Diamondrock Hospitality Company

Good day, and thank you for standing by. Welcome to the Diamond Rock Hospitality Company third quarter 2024 earnings 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Quinn, Chief Financial Officer of Diamond Rock Hospitality. Please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to Diamond Rock Hospitality's third quarter 2024 earnings call-in webcast. Joining me today is Jeff Donnelly, our Chief Executive Officer, and Justin Leonard, our President and Chief Operating 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 what we discussed 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. We are pleased to report another solid quarter, with results largely in line with our expectations. Comparable RevPAR growth was 2.8% over 2023, which was 60 basis points stronger than the prior quarter, and comparable total RevPAR growth was 2.3% over 2023. As we discussed on last quarter's earnings call, we anticipated that the growth in out-of-room spend would be significantly lower in the second half of the year due to a shift towards citywide-driven group business at our larger group hotels. While the portfolio did not sustain any material damage from Hurricane Helene in September, cancellations and business interruption held back our RevPAR and total RevPAR growth by approximately 35 basis points. Our urban hotels led the portfolio with comparable RESPAR growth of 4.2% in the quarter. Average daily rates were up 5.6%, offset by a percentage point decline in occupancy. While group demand continued to show strength, transient pickup, particularly on the weekends, was slightly weaker than we anticipated. Comparable RESPAR at our resorts declined 80 basis points from 2023. The 35 basis points of portfolio headwind from Hurricane Helene translated to an 86 basis point reduction to our resort RevPar and total RevPar growth. Despite this headwind, our resorts delivered total revenue growth of 1.6%. A few highlights in the resort portfolio include Cavallo Point delivering RevPar growth of over 18% on a very strong group quarter and Sonoma delivering RevPar growth of 7%, despite the headwinds in San Francisco. Chico Hot Springs delivered RevPar growth of 16%, all driven by an increase in ADR, as our revenue management strategies for this hotel are playing out. Group continued to be our strongest segment in the third quarter, increasing 15.7% over 2023, driven by an 8.8% increase in rate and a 6.3% increase in roommates. The strength in group was not limited to our urban hotels. Group revenues in our resort portfolio increased approximately 15% as we continue to add base at these hotels in order to preserve our transient pricing. As we mentioned previously, we had a significant shift to citywide group in the quarter, which caused a decline in banquet and catering revenue compared to the third quarter of 2023, and was a reversal of the double-digit growth in food and beverage revenue that we saw in the first half of this year. But as we talked about the last two quarters, it was that growth in lower margin F&B revenue that had been driving our higher headline expense growth numbers. With the leveling out in F&B revenues, total expense growth dropped from the over 5% growth rate we saw in the first half of the year to 2.6% in the third quarter. Comparable hotel adjusted EBITDA was 82.3 million, reflecting 2.2% growth over 2023 on a nine basis point lower margin. Corporate adjusted EBITDA increased 3.3% to 75.6 million. Last quarter, we provided an update on our technology initiatives, including a new ERP system alongside a robust enterprise analytics platform. These systems have greatly enhanced our ability to perform detailed custom analyses and forecasts with greater speed and precision. Moving forward, we are focused on strategically leveraging technology across operations, financial management, and ESG reporting to achieve meaningful savings in both workforce resource and time across the organization. Before I turn the call over to Jeff to discuss our outlook and strategy, let me touch on our capital markets activity and balance sheet. During the quarter, we continued activity under our share repurchase program, buying back an additional 700,000 shares at an average price of $8.14 per share. To date, we have repurchased 3.1 million shares with a weighted average price of $8.33 per share, for total consideration of approximately $26 million. Turning to our balance sheet, we ended the quarter with a net debt to EBITDA ratio of 3.7 times. In early August, we repaid the $73.3 million mortgage loan secured by the Courtyard Manhattan Midtown East. The loan was repaid with cash on hand, and our liquidity remained strong with over $75 million in corporate cash and full availability on our $400 million revolver. Also during the quarter, we took advantage of the steep decline in the forward rate curve and executed several swaps that will take effect in the fourth quarter and early 2025 to fix SOFR at an average rate of 3.2%. The forward curve has flattened considerably since those swaps were executed, and similar swaps would price much wider in today's market. As a result of these transactions, we will enter 2025 with approximately 57% of our debt at fixed rates. We also exercise the one year extension right on our $300 million term loan, which now matures in January 2026. Our next debt maturity is now in May of 25, and we continue to assess all available options to us, both secured and unsecured, and we'll continue to keep you updated on that front. As Jeff will elaborate on further, we are actively working on both asset acquisitions and dispositions as part of our capital allocation strategy and continue to evaluate share repurchases and high return internal investments. With that, I'll turn the call over to Jeff.

Thanks, Bryony, and thank you all for joining us this morning. I want to thank our entire team who, again, worked hard to deliver strong third quarter results, all while focusing on planning for 2025 and executing capital plans. Before I start, I want to highlight some recent accolades we recently received. Lake Austin Spa Resort was awarded number one destination spa by Condé Nast Traveler Reader's Choice Awards. La Fuga, the restaurant at Kimpton Shore Break Fort Lauderdale Beach Resort, was awarded Trip Advisor 2024 Traveler's Choice Best of the Best winner. Lastly, the Gwen was designated a One Key Hotel by The Michelin Guide is a symbol of excellence and was named one of the top hotels in Chicago for the fifth time by Condé Nast. We also want to announce that Diamond Rock has been awarded Hotel Global Sector Leader status by Gresby for the fifth consecutive year as part of its annual real estate assessment in recognition of our continued dedication to our corporate responsibility program and ESG transparency. So congratulations to our team for these and many other hard-earned and prestigious distinctions. Turning to an update on our capital and ROI projects, the conversion of the Dagny in Boston, which was completed a year ago, has been a big success. The Dagny is consistently ranked as the number one or number two hotel and trip advisor as an independent, up from a ranking in the mid-50s when it was branded. The hotel is performing in line with our underwriting, and we remain optimistic there will be significant cash flow growth in the years ahead. The hotel delivered a 13.5% rev car growth in the quarter and continue to pick up share from its competitive set. The debut of the Hotel Champlain in Burlington was completed in July for a total cost of $9 million, and our outlook is positive. In the third quarter, we generated over a half million dollars more revenue than last year from our new F&B outlets. We completed a comprehensive room renovation at the Westin San Diego Bayfront in June, totaling $16 million, which was almost $2 million below our budget. Guest feedback has been very positive, and since completion, the hotel has been taking share on ADR relative to peers. The Bourbon Orleans room renovation was completed in September, and we expect a refresh of the public areas to be completed by early 2025, ahead of the Super Bowl. Finally, we completed the addition of a new bar at Havana Cabana in Key West, which opened subsequent to quarter end. The bar replaces a rarely used fitness center with views of the water and will be a driver of incremental profits. So while you won't be able to work out at Havana Cabana any longer, you will now have two places to drink, and we think that has a better fit for this hotel's clientele. We hope you all get a chance to visit these special places. We aren't done. We continue to have a strong pipeline of high ROI opportunities, including projects like the combination of our two Sedona resorts in 2025 and the new marina at Tranquility Bay. We are constantly innovating to uncover value-add opportunities while reexamining our capital expenditure plans to maximize efficiency. In that regard, we are reducing our full-year capital expenditure guidance to $85 million from the previous range of $90 to $100 million. This reduction is the result of cost savings from reassessment of pieces of projects or entire projects, as well as better planning and execution. Our projected spend equates to approximately 7.5% of revenue, much lower than the double-digit levels typical of the industry. Now let's talk a little more about the outlook for the rest of the year and beyond. We are affirming the midpoint of our EBITDA guidance for the full year and narrowing the range based on the impact from recent hurricanes, as well as our outlook on the current economy and near-term demand. The midpoint of our full-year adjusted FFO per share guidance increases slightly. This updated guidance does not consider any unanticipated impacts to the business or operations. We are tightening guidance on our comparable REVPAR growth to a range of 1.5% to 2% compared to our previous guidance of 1.5% to 3% and continue to expect full-year total REVPAR growth to be about 150 basis points higher than REVPAR growth. 2024 adjusted EBITDA is expected to be between $281 to $287 million compared to $278 to $290 million previously. We now expect full-year adjusted FFO to be between $205 to $210 million compared to $201.5 to $213.5 million. Finally, the adjusted FFO per share range increases to $0.97 to $0.99 per share, a half-cent increase at the midpoint versus the prior range of $0.95 to $1. I want to commend my partners at Diamond Rock for delivering strong performance this year, consistently at or above our original expectations. This year hasn't been easy. Slowing economic growth, the result of sharp interest rate increases by the Fed in 2022 and 2023 presented a difficult backdrop. Hotel demand is evolving. It's not quite like 2022, but it's not like 2019 either. Group has been the winner this year, and for Diamond Rock, group revenues have surpassed pre-pandemic levels on a comparable volume of room nights. Looking ahead, Our group booking pace for 2025 is currently down over 3% compared to the same time last year, but we are seeing meaningful positive growth in pace for the first half of 2025 as we continue to lean into more group that are smaller, leisure-oriented assets whose groups typically have a short booking window. Business transient remains well below pre-pandemic levels, and while it is improving, it has a ways to go. I think BT demand parallels the return-to-office trend. Cities that have been quicker to return to office, such as Manhattan, have seen a more robust recovery in midweek demand, whereas cities like San Francisco, Portland, or Minneapolis that are only now seeing a return to office have seen a slower hotel recovery thus far. Leisure has been the winner over the cycle, and while growth may have slowed, broadly speaking, resorts are holding on to pandemic-era gains. I remain optimistic on resorts. They were a beneficiary of secular and demographic trends prior to the pandemic, so it is not surprising they delivered premium cumulative growth these past few years, well ahead of inflation. It's because of those drivers I expect resorts can hold on to much of their gains and return to premium growth. We're in the middle of our budgeting process for 2025, so I don't have any color to share at this time. But looking at the bigger picture, I am personally optimistic that 2025 is going to feel progressively better as we move through the year. Monetary policy shifts usually need a year to take hold in business fixed investment and personal consumption. SOFR increased on average 350 basis points in 2023, and we're feeling its impact in 2024. This year, however, SOFR is only up about 25 basis points over last year, and we've already seen the first rounds of what is expected to be several more rounds of rate cuts. That leads me to believe that as we progress through 2025, Main Street will feel what Wall Street is experiencing now, Consider the cadence of REVPAR. On whole, comparisons are easier in the second half of 2025 than in the first half. Looking at the demand segments, my instinct is they will line up similarly to 2024, although I wouldn't be surprised if the pace of growth in group decelerates at the margin, but business transient picks up some of that slack as more employees return to office. I expect leisure grows as rate cuts take pressure off consumers and comparisons get easier. We remain focused on driving free cash flow. To me, that begins with culture. Internally at Diamond Rock, we talk about being all-in and scrappy. They're key parts of our core values that speak to how we are aligned to focus on driving performance. Operations are, of course, the core of our success, and we manage to maximize profit and ultimately cash flow. However, it doesn't stop at Hotel Adjusted EBITDA. Our board took action to make our G&A more efficient, and we're working to preserve those savings. while making investments in systems to make us more effective. We are working to maximize our financial flexibility while keeping our overall financing costs low. Capital application is critical, so we're evaluating capital expenditures to be more efficient and more impactful. To be clear, it is not about ignoring critical items, but ensuring those precious dollars are well spent on both thoughtful cycle renovations and ROI projects. We're evaluating assets for disposition that we believe are a good source of capital that in turn can be reinvested accretively to cash flow per share. As part of that effort, we are working to enhance the marketability of non-core assets by extending ground leases, pre-negotiating PIPs, and vetting financing options. Reinvestment could be, of course, in share repurchases or perhaps at another hotel with a significantly higher free cash flow yield. From an asset perspective, Destination resorts have an appeal for the long-term growth and differentiation that they provide, but we also see value in targeted urban assets. In fact, we are close on a small acquisition that satisfies the criteria we are seeking. I'm hopeful we can share more in the future. In my career, the industry is focused on owning the largest hotels or generating the highest absolute rev par. Several peers have a stated focus on high EBITCO. It hasn't worked. As a group, hotel REITs are infrequent outperformers. FFO per share growth has been the missing ingredient. The industry is economically sensitive. That cannot be changed. But Diamond Rock can take steps to reduce our risks and volatility to enhance our performance. We focus on segments such as resorts with stronger long-term secular drivers. In urban centers where competition is high, a low investment basis well below replacement costs can reduce risk of new supply or outsized property tax assessments. Capital expenditures are our single largest cost, so we want to control how and when that money is spent, which is partly why we have leaned into independent as well as third-party managed hotels. Driving free cash flow per share is paramount. It is my strong belief that an intense analytical focus on free cash flow per share growth is our path to premium FFO per share growth. premium dividend growth, and ultimately narrowing our discount to net asset value. At this time, we would like to open it up so Justin, Bryony, and I can take your questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again.

Please stand by while we compile the Q&A roster. And our first question comes from Dori Keston with Wells Fargo Securities.

Your line is open.

Thanks. Good morning. As you look forward at your list of ROI projects slated over the next three years, are there others where changes are likely just given your rerun of return expectations? And should we somehow shift how we're thinking of your total spend? I think you mentioned kind of high single digits versus double digits as a percentage of revenue?

Yeah, on the first part, I think you're right. I mean, we tend to be in the high single digits, and I think we're aiming to be in that. It won't be perfect every year, but I think we're aiming to kind of remain in that 7% to 9% of revenue range going forward in terms of how we think about our total capital spending. We're always looking at projects. There are projects out there, I guess, that are contemplated, but we haven't necessarily advertised to the market, and I think There are some of those that even within that pipeline that I think we think about, you know, when's the right time to undertake those and, you know, what's the magnitude of investment? Yeah, so I would say nothing that's necessarily immediate, but it is something that we're thinking about.

Okay. And I know the situation is a bit fluid, but if you could take a crack at where labor costs may be over the next year versus the current year, just what some initial thoughts may be.

I think fluid is a good way to put it, Dori. I think one of the positive signs we've seen is that sort of the rampant growth in our resort markets, we've really seen a cooling of the labor pressure there. I think in the quarter in the resorts, wages for us were only up about a point and a half. Benefits were up a higher number. The flip to that, obviously, is on the urban side, where we have seen a number of the union contracts in major markets roll, and I think we'll probably see slightly higher, you know, three to five percent, depending on market wage growth for a lot of those hotels over the course of the next 12 months. I think for us, given our leisure orientation, we don't think it will be as much of a margin pressure as maybe we've seen over the last two years, but definitely something we're watching.

Okay, and just last, if you can kind of walk through your major convention markets for next year, just where there may be initial signs of strength or weakness. Yeah, for 2015.

I think we do have a bit of a weakness in Chicago, which tends to be a little bit of an even-odd convention market and has for a long time. Boston, I think we see generally flat on a year-over-year basis. And D.C., for us, is less of a citywide market, but D.C. also has a bit downward trend. So I think portfolio-wide, we have a slight negative bias versus this year.

Yeah, and that's why some of our smaller properties, we've been really kind of leaning more in the group as we head into the next year.

Got it. Thank you.

Thank you. And our next question comes from Austin Werschmidt with KeyBank Capital Markets. Your line is open.

Jeff, you had highlighted in your prepared remarks the optimism about resorts, but kind of referenced the strategic focus on booking group business at some of the smaller assets to build a base, as well as I think you guys had highlighted some weakness in weekend demand. So I guess how does this continued mix shift and any change in trend line affect for some of the transient side of the business, impact kind of the outlook as you think about next year and really what trend line that business is on here, maybe more in the near term?

Yeah, well, I guess my point on the focus on sort of leisure and resort assets is really more of a long-term statement because, frankly, we're in a situation where we really haven't built resorts in this country in a very long time, and I don't think that's going to change for a very long time. Just the removal of that supply headwind on the resort side, to me, is very powerful. And then at the same time, I won't go through all the points, but I do think there's going to continue to be a demographic benefit, much as you've seen it help other property types that will continue to help lodging over the next few years as people age and what sort of their peak spending for travel. So to me, it's longer term, that's what makes the resort or leisure segment so appealing. Nearer term, I think the reason why there's some challenges is that, you know, as I mentioned, I think the economy is at a point now where there is a lot of pressure on consumers, but I think that pressure will continue to be, we'll see it abate as interest rates continue to come down. Lodging, or leisure, I think, has priced itself very aggressively over the last two, three years. That's what I said, where it's run very far over the course of the pandemic. It's clearly been the winner in terms of total repar growth. You know, but it's vastly outperformed inflation. And so, There's probably going to be, I think we've seen much of it this year, is a little bit of pause on the growth and the leisure segments vis-a-vis some of the others, like Group or Business Transient, which have only recently begun to reclaim where they once were. So I don't know if that quite answered your question, but that's just kind of how I think about it, is that it's run very far. I think it still has great legs long term, but I think in the near term it's been a slower grower just because of its strong relative performance.

No, that's all helpful commentary. So with the focus on kind of maximizing cash flow growth and, you know, recognizing there's things you can and can't control from a business cycle perspective, does the focus change any portfolio allocation goals so that you're not over leveraged any specific market or segment?

Not necessarily. I mean, I think there's still, you know, appealing ways to be in urban markets, you know, and in leisure markets. you know, maybe there's going to be some of the markets that you'll choose. You're trying to minimize what I guess I would call like the factors that tend to be the ankle-biter issues that nibble away at you, whether it's, you know, jurisdictions that tend to surprise you with, you know, tax increases or sort of there's higher labor costs over time. You know, there's different things that we can do.

And then just last one, I don't believe you gave anything on group pace. you know, recognizing it's a little bit of a more challenging year, but can you just kind of give us where you're at from a pace perspective on group for next year and maybe, you know, what percent of that is on the books, you know, versus where you were at this time?

Yeah, I said in my remarks that I think our group pace for a full year, 2025, is down a little over 3% where we are today, but the nature of our hotels, just given their physical size, our group tends to be a little bit shorter and So if you actually look in the first half of next year, our group pace is actually positive year over year. And I think in the first quarter, it's high single digits. So we tend to be a book much closer in than I think some of our peers.

Got it. Sorry, I must have missed that. Thanks for the talk. Thanks, Austin.

Thank you. Our next question comes from Smeeds Rose with Citi. Your line is open.

Hi, thanks. I just wanted to go back a little bit where you talked about you're seeing a little bit of slowdown in the transient trends thus far in the fourth quarter. And is there any more color you can provide maybe as to what's causing that? Is it maybe more of an election impact than you were expecting? Or is there something else kind of going on? And I guess how long would you expect this to bleed into next year?

I think it was really a comment predominantly driven by what we saw in the third quarter. We did see some weakness, particularly in our urban hotels on the weekends. Weekend transient occupancy for us was down about 3% in the urban portfolio. And we saw that particularly in the back half of August and in September. And it was definitely a trend that was concerning to us if it was pointing to a more price-sensitive leisure customer. But we actually saw it reverse in October. So we were up 3% transient over the weekends. in our urban hotels in October, so I'm not sure there's necessarily a read-through.

Okay, and then I just wanted to ask, in New York, I think they passed what's called the Safe Hotels Act or something, but since your hotels in New York are already union, I guess this would have no impact on you, or is there anything that we should be thinking about there?

No, we don't really see any meaningful operational impact from the ordinance for our three hotels.

Thank you. Thanks, Dave.

Thank you. Our next question comes from Blaine Fenigworth with Evercore ISI. Your line is open.

Hey, Jeff and team. Good morning. Any more color on the booking curve? I guess to say that first half group paces up meaningfully. but you're down a little bit over 3%. Can you just comment on the booking curve year over year? Is it changing? Is it getting more close in relative to last year? And what would be the drivers of that?

I think some of it's the cadence. When you kind of think about the year over year trends, I mean, for example, the fourth quarter in the back half of this year, Chicago is going to look very strong. So when you flip to 2025, you know, Chicago, which is arguably our largest group hotel group, you know, has a difficult comp that it's climbing over. You know, but conversely, you know, some of our smaller hotels that we've continued to group up, I think, you know, look a little bit better in the first half of next year. It's low to mid single digit next year in the first half of the year, positive. So I didn't want you to have the expectation that it was, you know, double digit or something like that. And that really is really what's driving that cadence is that, you know, Chicago just has difficult comps. At the end of next year, as Justin said, there tends to be this three-year cycle, if you will, where you have a couple of good years and then sort of a tough year in Chicago.

That's helpful. And then just on the CapEx, it feels like this is maybe the second time you've revised it lower. Can you just give some insight into what that evaluation looks like? What are the specific projects that you're either canceling or pushing? And clearly there's more focus on capital discipline, but if you could just help us understand the evaluation process a little bit and what's changed. Thank you.

Yeah, I mean, some of the projects we mentioned, I mean, at the midpoint, we're down 10 million, and some of the projects we mentioned before, like, for example, Bourbon, New Orleans, you know, we really revisited the scope of the project that involved, like, F&B outlets and what the lobby would look like, and we just determined that that would not be a good use of the incremental capital. In San Diego, we did a rooms renovation that was just effectively coming in below budget and working to drive incremental savings on what was effectively a cycle room renovation. There's other pieces of projects that are underway where I think we can drive those savings. So that's really kind of how that revision has come down. And then I think as projects we look at going forward, whether they're sort of the cycle-type renovations or they're ROI projects, we're just trying to make sure they're as efficient as possible in terms of you know, minimizing our capital out the door, but achieving what you want to achieve.

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

Hey, good morning, everyone. Thanks for taking the questions. Jeff, I think I generally agree with your thesis. There's a little bit more return to office coming in some of the, you know, non Northeastern markets. But I guess the question, you know, by definition, someone can only be one place at once. And I guess if they replace, you know, a four-day weekend at a resort with a, you know, with a business trip, are your rates in urban markets, do you think there's kind of this almost negative, you know, swap effect, right? I mean, are your BT, if you look at your BT rates versus your resort rates, would that actually you know, kind of be diluted with the rev par all equal?

Yeah, that's a good question. I mean, you know, I don't see us going back to a five-day work week. I think a lot of the cities that you're seeing people coming back to are ones where, and it's surprising, I think, for a lot of people on this call to hear this, but I think there's still employers out there that are coming back from, you know, folks who are just merely encouraging people to be the office, where oftentimes they're in there fewer than one to two days a week. and they're trying to get them back to three days, or there's some where they're two to three days and they're trying to get to four. So I don't think that's going to have a material impact on, you know, that bleasure trend where folks might have ended up, you know, sort of traveling on a Friday, Saturday, Sunday, and adding a few more, you know, long weekends or what have you. I'm not as concerned about that as a margin. I think a lot of those cities where they've been lagging on return to office, you know, that's the trend that we're seeing. It's more of the two days going to three or two days going to four. That is people going from four to five.

Okay. Okay. Gotcha. That's good to hear. Um, and then on the, you know, kind of on the CapEx commentary, uh, it's certainly directly encouraging that you're, you're, you know, taking a hard scrub on, on everything and finding some opportunities to, you know, to reduce a little bit, I guess, um, along those lines though, Are those same analyses being done? I'm thinking maybe you're talking a little bit more about your independence. Can you do that same level of analysis or negotiation with the branded product? Or is that an area that's kind of off limits in terms of maybe scaling back on renovations?

It's definitely more of a negotiation, but I think we've seen our brand partners be a little bit more willing than they were pre-pandemic. I think there's definitely a recognition that fundamentals in some of these hotels has not returned nearly as fast as the cost of renovations have. So I think we are starting to see some more willingness and flexibility on renovation cycle times and ultimate scope. But I think, you know, that's some of the savings that we were able to pull out in a few of the recent renovations is, you know, negotiations of what a pertinent scope should be for some of our larger assets that we renovated, like Salt Lake and San Diego.

Okay. Thanks, Justin. Just final one for me is I think this year you had a pretty good outcome on if I recall on insurance renewal, I guess early to think about next year, but with the storms that have come through and I think there's probably an expectation in the industry that it may be a headwind again next year. Can you just remind us when you renew and if you have any thoughts based on what maybe happened in 22, which I think was also a bigger storm year, just some early high level thoughts, not looking for a specific number, thanks.

Sure, Chris. We renew our program on April 1. I think, you know, we obviously are watching closely the market, you know, given the storms that have happened. But early signs are that it may not be as impactful as we might have feared. So I'm hoping we're up in sort of the mid to high single digits next year. But that's obviously very preliminary.

Sure. Understood. Thanks, Bryony.

Thank you. Our next question comes from Michael Bellisario with Bayard. Your line is open. Thanks. Good morning, everyone. Hi.

Jeff, just on this smaller deal that you referenced, maybe take your picture in relation to this deal. Can you just talk about, remind us of sort of underwriting parameters, return expectations, and then how you internally think about doing a deal with a potentially lower initial yield and ramp up, but a good per key basis?

Yeah, it's a great question. I mean, I think, you know, ideally what you'd like to find is a property that really kind of checks all the boxes, one that's relatively newer, you know, one where you can get, you know, attractive yield both on, you know, I'll call it conventional sort of cap rate, but more on like an after capital yield, you know, right out of the blocks. And you can also get a very attractive basis. So I think to the extent you can check all those boxes and be doing it in a way that we think is a creative to, Our story, that's something you'd like to see because that way it's effectively superior to your existing portfolio and I think has good growth longer term.

Understood.

And then on a similar note, but related to buybacks, it doesn't look like you bought any stock back post-August earnings even though the stock was lower than where you had repurchased it. I guess was this pending acquisition in the works then and that's why maybe you had a slightly higher hurdle? to buy back stock, and you didn't, anything to read into there?

Yeah, no, Austin, we, I mean, sorry, Mike, we did approach just a little bit, but you're right, it was nominal post-reporting. But, you know, as you recall, we have that mortgage that we were paying off with cash on hand, and you're right, we have been evaluating a number of different alternatives, including this potential acquisition. So you're right on that front.

Understood. Thanks. Thank you. Our next question comes from Chris Darling with Green Street.

Your line is open.

Thanks. Good morning. Touching on the Orchard Inn repositioning, can you walk through the anticipated EBITDA disruption for next year, assuming that you think it'll be a headwind? And then taking a step back, the ADR gap between the Orchards Inn and the Lobert is pretty sizable today. I'm just curious if you could frame how much do you need that gap to close, that ADR gap, in order to achieve your underwriting there?

Good question. Chris, thank you. Actually, work on the orchard last week. Yeah, it just began last week. So I think a good chunk of the disruption that we would expect to see is going to be in the fourth quarter. I think it's about a half a million dollars on EBITDA. Not at a level, though, that I would say is It's real, but it's not on a level that's particularly notable, and I think every year we've always said we have somewhere between $2 and $4 million of earnings disruption. I would say this roughly falls within that.

I think one thing to point out when we think about Laverge is Laverge is roughly half suites, and so even within the Laverge ADR, there's a pretty large gap between where our standard rooms are and where our suite inventory is. I think The goal here is really to position orchards in the middle of those two products, maybe a little bit closer towards our standard room inventory given room size. So we think a $250 ADR lift for orchards should be easily achievable. We put it in line, if not slightly below, where our standard room inventory is now. So that's sort of our expectation as we ramp up with the ultimate goal that we can get those rooms to a place that's in between the suite inventory and the standard inventory that sits at Sedona today.

Okay, that's helpful to frame it. And it sounds like, just to follow up there, that because the bulk of, you know, activity, construction activity would take place in the fourth quarter, that this may even be a tailwind to performance going into next year.

I think we think about it as roughly flat. We will certainly have some disruption over the first six months of the year between the two in the aggregate. but then we will have a significantly improved product in orchards for the back half of the year that will hopefully make up that disruption over the first half. So when we look at it, I think, from an EBITDA perspective, the goal is to be roughly flat to this year.

Okay, understood. And then just one more for me. You've talked a little bit about this, but just as you've been active in the transaction market, just broadly, curious if you could speak to current conditions, any observed changes in pricing that you've seen across the... the types of assets that you own.

I was going to say, there haven't been a lot of transactions out there. That's really been the struggle, I think, the last few years, quite honestly, is there's been, what, $4 or $5 billion of transactions each year for the last few years. It's probably 10% of what the industry used to do. And I think when you really drill into that, probably a third of that has been these $400 or $500 million plus transactions. I'd almost say the depth of the transaction market is not really all that deep. I think there's definitely been a lot more, I'll call it hope in the sense that I think the brokerage community is advertising that they're seeing more activity coming. So it does feel like it's on the verge of changing. I think there's a lot of desire out there to transact for both buyers and sellers. But thus far, there haven't been a lot of

We really haven't seen a lot of significant transactions, and I think, you know, look, the messaging from a lot of the PE community is that we're waiting for rates to come down so we can actually get accretive financing for some of these transactions, and if you look at where we are, you know, there was definitely a lot more optimism a couple months ago after the, you know, first wave of rate cuts, and we actually saw that SOFR curve move down significantly, but, you know, we're at a 10-year that's, you know, significantly above where we were before rate cuts started, so I think that may have abated some of the optimism in the short term until we see a continued move down in the cost of capital.

All right, understood. Thank you all.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jeff Donnelly for closing remarks.

Well, thank you, everybody, for joining us today, and stay on the road and keep traveling.

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