Diamondrock Hospitality Co

NYSE:DRH

Earnings Call Transcript 2021-Q2

[Operator]

I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer. Please go ahead.

[Briony Quinn, executive]

Thank you. Good morning, everyone. Welcome to DiamondRock Hospitality Company's second quarter earnings conference call and webcast. Before we begin, please note that many of the comments made on today's call are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.

In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.

With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

[Mark Brugger, executive]

Good morning, and welcome to our earnings call. Second quarter financial results were very strong and significantly surpassed our internal expectations. The DiamondRock portfolio benefited from several positive attributes including: one, the portfolio is overweighting towards experiential properties and resort locations; two, our best-in-class asset management; and three, our ability to control cost by having the highest percentage third-party operated portfolio of any full-service lodging REIT. This powerful combination enabled DiamondRock to generate $19.8 million of adjusted EBITDA and $0.05 per share, a positive adjusted FFO in the quarter.

Demand increased in all travel segments. Leisure remained the strongest performing segment, but group and business transient are now showing meaningful gains. Business transient room revenues increased 173% from Q1 in the second quarter on a 24% sequential increase in ADR to $195. The clearest indication that business travel is increasing can be seen in the dramatic uptick in mid-week occupancy, which doubled at our urban hotels during the quarter from 25% in April to 50% in June.

We expect an accelerating trend line of business demand in the fall and into next year. The outlook for group is equally positive. Incremental lead generation accelerated sharply in the second quarter with over 11,000 leads for 1.7 million room nights. That's a dramatic increase from the 7,000 leads for 1.2 million room nights in the first quarter. The 50% plus increase in leads is the strongest we've seen since the start of the pandemic, and lead generation is now at 95% of pre-COVID first quarter 2020 levels.

The group setup for 2022 is good for our geographic footprint. In the quarter, we converted 63% more definite group room nights with most of the activity for 2022 and beyond. A positive sign meeting planner -- of meeting planner confidence is returning. We are excited to see that group rates are 8% higher in 2022 than they were in 2019.

Our 2022 is being boosted by the fact that many of DiamondRock's key group markets have strong convention calendars next year, like Boston, Chicago, San Diego and Washington, D.C. In addition to strong operating performance, which Jeff will discuss more of in a moment, DiamondRock made great progress on internal and external growth initiatives that we are confident will drive outsized cash flow growth in 2022 and increased net asset value.

I'll touch on just a few internal projects. The Lodge at Sonoma was reimagined into a luxury autograph collection resort over the last year with a new Michael Mina restaurant. We expect our $10 million investment here will generate a 25% internal rate of return. This resort has been a home run for us with NAV increasing well north of $100 million over our total investment.

The major repositioning of our Vail Resort is underway and will be complete in time for the upcoming ski season. It will reemerge as a luxury collection hotel and will be named The Height Vail Resort and Spa. We expect the resort will command a materially higher rate in peak season and generate several million dollars of incremental EBITDA starting in 2022.

The JW Marriott Denver will also be converted into a luxury collection hotel and be named The Cleo. The conversion is expected to take place at the end of this year so we can start benefiting in 2022. Additionally, this fall, we will convert our beachfront resort in Key West to the only Margaritaville resort in the Florida Keys. Collectively, our investment in these 4 repositioned hotels is expected to have an IRR of well over 30%.

Turning to capital recycling. In the quarter, we successfully sold 2 hotels, the Lexington and Frenchman's Reef, for total proceeds of $220 million or a 5% cap rate on combined 2019 actual NOI. We are recycling a portion of these proceeds into 2 great new acquisitions, both of which were off market and have the strategic characteristics that we are looking for. They're fee simple real estate. They're unencumbered by both brand and management. They're experiential and leisure oriented. Both have significant ROI potential, and they are accretive, conservatively underwritten yields.

First off, the Bourbon Orleans is located at the best street corner in the historic French Quarter. The number of hotels in the French Quarter that are large, fee simple and unencumbered can be counted on one hand, and they rarely become available. The moratorium on new construction means there will not be another hotel built in the French Quarter.

The Bourbon was purchased at a little over a 7% NOI cap rate on 2019 results. And we expect it will have a robust growth in 2022 with the return of Mardi Gras, Jazz Fest and the NCAA Final Four. New Orleans will also benefit by being the host of the Super Bowl in 2025. Moreover, we see enormous upside from professional management as it was owner-operated, and there are numerous ROI opportunities at this property. We expect that the Bourbon will stabilize at an 8% NOI yield.

Our second acquisition is the Henderson Park Inn, a luxury boutique resort in Destin that sits on one of the most desirable beaches in Florida. This resort is rated the #1 hotel in Destin on TripAdvisor because it provides guests such a great experience. The resort was purchased at a nearly 7% cap rate on trailing 12-month NOI and the combination of bringing in professional management and enhanced revenue management strategies provides a clear path to at least an 8% NOI yield, which is terrific for such an exceptionally high-quality real estate. This is our fourth oceanfront resort in Florida and our eighth waterfront hotel.

I'll now turn the call over to Jeff for more details on our results and balance sheet. Jeff?

[Jeffrey Donnelly, executive]

Thanks, Mark. I'll start by highlighting DiamondRock's excellent liquidity. We finished the quarter with $639 million of total liquidity comprised of $193 million of corporate cash, $46 million of hotel-level cash and $400 million of capacity on our revolver. Leverage is conservative with only $1 billion of total debt outstanding against roughly $3.5 billion of hotels and resorts. Overall, the balance sheet remains very strong.

Let's talk about investment capacity. We've been active on the acquisition front, and we expect to remain a disciplined acquirer of on-strategy properties like those Mark discussed earlier. With the strength of our balance sheet and high liquidity, we estimate we have over $300 million of investment capacity today while still operating within our long-term leverage targets.

Looking at profit margins. We remain confident we will have stronger stabilized profit margins when we fully emerge from the pandemic. To illustrate this point, let's look at the math on our resort portfolio. Total revenue at our resort hotel portfolio in the second quarter was $70 million. While this was $2 million better than the same period in 2019, hotel EBITDA was nearly $7 million higher. This exceptional profit flow-through resulted in a 39.3% resort portfolio margin in the second quarter as compared to a pre-pandemic margin of 30.5%.

My intent is not to suggest that the margin opportunity is as large as 880 basis points described here, but to highlight that our asset managers and their partners at the hotels have thoughtfully reconsidered the operating model from top to bottom to grow revenues and enhance profit without detracting from the guest experience. Importantly, despite these tight cost controls, our overall TripAdvisor score once again showed sequential improvement.

So why do we believe DiamondRock can stabilize operations at higher margins? I want to emphasize that DiamondRock is distinguished from its peers in that all but 2 of our hotels are subject to short-term management agreements. This means we have greater control over operations and you already -- and are already seeing the benefit of that flexibility in our results. Also, don't forget, we converted 6 hotels in 2020 from brand-managed to franchise and that alone is projected to lead 50 basis points of better portfolio-wide margins. And finally, add in reduced above property charges, new labor models and increased use of technology, and we believe we have the ingredients to outperform on stabilized margins.

Let me share a few success stories. The Lodge at Sonoma repositioning that Mark touched on earlier has been a big success. The project was completed on time and on budget and the resort increased RevPAR market share by over 20 points year-to-date versus 2019. The Landing Resort Lake Tahoe is having a record year with RevPAR up 44% year-to-date compared to 2019. Our asset management team designed a new labor model for this boutique resort that has reduced labor hours per occupied room by 42% compared to 2019, while increasing room revenue 83%.

Our Barbary Beach House Key West Resort is also having a record year and saw a 22-point rise in the market share this quarter compared to 2019 on a 91% increase in room revenue. While we are on Key West, in case you missed it, our Havana Cabana Resort was named by TripAdvisor as the #1 most saved resort in both the U.S. and the world. Of course, all of this success is due to the combined hard work of our best-in-class asset managers working with hand-selected operators. As a result, our portfolio RevPAR share was up nearly 4 points in the quarter over 2019.

This market share gain is even more remarkable when you consider the tight cost controls. Overall, rooms department cost per occupied room was reduced to under $55 per night or a 4.5% improvement from 2019. This was driven by a 7.2% decline in total labor per occupied room at our open hotels. As you can imagine, we are very proud of what we have achieved in the second quarter.

Looking ahead, DiamondRock is well positioned to continue our leading pace of growth. Group revenue on the books for the second half of 2021 increased 10% in the quarter and is now 2.5x greater than the first half of the year. Group revenue on the books for 2022 increased 8% in the quarter and is 44% higher than the forecast for 2021. Group rates on the books for 2022 are nearly $250 as compared to $220 in the back half of 2021. Citywide room nights on the books for 2022 are up 5% compared to 2019. And our 6 largest urban markets, Boston, Chicago, Fort Worth, Salt Lake, San Diego and D.C., have seen an 8% increase since the start of the year.

2023 is already on pace to match 2019 with the strongest growth in Boston, Salt Lake City, San Diego and Phoenix. We are also benefiting because of our very low exposure, less than 1%, to probably the worst urban market in the U.S., which is downtown San Francisco where return to office is low and convention room nights aren't expected to approach 2019 levels until sometime after 2023.

Looking forward, we expect to continue to generate significant positive quarterly EBITDA and AFFO per share for the rest of the year. Cash burn is just so 2020. The positive momentum in the portfolio can be seen in the change in quarterly revenues compared to 2019, which are rapidly improving on a sequential basis. Revenues were 64% lower in Q1 and improved 50% lower by Q2. Encouragingly, during the second quarter, monthly revenues compared to the same period in 2019 improved from down 58% in April to down 50% in May to down only 41% in June. July was amazingly strong for the DiamondRock portfolio with RevPAR down only 11.8%.

Looking to the third quarter, we expect quarterly revenues to get even better. We are projecting revenues to be about 20% to 25% greater than the second quarter. G&A and total financing costs that is preferred dividends and interest expense will be roughly similar to the second quarter. We recognize there is increased focus on the Delta variant and some areas of the country have reinstated mask mandates, but we have yet to see an impact on our business. As we have in the past, we will stay close to these trends. Nevertheless, we remain cautiously optimistic on the pace of the recovery.

With that, I will turn the call back over to Mark.

[Mark Brugger, executive]

Thanks, Jeff. Before we take your questions, I want to touch on our recent transactions and our outlook. The 2 announced transactions strongly demonstrate that we are strategically repositioning the portfolio to lean in to our long-held thesis that experiential and drive-to resorts will outperform over the next decade. While the acquisition market remains competitive, we intend to target more opportunities, consistent with our experience with drive-to resort and urban lifestyle focus. We are particularly focused on targeting hotels that are synergistic with our existing hotels in markets like Sonoma, Vail, Lake Tahoe and Sedona.

Let's talk a little more about the outlook. Overall, we feel very good about the setup for DiamondRock. Our portfolio is well positioned to capture the continuing robust leisure demand as well as the coming rebound in group and business transient activity. We think DiamondRock has 3 major competitive advantages versus many of our peers. First, our portfolio market exposure is favorable with our numerous resorts benefiting from the boom in leisure demand. And our well-located urban properties poised to expand on the group business transient trends as the second leg of the recovery kicks in. Also, the convention calendars in our most important group markets look very strong in 2022.

Second, our best-in-class asset management is benefiting us and gaining market share through creative revenue management strategies, execution of ROI projects and enhanced profit improvement implementations. Third and finally, our high weighting of third-party terminable operating agreements gives us more control and ability to be creative in running the hotels. The conversion of the multiple Marriott brand-managed hotels last year will add rocket fuel to our margin growth over the next few years.

This concludes our prepared remarks. We are excited about our future and see things improving more rapidly than on our last call. We have a great portfolio, a great balance sheet and a great team to be able to deliver shareholder value.

Thank you for your continued interest, and we are happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Dori Kesten from Wells Fargo.

[Dori Kesten, analyst]

Can you walk through the asset management opportunities that you see at Bourbon Orleans and Henderson Park with new management in place?

[Mark Brugger, executive]

Sure. Let me start -- I'll start with Henderson Park, and I'll turn it over, as I know, Tom's very excited about the Bourbon. I'll turn that one over to him. Henderson Park is pretty straightforward. It sits in -- it's #1 already on TripAdvisor. It's a great experience. It's a -- it's been owner-operated in a fairly unsophisticated revenue strategy where they just set one rate for the entire month. And so we're going to put in variable modern management.

We brought in Evolution to take over management last week, and we'll be implementing -- it's sold after the next couple of months, but we'll be implementing our best-in-class practices on revenue management. And so we think that we'll be able to -- without too much effort, be able to move the rate just by putting it in our usual revenue management strategies there. So that one is relatively straightforward. The hotel is in great shape. It's -- customers love it. The Bourbon sits in the A-plus location, but there's a lot more that we can do there to really kind of drive that one forward. Tom, do you want to talk about some of the opportunities that you see?

[Tom Healy, executive]

As Mark mentioned, at Henderson, really it's -- we'll do a rate efficiency model. It's kind of what we did in Sedona and all the other resorts looking at room types, lead times and basically trying to price it appropriately. So there's just a lot of little opportunities in Henderson with rate. We think we can do that. That's pretty easy lifting.

And then there's a fair amount of opportunity. There's a lot of demand in that market, and we think there's opportunities to enhance the food and beverage experience and drive more incremental value from not only at the property but off property and on the beach. So that will be the focal points there. And then at Bourbon, it's very similar. It's rate strategies, putting technology in place where you can monitor behavior, taking advantage of demand when they're citywides. And then we're looking at all the other opportunities in and around the space.

There's an amazing historic ballroom with a history that we could certainly enhance and try to create more awareness, I think, with all the website designs and being more nimble with the website, user-generated content on the website. Things that we can't do with branded hotels, with the independent hotels we can do. So it gives us a lot of flexibility to enhance pictures, generate user-generated content, which makes it more relevant. So there's a -- at Bourbon, there's a host of things that I would think there's opportunity.

And then we have some retail spaces down on the Bourbon Street, in and around there. There's some unused spaces that are -- I mean, they're amazing spaces, and we're just -- we're still trying to evaluate what to do with them because they're that good, like we have -- at Bourbon, there's a small little house with an outdoor patio. And they use it right now for offices, and there's not a whole lot of use to it. So we're trying to see how do we monetize that. We have a bar that sits on Bourbon Street that basically does de minimis revenue, and we think we could open that up and kind of do what we did in Fort Lauderdale with Lona, create and energize that whole space and drive revenue through. So that's -- there's a lot of things. So that's it, Dori, but I think that covers it, right?

[Dori Kesten, analyst]

Is there the ability to expand, I mean, increased room count at Henderson Park?

[Tom Healy, executive]

Sure. Yes. Well, it's interesting to say that the site is zoned for a 5-story building. And that -- you could build 150 rooms on the site. That's not in our underwriting and certainly not our immediate plan. But you could dramatically increase the size of this property by rebuilding it.

[Dori Kesten, analyst]

Okay. And if you separate your urban and resort hotels, where are you on demand versus '19, if you can compare April to July?

[Mark Brugger, executive]

April to July, well, just midweek business transient, we talked about doubling the doubling the occupancy on Tuesday, Wednesday to urban properties from really April through the end of the second quarter. So we're at 50% or so on Tuesday, Wednesday. So we're seeing business transient come in.

Group's lagging a little bit, and obviously, leisure is above 2019 levels. And then if you look at our -- obviously, just looking at our July numbers, we're down. We're dramatically better in the urban demand. We're only down 30%, but that's 20 points higher than we were just a couple of months ago. And then resorts are running above where they were in '19.

And just looking at July, to give you some context on some of the urban markets, I'm looking here, Boston, we were running our 2 Boston hotels in July. We're running 89%. And even the convention center hotel, Boston Westin ran over 64%. In Chicago, obviously, in the urban market, we ran 73% at The Gwen and even 1,200-room Marriott was running 58%. So we're seeing -- we're really seeing the urban markets starting to kick in as we're moving through summer and entering into Q3.

[Operator]

Our next question comes from the line of Smedes Rose from Citi.

[Bennett Rose, analyst]

I wanted to ask -- you mentioned that in the third quarter, you're looking for 20% to 25% increase sequentially in revenue. Could you talk about maybe your margin expectation as well. Would you expect it to be the same as what you put up in the second quarter? Or are you continuing to kind of restaff or having to pay higher, kind of what are kind of puts around what we should look for operating margin?

[Jeffrey Donnelly, executive]

Yes. Smedes, this is Jeff. Yes, I would say that when we look out to the third quarter, generally speaking, I think our margin opportunity in the third quarter compared to the second quarter is going to be the same to slightly better, maybe upwards of 200 basis points better sequentially. I think we're just trying to be realistic, given that we're going into a period of time where you're going to see some transition between leisure and business transient. But we're optimistic that we're going to get a little margin improvement on a sequential basis.

[Bennett Rose, analyst]

And Mark, I wanted to ask you a couple more questions on your -- the transactions you did. I mean it sounds like there's kind of a second lag potentially to the Destin acquisition. But I just wanted to understand a little bit more behind making an acquisition of a hotel with 30-something rooms. So it doesn't really move the needle a lot for you and I get that, I mean, it looks like a good investment, but relative to your overall portfolio, it's certainly very small. But then bigger picture, we've seen more activity from the public REITs in the transaction market. I'm just wondering, is there anything in general that you think is bringing more attractive assets to market?

[Mark Brugger, executive]

Sure. So let me answer, I guess 2-part question. So on Destin, it is a relatively small deal for us, although proportion to kind of enterprise value you've seen some other companies doing things that are relatively similar sized. I think the way we view it is, it was an off-market deal. It gives us a foothold in a market that we think is one of the better markets in the United States. Destin Rosemary Beach area, we think, has terrific fundamentals.

It has incredibly high barriers to entry, probably nothing else built on that strip of beach. So it has all the characteristics. And frankly, it's not going to be the value add that we have of changing revenue management bringing in. It's just not that asset management intensive. So those are all favorable for doing asset like that. And we think it gives us the ability to leverage some, what I'll call it, nearby assets, so we may be able to build upon this.

And then the ability with the entitlements, the ability ultimately to do something bigger there, that's not our plan A at all. But one way to think about it if you could do 150 units there, basically, we got a hotel for the land value and the hotel is free. So it's a good opportunity. We think it's additive to the portfolio. We think it gives us a foothold. And we think at our basis that we're -- we've already created value.

To your second question, I would say that overall environment remains incredibly competitive for hotels. The stuff that's been broadly auctioned, I can tell you, we haven't come close to winning because we just -- I think people are being maybe they're stretching on some of these deals where there's a lot of competition, again, 15, 20 offers.

So it's a competitive environment. A lot of people want to own hotels: Private equity, family office, international buyers. We have seen in the last 60 days, I see an uptick of properties coming to market. I think they're getting drawn out by the per key numbers on some of the -- particularly the resort assets.

And I think that there's just the bid-ask spread as there's more certainty as the mass mandates went away in June and fundamentals got better. I think they kind of the -- the buyers said now it feels like a better time to be a seller. So I think the environment just feels better from that side. And I think some of these trades and some of the assets have brought more buyers out of the wood work. So all that's kind of in play right now.

[Operator]

Our next question comes from the line of Rich Hightower from Evercore.

[Richard Hightower, analyst]

So Mark, I want to go back to one of the -- one of your prepared comments. I just want to confirm, the 1.7 million room night leads achieved during the second quarter, is that a same-store metric? Or is that not the same-store metric? And then also, typically, what portion of leads get translated into actual stays? And do you expect any changes in that ratio as things are maybe still a little bit choppy out there over the next few quarters?

[Mark Brugger, executive]

Yes. So it is same store for clarification. And then you could see -- I mentioned in the prepared remarks that we're -- our close rate of 63% on the business we're pitching. I think the broader message is just to see the sequential improvement in the lead generation. So things are really taking off from a group lead standpoint. Now those are for future periods.

So some of that's -- probably the bulk of it is 2022 and even some 2023 booking activity makes up the bulk of what we're seeing. But if you look at the Cvent and the major channels, we are seeing increases in group demand, meeting planners, there's a lot of pent-up demand. So I think all of that directionally is very encouraging.

And then I think our footprint for convention center calendars next year is also adding to the volume a little bit because Chicago and Boston and some of these markets have calendars that are as good or better on room nights than they were in 2019. So that's going to get booked into our hotels.

[Richard Hightower, analyst]

Okay. Great. And then just another question on a lot of the CapEx, the DiamondRock is undergoing or completing in the various assets in the portfolio. I guess as we think about the landscape of hotels that you're competing with that are probably heavily under CapEx to this point given what's happened over the last 1.5 years, at what point do you start to see those -- the benefits from all that spend showing up in your index scores, your trip scores? How long of a time period would that normally take? What are your expectations?

[Mark Brugger, executive]

Yes. So if you step back to last year, what we made the strategic decision to pursue the high ROI CapEx projects and position the balance sheet to do so, so that's getting done and completed this summer and into the fall, and the idea was to position to see the results starting in 2022. So Sonoma got completed in June. Vail got completed in November. The conversion to Margaritaville and Key West will occur by November. The luxury collection conversion in Denver will be done hopefully at the end of this year. So all of that, we should see the cash flow and the returns really starting beginning. Sonoma, we're already seeing with the market share gains. But you'll see that really trickle into our starting Q1 and next year, you should see pretty meaningful returns on those capital investments.

[Operator]

Our next question comes from the line of Chris Woronka from Deutsche Bank.

[Chris Woronka, analyst]

Mark, it sounds like the strategy is really kind of a focus on leisure, and well, we might take that to me in resorts. It sounds like you're open to leisure-centric hotels in traditionally urban markets. Is that -- so that could still keep pretty much every -- most markets out there on the map. Is that correct?

[Mark Brugger, executive]

It is. I mean we're not going to add -- we have sufficient in New York, Chicago, Boston, so we're not going to be additive in those markets. San Francisco is red lined, in our opinion, for the next several years. And markets that we're likely to expand in that are not what I call true resorts. There are going to be more markets like Charleston. That's a market that has some business and some with going into BMW having a fairly large presence in that market but also lends itself to be predominantly leisure. We think that those markets are going to outperform. New Orleans. It's a French Quarter. Particularly, it's an experiential market while it benefits from on strong convention calendars. We think that travel trends that are going to outperform are going to tend to be more experiential, whether that's urban or pure resorts.

[Chris Woronka, analyst]

Okay. Helpful. And second question is you guys have obviously restored a lot of liquidity. But as we think about acquisitions going forward, can you remind us where you are on ATM? And is there a thought towards just kind of over-equitizing acquisitions even if you theoretically could bring on property debt or use cash or something like that?

[Jeffrey Donnelly, executive]

Yes. Chris, it's Jeff. As we said at the end of the last quarter, we -- at that time, we said we had $112 million remaining on our ATM, and that ATM program actually expires in August. So you -- we said at that time, you'll see us replace that ATM program. So that will be recharged effectively. But I think technically, today, it's $112 million, and you'll see that go back up to a higher amount. We do have the ability to acquire assets using debt. But right now, we've been looking at recycling the proceeds from the dispositions that we've made. And so effectively using cash on hand. They've been funded all cash or effectively all the equity.

[Operator]

Our next question comes from the line of Patrick Scholes from Truist Securities.

[Charles Scholes, analyst]

So far this year, you've been running room margins in the mid-70%. It sounds like 3Q might not be so different. From a high level, and I think this is true for most of the hotel REITs, how long can that last? I mean it's -- I think that's something that surprised many of us how you're pretty much back there on room margins. Is that sustainable? Or as we get into the lower leisure season post Labor Day, does that start to slip back and then the whole issue of rising labor costs? Interested in your thoughts around that.

[Mark Brugger, executive]

Sure, Patrick. I'll take a far shot. So I guess for -- certainly into third quarter, for the balance of the year, we see maintaining profit margins with the continued recovery. And we think that margins -- we've just gone through on why margins are good and why they may permanently be better on prior peak. The labor model is the most -- for the industry, the labor model has fundamentally changed. We never before had to go through something like this where we use zero-based every single hotel.

And we've gotten rid of positions. We've permanently changed -- we permanently changed positions, FTE counts as an industry. So that benefits us. Technology is benefiting us. Mobile keyless, front desk, other sophisticated tools to monitor productivity, above property charges from the brands at the branded hotels have been reduced. So all those are helping margins.

I think what's going to be unique to us and what is already helping us is the conversion and [indiscernible] the brand-managed hotels, the 6 of which we had last year. So to give you an example of one change at Salt Lake City, we've been able to reduce the managers from 18 to 11, and we think we can maintain it roughly at that level. So that's 39% less managers at that hotel.

So you can imagine how that runs through in profitability and margins not only now but as we kind of return to prior peak too. So we're relatively optimistic on the margin front. We -- there clearly is a nationwide shortage of labor, and we are dealing with that like everyone else. But I think there's a lot of reasons to be optimistic on the flow-through and maintaining margins.

[Operator]

Our next question comes from the line of Michael Bellisario from Baird.

[Michael Bellisario, analyst]

Mark, I just want to go back to the acquisitions, kind of high level. It looks like you're assuming roughly a 7% cap or 7% caps that go to 8% caps, not that much growth, though. So maybe 2 parts. Why isn't you stabilized 8% cap the right number to target? And then I know you gave some details about what's not in your underwriting. But how should we think about maybe the stretch yield that you guys think you could get to over time on these deals?

[Mark Brugger, executive]

Yes. I mean you never want to overpromise. So I think stabilizing 8% is accretive to growth NAV of the assets. It creates value for our shareholders. I think it's if you can get to an 8% on high-quality real estate, it's additive in the public company format.

I think Henderson is a fairly straightforward deal. It's irreplaceable real estate. While it's small, it is beachfront, impossible to build in. And I think by the time we're done with it, it will be worth a lot more than we paid for it. Bourbon, too, it's got more creative aspects. We can employ to grow NAV. We haven't built in -- when we talk about that 8% yield, we haven't built in a lot of things Tom was talking about.

So the change in the retail, reconfiguring the F&B taking advantage of the separate buildings that come with the acquisition and turning into unique banquet and wedding spots. All that would be incremental ROI to that 8%. And so hopefully, we're going to be better. I mean take Barbary Beach, which is located in the Key West. Yes, that's an asset that is 35% or more above our underwriting. We put a 6% cap on that. I think obviously looking at total investment, our yield on that this year will be something like 11.5% on our total investment and that didn't include being goosed for the conversion to the Margaritaville.

So put a 6% cap on that number on $13.5 million this year, that's like $225 million for an asset we have $117 million basis. So hopefully, it will be successful like that asset. But I think we don't want to build in the ROI stuff when we talk to investors on the initial underwriting. We'd rather communicate to you what we think was pretty the straightforward clear path to stabilize yield. And then as we approve and finalize ROI projects, we'll communicate that to the investment community.

[Michael Bellisario, analyst]

Got it. So it sounds like 8% kind of a baseline, and you'll work higher from there, hopefully, right?

[Jeffrey Donnelly, executive]

That would be our hope, yes.

[Michael Bellisario, analyst]

Got it. And then just switching gears, maybe one for Tom. Can you help us get our arms around what you've seen for BT in the fall? Where the special corporate bookings occurring? And are you seeing the booking window extend at all at this point?

[Tom Healy, executive]

I've got to tell you, Mike, we've seen a little bit of growth in BT. We went from like 5% in -- we grew about one point a month in the second quarter, up to about 7%. The portfolio as a whole across all the hotels runs about 15%. And then obviously, in the urban, we're doing as much as 30% to 40% midweek when things are good. So we're seeing a little bit of movement. It's really -- there's nothing in the future. There's no future pace that shows anything -- that shows that there's no significant change at this point.

I think we're still too far out. And I think a lot of it's going to determine -- really come around to how does -- the kids go back to school, how do things play out in the fourth quarter. So -- but there are no indicators that things are dramatically improving or going backwards, right? So I think we're just monitoring.

[Mark Brugger, executive]

Yes, Mike, this is Mark. I would just add a couple of things. So we did see midweek increasing, which is both leisure and BT, as we mentioned on the -- in the prepared remarks. If we look at our July results for our major markets, Chicago, New York, Boston, I mean we have a lot of hotels that are running 70% to 90% midweek. So that's encouraging. And then if you look at travel policies, what's happened over the last 45 days, you've seen travel restrictions lifted. PwC and the consulting companies and a lot of companies have lifted travel restrictions. All that portends well for BT as we move into the fall. So I think the reduced travel restrictions are encouraging.

The expectation and we look at like Delta Airlines CEO was -- and they have more pure data, I would say, than we do because a lot of our -- one phenomenon is happening now. A lot of people are booking around their traditional special corporate. So it's harder for us to track the business traveler.

But they were saying it was 20% earlier this year. It's running about 40% versus '19 levels, and they hope it to be and based on what they're forecasting and seen in their systems post Labor Day getting 60% plus of what it was in '19. So the trend line is encouraging, we're extrapolating from that -- those data points that the airlines are seeing because they have better visibility because of the way people are booking around in the hotel business. So I think that's encouraging, but it's not like BT books for December right now. So I can't give you definitive numbers, but the trend lines seem like they're going in the right way.

[Operator]

Our next question comes from the line of Anthony Powell from Barclays.

[Anthony Powell, analyst]

We've seen a lot of transactions in the space, but the various deals on the big box group side, what's your view on the values there and investor demand for those types of assets currently?

[Mark Brugger, executive]

Yes. This is Mark. So I'd say there's just aren't any for sale. We just were at meeting with brokers recently just looking at what's in the market. I can't think of one big box that any broker has listed at the moment. So I think the general attitude of people that own big boxes is that it's not the right time to market them. Group will come back. I think people are pretty optimistic on the group front, but it doesn't feel like it's the time to market that asset. So with no trades in the market, it's hard to give you a perspective on exactly where value is on the big boxes. I suspect that this time next year, we'll see group recover maybe a little bit better than people expected, and that will bring buyers and sellers together next year on those kind of assets.

[Anthony Powell, analyst]

Got it. And you talked about maybe the marketing one of those at some point. I'm guessing commentary next year is when you can consider that maybe. Is that fair?

[Mark Brugger, executive]

If you were going to market a big box, next year, it would certainly be a much better time than right now. I think there's just more certainty. And I think we're fairly optimistic on the group recovery scenario. So I think we wouldn't want to be premature in bringing any large hotels to the market right now.

[Anthony Powell, analyst]

Got it. And I guess on the acquisition side, what's the total opportunity for these smaller resorts and maybe more leisure-focused urban hotels? Could you do maybe 10 of those needs over the next couple of years? It takes a lot of them to replace Lexington or a big box resort. I'm just curious what you see kind of the velocity of deals over the next few years?

[Mark Brugger, executive]

Yes. I mean there's a lot of hotels that are worth between $50 million and $100 million of fitness category. I think the real advantage that we have is our team here, Troy and his investment team, have been focused on this for over 5 years. So we've built a pretty sizable database of about 50, we'll call micro markets. That's the Sedona, Vails of the world, Park City, Jackson Hole. We know every hotel we've been talking to many, many of the owners for years now. That's how we're uncovering off market deals.

And looking at our internal pipeline, it has a lot of those a lot of those in there. Could we do 10 over the next couple of years? Sure. There's plenty of them. I think we have kind of unique key insights into that. And we really want to be focused on doing off-market unique deals. And I think a lot of these auction deals, as I mentioned, I mean we just saw one that is happening right now. We were $15 million shy of the winning bid, and we thought we were stretching. So it's -- we want to create value with our acquisitions, and I think continuing to focus on the strategy is the way that DiamondRock is going to create value when others may have to overpay and doing these auction deals.

[Anthony Powell, analyst]

Got it. Maybe one more quick one. How are distribution costs for the small independent resorts? The margins seem to be very strong. So it seems like you were able to overcome any OTA fee at these properties. So I'm curious how you're sourcing customers at Sedona or Havana Cabana.

[Mark Brugger, executive]

Tom, do you want to take that?

[Tom Healy, executive]

Sure. All the tools are in place for us to access the customers, especially with a brand like Sedona, where there's brand equity and people has -- it's relevant. But we use all the tools. We use the OTAs. We use a layered approach with regards to luxury travel agents. We have a luxury travel agent strategy, Virtuoso signature fine hotels on those type of resorts. And then we have -- and then we don't have the brand fees.

We have -- think about an independent hotel, we're not paying 10% for the brand. We're not paying all the brand marketing fees. And so we can allocate a portion of that and attack customers directly, right? We're not -- we focus -- we try to keep our portfolio focused on nothing in the aggregate, but only specifically to our assets. And so when we allocate dollars, we're targeting our specific asset, not a grouping of hotels like the brands do. And so that gives us a lot of nimbleness.

You'll see in like Havana Cabana we just -- we're #1 website in the nation, right, most save website in the world. And it's kind of funny to say how does Havana Cabana in Key West become the #1 saved website in the world. And it's because we have the ability to take user-generated content and retarget the customers. And so people save it. They use it, and they share it with their friends. And it's very powerful.

That independent hotels and our sales and marketing team, we have all the resources on our team at DiamondRock, and we do it for ourselves versus relying on the brands. And I think that's a very powerful tool. It gives us speed to market, and it reduces our costs, which is why we like the independent hotels so much.

[Operator]

Our next question comes from the line of Floris Van Dijkum from Compass Point.

[Floris Gerbrand van Dijkum, analyst]

Wanted to get your thoughts. It's intriguing to -- as competitors have bought assets near your assets at high prices. Mark, maybe get your thoughts on, first of all, the value of your assets and also put that in perspective, how is that value of your net worth -- of the company's net worth, I should say, or NAV changed since December when you issued some -- a small amount of equity on your ATM. Maybe if you can give some more thoughts on that, that would be great.

[Mark Brugger, executive]

Sure. So let's take both parts of that. So we did issue a little bit on the ATM last fall, but that was to position for the ROI projects. So that funded the Vail repositioning. That funded the Sonoma repositioning. That funded the Margaritaville conversion. That's funding the luxury collection conversion in Denver. So that capital has been spent or being completely spent right now and will position us for outsized growth in 2022. So that -- it wasn't really a statement on NAV as much as we have a very high use at 20%, 30% IRRs on those projects, and we thought that relative vague made a lot of sense.

As we look forward on acquisitions now and the use of capital and NAV, as far as our current state of value, so I think the NAVs are going up. I think if you look at our assets in markets like Key West and you look at our markets in like Sonoma and Sedona where we've seeing other trades, those assets now are breaking through their probably record pricing. Our Barbary Beach is worth more than $1 million a key. Sonoma is probably worth more than $1 million a key. And that compares to basis, that is, our basis in Sonoma is roughly $270,000 a key.

It's probably worth $1 million plus a key now. Barbary Beach, we're probably up 70% from our basis. So the NAVs -- with these numbers that are getting paid by others in the marketplace, it's increasing our NAV. So we're always reevaluating. It's always hard to know exactly where it is. But the private markets are paying a lot more than the public valuations, and there is a big disconnect right now between these valuations.

[Floris Gerbrand van Dijkum, analyst]

I appreciate that. And I was actually pretty intrigued, you made the comments that your returns on your Key West assets are in the double digits. I mean, obviously, there's more to come on the rebranding to the Margaritaville if you were to back off from your original acquisition costs, I mean how much value has been created? And how much has the value per key improved over your whole period?

[Mark Brugger, executive]

So let's take Barbary Beach or Havana Cabana. They're about double-digit returns on our investment. So if you put a 6% cap on those, just to say that's a market that's kind of where things feel like they're trading down there, that put Barbary Beach on this year's numbers at something like $225 million versus a basis of $117 million. So I don't -- I can't do the math in my head, but 90% increase in value and about $1.2 million a key. Havana Cabana put a 6% cap on what we think it will do this year. That puts at about $90 million.

I think our basis is 55. So that's 60%. And so again, I think what we're seeing is a lot of our thesis that we've been trying to articulate to investors over the last 5 to 7 years playing out, right, the trend lines and the high barriers to entry, there's no new supply and what do customers want the assets we've been buying particularly over the last 5 to 7 years between those 2 are really playing out. And we're seeing massive increases in NAV of those assets.

[Operator]

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

[Mark Brugger, executive]

Thank you, everyone, for joining us today on our earnings call, and we look forward to updating you next quarter. Take care, and have a great day.

[Operator]

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