three years.

The conversion from our brand to an independent to fully ramp up to its stabilized number.

Okay. Thanks, and then for my follow up maybe you could just give us a sense I thought the ex Florida.

Portfolio performance was interesting but.

As you look at the balance of the year markets like key west in particular.

Are you thinking it's just more of the same normalization or do you see any potential path.

To pick up later this year, maybe fourth quarter, thanks for taking the questions.

Duane So of course interesting I'll, let Justin jump in here too. So every asset is a little different in Turin quality Bay, which is a marathon key we actually saw it stabilize.

In July and we're encouraged by what's going on there the pace of decline in the keys is getting better.

So we're seeing it get better as summer, it's still negative year over year and as you may recall from our from our results and comments at the end of last year, we were seeing some deterioration there in the Florida keys earliest that they've gotten just kind of crazy high.

I think it's really more of the sort of normalization of that comparable years, we get to the back half of the year as Mark mentioned, we saw the Florida keys being one of the first asset that we had started to drop off from a year over year basis in the summer of last year and some of our other leisure assets fell off sort of in.

The back half of the summer so as we work through third quarter and get to the fourth quarter the comp gets easier for us on a year over year comparable.

Okay. Thank you.

Thank you one moment please.

Our next question comes from the line of Anthony Powell of Barclays. Your line is open.

Hi, good evening, everyone. Thanks for the question.

Hi.

Business transient.

Mentioned in flat showing are kind of slowing a bit.

A bit different commentary that we're hearing from others I guess outside of San Francisco.

Are there any other markets, where you're seeing kind of that slowdown or that I guess moderation or is it more of a broader comment that youre observing.

Yes, I mean, the data we're looking at it on on kind of industry wide as the Revpar for business Transit ROE, especially focused.

Focused on special corporate is down about 20% to 2019 levels. It varies it can vary dramatically obviously in New York City were actually above where we were in 2019.

In San Francisco is tragically behind so it varies a lot depending on the market and what's driving those individual markets.

Our rate of recovery and BT was very encouraging in the back half of last year and even in Q1 of this year, we're seeing it kind of moderate where it is now there's optimism that it starts improving.

A relatively good jumped post labor day as people get back to the office and Theres more business travel in the fall than the summer.

So we.

We remain hopeful to fall, but we are seeing a moderate and we wanted to tell you what we're seeing in real time.

Okay, Thanks, and maybe on the conversion in Boston to the independent hotel and the <unk>.

Acquisition of the independent hotel in Montana, you have gone.

Much more heavily independent and Youre kind of branding and your acquisitions in recent years.

Maybe comment on why Youre doing that and are you seeing the value of some of these brands kind of decline or at least.

More special situations in your view.

Yes.

The brands are still valuable.

Most of our hotels still have brands on them, but we'd look at each hotel is its individual case and there is <unk>.

<unk> are expensive in some case you get a great return on the brand and it's the appropriate thing to do certainly on the Big group houses are the most obvious.

Places, where they add value.

But some hotels and Chico would be a great example, they are their own brand and a lot of ways and we wouldn't see I don't think we'd see a material uplift in demand from from the brand and the costs. So I think the it's not a message that we don't think the brands are valuable we really do it's more a message that we try to tailor each individual app.

That too whether it makes sense to put a brand on it.

Clearly most of our hotels that have brand or.

Performing significantly better than they would without a brand both top and bottom line.

I guess, maybe in Boston, I guess, what drove that particular decision.

Yes, but Boston is kind of a unique location, it's a it's a hit.

Storage building and it's in a seven day, a week location and.

And we looked at what it does not have a material group component, which is often a reason to have to have the brand.

To attract the groups.

And it performs very well seven days a week, but it's a great business location. It's also close to Fanueil Hall to great leisure location as well and we thought that it can perform relatively equally well as the branded hotel with less cost associated with it. The other thing is even if it was just equal profitability.

Unencumbered nature of having that hotel probably at.

10% 500 basis points in the back end, so it probably increases to NAV of the hotel by $15 million to $20 million.

So those were the factors that led us to to embrace this conversion.

Alright, thank you.

Thank you.

One moment please.

Our next question comes from the line of Floris.

Dan Jacome.

Our conference point your line is open.

Hey, guys. Thanks, Thanks for taking the question.

I guess.

Maybe touch on the.

The new acquisition, a little bit more.

How did you get to this.

Transaction, you say you've been tracking it for a couple of years.

What caused the.

The owner to sell now and who else was bidding with you and maybe just talk a little bit about what.

No.

Hum.

What you see is this is an eight 1% yield the right yield for this do you think this is the.

Talk a little bit about the acquisitions environment, perhaps as well.

Sure. So I guess there are a lot of questions in there. So just start with the broadest which is the acquisition environment generally.

The acquisition volume is down over 70% there arent very many trades in the marketplace.

In some ways, it's a great time to be a public company because of our cost of debt advantage, where Barbara so for plus 135, private equities borrowing itself plus $4 50.

So there is there is a clear advantage there, we obviously have to consider other capital allocation choices.

This is this is kind of interesting deal we love, Montana, we like Big Sky, We like Bozeman, We love.

Paradise Valley.

We like things Jackson hole Yellowstone has been a high priority for us in our search for special special properties.

Once an institution in Montana.

Relatively famous small resort.

We've been tracking it the owner operators then the owner operator for more than two decades.

And he is looking to retire so it was a it was up two times he's staying involved in the property and we're going to we're going to leverage that relationship.

At the property and with the community.

Interesting. This originally went under contract with a.

I'll call private equity buyers that we understand it at $40 million about six months ago.

We looked at it we were very disappointed because that was more than we were willing to pay and.

And you could see how there is a.

It's a really special kind of place.

And that deal.

For four reasons, we're not privy to.

Fell apart and we were we were selected because we were.

We can pay cash right. We didn't have any financing risk we were the buyer of choice I think we were not even in the top four probably in price, but we were the <unk>.

We were the most certain to close so that gave us an enormous advantage in the process and I think we've got a tremendous value on the deal so.

Our plan there is to put in our professional kind of best practices put in modern reservation systems.

Enhance the property it was a constrained buyer before so we have the ability to.

<unk> improved the property.

Hopefully that leads to more satisfied customer center.

Increased demand and increased revenues at the property.

And I think you mentioned it was on a 153 acres is there expansion opportunities here down the road.

There are I mean, I think first we want we've owned it for 48 hours are firstly as we want to make sure. We understand it there is a lot of land here.

And so there are opportunities, but that's not our initial plan. Our initial plan is to make it a better version of itself.

Get our arms around it and the nice thing about these kinds of properties and this is what we talk about internally is there's a lot of ways that you can get lucky and win.

And so it has a lot of those kind of value creation opportunities, but again, our initial game plan, we're not promising we're going to do anything other than make it a better version of itself and I think that alone will make this a very successful investment for <unk>.

And maybe last follow up is does that mean that.

You are does this make you more interested in other properties in the area and sort of to get more of a clustering or are there other properties nearby that debt.

That you would like to have or in Montana.

And does having a stake in the ground.

Allow you to.

Get more opportunities or does this basically say no we're done with Montana, let's go to another part of the country.

Well remember that this whole investments $33 million for what.

Our company its got 4 billion asset so no we're not full up on Montana, we loved Montana, we loved the community we love the prospects we like.

Yellowstone, we like Bozeman, Big Sky, there are plenty of other opportunities, where we'd like to pursue and grow relationships. We're trying to build our reputation within that community and hopefully that will that will allow us to get off market transactions, it's a relatively small community.

But by being good stewards as asset and building those relationships, we would hope that that would allow us to get more deals in that state and we would absolutely expand our footprint there.

Opportunities emerged.

Thanks Mark.

Thank you.

Thank you one moment please.

Our next question comes from the line of Gregory Miller of Jewish Your line is open.

Thanks, Good afternoon.

Mark.

The prepared remarks, you spoke briefly about so I thought to ask a question about it.

How do you view your internal and <unk> today.

Relative to a quarter ago.

And in.

In particular, if youre able to comment on.

The drive to leisure assets acquired in the last number of years.

Curious to hear about that as well thanks.

Yes.

It's a great question, we just had a board meeting this week and we were talking about the same issue.

I would say that the truth is there's so few data points in the market with volumes being so low that I think anyone that's telling you a change in value is really just guessing.

There seems to be a tremendous amount of money on the sidelines several hundred billion dollars of <unk>.

Pivot equity that's interested in real estate.

That is poised so theres a theres a lot of potential buyers that are sitting there.

And then I think from the seller's perspective, a lot of them are sitting on the sidelines feeling like that is going to get more efficient and cheaper six to 12 months from now so why would I bring my my assets to market.

So volume is low it's hard to know what the changes value.

Obviously, the fading and some of the performance of the resorts.

Theres going to be some some valuation change there, but they still remain.

Yes, I had a conversation with private equity fund yesterday. It still remains one of the most interesting thesis in leisure and hotel investments.

Generally people still believe it's going to be the place to be over the next five to seven years and remember these assets. Unlike a hotel in let's say San Francisco. These assets have great trailing cash flow, even six 7% compared to zero in a market like San Francisco or San Jose right now so theres still finance a bowl so they still become the kind of.

Very interesting assets I know there was a recent assets trade in Nashville, we call that a totally leisure oriented asset.

<unk> four.

The cap rate that we looked at yes. It was about six zero.

Yes.

On trailing cash flows pretty stabilized asset a six cap.

Yes.

Relatively independent or unencumbered leisure oriented asset in Nashville, So theres not a lot of data points out there.

And so I think if we told you is it was 3% less that would just be a.

Our guests.

But we still think there is robust demand for these kind of assets.

You can provide some data points I appreciate that.

And thanks for the commentary.

For the follow up question I thought to ask specifically about the data with a little more gas on the.

The outlook that you provided through 2027.

Could you walk us through the bridge and how you get to the $17 million of EBITDA.

In 2027 versus $9 million.

This year and how much of the underwriting is driven by operating expense reductions.

Relative to topline gains.

Yes, Greg This is Jeff Donnelly I mean, I can take you through a little bit about that I mean, a good chunk of it that's going from this year into next year is going to be the elimination of some of the obviously some of the disruption that you have from the conversion. So there is a few million dollars that as Mark mentioned about $3 $5 million of EBITDA I think as we go into next year.

Going to be a big chunk of that and then.

I think theres going be some cost savings effectively that come with <unk>.

Removing the overhead that comes from being a branded asset.

<unk> enhances profitability, because we are able to bring more of that revenue down to the bottom line being an independent versus the branded operator, and then I think the final leg of it.

It was going to be just how we position that asset.

Are we better positioned across both the leisure and business transient channels in that market that we can effectively gain share.

In that marketplace.

Happy to grab more details right as an asset.

I think we're we're projecting $35 million of gross revenue. This year 19 revenues were at 43, So just simply the return back to 19.

With the renovated rebranded asset represents a significant amount of what we're calling potential upside and in general the brand costs on an asset like this given that it's all rooms revenue driven.

Franchise fee and frequent guest program or over 10%, so our $40 million rooms revenue asset just operating as an independent represents about $4 million.

Our brand cost that we save so I think that that's really the bridge. The combination of returned to prior peak revenues and under a more efficient cost structure, we should be able to drop to at least at the bottom line.

That's all very helpful. Thank you very much.

Thank you.

One moment please.

Our next question comes from the line of Sumita's Rose of Citi. Your line is open.

Hi, Thanks.

I just wanted to ask you you mentioned that group business in Chicago.

Slowing or slower in the second half I was wondering is that.

In line with what you were expecting already or is that changed from.

Your last update and then I was just wondering on group in General if you could just talk a little bit about what youre seeing in terms of kind of competition that's it.

Is it more corporate is it just associations coming back that's helping the citywide calendars are kind of just a little more color on the tenure of group I guess.

Sure so.

And Chicago in particular, it's driven very much by the citywide lay out in the way. The calendar was in 2023 is it just its way towards the more citywide we're focused in the first two quarters of the year. So this is as we expected and frankly 2024 looks terrific in Chicago in our bookings in 2024, and Chicago are very strong.

So.

We're excited about the prospects. So this is this just seasonality and kind of what we expected from the citywide so a number of our markets as I've mentioned in the prepared remarks.

Q4 back half of the year, and particularly Q4 looks very strong. So we think group will finish up relatively strong for us, but still opportunity and the cadence of versus 2019 gets progressively better. So are our group versus 19, the cadence as we move through.

The next five months, we will continue to get better.

Based on our booking patterns as well just a few additional comments.

Mark mentioned in his remarks, I know there was a little bit of noise on the line. We think returning to pre Covid group room night levels represents a big opportunity for us in 2024 and <unk>.

23 has progressed, we're continuing to narrow the gap to 2019 group room night. The first half of the year were down about 11% for 2019, we're forecasting that gap to drop to about 4% in Q4 in fact paces only off about 2% in room nights.

Q4, 2019 with rate of double digit higher on a percentage basis, we think Q4 revenue likely to be about 9% higher than 19 revenue. So we're seeing that gap.

Pre COVID-19 level room night levels.

<unk> significantly at a significantly higher rate.

And I think to your question on the composition, it's mostly the traditional folks I think theres been a little fall off on some of the Tech company bookings.

As you could imagine, but it's not a it's not a huge part of the group business and our markets.

Financials pharma.

<unk> business has been very strong the reasons to get together continue to be compelling in a hybrid work environment. We're seeing a lot of promotional incentive a lot of small group meetings that need to happen as people are working hybrid.

So that's probably the small groups probably.

Newer and more robust than it was pre COVID-19, but a lot of the traditional folks they're getting together for several reasons that they've always gotten together and so it's a lot of the folks that we would normally expect to see.

The composition of our group.

Thanks, and then I just wanted to ask I know you've answered a lot of questions on the Daphne but.

Sometimes when properties fall out of a major a reservation system and go independent you're going to see some disruption not having that.

Just get pulled out completely from the bigger brands system and how are you I guess avoiding that it sounds like you are just wondering kind of what you do pragmatically to kind of keep.

It's sort of short term disruption to a minimum.

Yes, I mean, we've been working hard on preparing for the August FERC state for a long time, we've had weekly revenue calls we've had strategies we've had web designs.

The most significant defensive thing. We did is we took 80 rooms, and we put delta in there at a decent rate.

To kind of cushion the transition period. This fall. So there will be there will be some disruption as we kind of we gave you and those are in Jeff's numbers that he provided during the prepared remarks.

And I think it's listen the hotel looks beautiful.

We're excited to see to see what it can do on its own just and you want to add anything.

As Mark mentioned, we did a lot of prep work.

To ensure that we really didn't have any significant revenue loss during a dark period. In fact, we essentially sold the hotel out for the first week of August to sort of ensure against that but we were alive. Both on GDS and most of the channels within 24 hours. So we do have all active reservation channels and actively booking.

We've also done a significant amount of base building both through the Delta contract and on the group side. So we're forecasting a drop in revenue as we continue to build brand awareness for the <unk>, but we have over $1 million of incremental group room blocks group rooms on the books for the back half of the year versus last year. In addition to the Delta contract. So.

August and September are both 70% sold and were significantly were.

Significantly better place than we were same time last year for the balance of the back half of the year. So we've got a great base to really preserve rate integrity as we grow brand identity.

Great. Thanks for the detail.

Thank you one moment please.

Our next question comes from the line of Chris Darling of Green Street. Your line is open.

Well thank you.

Mark in the prepared remarks, you mentioned exploring a few dispositions perhaps in the near term wondering if you could elaborate on what market Sandy what assets and then how you're thinking about seller financing in terms of the fluctuating a transaction today.

Yes. So great question. So we are committed to our resort and leisure oriented properties. We think that that is the best long term place to be so those will not be on the disposition list.

We will continue the pair down some of the urban exposure.

Yes, I think we want to identify publicly which assets as our but there'll be smaller assets. In this market that are finance. Both the large loans are the ones that are very difficult. So it'll be a couple of smaller smaller assets that are not core to the portfolio.

As far as your question about seller financing one of the reasons, we're selecting <unk>.

Smaller assets as they are financeable and don't need seller financing, we prefer not to do any.

And so we've built rather preserve that capability capacity if it involved a small piece to kind of fill the capital gapped out might be something we would entertain.

But we're not going out to the market offer and seller financing.

Got it that's helpful. And then one for Jeff maybe you gave a lot of good detail in terms of the different moving pieces on the expense side. This year, but just curious maybe taking a longer term view.

<unk> 24, and beyond what do you view as sort of a reasonable run rate for overall expense growth kind of assuming maybe a more normalized demand backdrop.

3% to 5% annually a decent betting line for us to think about it.

We get a decent range, but when you think about it I mean of course, it's going to relate to ultimately what sort of inflation is that the macro I think for us when you look at how our properties have recovered and we've largely recovered our revenues and earnings a lot of the factors that municipalities used to drive things like taxes.

I don't expect our taxes are going to see sort of outsized increases over a long period of time.

Property insurance is more difficult to forecast I'd like to believe that this past year was a year, maybe a little bit like post Katrina type event, where you saw big Spike and then you had decreases in cost or slowing significantly thereafter, but it is hard to forecast because those rates are renegotiated every year.

And then there might be some catch up in the industry I can't necessarily speak to us off the top of my head, but on labor costs, but I think same thing that tends to follow inflation over time. So I think your range is reasonable if I was a betting man I would probably be towards the lower to middle end of that but that's just a guess.

Alright, Thats very helpful. Thank you.

Thank you one moment please.

Our next question comes from the line of Michael Bellisario of R. W. Baird. Your line is open.

Thanks, Good evening guys.

Maybe.

Just first follow up on the transaction front was to chico's setup as a reverse $10 31 any pressing need to.

So something on the back end of this one.

It was not set up as a reverse 1031.

Got it Okay and then just on the transaction, maybe can you give us a little bit of background on who the customer is maybe what states people are coming from and then any percentage. If you have a just a number of repeat guests that come to the property.

Yes.

Institution, the clientele, obviously changes depending on the time of year is remarkable because of the hot Springs.

All year round. This asset really is obviously in this in the peak season when people are going to Yellowstone. This is close to an entrance to the Yellowstone.

You get in the summer you get more.

Greater than 50%, but you've got a fair amount of repeat folks.

Then in the rest of the area.

Is kind of the local draw it's probably the best restaurant within within 20 miles of location. So it's got kind of a great local following from Livingston in other areas.

But probably on average it's about 50% from out in other states from all over the country.

U S.

Yes, Michael I would add it's a very popular hangout with locals even just to go to the saloon and take US open the Hot Springs.

I wanted to ask if you guys did that too on your tour.

Thank you.

Yes.

No.

Okay.

In your.

A one pager that you've put out the other day, you referenced a 40 plus or minus a percentage point Revpar Delta and what is your underwriting assume.

Chico does versus the comp set and maybe how long does it take to get there.

Yes, Matt I think the.

To sum it up though is the gap is going to be both on on putting in the revenue system and having the revenue gains but out there there's probably things we can do on productivity and best practices that we can implement on the expense side that just haven't been done there.

Both of those but if you think about it we started eight 1% NOI cap rate and getting to a 10 is not a we don't have to bridge very much of that that gap to get there over time.

So that the comp sets a little bit.

It's pretty broad in that area. Because there is you got to go down the gardener in Livingston. So it's a kind of a broad comp set.

But you'll probably see more ability to move rate over time in the summer than than the other seasons.

Helpful. Thank you.

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

Well. Thank you everyone for tuning into our call and we look forward to updating you on our earnings next quarter take care and have a great evening.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

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Thank you for standing by and welcome to the Diamond Rock Hospitality companies second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation, there'll be a question and answer session.

You ask a question at that time, Please press star one wondering your telephone.

As a reminder, this call is being recorded.

I would like to turn the conference or to your host MS. Briony, Quinn Senior Vice President and Treasurer of Diamondback Hospitality. Please go ahead.

Thank you Valerie good evening, everyone welcome to Diamond <unk> second quarter of 2023 earnings call and webcast.

Before we get started let.

Let me remind everyone that many of our comments today are not historical fact and are considered to be forward looking statements under federal securities laws.

With that ill turn the call over to Mark Brugger, our president and Chief Executive Officer.

Thank you for joining us today for <unk> second quarter earnings call.

Global travel demand remains strong TSA throughput in the quarter reached 99% of 2019 levels and hotel stays in the United States. This year are expected to surpass and Youll pandemic record of $1 3 billion group.

Diamondback has been during the recovery and later well discuss why we are well positioned to hold and expand our sector is to come.

Against the favorable industry backdrop, however, the slowing macroeconomic environment is weighing on the pace of recovery such as travel and.

The redistribution of leisure travel from the current competition from cruise lines International destination.

Is impacting domestic leisure oriented properties.

Some of these adjustments are just momentary events, but they were a headwind in the second quarter and will remain a headwind until later this year.

However, we are seeing.

And emerging new baseline of travel demand that it's more weighted towards leisure travel than in the past.

And industry growth will build upon this foundation going forward after firming up its new normal in 2023.

<unk> competitive advantage remains the high quality portfolio of hotels and resorts that we have curated deeply resonate with the desires of todays travelers.

Measured by full year revenue, our portfolio was approximately 60% urban at 40% resort.

The 'twenty urban hotels were tailored to beat the hotel of choice for the business group and leisure travelers in their respective cities.

The 16 irreplaceable experience will resorts are each in special destinations and in many of these markets has been the first mover among the hotel Reits.

Perhaps our portfolios most distinguishing feature is that almost 95% of our hotels are unencumbered by long term management contracts, which gives us greater control over the operations at the properties.

And a premium valuation upon sale.

All of these portfolio advantages enabled <unk> to deliver modestly positive positive revenue growth to achieve all time record revenues in the second quarter.

Our hotels outperformed their competitive sets with.

With Revpar penetration, 112%.

Which represents a gain of 290 basis points from 2019.

Overall total.

Total revenues in the second quarter were $289 million.

We're nearly 1% ahead of 2022.

Hotel adjusted the second quarter was $93 6 million.

Which was $3 2 million ahead of 2019.

Results were held back by the onetime impact of disruption stemming from upgrades at the Salt Lake City, Marriott and the former Hilton Boston.

Combined with a small electrical fire that closed the Hilton Garden Inn times square for one week during the quarter.

Okay.

Let's look a little closer at the trends we saw.

At our urban hotels.

For your Revpar was strong.

Up seven 9% in the second quarter, Mark first time this cycle that quarterly Revpar for our urban hotels exceeded 2019.

The group segment at the urban hotels performed well.

Our solid results at our two largest urban hotels.

The Chicago, Marriott, which increased year over year, Revpar 22, 8%.

And the Boston, Westin, which increased year over year Revpar by 11, 7%.

In total portfolio group room nights increased four 6% as compared to the second quarter of 2022.

We are benefiting from having well maintained hotels and a favorable geographic footprint.

But importantly, there's even more opportunity after this year.

Second quarter group room nights were still 11, 1% behind 2019, and we project that there remains 67000 group room nights of opportunity after 2023 to just hit prior peak.

We want to emphasize that we are very encouraged by the 'twenty 'twenty four group bookings for our hotels.

2024 group revenues on the books is up.

Almost 28% led by strong convention calendars in many of our most important urban markets.

Business transient was more mixed in the second quarter.

But demand varies significantly by market.

There was good strength in cities like New York, but continued weak demand in places like San Francisco.

Mid week business transient occupancy at our urban properties increased 170 basis points in the second quarter versus the comparable period last year.

Our trio of select service hotels in Manhattan, where starts in the second quarter as strong business transient demand push revpar above 2022 eight.

Eight 4% over 2019.

Even with the impact of the one week closure at our Hilton Garden Inn.

However, we want to point out that BT comparisons became more difficult for the industry in the second quarter.

So the rate of improvement appears to be moderating a bit for BT.

Longer term, we believe an expanding economy will allow business transient demand to eventually recover to the 20 <unk> peak, but it will require a few more years to get there on a nominal basis.

Okay.

For our resort portfolio second.

Second quarter, Revpar was up nearly 32% over 2019, but down 13% compared to last year.

While leisure travel for Americans is likely to hit a record this year.

Unfettered access to international destinations and cruise lines in a post pandemic world is redistributing some of that demand.

As evidence of that trend the number of Americans traveling outbound from the U S to international destinations.

Is projected to be up nearly 20% over last summer.

And cruise lines, we're seeing big year over year bookings.

We began experiencing the impact of this redistribution late last year.

We expect leisure patterns to approach their new normal comparison for later this year.

We are already seeing signs this summer of stabilization at our resorts and Sonoma.

And Vale.

In fact, the booked revpar to avail resort for this coming December is up 24% versus the same time last year.

And while the impact from this year's redistribution of leisure is leading to some near term pullback.

Destination resorts remain the clear winner since the start of the pandemic and we remain confident that resorts will enjoy the strongest new normal secular travel patterns and lodging.

Due to a number of powerful factors.

Let me touch on a few of those.

One hybrid work as a game changer.

There have been two.

$2 7 billion days of locational flexibility created post pandemic.

That's more than two times the number of annual hotel stays in the entire U S.

And dislocation of flexibility will disproportionately benefit leisure properties.

Two people continue to value experiences more than things, partially powered by the phenomenon of social media sharing.

Three demographic changes are powering leisure with the wave of increasing travel by millennials and baby boomers.

By the end of the next decade, there will be nearly 40 million more people either in active retirement or starting a family than there were.

A decade ago.

Wonder lessor boomers is often underestimated.

And for one of the most powerful reasons behind our conviction in the bright future for resorts is that there is a fundamental supply imbalance with the limited number of resorts in the U S.

And this imbalance will persist because of the often in certain amount of barriers to build new product in most resort markets.

<unk> was early to recognize and exploit the long term outperformance trend in resorts, but its early allocation to this segment.

And just the second quarter alone our resorts had revpar increased 32% over 2019.

And hotel adjusted EBITDA up 47%.

That's a lot of.

Growth.

Turning to internal growth, we believe that <unk> has a competitive advantage from the large number of impactful ROI opportunities within the portfolio.

These projects will continue to drive cash flow and increase in EV.

And the last 24 months alone we have completed the conversion and upgrading of the highest <unk> luxury collection.

The hotel Cleo Denver to a luxury collection.

The Sheraton key west to a margaritaville.

And the lodge at Sonoma to an autograph collection.

Those four hotels alone generated collective Revpar increase of 33, 1% over 2019 in the second quarter.

With hotel adjusted EBITDA up 65, 3%.

And this is just the start.

For example, just a few days ago, we announced the successful conversion of the agony in Boston, which marks our 14th independent hotel.

<unk> is projected to grow EBITDA by $3 million next year and ultimately double this year's EBITDA with stabilized EBITDA approaching $17 million.

Additionally.

Actively underway with more ROI repositioning.

Such as the Hilton Burlington to a lifestyle resort to be named the hotel Champlain, a curio collection hotel to be completed early next year.

And the Bourbon Orleans repositioning to a premium urban lifestyle resort in the French quarter of New Orleans to be completed well before the Super Bowl and Margarita in early 2025.

Behind these <unk> is a large pipeline of opportunities there is a repositioning of the orchards in sedona.

There is the potential expansion opportunity to Lake Austin Spa resort and there is the ability to add almost 20% more keys at the landing resort in Lake Tahoe.

These are just a few examples of the many projects to come so stay tuned.

In total since 2021, we have completed or will soon complete $58 billion of ROI repositioning at 16 of our 36 properties.

Benefit of these projects often play out for several years. So we expect to continue market share gains and increased profit from these efforts for some time to come.

That's a good transition to give you an update on the acquisition market.

We have been working diligently to find more of the transactions that have worked so well for us.

Owner operated experiential hotels.

Deep destinations.

We have been focusing on these destination markets for the better part of a decade and have a first mover advantage.

We also have a deep understanding about unlocking value at these types of properties, which puts us in a great position to create value. When we can provide these type of properties loops.

As we said last call any deal we would do this year would have to be something we really love.

Well without one small deal that fits the bill the Chico Hot Springs Resort and Paradise Valley Montana.

This independent resort has been owner operated for a century.

This is a resort with a deep history, a fiercely loyal following and is a treasured part of the local Montana community, which we are very respectful of preserving.

We are buying the resort at an eight 1% NOI cap rate and we projected to stabilize at north of a 10% NOI yield as it benefits from our best practices and a modern revenue management system.

The prior owner operator, typically set rates just once per season did not adjust rates based on demand and regularly acceptor reservations two to three years in advance at current rates.

Most of the reservations, we'll still we're still made over the phone because theres no GDS system or modern booking tools in place.

Encouragingly year to date through the end of the second quarter Revpar has increased eight 7%.

In addition to the benefits related to booking practices. There are also a number of opportunities to add value with various enhancement projects on the 153 acre hotel site.

Chico has a special place in a special opportunity and is representative of the type of investments we seek out.

With that let me turn it over to Jeff.

Thanks Mark.

I apologize for our operators technical difficulties earlier I understand there might be some call quality issues that we're working to resolve.

As I mentioned in our last earnings call Q2 was set to be a challenging quarter given difficult comparisons on both revenue and expense.

Portfolio Revpar increased 5% and total revenue increased <unk>, 9% in the quarter.

This breaks down to a seven 1% increase in total revenue for our urban hotels, and an 8% decrease for our resort portfolio.

Our urban hotels were nearly flat to 2019 down just <unk>, 7%, but our resorts were a robust 33% higher.

Broadly speaking, Florida continues to exhibit the same year over year trend we've discussed since late last year.

If we excluded all seven of our Florida hotels, a few of which were up year over year in the quarter.

Revpar for our non Florida hotels increased three 7% and total revenue increased three 3%.

We had a few sources of disruption and displacement during the quarter.

And garden in times square it was closed for a week in June due to minor electrical fire originating from an MVP repair.

We also experienced some disruption from the completion of the rooms upgrade at the <unk> in Boston and the Salt Lake City Marriott.

Switching to EBITDA hotel adjusted EBITDA was $93 6 million at a 32, 4% margin was 381 basis points below Q2 last year, but only 178 basis points below 2019.

Adjusted EBITDA was $85 8 million.

Can you break down the bulk of the $10 billion variance and hotel adjusted EBITDA versus last year.

Disruption shaved about $1 million from EBITDA in the quarter and the property tax refunds. We received in Q2 of last year for prior periods created a $2 5 million dollar headwind in Q2 of this year.

Finally wages and benefits were up six 4% year over year of $5 1 million.

These costs were partially offset by aggressive asset management initiatives that generated incremental.

From other income items such as parking.

I must commend our asset managers here at Diamond rocks, and our third party managers at the properties for their exemplary performance during what was expected to be a difficult quarter.

Okay, let's transition to talking about capital allocation, we prioritize capital towards the highest IRR opportunities on a leverage neutral basis.

Constantly evaluate internal ROI projects, which generally have yields above 20% common and preferred share repurchases and finally external growth opportunities.

Mark already spoke to several of our ROI projects as well as the very special deal in Montana, We announced.

In the quarter, we repurchased 262000 shares at an average price of $7 67 per share for a total of $2 million.

In the past 12 months, we've repurchased over one 9 million shares or nearly 1% of our float for approximately $14 7 million or 777 per share.

Our purchase price equates to approximately a 10% capitalization rate.

We are exploring dispositions.

Proceeds of which can be used to fund additional repurchases future repositioning or external growth.

Regardless of the ultimate capital allocation, we will remain opportunistic on all fronts.

We remain committed to having a strong flexible balance sheet, we have low leverage as demonstrated by our trailing net debt to EBITDA ratio of three six times.

We have about $75 million of mortgage debt maturing in the next 18 months, a small mortgage on our courtyard Midtown east in Manhattan.

Our liquidity is very strong at 600 million or 30% of our market cap consisting of over $200 million of corporate and hotel level cash plus a fully undrawn $400 million revolver.

It remains difficult to provide guidance in a range that we feel is useful so let me walk you through some thoughts on the balance of the year.

Business transient gains are leveling off visibility is short, but we are hopeful we can see some pick up after labor day as more people return to the office.

Leisure demand continues to reset to a new normal well ahead of 2019, but a little behind 2022, and this normalization may play out the remainder of the year.

Taken together the outlook is in line with the demand we saw in the second quarter that resulted in nearly 1% revenue growth, but the back half of 2023 has a slightly more difficult revenue comparison.

Queen the two remaining quarters the fourth quarter was currently poised to finish stronger than the third quarter.

One final note.

Renovations in repositioning are projected to negatively impact second half total revenue growth by roughly $4 million or an additional headwind.

115 basis points per quarter on Revpar.

Full year that impact is expected to be $8 million or a little over 100 basis points.

Property insurance and property taxes are ultimately tied to factors like inflation, the recovery of income market values and replacement cost.

<unk> has been a leader in returning to and exceeding prior peak performance. So naturally we're among the first to see revenue and value dependent cost moving up I suspect our peers, we'll eventually see the same.

The cost of our property insurance is increasing $9 million on a full 12 month period, beginning with our renewable on April 1st second.

Second quarter fully reflected this new cost, which I mentioned in my bridge earlier was it greater than $2 million increase in the quarter.

Property tax comparisons will also be a headwind in the second half of 2023, we successfully negotiated a $9 million.

Abatements for prior periods in Chicago that we received in the second half of 2022, but these will not repeat this year.

All else equal, we expect the year over year property tax and property insurance increases.

Impact second half hotel adjusted EBITDA margins by approximately 270 basis points compared to the second half of 2022, we.

We do not expect tax headwinds in 2024.

Thanks, Jeff.

I'll conclude with a few thoughts on why we remain constructive on travel generally and <unk> specifically headed into 2024.

For the industry overall U S travel is projected to hit a new record next year with occupancy up more than one 3 billion hotel nights.

The leisure segment in the U S next year, we'll habits adjustment to the new normal behind it and can resume its long term trend line of outperformance.

For <unk>, we have room to run.

Our urban and resort properties, just get back to prior peak occupancy that is worth $54 million in incremental revenue.

Group room nights and associated spend just get back to 2019 levels that alone is worth $30 million in incremental revenue.

ROI projects lawsuit continued to pay off for example, the designee Boston repositioning. This year is projected to grow profits, 35% in 2024 with revenues up about $3 $5 million.

And importantly for Dime rock, we are excited about our growth prospects for next year.

Group revenue pace is up a terrific 28%.

Our hotels in Boston, Chicago, San Diego, Washington, DC, and Phoenix generate nearly 45% of our urban hotel EBITDA.

Currently these markets have three 2 million citywide room nights on the books for 2024. This is 10% or 300000 room nights more than in 2019.

So we're obviously encouraged by group trajectory.

In 2024.

As you can tell.

We remain positive on the future travel.

One of the most highly valued assets in our society and around the world.

And we believe that <unk> is well positioned for this cycle with a high quality portfolio, our focus strategy and ample liquidity to move opportunistically.

At this time, we'd like to open it up for your questions.

I would absolutely.

Just if I could summarize I know theres been some technical difficulties. So we will 8-K the transcript.

Of this call.

Thank you.

Again, ladies and gentlemen, if you'd like to ask a question. Please press star one on your telephone.

Again to ask a question. Please press star 111 moment please.

Our first question comes from the line of Duane <unk>.

Your line is open.

And are you there.

Hey, sorry, I didn't hear the name May call, but nice nice to speak with you.

Alright, sorry for the issue.

No no worries.

Can you help us maybe size the year over year impact you would expect from the ROI projects that are underway this year.

And the acquisitions that you've completed this year, what could look what could that look like on a year over year contribution basis into into 2024.

I'm just thinking about it and the answer for that is trying to build it up.

My suspicion is it's going to be a few million dollars from the acquisitions when you think about <unk>.

All the acquisitions that were effectively closed in this year, because we have Chico, obviously, which just happens.

Yes actually late last year, we had like Austin.

Maybe going back that far and then this year. We also have some of the ROI projects that are kind of come in and I think it would be another few million dollars on top of that there'll be some offsets this year.

Duane I mean as I mentioned.

Dag me in Boston was probably about $8 million of disruption, but then next year I think you should see a good chunk of that begin to reverse.

Yes, if I had to show up at a couple a couple of pieces here. So the diagnose and Chico probably the easiest one strip ratio. So we said on diagnose that we expect the revenues next year to be up at least $3 $5 million of probably $3 million in EBITDA year over year, when Chico, which is our acquisition. This year, we expect it to do north of $3 3 million and EBITDA in 2024 and then.

For the disruption obviously the disruption from the one week closure at Hilton Garden Inn, and we expect to get 100% of that.

Back next year and that Salt Lake City was a rooms rooms renovation that we would expect that to all return in 2024 as well the designated which we gave specific numbers on will take probably three years. It's a conversion from a brand to an independent to fully ramp up to its stabilized number.

Okay. Thanks, and then for my follow up maybe you could just give us a sense. So I thought the ex Florida.

Portfolio performance was interesting but.

As you look at the balance of the year markets like key west in particular.

Are you thinking it's just more of the same normalization or do you see any potential path.

To pick up later this year, maybe fourth quarter, thanks for taking the questions.

Duane So floris interesting what I'll, let Justin jump in here too. So every asset is a little different in Turin quality Bay, which is a marathon key we actually saw it stabilize.

In July and we're encouraged by what's going on there the pace of decline in the keys is getting better.

So it was kind of first to start the readjustment, if we well to the new normal. So we would expect it to be one of the markets that we start getting more normalized as we get to November December of this year. Justin do you want to have anything to add to that yeah. I think it's really more of the sort of normalization of the comparable years, we get to the back half of the year as Mark mentioned, we saw.

The Florida keys being one of the first assets that we had started to drop off from a year over year basis in the summer of last year and some of our other leisure assets fell off sort of in.

In the back half of the summer so as we work through third quarter and get to the fourth floor of the comp just gets easier for us on a year over year comparison.

Okay. Thank you.

Thank you one moment please.

Our next question comes from the line of Anthony Powell of Barclays. Your line is open.

Hi, good evening, everyone. Thanks for the question.

Hi.

Business transient.

Mentioned in flat showing are kind of slowing a bit.

A bit different commentary that we're hearing from others I guess outside of San Francisco.

Are there any other markets, where you're seeing kind of that slow down or that I guess moderation or is it more of a broader comment that youre observing.

Yeah, I mean, the data we're looking at it on on kind of industry wide as the Revpar for business Transit ROE, especially focused.

<unk> focused on special corporate is down about 20% to 2019 levels. It varies it can vary dramatically obviously in New York City were actually above where we were in 2019.

San Francisco was tragically behind so it varies a lot depending on the market and what's driving those individual markets.

Our rate of recovery and BT was very encouraging in the back half of last year and even in Q1 of this year, we're seeing it kind of moderate where it is now there's optimism that it starts improving.

Yes, a relatively good jumped post labor day as people get back to the office and Theres more business travel in the fall than the summer.

So.

We remain hopeful to fall, but we are seeing it moderate and we wanted to tell you what we're seeing in real time.

Okay, Thanks, and maybe on the conversion in Boston to the independent hotel and the acquisition of the independent hotel in Montana, you've gone.

Much more heavily independent and Youre kind of branding and your acquisitions in recent years.

Maybe comment on why Youre doing that and are you seeing the value of some of these brands kind of decline or at least.

More special situations in your view.

Yes.

The brands are still valuable.

Most of our hotels still have brands on them, but we've looked at each hotel is its individual case and there is brands are expensive in some case you get a great return on the brand and it's the appropriate thing to do certainly on the Big group houses are the most obvious.

Places, where they add value.

But some hotels and Chico would be a great example, they are their own brand and a lot of ways and we wouldn't see I don't think we would see a material uplift in demand from from the brand and the costs. So I think it's not a message that we don't think the brands are valuable we really do it's more of a message that we try to tailor each individual.

Asset to whether it makes sense to put a brand on it clear.

Clearly most of our hotels that have Randy R. R.

Performing significantly better than they would without a brand both top and bottom line.

I guess it may be in Boston, and I guess, what drove that particular decision.

Yes, but Boston is kind of a unique location. It's a it's a historic building and it's in a seven day a week location and.

And we looked at what it does not have a material group component, which is often a reason to have to have the brand.

To attract the groups.

Unencumbered nature of having that hotel probably at 10.

10% 500 basis points in the back end, so it probably increases the NAV of the hotel by $15 million to $20 million.

So those were the factors that led us to two embraces conversions.

Alright, thank you.

Thank you.

One moment please.

Our next question comes from the line of Floris.

Dan Jacome.

Our conference point your line is open.

Hey, guys. Thanks for taking the question.

I guess.

Maybe touch on the.

The new acquisition, a little bit more.

How did you get to this.

Transaction, you say you've been tracking it for a for a couple of years.

What caused the.

The owner to sell now and who else was bidding with you and maybe just talk a little bit about what.

Hum.

What you see.

As this is an eight 1% yield the right yield for this do you think this is the.

Talk a little bit about the acquisitions environment, perhaps as well.

Sure. So I guess there are a lot of questions in there. So I'll just start with the broadest which is the acquisition environment generally.

The acquisition volume is down over 70% there arent very many trades in the marketplace.

Some ways, it's a great time to be a public company because of our cost of debt advantage, where Barbara So for plus 135 private equities borrowing itself were plus $4 50.

So there is there's clear advantage there, we obviously have to consider other capital allocation choices.

This is kind of interesting deal, we love, Montana, we like Big Sky, We like Bozeman, We love.

Paradise Valley.

We like things Jackson hole in Yellowstone as it has been a high priority for us in our search for special special properties.

Once an institution in Montana.

Relatively famous small resort.

We've been tracking it the owner operators then the owner operator for more than two decades.

And he is looking to retire so it was a it was up two times, you're staying involved in the property and we're going to we're going to leverage that relationship.

At the property and with the community.

Interesting. This originally went under contract.

With a.

I'll call a private equity buyers that we understand it at $40 million about six months ago.

We looked at it we were very disappointed because that was more than we were willing to pay.

And you could see how theirs.

It's a really special kind of place.

And that deal.

For four reasons, we're not privy to.

Fell apart and we were we were selected because we were.

We could pay cash right. We didn't have any financing risk we were the buyer of choice I think we were not even in the top four probably in price, but we were the <unk>.

We were the most certain to close so that gave us an enormous advantage in the process and I think we've got a tremendous value on the deal so.

Our plan there is to put in our professional kind of best practices put in modern reservation systems.

Hence the property it was a constrained buyer before so we have the ability.

<unk> improved the property.

Hopefully that leads to more satisfied customer center.

Increased demand and increased revenues at the property.

And I think you mentioned it was under 153 acres is there expansion opportunities here down the road.

There are I mean, I think first we want we've owned it for 48 hours are firstly as we want to make sure. We understand it there is a lot of land here.

And so there are opportunities, but that's not our initial plan. Our initial plan is to make it a better version of itself.

Get our arms around it and the nice thing about these kinds of properties and this is what we talk about internally is yes, there's a lot of ways that you can get lucky and win.

And maybe last follow up is does that mean that.

You are does this make you more interested in other properties in the area and sort of get more of a clustering or are there other properties nearby that debt.

That you would like to have or in Montana.

And does having a stake in the ground.

Allow you to.

Get more opportunities or does this basically say no we're done with Montana, let's go to another part of the country.

Well remember that this whole investments $33 million for what.

Our company has got 4 billion asset so no we're not full up on Montana, we loved Montana, we loved the community we loved the prospects we like.

But by being good stewards as asset and building those relationships, we would hope that that would allow us to get more deals in that state and we would absolutely expand our footprint there if good opportunities emerged.

Thanks Mark.

Thank you.

Thank you one moment please.

Our next question comes from the line of Gregory Miller of Truest. Your line is open.

Thanks, Good afternoon.

Mark.

And your prepared remarks, you spoke briefly about so I thought to ask a question about it.

How do you view your internal and <unk> today.

Two a quarter ago.

And.

In particular, if youre able to comment on.

The drive to leisure assets acquired in the last number of years.

I'd be curious to hear about that as well thanks.

Yes, it's a great question, we just had a board meeting this week and we were talking about the same issue, yes I.

I would say that the truth is there's so few data points in the market with volumes being so low that I think anyone that's telling you a change in value is really just guessing.

There seems to be a tremendous amount of money on the sidelines several hundred billion dollars.

Private equity that's interested in real estate.

That is poised so theres a theres a lot of potential buyers that are sitting there.

Then I think from the seller's perspective, a lot of them are sitting on the sidelines feeling like that is going to get more efficient and cheaper six to 12 months from now so why would I bring my my assets to market.

So volumes below it's hard to know what the changes value.

Obviously, the fading and some of the performance of the resorts.

Theres going to be some some valuation changes there, but they still remain.

Yes, I had a conversation with private equity fund yesterday. It still remains one of the most interesting thesis in leisure and hotel investments.

Very interesting assets I know there was a recent assets trade in Nashville, we call that a totally leisure oriented asset.

<unk> four.

The cap rate that we looked at it was about six zero cafe, yes.

On a trailing cash flows pretty stabilized asset with a six cap.

Yes.

Relatively independent are unencumbered.

These oriented asset in Nashville, So theres not a lot of data points out there.

And so I think if we told you is it was 3% less.

B E.

I guess.

But we still think there is robust demand for these kind of assets.

You can provide some data points I appreciate that.

And thanks for the commentary.

For the follow up question I thought to ask specifically about the data with a little more gas on the.

The outlook that you've provided through 2027.

Could you walk us.

Through the bridge and how you get to the $17 million of EBITDA.

In 2027 versus $9 million.

This year and how much of the underwriting is driven by operating expense reductions.

Relative to topline gains.

Going to be a big chunk of that and then.

I think theres going be some cost savings effectively that come with <unk>.

Removing the overhead that comes from being a branded asset.

Secondly, enhances profitability, because we're able to bring more of that revenue down to the bottom line being an independent versus the branded operator, and then I think the final leg of it.

It was going to be just how we position that asset.

Are we better positioned across both the leisure and business transient channels in that market that we can effectively gain share.

In that marketplace.

Hey, Eddie.

EBIT grew at more details right as an asset I think work, we're projecting $35 million of gross revenue. This year 19 revenues were at 43, So just simply the return back to 19.

With the renovated rebranded asset represents a significant amount of what we're calling potential upside you in general the brand costs on an asset like this given that it's all rooms revenue driven.

Franchise fee and frequent guest program or over 10%, so our $40 million rooms revenue asset just operating as an independent represents about $4 million of.

Our brand cost that we save so I think that's really the bridge. The combination of returned to prior peak revenues and under a more efficient cost structure, we should be able to drop to at least at the bottom line.

That's all very helpful. Thank you very much.

Thank you.

One moment please.

Our next question comes from the line of Sumita's Rose of Citi. Your line is open.

Hi, Thanks.

I just wanted to ask you you mentioned that group business in Chicago.

Slowing or slower in the second half I was wondering is that.

In line with what you were expecting already or is that changed from.

Your last update and then I was just wondering on group in General if you could just talk a little bit about what youre seeing in terms of kind of competition that's it.

Is it more corporate is it just associations coming back that's helping the citywide calendars are kind of just a little more color around the tenure of group I guess.

Sure so.

In Chicago in particular, it's driven very much by the citywide lay out in the way. The calendar was in 2023 is it just it's weighted more the more citywide we're focused in the first two quarters of the year. So this is as we expected and frankly 2024 looks terrific in Chicago in our bookings in 2024, and Chicago are very strong.

So.

We're excited by the prospects. So this is this just seasonality and kind of what we expected from the citywide so a number of our markets as I've mentioned in the prepared remarks.

The next five months, we will continue to get better.

Based on our booking patterns as well just a few additional comments.

Mark mentioned in his remarks, I know there was a little bit of noise on the line. We think returning to pre Covid group room night levels represents a big opportunity for us in 2024 and <unk>.

23 has progressed, we're continuing to narrow the gap to 2019 group room night first half of the year were down about 11% for 2019, we're forecasting that gap to drop to about 4% in Q4 in fact paces only off about 2% in room nights.

Q4, 2019 with rate double digit higher on a percentage basis, we think Q4 revenue likely to be about 9% higher than 19 revenue. So we're seeing that gap.

Pre COVID-19 level room night levels.

<unk> significantly at a significantly higher rate.

And I think to your question on composition, it's mostly the traditional folks I think theres been a little follow up on some of the Tech company bookings.

As you could imagine, but it's not a it's not a huge part of the group business at our markets.

Financial is pharma.

<unk> business has been very strong the reasons to get together continue to be compelling at a hybrid work environment. We're seeing a lot of promotional incentive a lot of small group meetings that need to happen as people are working hybrid.

So that's probably the small groups probably.

The composition of our group.

Thanks, and then I just wanted to ask I know you've answered a lot of questions on the Daphne but.

Sometimes when properties fall out of a major a reservation system and go independent you can just see some disruption not having that.

Just get pulled out completely from the bigger brands system and how are you I guess avoiding that it sounds like you are just wondering kind of what you do pragmatically to kind of keep.

It's sort of short term disruption to a minimum.

Yes, I mean, we've been working hard on preparing for the August FERC state for a long time, we've had weekly revenue calls we've had strategies we've had web designs.

The most significant defensive thing. We did is we took 80 rooms, and we put delta in there at a decent rate.

And I think it's listen the hotel looks beautiful.

We're excited to see to see what it can do on its own just and you want to add anything.

As Mark mentioned, we did a lot of prep work.

To ensure that we really didn't have any significant revenue loss during a dark period. In fact, we essentially sold the hotel out for the first week of August to sort of ensure against that but but we were live both on GDS and most of the channels within 24 hours. So we do have all active reservations.

Actively booking.

<unk> and September are both 70% sold and were significantly.

Significantly better place than we were same time last year for the balance of the back half of the year. So we've got a great base to really preserve rate integrity as we grow brand identity.

Great. Thanks for the detail.

Okay.

Thank you one moment please.

Our next.

<unk> comes from the line of Chris Darling of Green Street. Your line is open.

Well thank you.

Mark.

Prepared remarks, you mentioned exploring a few dispositions perhaps in the near term I'm wondering if you could elaborate on what markets may be what assets and then how you're thinking about seller financing in terms of the saturating a transaction today.

Yes. So great question. So we are committed to our resort and leisure oriented properties. We think that that is the best long term place to be so those will not be on the disposition list.

We will continue the pair down some of the urban exposure.

As far as your question about seller financing one of the reasons, we're selecting <unk>.

Smaller assets as they are financeable and don't need seller financing, we prefer not to do any.

And so we'd rather preserve that capability capacity if it involved a small piece to kind of fill the capital gapped out might be something we would entertain.

But we're not going out to the market offer and seller financing.

Got it that's helpful and then one for Jeff maybe you.

You gave a lot of good detail in terms of the different moving pieces on the expense side. This year, but just curious maybe taking a longer term view.

24, and beyond what do you view as sort of a reasonable run rate for overall expense growth kind of assuming maybe a more normalized demand backdrop.

3% to 5% annually a decent betting line for us to think about it.

Are we a decent range, but when you think about it I mean of course, it's going to relate to ultimately what sort of inflation is that the macro I think for us when you look at how our properties have recovered and we've largely recovered our revenues and earnings a lot of the factors that municipalities used to drive things like taxes.

I don't expect our taxes are going to see sort of outsized increases over a long period of time.

And there might be some catch up in the industry I can't necessarily speak to us off the top of my head, but on labor costs, but I think same thing that tends to follow inflation over time. So I think your range is reasonable if I was a betting man I'd probably be towards the lower to middle end of that but that's just a guess.

Alright, Thats very helpful. Thank you.

Thank you one moment please.

Our next question comes from the line of Michael Bellisario of R. W. Baird. Your line is open.

Thanks, Gary.

Evening guys.

Absolutely.

Just first follow up on the transaction front was at Chico's setup as a reverse $10 31 any pressing need to.

Sell something on the back end of this one.

It was not set up as a reverse 1031.

Okay, and then just on the transaction, maybe can you give us a little bit of background on who the customer is maybe what states people are coming from and then any percentage. If you have a just a number of repeat guests that come to the property.

Yes.

Institution.

I would tell obviously changes depending on the time of year is remarkable because of the hot Springs.

All year round. This asset really is obviously in the peak season when people are going to Yellowstone. This is close to an entrance to the Yellowstone.

You get in the summer you get more.

Greater than 50%, but you get a fair amount of repeat folks and then in the rest of the year.

Is kind of the local draw it's probably the best restaurant within within 20 miles of location. So it's got kind of a great local following from Livingston in other areas.

But probably on average it's about 50% from out in other states from all over the country.

U S.

Yes, Michael I would add it's a very popular hangout with locals even just to go to the saloon and take US open the Hot Springs.

I wanted to ask if you guys did that too on your tour.

Thank you.

Yes.

Hello.

Yes.

In your <unk>.

One pager that you put out the other day, you referenced a 40 plus or minus a percentage point Revpar Delta and what is your underwriting assume and that Chico does versus the comp set and maybe how long does it take to get there.

Yes, Matt I think the.

To sum it up though is the gap is going to be both on on putting in the revenue system and having the revenue gains but out there's probably things we can do on productivity and best practices that we can implement on the expense side that just haven't been done there.

On both of those but if you think about it we started eight 1% NOI cap rate and getting to a 10 is not a we don't have to bridge very much of that that gap to get there over time.

So that the comp sets a little bit.

It's pretty broad in that area. Because there is you got to go down the gardener in living standards. So it is a kind of a broad comp set.

But you'll probably see more ability to move rate over time in the summer than than the other seasons.

Helpful. Thank you.

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

Well. Thank you everyone for tuning into our call and we look forward to updating you on our earnings next quarter take care and have a great evening.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

Q2 2023 DiamondRock Hospitality Co Earnings Call

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