Welcome to the DiamondRock's Third Quarter 2020 Earnings Call. I will now hand the call over to Ms. Briony Quinn. Please go ahead.

Thank you, Tiffany. Good morning, everyone. Welcome to DiamondRock's Third Quarter 2020 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 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 am pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning, and thank you for your interest in DiamondRock. Since our last earnings call, we have made outstanding progress on multiple fronts. I'll highlight just four. 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 NAV of our portfolio by $50 million but distinguishes DiamondRock's portfolio as the least encumbered by long-term management agreements among all full-service public lodging REITs. 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 that DiamondRock is known for. In contrast, business travel and group business demand has only marginally improved and is likely to remain very constrained until there is a healthcare 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 healthcare solution. Personally, this is my fourth downturn, and we know how to manage through these environments. That experience is why DiamondRock 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. 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. 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 $8 million in severance paid out this year. Rest assured that we are doing everything possible to be responsible fiduciaries and community citizens while making certain that DiamondRock is set up for future success. Let's turn specifically to DiamondRock's third quarter. Hotel adjusted EBITDA in the quarter was a $17.4 million loss, a marked improvement from the $30.4 million loss in the second quarter. Corporate adjusted EBITDA was a $24.4 million loss as compared to a $37 million loss in the second quarter. Third quarter adjusted FFO per share was a loss of $0.22 as compared to a loss of $0.20 in the second quarter. Two items worth noting with these results: one, they exclude $7.4 million in onetime severance cost; and two, this one is important, adjusted FFO per share was negatively impacted by a noncash income tax valuation allowance recognized in the quarter of $12.4 million or $0.06 per share. In other words, our third quarter AFFO would have been a loss of only $0.16 per share without that tax adjustment. Moreover, in the quarter, we successfully reopened five more hotels and had nearly 90% of our rooms available to sell at the end of the third quarter. To illustrate the progress, that 90% figure compares to just 58% at the end of the second quarter. Furthermore, portfolio occupancy jumped over 1,000 basis points from the second quarter to 18.6%. Recall that we ended the second quarter with just 22 hotels open and operating. We opened a 23rd hotel, our Lodge at Sonoma Resort, on the first day of the third quarter. Those 23 hotels saw occupancy rise from 26% in July to 28% in August and, finally, to 31% in September. In July, we reopened 2 other hotels besides the Lodge at Sonoma 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 our two big-box hotels, the Chicago Marriott and the Boston Waterfront Westin in early September. Now as you'd expect, nightly occupancy is comparatively lower at these two big-box hotels than the balance of the portfolio. But a resilient base of contract business and aggressive cost controls have thus far confirmed that reopening was the right decision. 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 and operating the entire quarter have delivered consistent gains in occupancy, RevPAR, and total RevPAR. For the entire portfolio, total revenue decreased 79% in the quarter as a result of an 81% decline in RevPAR that was partially offset by a smaller decline in food and beverage revenue. Total revenues were $50 million in the quarter as compared to just $20.4 million in the second quarter. Over the summer, monthly revenues showed steady progress, rising from slightly over $11 million in June to over $14 million in July to over $16 million in August and, finally, reaching almost $20 million in September. Encouragingly, revenue in October looks to be coming in even a little bit better at over $22 million. Okay, let's talk about profitability. To maximize absolute profit, our asset managers are working closely with our operators to aggressively drive revenue while implementing strict expense controls. In the third quarter, every department: rooms, F&B, and others saw material improvement in profitability as compared to Q2 with sequential acceleration in flow-through that surpassed internal forecasts. For example, the rooms department margin rose from 45% in the second quarter to 64% in the third quarter driven in large part by a 25% sequential reduction in the cost per occupied room. Over the course of the quarter, we saw the number of hotels achieving breakeven profitability continue 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 35% to a positive 9% margin as a testament to our ability to drive revenue while constraining cost. On an EBITDA basis, six hotels in June were operating profitably, and that figure rose to 10 hotels by September. What you cannot see, however, is that an additional 10 hotels were, on average, approximately $100,000 from breakeven 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 Marriott and the Westin Boston, from the 27 hotels we had opened in September, the remaining 25 hotels collectively would have been within $200,000 of breakeven EBITDA. Clearly, the portfolio is near a favorable tipping point for profitability, and much of the source of that strength is DiamondRock's drive-to resort 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 Tahoe saw a 19% increase in RevPAR over the third quarter 2019, with an ADR of nearly $500 per night and total RevPAR approaching nearly $560 per night. EBITDA margins at this hotel increased nearly 1,400 basis points as compared to the third quarter in 2019. The L'Auberge de Sedona saw a 21% increase in RevPAR over the third quarter in 2019, with total RevPAR approaching nearly $675 per night. Moreover, we are taking steps to ensure this success continues. For example, subsequent to the quarter end, we completed a new Michael Mina restaurant in Sonoma as part of the larger ROI upbranding of that resort from a Renaissance to an Autograph. The restaurant opened strong and, in just the first month of operation, generated nearly $325,000 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 rate this winter season. There are a number of other ROI 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. 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 36% occupancy and $141 in total RevPAR in July to over 43% occupancy and nearly $191 in total RevPAR in September, a $50 per night jump. For the third quarter, ADR at our resorts increased 2.2% as compared to last year, with September showing good strength at up 5%. The resilience of the rate at our resorts tells us price is not a gating issue in making the travel decision. This is an encouraging data point that the same people will ultimately be prepared to travel when their employers feel comfortable letting them get back on the road. As for business transient, our current thinking is that we will not see a material change until there is an announcement of a vaccine or broad distribution of a therapy. For our portfolio, business transient remained soft, but it did improve. In the third quarter, business transient revenue in rooms more than doubled from their contribution in the second quarter. In fact, business transient rooms were 23% of total rooms sold in the third quarter, up from only 19% in the second quarter. 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 DiamondRock saw approximately 250,000 room nights of leads generated each month during the quarter with most of the inquiries for 2021 and 2022. Interestingly, RFP conversion ratios to awarded business are at near-normal rates. Also, sports teams are playing. DiamondRock 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 Cvent, September was the strongest month of RFP activity since March. September volume is up 18% versus August. And October is on pace for a strong performance, too. Cvent also reports that overall group rates are down approximately 5% to 10% in 2021 but up 5% to 10% in 2022. Looking at 2021, rates are softer earlier in the year when uncertainty is the highest and quickly approach pre-pandemic levels by late 2021. Group rate integrity in RFPs 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 off to Jeff, I did want to touch on our capital investments. We held CapEx spending to $8.6 million in the quarter, which is inclusive of approximately $0.5 million 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 F&B repositioning initiative at our hotels in Sonoma and Charleston as well as completing the conversion renovation at the Barbary beach resort in Key West. We expect these investments will be measurable earnings contributors in 2021, and the average IRR for these projects is expected to exceed 30%. 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.

Thanks, Mark. Let me start by talking about our liquidity. We improved our liquidity in the quarter by nearly $71 million as a result of a successful preferred equity offering. At the end of the third quarter, we had approximately $435 million 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 $14.7 million. This was 14% better than the $16.8 million estimated in our early September investor presentation on a comparable basis. Let me walk through the sources of the $2 million improvement. The net operating loss at the corporate NOI level was $10 million per month in the quarter as compared to our earlier estimate of $11.5 million, a $1.5 million per month improvement, owing, among other reasons, to improving top line, strict cost controls and the decision to reopen additional hotels. Debt service was $4.1 million per month in the quarter as compared to a prior estimate of $4.5 million. The $300,000 to $400,000 per month savings is a result of forbearance that will reverse in the coming months. The straight-line capital expenditure budget in both cases is $3 million per month. Including CapEx, our total company burn rate was $17.7 million during the quarter and implies a cash runway through late 2022. 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 for our burn rate outlook, we are not providing specific guidance. However, typically, Q4 and Q1 experience lower demand levels, and there is a risk that the recent surge in COVID cases across much of the U.S. may prompt municipalities to rollback the operating guidelines that facilitated our reopening. While we will strive to minimize losses and maximize profitability, please consider that sequential revenue and profit growth may be difficult in the coming two quarters. We have revised our breakeven profitability analysis and estimate that overall, the portfolio will reach breakeven at 25% occupancy on a gross operating profit basis and 40% on a net operating income basis. This is approximately 500 basis points lower occupancy than our previous breakeven occupancy estimates. The average daily rate in this analysis reflects a decline of about 20% to 25% from 2019 levels, although individual hotel performance may differ. We finished the third quarter with $111 million in cash and over $300 million of undrawn capacity on our revolver. In August, we completed a $119 million, 8.25% Series A preferred offering and chose to allocate $50 million of the proceeds to reduce our revolver, which is still available to us, while keeping the remaining net proceeds from the offering as cash. At the end of the quarter, we carried $605 million in nonrecourse mortgage debt with a weighted average interest rate of 4.2%, and $500 million in bank debt, consisting of $400 million in unsecured term loans and just under $100 million drawn from our unsecured revolving credit facility. As I have mentioned several times recently, the composition of our debt and our maturity timetable is arguably our balance sheet's greatest strength. 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 two, addressing 2020 to 2022 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 I expect those conditions will remain a driver for capital markets activity in the industry in 2021. For DiamondRock, bank debt is less than 50% of our net debt, and net debt is just 22% of our estimated replacement cost of our hotels. We have just one mortgage maturity in early 2022, which has an extension option. More critically, our revolver matures in 2023, and our term loans mature in 2024 and each has extension options, too. In short, 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 DiamondRock can avoid the issuance of dilutive capital and pivot to offense at the appropriate time.

Before we take your questions, I wanted 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 inures to franchise properties, we believe the change will produce approximately $2 million of incremental profit on stabilized cash flows. We have already started reaping benefits from the change as we consolidated finance and management roles in Alpharetta, Denver, Sonoma, and Charleston that will yield almost $400,000 of annual savings. The second biggest value creator from the deal is a new franchise agreement to upbrand the Vail Marriott resort to a luxury collection brand upon completion of the renovation next year. As you'll 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 2021 in time for the ski season. Consistent with prior expectations, we estimate this repositioning at Vail could result in $3 million 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 JW Marriott Cherry Creek to a Luxury Collection brand with a small renovation. We are currently reviewing the ROI 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 this sweeping agreement adds at least $50 million of net asset value to the DiamondRock portfolio. No cash payment was associated with this agreement. Instead, DiamondRock agreed to standard renovation scopes that will be completed over the next three to five years for the converted hotels at costs 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 Hartmeier to the Board of Directors effective October 2020. 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. While we saw improvement in the third quarter, we do not expect the industry to significantly rebound until there is a healthcare solution to the pandemic. Our current view is that at least one of the eleven vaccines in Phase III trials could announce positive findings in the next 90 days with broad distribution by mid-2021. 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 last 30 years. On that note, we'll now open up the call and happily take your questions.

Our first question is from Rich Hightower with Evercore.

I have a couple of questions. Mark, I was interested in your comment about possibly seeking a joint venture partner for Frenchman's. In the context of wanting to avoid issuing common equity at current prices, it seems like you would still be giving up some equity in a valuable project, which comes with a cost for that new capital. Could you help us understand the potential cost of that equity contribution and the amount you're considering? Additionally, would you consider taking on project-level debt? Could you outline what a deal might look like?

Sure, Rich. I would say our thought right now is that we'll engage an adviser or broker over the next year and go out and seek a 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, I'll call it, Plan A now. I think it could take a variety of structures and shapes. So it's probably premature to speculate exactly what that will look like. But our thought is that it probably makes more sense to use someone else's capital for the reconstruction, that will be debt and equity events to share the upside but also to share the risk in the balance sheet capacity as we move forward.

Okay. And would you contemplate taking some sort of a management fee or a promote or anything like that, just as we understand some of those economics?

Yes, I think we are very open to whatever structure maximizes value for us. So it could take a variety of forms. I'd hate to kind of lead you down one path because I think we're going to be flexible to make sure we can maximize profit.

Okay. Got it. And just in regards to the addition of Mike Hartmeier to the Board, just the fact that you sort of called it out in the prepared comments, is there anything that we should infer from that in terms of corporate strategy for DiamondRock in the time ahead?

No, I mean I think the point we're trying to make is that the Board added someone who's really got great M&A experience. And certainly, as we look out over the next couple of years, we think the well-capitalized companies like us are going to be in good shape to create value and want to make sure we had voices in the boardroom that were going to explore and be able to maximize those opportunities.

Our next question comes from Smedes Rose with Citi.

This is Seth on for Smedes. You briefly mentioned group business. What kind of rebooking activity are you observing, and specifically, during what time periods are you noticing this activity?

Sure. So group volume, the leads are actually picking up. As you would expect, the cancellation 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 rebookings is really the second half of next year and really 2022 when people have more confidence that we'll be on the other side of the healthcare crisis.

Okay. We've noticed significant cost management on both the owner and brand sides. Is this affecting the brand fee structure in a way that will benefit owners in the long run?

Yes, that's a great question. The brands have been excellent partners in working to minimize costs during this time. While the franchise and management fees have remained stable, many other costs that are associated with the properties fall under different categories, such as program services fees. They have acted quickly at the beginning of this crisis to reduce headcount and cut costs allocated to us. As a result, we are seeing significant reductions, with some categories seeing cuts of 50%, or even complete elimination. Additionally, there will be periods early next year where they won’t charge these fees at all. Overall, we believe they are performing well and taking actions that positively impact the costs allocated to our hotels.

Our next question comes from Austin Wurschmidt with KeyBanc.

I 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 curious what's holding you back from just an outright sale? And then also curious if this is a partnership that you think you would consider additional investments beyond just the Frenchman's deal?

We see this as a fantastic piece of real estate with significant potential. The goal of the joint venture is to leverage a partner's balance sheet to complete the project while allowing us to maintain an equity position and benefit from the anticipated growth over the next three to four years. Regarding your second question, this may not be the best deal for a wider joint venture. We've received several inquiries from institutions interested in exploring joint ventures to capitalize on distressed hotel opportunities in this environment. While there could be interesting possibilities, there is likely limited interest from those looking to invest in Caribbean development projects.

Got it. Understood. And then just thoughts on an outright sale. I mean is this really just the upside that you talked about and you're just wanting to maintain that as EBITDA ramps over time?

Yes. I mean we're flexible; everything is for sale. So if someone's willing to pay us 100% of what we think the future value is, we would gladly sell the hotel. But I think that in this environment, we believe that there is value there. So we're likely to maximize our view of value versus what someone may pay us, probably the way to do that is through a joint venture.

Okay. Got it. And then I appreciate all the detail you provided and the thoughts on some of the near-term ROI projects, like you mentioned Barbary Beach and some other F&B initiatives. But maybe focusing more on some of the larger projects you've outlined, Frenchman's you mentioned is on hold and then you've got some restrictions, I believe, under the amended credit agreement. So how much of those nearly $40 million to $50 million of ROI spend you've specifically outlined, like adding keys at the Landing or the Boston Hilton, are targeted maybe for 2021? And how are you prioritizing some of those projects?

We made significant progress this year with several front-loaded ROI projects that were finished just as the crisis began. For instance, we completed the Worthington project, which included a Celebrity Chef restaurant, and we also developed one in Charleston. Across our portfolio, we accomplished a number of projects. Currently, we are focusing on Barbary Beach House, which we believe presents a substantial opportunity. Vail is expected to be our most significant project from an ROI standpoint in 2021, along with various smaller initiatives. However, larger expenditures, such as adding more rooms at the Boston Hilton or the additional rooms at the Landing, may be deferred until 2022.

Our next question comes from Chris Woronka with Deutsche Bank.

I wanted to drill down a little bit into the resort performance, which obviously was really strong, especially on the rate side. When you think about slightly more normalized times, and it will be great for you and for the entire industry, but I guess is there going to be a little bit of an offset? I mean I don't know if you've been able to drill down into your database to see if these customers who are staying maybe on a Thursday at a resort for $700 are going to go back to paying $200 on their corporate rate on a Wednesday. So not to nitpick, I'm just curious if you've been able to drill down and see if some of these customers have swapped business for leisure?

Yes. I mean it's a good question. I think overall in the resort portfolio and when you think about we have some, what I'll call, medium-sized resorts that usually have some group components, that will probably offset as demand comes. But inevitably, we're probably capturing people at luxury resorts, like L'Auberge, that otherwise would be flying to Paris or going to Lake Como or something on a Saturday night. In Sedona, it's $1,400 a night. That's a traveler who can 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 they're terrific experiences. So I think the offset to when the kind of pandemic has passed 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. So we're relatively optimistic that a lot of this business and this rate sticks even over the next couple of years.

Okay. That's helpful. And then on New York, now that you have the option to be out of the branding contract on the Lexington, does that potentially accelerate any plans to market? I don't know where you guys see the market 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?

New York is a fascinating market. I believe the situation in New York will remain challenging for some time, but eventually it will improve significantly. Our real estate focus is primarily in Midtown East, where there is a lack of supply. Two of our major competitors have closed permanently, and a third might do the same. Currently, we're facing a competitive supply decrease of about 9% for the Lexington. This is quite promising. Another positive development for us is that the Autograph will now be one of the few full-service Marriott options in Midtown East, particularly since the Marriott East Side has dropped its flag. With fewer Marriott options available in Midtown East, we anticipate that this will result in better performance for that hotel when New York City eventually opens up again. However, the next few quarters are expected to be tough in New York, similar to what we see in San Francisco and other markets. This is the reality we're currently facing. Looking ahead to the next five years, we remain very optimistic about New York, as we expect supply constraints to improve conditions on the other side. Nonetheless, the upcoming quarters are likely to be quite difficult in New York.

Our next question comes from Lukas Hartwich with Green Street.

I just have one. As time goes on and operators get a better handle on operating expenses, can you talk about the confidence level of being able to operate more efficiently in a normal environment and maybe just touch on where those savings will come from?

Certainly. It's important not to squander a crisis. We're undertaking initiatives we've never attempted before and merging roles that were previously separate. We're achieving efficiency levels amidst low occupancy that we haven't seen previously. The brands are exploring new models for distributing costs. They are questioning the necessity of certain personnel and considering if technology can take over previous functions. This presents a unique opportunity to transform many of their programs, especially since they've had to furlough or lay off staff. This provides a chance to reassess and restaff while rethinking the entire operational model, which I know is being actively pursued. They are motivated to minimize costs because their business model relies on delivering value to encourage continued brand loyalty. In this context, maintaining their pipeline means they must work diligently to make their model as profitable as possible for real estate owners. I believe many of the current changes will remain in place, but some will not. For instance, we can't permanently close restaurants and eliminate dining services at full-service hotels. There will be adaptations, such as handling all food and beverage from a different location or reconfiguring dining spaces. However, I am optimistic that costs allocated to us, which amount to millions each year, will be lower on the other side of this, even when our cash flows return to normal.

Our next question comes from Stephen Grambling with Goldman Sachs.

So as you think about the small resort property strategy that you've been executing on ahead of this and seeing it really 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 advantaged buyer? And/or do you feel like the resilience of the business is making you rethink what the appropriate valuation is within any process?

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 in buying small resorts, right, seven of our last eight acquisitions. And frankly, I wish our entire 100% 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. We've kept our entire acquisition team in place. They, over the last four or five years, have built a pretty impressive database and relationships in a lot of these resorts, in resorts what I'll call micro markets like Sedona and Sonoma. And Lake Tahoe is where I think we have a head start, again, because we've been there and we've been building these relationships, monitoring these potential deals. We're not going to get the same kind of discount pre-COVID. But frankly, that's because the values are still there. I mean their cash flow hasn't gone down as much and the upside still remains. So we still think that, that will be the bulk of our external growth over the next several years.

Fair enough. I have a quick follow-up related to that. I may have missed this in the opening remarks, but I noticed that some larger properties reopened a bit later in the quarter. Can you elaborate on how cash burn has varied across the portfolio and how you expect that to change as we move into the fourth quarter?

Sure. And I'll let Jeff jump in here, too. I mean it's as you would imagine. Our small resorts have been the best. And then as you get to the larger resorts that rely on some group, it kind of fades a little bit. And then the worst-performing assets are the big-box hotels. So the bigger hotels, there's no large group meetings happening in the United States. And there are relatively big property taxes and other fixed costs with those boxes even if they're closed. So those have the toughest burn rates. Jeff, do you want to jump in?

Yes, sure. Stephen, yes, the thing I would add and maybe just to 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 during the month of September, for example, I think the three closed hotels plus the Westin Boston and Chicago Marriott that just reopened in the quarter, collectively, those were the vast majority of our hotel level burn. I think, in rough numbers, if it was sort of $8 million of burn, probably 90% of that, or if not more, was really concentrated in those larger, chunkier hotels. I think the 25 other operating hotels, which are pretty heavy in the resort area, collectively almost broke even. So I think that's kind of interesting indication for how things are progressing. It's hard to say we'll hold that way each and every week or month as we move forward in the remainder of the year. But I think it shows the disparity there.

Our next question comes from Anthony Powell with Barclays.

I wanted to focus a bit more on your, I guess, your urban lifestyle or luxury properties, like, say the Palomar Phoenix, and maybe The Gwen fits in there. You were acquiring or developing some of these a few years ago. We haven't heard you talk more about them recently. Is that still part of your strategy going forward? Some of these hotels have done relatively better than the larger big-box hotels in the urban markets.

Yes, it's a great question. So they are part of our strategy. I would say that as we think about our external growth strategy, the focus still remains trying to get to 50% resorts in total. So when we sit down and we look at our pipeline, that's still magnetic north on priorities. But hotels like the Emblem in San Francisco or The Gwen, we still believe in, what I'll call, small or medium-sized lifestyle hotels 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 5 to 7 years. So still part of our strategy. The big boxes are probably the least part of our strategy going forward. 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 then urban lifestyle, what I'll call, medium and small lifestyle hotels in urban markets second.

Okay. On that topic, big-box hotels seem to be less popular right now. However, some companies, including REITs, are still investing in these types of properties. Do you see the possibility of selling some of these larger big-box properties in the future, even to peers who may adopt that strategy?

Yes, we will continue our focus, and that would be the quickest way to achieve what we envision as the ideal portfolio allocation for DiamondRock through both selling and acquiring. While we are open to that, I believe now may not be the ideal time to sell a big-box hotel. Looking ahead five years, I think the proportion of big-box hotels in our portfolio will likely decrease as we expand, since we don't plan to acquire more of them, and we only own two that we value. However, at the right price, we would certainly consider selling.

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