Diamondrock Hospitality Company

Good day, ladies and gentlemen, and welcome to Diamond Rock Hospitality's second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press star and zero on your touch-tone telephone to reach an operator. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Bryony Quinn, Senior Vice President and Treasurer. Bryony, you may begin.

Thank you. Good morning, everyone. Welcome to Diamond Rock Second Quarter 2020 Earnings Call. Before we begin, I'd like to remind everyone that many of the comments made today are considered forward-looking statements under federal securities laws. As described in our filings with the SEC, These statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning, and thank you for your interest in Diamond Rock. We made excellent progress in the quarter, reducing our cash burn rate, improving our total liquidity, and reopening hotels for the eventual recovery. The second quarter, however, was unlike any in the history of the hotel industry. When we last spoke in May, we were in the midst of the largest contraction in GDP ever experienced in the U.S., as government restrictions were imposed to curtail the spread of COVID-19 in order to protect the general public. While some communities were able to reduce the spread of the virus, other locations experienced sudden increases in the transmission of this terrible virus. Contemporaneously, the concerns over systematic bias in our society led to demonstrations across the United States involving an estimated 15 to 25 million people. The overall environment experience in 2020 is the very definition of unprecedented. Before going any further, I want to recognize the hard work of our hotel operating teams and their dedication to the health and safety of our guests. I also want to recognize our corporate employees for their agility, creativity, and perseverance to ensure that Dimerock is secure and well positioned for a profitable future. Many of the observations we made on the first quarter conference call still resonate with us today. Let me recap those for you. One, the second quarter is expected to be the worst period in the year. Two, the demand, the demand recovery will come in stages with leisure demand from drive-to resorts coming back first, followed slowly by emerging business transient customers, and finally by the return of large group meetings likely in 2021. Three, supply. Supply is going to be constrained going forward as new construction starts evaporate and obsolete hotels shut their doors for good. According to FW Dodge, rolling three-month hotel construction starts were down 56% in June as compared to the prior year. Moreover, last quarter, we suggested as much as 10% of the existing supply in Midtown East New York may not reopen. There's reason to believe that our early estimate may be conservative. Fourth and finally, this is an opportunity to reinvent the operating model by identifying lasting opportunities to increase efficiencies through new best practices, promoting technology adoption like digital check-in, and supporting emerging customer priorities such as the Green Room Initiative. We are optimistic that this could lead to increased profit margins once we return to pre-COVID-19 levels of demand. All right, let's talk specifically about the second quarter. In response to travel demand declining by over 90%, we suspended operations at 20 of our 30 operating hotels, leaving just 10 hotels open at one point in April. The quick action taken by the team allowed us to realize a 72% reduction in hotel-level expenses, excluding wage and benefit accruals. Impressively, compared to the prior year, second-quarter man-hours decreased 83% at open hotels and 99% at hotels with suspended operations. The decision to reopen hotels has been and continues to be dynamic and data-driven. As we articulated in the past, our plan is to reopen hotels if we can lose less money doing so. Accordingly, starting in May, we prioritized our drive-to resorts based on returning demand visible through various channels. And ultimately, we reopened a total of 12 additional hotels in the second quarter. The 22 hotels we had open at the end of the quarter represent 58 percent of our hotel rooms. But since the openings were staggered, the math works such that just 43 percent of our rooms were available in the quarter. Demand got a little better as the quarter progressed. Weekly occupancy for our operating hotels, which had bottomed at 6.8 percent at the end of March, rose steadily to 27.8 percent by the last week in June. This trend has continued beyond Q2, with occupancy for operating hotels in July over 200 basis points higher than the full month of June. Over the course of the quarter, we saw a growing number of hotels achieve break-even profitability, and we expect that this trend continued in July. In April, five hotels achieved break-even profitability on a GOP basis, and this figure grew to seven hotels in May and 10 hotels in June. On a hotel EBITDA basis, two hotels generated profits in April, and the count increased to four hotels in May and six hotels in June. The consistent theme is that nearly every one of these hotels is among our collection of drive-to resorts. Leisure. Leisure was clearly the brightest segment during the quarter and certainly a source of strength in Dynarock's portfolio. As highlighted in our most recent investor presentation, weekly occupancy in our opened resorts increased from just 8% in early May to over 42% by the last week of June. And ADR was higher year over year throughout June and much of May. As you might have guessed, weekends were the strongest. From early May to the end of June, weekend occupancy at our resorts increased from 11% to nearly 56 percent, with healthy gains in ADR for the majority of the weeks. For the second quarter, leisure transient ADR was 1.6 percent higher than in the second quarter of 2019. The resilience of rate in the leisure category tells us that price is not a gaining issue for those customers. Trends at our resorts in July were encouraging. The shore break in Surf City Huntington Beach averaged nearly 50% occupancy in July. Our La Berge de Sedona, Orchards Inn, and Havana Cabana Key West each ran occupancy over 60%. La Berge actually had an average rate in July of $553, which was a 14% increase over the prior year. But our little star of the month was the landing in Lake Tahoe, which had 80 percent occupancy in July, with average rate up nearly $100 a night to over $519. As for business transient, we are not expecting a significant recovery after this summer. In fact, we do not expect a true recovery of business transient demand until folks return to the office, which appears drifting towards early 2021 for many major employers. Nevertheless, there are individuals traveling for business, and we did see a gradual improvement in our room and total revenue activity each month over the course of the quarter. In April, the weakest month of the quarter, we saw less than $400,000 of revenue from business transient channels. But this grew to $1 million in May and $2.5 million in June. These are meager beginnings. But longer term, we are optimistic that as a consequence of more office personnel working from home, there may be an increase in hotel meeting activity to plan strategy, conduct training, and foster corporate culture. The group segment has certainly experienced an enormous deferral of business. Globally, CBAN had 2 billion RFPs pass through their system in the second quarter of 2020, as compared to 6 billion in the second quarter of 2019. No question, group trends are challenging, and we expect this segment will be the final one to recover. While Domrock does not have the depth of exposure to group, particularly large group, as some of our peers, we thought that the limited data points we were seeing could be of value. Since the start of the COVID impact and through the second quarter, our portfolio experienced approximately $117 million of canceled group revenue. Over 80% of these cancellations occurred in March and April. The pace of cancellations was initially as high as $20 million per week in March, but has since slowed to just $2 to $3 million per week. We expect cancellations will persist as we move throughout the year. However, it was encouraging to see 250,000 to 350,000 room nights of group leads generated each month during the second quarter. Some of the early lead volume was rebooking activity. Short-term, group bookings are increasingly weighted towards SMRF, association, and wedding events. We're seeing larger pieces of group business, which are typically corporate, look at dates in 2021 and 2022. Overall, rate expectations are consistent with pre-COVID levels. While there have been short-term opportunistic groups booked in 2020, rate parameters for the 2021 and 2022 periods have been normal. Instead, the main request is around terms for cancellations and rebookings, highlighting that groups do want to meet but desire flexibility until there is greater visibility. I'll now turn the call over to our Chief Financial Officer, Jeff Donnelly, who will talk more about our balance sheet strength and liquidity. Jeff?

Thanks, Mark. I want to touch on a few financial items in Q2, address our capital markets activity in the quarter, and I'll conclude with an update on our liquidity and cash burn rate. Total revenue decreased 92.1% in second quarter 2020 as a result of a 92.8% decline in REVPAR. Total revenues were $3.3 million last in April with 10 hotels open, 5.7 million in May with 12 hotels open, and 10.9 million in June with 22 hotels open. Excluding the Sonoma Renaissance, which opened July 1st, the same 22 hotels are on pace for nearly $13 million of revenue in July. As Mark mentioned, we decreased hotel-level operating expenses 72%, from $170 million to approximately $48 million. excluding nearly $3 million of accrued benefits for furloughed employees. We were able to slash variable expenses by 80%. It is critical to understand that we achieved this level of cost reduction despite over 70% of our hotels partially open during the quarter. Hotel adjusted EBITDA in the quarter was negative $30.4 million. Corporate adjusted EBITDA in the quarter was negative $37 million. Finally, second quarter adjusted FFO per share was negative 20 cents. For CapEx, we have canceled or delayed over 65% of our original capital expenditure plans. In the second quarter, we restricted CapEx spending to only 20.7 million, including 8.5 million for Frenchman's Reef to put the project in a position where we could pause work. Our primary focus remains conserving capital, so we are prioritizing only those expenditures where we have high confidence that they can produce a near-term earnings benefit and high return on investment at minimal cost and complexity. In this regard, we spent $4.5 million to complete the F&B repositioning initiatives at our Renaissance Hotels in Sonoma, Worthington, and Charleston, as well as the JW Marriott Cherry Creek. We expect these investments will be earnings contributors in 2021, and the average IRR is forecast to be over 30%. We remain in a strong liquidity position. At the end of the quarter, we had $364 million of total liquidity between corporate and hotel-level cash and undrawn revolver availability. I'm also pleased to report that through hard work, we were able to beat our initial expectations for our overall cash burn rate. At the hotel operating level, we averaged a $10.1 million monthly loss in the quarter, surpassing our initial forecast by 16%. Including corporate G&A, the average monthly loss was approximately $12 million, or 12% ahead of our expectation. Finally, our total burn rate, including debt service, was approximately $17 million. Compared to our average pace in second quarter 2020, we expect our burn rate will improve slightly in July, mainly because we had 58% of our rooms open at the end of June as compared to only 43% during the quarter. Our preliminary estimate for our hotel-level cash burn in July is approximately $9 to $10 million, which is potentially $1 million or 10% lower than the average monthly pace seen in the second quarter. Including cash G&A and debt service, This works out to an overall burn rate of $16 to $17 million and provides a runway before CapEx of up to 23 months based upon our total liquidity of $364 million at the end of the quarter. I want to make a few additional comments on the balance sheet. The erosion in EBITDA obscures the strong balance sheet Diamond Rock wielded before going into the pandemic. For example, net debt to undepreciated book value as the second quarter 20 was just 26%. We ended the second quarter with net debt of only $106,000 per key on a portfolio with a replacement cost in the range of $450,000 per key. This implies a net debt to replacement cost of less than 24%. Importantly, Diamond Rock's debt is well-structured. It is diversified between non-recourse CMBS and bank mortgage, debt as well as unsecured bank debt. At the end of the quarter, we had $605 million of non-recourse mortgage debt at a weighted average interest rate of 4.1%. We had $550 million of bank debt comprised of $400 million in unsecured term loans and just under $149 million on our unsecured revolving credit facility. We finalized an amendment to our credit facility in the quarter We had several objectives in this process, but there are three I'd like to highlight. First, secure a waiver through the end of the first quarter of 2021 and relaxed covenants through year-end 2021. Covenant tests restart in the second quarter of 2021 using annualized results to wash out 2020 from our financial results. Second, flexibility for investments. Collectively, we have $110 million for capital investment, which has proved to be one of the largest capital investment allowances relative to assets or pre-COVID EBITDA. Third, flexibility for acquisition. We have no limitation on our ability to pursue equity-funded unencumbered acquisitions, and our $300 million limitation on encumbered acquisitions is proportionally larger than the limitation many peers have on total acquisitions. I think a key competitive advantage that will come into sharper focus in the next year is our maturity schedule. We have no debt maturities for the balance of 2020. We have no maturities in 2021. And we have only one loan for $48 million due in 2022. And even that can be extended to 2023 under certain conditions. Our first significant maturity is our revolver, which matures in 2023. But this, too, can be extended one year into 2024. The combination of a conservatively leveraged balance sheet, a diversified source of debt capital, and one of the best maturity schedules in the sector is a measurable competitive advantage for Diamond Rock. In closing, I want to point out we've expanded our disclosure to provide monthly detail on hotels open the entire quarter, hotels partially open during the quarter, and hotels that remain closed. It is here that you can see how the hotels progressed as we move through this most difficult period. Moreover, we provided the number of days each hotel was open to give you context to revenue, expense, and EBITDA that each hotel produced. And on that note, I'll hand the call back to Mark for final comments.

Thanks, Jeff. I want to make a few comments about the future. Although we saw improvement in the second quarter, we expect uncertainty will persist until there is an effective vaccine, improved patient outcomes, broad acceptance of safety protocols, such as social distancing and wearing masks, or some combination of the above. Encouragingly, there are already 30 vaccines in human trial. Because of the wide array and variables related to the resolution of the healthcare crisis, we are not in a position today to provide you with company guidance. We do expect the balance of 2020 to be difficult. With drive-to resorts doing best, only very modest increases in BT business and large group business not meaningfully returning until 2021. We did want to provide you with some of the ways in which we are positioning Diamond Rock for the future. Let me highlight a few. One, we have a great portfolio that is increasingly weighted towards drive-to resorts. We have 13 of 31 hotels that are leisure oriented. This has been a multi-year strategic initiative as seven of our last eight hotel acquisitions fit into this category. We were early to recognize the trend here and remain committed believers. Two, small hotels have been outperforming. According to STR, hotels under 300 rooms have shown the best relative performance. Due to our focus on boutiques and drive-thru resorts, The median hotel in Dimerock's portfolio is just 265 rooms. Three. The portfolio has numerous ROI projects, many with 30% plus IRRs. These include the just completed rebranding of the Sheraton Key West to the Barbary Beach House Resort, as well as the upcoming luxury up branding of our Vail Resort. Four. While we pause the reconstruction of Frenchman's Reef, we remain excited about its long-term prospects. Essentially, this is a nugget of future value for our shareholders. And finally, we have a solid balance sheet to allow us to withstand a substantial downturn and then position us to be offensive at the right time. We are already seeing some interesting opportunities in the market. In wrapping up the prepared remarks, let me just say that these are undoubtedly challenging times, but we are prepared to meet them and we are determined to prosper on the other side. We have great assets, a solid balance sheet, strong industry relationships, and an experienced management team that has weathered numerous prior downturns over the last 30 years. On that note, We'll now open up the call and take your questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Austin Worshmuth with KeyBank Capital Markets. Your line is now open.

Hi. Good morning, everybody. I appreciate some of the monthly detail you guys provided in the supplemental. And, Mark, I think you mentioned that July occupancy is 200 bps above June's average. So was that in reference to the 13% for the overall portfolio? And so we should take away from that that you're running around 15% in July occupancy?

Yeah, that's a fair way to look at it. So I think what we're trying to convey is that in July, July 4th obviously helped with the leisure demand, but we saw a continuation of the positive trends that we saw in June, particularly at the drive-to resorts. Now we'll see how August plays out, but we anticipate that August will be another good leisure month for us. And then potentially September being elevated as many school districts have gone online, you may see September perform a little better on the leisure than in a normal year.

Yes, that certainly makes sense. I appreciate the thoughts there. And then as it relates to Frenchman's, you know, that hotel redevelopment there being on pause, you mentioned, you know, I think 23 months of sort of runway at the current cash burn. You had about $100 million to $120 million of remaining spend there, if I recall correctly. So how should we be thinking about the timing of, you know, recommencing that redevelopment and when you'd expect that to come back online?

That's a great question. So it's still a project we're excited about. We're working closely with the governor and the government and the USVI to get it going again. I think at this moment the liquidity, we want to preserve liquidity and understand where we're going and reaching bottom and kind of coming out of this thing before we start reconstruction of the Frenchman's Reef. So the runway does not include recommencement of that, and we would envision restarting that when we have a little bit more clarity on the future. Understood.

Thank you.

Thank you. Our next question comes from Smedes, Rosewood City. Your line is now open.

Hi, good morning. This is Seth for Smedes. In your opening remarks, you mentioned that 10% of New York, you know, not reopening in Midtown, that may be a conservative estimate. Can you just talk about how you view the New York market in the near term and long term?

Sure. I mean, it's obviously the number one destination in the U.S. traditionally, but the cost structure, you know, property taxes and the labor structure there are very difficult. We've had a 50% increase in supply in the last 10 years, which the city is still absorbing. And so we went into this kind of in a difficult structural sense, I think, with the cost structure in New York. So I think some hotels won't be able to survive it, which will mean potentially a net reduction in certain submarkets of supply. I think the optimistic case would be that supply is essentially stunted in New York for the next five-plus years and that we'll be able to work productively with the With the unions to a cost structure that helps us get these hotels, some of the hotels reopened and making sense again functionally. So I think the supply picture has brightened in New York. I think we, you know, it's traditionally been one of the highest demand markets in the country, and if we can get supply and the cost structure figured out, you know, we think that there will be brighter days ahead. Great.

Thanks. Thank you. Our next question comes from Chris Maranca with Deutsche Bank. Your line is now open.

Hey, good morning, guys. Mark, I know there's been a lot of talk in the industry about kind of redefining the operating model for full service when we come out of this. And I guess from your perspective, how much of that, you know, how flexible do you think the brands will be at the end of the day? And then also, how much do you think the customer will bear in terms of keeping the, you know, up or off scale kind of rate structure intact?

Sure. Great question. So we are optimistic that there will be a lot of enhancements to the business model on the other side. There will be some offsets. But the brands were incentivized collectively to figure out an efficient cost structure because the viability of their business model is on adding additional units. And if it's not cost-effective – their pipeline slows down. So they have every incentive in the world to, while preserving good customer experience, but they want to get the model as efficient as possible so they can continue to grow their pipelines. Technology is going to be a big piece of it. I think we've accelerated adoption of things like mobile check-in probably by five to seven years, and those things definitely enhance our ability to deliver a good customer experience. while potentially creating more efficiencies at the hotel. And then we're going to do a lot of things that we've never done before at the hotels. And so I think through trial, this downturn, and trying to justify getting these hotels open with more efficient models, I think we'll learn things and we'll be able to take those lessons and have some permanent savings as we'll be able to implement those long term. So I'm fairly optimistic on those. I'm sure we'll have enhanced cleaning standards that will be here to stay. So that will be a little bit of an offset. But listen, we're all incentivized to get these hotels profitable as soon as possible. We're all incentivized for cost efficiencies. I think we are all incentivized at the moment to find innovative ways to incorporate technology. And I think the customers are, you know, I think they're willing to adopt technology certainly for a touchless experience. I think that they're willing to, and more and more environmentally conscious, and the green room initiatives. I think people probably want less intrusion in their room while they're staying there. There's some of that that will be a permanent shift. So I think there's a lot of favorable things that will occur on the business model side as we move forward.

Great. That's very helpful, Mark. And then just curious as to whether you have an opinion on kind of how this idea of de-densification might work in the urban markets as far as it relates to hotels? I know it's very early and kind of very theoretical at this point, but is there anything you look at to guide how that might impact you?

I think there's a lot of consequences of the pandemic that we'll need to think through, and some are going to be good for hotels and some are going to be bad for hotels. I think the potential work-from-home phenomenon will ultimately be beneficial to our space. I think the fact that people aren't in their office as much probably means they need to do more training, more meetings, more get-togethers. So I think that trend is very favorable for hotels overall. But listen, it's always hard when you're in the midst of a crisis to fully appreciate what the long-term ramifications are. I am generally a return to the mean person in travel. You know, the basic reasons people travel will persist. The desirability of the hotels, the high-quality hotels and good meeting space and good rooms will persist. Infrastructure, airlines, trains, All the basics, those will remain true for the foreseeable future.

Okay, very helpful. Thanks, Mark.

Thank you. Our next question comes from Anthony Powell with Barclays. Your line is now open.

Hi, good morning. Just a question on your drive-through resorts. When I look historically, a lot of them tend to do better in the fourth quarter than the third quarter. Should that continue this year, or does the mix in those quarters shift to make it a bit more tough for those hotels continuing to have that pattern this year?

Yes, Mark. Interesting question. Hard to know how consumer behavior will play out this fall. Certainly we're seeing that there is pent-up demand on the leisure side and that people are willing to travel for leisure activities probably in a way that they're not willing to do for business yet. And in markets like Lake Tahoe, you know, rate was up in July up $100 versus the comparable period last year. And, you know, people would drive from San Francisco and Sacramento area up to Lake Tahoe, so it's a great drive to market. I think you'll see increased demand. I think you'll, you know, to the extent people don't return to the office in 2020 this fall, That will create some incremental ability, if you will, for those customers to travel. But I think we're going to see consumer behavior play out in ways that are difficult to forecast as we sit here today. So I'm not sure we know the answer. We are certainly trying to be prepared. We're looking at our demand channels every day, trying to make sure that we have the right staffing and the right product and can accommodate demand when it comes at those resorts in the fall. So I think we're cautiously optimistic that we'll see some incremental demand from the flexibility that those customers have, but it's hard to accurately predict at this moment.

All right. And just let me ask it this way. So in the fourth quarter of last year at some of these resorts, like let's say the Fort Lauderdale West End, what was the leisure business mix in that kind of hotel last year?

Tom? It makes roughly 50-50 as we get into peak season. We had a fair amount of group at Fort Lauderdale because of the meeting space, which the incremental value of that is certainly strong because the rate and the incremental spend in many ways group at the right time in the softer moving into peak months is more valuable than a transient room. If The premise is now if the group's not going to come back this fourth quarter and probably first quarter, we feel positive based on some of the transient trends we've seen that the transient should be able to backfill that group. Will it take 100% of it? No. But the transient demand has been pretty solid. We had a nice – our peak demand from a transient standpoint was Around June 15th, we saw about 5,000 room nights picked up for our resorts and about 1,700 for our non-resorts. And then, obviously, the news slowed things down, but we continue to see positive demand for our – certainly for our leisure and resort locations. An example of that is La Berge and Landing were both – REVPAR was up 13% of both of those locations in July. Okay. So it's there. The question is when is it going to come, how is it going to come, and certainly what rate is it going to come at because that's how the market behaves affects us.

So I guess in hotels like La Verge or Lake Tahoe or Key West, there's minimal, I guess, business or group in those hotels in the fourth quarter of last year. Is that fair?

Yeah, basically zero. Yeah. And, you know, if you think about what is the ideal asset right now, it's probably La Verce de Sedona. It's drive-to for most of its customers. It is individual bungalows for the most part, and it's outdoor experience. I mean, that's exactly what customers want at this moment in time.

Got it. And just maybe one more on the acquisitions you've looked at that you mentioned and you're pre-announcement that you're looking at some deals in June, in the second quarter. What are you seeing out there, and what's your kind of willingness to transact kind of in this environment?

So I'll let Troy comment a little bit on what we're seeing in the pipeline, but there are some interesting small deals percolating up. But, you know, at our stock price at whatever we're pre-marketing today, 490, it's hard to imagine that we're going to be able to do a deal that makes sense at this price. You know, as early as – As the first or second week of June, we were 60% higher in stock price, and the relative trade of a discounted hotel probably made more mathematical sense. So I'd say while we have the flexibility under our amended facility with the banks and with the balance sheet, I think it's unlikely until we start seeing some rally in the stock price that we'll pursue it. But there are some interesting deals, and we've been approached on a number of things recently. that I think certainly pique our interest. Troy, you want to comment on some of the things you see in the marketplace?

Yeah, sure, Anthony. I think, as Mark was saying, the volume of available properties is certainly picking up in Q3 versus currently versus the first two quarters. Pricing, kind of touching on your resort comments, pricing for resorts and drive-to markets is definitely holding up better than urban markets. you know, those are the properties that are continuing to hold up well. You know, I think at this point, as Mark said, you know, given our current cost of capital, even though we track these and underwrite some and kind of are studying values and where they're moving towards, you know, it's unlikely you'll see us pursue anything at our current cost of capital. Thank you.

Our next question comes from Danny Assad with Bank of America. Your line is now open.

Hey, good morning, guys. So my question is a little bit on just the recovery in the back half. So the sequential improvement in this stage I think has been really encouraging, and all the data Jeff and Mark, you guys have provided has been really helpful. But how should we think about, you know, the balance of the year as we move into a period that has a little bit more core productivity? I appreciate that, you know, obviously like your booking lead times are, you know, the booking windows are really short and everything you're seeing is, you know, is all real-time, but any thoughts you have there would be really helpful.

Yeah, Dennis, Mark. So I think leisure is going to be better in the summer than it will be in the fall, but I think leisure will still have a fair amount of demand as we move into the third and fourth quarter. So I think we still hold some level of optimism that leisure will hang in there and be good, although some of the resorts are less attractive in the fall. I think business transient, there are still some people that need to get out and travel. Certainly difficult in markets like New York City to get to at the moment. But there's going to be reasons that people need to get on the road. And I think after Labor Day, you'll see a modest increase in business transient, but at very, very low levels. But I wouldn't be surprised to see some sequential improvement. But big companies and major employers just aren't, you know, they're under very tight travel restrictions and We don't anticipate that changing for the balance of 2020. And then large group, we'll probably see some small group. We've seen some state association. We've seen some small groups. But by and large, I can't imagine there's going to be a big citywide until there's a vaccine or healthcare remedy of some sort. So, you know, as we go through, we've basically washed out any large group for the balance of this year. So, I think that in short, leisure should hang in there. Not quite as strong just because of seasonality, but we still think leisure demand will be there in the fall. Business transient will be a tiny bit better, but there will always be reasons for people to be on the road. But by and large, business transient is going to be at dramatically low levels. And then you'll see some small group weddings and some of those kind of events as we move through the fall. But virtually no large group meeting in the United States for the balance of 2020. That's how we see it.

Got it. And then just for my follow-up, you know, the properties that you have that are still closed, you guys were pretty clear about what it takes to reopen in terms of, you know, losing less money by being open and staying closed. But can you maybe give us a sense of how close we are in maybe something like New York, you know, Boston, Chicago? How close are we to, you know, when you look at your data in front of you to reopening some of these properties?

Yeah, I mean, we're looking every day at the demand channels and government policies. You know, the restriction of self-quarantine in New York City and some of these other markets certainly hampers the ability to reopen hotels. So we're looking every week. The tricky part is going to get, as we move into the fall, if you can't justify opening it in the fall, it's traditionally a week anyway in December, January, February in some of these northeast markets. And so then you kind of get caught in does it make sense to lose less to keep them closed a little longer. But it's a week-by-week evaluation. We haven't made any, I'll say, firm calls yet because really the demand channels we're looking at every day. And some of it will depend on what our neighbors do. To the extent, you know, the other large hotels decide to stay closed, it may actually justify us opening them. If 50% of the large boxes are closed for the balance of the year, there might be enough demand to justify opening our hotel. It's fluid, and we are constantly looking at the data, and we really want to be data-driven. Obviously, we've had good success in reopening 12 hotels from the lowest point here. We're optimistic we're going to be able to get hotels, and we certainly want to get them open and get people back to work. But we've got to look at where the demand channels are and make sure it makes sense for our shareholders. Understood. Thank you very much.

Thank you. Our next question comes from Thomas Allen with Morgan Stanley. Your line is now open.

Thank you. Two related questions. Can you just talk about your use of OTAs in the current environment and how you anticipate change in the future? Sure. And then second part of the question is can you just talk about your current perception of the value of being branded versus independent for a hotel? Thank you.

So why don't I take the second question first and I'll turn the OTA question over to Tom. So I think every asset is different. We think the brands will generate as we recover. There will be a lot of value in the brands and their ability to drive customers into the properties both through their honored guest programs, which we think will be powerful for getting people back on the road, as well as just the, what I'll call the assurity of cleanliness and standardization. And certainly with corporate America staying at a Hilton or a Marriott, I think there'll be a level of confidence you won't get at a independent hotel on that side. Probably it's different for resorts. Resorts Probably it depends more on how you're constructed. You know, if you're a bungalow-style resort spread over a property like a Sedona, that's probably a more important factor than the brand. But we remain, you know, I think we remain agnostic on the general thesis that we think every asset should be thought about individually. So I think on the resorts, it's probably less important. And on the urban markets, we think that the brands initially will recover faster.

So, Mark, your view hasn't really changed from pre-COVID as a fair statement.

Yes, I think that's fair. I think that the thing that's different or that we kind of have put into the calculus now is we do think in particularly the urban markets, the assurity of cleanliness that the brands will offer will be a competitive advantage initially. A lot of people are still concerned about the virus.

And then, Tom, on the OTA question?

Yeah, on the OTA question, all of our channels are open at this point. Your hotels are, you know, running. The demand's not available. We're going to be playing in those channels. Those are retail channels. Those are channels that leisure customers use. and we have to be on those channels, and we have to be marketing on those channels. We've shut down all that marketing and have monitored, and now as we see demand come back, we have started to jump back in and make sure that we are active and we are open and people can find us. Once again, those are retail customers. That's how the customer shops. They go through the brand, but they also are certainly going through the OTAs, and we certainly have to be there.

Okay, helpful. And then just on the New York City assets, all three are still closed. Is there a chance that there's higher and better use for those assets?

I think that in New York City as a general proposition, there is a lot of evaluation of conversion of assets. While some of ours may have that potential, I think that ours are likely to remain hotels based on the information we're seeing today. Thank you.

Thank you. Our next question comes from Michael Belisario with Baird. Your line is now open.

Good morning, everyone. Good morning. Just one question from me, maybe for Jeff, but could you walk us through the different buckets of capital that you have available to yourself today, and then how do those fit into what you can and can't do within the confines of your credit facility amendments?

Sure, that's a good question. The different buckets of capital is that, and they're somewhat fungible, quite honestly, but when we worked with our bank group, we specified that we wanted to have $50 million for traditional ROI projects at the hotel, an additional $25 million that could be used for pursuing buyouts of management or franchise agreements or ground leases. I think an additional $30 million would be used for projects at Frenchman's Reef, whether that's just the winding down of construction there or it's maintaining some base level of construction. And then there is the increment beyond that. There's a small amount beyond that for just emergency investments in the properties, you know, for repairs and maintenance and whatnot. I think I would say as a general comment, I think the bank groups were fairly flexible with, you know, where those monies ended up, but collectively it was about $110 million that we were permitted to spend.

That's helpful. Thank you.

Thank you. Our next question comes from Lucas Hartwich with Green Street Advisors. Your line is now open.

Thanks.

Good morning.

Mark, I thought your New York comments were pretty interesting about the 10% potential supply reduction being conservative even, or at least I guess in Midtown East. Do you expect supply to come down to be converted into things other than hotels outside of New York?

I mean, New York's probably the one where there's the alternative uses, the way the math works makes sense. You may see some in some of the other urban markets, but we're not hearing anecdotal cases. New York's really where we've heard the most discussion about conversion of hotels into other uses. Inevitably, you'll see some conversions in other places, but I think you won't see the same numbers you might see in New York City.

That's helpful. I'm curious about the competitive dynamics with short-term rentals right now, especially for your leisure properties. We're reading reports that Airbnbs resort-type locations is actually doing quite well. So I'm curious, that competitive setup, what it looks like for your resorts.

A lot of our resorts don't have Airbnb competitors, just given the nature of where they're located. But listen, there's a ton of leisure demand right now. People can't fly fly to somebody's flight, can't go to Hawaii, they can't go to one of these other markets, are uncomfortable. And so I think that's just as people want to get out of their house and they're tired of working from home, that's pushing the weekly rentals for Airbnb. That's certainly pushing the leisure for us. So I think that demand channel is just – it's probably fairly healthy for everyone at this moment. So it doesn't surprise me. We're not – I don't think we're losing much. You know, a lot of those are houses and other things that people want to be in, which are a different customer than what we're appealing to. But I'd say just we're pleased with the leisure demand we're seeing right now. You know, it's always hard to measure if Airbnb is impacting you in those markets, but, you know, in Sedona or Sonoma, we don't think we're losing anything to Airbnb.

Perfect. And then last one for me, just, you know, obviously... I think you highlight the leisure resorts that you own are doing quite well. I'm curious, are there any properties or types of hotels in the portfolio or maybe not in the portfolio that you've looked at in the past that you think you're less interested now given the experience we're going through? I'm thinking big box hotels, lots of group space, business transient focus. anything along those lines have changed given the experience we're going through right now?

Yeah, Lucas, I think we're committed as we – same as we were a year ago to trying to get to 50% of resorts. And, you know, some of that's going to be through subtraction as well as addition. Probably what's changed the most is that we, you know, we constantly reevaluate our assets. And so as we look at the five-year forecast when we figure out how much we think each of our assets is worth, it's clearly changed more on some assets than others. So that's probably the biggest difference is what we would be willing to dispose of some of these assets. Those prices have shifted as we think about how we want to position our portfolio over the next couple of years. So that's the material difference. Great. Thank you. Sure.

Thank you. Our next question comes from Dory Keston with Wells Fargo. Your line is now open.

Thanks. Good morning. A similar question to Lucas. Can you update us on your thoughts on dispositions over the next few quarters if you're receiving inbounds at this point and where you think values could settle out once debt markets are more open?

Yeah, Dori. So I'll try to jump in here, too. But I think until there's really a healthy functioning debt market for hotels, it's harder to get kind of a handle on where values are. We think they're probably down 15% to 25% as a general rule across the industry. Obviously, there's exceptions probably both ways. But as a general rule, that's kind of what we're seeing in the marketplace for high-quality assets, what we'll call non-broken hotels in desirable locations. Hard to know where it settles out. I mean, I think right now the shape of the recovery and the future of near-term hospitality is determined by the resolution of the health care crisis So, you know, if you think we're going to have widespread vaccine distributions by January, you have one view. If you think it's going to take, you know, 18 months before we get wide distribution of vaccines and healthcare resolution, probably the values of the hotels are different, right, because the near-term cash flow scenario is very different and probably the debt markets are very different. So, you know, we can tell you what we're seeing today, which is generally 15 to 25 on the assets that we're looking at. But it's hard to know where it settles out because you're really trying to make a prognostication of where you think – when you think the health care crisis will get resolved.

Yeah, Dory, I would just add, you know, we get a considerable amount of inbound inquiry about all of our assets. I think the market and investors generally like our portfolio a lot and are kind of always curious if we would transact. So I think that's more of a statement about the portfolio.

Okay, thanks. Thank you. And our next question comes from Bill Crow with Raymond James. Your line is now open.

Hey, good morning, folks. Thanks. Three quickies for you this morning. Mark, anything in the labor agreements that may prompt you to open a hotel sooner than you would otherwise?

No, I mean, obviously, if we can justify opening a hotel and get people back to work and meet some level of demand, we want to do that. You know, we're looking after the people at the hotels and trying to make sure we're making good decisions. You know, we are in constant communication with the unions. We're only union in two markets, which is New York and Boston. So in both those markets, we continue to try to have an active and productive dialogue on trying to figure out strategies to get the hotels open and get people back to work. But there's nothing particular. I mean, there are consequences if you keep your hotel closed longer, and certainly things like how long does the health care subsidy last, and there are issues there undoubtedly. But there's nothing that would force us to reopen the hotels.

Okay. As we think about the period beyond September, is it possible, is it maybe likely that ADR declines even more than it did June, July, given the mix shift that we typically see full-price business transient travel and we're replacing that with discounted leisure business?

Yeah, it's possible. I mean, I think it's going to be – The industry versus individual markets, there will be probably more disparity depending on what's happening in the fall. So, yes, there will be less leisure and there will be more business transient. I'm hopeful that post-Labor Day we start seeing an increase in demand from business transient where it's not going to be anything to get very excited about, but that it's helpful. And so in some of our markets, with a couple exceptions, You know, we hope that things get a little better on the business transient side, and that helps on the overall rate.

And then, thanks. And finally, for me, the TSA data, including that that just came out this morning, shows about a 5% increase in activity during the past week, and that's the first increase since July 4th. As you look at your bookings real-time, are you seeing – recovery in leisure demand coming in August?

It's been so short-term, Bill. I'd hate to give you numbers. I think they could be misleading. We can sometimes have, you know, 10% or 15% of the rooms show up and book within a 24-hour period at some of these hotels. So even the data that we have today, I'm not sure would be indicative of how the whole month plays out. I do know anecdotally a number of our resorts, you know, we're seeing increased call volume. We are seeing increased inquiries. I think there is generally in our society more people are feeling cooped up and want to get on the road. So, you know, I think that gives us some level of optimism about how August is going to play out. But because of the short-term nature of these bookings, I think the things that we're seeing now, you know, I can't give you any assurance of how the month is going to play out. Thank you. Thank you, Bill.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Mark Brugger for closing remarks.

Thank you, everyone. We appreciate your interest in Dimerock, and we look forward to updating you on the next quarterly call. Take care and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.