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spk07: I would now like to hand the conference over to your speaker today, Breanne Quinn, Senior Vice President and Treasurer.
spk00: Please go ahead. Thank you.
spk05: Good morning, everyone. Welcome to Diamond Rock Hospitality Company's second quarter earnings conference call and webcast. Before we begin, please note that many of the comments made on today's call are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger, our president and chief executive officer.
spk04: Good morning, and welcome to our earnings call. Second quarter financial results were very strong and significantly surpassed our internal expectations. The Dimerock portfolio benefited from several positive attributes, including, one, the portfolio's overweighting towards experiential properties and resort locations, two, our best-in-class asset management, And three, our ability to control cost by having the highest percentage third-party operated portfolio of any full-service lodging REIT. This powerful combination enabled Dimerock to generate $19.8 million of adjusted EBITDA and $0.05 per share of positive adjusted FFO in the quarter. Demand increased in all travel segments. Leisure remained the strongest performance segment, but group and business transient are now showing meaningful gains. Business transient room revenues increased 173% from Q1 in the second quarter, on a 24% sequential increase in ADR to $195. The clearest indication that business travel is increasing can be seen in the dramatic uptick in midweek occupancy, which doubled at our urban hotels during the quarter, from 25 percent in April to 50 percent in June. We expect an accelerating trend line of business demand in the fall and into next year. The outlook for group is equally positive. Incremental lead generation accelerated sharply in the second quarter, with over 11,000 leads for 1.7 million room nights. That's a dramatic increase from the 7,000 leads for 1.2 million room nights in the first quarter. The 50% plus increase in leads is the strongest we've seen since the start of the pandemic, and lead generation is now at 95% of pre-COVID first quarter 2020 levels. The group setup for 2022 is good for our geographic footprint. In the quarter, we converted 63% more definite group room nights with most of the activity for 2022 and beyond. A positive sign of meeting planner confidence is returning. We are excited to see that group rates are 8% higher in 2022 than they were in 2019. our 2022 is being boosted by the fact that many of Dimerock's key group markets have strong convention calendars next year, like Boston, Chicago, San Diego, and Washington, D.C. In addition to strong operating performance, which Jeff will discuss more of in a moment, Dimerock made great progress on internal and external growth initiatives, that we are confident will drive outsized cash flow growth in 2022 and increase net asset value. I'll touch on just a few internal projects. The lodge at Sonoma was reimagined into a luxury autograph collection resort over the last year with a new Michael Mina restaurant. We expect our $10 million investment here will generate a 25% internal rate of return. This resort has been a home run for us, with NAV increasing well north of $100 million over our total investment. The major repositioning of our Vail Resort is underway and will be complete in time for the upcoming ski season. It will reemerge as a luxury collection hotel and will be named the Height Vail Resort and We expect the resort will command a materially higher rate in peak season and generate several million dollars of incremental EBITDA starting in 2022. The JW Amerit Denver will also be converted into a luxury collection hotel and be named the Clio. The conversion is expected to take place at the end of this year so we can start benefiting in 2022. Additionally, This fall, we will convert our beachfront resort in Key West to the only Margaritaville resort in the Florida Keys. Collectively, our investment in these four repositioned hotels is expected to have an IRR of well over 30%. Turning to capital recycling, in the quarter, we successfully sold two hotels, the Lexington and Frenchman's Reef, for total proceeds of $220 million, or a 5% cap rate on combined 2019 actual NOI. We are recycling a portion of these proceeds into two great new acquisitions, both of which were off-market and have the strategic characteristics that we are looking for. They're fee-simple real estate. They're unencumbered by both brand and management. They're experiential and leisure-oriented. Both have significant ROI potential, and they are creative, conservatively underwritten yields. First off, the Bourbon Orleans is located at the best street corner in the historic French Quarter. The number of hotels in the French Quarter that are large, fee simple, and unencumbered can be counted on one hand, and they rarely become available. The moratorium on new construction means there will not be another hotel built in the French Quarter. The bourbon was purchased at a little over a 7% NOI cap rate on 2019 results, and we expect it will have a robust growth in 2022 with the return of Mardi Gras, Jazz Fest, and the NCAA Final Four. New Orleans will also benefit by being the host of the Super Bowl in 2025. Moreover, we see enormous upside from professional management as it was owner-operated and there are numerous ROI opportunities at this property. We expect that the bourbon will stabilize at an 8% NOI yield. Our second acquisition is the Henderson Park Inn, a luxury boutique resort in Destin that sits on one of the most desirable beaches in Florida. This resort is rated the number one hotel in Destin on TripAdvisor because it provides guests such a great experience. The resort was purchased at a nearly 7% cap rate on trailing 12-month NOI, and the combination of bringing in professional management and enhanced revenue management strategies provides a clear path to at least an 8% NOI yield. which is terrific for such an exceptionally high quality real estate. This is our fourth oceanfront resort in Florida and our eighth waterfront hotel. I'll now turn the call over to Jeff for more details on our results and balance sheet. Jeff?
spk12: Thanks, Mark. I'll start by highlighting Diamond Rock's excellent liquidity. We finished the quarter with $639 million of total liquidity, comprised of $193 million of corporate cash, 46 million of hotel-level cash, and 400 million of capacity on our revolver. Leverage is conservative with only $1 billion of total debt outstanding against roughly $3.5 billion of hotels and resorts. Overall, the balance sheet remains very strong. Let's talk about investment capacity. We've been active on the acquisition front, and we expect to remain a disciplined acquirer of on-strategy properties like those Mark discussed earlier. With the strength of our balance sheet and high liquidity, we estimate we have over $300 million of investment capacity today, while still operating within our long-term leverage targets. Looking at profit margins, we remain confident we will have stronger stabilized profit margins when we fully emerge from the pandemic. To illustrate this point, let's look at the math on our resort portfolio. Total revenue at our resort hotel portfolio in the second quarter was $70 million. While this was $2 million better than the same period in 2019, Hotel EBITDA was nearly $7 million higher. This exceptional profit flow-through resulted in a 39.3% resort portfolio margin in the second quarter as compared to a pre-pandemic margin of 30.5%. My intent is not to suggest that the margin opportunity is as large as 880 basis points described here, but to highlight that our asset managers and their partners at the hotels have thoughtfully reconsidered the operating model from top to bottom to grow revenues and enhance profit without detracting from the guest experience. Importantly, despite these tight cost controls, our overall TripAdvisor score once again showed sequential improvement. So why do we believe Diamond Rock can stabilize operations at higher margins? I want to emphasize that Diamond Rock is distinguished from its peers in that all but two of our hotels are subject to short-term management agreements. This means we have greater control over operations and are already seeing the benefit of that flexibility in our results. Also, don't forget we converted six hotels in 2020 from brand managed to franchise, and that alone is projected to lead to 50 basis points of better portfolio-wide margins. And finally, add in reduced above property charges, new labor models, and increased use of technology, and we believe we have the ingredients to outperform unstabilized margins. Let me share a few success stories. The lodge at Sonoma repositioning that Mark touched on earlier has been a big success. The project was completed on time and on budget, and the resort increased REVPAR market share by over 20 points year-to-date versus 2019. The landing resort Lake Tahoe is having a record year with RevPar up 44% year to date compared to 2019. Our asset management team designed a new labor model for this boutique resort that has reduced labor hours per occupied room by 42% compared to 2019 while increasing room revenue 83%. Our Barbary Beach House Key West Resort is also having a record year and saw a 22 point rise in the market share this quarter compared to 2019 on a 91% increase in room revenue. While we were on Key West, in case you missed it, our Havana Cabana Resort was named by TripAdvisor as the number one most saved resort in both the US and the world. Of course, all of this success is due to the combined hard work of our best-in-class asset managers working with hand-selected operators. As a result, Our portfolio rev par share was up nearly four points in the quarter over 2019. This market share gain is even more remarkable when you consider the tight cost controls. Overall rooms department cost per occupied room was reduced to under $55 per night, or a 4.5% improvement from 2019. This was driven by a 7.2% decline in total labor per occupied room at our open hotels. As you can imagine, we are very proud of what we have achieved in the second quarter. Looking ahead, Diamond Rock is well positioned to continue our leading pace of growth. Group revenue on the books for the second half of 2021 increased 10% in the quarter and is now two and a half times greater than the first half of the year. Group revenue on the books for 2022 increased 8% in the quarter and is 44% higher than the forecast for 2021. Group rates on the books for 2022 are nearly $250 as compared to $220 in the back half of 2021. Citywide room nights on the books for 2022 are up 5% compared to 2019, and our six largest urban markets, Boston, Chicago, Fort Worth, Salt Lake, San Diego, and D.C., have seen an 8% increase since the start of the year. 2023 is already on pace to match 2019 with the strongest growth in Boston, Salt Lake City, San Diego, and Phoenix. We are also benefiting because of our very low exposure, less than 1%, to probably the worst urban market in the US, which is downtown San Francisco, where return to office is low and convention room nights aren't expected to approach 2019 levels until sometime after 2023. Looking forward, we expect to continue to generate significant positive quarterly EBITDA and ASFO per share for the rest of the year. Cash burn is just so 2020. The positive momentum in the portfolio can be seen in the change in quarterly revenues compared to 2019, which are rapidly improving on a sequential basis. Revenues were 64% lower in Q1 and improved 50% lower by Q2. Encouragingly, During the second quarter, monthly revenues compared to the same period in 2019 improved from down 58% in April to down 50% in May to down only 41% in June. July was amazingly strong for the Diamond Rock portfolio, with REF PAR down only 11.8%. Looking to the third quarter, we expect quarterly revenues to get even better. We are projecting revenues to be about 20% to 25% greater than the second quarter. G&A and total financing costs, that is preferred dividends and interest expense, will be roughly similar to the second quarter. We recognize there is increased focus on the Delta variant, and some areas of the country have reinstated mask mandates, but we have yet to see an impact on our business. As we have in the past, we will stay close to these trends. Nevertheless, we remain cautiously optimistic on the pace of the recovery. With that, I will turn the call back over to Mark.
spk04: Thanks, Jeff. Before we take your questions, I wanted to touch on our recent transactions and our outlook. The two announced transactions strongly demonstrate that we are strategically repositioning the portfolio to lean in to our long-held thesis that experiential and drive-to resorts will outperform over the next decade. While the acquisition market remains competitive, we intend to target more opportunities consistent with our experience with drive-to resort and urban lifestyle focus. We are particularly focused in targeting hotels that are synergistic with our existing hotels in markets like Sonoma, Vail, Lake Tahoe, and Sedona. Let's talk a little more about the outlook. Overall, we feel very good about the setup for Diamond Rock. Our portfolio is well positioned to capture the continuing robust leisure demand as well as the coming rebounding group and business transient activity. We think Dimerock has three major competitive advantages versus many of our peers. First, our portfolio market exposure is favorable with our numerous resorts benefiting from the boom in leisure demand and our well-located urban properties poised to expand on the group business transient trends as the second leg of the recovery kicks in. Also, the convention calendars in our most important group markets look very strong in 2022. Second, our best-in-class asset management is benefiting us in gaining market share through creative revenue management strategies, execution of ROI projects, and enhanced profit improvement implementations. Third and finally, our high weighting of third-party, terminable operating agreements gives us more control and ability to be creative in running the hotels. The conversion of the multiple Marriott brand managed hotels last year will add rocket fuel to our margin growth over the next few years. This concludes our prepared remarks. We are excited about our future and see things improving more rapidly than on our last call. We have a great portfolio, a great balance sheet, and a great team to be able to deliver shareholder value. Thank you for your continued interest, and we are happy to take your questions.
spk07: 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 the line of Dori Keefton from Wells Fargo. Your line is now open.
spk06: Thanks. Good morning, everyone. Can you walk through the asset management opportunities that you see at Bourbon, Orleans, and Henderson Park with new management in place?
spk04: Sure. Let me start. I'll start on Henderson Park. I'll turn over to Noah. I'm very excited about the bourbon. I'll turn that one over to him. Henderson Park is pretty straightforward. It's number one already on TripAdvisor. It's a great experience. It's been owner-operated in a fairly unsophisticated revenue strategy where they just set one rate for the entire month. And so we're going to put it in variable three. You know, modern management, we brought in Evolution to take over management last week, and we'll be implementing, it's sold out for the next couple months, but we'll be implementing, you know, our best-in-class practices on revenue management. And so we think that we'll be able to, without too much effort, be able to move the rate just by putting in, you know, our usual revenue management strategies there. So that one's relatively straightforward. The hotel's in great shape. It's, you know, customers love it. The bourbon sits in the A-plus location, but there's a lot more that we can do there to really kind of drive that one forward. Tom, do you want to talk about some of the opportunities that you see?
spk11: As Mark mentioned, at Henderson, really we'll do our rate efficiency model. It's kind of what we did in Sedona and all the other resorts, looking at room types, lead times. and basically trying to price it appropriately. So there's just a lot of little opportunities in Henderson with rate. We think we could do that. That's pretty easy lifting. And then there's a fair amount of opportunity. There's a lot of demand in that market. And we think there's opportunities to enhance the food and beverage experience and drive more incremental value from not only at the property, but off property and on the beach. So that'll be the focal points there. And then at Bourbon, It's very similar. It's rate strategies, putting technology in place where you can monitor behavior, taking advantage of demand when they're citywide, and then we're looking at all the other opportunities in and around the space. There's an amazing historic ballroom with a history that we can certainly enhance and try to create more awareness, I think, with all the website designs and being more nimble with the website, user-generated content on the website, things that we can't do with uh branded hotels with the independent hotels we can do so it gives us a lot of flexibility to enhance pictures generate user generated content which makes it more relevant so there's a there's a bourbon there's a host of host of things that we think um there's opportunity at and then we have some retail spaces down on the on bourbon street and around there there's some unused spaces that are i mean they're amazing spaces and we're just we're still trying to evaluate what to do with them because they're that good like we have a at bourbon there's a small little house with a outdoor patio, and they use it right now for offices, and there's not a whole lot of use to it. So we're trying to say, how do we monetize that? We have a bar that sits on Bourbon Street that basically does de minimis revenue, and we think we could open that up and kind of do what we did in Fort Lauderdale with Lona, create and energize that whole space and drive revenue through. So there's a lot of things. So that's it, Dory, but I think that covers it, right?
spk06: Is there the ability to expand or, I mean, increase room count at Henderson Park?
spk10: Troy? Yeah, well, it's interesting you say that. The site is zoned for a five-story building, and, you know, you could build 150 rooms on the site. That's not in our underwriting and certainly not our immediate plan, but you could dramatically increase the size of this property by rebuilding it.
spk06: Okay. And if you separate your urban and resort hotels, where are you on demand versus 19, if you can compare, you know, April to July?
spk04: April to July. Well, just midweek, if you think about business transit, and we talked about doubling the, doubling the accuracy on Tuesday, Wednesday to urban properties from from really April through the end of the second quarter. So we're at 50% or so on Tuesday, Wednesday. So we're seeing business transit come in. Groups lagging a little bit, and obviously leisure is above 2019 levels. And then if you look at our, I was just looking at our July numbers, we're down. We're dramatically better in the urban demand. We're only down 30%, but that's 20 points higher than we were just a couple months ago. And then resorts are running above, you know, above where they were at 19. And just looking at July to give you some context on some of the urban markets, you know, I'm looking here. Boston, we were running our two Boston hotels in July. We're running 89%. And even the Convention Center Hotel, the Boston-Western ran over 64%. In Chicago, you know, obviously an urban market, we ran 73% at the Gwinn. Even the 1,200-room Marriott was running 58%. So we're really seeing the urban markets starting to kick in as we're moving through the summer and entering into Q3.
spk07: Okay, thanks. Thank you. Our next question comes from the line, which means Rose from Citi. Your line is now open.
spk14: Hi, thank you. I wanted to ask, you mentioned that in the third quarter you're looking for 20% to 25% increase sequentially in revenue. Could you talk about maybe your margin expectations as well? Would you expect it to be the same as what you put up in the second quarter, or are you continuing to restaff or having to pay higher? What are the puts around what we should look for for operating margin? Yeah.
spk12: Yeah. Hey, Smeeds. This is Jeff. Yeah, I would say that when we look out to the third quarter, generally speaking, I think our margin opportunity in the third quarter compared to the second quarter is going to be the same to slightly better, maybe upwards of 200 basis points better. Sequentially, I think we're just trying to be realistic given that we're going into a period of time where you're going to see some transition between leisure and business transient, but we're optimistic we're going to get a little margin improvement on a sequential basis.
spk14: Mark, I wanted to ask you a couple of more questions on the transactions you did. It sounds like there's kind of a second leg potentially to the Destin acquisition, but I just wanted to understand a little bit more behind making an acquisition of a hotel with 30-something rooms. That doesn't really move the needle a lot for you, and I get that it looks like a good investment, but relative to your overall portfolio, it's certainly very small. But then bigger picture, we've seen more activity from the public REITs in, you know, transaction market. I'm just wondering, is there anything in general that you think is bringing more attractive assets to market?
spk04: Sure. So let me answer a two-part question. So on Destin, it is a relatively small deal for us, although proportioned to kind of enterprise value, you've seen some other companies doing things that are a relatively similar size. I think the way we view it is it was a – It was an off-market deal. It gives us a foothold in a market that we think is one of the better markets in the United States, the Destin-Rosemary Beach area, we think has terrific fundamentals. It has incredibly high barriers to attributes. There'll be probably nothing else built on that strip of beach. So it has all the characteristics, and frankly, it's not going to be the value add that we have of changing revenue management brain. It's just not that asset management intensive. those are all favorable for doing assets like that. And we think it gives us the ability to leverage some, what I'll call, nearby assets so we may be able to build upon this. And then the ability with the entitlements, the ability ultimately to do something bigger there, that's not our plan A at all. But one way to think about it, if you could do 150 units there, basically we got a hotel for the land value and the hotel was free. So it's a good opportunity. We think it's added to the portfolio, which gives us a foothold. And we think at our basis that we've already created value. To your second question, I would say the overall environment remains incredibly competitive for hotels. The stuff that's been broadly auctioned, I can tell you we haven't come close to winning because we just – I think people are being maybe – They're stretching on some of these deals where there's a lot of competition against 15-20 offers. So it's a competitive environment. A lot of people want to own hotels, private equity, family office, international buyers. We have seen in the last 60 days, I'd say, an uptick of properties coming to market. I think they're getting drawn out by the per-key numbers on some of the, particularly the resort assets. And I think that there's just... The bid-ask spread is there's more certainty as the mask mandates went away in June and fundamentals got better. I think the buyers said now feels like a better time to be a seller. So I think the environment just feels better from that side. And I think some of these trades and some of the assets have brought more buyers out of the woodwork. So all that's kind of in play right now.
spk14: Okay.
spk04: Thank you.
spk07: Thank you. Our next question comes from the line of Rich Hightower from Evercore. Your line is now open.
spk08: Hey, good morning, guys. All right. So, Mark, I want to go back to one of your prepared comments. I just want to confirm the 1.7 million room night leads achieved during the second quarter. Is that a same store metric or is that not the same store metric, and then also, you know, typically what portion of leads get translated into actual stays, and do you expect any changes in that ratio, you know, as things are maybe still a little bit choppy out there over the next, you know, few quarters?
spk04: Yeah, so it is same store, for clarification. And, you know, you can see I mentioned the prepared marks that are our close rate of 63% on the business we're pitching. I think the broader message is just to see the sequential improvement in the lead generation. So, things are really taking off from a group lead standpoint. Now, those are for future periods. So, some of that's, you know, probably the bulk of it is 2022, and even some 2023 booking activity makes up the bulk of what we're seeing. But, you know, if you look at this event, the major channels, we are seeing increases in group demand, meeting planners. There's a lot of pent-up demand. So I think all of that directionally is very encouraging. And then I think our footprint for convention center calendars next year is also adding to the volume a little bit because Chicago and Boston and some of these markets have calendars that are as good or better on room nights than they were in 2019. So that's going to get booked into our hotels.
spk08: Okay, great. Thanks for the clarification. You know, just another question on a lot of the CapEx that Diamond Rock is undergoing or completing, you know, in the various assets in the portfolio. I guess, you know, as we think about the landscape of hotels that you're competing with that are probably heavily under CapExed at this point, given what's happened over the last year and a half, you know, at what point do you sort of start to see those you know, the benefits from all that spend showing up in your, you know, your index scores, your trip scores, you know, how long of a time period, you know, would that normally take? What are your expectations?
spk04: Yeah, so if you step back to last year, what we made the strategic decision to pursue the high ROI CapEx projects and position the balance sheet to do so. So that's getting done and completed, you know, this summer into the fall. And the idea was positioned to see the results starting in 2022. So, you know, Sonoma got completed in June. Vail will get completed in November. The conversion to Margaritaville and Key West will occur by November. The luxury collection conversion in Denver will be done hopefully at the end of this year. So all of that, we should see the cash flow and the returns really starting beginning, you know, Sonoma, we're already seeing it with the market share gains. But you'll see that really trickle into our starting Q1 of next year. You should see pretty meaningful returns on those capital investments.
spk08: Great. Thanks, Mark.
spk04: Thanks, Rich.
spk07: Thank you. Our next question comes from the line of Chris Woronka from Deutsche Bank. Your line is now open.
spk01: Hey, good morning, guys. Mark, it sounds like the strategy is really kind of a focus on leisure, and while we might take that to mean resorts, it sounds like you're open to leisure-centric hotels in traditionally urban markets. So that could still keep pretty much most markets out there on the map. Is that correct?
spk04: It is. I mean, we're focused. you know, we're not going to add, we have sufficient in New York, Chicago, Boston, so we're not going to be additive in those markets. You know, San Francisco is redlined, in our opinion, for the next several years. And markets that we're likely to expand in that are not well-called true resorts are going to be more markets like Charleston. You know, that's a market that has some business and some with BMW having a fairly large presence in that market, but also lends itself to be predominantly leisure. We think that those markets are going to outperform. New Orleans, French Quarter particularly, it's an experiential market, benefits from strong convention calendars. We think that travel trends that are going to outperform are going to tend to be more experiential, whether that's urban or pure resorts.
spk01: Okay, helpful. And Second question is, you guys have obviously restored a lot of liquidity, but as we think about acquisitions going forward, can you remind us where you are on ATM, and is there a thought towards just kind of over-equitizing acquisitions, even if you theoretically could bring on property debt or use cash or something like that?
spk12: Yeah, hey, Chris, it's Jeff. You know, as we said at the end of the last quarter, at that time we had $112 million remaining on our ATM, and that ATM program actually expires in August. So, you know, we said at that time you'll see us replace that ATM program. So that'll be recharged effectively, but I think technically today it's $112, and you'll see that go back up to a higher amount. We do have the ability to acquire assets using debt, but right now we've been looking at recycling the proceeds from the dispositions that we've made, and so effectively using cash on hand, they've been funded all cash or effectively all the equity.
spk01: Okay. Very helpful. Thanks, guys.
spk07: Thank you. Our next question comes in the line of Patrick Schultz from Truist Securities. Your line is now open.
spk13: Hi. Good morning, everyone. Good morning. You know, so far this year, you've been running room margins in the mid-70%. It sounds like 3Q might not be so different. You know, from a high level, and I think this is true for most of the hotel REITs, you know, how long can that last? I mean, I think that's something that surprised many of us, you know, how you're pretty much back there on room margins. You know, is that sustainable? Or, you know, as we get into the lower leisure season post-Labor Day, you know, does that start to slip back? And then the whole issue of rising labor costs. Interesting your thoughts around that. Thank you.
spk04: Sure, Patrick, I'll take a first shot. So I guess for certainly into the third quarter, for the balance of the year, we see maintaining profit margins with continuing recovery. And we think that margins, you know, we've just gone through, let's talk about why margins are good and why they may permanently be better on prior peak. You know, the labor model is the most, you know, for the industry, the labor model has fundamentally changed. We've never before had to go through something like this where we zero-based every single hotel. And we've gotten rid of positions. We've permanently changed positions, FTE counts, as an industry. So that benefits us. Technology is benefiting us. Mobile key, less people at the front desk, other sophisticated tools to monitor productivity. Above property charges from the brands at the branded hotels have been reduced. So all those are helping margins. I think what's going to be unique to us and what is already helping us is the conversion and comp to the brand-managed hotels, the six of which we had last year. So giving an example of one change at Salt Lake City, we've been able to reduce the managers from 18 to 11, and we think we can maintain it roughly at that level. So that's 39 percent less managers at that hotel. So you can imagine how that runs through in profitability and margins. not only now, but as we kind of return to prior peak too. So we're relatively optimistic on the margin front. There clearly is a nationwide shortage of labor, and we are dealing with that like everyone else. But I think there's a lot of reasons to be optimistic on the flow through and maintaining margins.
spk13: Okay, thank you. Good to hear your thoughts on this topic. Thanks, Patrick.
spk07: Thank you. Our next question comes from the line of Michael Belisario from Baird. Your line is now open.
spk02: Thanks. Good morning, everyone. Good morning. Mark, I just want to go back to the acquisitions kind of high level. It looks like you're assuming roughly a seven cap or seven caps that go to eight caps. Not that much growth, though, so maybe two parts. Why is the stabilized eight cap the right number to target and then I know you gave some details about what's not in your underwriting, but how should we think about maybe the stretch yield that you guys think you could get to over time on these deals?
spk04: Yeah, I mean, you never want to overpromise. So I think stabilizing 8% is a creative growth to any of the assets. It creates value for our shareholders. I think if you can get to an 8 on high-quality real estate, it's additive in the public company format. I think Henderson is a fairly straightforward deal. It's irreplaceable real estate. It's small. It is beachfront, impossible to build in. And I think by the time we're done with it, it'll be worth a lot more than we paid for it. Bourbon, too, it's got more creative aspects we can employ to grow NAV. We haven't built in, when we talk about that 8% yield, we haven't built in a lot of the things Tom was talking about. So the changing the retail, reconfiguring the F&B, taking advantage of the separate buildings that come with the acquisition and turning it into the unique banquet and wedding spots, all that would be incremental ROI to that 8%. And so hopefully we're going to do better. I mean, take Barbary Beach. We're looking at the Key West. That's an asset that is 35% or more above our our underwriting, we put a six cap on that. I think our total investment, our yield on that this year will be something like 11.5% on our total investment, and that doesn't even include being goosed for the conversion to the Margaritaville. So put a six cap on that number on 13.5 million this year, that's like $225 million for an asset we have $117 million basis in. So hopefully it'll be successful like that asset, but I think we don't want to build in the ROI stuff when we talk to investors on the initial underwriting. We'd rather communicate to you what we think is pretty straightforward, clear path to stabilize yield, and then as we approve and finalize ROI projects, we'll communicate that to the investment community.
spk02: Got it. So it sounds like eight is kind of the baseline, and you'll work higher from there hopefully, right?
spk04: That would be our hope, yep.
spk02: Got it. And then just switching gears, maybe one for Tom. Can you help us get our arms around what you've seen for BT in the fall, where this special corporate booking is occurring, and are you seeing the booking window extend at all at this point?
spk11: I've got to tell you, Mike, we've seen a little bit of growth in BT. We went from like 5% in, you know, we grew about one point a month in the second quarter, up to about 7%. The portfolio as a whole, you know, across all the hotels runs about 15%. And then obviously in the urban, we're doing as much as 30 to 40% midweek when things are good. So we're seeing a little bit of movement. It's really, there's nothing in the future. There's no future pace that shows anything, you know, that shows that there's no significant change at this point. I think we're still too far out. And I think a lot of it's going to determine, really come around to, you know, how does The kids go back to school. How do things play out in the fourth quarter? But there are no indicators that things are dramatically improving or going backwards, right? So I think we're just monitoring.
spk04: Yeah, Mark, I would just add a couple other things. So we did see midweek increasing, which is both leisure and BT, as we mentioned in the prepared remarks. If we look at our July results for our major markets, Chicago, New York, Boston, we have a lot of hotels that are running 70% to 90% midweek. So that's encouraging. And then if you look at travel policies, what's happened over the last 45 days, you've seen travel restrictions lifted at PwC and the consulting companies, and a lot of companies have lifted travel restrictions. All that portends well for BT as we move into the fall. So I think the reduced travel restrictions are encouraging. The expectation, and, you know, we look at like Delta Airlines CEO was, and they have They have more pure data, I would say, than we do because a lot of our, one of the phenomena that's happening now, a lot of people are booking around their traditional special corporate, so it's harder for us to track the business traveler. But, you know, they were saying it was 20% earlier this year. It's running about 40% versus 19 levels, and they hope it to be, based on what they're forecasting and seeing in their systems, post-Labor Day getting 60% plus of what it was in 19. So, The trend lines are encouraging. We're extrapolating from those data points that the airlines are seeing because they have better visibility because of the way people are booking around in the hotel business. So I think it's encouraging, but it's not like BT books for December right now, so I can't give you definitive numbers. But the trend lines seem like they're going in the right way.
spk02: Thanks for all that.
spk07: Thank you. Our next question comes from the line of Anthony Powell from Barclays. Your line is now open.
spk03: Hi, good morning. We've seen a lot of transactions in this space, but very few on the big box group side. What's your view on those values there and investor demand for those types of assets currently?
spk04: Yeah, this is Mark. So I'd say there just aren't any for sale. You know, we just were at... Meeting with brokers recently, just looking at what's in the market, I can't think of one big box that any broker has listed at the moment. So I think the general attitude of people who own big boxes is that it's not the right time to market them. The group will come back. I think people are pretty optimistic on the group front, but it doesn't feel like it's the time to market that asset. So with no trades in the market, it's hard to give you a perspective on exactly where value is on the big boxes. I suspect that this time next year we'll see group recover maybe a little bit better than people expected, and that will bring buyers and sellers together next year on those kind of assets.
spk03: You talked about maybe marketing one of those at some point. I'm guessing my commentary next year is when you could consider that maybe. Is that fair?
spk04: If you were going to market a big box, next year would certainly be a much better time than right now. I think there's just more certainty, and I think we're fairly optimistic on the group recovery scenario. So I think, you know, we wouldn't want to be premature in bringing any large hotel to the market right now.
spk03: Got it. And I guess on the acquisition side, you know, what's the total opportunity set for these kind of smaller resorts and maybe more, you know, leisure-focused urban hotels? You know, could you do maybe 10 of these over the next couple years? It takes a lot of them to replace the – you know, a Lexington or a big box resort. I'm just curious what you see kind of the velocity details over the next few years.
spk04: Yeah. I mean, there's a lot of hotels that are worth between 50 and a hundred million dollars to fitness category. I think the, you know, the, the real advantage that we have is our team here, Troy and his, in his investment team have been focused on this for over five years. So we built a pre-sizable database of about 50 we'll call micro markets. You know, that's the Sedona veils of the world. Park City, Jackson Hole. We know every hotel. We've been talking to many, many of the owners for years now. That's how we're uncovering off-market deals. And looking at our internal pipeline, it has a lot of those in there. Will we do 10 over the next couple of years? Sure. There's plenty of them. I think we have kind of unique insights into that. And you know, we really want to be focused on doing off-market unique deals. And I think, you know, a lot of these auction deals, as I mentioned, I mean, we just saw one that is happening right now. We were $15 million shy of the winning bid, and we thought we were, you know, we thought we were stretching. So, you know, we want to create value with our acquisitions, and I think continuing to focus on the strategy is the way that Dimerock is going to create value when others may have to overpay in doing these auction deals.
spk03: Got it. Maybe it's one more quick one on, you know, how the distribution costs for the small independent resorts, you know, the margins seem to be very strong. So it seems like you're able to overcome any, you know, OTAC, you know, at these properties. I'm curious how you're, you know, sourcing customers at, at a, you know, Sedona or, uh, you know, Havana Cabana.
spk11: Sure. Um, all the, all the tools are in place for us to access the customers. especially with a brand like Sedona where there's brand equity and it's relevant. But we use all the tools. We use the OTAs. We use a layered approach with regards to luxury travel agents. We have a luxury travel agent strategy, virtuoso signature, fine hotels on those type of resorts. And then we don't have the brand fees. Think about an independent hotel. We're not paying 10%. for the brand. We're not paying all the brand marketing fees. And so we can allocate a portion of that and attack the customers directly. We try to keep our portfolio focused on nothing in the aggregate, but only specifically to our assets. And so when we allocate dollars, we're targeting our specific asset, not a grouping of hotels like the brands do. And so that gives us a lot of nimbleness. You'll see in Like Havana Cabana, we're just number one website in the nation, right? Most saved website in the world. And it's kind of funny. You say, how does Havana Cabana and Key West become the number one saved website in the world? And it's because we have the ability to take user-generated content and retarget the customers. And so people save it, and they use it, and they share it with their friends. And it's very powerful that independent hotels – And our sales and marketing team, we have all the resources on our team at Diamond Rock, and we do it for ourselves versus relying on the brands. And I think that's a very powerful tool. It gives us speed to market, and it reduces our costs, which is why we like the independent hotels so much.
spk03: Thank you.
spk07: Thank you. Our next question comes from the line of Floris Van Dijkoen from Compass Point. Your line is now open.
spk09: Thanks morning guys for wanted to, you know, get your thoughts I you know, it's, it's intriguing to as competitors have bought assets near your assets at high prices. And Mark, maybe get your thoughts on first of all, the value of your assets and also put that in perspective. How has that value of your net worth, of the company's net worth, I should say, or NAV, changed since December when you issued a small amount of equity on your ATM? Maybe if you can give some more thoughts on that, that'd be great.
spk04: Sure. So let's take both parts out. So we did issue a little bit on the ATM last fall, but that was the position for the ROI project. So that funded the Vail repositioning, that funded the Sonoma repositioning, that funded the Margaritaville conversion, that's funding the luxury collection conversion in Denver. So that capital has been spent or being completely spent right now and will position us for outsized growth in 2022. So that, it wasn't really a statement on NAV as much as we had very high use, you know, 20, 30% IRs on those projects. And we thought that relative fake made a lot of sense. As we look forward on acquisitions now and the use of capital and NAV, as far as our current state of value, I think the NAVs are going up. I think if you look at our assets in markets like Key West and you look at our markets in like Sonoma and Sedona where we've seen other trades, Yeah, those assets now are breaking through the probably record pricing. You know, our Barbary Beach is worth more than a million dollars a key. Sonoma is probably worth more than a million dollars a key. And that compares to basis. That is, you know, our basis in Sonoma is roughly $270,000 a key. It's probably worth a million dollars plus a key now. Barbary Beach, we're probably up 70% from our basis. So the NABs, you know, with these numbers that are getting paid by, by others in the marketplace, you know, it's increasing our NAV. Uh, so we're always reevaluating. It's hard to, you know, it's always hard to know exactly where it is, but, um, you know, the private markets are paying a lot more than the public valuations. And there's a big disconnect right now between these valuations.
spk09: Thanks. I appreciate that. And I was actually, you know, uh, pretty, uh, intrigued. You made the comment that your returns on your Key West assets are in the double digits. Obviously, there's more to come on the rebranding to the Margaritaville. If you were to back solve from your original acquisition costs, I mean, How much value has been created and how much has the value per key improved over your hold period?
spk04: So let's take Barbary Beach or Havana Cabana. They're both double digit returns on our investment. So if you put a six cap on those, just to say that's market, that's kind of where things feel like they're trading down there. That put Barbary Beach on this year's numbers at something like $225 million versus a basis of 117. So I can't do the math in my head, but 90% increase in value and about $1.2 million a key. Havana Cabana put a six cap on what we think it will do this year. That puts it about $90 million. I think our basis is 55, so that's up 60%. And so, you know, again, I think what we're seeing is a lot of our thesis that we've been trying to articulate to investors over the last five to seven years playing out. The trend lines and the high barriers to entry, there's no new supply, and what do customers want? The assets we've been buying, particularly over the last five to seven years, those two are really playing out, and we're seeing massive increases in NAV in those assets.
spk09: Thanks, Mark. Appreciate it.
spk04: Absolutely.
spk07: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Mark Gruber for closing remarks.
spk04: Thank you, everyone, for joining us today on our conference call, and we look forward to updating you next quarter. Take care and have a great day.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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