Diamondrock Hospitality Co

NYSE:DRH

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:04] Welcome to the Diamond Rock's third quarter Twenty twenty earnings call, I will now hand the call over to Miss Briony Quinn. Please go ahead.

[Briony Quinn, Senior Vice President and Treasurer]

[00:00:14] Thank you, Tiffany. Good morning, everyone. Welcome to Diamond Rock. Third quarter Twenty twenty earnings call. Before we begin, let me remind everyone that many of the comments made on this call are considered forward looking statements and not historical fact as described in our filings with the FCC. 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 gap financial information. A reconciliation of this information to the most directly comparable gap financial measure can be found in our earnings press release. With that, I am pleased to turn the call over to Mark Brugger, our president and Chief Executive Officer.

[Mark Brugger, President and Chief Executive Officer]

[00:01:04] Good morning and thank you for your interest in Iraq since our last earnings call, we have made outstanding progress on multiple fronts. Highlight just for first, we increased our total liquidity and decreased our total debt through a successful preferred equity offering. Second, we reduced our monthly burn rate significantly, beating our prior expectations. Third, we reopened five additional hotels. And fourth, we struck a sweeping deal with Marriott that not only increased the Navy of our portfolio by 50 million dollars, but distinguishes Dirac's portfolio as the least encumbered by long term management agreements among all full service public lodging rates. Now, while we have made good progress and remain optimistic about the future of travel, the pandemic we are living through has obviously created tremendous dislocation in near-term demand in the third quarter. There were some encouraging early signs of a recovery in travel demand. The relative bright spot has been in leisure travel, which of course is elective travel. Guests have been checking into the drive to resorts Tamarack is known for. In contrast, this is travel and group business demand has only marginally improved and is likely to remain very constrained until there is a health care solution, such as a vaccine, effective therapy or a massive national testing program. Interestingly, we are seeing signs of pent up demand. So we believe there is a chance for a meaningful snapback on the other side of the health care solution.

[00:03:13] Personally, this is my fourth downturn and we know how to manage through these environments, that experience is why Demara has always embraced a low leverage and conservative balance sheet strategy. We currently have more than enough liquidity to carry the company until such time as we are cash flow positive once again.

[00:03:40] History shows that travel demand always eventually surpasses the peak of the prior cycle. And we remain optimistic that this recovery ultimately will be no different.

[00:03:56] But make no mistake, this is the most difficult operating environment of modern times and requires almost Herculean efforts to ensure guest and employee safety first while trying to preserve cash flow. Accordingly, I want to acknowledge the efforts of everyone at our hotels and everyone on our team that has put in countless hours. Although the environment required significant reductions in staffing. We were able to soften the blow to hotel associates with nearly eight million dollars in severance paid out this year. Rest assured that we are doing everything possible to be responsible fiduciary and community citizens while making certain that Dymock is set up for future success. Let's turn specifically to Iraq's third quarter hotel adjusted EBITDA in the quarter was a seventeen point four million dollar loss, a marked improvement from the thirty point four dollars million loss in the second quarter. Corporate adjusted EBITDA was a twenty four point four million dollar loss. As compared to a thirty seven million dollar loss in the second quarter.

[00:05:27] Third quarter, just FFO per share, was a loss of twenty two cents as compared to a loss of 20 cents in the second quarter.

[00:05:38] Two items worth noting with these results, one, they exclude seven point four million dollars in one time severance cost and two. This one's important adjusted FFO per share was negatively impacted by a non-cash income tax valuation allowance recognized in the quarter of twelve point four million dollars or six cents per share. In other words, our third quarter affo would have been a loss of only 16 cents per share without that tax adjustment.

[00:06:26] Moreover, in the quarter, we successfully reopened five more hotels and had nearly 90 percent of our rooms available to sell at the end of the third quarter. To illustrate the progress, that 90 percent figure compares to just fifty eight percent at the end of the second quarter.

[00:06:50] Furthermore, portfolio occupancy jumped over 1000 basis points from the second quarter to eighteen point six percent.

[00:07:01] Recall that we ended the second quarter with just twenty two hotels open and operating, we opened a twenty third hotel our at Sonoma Resort on the first day of the third quarter, those twenty three hotels. So occupancy rise from twenty six percent in July. To twenty eight percent in August. And finally to thirty one percent in September. In July, we reopen two other hotels besides the Logits cinema that included the Hilton Boston downtown and the Hilton Burlington on Lake Champlain. Our decision to reopen hotels has been and continues to be dynamic and data driven. We reopen hotels if we can lose less money doing so. Based on this approach, the data led us to keep three of our New York City hotels closed, but to reopen are two big box hotels, the Chicago Marriott and the Boston waterfront Westin in early September.

[00:08:22] Now, as you'd expect, nightly occupancy is comparatively lower at these two big box hotels. Then the balance of the portfolio. But a resilient base of contract business and aggressive cost controls has thus far confirmed that reopening was the right decision.

[00:08:46] As you can see in the tables in our press release, which is on our website, if you have not had a chance to review it. Hotels open in operating the entire quarter have delivered consistent gains in occupancy, rapport and total rapport for the entire portfolio.

[00:09:08] Total revenue decreased seventy nine percent in the quarter as a result of an 81 percent decline in rev par that was partially offset by a smaller decline in food and beverage revenue. Total revenues were fifty million dollars in the quarter, as compared to just twenty point four million dollars in the second quarter. Over the summer, monthly revenues showed steady progress, rising from slightly over 11 million dollars in June. To over 14 million dollars in July to over 16 million dollars in August. And finally, reaching almost 20 million dollars in September, encouragingly, revenue in October looks to be coming in even a little bit better at over twenty two million dollars. OK, let's talk about profitability to maximize absolute profit, our asset managers are working closely with our operators to aggressively drive revenue by implementing strict expense controls. In the third quarter, every department rooms, FMV and other small material improvement in profitability as compared to Q2 with sequential acceleration in flowthrough that surpassed internal forecast. For example, the rooms department margin rose from forty five percent in the second quarter to sixty four percent in the third quarter. Driven in large part by a twenty five percent sequential reduction in the cost per occupied room.

[00:11:10] Over the course of the quarter, we saw the number of hotels achieving break, even profitability continued to expand. In June, we had 10 hotels generating positive gross operating profit, or GOP, and this figure rose to 18 hotels by the end of September. Over that same period, GOP margin moved from a negative thirty five percent to a positive nine percent margin as a testament to our ability to drive revenue while constraining costs. On any basis, six hotels in June were operating profitably and that figure rose to 10 hotels by September. What you cannot see, however, is an additional 10 hotels were on average, approximately one hundred thousand dollars from break, even EBITDA in September. Here's one other additional data point I think you'll find interesting if we exclude the two big box hotels, the Chicago area and the West and Boston from the twenty seven hotels we had open in September, the remaining twenty five hotels collectively would have been within two hundred thousand dollars of break, even EBITDA. Clearly, the portfolio is near a favorable tipping point for profitability, and much of the source of that strength is Dymocks drive to resource portfolio. Our resorts are performing very well and generated positive and growing EBITDA every month in the quarter. Let me share with you a couple of highlights from just two of our resorts to give you an idea of the pockets of strength. We are seeing the landing in lake tile. So a 19 percent increase in repr over the third quarter 2019 with an ADR of nearly 500 dollars per night and total Rampa approaching nearly five hundred and sixty dollars per night.

[00:13:32] EBITDA margins at this hotel increased nearly 14 hundred basis points as compared to the third quarter in twenty nineteen. The repairs to Sedona saw a 21 percent increase in roupas over the third quarter in 2019, with total Wepa approaching nearly six hundred and seventy five dollars per night. Moreover, we are taking steps to ensure this success continues, for example, subsequent to the quarter end, we completed a new Michael Maeno restaurant in Sonoma as part of the larger ahli up branding of that resort from a renaissance to an autograph. The restaurant opened strong and in just the first month of operation, generated nearly three hundred and twenty five thousand dollars in revenue. We also expect the restaurant to create a halo effect at that resort, which will allow us to increase room rates. Another example of strength is likely to come from the almost complete renovation of the Barbary Beach house in Key West, which will be done before year end. This former Sheraton has been reimagined into a very special lifestyle boutique that is already getting rave reviews and we are optimistic about our ability to drive this winter season. There are a number of other Auri projects recently completed or getting done throughout the portfolio, but there isn't enough time on this call to get into detail on all of them.

[00:15:25] Switching gears, let's look at each of our segments of demand in the quarter. Leisure is unquestionably the strongest performing segment in the portfolio, the resort portfolio performance increased strongly and steadily over the quarter from thirty six percent occupancy and one hundred and forty one dollars in total Rafaat in July to over forty three percent Occy and nearly one hundred and ninety one dollars in total. Rutbah in September. A fifty dollar per night jump. For the third quarter, ADR at our resorts increased two point two percent as compared to last year, with September showing good strength at up five percent. The resilience of rated R our resorts tells us price is not a gating issue in making the travel decision. This is an encouraging data point that these same people will ultimately prepared to travel when their employers feel comfortable letting them get back on the road. As for business transience, our current thinking is that we will not see a material change until there is announcement of a vaccine or broad distribution of a therapy. For our portfolio, this is transient, remain soft, but it did improve in the third quarter. This is transient revenue and rooms more than doubled from their contribution in the second quarter. In fact, this is transient rooms. We're twenty three percent of total rooms sold in the third quarter. Up from only 19 percent in the second quarter.

[00:17:23] Similarly, the group segment remains a relative soft spot outside of social gatherings such as weddings. We continue to expect that large corporate group events will be the final segment to recover. Nevertheless, there are some encouraging data points to share with you. The first data point is that Dumaresq saw approximately two hundred and fifty thousand room nights of leads generated each month during the quarter, with most of the inquiries for twenty twenty one and twenty twenty two. Interestingly, RFP conversion ratios to awarded business are at near normal rates. Also, sports teams are playing time, Iraq has arrangements with seven professional football and baseball teams, several NCAA sports teams and even a PGA golf tournament. Another good data point is that, according to CNN, September was the strongest month of RFP activity since March September volume is up 18 percent versus August, and October is on pace for a strong performance to.

[00:18:52] See, that also reports that overall group rates are down approximately five to 10 percent in twenty twenty one. But up five to 10 percent in 20, 20 to.

[00:19:07] Looking at twenty twenty one, rates are softer earlier in the year when uncertainty is the highest and quickly approach pre pandemic levels by late twenty twenty one. Group rate integrity in arties has been relatively more resilient in New York City, Boston and Chicago than it has been in San Francisco. Again, an encouraging trend given our geographic mix. Before handing the call to Jeff, I did want to touch on our capital investments. We held CapEx spending to eight point six million dollars in the quarter, which is inclusive of approximately a half a million dollars for Frenchman's Reef. Outside of life safety projects or emergency repairs, our primary focus remains conserving capital. However, we did prioritize projects that can produce a near-term earnings benefit and high return on investment. These projects include the FMV repositioning initiatives at our hotels in Sonoma and Charleston, as well as completing the conversion renovation at the Barberi Beach Resort in Key West. We expect these investments will be measurable earnings contributors in twenty twenty one and the average IRR for these projects is expected to exceed 30 percent before leaving CapEx. I did want to remind everyone that we have paused the reconstruction of Frenchman's Reef. Our current plan is to look for a joint venture partner for this project over the next year before restarting construction in order to preserve our balance sheet capacity. Now, let me turn the call over to Jeff Donnelly to discuss our balance sheet.

[Jeff Donnelly]

[00:21:15] Thanks, Mark. Let me start by talking about our liquidity. We improved our liquidity in the quarter by nearly seventy one million dollars as a result of the successful preferred offering, preferred equity offering. At the end of the third quarter, we had approximately four hundred and thirty five million dollars of total liquidity, including corporate level cash, hotel level cash and undrawn revolver capacity. I'm pleased to report we are beating our original estimates for monthly cash burn rates and we continue to make significant gains before capex. Our average monthly burn rate in the third quarter pro forma for the preferred dividend was fourteen point seven dollars million. This is 14 percent better than the sixteen point eight dollars million estimated in our early September investor presentation on a comparable basis. Let me walk through the sources of the two million dollar improvement. The net operating loss at the corporate energy level was ten million dollars per month in the quarter, as compared to our earlier estimate of eleven point five million to one point five million dollars per month improvement, owing among other reasons to improving top line strict cost controls and the decision to reopen additional hotels. Debt service was four point one million dollars per month in the quarter, as compared to a prior estimate of four point five million, the three to four hundred thousand dollars per month savings is a result of forbearance that will but will reverse in the coming months.

[00:22:48] The straight-line capital expenditure budget in both cases is three million per month, including CapEx. Our total company burn rate was seventeen point seven dollars million during the quarter and implies a cash runway through late twenty twenty two. As Mark mentioned at the start of the call, we strongly believe that we have more than enough liquidity to carry us through to a point where we are cash flow positive. And that is why we took the step of issuing preferred equity last quarter so that we would not be pressured into a common equity offering in the future. As it relates to the outlook for our burn rate, we are not providing specific guidance. However, remember that Q4 and Q1 historically see weaker demand levels and there is a risk that the recent increases in covid cases throughout much of the U.S. could lead to municipalities rolling back the operating guidelines that have allowed us to reopen. Well, we will continue to do everything within our power to minimize loss and maximize profitability. I encourage you to consider that sequential revenue and profit growth could prove challenging in the next two quarters. We updated our analysis of breakeven profitability and estimate that on hold, the portfolio will achieve breakeven profitability at twenty five percent occupancy on a gross operating profit basis and 40 percent on a net operating income basis.

[00:24:14] This is about 500 basis points, lower occupancy than our original or I should say our earlier estimates of break, even occupancy. The average daily rate assumed in this analysis is approximately 20 to 25 percent decline from twenty nineteen levels. Individual hotels can, of course, vary from the average. We ended the third quarter with one hundred eleven million dollars of cash and over three hundred million dollars of undrawn capacity on a revolver. We executed a one hundred and nineteen dollars million, eight and a quarter percent series, a preferred offering in August, and elected to use 50 million dollars of the proceeds to pay down our revolver, which remain available to us and retain the remaining net proceeds from the offering in cash. At the end of the quarter, we had six hundred and five million dollars of nonrecourse mortgage debt and a weighted average interest rate of four point two percent. And five hundred million dollars of bank debt comprised of four hundred million dollars of unsecured term loans and just under one hundred million dollars drawn on our unsecured revolving credit facility. As you have heard me say many times in recent months, our debt composition and maturity schedule is perhaps our balance sheets greatest strength.

[00:25:30] In general, banks are reluctant to commit new capital at this time, and they are keenly focused on one curtailing overreliance on bank debt and to addressing twenty twenty to twenty twenty two maturities without meaningfully impairing existing liquidity. Not surprisingly, these factors are the impetus for many travel and leisure companies entering the high yield bond market, and they expect those conditions will remain a driver for capital markets activity in the industry. In Twenty twenty one for Diamond Rock Bank, that is less than 50 percent of our net debt and net debt is just twenty two percent of our estimated replacement cost of our hotels. We have just one mortgage maturity in early twenty twenty two, which has an extension option, more critically, our revolver matures in twenty, twenty three and our term loans mature in twenty twenty four. Each has expansion options to ensure that we are not seeking new debt capital commitments from our lenders at this time. We believe these facts, in combination with our strong liquidity and declining burn rate greatly improve. The likelihood of interest can avoid the issuance of dilutive capital and pivot to offense at the appropriate time. But that I would turn the floor back over to Mark.

[Mark Brugger, President and Chief Executive Officer]

[00:26:44] Before we take your questions, I want to make a few comments about two events we announced in the quarter and conclude with our perspective on the future. In late August, we announced a sweeping transaction with Marriott International that has several features. Let me hit the highlights of that deal. Most significantly, we converted five of our managed hotel contracts to franchise agreements. These conversions were completed in September and we have engaged a variety of leading third party managers that are uniquely suited to each asset. In addition to the 50 to 100 basis point improvement in residual cap rate for the five hotels that generally Neuse to franchise properties, we believe the change will produce approximately two million dollars of incremental profit on stabilized cash flows. We've already started reaping benefits from the change as we consolidated finance and management roles in Alpharetta, Denver, Sonoma and Charleston that will yield almost four hundred thousand dollars of annual savings. The second biggest value creator from the deal is the new franchise agreement to brand the Vail Marriott Resort to a luxury collection brand upon completion of the renovation next year. As you recall, we had undertaken the renovation of this hotel to a luxury standard over the past few years, and the lobby renovation next year is the final phase. We expect to be done in late twenty twenty one in time for the ski season.

[00:28:29] Consistent with prior expectations, we estimate this repositioning fail could could result in three million dollars of incremental EBITDA given the significant rate differential that exists today between the resort as a Marriott and the luxury competitive set. The third benefit of the deal is that we have the right, but not the obligation to convert the J.W. Marriott Cherry Creek to a luxury collection brand with a small renovation. We are currently reviewing the R.I on this opportunity. The final benefit to us is that we secured an explicit right to terminate the autograph collection franchise agreement encumbering the Lexington Hotel for a termination fee. We believe that this improves the residual cap rate of the property by greatly expanding the universe of potential buyers. In the aggregate, we calculate that the sweeping agreement adds at least 50 million dollars of net asset value to the Dymock portfolio. No cash payment was associated with this agreement. Instead, Dymock agreed to standard renovation scope's that will be completed over the next three to five years for the converted hotels at cost, generally consistent with our normal internal expectations. In addition, we provided franchise extensions at our Westin, D.C. and Westin, San Diego properties at market terms, ensuring that these hotels will remain dominant hotels in their respective markets. The second announcement we made in late August was the addition of Mike Hart Meyer to the board of directors effective October 20 20.

[00:30:29] Mike is one of the most experienced lodging M&A bankers in the industry, and we believe he will be a valuable, unbiased voice in the boardroom to pursue options that maximize value for shareholders. Turning to our outlook, we saw improvement in the third quarter. We do not expect the industry to significantly rebound until there is a health care solution to the pandemic. Our current view is that at least one of the 11 vaccines in Phase three trials could announce positive findings in the next 90 days with broad distribution by mid twenty twenty one. This in combination with improved patient outcomes and broader acceptance of safety protocols such as social distancing and wearing masks should lead to increasing travel activity and improving financial performance. Once profitability is restored, we expect to see a handful of well capitalized lodging platforms pivot to exploit what could be an extended period of accretive investment opportunities. Let me conclude the prepared remarks by saying that these are challenging times, but we are prepared to meet them and determined to prosper. On the other side, we have a solid balance sheet to allow us to withstand the substantial downturn and then pivot to offense at the right time. We have great assets, strong industry relationships and an experienced management team that has successfully weathered numerous prior downturns over the prior 30 years.

[00:32:23] On that note, we'll now open up the call and happily take your questions.

[Operator]

[00:32:29] Thank you. And ladies and gentlemen, if you have a question, just star then one on your telephone keypad to withdraw your question. Simply press, apparently.

[00:32:41] One moment while we compiled Q&A roster. Our first question is from Rich Hightower with Evercore. Please go ahead.

[Rich Hightower, Evercore]

[00:32:51] Good morning, everybody. So a couple questions here I was, Mark, I was intrigued by the additional comment that you might be looking for a joint venture partner for Frenchman's. And, you know, I guess in the in the same context of not wanting to issue common equity at current prices, you're still giving you would still ostensibly be giving up some equity in the project. That's worth something. And there's a cost obviously associated with that new capital. And so just help us understand maybe the cost of that equity contribution, the dollars that you're investing. You know, would you take on project level debt, just some of the contours of what a deal might look like there?

[Mark Brugger, President and Chief Executive Officer]

[00:33:36] Sure. So say, you know, our our thought right now is that will engage a adviser or broker over the next year and go out and seek joint venture partner, which would essentially use their capital to fund the balance of the construction of the redevelopment and then share in the economics of the deal. That's kind of our our plan. Now, I think it could take a variety of structures and shapes, so it's probably premature to kind of speculate exactly what that will look like. But but our thought is it probably makes more sense to use someone else's capital for the reconstruction. That'll be that'll be debt and equity to vent to to share the upside, but also share the risk in the balance sheet capacity as we move forward.

[Rich Hightower, Evercore]

[00:34:25] Ok. And would you would you contemplate taking, you know, some sort of a management fee or a promote or anything like that, just as we understand some of the economics?

[Mark Brugger, President and Chief Executive Officer]

[00:34:36] I think we are very open to whatever structure maximizes value for us. So it could take a variety of forms of hate to kind of lead you down one path, because I think we're very flexible to make sure we can maximize profit.

[Rich Hightower, Evercore]

[00:34:51] Ok, got it. And just in in regards to the addition of Mike Myers to the board, you know, just the fact you sort of called it out in the in the prepared comments, is there anything that we should infer from that in terms of, you know, corporate strategy for Diamond Rock in the you know, in the time ahead?

[Mark Brugger, President and Chief Executive Officer]

[00:35:16] I mean, I think the point we're trying to make is that the board added someone that's really got great M&A experience. And certainly as we look out over the next couple of years, we think well capitalized companies like us are going to be in good shape to create value and want to make sure we have voices in the boardroom that that we're going to explore and be able to maximize those opportunities.

[Rich Hightower, Evercore]

[00:35:38] Thank you, sir.

[Operator]

[00:35:42] Thank you. Our next question comes from Smedes Rose with a Citi. Please go. Go ahead.

[Smedes Rose, Citigroup]

[00:35:49] Hi. Good morning. This is Stephan. First to me, just about you touched on business a little bit, but what kind of rebooking activity are you seeing? And I guess more specifically, what periods are you seeing? Activity and.

[Mark Brugger, President and Chief Executive Officer]

[00:36:08] Sure, so group I am the leads is actually picking up, as you would expect, the cancelation rates have declined, but still there's not much group business for the balance of this year. And the stuff that is booking early next year is pretty tentative. So the strength we're seeing in rebooking is really the second half of next year and and really twenty, twenty two when people have more confidence that we'll be on the other side of the health care crisis.

[Smedes Rose, Citigroup]

[00:36:41] And then the we've seen a lot of the cost containment from, you know, on our side as well as the France is not changing anything from the brand, the structure, you know, that will help owners over the long term.

[Mark Brugger, President and Chief Executive Officer]

[00:36:58] Yes. So that's a it's a great question. So the brands have been, I would say, great partners overall in trying to figure out how we can minimize costs and go through this. So while the franchise and management fees remain consistent, there's a lot of other costs that are allocated out to the properties that come under the umbrella of different terms called program services fees and other things. And they've done, I think, a very good job of moving rapidly at the onset of this crisis to reduce headcount and reduce allocated cost out to us. And we are seeing that, in fact, they've either cut it by 50 percent in some categories, eliminated it, or they're going to have periods where they're not going to charge it at all early next year. So I think our opinion is they're doing a great job and they are doing things that are benefiting the cost that are allocated out to our hotels.

[Operator]

[00:37:56] Thank you, our next question comes from Austin Wurschmidt with KeyBanc. Please go ahead.

[Austin Wurschmidt, KeyBanc Capital Markets]

[00:38:03] Great, thanks. Good morning, everybody wanted to circle back to the Frenchman's reef and your comments around seeking a JV partner, would you guys like to maintain control of the asset? And what's holding you back from from just an outright sale? And then also curious if this is a partnership that you think you would or you would consider additional investments beyond just just the Frenchman's deal?

[Mark Brugger, President and Chief Executive Officer]

[00:38:34] Yeah. So there's a lot there. So I would say we we think this is a spectacular piece of real estate and it's an opportunity. We see a lot of upside. And I think the the idea of the joint venture is that we can kind of have our cake and eat it, too, a little bit, and that we can bring someone in that can help use their balance sheet to finish the project. And hopefully we can stay in for an equity position and realize some of what we think is going to be great, great upside over the next three or four years. So that's the kind of impetus of going down that path. I think for the second part of your question, this probably isn't the ideal deal to do a broader joint venture. We have had a number of inquiries from institutions that have wanted to explore, doing joint ventures to take advantage of distressed debt, distressed hotel opportunities. In this environment, there might be something that's interesting, but those those folks probably there's not a lot of overlap for people that want to do Caribbean development deals.

[Austin Wurschmidt, KeyBanc Capital Markets]

[00:39:43] I don't understand. Just thoughts on an outright sale, I mean, it's just really just the upside that you talked about and you just wanting to maintain that as EBITDA ramps over time.

[Mark Brugger, President and Chief Executive Officer]

[00:39:53] Yeah, I mean, we're flexible. Everything's for sale. So if someone's willing to pay us a hundred percent of what we think the future value is, we would gladly sell the hotel. But I think in this environment, you know, we we believe that there is value there. So we're likely to to maximize our view of value versus what they pay us. Probably the way to do that is through a joint venture.

[Austin Wurschmidt, KeyBanc Capital Markets]

[00:40:16] Got it. And then appreciate all the detail you provided and the thoughts on some of the near-term. Otherwise projects like you mentioned, Barbary Beach and some other SMB initiatives, but maybe focusing more on some of the larger projects you've outlined, Frenchman's dimensions on hold, and then you've got some restrictions, I believe, under the amended credit agreement. So how much of those nearly 40 to 50 million of ROIC spend you've specifically outlined, like adding Kei's at the landing or the Boston Hilton are targeted maybe for twenty twenty one? And how are you prioritizing some of those projects

[Mark Brugger, President and Chief Executive Officer]

[00:40:50] So we can for various better? We had a lot of front end loaded ROIC projects in this year which got completed as the crisis was coming on. So we did Worthington. We did a big project and created a celebrity chef restaurant there. We build out one in Charleston just across the portfolio. We had a number of things that got completed. Right now. The big focus is Barberi Beach House, which we think is a big opportunity that we're completing. Vayle will be the number one big project, if you will, from our eye perspective in twenty, twenty one. And there's a variety of smaller projects, but big spend projects like this, you know, like the additional Keys and Boston Hilton or the seventeen additional keys at the landing will probably get pushed into Twenty twenty to.

[Austin Wurschmidt, KeyBanc Capital Markets]

[00:41:41] Got it. Thanks for the time, sir.

[Operator]

[00:41:44] Thank you. Our next question comes from Chris Woronka Deutsche Bank. Go ahead.

[Chris Woronka, Deutsche Bank]

[00:41:51] Hey, good morning, guys. I wanted to drill down a little bit into the into the resort performance, which obviously was really strong, especially on the on the right side when you think about slightly more normalized times and it'll be great for you and for for the entire industry. But I guess, you know, is there is there going to be a little bit of an offset? I mean, either of you been able to drill down into your database to see if, you know, these customers who are staying maybe on a Thursday at a resort for seven hundred dollars are going to go back to paying two hundred dollars on their corporate rate on a on a Wednesday. So not to nitpick, I'm just curious if you've if you've been able to drill down and see if if some of these customers are, you know, have swapped business for for for Leyser.

[Mark Brugger, President and Chief Executive Officer]

[00:42:39] Yeah, it's a good question, I think overall in the resource portfolio, when you think about we have some, you know, local medium sized resource that that usually have some crude components that will probably offset as as demand comes. But inevitably, we're probably capturing people at at luxury resorts like labelers that otherwise would be flying to Paris or going to Lake Como or something on a Saturday night in Sedona. It's fourteen hundred dollars a night. That's a you know, that's a travel and go a lot of places. I think we're optimistic that we are getting a lot of new customers that have never been to these resorts. And we think that there are terrific experiences. So I think the offset to, you know, when when the kind of pandemics past and people can go to more locations is that more people have been introduced to our resorts than ever before. And I think they're having great experiences. So not only will they come back, but they'll tell other people and there's kind of a multiplier effect on that.

[00:43:37] So we're relatively optimistic that, you know, a lot of this business in this rate sticks even over the next couple of years.

[Chris Woronka, Deutsche Bank]

[00:43:45] Ok, that's helpful. And then on on New York, now that you have the option to be out of the branding contract on the Lexington, does that, you know, potentially accelerate any any plans to to market it? I don't know where you guys see the the market for for New York right now. And also just your opinion on where the city is shaking out in terms of hotels closing and that potentially making assets like yours more attractive to longer term buyers?

[Mark Brugger, President and Chief Executive Officer]

[00:44:18] Yeah, New York's an interesting market. I mean, I think New York stays bad. It's going to be really bad for a little while and then at some point it's going to turn and be really good. Our concentration of real estate in in Manhattan is mostly in midtown east. There is negative supply in that market. You know, we've had two of our largest competitors either close is to have closed permanently and a third may close. I think we're looking at negative nine percent supply ahead of supply for the Lexington at the moment. So, you know, I think that's very encouraging. The other really encouraging sign for us is the autograph now will be just about the only full service merit option in midtown East now that the the fliers come off the side. So, as you can imagine, the did we have a huge funnel of our customers that will then have less options in midtown east and hopefully that will drive outperformance of that hotel once New York City opens up again. But but listen, between you know, the next couple of quarters are going to be they're going to be very difficult in New York like they are in San Francisco and some of these other markets. And, you know, that's that's the world we're living in today. But I think we're if you had a five year hold, we're tremendously positive on New York over that period because I think another side supply does get constrained. But in the next couple of quarters, it going to be very difficult in New York.

[Chris Woronka, Deutsche Bank]

[00:45:48] Ok, very good. Appreciate all the detail. Thanks, Mark.

[Mark Brugger, President and Chief Executive Officer]

[00:45:52] Sure.

[Operator]

[00:45:53] Thank you. Our next question comes from Lukas Hartwich with Greenstreet.

[Lukas Hartwich, Green Street Advisor]

[00:45:59] Thank you. As someone you know, as time goes on and operators get a better handle on operating expenses, can you talk about the confidence level being able to operate more efficiently in a normal environment and maybe just touch on where those savings will come from?

[Mark Brugger, President and Chief Executive Officer]

[00:46:19] Sure. I mean, you never, never waste a good crisis. As they say. We are doing things that we've never done before. We've combined jobs we've never combined before. We're running efficiency levels, low occupancy we've never, never done before. I think the brands are testing new models for distribution of allocated cost. Do we need all these costs or people can technology replace what we had before? It's a once in a generation opportunity to reinvent a lot of their programs. Right. Because if you if you if you've furloughed or laid off people, you can really then restaff and rethink the whole model, which I know they are doing on a number of fronts. So I think and they're incentivized to get their costs as low as possible. Remember, their their whole business model is making sure that they're delivering value so people continue to sign up for their brands. And in this environment, you know, they want their pipeline to stay. They're going to have to continue to work on making that model as profitable as possible for real estate owners. So I think a lot of that sticks. There is a number of things that we're doing today that won't stick. I mean, we can't close down the restaurants and not have any F at a full service hotel forever.

[00:47:35] We can do things, you know, can we can we run all the F and be out of the what was the breakfast and closed the convert, the the fine dining restaurant. I mean, there will be some of those changes, but we are certainly doing things in this environment that are not not sustainable. But I'm very encouraged that on the allocated costs, which is millions of dollars to us a year, that those will be reduced on the other side of this even when we're back to normalized cash flows.

[Lukas Hartwich, Green Street Advisor]

[00:48:05] Great, thank you.

[Mark Brugger, President and Chief Executive Officer]

[00:48:07] Absolutely.

[Operator]

[00:48:09] Thank you. Our next question is from Stephen Grambling with Goldman Sachs. Stephen, your line is open.

[Stephen Grambling, Goldman Sachs]

[00:48:19] Hi there. So as you think about and thanks for taking the question as you think about this small resort property strategy that you've been executing on it, you know, ahead of this and seeing it really, you know, play out. Well, you mentioned this comment about going on offense. At some point, it seems like valuations on that side of the hotel space have been a little bit more resilient. So as you're thinking about continuing to execute on that strategy, how do you position yourself as an advantage buyer and or do you feel like the resilience of the business is making you rethink what the appropriate valuation is within any process?

[Mark Brugger, President and Chief Executive Officer]

[00:49:02] Good question. So a couple of thoughts. One is certainly this downturn has validated what we've been doing over the last number of years and buying small resorts for seven of our last eight acquisitions. And frankly, I wish our entire one hundred percent of our portfolio was small resorts at the moment. No, we're still bullish on resorts. We're still bullish that they're going to outperform. There is less distress certainly in that market. But I do think we have an enormous head start. You know, we've kept our entire acquisition team in place. They've over the last four or five years have built a pretty, pretty impressive database and relationships. And a lot of these resort and resort called micro markets like Sedona and Sonoma and Lake Tahoe's, where I think we have a head start again because we've been there and we've been building these relationships, monitoring these these potential deals. We're not going to get the same kind of discount to pre covid. But frankly, that's because the values are still there. I mean, the cash flow hasn't, you know, hasn't gone down as much and the upside still remains. So we still think that that'll be the bulk of our external growth over the next several years.

[Stephen Grambling, Goldman Sachs]

[00:50:19] Fair enough. And one quick follow up just related to that and maybe I missed this in the opening remarks, but select larger properties. We opened a little bit later in the quarter. And if I look at the dispersion of cash burn, can you just elaborate a little bit more about how cash burn is different, has been different across the portfolio, and also how that might evolve moving into the fourth quarter?

[Mark Brugger, President and Chief Executive Officer]

[00:50:45] Sean, I'll let Jeff jump in here, too. I mean, it's, as you would imagine, are small or small resort, you know, have been the best.

[00:50:55] And then as you get to the larger resorts that rely on some group, you know, it kind of fades a little bit. And then the the worst performing assets are the big box hotels. So the bigger hotels just there's no there is no large group meetings happening in the United States and there is relatively big property taxes and other fixed cost with those those boxes, even if they're closed. So there's the toughest burn rates. Jeff, do you want to jump in?

[Jeff Donnelly]

[00:51:24] Yeah, sure. Hey, Stephen. Yeah. The thing I would add and maybe just reiterate from Mark's remarks earlier in the call is a lot of our burn rate is really concentrated in our larger hotels. As Mark said. I think, you know, during the month of September, for example, I think the three closed hotels plus the West and Boston, Chicago, Marriott that just reopened in the quarter, collectively, those were the vast majority of our hotel level burn. I think, you know, in rough numbers, if it was sort of eight dollars million of burn, probably 90 percent of that, or if not more was really concentrated in the larger junkier hotels. I think the twenty five other operating hotels, which are pretty heavy in the resort area, collectively almost broke even.

[00:52:06] So I think that's kind of interesting indication for how things are progressing. It's hard to say.

[00:52:12] Well, hold that way each and every week or month as we move forward into the remainder of year. But I think it shows the disparity there.

[Stephen Grambling, Goldman Sachs]

[00:52:21] Great, thanks so much.

[Operator]

[00:52:24] Thank you. Our next question comes from Anthony Powell with Barclays. Go ahead.

[Anthony Powell, Barclays]

[00:52:32] Hi. Good morning. I want to focus a bit more on your I guess your your urban lifestyle and the luxury properties like, say, the you know, the Pellmann Phenix, maybe the Gweneth. It's in there. You are acquiring or developing some of them. Some of these in a few years ago, we haven't heard you talk more about them recently. That's so part of your strategy going forward. Some of these hotels have done relatively better than the larger big box hotels and in the urban markets.

[Mark Brugger, President and Chief Executive Officer]

[00:53:00] Yeah, it's a great question. So they are part of our strategy.

[00:53:04] I would say that it's we think about our external growth strategy. The focus still remains trying to get to 50 percent resorts in total.

[00:53:12] So we sit down and we look at our pipeline that's still magnetic north on priorities. But, you know, hotels like the emblem in San Francisco or the Glen, we still believe in small or medium size lifestyle hotels and in those markets. But as you think about our portfolio and portfolio rotation, we're more likely to sell urban hotels and buy more resorts as we continue to reposition the portfolio. I think that will drive outperformance over the next five to seven years. So still part of our strategy, you know, the big boxes are probably the least part of our strategy going forward that we will not buy another big box hotel. I just don't think that's where the outperformance is going to be going forward. So you'll see us much more committed to continue to focus on small resorts first and an urban lifestyle like the small size lifestyle, hotels and urban markets. Second.

[Anthony Powell, Barclays]

[00:54:12] I think on that topic, yeah, big box hotels are, I guess, out of favor or but I mean, there are some companies who are still investing in these properties. So could you maybe think of yourself selling some of these larger big box properties in the future, even to their peers as they kind of go to that strategy?

[Mark Brugger, President and Chief Executive Officer]

[00:54:30] Yes, that's the short answer is will continue and clearly that would be the fastest route to getting to some of our what we think is the kind of model portfolio allocation for Dymock through subtraction as well as Ed. But yes, we're open to that. I'm not sure now is the best time to sell a big box hotel. But as we kind of think about where do we want to be five years from now, you know, I'm not sure they'll probably shrink as a percentage of the company as we grow in any event, because we're not going to buy any more big boxes. And we only really have the two and we like them both the right price. We would certainly be sellers.

[Anthony Powell, Barclays]

[00:55:10] Right. Thank you.

[00:55:13] Thank you. And ladies and gentlemen, this concludes today's Q&A and program. Thank you for participating. Have a great day, everyone.