Diamondrock Hospitality Company

Good day and thank you for standing by. Welcome to the Diamond Rock Hospitality fourth quarter 2021 earnings release conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Brianna Quinn, Senior Vice President and Treasurer. Please go ahead.

Thank you.

Good morning, everyone. Welcome to Diamond Rock's fourth quarter 2021 earnings call. With me on the call today are Mark Brugger, our President and Chief Executive Officer, and Jeff Donnelly, our Chief Financial Officer. Before we begin, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed or implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial affirmations. a reconciliation of this information to the most directly comparable gap financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger. Mark?

Thank you again for joining us today for Dimerock's earnings call. In 2021, we saw travel demand dramatically rebound shortly after the national mask mandate recommendation was lifted in May. In July, our portfolio recovered 91% of its 2019 total red bar. And in December, we recovered nearly 99%. The emergence of new COVID-19 variants during 2021 made for a choppy recovery. But the undercurrent pushing the wave of travel demand is clearly strong. National numbers on COVID infections are rapidly declining once again. States are relaxing mask mandates. and more workers are returning to the office. If trends continue, we estimate that the travel recovery timeline was delayed just a few months from Omicron. As we look ahead, we remain very confident in the future of travel and the brisk return of pent-up hotel demand. For Diamond Rock, the fourth quarter and full year 2021 hotel results significantly exceeded our initial expectations. One factor, among many, stands out as a testament to the creativity and success of our team. In 2021, the portfolio generated nearly $2,900 per key of AFFO. According to consensus estimates, that is over three and a half times more than the average for the five largest full service REITs. Our focus on driving cash flow is the culmination of strategic decisions on market exposure, balance sheet structure, and the innovative sales strategies and tight cost controls implemented by our operators in partnership with our leading asset management team. Looking at the company's results more closely, In the fourth quarter, we were able to drive REBPAR up 232 percent over the prior year, which is just 13.8 percent below 2019. Moreover, on a comparable basis to 2019, the monthly progression of total REBPAR was down 18.9 percent in October, down 17.1 percent in November, and down just 1.5 percent in December. These rebounding levels of REVPAR allowed Dimerock to generate fourth-quarter hotel-adjusted EBITDA of $43.1 million and AFFO of 9 cents per share. While the industry in 2021 started seeing a recovery in business transient and group bookings, which Jeff will discuss in more detail in a moment. The positive results for the fourth quarter and the full year were powered by Dimerock's large portfolio of drive-to resorts. Several resorts achieved record-breaking room rates in 2021, and we are seeing this trend continue. Even compared to 2019, our resort portfolio had positive full-year repar, with REBPAR increasing almost 24% in the fourth quarter. In fact, a dozen of our resort and lifestyle hotels beat 2019 REBPAR levels last quarter. Led by properties like the Henderson Beach Resort, La Berge de Sedona, Orchard Sedona, the Hythe Vale Mountain Resort, the Lodge at Sonoma, our two Key West resorts, and the Kempton Shorebreak. These good results were largely the product of a decision we made several years before the pandemic to pivot and focus our external growth on drive-to resort and lifestyle hotels. Since that pivot, we have completed more than $1 billion in transactions to assemble the portfolio that today defines Dimer Rock. We acquired Havana Cabana Key West, the Westin Fort Lauderdale Beach Resort, the Kempton Shorebreak, Margaritaville Key West, the Kempton Phoenix Palomar, La Berge de Sedona, Orchard Sedona, the Landing Lake Tahoe, Cavallo Point in Sausalito, and our most recent acquisitions, the Bourbon Orleans in the French Quarter, Tranquility Bay in the Florida Keys, and the two Henderson Beach resorts. We remain all in on our thesis that superior profit growth can be achieved from experiential resorts and lifestyle hotels. Going forward, we intend to exclusively focus our investments on similar assets while opportunistically recycling non-core branded urban hotels to fund and accelerate our strategic direction. A critical point of differentiation for Dimerock from our peers, which is often overlooked, is that in the past few years, Dimerock's portfolio has transformed in another important way. It has gone from over 80 percent of the portfolio being encumbered by long-term brand management agreements to today less than 10 percent. In other words, today, only two of our 33 hotels are subject to long-term management agreements. We believe that this gives us a huge competitive edge in controlling expenses at the hotels and increases NAV at the hotels by over 15 percent on average, because unencumbered hotels can generally be sold for a 100 basis point cap rate premium versus encumbered hotels. No other public full-service lodging REIT has executed this transformation or has less brand-managed hotels. As we continue our external growth initiatives, you should expect more of the same on asset selection and direction. In 2021, we stayed laser focused on our strategic transformation as the team executed on dispositions and acquisitions to keep Dimerock out ahead. In total, we sold $220 million of hotels at a 5.3% cap rate on 2019 NOI and probably a much lower cap rate on 2022 NOI for those hotels. And what do we do with that freed up investment capacity? We reinvested the proceeds into four independent experiential properties totaling $293 million at a 7.5% cap rate on 2022 budgeted NOI and ramping to an 8% or better stabilized yield. We estimate that last year's disposition acquisition change alone will add well over $20 million of incremental EBITDA to our 2022 results. In fact, the two mid-year acquisitions, Bourbon Orleans and Henderson Park Inn, were ahead of initial underwriting in 2021, with Henderson Park Inn delivering a 9% NOI yield. In December, we acquired Henderson Beach Resort, a luxury property with enormous upside, And we kicked off 2022 with the acquisition of the Tranquility Bay Resort in the Florida Keys at an 11% trailing NOI cap rate. How do we find these great deals in a competitive marketplace? Mostly because we don't rely on brokers. Rather, we have spent years building relationships with owners of on-strategy hotels in micro markets like Sedona and Destin Beach that fall outside the mainstream. Off-market transactions provide the time to solve the seller's partnership, debt, or legal issues to our benefit. We are optimistic we can close a similar volume of transactions in 2022. In fact, we are actively working on four deals right now at some stage of evaluation. Half of those are off-market through longstanding relationships. While we have been executing on external growth, we were also intensely focused on creating value at our own portfolio for repositionings. In 2021, we completed the repositionings of the Lodge at Sonoma, the Heights Vale Mountain Resort, and the Margaritaville Key West. The returns on these investments are projected to be a big catalyst to our 2022 earnings. Here's a powerful fact. These three repositioned resorts are budgeted to collectively increase profit by $12 million in 2022 over 2019. That's more than a 50% increase in profit versus pre-pandemic levels as a result of our efforts and strategic locations. And we are not close to being done. We have two more repositioning rebrandings happening in the first quarter of 2022. And behind that, there are two more ROI conversions underway that will debut in 2023. We consider the ability to identify and successfully execute these high ROI projects as a key part of the Dimerock value proposition. Now I'll turn the call over to Jeff to discuss operations in more detail and to review the highlights of our balance sheet strength. Jeff?

Thank you, Mark. We finished the quarter with $441 million of total liquidity comprised of $39 million of corporate cash, $93 million of hotel-level cash, and $310 million of undrawn capacity on our revolver. Leverage remains conservative with only $1.15 billion of debt against over $3.5 billion of resorts and hotels. we have no debt maturities in 2022. Earlier this month, we amended our credit facility to obtain additional covenant waivers and extend our relaxed covenants to a final testing date of August 2023. Moreover, we increased our gross potential acquisition capacity to 550 million. There was no change to our pricing grid from this modification. Let me turn to more detail on our operating results. Fourth quarter results were sharply ahead of our original forecast. Total revenues in hotel-adjusted EBITDA were 190 million and 42.7 million, respectively, beating our original expectations by 20 million in revenue and over 5 million in hotel-adjusted EBITDA. Profit flow-through was excellent. Hotel-adjusted EBITDA profit margins were 22.5% and over 40 basis points above our forecast. The 12% upside to rooms revenue was driven primarily by stronger than expected average daily rate, partially offset by softer than expected occupancy from last-minute cancellations from the emergence of Omicron. The rate-driven upside pushed room profit margins over 200 basis points above forecast. F&B and other revenues were also 12 percent above expectations, but food inflation and labor pressures constrained F&B margin to 24%, which was below original expectation. Resort revenues were 85 million in Q4 21, or $13 million ahead of 2019. Resort total rev par was 18% ahead of 2019 levels and resulted in hotel adjusted EBITDA margins of 30%, 240 basis points stronger than 2019. For the full year, Resort revenues were $286 million, matching 2019. The story here is hotel-adjusted EBITDA margins were over 380 basis points higher on similar revenue. Urban hotels improved during the year but remained well below 2019 levels. Urban hotel revenues were $105 million in the quarter, with total rev par 30% below 2019, leading to margins of 16%. For the full year, urban hotel revenues were $281 million, down $333 million, or 54%, resulting in a 90% decline in hotel-adjusted EBITDA and a low 6% margin. Clearly, there is significant opportunity for recovery in 2022. Business Transient continued to show slow improvement during pockets of the fourth quarter, But plans for a more ambitious return to business travel in January did not come to fruition due to the spike in Omicron. The business we are seeing is mostly from top consulting companies as well as project work. Based on feedback from corporate accounts, we believe Omicron likely pushed out the start of a major recovery in business travel by three to four months. Compared to Q4 19, room nights were 22% lower but rates held steady and even showed sequential improvement from earlier in the year. On group business, there are some good indicators of future strength. Q4 brought over 12,000 leads for 2 million group room nights, matching third quarter's production during what is typically a seasonally slower period. We booked 135,000 definite room nights during the fourth quarter, 8% more than Q3, of which 85% of these nights were for 2022. Momentum was very strong as 40% or 53,000 of these room nights were booked in December. In January, we've seen an encouraging trend that bodes well for 2022. Sales lead volume and lead room nights, even despite the impact of Omicron, were up 5% and 33% respectively as compared to the average month in the fourth quarter. This means January points to a Q1-22 sales lead pace that meets or exceeds Q1-20, and February is showing continued improvement, clearly a sign of good things to come. Citywide room night activity in our major urban markets remains strong. In 2019, Boston's convention centers generated 349,000 room nights, and they currently project 330,000 room nights in 2022, and 438,000 nights in 2023. Chicago generated 1.1 million nights in 2019 and is expected to generate 1.2 million room nights in 2022 and already has 1.1 million nights on the books for 2023. Collectively, the convention centers in Boston, Chicago, San Diego, D.C., and Phoenix have as many citywide room nights on the books in 22 and again in 2023 as they had in 2019, and booking activity is poised to accelerate in April. Leisure demand is off the charts. Leisure comprised 50% of our room revenues during the quarter, compared to 38% in Q4-19. Compared to Q4-19, leisure segment room rates were nearly $290, up 19% over 2019, on a 7% decline in rooms. This is an acceleration from quarters earlier in the year. Performance of our recently upgraded resorts, as well as our advanced bookings in key leisure markets, leads us to expect continued robust strengths in this segment. Overall portfolio profitability was significantly aided by operating efficiencies due to a number of efforts put in place by our teams. Occupancy was 30% lower in full year 2021 than in 2019, But our hotels manage to hold costs per occupied room to just a 4% increase, resulting in a rooms margin of 74.4%, which is only 100 basis points below full year 19. Hiring, training, and retaining high-quality associates is perhaps the greatest challenge for our hotels. U.S. labor force participation has been sluggish to recover due to a combination of temporary and structural factors, but economists expect people to return to the workforce in the second half of 2022. To maximize efficiency, our hotels have provided dynamic and incentive-based compensation structures during this hopefully temporary tight labor market. Some competitors have been more inclined to make permanent changes. To remain competitive, our hotels may ultimately need to make some adjustments. Based on our current data, we are adjusting our outlook for long-term margin expansion potential for U.S. full-service hotels. While increased productivity, better labor models, and more efficiencies from brands will help improve stabilized margins, rising base wage and benefits costs will likely offset some of that improvement. Accordingly, we now see the long-term margin improvement potential for U.S. full-service hotels to be in the range of flat to 100 basis points. That is 50 basis points lower than our prior estimate. We believe Diamond Rock has an added advantage over our peers. The six managed to franchise conversions provide approximately 50 basis points of long-term margin enhancement that is unique to Diamond Rock. Hence, we think Diamond Rock's margins have the potential to be 50 to 150 basis points above prior levels once demand has fully recovered. Looking to the future, we do not have sufficient clarity today to provide full-year earnings guidance for 2022. However, we do believe our unique segmentation, geographic footprint, recent rebrandings and acquisitions, and other beneficial portfolio enhancements will collectively drive robust revenue and cash flow growth. We expect our resorts will continue to deliver strong revenue and margin performance, and our urban hotels have significant upside potential as we move past Omicron and corporate travel demand follows a return to office. Omicron resulted in $17 million of group cancellations, of which approximately $13 million occurred in Q1 and much of it early in the quarter. As a result of Omicron, we expect the change in total revenue and hotel-adjusted EBITDA margin, as compared to 2019, will be softer in Q1 than in Q4. Preliminarily, January total revenues were down 23% compared to January 2019, Encouragingly, February is looking better, and early indications point to an acceleration of these trends into March. With that, let me hand the floor back to Mark. Thanks.

As Jeff mentioned, the travel trends are clear, and the desire to travel is certainly robust. As we look at 2022 and beyond, we are confident that Dimerac has competitive advantages. I'd like to just highlight a few before opening the call for your questions. First, Our drive to leisure focus. The world is positioned to embrace a more hybrid work structure, which lends itself to increased B-leisure travel. Our leisure-focused destination resort and urban lifestyle hotels are prime beneficiaries of this trend. They were strong performers in 2021, and we expect this strength to persist. Second, acquisitions. We successfully executed four on-strategy acquisitions in the last year alone. with strong initial yields of 7.5%. Behind that, we have an active pipeline of deals. Third, up-brandings. The up-brandings in 2021 of the Lodge at Sonoma, the Hitevale Mountain Resort, and the Margaritaville Key West will power those resorts to collectively grow EBITDA over 50% from their 2019 levels. Fourth, balance sheet. We have a great balance sheet with low leverage and ample capacity to continue aggressively leaning in to our strategy to assemble a unique portfolio of resorts and lifestyle hotels. Fifth, group setup. Our footprint is good for 2022. Group revenue on the books at our two most important group hotels, the Westin Boston and Chicago Marriott, is three times more than in 2021. I'll note that we are fortunate to have less than 1% of our rooms in the troubled San Francisco market. Sixth, management conversions. We converted six brand-managed hotels to franchise hotels in 2020. That will ultimately boost portfolio profit margins by 50 basis points over pre-pandemic levels and increases NAV by 15% at those six properties. And the final competitive advantage for Dimerock that I'll mention is ESG excellence. We were once again ranked number one by Gresby as hotel listed sector leader and awarded ESG prime status by ISS, a designation held by the top 5% of the real estate sector worldwide. If ESG is important to you, as it is to us, Dimerock is a leading choice among all public lodging REITs. To wrap up, we are still in the very early stages of an emerging travel recovery with significant pent-up demand. And with that backdrop, we are confident Dimerock has the portfolio, the strategy, and the balance sheet to continue to distinguish itself in 2022 and going forward. At this time, We would like to open it up for your questions.

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 Smith Rose from Citi. Your line is now open.

Hi, good morning. I wanted to ask you just some clarification on the groups that you talked about. And I kept wondering, just to put it in context, or you go just to say, for 2022, kind of what percent of group nature on the books relative to say, 2018, going into 19, and maybe 2017, going into 19. So thinking about 22 and 23. Tom, do you wanna grab that one? Sure.

Currently on the books, we're about 29% behind 2019 on room nights. Rates about flat, and the new bookings that are coming in, we're seeing increased rate as new bookings come in. So it's been, we're about, like I said, we're about 165,000 behind where we need to be for the full year. And historically, we've picked up about 250,000 rooms in the year for the year. So we feel pretty good about where we are right now with the pace for the portfolio. And then, you know, as I mentioned, historically, we pick up about 250,000 group rooms in the year, and we need to get about another 165,000 in the year for the year to make our currently projected numbers. So I think we're in a good position. Okay, thank you.

Mark, I wanted to ask you just, you know, as you look at the performance of urban hotels, it looks like they're starting to get a little better. I mean, do you have any thoughts on how is it critical that folks return to the office in order for urban hotels to really start to perform much better? Or do you think that they can gain sort of positive traction even if, you know, we don't really ever fully go back to the office the way that we did pre-pandemic?

It's a good question. I think there's going to be a correlation between return to office hybrid, lowering of mask mandates, and obviously declining COVID numbers. But it's not necessarily that people need to be in their office to business travel, but I think those things will correlate towards businesses who are seeing this now, getting people back on the road and being comfortable approving corporate travel. But it's going to be a little different this year. We'll see some of the traditional stuff come back as people are returning to office, but also there's been a two-year hiatus on small team meetings, building culture. I think as you talk to, as we do, our biggest corporate customers, what they're saying is even if we're in hybrid, that probably means we need to get our small teams together more. We need to focus on culture. How are we going to conduct business if we have less people in full time? Some of that's going to facilitate travel that didn't exist before. And then I think there's also just this pent-up demand of people that haven't been together in almost two years that need to see their clients, need to get their groups together. And so I think that you'll see this kind of burst as we move through 2022 based on those trends.

Okay. And then just the last one, I just want to, do you have a sense of where wage and benefits will track in 2022 and what percent you would expect to increase that by?

Yeah, we're seeing wages probably in the four and a half, 5% range in 22 benefits are still coming in, but you know, somewhere in that range for this year, which is a little higher than we would have projected this time last year for 22. And that's kind of the revision where we think the peak margins come out on the other side of this that Jeff was referring to in the prepared remarks. Great. All right. Thank you.

Thank you. Our next question comes from the line of Austin Worshmith from KeyBank. Your line is now open.

Yeah, good morning. So, Mark, you referenced kind of, you know, how Diamond Rock set out on a strategic shift seven years ago, which, you know, has continued to evolve. And I, I recognize it's, it's probably constantly evolving, but I guess what are the biggest opportunity or changes that lie ahead that maybe could continue to expand upon the margin opportunity and just, um, strategic goals, you know, for the company, uh, moving forward?

Yeah, it's going to be more of what you saw last year. So it's going to be selling these branded urban properties and moving more into these, um, what we'll call medium-sized lifestyle hotels and lifestyle markets. And whether that's a true resort market like Henderson Beach or Charleston or New Orleans, we're going to continue to go into those markets. They're generally higher-rated hotels. And frankly, they have more levers to push and really where we can apply our creativity, whether it's a Vivian Howard restaurant in Charleston or the Michael Mina restaurant in Sonoma, repositioning resorts in very creative ways that can drive incremental revenue. We just see a lot more revenue potential at those kind of hotels. And you can see in our portfolio when you go through the property-specific results that the resorts have really allowed us to really use all the tools in our tool belt to drive revenues and profitability. So we're going to continue to focus on those kind of hotels going forward.

Got it. And then you discussed, though, that there may be some, you know, given the lag in the urban recovery, there may be, you know, potential for urban hotel performance, you know, to have a little bit more significant upside, it sounded like. But I think, Jeff, you mentioned also some acceleration in performance of the resort assets. And even though you're not giving guidance, can you just give us a sense of how you think, you know, rev par and margins relative to 19 between those two groups could perform in 2022, just broad ranges? or where you see the most opportunity.

Jeff, you want to take that?

Yeah, Austin, I mean, we're not going to, you know, give full year numbers for 2022 by segments. I think right now that's still, you know, in flux to some degree. But I think where you think about margin upside, obviously, it's going to be significantly greater in the urban side of the portfolio, just because they're coming off such a low base of revenue that I think you're going to see much greater flow through at the margin of dollars coming in from revenue, flowing to the bottom line as demand comes back. On the resort side, they're performing very well. They're actually at a very high level of profitability and strong revenue production. That's not to undermine or look down upon our resort portfolio. They're doing very well. But I would say from this point forward, probably more of the dollar upside is going to fall to our urban portfolio.

And so was the rate improvement for the overall portfolio, which was seemingly, you know, more urban assets, you saw December, it seemed to be sticky in January. Should we just, you know, assume that that kind of continues as sort of the midweek corporate travel, you know, starts to reaccelerate again, potentially, you know, over the next month or so?

Yeah, well, January from Omicron, you'll see a pullback, and we talk about our January numbers, and then we think in February we start accelerating each month.

But the ADR, I guess the ADR, the plus 20% or so on ADR, and then you kind of saw it, I think, again in December relative to what October and November did. Whereas resort relative to 19 was sort of stable, the overall portfolio saw a pretty significant leg up in ADR, and I'm just curious if that is attributable to the urban hotels and the sustainability of that kind of sequentially through the year?

It's both. I mean, in the fourth quarter, we saw obviously the resorts were on fire, as we talked about. But in the urban markets, we saw it's really driven more by leisure than it was midweek. We saw kind of the Thursday through Sunday business being driven by leisure in the urban properties as well in the fourth quarter. So that'll lessen a little in January at the urban hotels. And then I think you'll see an acceleration with the return of BTN group as we move particularly into the second and third quarters of this year.

Yeah, that's what I was wondering. All right, very helpful. Thank you.

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

Hi, good morning. I guess a question on the long-term margin, I guess, discussion that you've started. You are seeing more wage inflation, which I guess may result in a 50 basis points decline, but there's also inflation in room rates. So I would have thought that would have maybe canceled each other out. So I'm just curious how you think pricing power is over the long run and how that relates to margin expansion.

Yes, Mark, I'll start it off and then maybe kick it over to Jeff or Tom to add on to it. So we're still saying we think margins on the other side of this versus prior peak are going to end up better, and that's from productivity and labor model and, frankly, a lot of learnings that we have from going through the worst downturn in the history of the industry. So we're still constructive on where margins are, but wages are higher than we would have anticipated a year ago. I think a lot of the things that have caused them to go up are now getting better as we move through the years, more people return to the labor workforce. But they are a little higher than we thought, so we kind of adjusted our estimates to reflect that. But I think if Damaroc ends up at 50 to 150 basis points better off than prior peak margins, I think that's a pretty remarkable result, and we're still very positive about that.

So I guess wages are higher, but aren't your room rates also going to be higher than you thought, or are you a bit more cautious there given kind of the urban recovery and whatnot?

No, we still feel very good about the rate side of it. That would get us to the 150 basis points of margin expansion on the other side of this.

Okay, all right. I guess switching gears maybe to transactions, the resorts have done well since you bought them. Are you seeing sellers increase their pricing expectations given kind of just the overall strength in the resort market set that you and others have seen?

Yeah, I mean, it's a highly competitive market. People like resorts. They're probably on a risk-adjusted basis still the preferred investment by us and by others. And the cash flows have been excellent, and we think that a lot of that's sticky. So the prices on those hotels have increased. And the urban hotels, I would suspect as the year goes on, the trailing cash flows will get stronger. The debt markets for those kind of hotels will improve. and you'll have more and more private equity and others want to return to pay the cycle. So that probably becomes a more and more active market, and those prices probably rise as we move through the next 12, 16 months. All right. Thank you.

Thank you. Our next question comes in the line of Rich Hightower from Evercore. Your line is now open.

Hey, good morning, guys. Morning. Mark, you laid out sort of a tantalizing comment in the prepared comments in terms of an exclusive focus on resort and leisure assets going forward. So, one, I just want to confirm that that is indeed the plan forever going forward into the future. And then as far as the recycling efforts in terms of selling the urban assets eventually, what's the timing on that and what are the gating factors? I think you mentioned a couple earlier. earlier, you know, but besides basically, you know, cash flow improving from the currently depressed period for operations at those hotels.

Sure. So, yeah, we want to make clear to investors that we have clear strategy and we continue to try to differentiate our story from other stories in the marketplace by buying, you know, the hotels that we've been buying for the last seven years. And that's going to continue to be the kind of hotels that we buy for going forward. And I don't know about forever. But clearly, that's the trend line that we think will outperform for the next several years, and that's where we want to allocate our investments going forward. And we do have a number of urban hotels. We think we have some terrific gateway hotels, but we will probably reduce that exposure as we go forward and use proceeds from some of those sales to fund the strategic direction that we're taking the company. As far as timing on some of the urban sales, I would say it feels a little early at the moment. I do think that the pricing and the kind of competitive marketplace for bids on those will improve as we move through the year. Trailing cash flows, as I mentioned and you reiterated, is going to get better as the financing markets will get better, as the trailing cash flows get better. So I think as we move towards later in this year and early next year, we'll get kind of more full pricing for those kind of assets right now.

Okay, that makes sense. And, you know, maybe just a broader question on leisure, but I think a lot, you know, what a lot of us are trying to figure out in terms of the underwriting on such assets, you know, obviously resorts at extremely strong pricing power in 2021. And it sounds like the same is going to be true in 2022. But as we think about, you know, lapping sort of the extraordinary, you know, stimulus in the economy, last year as we think about international markets and borders reopening, and obviously there's a give and a take there, but how do you sort of underwrite against those potentially opposing forces as you think about what stabilized operations at a U.S. resort property would look like, not just this year, but beyond?

Yeah, it's a great question. I think for 2022, we feel very confident that we're seeing the advanced bookings are incredibly strong throughout all of 2022. I think there's a couple observations. We have this internal debate as well. One is a lot of these shoulder seasons at these resorts have kind of, I think, permanently changed to be strong. People can't work remotely, so in Henderson Beach or Vail, what used to be shoulder seasons, they're just much stronger, and that's a permanent change, I think, from the hybrid work structure. We'll just see more demand, and that'll improve for your rep part of those resorts. And then I think you have discovery at La Berge de Sedona. You have a whole new set of people that have seen it, talked to their friends about it, discovered it. I think that's permanent. We'll have a lot of return business at those kind of resorts. And then we've retrained the customer. And so we're relatively bullish on the stickiness of this rate. But time will tell. I mean, there will be some leakage out as the Caribbean reopens and Europe kind of reopens on some of this. But we think these drive-to resorts domestically are permanently a much higher baseline going forward.

Got it. Thank you, Mark.

Thanks, Rich.

Thank you. Our next question comes from the line of Chris Wolronka from Deutsche Bank. Your line is now open.

Hey, good morning, guys. I wanted to see if we could maybe get a sense for how the cost structures differ kind of across your resort portfolio versus your urban portfolio at a high level, not into any individual market or anything. Just trying to figure out if, you know, the wage inflation that you've seen is, you know, is there any big difference between those two categories, and is there one that could still, is there still risk that they need to catch up, or do you think we've got the wages, you know, do you think we're at a level where they can stabilize across all the segments?

Tom, you're closest to that. Why don't you go ahead and do it?

Sure. Hey, Chris. We think when we look at our resort portfolio, you know, profit margins, right? We believe this year projects out to be somewhere around 41% as compared to about 39% in 2019. We continue to... The interesting thing about labor in the resort markets is they've always been challenged, right? Typically where resorts are, housing costs are expensive. So we've always had the need for H2Bs and additional labor and managers kind of doing multitasking. But I think as we look forward into coming out of COVID, what we've learned is we can complex with technology a lot of positions. We've started to look across the portfolio. For example, I'll give you one specific example. We have a lot of luxury hotels. You pick them all, and we're looking at the luxury travel agent and the travel market and targeting the virtuosos of the world. We said, why do we need a specialist that targets those travel agents in every hotel? Let's cluster that position, and let's put it over all of our luxury hotels, regardless of brand, regardless of managers. So we'll take one specialized high performer and spread that individual over 10 properties, and let that individual represent all of our hotels, regardless of location. So those are the type of things that we've evaluated, and those are the type of things that are working as we move forward. And they're sticky. They're going to stay. When you look at our total management, fixed management positions, we're down about 100 fixed FTEs from 1990. And we believe that sticks. That's a budgeted number where we think we land for the portfolio. So I think the fixed piece is what we're working on. And then, as mentioned earlier, we've got to drive the revenue, right? We can't save our way to profit. So we're going to drive revenues. We continue to look at ADR. We continue to perform. And when we look at our resort portfolio – That's another example. Our rates, about $270 in 2019 were about $350 in 2022. And, you know, the biggest driver of Q4 profit, the ADR was up $76 in our resorts, you know, for the resort portfolio in Q4. And, you know, ADR was up 38% in Q4. So it's working our pricing, our strategies, our revenues, our investments in restaurants. We're up about $11 million, $12 million in incremental revenue in our investments in our restaurants. So it's really a focus of the bottom and also the top.

I'll just add on then the wages. So I think generally our wage increases bring us to fully up to parity of where we want to be at our property this year. So there's not a second leg up that we think we need to be competitive in the marketplaces. Some of the markets, you know, it varies by market. A market like New York City still has a multi-year market bargaining agreement ahead of it. So wage increases aren't going to be as dynamic in a market like that because they're already fixed by a long-term contract. And then other markets, you know, we think we're in pretty good shape with where we've adjusted wages this year. And as Tom mentioned, the resort markets in particular will be easier to we think adjust the rates to more than make up for the wage increases at those particular properties.

Yeah, thanks, guys. That was super helpful. Appreciate all the color. Follow-up is on, Mark, some of the B leisure business you talked about. I guess there may be no clean way to answer this, but are we sure that we're not going to be double counting kind of return to office, right, and some of this maybe day of week, Monday, Thursday, Friday stuff that people may, they can't be two places at once. Maybe they're back in the office more. They're not at the resort Monday or Friday. Is there, I don't know if there's any way you've looked at your customer data and tried to figure out if people are going on a corporate code on during the week. Is there any way to, to just think about that at a high level?

Yeah, it's a good question. And we've talked about that internally. Um, I think that the right answer is we don't think the risk is that high because we think the pie is going to expand so much. So there's so many people that haven't been on the road in the last two years that the overall pie is just going to be bigger. So the B leisure, you know, you're going to go to Chicago and you're going to stay over Sunday night and work for your end earlier, stay late and work from a hotel room and enjoy the city, maybe with your significant other, maybe not. we just think that trend is going to persist. And the pie is just so much bigger with the pent-up demand of travelers that are going to hit the road, that even if some of the leisure folks that have been on the road last year kind of offset, the bigger pie is going to more than overwhelm that double-counting impact, if you will. But we don't have a great way to track that at the moment.

Okay. Fair enough. Thanks, guys.

Thank you. Our next question comes from the line of Michael Belisario from Bayard. Your line is now open.

Thanks. Good morning, everyone. I just want to go back to the margin comments one more time. And I know you're using a broad brush there, but maybe can you provide any color on how you see the range in terms of margin expansion, how that might differ? I know you sort of talked about resource, but resorts versus urban. encumbered versus unencumbered hotels because your portfolio today is not necessarily like the average U.S. full-service hotel that you're kind of quoting there for that range.

Yeah, I mean, Mike, I would say I really don't want to get into giving full-year guidance, but maybe I can circle back with people later. I do think the opportunity for the upside is going to be much greater from the urban hotels just simply because they ended up finishing the last year materially lower than our resort hotels. Our resorts I think finished the year 2021 with margins about 300 basis points better than they were in 2019, whereas the urban hotels are dramatically lower. So we're going to be providing some updated information as we go into the upcoming conferences, and I'll see what additional calls I can provide you guys at that time. But off the cuff, I don't have the figures handy to share with you.

Yeah, but I guess my question was more on the long-term target, that range you guys gave, not the 41 to 39 for the resorts. Just are there – Are there puts and takes, urban, suburban, urban resort? Where do you guys differ versus the average kind of broad brush range that you guys just provided?

So a couple observations on there. The 50 basis points of portfolio expansion from the brand-managed conversions, those six hotels are primarily urban hotels. So that will be represented in our urban portfolios. The resorts we think stabilize at much higher rates. So you should expect the flow through and profitability ultimately to settle out at a higher level at those. So there's more opportunity within the resort portfolio to stabilize at higher post-pandemic margins than pre-pandemic margins. So that's the greater opportunity on average.

Got it. Helpful. And then switching gears just on CapEx. Maybe talk about plans in Burlington and Sedona. And then I think maybe more importantly, how are you balancing increased capex spending and then some likely renovation disruption at these better performing properties this year?

Yeah, so I guess we're super excited about what we completed in 21. That was a big year for us with those three conversions. We have two conversions happening in the first quarter of this year, which aren't terribly capital intensive, but we'll probably accumulate $10 million or something to get those done. And then the big ones that we have coming up over the next, let's say, 18 months will be the Boston Hilton, the Burlington Hilton, which we're hoping to convert to a Curio next year, and then the repositioning of Orchards Inn. So the seasonality of the Boston Hotel will allow us to really keep disruption to a minimum there. Orchards will have some, but we'll try to do it seasonally slow, and it's a relatively small asset on the overall portfolio, so we think that that's very manageable. And Burlington, we can do off-season as well. So we're not anticipating significant disruption from our capital programs in 2022. Thank you.

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

Thanks. Good morning. Just going back to those ROI projects that you just talked about and maybe any future projects in the pipeline, can you discuss the impact of any of that construction cost increases and snags in the supply chain they have had? Has it caused you to perhaps delay or maybe even rethink the viability of any projects at all?

Well, we completed a number of those repositions in mid-late last year, and there were supply chain issues and we navigated through them. Fortunately, most of these are really repositions with FF&E and Millwork and those kind of things. They're not building a new building, which tends to be the bigger issue on the supply chain issues. Going forward, when we look at, well, we'll have two converted this quarter, so those are clocked out and in good shape. And then as we're looking forward to orchards in, Burlington and Boston Hilton. We think we have good preliminary pricing in from general contractors on most of it. Again, most of the cost, the overall cost is going to be FF&E, which isn't as big of an issue as getting construction workers and doing something like a new build. So we think we have it under control. We will have, like everyone, we'll have some issues on lighting and other components, I'm sure, that we'll have to make sure we're doing more advanced work and ordering things probably two to three months earlier than we would in what I call normal times. But the advanced planning that we're doing and having enough lead time should help us mitigate the supply chain issues. And then the cost, the nature of our work should lead to our ability to control those costs in a relatively efficient manner. But there clearly has been some cost increase But we think we have that reflected in our current estimates.

Okay, understood. Appreciate those thoughts. And then just one more. Now that you have control of the Henderson Beach Resort, does that in any way kind of change how you view the opportunity to densify the Henderson Park Inn down the street?

Yeah, so we have the ability on the Henderson Park Inn, as you know, to densify. develop a tower beachfront tower on that we don't currently you know we just bought the henderson resort in september so we're still getting our arms around that opportunity but the the game plan for 22 is just there's a lot of low-hanging fruit at henderson resort it's to make sure we've kind of picked all that low-hanging fruit and then down the road we always have the opportunity to do development but it's not on the near term hit list for us gotcha thank you

Thank you. Our next question comes from the line of Flores Van Dijkom from Compass Point. Your line is now open.

Morning, guys. I wanted to change tack just a little bit. Obviously, talk about the balance sheet here. You're in a pretty decent position. Jeff, maybe if you can touch upon how close are you guys? I know you guys just got the extension, but how close are you from emerging to from the covenant waivers? Is there an opportunity that, you know, starting in the second quarter, you could be free and clear? And what implication would that have on dividend payments going forward?

Yeah, that's a good question, Floris. I mean, obviously, it's a function of how well our performance and specifically how well specific hotels perform as we move through the year. But I would say our internal projections today would say that we can be in compliance with our covenants in the middle of the year. So I do think we're on a good trajectory on that point. As far as the advantages that come, I would tell you that I think that one of the greatest points of flexibility is that you end up with a lot more flexibility on how you're allocating your capital, whether it's recycling assets, acquisition capacity, It's really the flow of funds and capital you raise and what you can use it for. I think that's very valuable. As far as dividend payments, that'll ultimately be, I'll defer to Mark on that, but I think that's ultimately gonna be the decision of the board. From our standpoint right now, I think we have really attractive uses of capital in our portfolio for ROI projects and some of the acquisition opportunities that we're looking at. And from a practical standpoint, we have debt operating losses that would effectively allow us to not have to pay a dividend. Electively, we could, but I don't expect we will be obligated to pay a material dividend this year.

And then if I can follow up, I was just looking at the EBITDA contributions from some of your, you know, the largest EBITDA contributions for some of your hotels in the fourth quarter. A couple of things which struck me. Obviously, Margaritaville has been a huge winner I think for the year you had like almost $14 million of EBITDA, and this had $5 million in 2019. How does that make you think about other potential Margaritaville conversions? And then also maybe you can touch upon the Worthington Fort Worth, which seemed like it had almost all of its EBITDA coming in the fourth quarter. Was there some anomaly there, or was there anything else going on? And how should we think about that hotel? What should be the run rate going forward?

Of course, maybe I'll start with the Margaritaville and then turn it over to Tom to talk on the Warmington. So Margaritaville Key West, it's been terrific. It's the highest rated Margaritaville in their system. So Jimmy Buffett was there Tuesday of this week taking pictures with guests and had very favorable comments on our resort, so we were thrilled about that. So yeah, we would do more Margaritavilles. That market also is the, I can't imagine there's a better market to do a Margaritaville than Key West. But we've been very pleased with our partnership with them, very pleased with the results, and we think we'll be able to set records on rate and F&B sales in 2022 there. So, so far, so good. Very pleased with our partnership there. For Worthington, I'll let Tom speak on kind of the trends and why the fourth quarter was the strongest quarter there. Tom? Sure.

Thanks, Mark. Worthington, it was very simply two things. We actually had groups in. It was a pretty active group. season for the hotel, a fair amount of activity with the colleges and games and football, and then the repositioning of the lobby and the Toro Toro restaurant in the lobby generated about $3 million in revenue, and certainly that was partially due to a lot of holiday events in the space. So really it was a two-things group, and then the investment in the Toro Toro restaurant that drove performance at that hotel.

And that's a sustainable run rate, you think, going forward?

Listen, we had a pretty strong rooms. Yeah, rooms flow through at about 85%, and food and beverage flow through at about 50%. When the business, if the group comes back like it should in this market, the flow throughs and the margin will be just fine. I mean, we're still down. We're projecting down about $93 million in banquet food and beverage for the portfolio today. in 22 versus 19. Once the group comes back, you know, banquet revenues is our second highest margin, right? So as that comes back, our margin and our profitability and our flow through should continue to improve. So there's certainly runway there.

Yeah, I would just add on 22 expectations, we expect Worthington year over year versus 21 to be one of our strongest performers.

Thanks, Max.

Thank you. Our next question comes from the line of Steven Grambling from Goldman Sachs. Your line is now open.

Hi, thanks. I guess a couple of questions on the M&A environment. First, given the strength in the lifestyle leisure transaction market, how do you think that's impacted your NAV versus pre-pandemic? And I know you mentioned you're more focused on ROI and see also potential acquisition targets as well, but what would make a buyback perhaps more interesting as an alternative? And then second, are you seeing any or expecting any impact on rising rates on the financing market at this point, whether for purchasing existing assets or even broader hotel development?

Okay, a lot there. So we think M&A will be active this year. I think hotels on a relative basis still remain a very interesting asset class, and we're getting a lot of – there's a lot of chatter in the marketplace. On NAV – I'm trying to get your questions one at a time. NAV, our resorts on average are probably up more than 20% versus pre-pandemic levels, some much more than that. So they clearly had the biggest increase in NAV. Some of our urban hotels are flat to down. I'd expect the urban to recover as the cash flows recover and people gain more confidence in the BT and group returning as we move through 22. Financing, we're not seeing that significant change in financing rates. There's a lot of active available debt for hotels. The bigger challenge is getting the trailing cash flow so you can get the loan value proceeds that are required to you know, to get an active market for these urban hotels. So I think it's going to be less about rate on driving the urban hotels and more about the return of cash flow so people can get the leverage levels that they need to create the true liquidity in that market.

And perhaps as a quick follow-up, given how efficient you were there, I guess would you be willing to consider the, you know, if a portfolio comes out of the gates here that could be in the market, if it wasn't, just focused on resorts, or is that just too much of a headache to get through some of the urban stuff that could come with some of those?

I guess, you know, to give you an evasive answer, it depends. So, no, if we had a portfolio that we loved and it had, you know, five resorts and two urban hotels, that wouldn't necessarily be a deal killer. You know, our preference probably would be to partner going into that, but that wouldn't mean we wouldn't do that deal. So there's a couple portfolio deals that are on the market now. We're looking at them. we wouldn't do something that would significantly change the strategic direction that we're headed in now. But if it was complimentary and had a couple of deals that were not an exact fit but were still quality, that would be a portfolio that we'd be interested in looking hard at.

Awesome. Thanks so much. Got it.

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

Thank you, everyone. We appreciate you tuning in for our call today, and we look forward to updating you on our next quarterly call. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.