Q3 2023 DiamondRock Hospitality Co Earnings Call
Okay.
[music] again.
Good day, ladies and gentlemen, thank you for standing by and welcome to Diamondback Hospitality third 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 to ask a question. During the session you will need to press star one on your telephone you will then hear an automatic message advising Union space. Please note that today's conference is being recorded.
I will now hand, the conference over to your Speaker House, Briony, Quinn Senior Vice President and Treasurer, you may begin.
Thank you good morning, everyone welcome to Diamond rocks third quarter 2023 earnings call and webcast.
Before we get started let me remind everyone that many of our comments today are not historical facts and are considered to be forward looking statements under federal securities laws.
As described in our filings with the SEC. These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed in our comments.
In addition on today's call, we will discuss certain non-GAAP financial information.
Conciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.
With that I'm pleased to turn the call over to Mark Brugger, Our President and Chief Executive Officer Mark.
Thank you for joining us.
Global travel demand remains strong and new hotel stays in the United States are expected to surpass the pre pandemic record of $1 3 billion room nights.
2023 is also setting a new normal in hotel patterns.
As the changes to the way global citizens travel settles in post pandemic.
During this recovery Diamondback.
<unk> has been a leader and we believe we are well positioned to outperform going forward.
Our confidence.
<unk> from our high quality portfolio.
We have spent more than a decade, renovating repositioning and recycling our portfolio to curate a collection of hotels and resorts.
Specifically designed to attract today's travelers.
By full year revenue.
Our portfolio remains approximately 60% urban and 40% resort.
An important aspect of our strategy, which distinguishes <unk> from its peers is.
Is that nearly 95% of our properties are unencumbered by long term management contracts.
This gives us greater control over operations at the properties.
And higher values upon sale.
These portfolio advantages.
A key element that enabled <unk> to deliver solid results.
Total revenue for our portfolio in the third quarter is up 12% as compared to 2019 and.
And just over flat to last year.
We were pleased with these results.
Which were modestly ahead of our expectations.
Revpar in the third quarter contracted one 1% as compared to the same period in 2022.
Compared to 2019.
Revpar in the quarter was up seven 6%.
Which is more than 100 basis points ahead of the midpoint of our expectation.
While urban total Revpar was up two 9% in the quarter over last year. It was the sequential improvement in resorts that exceeded our expectations.
As measured by total Revpar, we saw strength at the landing Lake Tahoe resort up 15, 2% to last year.
Quality Bay resort in the Florida keys.
Up 10, 4% to last year, and our luxury resort in Vail up nine 3% to last year.
Of course, some resorts continue to adjust and we're down to the prior year.
But we are encouraged that the year over year decline in our resort revenue.
Improved 340 basis points sequentially from last quarter.
And are still nearly 26% higher than 2019.
Moreover.
We expect additional sequential year over year improvement in resort revenues for the fourth quarter.
Overall total revenues for <unk> entire portfolio in the third quarter were $277 $1 million.
While up only modestly from 2022.
It was still a new record for dime rock as it marked the highest third quarter revenue in the history of the company.
This led to hotel adjusted EBITDA in the third quarter of $81 1 billion, which was $6 6 million or eight 9% ahead of 2019.
It is worth noting that we achieved these third quarter 2023 revenue and adjusted EBITDA results.
Despite about $2 million of disruption impact stemming stemming from renovations at the Salt Lake City, Marriott and Hilton Boston repositioning to the Daphne.
Okay, and reviewing the quarter, let's look a little closer at the trends that we saw.
At our urban hotels year over year Revpar increased two 2%.
And exceeded 2019 by two 1%.
The group segment at the urban hotels was up modestly across the portfolio.
However, we did have several stars.
On the group side in the quarter.
On a year over year basis group business in the third quarter was terrific at the DC Westin up 33%.
The Westin Boston up 10, 4% the Westin San Diego up 15, 6%, the Worthington Fort worth, Texas up 15%.
In the Phoenix, Palomar up high single digits.
This strong group performance from our stars was somewhat offset by lower group business from the softer convention calendar in Chicago This quarter as we discussed last earnings call along with the anticipated renovation impact from the Salt Lake City Marriott.
Business transient in the third quarter solid demand increased five 6% as compared to Q3 'twenty two.
Over the summer the business demand landscape evolve quickly.
We worked closely with our operators to aggressively adjust.
And we were successful in executing on our revenue maximization strategies.
This BT strategy involved channel shifts.
And carefully calculated occupancy for rate tradeoffs.
As we move beyond labor day and into the fall.
We are seeing gradual gains in business transient demand, but at levels that remain well below prior peak.
For our resort portfolio.
Third quarter resort Revpar increased nearly 24% over 2019.
Despite contracting eight 2% compared to last year.
Encouragingly the year over year quarterly decline in resort Revpar improved a full 500 basis points from the prior quarter.
Importantly.
We expect that year over year quarterly comparable Revpar will improve yet again in the fourth quarter as we settle in to the new normal secular travel patterns for resorts.
Clearly resorts have been a big winner for Dime rock.
In the third quarter alone our resorts had adjusted EBITDA that was 23% higher than in 2019.
Going forward. Despite some near term adjustments it looks like resorts are likely to outperform the industry over the next decade from the acceleration and adoption of hybrid work in the U S.
Remember that there has been $2 7 billion more days of locational flexibility created post pandemic from the average worker being in the office 335 days per week from the prior four four days per week in 2019.
To put this into context the.
The number of nights of locational flexibility is two times the annual demand for all hotel rooms of all types in the United States.
And resort hotels, specifically comprised just 10% of the existing supply.
And resort supply in many of the resort markets is likely to remain near zero from legal restrictions like in key west or.
Or the unavailability of developable land like Huntington Beach in coastal California.
As you can tell we remain constructive on the long term outlook for our resorts.
Okay, let's turn to internal growth.
While diamondback has always invested in its assets to keep them highly competitive spending more than a half a billion dollars over the last five years.
One of our biggest competitive advantages is derived from the large number of high impact.
Opportunities within the portfolio.
These ROI projects drive cash flow and lead to outsized increases.
In the last 24 months we.
We have delivered on a number of projects.
Including the conversion and up branding of the highest vale to a luxury collection.
The Clio Denver to a luxury collection.
The key West House to a margaritaville and the lodge at Sonoma to an autograph.
Those four hotels alone.
Generated a collective revpar increase of 27, 4% over 2019 in the third quarter with the hotel adjusted EBITDA up 42, 8%.
We will continue to benefit from the completion of these and a number of other recently completed ROI projects.
In the last 36 months, we have executed a total of $58 million in ROI projects that touched more than a third of our hotels.
The benefits of these projects often play out for several years and we should continue to reap market share gains and increased profits that will bolster overall portfolio results.
And we're not done.
<unk> has a strong culture of excellence.
That has driven our quest to identify and execute additional value add ROI opportunities.
For example on August one we announced the successful conversion of the Dag knee Boston.
Which marks our 15th independent hotel.
The diagnosed projected to increase its EBITDA by $4 million next year, and ultimately stabilize in excess of $15 million of annual EBITDA.
Sure.
Additionally.
We are actively underway with other ROI repositioning.
The Hilton Burlington is in the process of being converted to a lifestyle hotel to be named hotel Champlain, a member of the Curio collection.
It is on track to be completed during the summer of 2024.
The Bourbon or leads is also underway with its repositioning to be the premier urban resort in the French quarter of New Orleans.
This ROI project is expected to be completed late next year.
And behind these diamondback has a large pipeline of future opportunities.
I'll list just a few.
At orchards Inn Sedona, we are in the permitting process to move that hotel to a luxury level and make it part of the adjacent la bears the Sedona resort.
The repositioning is projected to increase ADR there by $300.
At the landing Lake Tahoe, we have opportunity to add almost 20% more keys.
At the Chico Hot Springs resort, we are evaluating adding more cabinets on our 748 acre property.
At shrink quality Bay, we are seeking permits to build <unk> first marina with about 30 slips.
These are just some examples and there are many more so stay tuned.
That's a good transition to give you an update on the acquisition market.
While Jeff will discuss our capital allocation options in a few moments.
We have been disciplined in working to find more of the transactions that have worked so well for us.
Owner operated experiential hotels, often in unique destinations.
We have a deep well of understanding about unlocking value at these types of properties.
Which puts us in a great position to create value when we can provide them loose.
However, as we said last call any deal we would do this year will have to be something we really love.
Our one deal this year, the Chico Hot Springs resort and Paradise Valley, Montana.
Currently fits that bill.
This independent owner operated hotel has lots of upside opportunities.
We bought it at an eight 1% NOI cap rate.
And in the third quarter 2023, comparable Revpar grew a robust 10, 8% for a period of ownership.
We projected our investment in the Chico resort will ultimately stabilized north of a 10% NOI yield just from the implementation of our best practices and a modern revenue management system.
While the Chico resort was a special opportunity we continue to vigorously work our proprietary database of opportunities with similar characteristics.
I should also mention that we are testing the market with a few potential dispositions.
We will remain disciplined with release prices.
Now, let me turn it over to Jeff for more details on the quarter.
Thanks Marc.
Starting at the top Diamond rocks Revpar contracted one 1% in the quarter from the prior period exceeding our guidance of a one 5% to 2% decline.
This better than expected performance was largely due to the improving performance of our resorts.
Food and beverage and other revenues saw mid single digit growth pushing same store portfolio revenue up slightly versus last year.
The growth in comparable total revenue breaks down between the two 9% increase for our urban hotels and a four 6% decrease in our resort portfolio.
It is important to highlight the steady improvement we are seeing at our resorts.
Comparable total revenues at the resorts declined 8% in the second quarter, just four 6% in the third quarter and in September they declined only two 8%.
We expect this trend to continue in October.
Compared to 2019 comparable total revenue at our urban hotels was five 8% higher with steady mid single digit gains each month over the quarter.
Comparable total revenue at our resort portfolio finished the third quarter nearly 26% above 2019 and September was the strongest month with nearly 32% growth.
Before I move on to profits I want to spend a moment on the group segment.
We expected group revenue gains in the third quarter to be softer than the strong results seen in the first half of the year.
Discussed on our last conference call. This was mainly due to the shifts in the citywide calendar in Chicago.
Third quarter group revenues were in line with our original expectation for group room rates were slightly stronger than forecast.
We expect comparable group revenue will exceed 2019 levels. This year, but we forecast group room nights will still be 10% or 79000 room nights below 2019.
Next year is shaping up to be very strong with group revenue pacing up over 23% compared to the same time last year.
Our footprint continues to serve us well.
And our largest group markets the Westin Boston Group revenue was pacing up nearly 18% and the Chicago Marriott is up over 40%.
Group revenues at the Worthington Western DC, Westin Fort Lauderdale, and Western San Diego are collectively up over 60% compared to the same time last year.
We believe the strength and breadth of our group set up for 2024 is a unique advantage for tundra.
Moving onto profits comparable gross operating profit or GOP was $111 million.
Or <unk> 40.
2% margin on $277 million of comparable total revenue.
To put this in context. This means our asset managers were able to keep same store hotel operating expenses to just one 4% growth. Despite the disruption of the <unk> and flat revenue.
Hotel adjusted EBITDA was $81 million and a 29, 3% margin and corporate adjusted EBITDA was $73 million.
Hotel adjusted EBITDA margins were 210 basis points lower than third quarter 2022.
The adjusted EBITDA comparisons were made more challenging mainly by two events discussed on last earnings call.
First disruption and displacement mainly at the Daney and second the property tax relief in Chicago last year.
Not for these two factors we estimate our hotel adjusted EBITDA margin would have been 170 basis points higher than reported results.
Let me reconcile the variances to the third quarter hotel adjusted EBITDA compared to 2022.
The disruption and displacement shaved better than $2 million from the quarter.
We had a successful tax appeal in Chicago in 2022 that resulted in $2 $8 million increase in our property taxes in the third quarter. This year.
Remember, we will face a $6 $2 million increase in property taxes compared to last year in the fourth quarter.
Our insurance policies renewed on April one.
So our third quarter results reflect a full quarter impact of higher cost, which was up $1 9 million over 2022.
Finally wages and benefits were up two 8% year over year.
Labor cost growth is slowing because we are fully staffed and wage inflation has moderated.
Can see this trend in the sequential comparisons where second quarter labor costs rose six 5% over the prior year versus just two 8% in the third quarter.
These costs were offset by aggressive asset management initiatives that increased other income by eight 5% as the team aggressively pursued opportunities from EBIT parking agreements adjust resort fees and promote our spots.
I'd like to point out a few stars in the quarter.
The Dad mean, Boston officially opened on August one and the on site team has done a superlative job keeping the project on schedule and on budget and the hotel looks fantastic.
Importantly, third quarter EBITDA was 5% ahead of our internal expectation after conversion.
Collectively.
Our luxury resorts held EBITDA margins nearly flat despite the competitive pressures the season from Europe and cruise alternatives. For example, the height and Vale posted a nearly 400 basis point EBITDA margin increase on a nearly 5% increase in revpar.
Turning to Boston Revpar at our Western Seaport was up seven 6%, which is four 8% higher than 2019.
Moreover, the western had a very strong quarter for advanced bookings, helping us set up for a successful 2024.
Tranquility Bay posted a four 8% increase in Revpar and a 10, 4% increase in revenue and one in what is otherwise a slow seasonal period for the keys.
As Florida return towards historical seasonal patterns, our occupancy focus revenue strategy allowed us to drive year over year, EBITDA growth and an EBITDA margin change that surpassed the portfolio average.
<unk> strategy was successfully deployed at the landing Lake Tahoe, resulting in a 19% year over year increase in EBITDA and over 150 basis point margin increase.
Finally, I want to point out that comparable F&B profit margins are excellent in the third quarter at 37%.
That's 50 basis points better than in 2022, despite food inflation by.
By making smarter choices on the menu along with rigorous changes in competitive sourcing we improved food costs year over year. We also had success growing beverage profits too with margins of 140 basis points. This was achieved through an increased focus on selling more profitable cocktails and utilizing lower cost providers.
Okay, let's talk about capital allocation, we prioritize capital towards the highest IRR opportunities on a leverage neutral basis, we constantly evaluate internal ROI projects common and preferred share repurchases and finally external growth opportunities.
Beyond the ROI projects Mark has already spoken about in the past 12 months, we have repurchased over one 8 million shares for approximately $14 7 million or $7 77 per share.
We are exploring dispositions the proceeds of which can be used to fund additional repurchases ROI projects or external growth.
<unk> to the ultimate capital allocation, our focus is on maximizing shareholder value.
We remain committed to having a flexible balance sheet.
Conservatively leveraged as demonstrated by the low net debt to EBITDA ratio of three eight times trailing four quarter results.
Importantly, our current liquidity is nearly 140% of our debt maturities through 2025, and nearly seven times, our 2024 maturities.
Let me provide a few building blocks on our 2023 numbers, our corporate overhead remains on track to be around $32 $5 million debt.
Debt service costs are expected to be about $63 million.
Preferred equity dividends, our $9 8 million.
Also wanted to note that western is rolling out as heavily bent to point out program and by committing to the new bedding package in the fourth quarter, we can secure a 30% price reduction.
This will result in an expense of $1 million in the fourth quarter to better position our lessons in 2024.
Looking ahead to 2024, we expect several expense comparisons to get easier as you put inflation fueled wage growth rising staffing levels are hard insurance market and property tax true ups in the rearview mirror.
Let me turn the call back to Mark.
Overall travel trends remained solid but the current environment continues to adjust as the market establishes its new normal in 2023.
We expect fourth quarter comparable revpar to be approximately flat year over year.
This represents a 100 basis point sequential improvement from the third quarter, largely due to improving performance at our resorts.
We are also pleased that our current full year forecast is generally consistent with wall Street analyst estimates.
For 2024.
The U S economy will certainly impact actual industry results.
We believe that the industry has a potential to perform relatively well.
This belief is based on a few factors.
ADR is likely to increase at or above inflation.
Corporate transient should continue to improve albeit gradually but with special corporate rates up mid to high single digits.
Group demand should continue to stay strong as forward bookings nationally are solid.
And finally <unk>.
<unk> hotel supply in most markets provides a good backdrop for fundamentals.
Now for Diamond Iraq, we like our particular setup.
Let me give you a few specifics.
First we have room to run.
For our hotels to get back to prior peak occupancy.
We expect to end 2023 about five five percentage points of occupancy behind prior peak.
Closing that gap is worth $57 million in incremental room revenue.
Second.
There is an opportunity on group.
Our geographic setup is good for 2024 with terrific convention calendars in important markets for us like Chicago, DC and San Diego.
If group room nights, just get back to 2019 levels.
That is worth over $34 million in incremental room revenue and concomitant outside the room spend.
As Jeff noted <unk> has a strong group pace for 2024 up over 23%.
And lastly.
ROI projects will continue to fuel results.
For example, the Dagley Boston repositioned in 2023 is expected to experience a 50% profit growth in 2024 with the EBITDA EBITDA projected to increase $4 million.
As you can tell we remain constructive on the future of the travel industry.
Travel is one of the highly valued assets in our society and around the world.
And we believe that <unk> is well positioned for this cycle with a model portfolio focused strategy and ample liquidity to move opportunistically.
At this time we.
We would like to open up for any of your questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced can withdraw your question Press Star One again, please standby, while we compile the Q&A roster.
And our first question coming from the line of.
San <unk> with Keybanc capital markets. Your line is open.
Yes, Thanks, and good morning, everybody just starting off wanted to clarify a couple of items around the recent trends in resorts. You reference is the sequential improvement in resort performance is that a re acceleration in year over year growth that youre alluding to and does that include the Fort Lauderdale, Kimpton Beach, and then separately I'm just.
<unk> is it fair to say that you think the normalization period and resorts is kind of.
Starting to improve and that you expect it to Reaccelerate again in 2024.
Yes. This is mark it's a great question on our resorts I think it's a it's a mix so at some resorts like the Florida keys, we're seeing stabilization. We're also seeing material year over year comps with some of the markets that started I would say correcting to the new normal patterns earlier, we're getting into the comparable periods for those now but.
There are other resorts that are I would say we saw a good footing year over year the ones, we called out and we are adjusting some of their strategies given the shift in some of the demands.
I would call out Lake Tahoe, our asset the landing there, where we did some carefully calculated rate for occupancy trade.
Which led to substantial outperformance on revenues, but also more importantly on profits.
So I think it's a combination of all three so it's.
Easier comps in some markets. It is sub markets that are I would say stabilizing our re accelerating but really some of that is I would say.
More focused asset management revenue strategies being executed successfully.
So if you were to stack up I guess, the three segments of your business without pinpointing 24 guidance between group Leisure you mentioned kind of a gradual continued recovery in <unk> I guess, how would you rank those three segments as it stands today.
For 2024, we're still just rolling up the budget right now so I think it's a little early to give you kind of.
We'll know a lot more than 30 days after we've been through the budgets.
You want to jump that requirement through each of those.
Okay, alright, thanks for the time.
Thank you.
Our next question coming from the line of <unk> <unk> with Citi. Your line is now open.
Hi, Thanks.
It sounds like you just have some improved visibility I guess into 2024 as the world kind of continue to normalize.
Some of the asset management tools that you've talked about would you consider at some point sort of reintroducing a more kind of formal guidance for the full year or are you thinking more in terms of just kind of.
Giving some some color around the next the next quarters that <unk> been doing.
Hey, good morning speeds I think as the world settles down we'll see where we are when we get to February will certainly have that discussion at the board meeting.
Wed like right now you have two wars going on the uncertainty of the fed going on a number of other factors hopefully by the time, we get to February things will will be a little bit clearer, we will be able to kind of give more forward outlook, but I think we'll have to take it kind of one quarter a time right now.
Okay, and then can I just ask you I know, it's a relatively small piece of the overall portfolio, but it was the lake Austin.
Her key investment and I think when you bought it you would expected this year its contribution to be.
Around $7 million it looks like its running significantly below that and I was just wondering what kind of went wrong relative to your initial forecast and do you think it can reach the second million dollar contribution.
One point.
Next year sure.
Yes, I think we've had a little bit of a struggle at Austin sort of going from an owner operated owner operated resort to do more.
More of an institutional set of revenue management tools, while we saw some falloff in high end leisure demand. So we've come back from a pricing strategy that is a little bit more occupancy for we've seen a lot of success, there and I think a lot of the things that we saw as opportunities youre going from an owner operated resort in terms of increased group contribution and really group is a.
<unk> part of the segmentation, which has never really been there we've seen a lot of inroads on so I think we're still confident about our overall underwriting, especially on the on the group and through connections the GDS, which didn't previously exist just taken a little bit longer to implement I think some of those revenue growth strategies that we saw at acquisition.
Okay. Thank you.
Okay.
Thank you Noah.
Next question coming from the line of Peter <unk> with Evercore ISI. Your line is now open.
Hey, this is actually going for Peter.
Are you guys good morning.
As you think about trends into 2024, just a follow up on an earlier question.
Which markets do you think have the most headroom.
Which ones would you expect a lag you mentioned I think for a couple quarters now of good building convention calendar.
Market like Chicago, how would you see that market kind of trending in total.
Yes, I mean, I think the most visibility we have into 2024 is on the group side. So we can look at the forward bookings at our hotels in the citywide convention calendars. So if you look at Chicago were up as we mentioned significantly over 40% in our revenues for next year of forward bookings and the city Wides are actually going to be ahead of it.
Room nights ahead of 2019, so that one feels very good Boston is having a good year. This year and next year still supposed to remain significantly above 2019 levels in room nights.
And our forward bookings there are low double digits that feels good as well D. C. It looks like it's going to be outstanding Signet.
Significantly ahead of where it was.
Last year and 2019, San Diego the kind of the same thing in other another very good year substantially ahead of prior peak. So all of those markets are particularly attractive or are for bookings at our hotels correspond with the strength in those markets.
It's really where the visibility is right now we will go through the budgeting process at the individual hotels, it really kicks off this week.
And 30 days from now we'll have much better sense having.
More time at the properties and seeing those detailed budgets.
On how 'twenty four will shape up.
Thanks, and then just on the conversion to independent like the Dag me can.
Can you talk about how your mix changes and any changes you see on distribution channels.
For example, how much of the prior demand was staying on point.
And what are you backfill that demand with and is it really as you convert independent as it really.
Is that pick up share when you when you transition to an independent thanks for the thoughts.
I think it's.
<unk> got a base building exercise over a couple of years of building market awareness, we have put some contract business, which I think got on really sort of a rate parity basis will supplant.
Probably slightly in excess of the amount that we were getting from redemption out of the Hilton system.
Now we're just in the process of establishing a name for the hotel with a lot of our local partners on the BT side, which we've seen some encouraging results on and I think we're up about 60% in group for the <unk> specifically it is near its not a huge group hotels like the Westin that we have in Boston, but but we've seen some good inroads with the renovated product from.
Some of our local corporate customers.
I appreciate the thoughts.
Thank you and our next question coming from the line of.
Alright, Kesten with Wells Fargo Securities. Your line is open.
Thanks.
You said that Q3 expenses were up one 5% with flat revenues not looking into 'twenty four and there are some expense tailwind are.
Are you able to give any more detail on what that potential runway run rate could be as we're looking into 'twenty four.
Yes, Hi, Jerry this is mark we're not really giving 24 guidance, but we are seeing expenses, particularly on comparisons to fully SaaS hotels, better food cost I think a number of the labor initiatives. We put in are also helping our productivity per room.
So as you saw sequentially the expenses have come down substantially on a year over year basis.
That's a trend ex some uncontrollable with like property tax that we expect to continue.
And hopefully as move in 'twenty for the comparisons continue to get better we do anticipate that we'll have higher banquet revenues in 2024 from the strength of our group book.
So there'll be some associated expense as we as we layer the banquet back into 2024 as well.
Okay and whats the quick math on Q4 margins.
Based on your comment that you're comfortable with.
Yeah.
Yes, it's a good question.
I guess I would.
Splain it this way year to date.
Our margins for hotel adjusted EBITDA quarter by quarter are down about 200 basis points year over year versus 2020 to the fourth quarter, we will have a bit larger dip because as you recall, we have the tax in Chicago or the tax relief in Chicago, that's not going to repeat so that's about 240 basis point benefit to last year, we're not going to have this year.
Sure.
And then beyond that you.
You have the insurance property tax insurance renewal this year, which is about a 75 basis point drag and then I mentioned the expenditure on something like the western linens and some other small items or about a 40 basis point drag. So if you think of it as sort of adding that on top of the 200 basis point change we've seen before youre, probably something close to almost a 500 basis point differential versus.
The margins that we did in the fourth quarter of 'twenty two.
Okay.
And then you mentioned testing the market on dispositions should we assume that.
And are you primarily in urban markets and then I guess second is that a good thing yet to pass pricing on larger box.
So.
We generally don't like to talk too much about pending dispositions as we we always assume that the potential buyers or listen to these calls as well.
But I will say.
Assets that we are testing the market on our all urban asset so thats a correct assumption.
I think it's really deals below a $100 million, where there seems to be more liquidity and volume. The bigger deal is just because of where the debt markets are and the.
More difficult.
Large loan market that exists today, it's just hard to get those deals done.
Okay. Thanks.
Thank you one for next question.
And our next question coming from the line of Chris.
Ms Wang <unk> with Deutsche Bank. Your line is now open.
Hey, good morning, guys. Thanks for all the details so far.
Mark I guess one of your friends recently sold a hotel in Boston I think are going to convert to.
To Hilton.
Is there any.
You look out a couple of years is that a net positive or net.
Are you at all given you have you recently converted year Hilton slightly different neighborhood, and then you have the Westin, which I.
Yes, I don't know what the longer term plans. There are so can you give us any color on.
Any impact from that sure.
One.
I thought a good cap rate and that's a good I think thats a good comp to have in the marketplace for assets in Boston. So I thought that was favorable read through on the Hilton branding one of the reasons, we want independent as we have a seven day, a week kind of location that lends itself because of the kind of consistent demand in our locations with <unk>.
<unk>.
And it avoided the what would have been a problem with Hilton It decides to put another hilton.
Brand on 1000 rooms, not too far away from our hotel. So I think in a lot of ways. It vindicates our decision.
To not be exposed to new Hilton supply within this market. So we.
We feel good about our decision we felt good about the prospects of the diagnosis had a had a very good August which was ahead of our original <unk>.
Pay the pace September looked good.
Came in just on just on underwriting so.
We feel really good about that.
Okay I appreciate that Marc and then really just wanted to follow up on a couple of quick ones from the prepared comments one is on corporate transient I think a pretty good.
Pretty good comment around pricing question. There is are there any volume guarantees associated with those maybe relative to 19 and then the second part of it is I think you talked about some cost comps be easier, especially you mentioned insurance there I guess that caught me a little bit by surprise given what we're seeing is that because you have insurance for next year lock.
In or Youre, just more optimistic in general.
Taking those in reverse order then property insurance renewal was April one so we're locked until April one I think that's what we're trying to convey in the prepared remarks.
We know what we know what our cost will be through that and we have a substantial increase last year hopefully the market will be more accommodating when we get to April, but we'll see when we get there.
On the BT.
I think the the surveys that I've seen come back from the largest special corporates is that they intend to travel more in 'twenty four than they did in 2003 at this time.
That's helpful. There are most of RPT special corporates don't have minimum guarantees.
But we're taking some comfort from the fact that they are the initial surveys indicate that they are intending to travel more than the restricted levels that they were at in 2023, but we don't expect a rapid reacceleration of <unk> as we move into 2004 and certainly not the way we are engineering the mixes at our hotels.
Okay Super helpful. Thanks, guys.
Sure.
Thank you and our next question coming from the line of Floris Van <unk> with Compass point. Your line is now open.
Hey, good morning, guys.
I had a question for you on.
On the capital markets and how that's impacting.
Your business and obviously you are testing the market with some some asset sales.
Should we presume that.
You are testing the market.
In sales below $100 million or because because of the difficulty in getting that on some of these larger transactions or does the sunstone news makes you more.
Positive on some of the some of the bigger.
The bigger potential dispositions and then the follow up I guess is on.
The fact that the debt markets are more accommodating for smaller transactions are you seeing more competition for the types of assets.
You've been buying like the like the Chico and.
The resort type assets.
Yes.
Let me try to try to parse through the several questions. So I would say in our portfolio.
Everything is for sale and there certainly seems to be an arbitrage between private market values and public market.
Implied values, so we'd like to take advantage of that arbitrage with that said, it's a it's not a great sellers market right now.
So we're trying to be prudent about making sure that we're doing what's in the best interest of our shareholders on release prices. So we're actively involved in testing the market I think is below $100 million, we've seen greater volume.
Excuse me in the number of lenders.
The number of potential bidders. So you are more likely to get a number of bidders on those.
Are those more small to mid sized deals and you are on the.
$200 billion product.
The deals that are out in the marketplace. So we remain we think the best arbitrage is still probably in those under $100 million.
Dispositions the flip side is as you point out is that for acquisition opportunities. There is more competition for those kind of opportunities. That's why we continue to spend our efforts on off market transactions.
And as I mentioned, our proprietary database that we've spent over 10 years now on to focus on these kind of unique opportunities like Chico and Lake Austin.
They continue to be where we are spending our time on the external growth front.
Great and maybe my follow up question is.
You have a mortgage on the courtyard in New York and that's coming due next year $74 million.
Pretty low interest.
Essentially I mean, you could look to sell that could be one of your dispositions as well potentially so you don't have to deal with that but would you otherwise should simply pay down the mortgage and.
<unk>.
Increase your unsecured borrower.
Borrowing base.
Well I don't think it makes it more likely that we sell the asset is that that fungible among the assets. If we sold another asset we can certainly use it but I would say we have we ended the quarter with $102 million of cash plus the undrawn revolver. So we could satisfy that mortgage just with cash on hand.
So we have all that kind of all the optionality that we need to it's one of the reasons, we keep the fortress balance sheet and the financial flexibility to handle those kind of.
That's when they come without putting any pressure on the company.
Yeah.
Thanks, that's it for me.
Thanks Laurence.
Thank you and our next question coming from the line of Anthony Powell with Barclays. Your line is open.
Hi, Good morning. This question on business transient I think you've talked about some sluggishness there in the third quarter.
Any particular markets or I guess category that drove that that decline and what revenue management strategy to implement <unk>.
Correct.
Yeah. So just good morning, Anthony it's Mark just to clarify we didn't CPT.
Softness we just said it's substantially we remain substantially below 2019 levels.
Really what we're seeing it and you've seen these comments from the big brand companies as well as the small business travelers still remains relatively robust and their platelet levels north of what they did.
Pandemic, but the biggest special corporates.
<unk> Pwc's.
They are traveling.
Much lower volumes than they did pre pandemic and that trend continued in the second quarter in the third quarter. The comps were obviously easier to last year.
But they remain they remain at those lower levels and we're seeing it gradually get better post labor day, but it remains that.
Kind of depressed levels overall.
Got it thanks, and then maybe one on cash flow for next year I mean, you talked about some more developments redevelopments in 2024.
The capex.
Do you remain kind of where it is and also on the dividend do you have any.
All but one that Keith Gibson and kind of the next tenant level or maybe the dividend go up next year.
<unk> continues to increase.
Anthony It's Ed.
Jeff right now as Mark said earlier, we're still pulling together our budgets I think our Capex will generally remains what it was originally contemplated to be this year, which I think about $100 million.
It's a pretty consistent number for us that might flex a little bit simply sometimes there is timing issues between when projects are started and completed our carryover from the prior year, but it'll be about $100 million.
As for the dividend right now we paid.
12 cents a share per year ill defer to mark on.
The board said that but I think thats the plan going forward and going lower.
And we have sufficient net operating losses that we can continue to use to offset to pay a dividend I believe through much of 2024, if not all of 2024. So I think we have the ability to keep it at that level.
Yeah, I'll just add on the dividend policy, it's something we'll review with the board every quarter, but right now it looks like the highest and best use of our capital is in other places why we value the dividend I know, it's an important component of long term returns for lodging Reits right.
Right now given where the stock prices trading we just think that there are higher better use is generally for that capital, but there'll be something that we talk about every board meeting and we will evaluate quarter to quarter.
Okay. Thank you.
Thank you.
Question coming from the lineup.
From Bank of America. Your line is now open.
Hi, good morning, guys.
We've heard airlines commenting during this earnings season, there's been.
Theyre seeing strength on peak holidays, but outside of those windows has been a little bit more weakness and between.
Are you seeing any kind of that similar behavior in your booking patterns and maybe why or why not we can be different and kind of what we're seeing on the airline side.
Hey, Danny I think it's a little bit of where we're starting to establish the new normal patterns. This year.
On that so certainly there are some Florida fatigue, I would say in some of that stuff that we had exceptional shoulder seasons, they're remaining better than they were pre pandemic, but they're kind of coming down I think more sustainable levels that we can build on going forward. So I wouldn't say that that's different we are.
Implementing strategies around that reality, so that may mean in some of our resorts like I'll take one Henderson Beach resort, which we Havent Destin has terrific meeting space last year, we basically locked it up and barely used it as we move into 'twenty four we're going to be much more aggressive in booking in high end group.
During the mid week to make sure that we're maximizing profits the hotels. So I think you need to understand what's happening in the in the demand channels you have to be very proactive and anticipatory and the way you set your revenue strategies, particularly midweek group.
We've done excellent job on it so far and I think we're trying to stay ahead of the curve as we move into 2024 on the shifting patterns as the new normal is established.
Thank you very much.
Thank you.
Question coming from the line of Bill Crow with Raymond James Your line is open.
Hey, Good morning, Jeff Let me, let me start with you.
And recognizing you're still rolling up budgets, but also recognizing that you opened the subject to 'twenty four expenses margins in your prepared remarks. So let me frame. It. This way one of your peers recently suggested that in order to achieve flat.
EBITDA margins next year, they would need about 4% Revpar growth is there any reason to.
To think that the diamond rock would be materially different than that one way or the other.
Yeah.
I think we have some sort of unique factors going on for us like as I mentioned like with the diagnosis is going to be coming on and adding some significant EBITDA as that ramps back up I think for a portfolio that is maybe a little more stack. If you will I think thats probably in the vicinity.
That's kind of area of course portfolio to portfolio, but I think thats, probably kind of a good industry metrics.
Alright, thanks for answering that.
Mark maybe a subtle question here, but.
When we look at leisure is it normalizing or is the consumer weakened needs.
Well, it's hard to distinguish those two I think it's.
We're seeing normalization, we're not see maybe at some consumer weakening, but we're not seeing that we're seeing the share of wallet is still be significant we're seeing people spend on experiences versus things.
Seems like they are cutting back their material purchases before they're cutting back their travel expenses.
But it's hard to always pull out exactly what's driving the behavior.
But people are traveling I think we'll see a pretty robust.
Holiday season, as we come up here, so we're relatively optimistic but clearly things have settled into new patterns in 2023.
Great.
Thank you guys.
Thank you.
Mark can you touch on whats been pretty strong fundamental performance in New York City, and how sustainable that might be going forward and then is it fair to suggest that New York is one of those rare markets with values might actually be up in recent months. Despite the movement in the tenure.
Yes, so I guess I'll speak on a couple of kind of detailed questions here. So I think our values. The interest in New York City from investors is always high and its a market that always gets international and everyone's attention.
New York continues you could see increase in values people believe in the thesis in New York and it's always been active on investor kind of a global scale investor appetite.
Fundamentals are good.
You have a lot of positive things happening there, most notably <unk> had a lot of supply get taken out and converted to other uses.
Roosevelt.
Getting converted to migrate housing and other big property is getting taken out permanently for student housing. Other uses that's been that's been very helpful.
You have the one rezoning going forward, which will take out the ability to build non.
Non union hotels generally after after 2026, that's going to be a nice catalyst of course, most recently we've had the change in the laws around Airbnb, which is taken out significant number.
Available units through that channel. So there's a lot of reasons to people show New York I'd say the other one is that the type of industry in New York the financials have probably been the single most aggressive industry and making sure people returned to work four or five days a week.
Juxtapose that with a tech centric market like CF.
<unk> San Francisco.
Those interest rates have kind of lagged on the return to office.
Stats, which is kind of suppressed the ability to get the the transient coming into those markets. So I think theres a lot of where you seem to be constructive on New York. We certainly are I think will be constructive as we set our budgets for 2024, there as well.
So that feels good.
And any any commentary you would have on the investment sales market in New York.
Yeah.
There has been some recent trades, particularly smaller select service hotels and at the high end that have gone off.
Again, I think the feedback from the brokers. So we've talked to you that participate in this processes. They were fairly fairly robust demand for those offerings. I think people are interested in that market as I mentioned in New York is one of those buckets, you will always get the international and high Networth individuals interested in.
So I think it's a constructive market for dispositions.
Okay Fair enough I appreciate the thoughts thank you Chris.
Thank you.
Next question coming from the line of Mike <unk> with Baird. Your line is open.
Thanks, Good morning, everyone.
Alright.
Just first on the monthly cadence was September really the main driver of the <unk> upside versus your expectations and then can you provide any color on what you saw in October, particularly relative to what you thought the month was going to look like.
Yes, so its September did come in a little better than we anticipated we gave our expectation about two months ago. So September was the kind of the variability in that came in a little better, particularly in the resorts that we had forecasted October is a strong month it'll be the strongest month of the fourth quarter for us the.
Wait group laid out in our major markets, particularly focused on October.
So we were at or ahead of our expectations for October we don't expect November December to have the same group strength. So they probably won't be as on a comp basis as strong as October was.
But so far so good this quarter.
Got it helpful. Thank you for that and then just.
Switching gears a little bit.
Hershey transaction was announced in late August after <unk>.
Your last conference call.
One can you provide any updated view on what private equity groups are looking for what youre hearing from them and then how that.
Jack maybe shapes or changes your view on relative value and next steps for you looking at.
Well I would say the Hershey transaction had a positive read through and that they had substantial interest from a number of high quality very capable private equity firms.
The depth of the bidding there I think was very encouraging and the that they were able to secure.
I think with us are very encouraging.
It was significant.
Fairly good competition for the debt and the pricing looks like it's going to be on a relative basis.
Fairly attractive so I think all of that are positive read throughs.
Does that change our outlook I don't know that it changes our outlook I think private equity is still interested.
But it doesn't feel like this is the moment in time, when they are particularly leaning into get super aggressive on pricing for the public Reits.
I think based on where we are with the fed.
The concern of slower economy, I would imagine that the middle of next year is probably going to be a more robust time for P firms to lean in youll be hopefully past the peak of the fed raising the rates hopefully liquidity will will get even more.
More robust in the debt markets today, it's functioning I would say, but it's not robust.
Those things should come together in the middle of next year, and I would imagine that that opa more optimal time for people.
Private equity too to make aggressive decisions.
Perfect.
Thanks for that.
Thank you.
I see no further questions in the queue at this time I will now turn the call back over to Mr. Mark Brugger for any closing remarks.
Thank you for everyone on the call. We appreciate your interest in <unk> and we look forward to updating you next quarter have a great day.
Okay.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
Sure.
Okay.
Sure.
Yes.
Sure.
Okay.
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[music] away.
Okay.
Okay.
Got it.