DiamondRock Hospitality Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2024

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the DiamondRock Hospitality 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Brian Nequin, Chief Accounting Officer and Treasurer.

Operator

Please go ahead.

Speaker 1

Good morning, everyone. Welcome to DiamondRock's 4th Quarter 2023 Earnings Call and Webcast. Before we get started, let me remind everyone that many of our comments today are not historical facts and are considered to be forward looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed in our comments today. In addition, on today's call, we'll discuss certain non GAAP financial information.

Speaker 1

A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Speaker 2

Thank you for joining us today for our earnings call and our outlook for 2024. We are pleased that we will be reintroducing guidance on this call. Let's jump in. 2023 was another successful year for DiamondRock across several fronts. The company generated total shareholder returns of just over 16% as our portfolio of high quality hotels and resorts achieved total revenue of $1,100,000,000 a new record for DiamondRock.

Speaker 2

As a testament to the success of our investment strategy, total comparable revenue was 11.3% higher than 2019, among the best of any full service lodging REIT and full year hotel adjusted EBITDA was $19,000,000 higher than 20 19. Solid results from the DiamondRock portfolio led to full year 2023 comparable revenues increasing 4%. Adjusted EBITDA of $271,700,000 and adjusted FFO per share of $0.93 In the Q4, adjusted EBITDA was $57,100,000 and adjusted FFO per share was $0.18 All these results are in line or ahead of management expectations provided in our last earnings call in November, where we said we were comfortable with consensus estimates. I'll briefly provide some highlights from the Q4, so we can save more time to discuss our outlook and allow time for your questions. In the Q4, there were a few notable trends.

Speaker 2

1st, resorts, which have been the biggest winners in travel since pandemic had some pullback earlier in 2023 as they settled into the new normal. Resorts found some firmer footing in the Q4 and we believe resorts still have the best long term setup. Let's look at some encouraging resort trends. Quarterly RevPAR at our resorts troughed at 87% of 2022 peak RevPAR in the 2nd quarter, improved to 92% in the 3rd quarter and improved even more to finish the 4th quarter at 96% of 2022 comparable peak. On a revenue basis, the sequential performance was even better.

Speaker 2

The resorts progressed from 92% of 2022 in the second quarter to finish the 4th quarter at 98% or down just 2% to the 2022 peak revenue. The Florida Keys turned a corner with our 3 resorts collectively delivering positive RevPAR and revenue growth of 7% 8%, respectively in the Q4. Elsewhere in South Florida, the Westin Fort Lauderdale generated 5.8% comparable RevPAR growth. It is worth noting that our Avail Luxury Collection Resort experienced some headwinds from late snowfall in the Q4, but RevPAR turned positive in January. Overall, we were relatively pleased with the resort portfolio in 2023, but we are most proud of the efforts of our asset managers working closely with our operators in maintaining tight cost controls to keep full year total expense growth at our resorts to just 1.7%.

Speaker 2

That's a fantastic result. As we look to 2024, we expect our resort portfolio will improve as the year progresses with various resorts finding their footing in early 2024 so that the overall resort portfolio can achieve a more uniform return to growth. Resorts should benefit as competitive pressures from luxury events travel to Europe less in this year. Moreover, South Florida and the Florida Keys look poised to deliver growth in 2024 after finding its new normal in 2023. While South Florida was an early and robust beneficiary of pandemic leisure travel trends and peaked in late 2022.

Speaker 2

Other resort markets did not peak until mid-twenty 23. These other resort markets are now finding their new normal several months later than we saw in Florida. For example, the Wine Country and Charleston market saw RevPAR growth peak months after South Florida's peak. So it is understandable that comparisons will not likely turn positive until we lap those initial declines later this year. Specific to DiamondRock, I do want to mention that there's a little odd around the rooms number at the Henderson Resort, which took into its room inventory a number of adjacent condo units that were recently delivered by a master developer.

Speaker 2

This is good for our long term profits, but the optics are a little noisy as we get those units into our room count during the seasonally slow period. So overall for resorts, we are positive about the outlook as we expect near term headwinds on comparisons will reverse as the year progresses and consumers continue to prioritize leisure travel. Let's turn to our urban hotels. We are fortunate to have an urban footprint concentrated in better performing cities. We have largely avoided impaired markets like San Francisco, Portland and Downtown LA.

Speaker 2

Instead, we have focused our urban exposure more on markets like Boston, New York City, Chicago, Salt Lake City, Dallas Fort Worth and San Diego. In the 4th quarter, comparable total revenue at our urban hotels climbed nearly 2%, bringing the top line revenue to over 102% of 2019. That's a stat we think compares very favorably among our peers. Looking a little deeper, the DAGNY Boston, our biggest repositioning in 2023 was a key performer in the quarter, generating top line revenue $870,000 above our operator budget with 233 basis points of stronger EBITDA margin growth. In December, the Dagne's RevPAR index to the competitive set increased 15 points to a 110% index premium, surpassing our penetration last year as a Hilton.

Speaker 2

The initial results from the DAGNY have exceeded our expectations I will discuss this more when we move to our 2024 outlook. There were other stars in the 4th quarter, such as our Kimpton Phoenix increasing total RevPAR 34%. Our Marriott Salt Lake City increasing total RevPAR by 9.8 percent and our Westin San Diego increasing total RevPAR by 7.2%. Of course, group success bolstered overall urban results. DiamondRock's group room revenue for 2023 surpassed 2019 by more than 3%.

Speaker 2

We had positive contributions from a number of our hotels. The Westin Fort Lauderdale was up 23%, the Westin Boston was up 2%, the Westin City Center DC was up 18% and Hilton Burlington was up a whopping 70% on a small base. Over the course of the year, we saw group momentum within the portfolio continue to build. In Q2, group room was flat to 2019. In Q3, it was up 3.8% and in Q4, it was up nearly 7%.

Speaker 2

Compared to the prior year, 2023 group room revenues were better by 13% or nearly 4% higher rates. Growth in group room volumes and group room rates also improved sequentially throughout 2023. As we look out to 2024, DiamondRock's group story is a major reason for our optimism and gives us the foundation to reintroduce guidance today. Our group revenue pace is up 21% versus this time last year. Our urban portfolio is particularly well set up for 2024 with a very favorable geographic footprint leverages some of the best group markets this year, a key advantage for DiamondRock.

Speaker 2

Markets like Boston, Chicago, Washington DC, San Diego, New Orleans, Denver and Fort Lauderdale are all expected to have stronger citywide calendars in 2024 than they did last year. And Phoenix and Fort Worth are also within striking distance to see gains. We expect our urban hotel portfolio will deliver slightly stronger RevPAR growth in the second half of the year than in the first because of the citywide calendars and on the books events. The main driver behind this timing is a significant shift in the convention calendar in Chicago and to a lesser extent Washington DC. In Chicago, the citywide demand was fairly bunched up in 2023 with peak activity in Q2.

Speaker 2

In 2024, the citywide room nights are steady after Q1 in Chicago. This means the Q2 citywide room nights in Chicago are lower than last year, but that the Q3 and Q4 activity is much stronger, almost 2 times stronger. In Washington DC, the group room nights are up each quarter across the year, but most significantly in the second half of the year, up over 100% in Q3 and up 36% in Q4. Before turning the call over to Jeff to get into more details on the financials and the balance sheet update, let me provide you with our outlook. We are pleased to reintroduce guidance.

Speaker 2

Based on current trends, we believe that the lodging industry is likely to experience RevPAR growth in the range of 2% to 4%. With that backdrop, we expect DiamondRock to have similar RevPAR growth, but with the advantage of another 50 to 75 basis points of higher total revenue growth as our focus on outside the room spend initiatives bear fruit. Although January RevPAR was up 5.4% for our entire portfolio, we expect the Q1 to be lumpy and that the strength of the portfolio's results will be weighted towards the back half of the year because of the layout of the citywide convention calendars in our markets and increasingly beneficial comparison for our resorts. On the expense side, we have been hard at work managing expenses at our properties. On the positive side, we believe some of the difficult culprits will be much easier in 2024 As hotels are fully staffed to their new but more efficient levels, giant property insurance increases are largely behind us.

Speaker 2

Real estate tax increases will greatly moderate this year and cost pressures will lessen from improved supply chains and lower inflationary pressures. However, wages and benefits, our largest cost categories, are likely to increase mid single digits. And while other cost categories are moderating, some are still likely to increase above inflation. Accordingly, if DiamondRock's portfolio generates RevPAR growth in the middle of the 2% to 4% range, we would expect the company to generate adjusted EBITDA of approximately $275,000,000 and adjusted FFO per share of $0.95 Turn it over to you, Jeff.

Speaker 3

Thanks, Mark. Recall that in our Q3 earnings commentary and follow-up, we felt RevPAR would be in a range of flat to down 100 basis points and we were comfortable with the then full year consensus estimates of $270,000,000 of adjusted EBITDA and $0.93 per share of funds from operations. Operating and financial results were in line or slightly ahead of our expectation. In the quarter, comparable RevPAR contracted 60 basis points from the prior period and total RevPAR increased 30 basis points, both in line with our expectation. Moreover, full year adjusted EBITDA was $272,000,000 and FFO was $0.93 per share.

Speaker 3

The 30 basis points of total RevPAR growth in the quarter stems from a 2.4% decline in our resorts portfolio and 1.8% growth in our urban portfolio. It is important to highlight the steady improvement we saw in our resorts. Comparable total revenues at the resorts declined 8% in the Q2 of 2023, 4.6% in the 3rd quarter and just a 2% decline in the 4th quarter. We are optimistic we can continue this improving trend and pivot the growth in 2024. Moving on to profits, comparable gross operating profit or GOP was $94,000,000 or a 36% margin on $261,000,000 of comparable total revenue.

Speaker 3

This means our asset managers were able to keep same store controllable operating expenses to just 3% growth despite 110 basis points of higher occupancy from the prior period. In fact, the growth in controllable operating expenses over the past 3 quarters has averaged just 3% despite a 150 point average rise in occupancy. Hotel adjusted EBITDA was $65,000,000 with a 24.7% margin and corporate adjusted EBITDA was a little over $57,000,000 Hotel adjusted EBITDA margins were 500 basis points lower than Q4 2022 for a few reasons we discussed on our prior earnings call. First, the property tax headwind in Chicago was over $6,000,000 or a 2.42 basis point margin impact. 2nd, our insurance costs were $2,200,000 higher in the quarter due to unfavorable industry conditions last year and this accounted for an 80 basis point impact.

Speaker 3

Finally, we elected to accelerate the one time purchase of new brand standard bedding at our Westin flagged hotels to obtain discounted pricing. The $1,500,000 bedding expenditure negatively impacted the margins in the quarter by 55 basis points. Collectively, these items explain about 3.75 basis points of the margin change from the Q4 of the prior year. The group segment remained a bright spot in the quarter with group room revenue up 4% on gains in both room volume and average daily group room rates. As we discussed in the call last quarter, both of our Chicago hotels had difficult comparisons in late 2023 due to a shift in citywide calendars compared to 2022.

Speaker 3

Overall, comparable full year room revenues in the group segment were $21,000,000 stronger in 2022 and exceeded 2019 by $6,000,000 However, group room nights were still 10% or 78,000 nights below 2019 results. 2024 is shaping up to be strong. Our group revenue is pacing up 21.4% compared to the same time last year. Our footprint continues to serve us well. In our largest group markets, the Westin Boston's group revenue is pacing up nearly 8% and the Chicago Marriott is up over 30.

Speaker 3

Outside of our 2 largest group hotels, the strength of our group revenue pace is broad. Group revenues at the Worthington, the Hytheon Vale, Westin Fort Lauderdale and Westin San Diego Bayview are each up over 30% and our Westin DC is up 80%. We believe the strength and breadth of our group setup for 2024 is a key point of differentiation for DiamondRock. Turning to capital allocation, there were no acquisitions or dispositions during the quarter and we did not repurchase any shares. However, we continue to explore dispositions, the proceeds of which can fund equity repurchases, ROI projects or fund external growth.

Speaker 3

Maximizing shareholder value is the singular focus behind our capital allocation decisions. We remain committed to having a flexible balance sheet. Our leverage is conservative as demonstrated by the low net debt to EBITDA ratio of 3.9 times trailing 4 quarter results. Our liquidity is strong with $122,000,000 in corporate cash, dollars 102,000,000 in hotel level cash and a fully available and undrawn $400,000,000 revolver. Importantly, our current liquidity is 140% of our debt maturities through year end 2025.

Speaker 3

We have provided RevPAR and adjusted EBITDA guidance ranges in our press release. As Mark said, it is our expectation that total RevPAR growth will be approximately 50 basis points to 75 basis points better than our RevPAR forecast. In addition, we have provided preliminary ranges for corporate expenses, interest expense and income taxes and our available room count. As Mark indicated, we expect the second half growth will be stronger than the first half owing to an evenly distributed convention calendar in our Urban Hotel segment that last year was more concentrated earlier in the year and a Resort segment that should improve as we move through the year for the reasons discussed. In the Q1, there was about $2,000,000 of unfavorable impact for work at Hotel Champlain in Burlington and our Westin San Diego.

Speaker 3

Later in the year, we expect approximately $1,000,000 of impact from renovation work at The Bourbon in New Orleans. In total, the displacement and disruption is consistent with prior years. On the expense side, we expect labor related costs will remain the dominant industry headwind as we put rising staffing levels, a hard insurance market and property tax true ups in the rearview mirror. And with that, I can turn the floor back to Mark.

Speaker 2

Thanks, Jeff. We believe DiamondRock is well positioned for the future with a high quality portfolio that aligns with some of the best long term trends in travel. Our portfolio, the least encumbered of any full service public lodging REIT, commands a net asset value premium.

Speaker 4

We also

Speaker 2

have a fortress balance sheet that gives us significant dry powder to take advantage of acquisition opportunities that should emerge this cycle. Even better, one of the things that I think is a little bit of DiamondRock's secret sauce for superior future performance is our extensive list of ROI projects. While there's a fuller list in our investor presentation available on our website, I'll just hit a few. The Dagne Boston converted only 6 months ago from a $30,000,000 investment should outperform for the next several years as it ramps to its full potential. The Hilton Burlington will convert this year to a lifestyle resort named The Champlain with a specialty restaurant

Speaker 5

led by

Speaker 2

a James Beard nominated chef. We are excited about this one. In the Florida Keys, we are in the final permitting process to build a high ROI Marina. And in 2025, we plan to expand our Lake Tahoe Resort by adding 20% more rooms and building new group meeting space. And finally, our most exciting project, we are working diligently to transform the 77 Room Orchard Inn into The Cliffs at L'Auberge de Sedona with a new mountainside pool and restaurant with some of the best views of the Red Rocks in all of Sedona.

Speaker 2

This should allow us to double the property's revenue and it will become one of the true gems in our portfolio. To wrap up, these continue to be exciting times at The Rock. And while we believe that this will be a good year for the travel industry, we are encouraged with the setup for 20252026 as the economy is likely to reaccelerate against a backdrop of exceptionally low hotel supply. Our well balanced portfolio is ideally suited for the most dynamic trends in travel over the next decade. And we are happy to lean into our strategy focused on the data that supports that traveler preferences will make hotels in markets like ours, Vail, Boston, New York City, Sedona and Marathon Key, smart capital allocation for long term outperformance and NAV growth.

Speaker 2

At this time, we would like to open up this call for any of your questions.

Operator

Thank you. Our first question comes from the line of Doreen Kaston from Wells Fargo Securities. Your line is open.

Speaker 6

Thanks. Good morning. Can you talk about the quantity of assets you deem of interest in relatively small experiential that are in your pipeline today? And just given your comfort in providing guidance, is it fair to say that you may be more acquisitive this year with perhaps fewer uncertain variables?

Speaker 2

Good morning, Dory. It's Mark. Good questions. I think the acquisition pipeline and our acquisition team led by Troy Forray here, they're always looking at deals. We have focused on off market transactions, as you know, over the last several years.

Speaker 2

Those transactions kind of go on their own time line based on the individual owners' circumstances. So we continue to maintain an active pipeline of those deals. Given our cost of capital and the discount to NAV of our stock, they have to be exceptional deals and continue need to be exceptional deals to be able to do them. We are actively looking at things now, but we need to be sensitive to our cost of capital. We certainly have the dry powder and the balance sheet to do interesting deals, and we would hope to find 1 or 2 transactions this year.

Speaker 6

Okay. We've talked in the past about your likelihood of selling a large urban box. Do you think pricing you'd receive today would be fair? And is there enough, I guess, capital out there interested in acquiring upwards of 100,000,000

Speaker 7

dollars Yes.

Speaker 2

So we've seen some bigger trades, the Biltmore and some other big trades over the last 6 months. I think our opinion is the debt markets continue to improve and their rates will be much lower next year than they are this year or the end of this year. So that you're likely to get someone to stretch and pay a bigger number for a bigger asset if you have a little bit of patience. So our overall view is while it may test the market, more likely that those transactions will occur either at the end of this year or sometime in 2025.

Speaker 6

Okay. And Jeff or Rainy, where are your NOLs today? And should we expect dividends to return? I guess, what pace should we expect dividends to return over the medium term? Your earnings outlook for this year looks pretty similar to when you were paying out $0.50 annually.

Speaker 3

Yes. I'll pick the NOL piece and I can defer to Mark on the dividend. That's something that we discussed with our Board. But on the NOLs, there's about $140,000,000 of NOLs remaining at this point in time.

Speaker 2

And do you want

Speaker 3

to Sure.

Speaker 2

On dividend policy, we actually have a Board meeting next week and we'll review we review the dividend regularly with them. I think where we are now and looking at other alternatives to capital, while we think about modestly potentially increasing the dividend, the focus really is on other uses of the capital that might drive the stock price.

Speaker 6

Okay. Thank you.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Smedes Rose from Citi. Your line is open.

Speaker 5

Hi, thanks. I guess just following up on your some of your last comments, Mark, about uses of capital and you mentioned your perception that the stock is below NAV and stuff like that. So why not have a more kind of robust share repurchase program at this point?

Speaker 2

No, it's a great question, Smedes, and it's something we're actively talking to the Board about what the right level of that is. We wanted to make sure we have plenty of balance sheet capacity for all maturities for the next couple of years. But as the debt markets have opened up and gotten much better and rates seem like they're going to head south, we're more comfortable using that balance sheet capacity. So that will be something we have a conversation with on the Board meeting next week.

Speaker 5

Okay. And I just wanted to follow-up, when you talk about the DAGNY gaining, I guess, relative market share, and you mentioned some of the RevPAR index gains. Is that on the same competitive set from when it was at Hilton? Or when it goes independent, do they change the set that you're competing against?

Speaker 2

That's a relatively consistent set. I mean, there's always renovations going on at Pure hotels, so there's a little bit of noise in that. I should mention that we do we did take a what we thought was a risk mitigation strategy at the hotel to put some group in there, I mean, some of the contract business in there, which will benefit us more in the winter months, which is the lower demand season. And that was something we wanted to do consciously as we ramped up from the brand conversion. So we would not expect to command a premium for the full year 2024 versus our time at the Hilton, we think that, that will take a couple of years to close that gap, and that's really the upside performance of the asset as well.

Speaker 5

Okay. And then just final question, it sounds like you're building maybe 15 rooms or so at the Lake Tahoe asset. What are you sort of thinking about in terms of the cost per key there?

Speaker 2

Justin, you want to go

Speaker 4

and take that one? Yes. We think we're probably all in about 425 a key, for the 14 incremental. We're reutilizing an existing building that has been out of service for some time and then building about 6 of those in a new purpose built building in addition to adding some meeting space. Okay.

Speaker 5

So pretty small overall capital to it, I guess?

Speaker 2

About a $7,000,000 project. Yes.

Speaker 4

It's a small project.

Speaker 2

Large relative to the scale of the

Speaker 4

resort, but small in the aggregate.

Speaker 5

Right. Okay. Thank you.

Operator

Thanks, Spence. One moment for our next question. Our next question will come from the line of Austin Wurschmidt from KeyBanc Capital Markets. Your line is open.

Speaker 7

Thanks. Good morning, everybody. Just wanted to start off with the group pace of plus 21%. Curious, first off, how much is on the books today versus this time last year? And what does your guidance assume for RevPAR growth for that segment as you see that kind of ratchet down through the year on the pace front?

Speaker 2

Josh, do you want to take that?

Speaker 4

Yes, happy to. So, as we sit here today, I think we're sitting with about 530,000 group rooms versus 450,000 last year. So we're sitting at a significantly increased position on a relative basis. We obviously think that's going to tail off in the year for the year just given space availability concerns.

Speaker 2

But I think the goal is for us

Speaker 4

to sort of shift segmentation about 2 points into the group category. So it was about 28% for us last year, where we ended about 30%. And I think what we consider to be equal, if not more significant is that we're seeing that pace increase spread throughout the portfolio. So it's not just driven by good years in our big group boxes. Our resort portfolio, though, makes up a much smaller piece of the segmentation, is also up about 20% as we've really leaned in to kind of reorienting our sales teams and trying to drive some incremental demand into those resorts as we saw leisure demand tail off a bit last year.

Speaker 7

And then what are you assuming within the RevPAR guide before for the group segment for growth this

Speaker 2

year? It's

Speaker 4

probably at the top end, it probably ends up being about 2 thirds of the growth.

Speaker 7

Got it. And then last quarter, you guys had highlighted about a $4,000,000 lift you expected from the DAGNY. Did I hear you correctly that you expect other disruption this year to fully offset that amount? Or are those kind of apples to apples comparisons? Just wanted to clarify.

Speaker 3

Yes. You heard that correctly, Austin. I would say typically every year we have about $3,000,000 to $4,000,000 of disruption and displacement. But you're right, we do expect to get a lift at the DAGNY. But as we always

Speaker 4

are looking at ROI projects

Speaker 3

in the portfolio, there's always some noise that comes up and it's the assets that I mentioned that will be in the Q1 and Q3. Last year, the DAGNY was predominantly a second and third quarter impact.

Speaker 7

Got it. So I guess between I guess the dagging off sets a little bit, but with group then does that imply that RevPAR growth for sort of the leisure BT type segments, you're in the low single digit range for the full year? Am I thinking about that correctly?

Speaker 2

Yes. Leisure is on the lower end, the group is on the high end, kind of when you think about the revenue breakdown for the year. So the group is clearly going to carry the RevPAR growth. They're going to carry the weight of it in 2024.

Speaker 7

Great. Thanks for the detail.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Mike Bellisario from Baird. Your line is open.

Speaker 8

Good morning, everyone.

Speaker 3

Good morning.

Speaker 8

Question on the South Florida performance and commentary that you guys gave. What was the driver of that improvement? Was it just comparisons to last year? Did you actually see a sequential acceleration in demand and or pricing in that market?

Speaker 2

All of those really. I mean, the comparisons got easier. South Florida peaked 1st and most robust. So it's kind of think about the lapping effects helping it. But demand was better than we anticipated and certainly in the Keys as we move through the Q4.

Speaker 2

So we were very encouraged about the performance. At the Westin, we did layer in some group there, but I think Florida Keys story is a very encouraging one.

Speaker 8

Got it. Okay. And then a follow-up just on inbound international travel to your major markets. Where do you think that's at for your portfolio today versus pre pandemic levels? And what are you seeing in the booking curve that would suggest improvement in 2024?

Speaker 8

Could you quantify that improvement based on the bookings you're seeing?

Speaker 2

Thanks. Yes, Mike. It's hard to give the specific data because we don't track it for the individuals. We do see on the macro data. We believe that last year we probably under indexed particularly in the high end traveler that went to Italy.

Speaker 2

And this year, places like Sedona, we would expect to benefit from as much international coming in, which is really coastal positive, but more of the domestic travelers, particularly the well heeled domestic travelers decided to vacation in the United States versus their kind of revenge trip to Europe.

Speaker 3

And Mike, I would just add on and I think pre pandemic, if you just

Speaker 4

did a market by market analysis for

Speaker 3

us, we were kind of mid single digit exposure. It's not a guess by guess analysis, but just

Speaker 4

exposure to geography, I think, we're sort of

Speaker 3

mid single digit exposure of our demand was from international sources.

Speaker 8

Got it. Understood. And then maybe just zoom in there on the group bookings, can you tell if you're seeing more demand from international groups coming to your gateway markets? Presumably, you can track that much easier than the transient traveler. And that's all for me.

Speaker 8

Thank you.

Speaker 4

Yes. I mean, so I think we don't necessarily see a lot of groups that are completely international, right? You have attendees that are coming in from international destinations for domestic group oriented business. So it's not necessarily a stat that we honestly parse through when we get rooming less from groups, it typically doesn't have a destination for the consumer. So hard for us to quantify honestly.

Operator

Thank you. One moment. Our next question comes from the line of Duane Pfennigwerth from Evercore ISI. Your line is open.

Speaker 9

Hey, thank you. For the resort markets in your portfolio, where would you expect the highest growth rates to be this year? I mean, you clearly sound a little bit more upbeat on Florida, but as you look across the portfolio, what do you think would outperform and what would you expect to lag on the resort side?

Speaker 2

Yes, sure. So I think in our prepared remarks, we talked about South Florida, we were encouraged on markets like Charleston, which have been terrific, we would expect that to pull back a little bit this year. Generally, what other markets it was kind of go through that would be Wine Country, Sonoma, we're seeing some pullback continue there. So we expect those to be on the lower end of the gross scale to give you kind of give you barbell on the resort portfolio.

Speaker 9

Okay, thanks. And then just on the just a follow-up on the prior questions on acquisitions. Should we assume that a big disposition would need to happen first? And if you get that done, how would you be looking to shape the portfolio? Where do you feel that you're under indexed?

Speaker 2

Great question. So Jeff went through our balance sheet and our capacity. We feel like we have excess dry powder right now. So that's not the hesitation. It's not a dry powder issue.

Speaker 2

We have a very attractive balance sheet and we have we're sitting on cash and a completely undrawn revolver and our metrics are excellent. So it's not a capacity issue, it's really an opportunity issue. And then when you think about what kind of opportunities given that we think we trade at a significant discount to NAV would be accretive to shareholders at this point, it's going to be more of the kind of things that we think are our core capacity. So we're looking at things where we think we can put our estimates to the best practices, where they might be an owner operator who doesn't hasn't kind of kept up with the market on moving rates or may not be efficient in labor practices and other things that we can bring to the table. Those are the inefficiencies.

Speaker 2

We're unlikely to buy a luxury asset that's well run in a competitive process that's just not going to be accretive for our shareholders. So we think the best acquisition opportunities and the best accretive opportunities remain the kind of assets we're going to buy in, which are these really expense experiential differentiated assets, generally markets that are incredibly hard for new supply to enter. And we think that the consumer and the traveler today and over the next decade where the outsized growth is going to be is where you can provide something that's really a unique, and differentiated experience for that traveler.

Speaker 9

Great. Thank you.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Chris Woronka from Deutsche Bank. Your line is open.

Speaker 10

Hey, good morning guys. So Mark, appreciate all the color so far. Can you maybe talk a little bit about how you're thinking about summer this year? You kind of hit on it a few minutes ago, but last year, I think there was a little bit of a surprise at how much domestic travel went outbound. And maybe the expectation is you're going to get more inbound this year or maybe you think folks are going to stay home, but just any is there any kind of confidence you can give us any kind of bookings you have right now for summer that make you feel better?

Speaker 2

Yes. I mean, I think the fundamental thing that makes me feel better is that it's going to be our strongest group quarter. So unlike last summer, what we've done this year is to really take the group and not rely on that short term variance showing up. So to the extent we can put a group in there, we're putting a group in there. And then if you as we talked about in the prepared remarks, a lot the strength and certainly our strongest quarter based on the current bookings is going to be Q3.

Speaker 2

So we feel good about our positioning, but we are taking a little bit of defensive position that we're trying to group up where it makes sense to group up and not be reliant like we were last summer on a lot of that short term, both leisure and corporate travel.

Speaker 10

Okay, great. And then, obviously, strong job on the cost front in 2023 and it sounds pretty benign for 20 24. You did mention labor. I guess, do you have any labor situations, any union markets, even though you wouldn't be union, any markets later in the year that you're keeping an eye on for a reset next year?

Speaker 2

Yes. I mean, we're always looking at the markets to make sure that our wages are staying competitive with the set, whether they're union or non union hotels. Last year, the story was really the LA story. But there are some Chicago got that was a relatively mutually win win agreement, I'll call it their negotiation and we're optimistic that we have that in Boston as well coming up. But there's nothing that's on the radar now that we think we'll be talking a lot about as we move through the year or that makes us particularly nervous on the expense side in 2024.

Speaker 10

Okay. I appreciate that. Just last one is just kind of on the acquisition disposition. I hear you on expectations of lower rates. I that may be up for debate a little bit.

Speaker 10

But I guess the question would be, we're also hearing about more distressed or semi distressed stuff kind of hitting the market. I mean, I assume that that's a good thing if you're a buyer, but you mentioned some non core sales, maybe not necessarily the best thing if you're a seller. Any thoughts on how it could play out?

Speaker 2

Yes. I mean, I think what we're seeing in the marketplace generally is the stuff that's of quality is getting pushed another year. The lenders are working with folks. I think the consensus view and again it could be wrong, but between both lenders and owners is if you have a quality asset, you're more likely to get a higher price in the market the end of this year or next year. And I think people are working towards that timeline versus bringing things to market now.

Speaker 2

There's not a lot on the market now. Worst is first is certainly a motto for now. The stuff that is coming in, I would say the distress that's in the market are really pretty terrible hotels that have things that are unfixable generally. We're not seeing quality assets come to market right now that are distressed. We're seeing people that they'd be motivated if they can get a decent price, but we're not seeing the kind of assets that we own.

Speaker 2

We're not seeing those come to market under distressed terms right now.

Speaker 10

Okay. Very good. Thanks, Mark.

Operator

Thank you. One moment for our next question. Our next question will come from the line of florist van de Koon from Compass Point. Your line is open.

Speaker 11

Hey, morning guys. Thanks for taking my question. Just as I Mark, as I listen to you and Jeff talk a little bit about the attractiveness of your shares and obviously you haven't bought back stock unlike some of your peers, but also weighing some opportunities on the investment side. Maybe if you could talk about your leverage ratio and how comfortable would you be to see that leverage ratio trend a little bit higher? You're pretty modestly levered today.

Speaker 11

I think it looks 3.9 times or somewhere around that level. How would you be comfortable operating up to 5 times and then with the eye of reducing that with asset sales or potential equity down the road?

Speaker 2

Well, Jeff, why don't you start just a little bit about capacity and then I can chime in maybe at the end.

Speaker 3

Yes. Yes, Flores, right now, we're about 3.9x debt to EBITDA. We have about $525,000,000 of liquidity, including our revolver. We certainly do look at share repurchases as you suggested. It is a leveraging event and so we just try to be mindful about striking that balance between getting a bit of return on investment, but at the same time recognizing that it does push up your leverage and historically that can weigh on your valuation.

Speaker 3

Over time, it's one thing I think we try to put a lot of effort into and something that we regularly discuss with our Board is where is that appropriate ceiling on leverage. And Mark can speak to this too. But I would say that historically, the lending community and trying to maintain a good relationship with them, there I think there's comfort with you going up to around the level that you spoke to, around 5x because you could probably go through a pretty severe downturn and still not run afoul of your credit agreements. And then I guess how would we think about it? I think we do have capacity, but it's also balancing against the opportunities that we'd like to believe are coming down

Speaker 4

the road either in ROI opportunities in our portfolio or potential acquisitions.

Speaker 2

Yes. I would just add that Jeff did an excellent job describing that. But yes, 5 times is probably the high end of where we'd be comfortable going. Again, if you model down the great financial crisis, you'd still be okay in that situation. We do have dry powder.

Speaker 2

We think having low leverage is a core strategic move. But if you never use your dry powder, it's not really that valuable. So yes, we would if we found great acquisitions, we'd be willing to lever up a little bit. Hopefully, cash flows, we're optimistic that cash flows in 2025 and 26 are pretty good. And that growth alone would deleverage the company.

Speaker 2

But right now, we can continue to maintain a fairly conservative and prudent capital allocation strategy. The debt metrics are getting better. That does make us a little bit more aggressive. And if we find great opportunities that we can create value for shareholders, we're going to do those deals. We're just not seeing a ton of those at the moment, but we continue to work hard to try to uncover them.

Speaker 11

Thanks. And maybe my follow-up for you guys. Obviously, you've done a bit of investing in your portfolio and the Cliffs of Sedona, I think, are going to be on my bucket list, it sounds like, once you guys are done there as well. Can you just remind us what percentage of your EBITDA has been touched since 2019?

Speaker 2

Since 2019.

Speaker 3

I know. I was thinking about it because we've probably touched probably 15 assets in terms of up brandings and just even types of different types of renovation products projects. I'm estimating here, I'd say probably is about 30% to 40% of our EBITDA. It has had some work done at the end. If I can circle back to you, Forrest, on that, just

Speaker 2

so I'm not just shooting from ahead. I would guess in the last 6 years, we've put about $500,000,000 into our portfolio, something like that. So we've invested fairly significantly, both to maintain our assets in 1st class status, but also to make sure we're maintaining them to brand standards and assets that customers want to return to again and again. So we look for ROI opportunities. We've done a number.

Speaker 2

The nature of our assets lend themselves to do that. So whether that's taking the JW Marriott at Cherry Creek and converting that to the Clio Luxury Collection or taking a Marriott in Vail and making that a Hythe Luxury Hotel. That's the nature of having these experiential hotels. It gives you more of those kind of opportunities. So probably have touched more than a number of our peers just because there is more ROI opportunities to reposition these kind of assets because they are not standard boxes often in our portfolio.

Speaker 4

Thanks guys.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Anthony Powell from Barclays. Your line is open.

Speaker 12

Hi, good morning. We haven't talked a lot about corporate transient on the call yet. So maybe you could tell us where it ended up as a mix of your revenues in 2023, where that was versus 2019 and where you're seeing kind of that business going forward?

Speaker 2

Yes. Corporate transient, it's a tricky one. It's obviously the one that's been the hardest kind of, I'll call it, post pandemic new normal. It's probably down about 20 from where we were at a pre pandemic level. On the positive side, special corporate rate negotiations have been up year over year and the small corporates, I'll call it the non special corporates, but corporate travelers, that's actually penetrating in above 100% of what it did in 2019.

Speaker 2

But the big special corporates, a lot of the big consulting companies and the ones that generate 100 of 1000 of room nights a year, a lot of those are down 30%, 40%, 50% from wherever they were in a pre pandemic world. And we're seeing that heal gradually and slowly. And what's built into our guidance is that it continues to get a little better every quarter, but not a big upshift in the level that we're at today.

Speaker 12

What markets does that decline in the consulting and whatnot? And where does that hit you the most?

Speaker 2

It's broad based. I mean, in New York City, we benefited from supply contraction and some other things that have offset it. But special corporate, it permeates the entire United States. Obviously, the top 25 markets are probably more attuned to the big special corporates. But whether you're in Boston, Chicago, Miami, it's going to impact all the major markets in the United States.

Speaker 2

I think the good news is that the small business traveler is really the overall economy is $3,000,000,000,000 bigger than it was in 2019. And business travel generally, on kind of historic terms, has correlated with the growth of the overall economy. So we saw that correlation happen with the small business traveler, which is great. But there's been fundamental changes in the way that big special corporates travel, the number of days they travel, whether they travel on Mondays and Fridays. So some of that's going to be a lasting impact.

Speaker 2

And as the business travel evolves and it always evolves and the general economy gets bigger and bigger, yes, we'll probably get back to 2019 levels, but not on an inflation adjusted basis.

Speaker 12

Got it. And maybe one more for me on some of the deals you've done. I know at Lake Austin and the Kimpton, Fort Lauderdale, there are some, I guess, issues at acquisition with managers or whatnot. Can you talk about how those have progressed and maybe talk about how Chico Hot Spring has done relative to your expectations?

Speaker 2

Yes. So Chico is our most recent acquisition. We closed in that in August of last year. It came we also bought the adjacent ranch. So if you just take the Chico Hot Springs, we bought it on 8 Cap.

Speaker 2

I think this year on budget for just the Hot Springs Resort, it's about an 8 Cap. So we feel great about the acquisition. We're excited to figure out what we can do with the extra 600 acres of land that we have. So that continues to be a very interesting asset for us. On some of the other ones, Fort Lauderdale, the Kimpton we have there, we redid the roof and added kind of a, we'll call it, roofed hotspot.

Speaker 2

So that took a lot of last year and that transition, so it continues to ramp up year. We think we'll see significant growth. It is a little under our behind our underwriting. And then Lake Austin, we think is the it's the only hotel that will ever be on Lake Austin. So we think it's a truly kind of a once in a career opportunity to own something in that location.

Speaker 2

But there was some transition as new systems got implemented, which we talked about on prior calls, but we remain optimistic about the performance of that asset over the next couple of years. But there's been it will be a longer ramp than we originally underwrote.

Speaker 12

Okay. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Bill Crow from Raymond James. Your line is open.

Speaker 10

Hey, good morning. Thanks. And Mark, I'm curious, the TSA screening growth year over year has been running about twice the growth or maybe more than twice the growth of hotel demand. And I'm wondering how much of that we should attribute to business travel shifting from a 4 or 5 day a week travel environment to 1, 2 or 3 days a week. Is that the primary driver?

Speaker 10

Is that still outbound international? Or how should we think about that relationship?

Speaker 2

It's an interesting question. To tell you the truth, we haven't really contemplated it that much. I mean, we're looking at the demand generators that are coming into our individual hotels and tracking those patterns and we look at employments and which obviously TSA throughput tracks as well. We're seeing the inflamence up and the passenger loads up, but not corresponding to the demand at the hotels kind of have to noodle through that one and look a little deeper and get back to you.

Speaker 5

All right.

Speaker 2

Fair enough. Appreciate it. Thanks.

Operator

Thank you. And I'm not showing any further questions in the queue. I would now like to turn it back over to Mark Brugger for any closing remarks.

Speaker 2

Thank you. Well, first before we conclude, let me just shout out that it's National Hospitality Workers' Day. So we extend our appreciation to everyone that works in the hospitality industry for taking care of the customers and making it such a great industry. We appreciate our investors and analysts for tuning in today and today's call and we look forward to updating you next quarter. Take care.

Speaker 2

Have a great day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
DiamondRock Hospitality Q4 2023
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