Good morning, everyone and welcome to DiamondRock Hospitality's Third Quarter Earnings Conference Call. 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.

Good morning and welcome to our earnings call. The third quarter was a strong one for DiamondRock. Hotel profits hit their highest levels since the inception of the pandemic. In fact, hotel RevPAR was within 20% of the comparable quarter in 2019, with 12 of our 31 hotels actually exceeding the comparable quarter results in 2019 and five hotels setting all-time highs. The strength of these results exceeded our internal expectations. Our portfolio benefited from its geographic footprint and a concerted effort by our team to maximize the benefits from the resurgence in travel demand. Our portfolio took nearly 1,300 basis points of RevPAR index from our competitors in the third quarter. Moreover, having the industry's highest percentage of full-service hotels with short-term management agreements also played to our advantage in managing cost and driving profit flow-through. In total, this powerful combination enabled DiamondRock to generate a healthy $38.9 million of adjusted EBITDA and $0.10 of positive adjusted FFO per share. In the quarter, we saw travel demand increase in all travel segments, with leisure leading the way. Additionally, group and business transient also showed meaningful acceleration. There were some real positives for business travel trends in the quarter. We saw BT revenue jump to 84% of the comparable 2019 levels, with occupancy up 26 percentage points over the second quarter. Encouragingly, business transient ADR was just 1% below Q3 '19 levels. The outlook for the group is equally encouraging. Lead generation in the third quarter grew to over 12,400 leads representing over 2.1 million future room nights. July was the best month for lead volume with over 750,000 room nights. While the Delta variant that emerged late summer led to a drop-off in activity in August, meeting planners appear to have shrugged off the headlines as production snapped back close to July's pace by September. In addition to strong operating trends which Jeff will discuss in a moment, DiamondRock continues to make tremendous progress on internal and external growth initiatives to drive outsized cash flow growth in 2022. Let me highlight a few of the bigger ROI projects. Our Vail Resort is finishing a $40 million repositioning. By the end of this month, the resort will be relaunched as The Hythe Vail Resort & Spa, a luxury collection hotel. The repositioned resort is expected to generate several million dollars of incremental EBITDA. Our Barbary Beach Key West Resort will also complete its conversion in November. It will be relaunched as the only Margaritaville Resort in the Florida Keys. We expect the repositioning to allow us to push average rates by $15 and to generate several million dollars of incremental retail and bar sales. The last ROI project I'll highlight is in Denver, where we are underway with the upbranding of the JW Marriott to a luxury collection hotel to be named The Clio. This one should be completed in the first quarter of 2022. These ROI repositionings are expected to deliver IRRs north of 30%. As you might have guessed, we are big believers in these types of projects and our past success gives us great confidence. As a testament to DiamondRock's track record, I'm proud to announce that The Gwen was named in Conde Nast Travelers 2021 Readers' Choice Awards as the number one hotel in Chicago and number eight in the world, the highest ranking of any REIT-owned hotel. In addition to The Gwen, Conde Nast also recognized several of our other outstanding hotels, including Cavallo Point in Sausalito, both of our hotels in Key West, and the L'Auberge Resort in Sedona, Arizona. As a final comment on ROI repositionings, I'll just mention that we are working on several other upbranding opportunities within the portfolio. We hope to share those with you in the coming months. Let's turn to acquisitions and dispositions. We have been active in upgrading and focusing the portfolio. In the third quarter, we successfully recycled proceeds from our second quarter dispositions. Our two new acquisitions are the Bourbon Hotel in the French Quarter of New Orleans and The Henderson Park Inn, a beachfront resort in Destin, Florida. These acquisitions align with our strategy to focus on hotels that resonate with today's traveler as they are experiential and leisure-oriented lifestyle hotels. I am pleased to announce that both hotels are forecasted to exceed our underwriting for 2021. In fact, the Destin Beach Resort deal is now tracking to be an 8.8% cap rate on 2021 NOI. While this is great, we are not resting on our success. We are actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets. I'll now turn the call over to Jeff for more details on our results and balance sheet.

Thanks, Mark. I'll start by highlighting DiamondRock's excellent liquidity. We finished the quarter with $538 million of total liquidity comprised of $67 million of corporate cash, $71 million 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 in hotels and resorts. Overall, the balance sheet remains very strong. As Mark mentioned, we expect to remain an active but disciplined acquirer of on-strategy properties. We have over $300 million of investment capacity today while operating within our long-term leverage targets. Let me share a few success stories in our portfolio this quarter. Midweek occupancy at our urban hotels was up 26 percentage points over the second quarter. The upbranding of The Lodge at Sonoma to the Autograph Collection has been very well received. Since completion early in the third quarter, total RevPAR is nearly $460 a night with ADR up over $100 a night from the second quarter. Third quarter ADR is 22% higher than 2019, whereas prior to renovation, ADR was 4% below 2019. Performance has exceeded our expectations and The Lodge is expected to meaningfully exceed our budget for 2021. The Hilton Burlington generated one of the three biggest upsides to budget during the quarter on strong RevPAR and margin gains. Average daily rate was over $300 per night and among the best in the portfolio. For those who have never been, Burlington is a terrific college town that has quietly evolved into a foodie destination anchored by some of the highest-rated craft breweries in the United States. Our pair of hotels in Key West continued to deliver strong performance with third quarter EBITDA margins 3,000 basis points above 2019 levels. I must recognize The Henderson Park Inn, our newest acquisition, for beating our underwriting with the third highest total RevPAR in the quarter, $777 a night. Third quarter would have been even better if not for the impact of wildfires in Northern California which forced a six-week closure at The Landing at Lake Tahoe and resulted in $1.8 million of lost profit. The resort is fine and back open now. We filed an insurance claim and hope to collect lost profits in the coming months. As for our Bourbon hotel, I should note that while Hurricane Ida did impact New Orleans, we were fortunate not to have any material damage. In fact, our team quickly restored power to the Bourbon Hotel, one of the first hotels back online in New Orleans, allowing us to opportunistically book first responders. We expect to beat original underwriting here for 2021. Let's talk about profit flow-through in labor costs. Third quarter wages and benefits were 30.4% of revenue, just 50 basis points higher than 2019, owing to a 2% improvement in man-hours per occupied room. Despite slightly higher overall labor costs, our asset management team and operators were able to develop several creative offsets to maximize overall profitability by optimizing revenue management for the labor environment. This is how we held gross operating profit flow-through at a constant 45% in the third quarter versus the second quarter, and on comparable third-quarter hotel EBITDA margins were up over 300 basis points from the second quarter. We think this is a great result in this environment. Turning to group; our geographic footprint is a real advantage for group trends in 2022 and beyond. Group revenue on the books for 2022 increased 14% from the second quarter, an acceleration from 8% in Q2. Group revenue on the books for 2022 is now nearly 50% above the forecast for 2021. Group rates for 2022 are $50 a night higher than 2021 year-to-date, owing to the fact many of DiamondRock's key group markets like Boston, Chicago, San Diego, and Phoenix have strong convention calendars next year. Across the entire portfolio, citywide room nights for 2022 increased 7% from the second quarter. And compared to 2019, citywide room nights for Boston, Chicago, and San Diego, collectively are up 3% in '22 and up 5% in 2023. With that, let me turn the floor back to Mark for concluding remarks.

Thanks, Jeff. Before we take your questions, I want to touch on our ESG performance and discuss our outlook. Recently, DiamondRock was again named the hotel sector leader by GRESB and number one among all lodging REIT peers. Being a good corporate citizen and aligning these objectives with our business is a high priority for DiamondRock. I want to thank everyone on our team whose dedication made this achievement possible. Let's turn to DiamondRock's setup for '22 and beyond. We think DiamondRock has four major competitive advantages over many of the peers. First, our portfolio market exposure is uniquely favorable in three ways. We have numerous resorts benefiting from the boom in leisure travel. Our well-located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in. And our group recovery should be above industry average because of our geographic footprint with the convention calendars in our most important group markets all very strong through 2023. The second advantage we have is the multiyear benefit from our hotels that have recently completed repositionings, such as The Lodge at Sonoma, the Hythe Vail, Margaritaville Key West, and The Clio, Denver. The third advantage is our industry-leading percentage of third-party terminable operating agreements. This gives us more control and ability to manage costs than many of our peers. This benefit is amplified by last year's conversion of nearly 20% of our portfolio for Marriott brand management which should add over 50 basis points of portfolio margin expansion alone. The last advantage I'll point out is our best-in-class asset management team's ability to implement strategies to gain market share. There is no better evidence than stealing nearly 1,300 basis points of share last quarter. I'll conclude the prepared remarks by saying that we are excited about our future and see things improving more rapidly than on our last call. At this time, we're happy to take your questions.

Our first question comes from the line of Rich Hightower with Evercore. Your line is open, please go ahead.

Hi, good morning everybody. So I'd like to go back to the sort of acquisitions environment for DiamondRock and you did make some references to this in the prepared comments. But just in terms of the deals you're looking at currently, the ones that you've transacted on, the ones that you've maybe passed on or didn't quite make it to the final round. I mean, just give us a little more color on some of the differences within that pool of assets at this point.

Sure, this is Mark. As mentioned in our prepared remarks, we are comfortable with approximately $300 million in balance sheet capacity for acquisitions. To provide some context for this year, we've lost every bid in broker deals due to the substantial amount of capital pursuing hotels, creating a highly competitive environment. Every private equity firm is targeting hotels, attracted by the recovery potential. Other REITs have taken on more risk in certain acquisitions with different assumptions and outlooks than we would. Currently, we have about five written offers, most of which are off-market deals. This includes four resorts and one unique lifestyle market property. We are focusing primarily on off-market opportunities, leveraging our relationships and different visions for repositioning properties to pursue deals that benefit our shareholders.

Okay. Appreciate the color there. And then maybe, Jeff, just to go back to the comments on group, I was sort of furiously typing and I think I missed a couple of points. But are you able to kind of tell us where group booking pace for 2022 is at this point as compared to same point in 2019?

Yes. Our booking pace for 2022 compared to 2019 is down about 25% from where it was at that time. Is that useful?

That is useful. Thank you.

Yes, Rich, I'm sorry. Let me update everyone before I take the next caller regarding the group. The convention calendars for our properties show that we are relatively optimistic for next year. Chicago and Boston are our two most important markets. Chicago has 1.25 million citywide room nights scheduled for 2022, which is actually 100,000 more than in 2019. Boston has almost the same number of room nights for next year as it did in 2019. Phoenix is ahead of 2019, San Diego is within 5% of 2019, and DC is above. Overall, the cities are solid. We see things really picking up, especially after the first quarter of 2022, and we believe our presence will be an advantage for DiamondRock next year. With that, I'm happy to take the next caller.

And our next question comes from the line of Smedes Rose with Citi. Your line is open, please go ahead.

Hi Mark, I wanted to ask you about the significant rebound in leisure and resort properties this year compared to 2019. Do you think this trend can continue over the next couple of years? Do you believe operators will recognize their improved pricing power and that the market won't revert back to pre-COVID conditions, even if that results in slightly lower occupancies? Or do you think things might settle back to what they were before?

No, it's a great question, Smedes. Our view, I guess, is multilayered. But we think a lot of it is sticky. Some inevitably, as the world opens up, particularly at the very high end, people paying over $1,000 a night can clearly go anywhere. And so as the Amalfi Coast in Italy opens up in the South of France, inevitably, some of that's going to leak out. But I think people have permanently valued leisure higher. I think there's been some retraining on what the rates are in a lot of these properties. And I think the work-from-anywhere environment particularly is going to create those Thursday through Sunday trips, where guests will arrive Thursday and leave Monday, and it will create periods of travel that just didn't exist before. People can fly in from the East Coast to go to Sedona for a four-day stay, they couldn't have done that if they had to leave Friday night and come back Sunday night. So I think a lot of it stays. I think you've got to be careful because I think different levels will be stickier than others, but I do think there's a retraining of what the acceptable price is for a resort. And I do think that there will be changes in the kind of the paradigm that will allow a lot of these to remain.

Okay. Jeff, I wanted to revisit your comments on labor and discuss it further. Could you talk about the increases in hourly worker wages that have been mentioned in previous calls? It seems like there is some upward movement, but maybe you haven't experienced that yet? Could you provide some insights on this?

Yes, thank you, Smedes. There are several factors at play. We’ve noticed some minor increases in wage rates across the country, and we are being creative in managing this. For instance, we are offering incentives to employees to attract new labor, such as bonuses for recruiting friends. Additionally, we have implemented incentives linked to revenue production. In our restaurants, if they reach certain revenue targets within a week or a month, there is a sort of tip pool that gets distributed among employees, which helps us better manage labor costs in relation to revenue. Another factor is the mix of labor. After reducing headcount over the past year, we are left with a higher proportion of experienced employees who command higher wages, which can make it appear as though wage rates are rising year over year. Tom, do you have any additional comments?

No.

Thank you, guys.

And our next question comes from the line of Dori Kesten with Wells Fargo. Your line is open, please go ahead.

Thanks, good morning. Can you highlight which urban markets are showing improvement in midweek demand, including those that are leading and those that are lagging? Additionally, how have corporate rates changed from July to October?

Dori, this is Tom. The markets are varied, and while it's still somewhat sluggish, Chicago stands out. At the Gwen, 18% of our rooms during the quarter were business transient, which is a significant increase compared to The Set's 6.5%. We've seen our usual producers during the quarter, including Deloitte, PricewaterhouseCooper, Ernst & Young, and Boston Consulting. It's encouraging that the consulting firms are returning. The key question is how quickly they will come back. We believe that once we reach the first quarter of 2022 and complete the vaccine rollout, we should see a substantial increase in business activity, particularly in transient business. Additionally, we are noticing a lot of short-term activity from the pharmaceutical sector. Historically, pharmaceuticals have driven the hospitality industry, and we are currently seeing considerable engagement in that area, which is a positive trend. This aligns with the ongoing developments in the healthcare landscape, so it's an encouraging outlook.

Yes. Let me add on to that a little bit, if I could. I mean we saw the biggest gains in market share in our portfolio in Boston, Chicago, and New York in the third quarter which are clearly more business transient driven. And then if we just look at current trends, just looking at our October results, our Boston hotels ran 89% and 84% occupancy in October, and the Chicago Gwen which Tom was noting, did 78% in October, and the New York hotels ran a couple of them ran into 90% occupancy. So we're seeing some pickup; rate is a little challenging in some of the business that we're picking up. But clearly, there's signs of life in the BT. I don't think it's going to be off roaring until we're into 2022 but it was more encouraging in Q3 than Q2.

And when you noted the two recent acquisitions that they're exceeding initial underwriting, what were your initial expectations for the year? And then where are they now? And is that upside, is it on the top line or through cost savings?

It's different for two properties. Henderson Park significantly exceeded our October expectations, with better leisure activity and a rate that was $100 higher than we had anticipated. That's making a big difference. My only regret is that I can't say it's even more impressive, but it has been a major success for us so far, with an expected cap rate of 8.8% for a high-quality resort. New Orleans was a different story. There was a hurricane, Ida, that impacted the area. We were lucky to be among the first hotels to regain power, and our team did an exceptional job of securing business from first responders. As we moved through the year, although the hurricane's effects have diminished, the market in New Orleans remains challenging, but it's performing as we expected. We received a slight boost from the first responders, and now we are tracking in Q4 in line with our expectations.

Okay, thank you.

And our next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open, please go ahead.

Great, good morning everybody. Mark, given kind of your view on the stickiness of the leisure traveler and some of these ADR trends, are you underwriting the current paradigm for these five acquisitions? Or what level of conservatism, I guess, are you assuming?

It's different in different markets. It's a great question. It's one we talk a lot about. I think as a general rule, we're looking at '19, we're seeing how much it's increased since 2019. And then generally, we're seeing it's peaking in '21 and we'll give back some of the, I'll call it, the peakiness, right now from COVID but it will maintain substantially higher than 2019. That's our typical resort underwriting. Some of the markets depending on where they're coming from and how affluent the travelers are, we think it's stickier. Clearly, the super high-end ones that travelers just have a lot more options. They were the ones who were going to Europe last year. And that's probably faced some that they've been retrained on price domestically; that's probably faced a little more pressure than the Key West Resorts, for instance. So we're trying to be thoughtful market by market customer, what kind of customers coming to that particular resort. But we certainly think it's substantially higher than where these resorts leveled off in 2019.

Very helpful. And then, to the extent you hit on one or more of these deals, presumably you don't want to spend the entire $300 million without maybe having something else lined up. So what's sort of the most attractive source of funding today? Or OP units to consideration any assets that you've got kind of teed up and waiting to the extent that it looks like you're going to move forward with one or more of these deals?

Yes, so nothing is enormous. I mean, so we have bids out. I think the totality of those five is about $350 million. So nothing is giant within the pipeline. We're sitting on substantial cash and we have the revolver available. We have talked to people about OP units. But we're trading, we believe, below NAV. So we have to figure that out and adjust the purchase price accordingly. But the tax advantages can be substantial for a seller. So we have had some of those conversations. Jeff, do you want to talk a little bit more about sources?

Yes. No, I think you hit the nail on the head. I think immediately, we would probably be using that cash on hand that we have. And as Mark said, we have pretty abundant capacity to fund the acquisitions, even the ones that we're looking at, assuming we hit on every single one. Beyond that, I think I guess all options are open, but we're pretty stingy about equity issuance at prices that are below NAV.

No, that's helpful. Thanks for the time.

And our next question comes from the line of Dany Asad with Bank of America. Your line is open please go ahead.

Good morning, everyone. My question is about your non-room revenues, specifically the other revenue component that is not food and beverage. This is rapidly approaching 2019 levels, much quicker than your RevPAR. Can you explain the main drivers of that component and its sustainability in the upcoming months and quarters?

I'll let Tom respond to this question. It's a reflection of all the efforts he's put in, particularly focusing on the resorts, which generate considerable additional income. The effective implementation of resort fees and the food and beverage programs have played a significant role. One of Tom's key strengths is his ability to identify various opportunities to generate revenue at hotels. Tom, I'll pass it over to you since this really highlights your contributions.

Yes, our goal is to maximize revenue per square foot in the hotel. Once we capture our guests, the mix changes, especially with high occupancy from leisure visitors. When they are on-site, we focus on how to encourage spending from them. This includes resort fees, additional charges, services, vendor partnerships, and packaging. We analyze revenue by looking at RevPAR and how we can enhance our ADR and RevPAR. If we're achieving 120% of our rate across all price categories in the hotel, that means every aspect of the property needs to respond to demand. Services such as food and beverage, parking, and the spa should all be optimized accordingly. Pricing for a Saturday should differ from a Tuesday. By applying this approach and optimizing everything, those additional revenue sources accumulate. We have also benefited from cancellation fees and have explored various revenue streams alongside room rentals. It’s certainly a team effort, and we are pleased with the outcomes.

Awesome. My follow-up is actually related to something Jeff mentioned earlier about the group pace in '22 being down 25% compared to '19. Do you know what that number might have been around 90 days ago?

I don't have it with me. I'm looking at Tom if he might have it.

We had about 300,000 group rooms booked 90 days ago, and now we have around 350,000 group rooms for 2022. This reflects very positive movement. Our outlook for the quarter is as strong as we've seen in the past eight quarters, so we are feeling quite optimistic about it. When comparing this to 2019, when we had approximately 400,000 rooms, we increased by about 70,000 rooms quarter-over-quarter in that year. This time, we expect to pick up roughly 50,000 versus the 70,000 from 2019, so we're getting close.

Okay, thank you.

And our next question comes from the line of Michael Bellisario with Baird. Your line is open, please go ahead.

Thanks. Good morning, everyone. Tom, a question for you. Just as your hotels are signing new group business and new BT contracts today, what are you seeing in terms of changes that might be being made to those contracts? And what are or aren't meeting and travel planners asking for today?

We've become more proactive in how we handle contract projections. In the past, we estimated contracts at a 20% wash rate, but now we're aiming for a more conservative 50% for 2022. Management companies have their standard contracts, which we want to keep consistent. There have been significant shifts in recent years; contracts often move from one year to another, especially due to COVID-related uncertainties. As a result, we observe that attrition clauses are becoming less strict. Our team conducts contract audits across our properties, focusing on group contracts to ensure that they remain robust and that we're safeguarding our interests, which includes protecting shareholders and future forecasts. This is a key priority for us, and we are keeping a close eye on it, considering the varying market dynamics. When a large company like AT&T presents their terms, it becomes a crucial business decision of whether to accept those terms or not. It's a balancing act. The important thing is that we are attentive to these issues and working to reduce risk moving forward.

Got it. That's helpful. And then just in terms of group cancellations that might have occurred during the third quarter, what was the total there? And then for what periods were those groups canceled or maybe even rebook for?

Yes, Mike, this is Jeff. We had about $7 million of group revenue that was canceled really in the third quarter related to Delta variants. I think more than half of that, I think, was rebooked into 2022, in different periods. I think there's a small amount of cancellation and attrition income that was collected. I think, off the cuff, I think it was about $1 million or $2 million, $2 million that was collected during the quarter. So, yes, I think we've done a very good job at making sure that we can reschedule those bookings that we're seeking cancellations and trying to push that revenue off into 2022.

We had about 35,000 group rooms canceled and we moved about 15,000. So, we were able to shift about 50% of those rooms into the future, which is a positive outcome. Additionally, we received approximately $2.6 million in cancellation fees. This remains a priority for us; it's simply part of the business that we need to focus on.

Thank you. And our next question comes from the line of Chris Starling with Green Street. Your line is open, please go ahead.

Thanks, good morning everyone. I want to go back to the favorable citywide calendar that you mentioned in your Boston, Chicago and several other markets. First, I'd be curious to understand how you're thinking about those markets on a longer-term basis? And then secondly, just given the favorable backdrop next year, does that maybe provide you sort of a window of opportunity to sell into that strength and redeploy capital elsewhere.

It's a great question. I think short term; we're pretty constructive on all those markets. I think we're particularly constructive on markets like Phoenix and Salt Lake City. Boston, we really like our two hotels in that market. We like our locations, the quality of those assets. Chicago is a market that probably over time, we would love to shrink our exposure to, given that it's always had supply challenges and it's much more rate sensitive than a market like Boston. So yes, it could provide us an opportunity when cash flows are returning to potentially reduce some of that exposure. And as we articulated in the prepared remarks, we continue our strategy that we've had for the last seven or eight years of moving more into these lifestyle experiential properties in submarkets like Sedonas and Huntington beaches and Vails. And so, selling something like a Chicago asset would certainly be consistent with executing on that long-term strategy.

And our next question comes from the line of Bill Crow with Raymond James. Your line is open, please go ahead.

Thanks, good morning. Tom, could you discuss the strength of BT travel in Chicago and Boston? There are still seasonal factors at play, right? Now that we're in November, I'm wondering if in 90 days we'll be discussing a decline in business travel in those markets due to seasonal influences or how we view the fourth quarter and the beginning of the first quarter.

Yes, it's going to be stable and flat. As you mentioned, Bill, we are entering a seasonal pattern, so we do anticipate a slowdown in the fourth quarter and the first quarter. That's why I pointed out earlier that I expect a significant increase in the second and third quarters of 2020. We are still negotiating with major brands like Marriott and Hilton regarding the rates for 2022. It's challenging to predict, but I emphasized earlier that in the Chicago market, we have observed positive movement and activity compared to the overall market. If we continue to provide quality service, we believe we can achieve better performance than our competitors. This doesn't imply a major comeback, but we are exceeding our peers, and that was the key point I wanted to make.

I'll just add that we see the recovery in business travel as a longer-term story, not just focused on the fourth quarter of this year. This morning's announcement about changes in tax law and the Pfizer pill is a positive development. More importantly, the announcement regarding the January 4 date for OSHA requirements, which will affect two-thirds of workers in the U.S., could be a key moment for C-suites to inform their employees that it’s safe to travel and return to the office. This date may represent a pivotal moment in corporate America and could significantly impact the recovery of business travel. Looking back in six months, we might recognize January 4 as a crucial turning point in this recovery.

I hope so. Hey, Jeff, just a quick modeling question. The tax lines created a little bit of noise this quarter. I'm wondering what you're thinking going forward?

Yes. The short answer is there was a little bit of a switch there. As you know, we effectively are trying to accrue for income taxes on an annual year target, if you will, based upon how our outlook is changing. And we switched from an income tax benefit in Q2 to an income tax expense in Q3. On a full-year basis, I think we're looking for income tax in the fourth quarter to be about $500,000 to $1 million expense in the fourth quarter, so a little less than we saw in the third quarter. It's a volatile figure but I think that's how you should be thinking about it in the fourth quarter line. So year-to-date, I think it's about $1.5 million.

Of cash; that's cash.

Our next question comes from the line of Stephen Grambling with Goldman Sachs. Your line is open, please go ahead.

Hi thanks, I know you referenced trading below NAV. I'm curious if you've actually kind of set the bar on where you estimate NAV is and how that's evolved over the past quarter. And then as you referenced, private equity has been very active, I'm curious to hear what themes you're seeing and where they're focused? And how that may even influence NAV going forward?

Sure, I'll address the second question first. It's interesting to note that there's a significant amount of private equity pursuing hotel investments. The traditional players, like Blackstone and others, are actively engaged. What's particularly interesting is that they are securing financing, and we recently competed with one of the largest private equity firms on a resort deal. They were able to get financing at a 65% loan-to-value ratio at L plus 180, which is contributing to rising prices. The debt markets for cash flow and hotels are quite strong, allowing private equity firms to capitalize on these opportunities. However, I believe there is a permanent change in pricing. Notably, REITs like Blackstone and Starwood have raised substantial amounts, around $2.5 billion to $3 billion a month, putting away $5 billion to $10 billion in real estate on a more permanent basis. As properties enter that 'lock box', there is less product available on the market, which increases the value of what is still available. When you compare hotels to multifamily, industrial, and other real estate sectors, hotels have not experienced the same price compression as the others. Our perspective is that the net asset value (NAV) for hotels is increasing, and there is potential for it to rise further, both absolutely and relatively compared to other asset classes. We've seen our NAV consistently increase over the last several quarters. We believe it has grown in the past three to six months. We spend considerable time assessing our NAV; however, we won't know for sure until we go to market. Each time we lose a bid, we realize that our internal NAV estimate may be too low. We have not published our NAV for quite some time since the pandemic began, but we are actively considering it and will approach the decision thoughtfully before sharing any updates.

Fair enough. And then as you move the mix to more independent lifestyle hotels and changed a lot of the terms in terms of the management contracts. Does that change, I guess, how you would maybe think about M&A for more of like portfolio properties? And/or thinking about consolidation within the broader REIT space?

Yes, I believe we have worked diligently to create something truly unique in the public markets. There is no other public company in the full-service sector that offers as many short-term, terminable management agreements. We believe this could potentially increase our net asset value by around 10% and lower the exit cap rate by 50 to 100 basis points. Therefore, we feel there is a strong narrative to present regarding why we should command a higher valuation multiple. Additionally, having more control over independent operators is appealing for several reasons. As we explore M&A opportunities, we see this model as more liquid and of higher value. This is something you could consider when evaluating other companies. Overall, we are very pleased with our progress, as we have invested significant effort to reach this point, but we remain open to all possibilities.

And our next question comes from the line of Chris Woronka with Deutsche Bank. Your line is open, please go ahead.

Good morning, everyone. I have a question for Mark that builds on the previous one but takes it in a slightly different direction. Mark, I’ve noticed that public REITs are becoming more active in purchasing hotels. There's been a lot of discussion about private equity pricing, the amount of capital they are raising, and the disconnect between public and private pricing. From an industry perspective, do you believe this situation encourages public mergers and acquisitions? Is there a more compelling reason to pursue that from a high-level view?

Well, listen, we're not scared of private equity. We're fiduciaries for our shareholders; we'll always do what's right. And if that means we get a big offer and sell the company at a premium is certainly something that was the right thing to do for shareholders. The merge-to-avoid that would not be a strategy we'd employ. I mean, we're fine doing what's right for shareholders. I think mergers in the public to public makes sense if you can articulate a clear strategy after the merger and you clearly articulate that you didn't pay too much and that the savings from the G&A because you probably wipe out 85% of the G&A of the target company you put a multiple on that, and you say, okay, on the other side, that's between G&A savings and other synergies. I think it's a clear strategy and the stock price should be higher. That's fine but we're in a space that bigger hasn't proven by itself to create value. So we don't buy into that thesis but certainly, if you could do something where the math works, you could come out the other side from a combined company with a clearly articulated strategy, that's something we should look hard at.

Okay, very good. The other question would be about DiamondRock's preference for keeping things simple. You have been one of the easier companies to follow, analyze, and understand. We've noticed that some of your competitors have pursued joint ventures more. Would you consider a similar approach if there was a possibility involving a larger public or private portfolio? Are you open to stepping outside your usual strategy and exploring something a bit unconventional for DiamondRock?

Chris, it's Jeff. I mean, I don't think you can ever rule that out but I do think we like the simplicity and the control that comes from wholly owning our assets. I think having joint ventures going to be complicating from a balance sheet standpoint and from an underwriting standpoint, from your perspective or from investors perspective. So I would never preclude us from entering into an attractive investment if a joint venture was necessitated, but I think our preference is to solely own our assets and really kind of keep a clean balance sheet and control.

Okay, very good. Appreciate the thoughts. Thanks, guys.

Thank you. And our next question comes from the line of Anthony Powell with Barclays. Your line is open, please go ahead.

Hi, good morning. First, a question on pricing. We've seen obviously very strong pricing on leisure and resorts. Does that change how you approach pricing next year for business transient and group? Is there more of an opportunity to tick up pricing in those segments? Or are you more interested in kind of filling hotels with those customers?

Great question. Let’s break down the three segments. In leisure, especially with the holiday week approaching, there’s such high demand that we could probably charge more. Therefore, we should really focus on increasing our prices. Looking at business transient, it’s encouraging that in the third quarter, we were just 1% off the business transient rate from Q3 in 2019. It’s not really just about the rates; it’s more about whether companies are ready to send people out on the road. Lowering prices by even $10 isn’t likely to change that. We’ve instilled a philosophy in our hotels that this is primarily a matter of safety rather than pricing. Discounting won’t bring in more guests, so it’s better to maintain our rates. Generally, this seems to be the prevailing mindset within the hotel industry, which gives me some optimism about pricing for business transient. We will have some changes in mix next year. While we want to fill rooms, we may have to take in more lower-rated business transient to achieve that, which ultimately may lead to better profitability. As demand picks up, we’ll be able to raise those rates again. However, instead of discounting to attract business transient, we’ll embrace these mix shifts, which might initially lead to some rate declines. For groups, although we’re down in room nights, we’re actually seeing rates increase by almost 2%. The same approach applies here: groups will meet not just because it’s cheaper, but because they value the meeting space. After not meeting for two or three years, there’s a strong need to reconnect, especially from the corporate side where companies are enjoying record profits. CFOs aren’t looking to cut travel budgets but rather to focus on growth and hiring. All of this is likely to support rate stability next year. Nevertheless, I want to emphasize that we will experience some mix shifts, accommodating lower-rated business transient temporarily before we can increase those rates as conditions improve. You will definitely see this trend in 2022. Thanks, Jeff. Before we take your questions, I want to touch on our ESG performance and discuss our outlook. Recently, DiamondRock was again named the hotel sector leader by GRESB and number one among all lodging REIT peers. Being a good corporate citizen and aligning these objectives with our business is a high priority for DiamondRock. I want to thank everyone on our team whose dedication made this achievement possible. Let's turn to DiamondRock's setup for '22 and beyond. We think DiamondRock has four major competitive advantages over many of the peers. First, our portfolio market exposure is uniquely favorable in three ways. We have numerous resorts benefiting from the boom in leisure travel. Our well-located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in. And our group recovery should be above industry average because of our geographic footprint with the convention calendars in our most important group markets all very strong through 2023. The second advantage we have is the multiyear benefit from our hotels that have recently completed repositionings, such as The Lodge at Sonoma, the Hythe Vail, Margaritaville Key West, and The Clio, Denver. The third advantage is our industry-leading percentage of third-party terminable operating agreements. This gives us more control and ability to manage costs than many of our peers. This benefit is amplified by last year's conversion of nearly 20% of our portfolio for Marriott brand management which should add over 50 basis points of portfolio margin expansion alone. The last advantage I'll point out is our best-in-class asset management team's ability to implement strategies to gain market share. There is no better evidence than stealing nearly 1,300 basis points of share last quarter. I'll conclude the prepared remarks by saying that we are excited about our future and see things improving more rapidly than on our last call. At this time, we're happy to take your questions.

This concludes today's conference call. Thank you for participating. You may all disconnect. Everyone, have a great day.