DiamondRock Hospitality Co Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to DiamondRock Hospitality's Fourth Quarter 2021 Earnings Release Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer. Please go ahead.

Thank you. Good morning everyone. Welcome to DiamondRock's fourth quarter 2021 earnings call. With me on the call today are Mark Brugger, our President and Chief Executive Officer, and Jeff Donnelly, our Chief Financial Officer. Before we begin, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under Federal Securities Laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed or 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. Mark.

Thank you again for joining us today for DiamondRock’s earnings call. In 2021 we saw travel demand dramatically rebound shortly after the national mass mandate recommendation was lifted in May. In July, our portfolio recovered 91% of its 2019 total RevPAR, and in December we were recovering nearly 99%. The emergence of new COVID-19 variants during 2021 made for a choppy recovery, but the undercurrent pushing the wave of travel demand is clearly strong. National numbers of COVID infections are rapidly declining once again. States are relaxing mass mandates, and more workers are returning to the office. If trends continue, we estimate that the travel recovery timeline was delayed just a few months from Omicron. As we look ahead, we remain very confident in the future of travel and the brisk return of pent-up hotel demand. For DiamondRock, the fourth quarter and full year 2021 hotel results significantly exceeded our initial expectations. One factor among many stands out as a testament to the creativity and success of our team. In 2021, the portfolio generated nearly $2900 per key of AFFO. According to consensus estimates, that is over three and a half times more than the average for the five largest full-service REITs. Our focus on driving cash flow is the culmination of strategic decisions on market exposure, balance sheet structure, and the innovative sales strategies and tight cost controls implemented by our operators in partnership with our leading asset management team. Looking at the company's results more closely, in the fourth quarter we were able to drive RevPAR up 232% over the prior year, which is just 13.8% below 2019. Moreover, on a comparable basis to 2019, the monthly progression of total RevPAR was down 18.9% in October, down 17.1% in November, and down just 1.5% in December. These rebounding levels of RevPAR allowed DiamondRock to generate fourth quarter hotel adjusted EBITDA of $43.1 million and AFFO of $0.09 per share. Our industry in 2021 started seeing a recovery in business transient and group bookings, which Jeff will discuss in more detail in a moment. The positive results for the fourth quarter and the full year were powered by DiamondRock’s large portfolio of drive-to resorts. Several resorts achieved record-breaking room rates in 2021, and we're seeing this trend continue. Even compared to 2019, our resort portfolio had positive full year RevPAR, with RevPAR increasing almost 24% in the fourth quarter. In fact, a dozen of our resort and lifestyle hotels beat 2019 RevPAR levels last quarter, led by properties like the Henderson Beach Resort, L'Auberge de Sedona, Orchards Sedona, The Hythe Vail Mountain Resort, The Lodge at Sonoma, our two Key West resorts, and the Kimpton Shorebreak. These good results were largely the product of a decision we made several years before the pandemic to pivot and focus our external growth on drive-to resort and lifestyle hotels. Since that pivot, we have completed more than $1 billion in transactions to assemble the portfolio that today defines DiamondRock. We acquired Havana Cabana Key West, the Westin Fort Lauderdale Beach Resort, the KIMPTON Shorebreak, Margaritaville Key West, the Kimpton Phoenix Palomar, L'Auberge de Sedona, Orchards Sedona, The Landing Lake Tahoe, Cavallo Point in Sausalito, and our most recent acquisitions, the Bourbon Orleans in the French Quarter, Tranquility Bay in the Florida Keys, and the two Henderson Beach Resorts. We remain all-in on our thesis that superior profit growth can be achieved from experiential resorts and lifestyle hotels. Going forward, we attempt to exclusively focus our investments on similar assets while opportunistically recycling non-core branded urban hotels to fund and accelerate our strategic direction. A critical point of differentiation for DiamondRock from our peers, which is often overlooked, is that in the past few years, DiamondRock’s portfolio has transformed in another important way. It has gone from over 80% of the portfolio being encumbered by long-term brand management agreements to today less than 10%. In other words, today only two of our 33 hotels are subject to long-term management agreements. We believe that this gives us a huge competitive edge in controlling expenses at the hotels and increases NAV at the hotels by over 15% on average because unencumbered hotels can generally be sold for a 100 basis point cap rate premium versus encumbered hotels. No other public full-service lodging REITs has executed this transformation or has less brand-managed hotels. As we continue our external growth initiatives, you should expect more of the same on asset selection and direction. In 2021, we stayed laser-focused on our strategic transformation as the team executed on dispositions and acquisitions to keep DiamondRock out ahead. In total, we sold $220 million of hotels at a 5.3% cap rate on 2019 NOI and probably a much lower cap rate on 2022 NOI for those hotels. And what did we do with that freed-up investment capacity? We reinvested the proceeds into four independent experiential properties totaling $293 million at a 7.5% cap rate on 2022 budgeted NOI, ramping to an 8% or better stabilized yield. We estimate that last year's disposition acquisition change alone will add well over $20 million of incremental EBITDA to our 2022 results. In fact, the two major acquisitions, Bourbon Orleans and Henderson Park Inn, were ahead of initial underwriting in 2021, with Henderson Park Inn delivering a 9% NOI yield. In December, we acquired Henderson Beach Resort, a luxury property with enormous upside and we kicked off 2022 with the acquisition of the Tranquility Bay Resort in the Florida Keys at an 11% trailing NOI cap rate. How do we find these great deals in a competitive marketplace? Mostly because we don't rely on brokers. Rather, we have spent years building relationships with the owners of Orange strategy hotels in micro markets like Sedona and Destin Beach that fall outside the mainstream. Off-market transactions provide the time to solve the seller’s partnership, debt, or legal issues to our benefit. We're optimistic we can close a similar volume of transactions in 2022. In fact, we are actively working on four deals right now at some stage of evaluation. Half of those are off-market through long-standing relationships. While we have been executing on external growth, we were also intensely focused on creating value at our own portfolio through repositionings. In 2021, we completed the repositionings of The Lodge at Sonoma, The Hythe Vail Mountain Resort, and the Margaritaville Key West. The returns on these investments are projected to be a big catalyst to our 2022 earnings. Here's a powerful fact, these three repositioned resorts are budgeted to collectively increase profit by $12 million in 2022 over 2019. That's more than a 50% increase in profit versus pre-pandemic levels as a result of our efforts and strategic locations. And we are not close to being done. We have two more repositioning and rebrandings happening in the first quarter of 2022, and behind that, there are two more ROI conversions underway that will debut in 2023. We consider the ability to identify and successfully execute these high ROI projects as a key part of the DiamondRock value proposition. Now I will turn the call over to Jeff to discuss operations in more detail and to review the highlights of our balance sheet strength. Jeff.

Thank you, Mark. We finished the quarter with $441 million of total liquidity, comprised of $39 million of corporate cash, $93 million of hotel level cash, and $310 million of undrawn capacity on our revolver. Leverage remains conservative with only $1.15 billion of debt against over $3.5 billion of resorts and hotels. We have no debt maturities in 2022. Earlier this month, we amended our credit facility to obtain additional covenant waivers and extend our relaxed covenants to a final testing date of August 2023. Moreover, we increased our gross potential acquisition capacity to $550 million; there was no change to our pricing grid from this modification. Let me turn to more detail on our operating results. Fourth quarter results were sharply ahead of our original forecast. Total revenues and hotel adjusted EBITDA were $190 million and $42.7 million respectively, beating our original expectations by $20 million in revenue and over $5 million in hotel adjusted EBITDA. Profit flow-through was excellent. Hotel adjusted EBITDA profit margins were 22.5% and over 40 basis points above our forecast. The 12% upside to rooms revenue was driven primarily by stronger than expected average daily rate, partially offset by softer than expected occupancy from last minute cancellations from the emergence of Omicron. The rate-driven upside pushed room profit margins over 200 basis points above forecast. F&B and other revenues were also 12% above expectations, but food inflation and labor pressures constrained F&B margin to 24%, which was below original expectations. Resort revenues were $85 million in Q4 2021 or $13 million ahead of 2019. Resort total RevPAR was 18% ahead of 2019 levels and resulted in hotel adjusted EBITDA margins of 30%, 240 basis points stronger than 2019. For the full year, resort revenues were $286 million, matching 2019. The story here is hotel adjusted EBITDA margins were over 380 basis points higher on similar revenue. Urban hotels improved during the year, but remained well below 2019 levels. Urban hotel revenues were $105 million in the quarter, with total RevPAR 30% below 2019, leading to margins of 16%. For the full year, urban hotel revenues were $281 million, down from $333 million or 54%, resulting in a 90% decline in hotel adjusted EBITDA and a low 6% margin. Clearly, there is significant opportunity for recovery in 2022. Business transient continued to show slow improvement during pockets of the fourth quarter, but plans for a more ambitious return to business travel in January did not come to fruition due to the spike in Omicron. The business we are seeing is mostly from top consulting companies as well as project work. Based on feedback from corporate accounts, we believe Omicron likely pushed out the start of a major recovery in business travel by three to four months. Compared to Q4 2019, room nights were 22% lower, but rates held steady and even showed sequential improvement from earlier in the year. On group business, there are some good indicators of future strength. Q4 brought over 12,000 leads for 2 million group room nights, matching third quarter’s production during what is typically a seasonally slower period. We booked 135,000 definite room nights during the fourth quarter, 8% more than Q3, of which 85% of these nights were for 2022. Momentum was very strong as 40% or 53,000 of these room nights were booked in December. In January, we've seen an encouraging trend that bodes well for 2022. Sales lead volume and lead room nights, even despite the impact of Omicron, were up 5% and 33% respectively, as compared to the average month in the fourth quarter. This means January points to a Q1 2022 sales lead pace that meets or exceeds Q1 2020, and February is showing continued improvement, clearly a sign of good things to come. Citywide room night activity in our major urban markets remains strong. In 2019, Boston's convention centers generated 349,000 room nights, and they currently project 330,000 room nights in 2022 and 438,000 nights in 2023. Chicago generated 1.1 million nights in 2019 and is expected to generate 1.2 million room nights in 2022 and already has 1.1 million nights on the books for 2023. Collectively, the convention centers in Boston, Chicago, San Diego, DC, and Phoenix have as many citywide room nights on the books in 2022 and again in 2023 as they had in 2019, and booking activity is poised to accelerate in April. Leisure demand is off the charts. Leisure comprised 50% of our room revenues during the quarter, compared to 38% in Q4 2019. Compared to Q4 2019, leisure segment room rates were nearly $290, up 19% over 2019 on a 7% decline in rooms. This is an acceleration from quarters earlier in the year. Performance of our recently upgraded resorts, as well as our advanced bookings in key leisure markets, leads us to expect continued robust strength in this segment. Overall, portfolio profitability was significantly aided by operating efficiencies due to a number of efforts put in place by our teams. Occupancy was 30% lower in full year 2021 than in 2019, but our hotels managed to hold costs per occupied room to just a 4% increase, resulting in a room margin of 74.4%, which is only 100 basis points below full year 2019. Hiring, training, and retaining high-quality associates is perhaps the greatest challenge for our hotels. U.S. labor force participation has been sluggish to recover due to a combination of temporary and structural factors, but economists expect people to return to the workforce in the second half of 2022. To maximize efficiency, our hotels have provided dynamic and incentive-based compensation structures during this hopefully temporary tight labor market. Some competitors have been more inclined to make permanent changes. To remain competitive, our hotels may ultimately need to make some adjustments. Based on our current data, we are adjusting our outlook for long-term margin expansion potential for U.S. full-service hotels. While increased productivity, better labor models, and more efficiencies from brands will help improve stabilized margins, rising base wage and benefits costs will likely offset some of that improvement. Accordingly, we now see the long-term margin improvement potential for U.S. full-service hotels to be in the range of flat to 100 basis points. That is 50 basis points lower than our prior estimate. We believe DiamondRock has an added advantage over our peers. The six managed to franchise conversions provide approximately 50 basis points of long-term margin enhancement that is unique to DiamondRock. Hence, we think Diamond Rock's margins have the potential to be 50 to 150 basis points above prior levels once demand has fully recovered. Looking to the future, we do not have sufficient clarity today to provide full-year earnings guidance for 2022. However, we do believe our unique segmentation, geographic footprint, recent rebrandings and acquisitions, and other beneficial portfolio enhancements will collectively drive robust revenue and cash flow growth. We expect our resorts will continue to deliver strong revenue and margin performance and our urban hotels have significant upside potential as we move past Omicron and corporate travel demand follows a return to office. Omicron resulted in $17 million of group cancellations, of which approximately $13 million occurred in Q1, and much of it early in the quarter. As a result of Omicron, we expect the change in total revenue and hotel adjusted EBITDA margin as compared to 2019 will be softer in Q1 than in Q4. Preliminarily, January total revenues were down 23% compared to January 2019. Encouragingly, February is looking better, and early indications point to an acceleration of these trends into March. With that, let me hand the floor back to Mark.

Thanks. As Jeff mentioned, travel trends are clear, and the desire to travel is certainly robust. As you look at 2022 and beyond, we are confident that DiamondRock has competitive advantages. I like to just highlight a few before opening the call for your questions. First, our drive-to leisure focus. The world is positioned to embrace a more hybrid work structure which lends itself to increased leisure travel. Our leisure-focused destination resorts and urban lifestyle hotels are prime beneficiaries of this trend. They were strong performers in 2021, and we expect this trend to persist. Second, acquisitions. We successfully executed four Orange Strategy acquisitions in the last year alone with strong initial yield of 7.5%. Behind that, we have an active pipeline of deals. Third, up brandings. The up brandings in 2021 of The Lodge at Sonoma, The Hythe Vail Mountain Resort, and the Margaritaville Key West will power those resorts to collectively grow EBITDA over 50% from their 2019 levels. Fourth, balance sheet. We have a great balance sheet with low leverage and ample capacity to continue aggressively leaning into our strategy to assemble a unique portfolio of resorts and lifestyle hotels. Fifth, group setup. Our footprint is good for 2022. Group revenue on the books at our two most important group hotels, the Westin Boston and Chicago Marriott, is three times more than in 2021. I will note that we are fortunate to have less than 1% of our rooms in the troubled San Francisco market. Sixth, management conversions. We converted six brand managed hotels to franchise hotels in 2020. That will ultimately boost portfolio profit margins by 50 basis points over pre-pandemic levels and increase NAV by 15% at those six properties. And the final competitive advantage for DiamondRock that I will mention is ESG Excellence. We were once again ranked number one by GRESB as hotel listed sector leader and awarded ESG Prime Status by ISS, a designation held by the top 5% of the real estate sector worldwide. If ESG is important to you as it is to us, DiamondRock is a leading choice among all public lodging REITs. To wrap up, we are still in the very early stages of an emerging travel recovery with significant pent-up demand. And with that backdrop, we are confident DiamondRock has the portfolio, the strategy, and the balance sheet to continue to distinguish itself in 2022 and going forward. At this time, we would like to open it up for your questions.

Our first question comes from the line of Smedes Rose from Citi. Your line is now open.

Hi, good morning. I wanted to ask you just some clarification on the groups that you talked about and I am just wondering just to put it in context, are you able just to say for 2022 kind of what percent of group nights are on the books relative to say 2018 going into 2019 and maybe 2017 going into 2019, so thinking about 2022 and 2023?

Tom, do you want to grab those.

Sure. Currently on the books we are about 29% behind 2019 on room nights. Rate is about flat and the new bookings that are coming in we're seeing increased rate as new bookings come in. So it has been, we are about 165,000 behind where we need to be for the full year and historically we picked up about 250,000 rooms in the year for the year. So we feel pretty good about where we are right now with the pace for the portfolio and then as I mentioned historically we pick about 250,000 group rooms in the year and we need to get about another 165,000 in the year for the year to make our currently projected number. So, I think we're in a good position.

Okay, thank you. Mark, I wanted to ask you just as you look at the performance of urban hotels, it looks like they're starting to get a little better. I mean do you have any thoughts on how is it critical that folks return to the office in order for urban hotels to really start to perform much better or do you think that they can gain sort of positive traction even if we don't really go back to the office the way that we did pre-pandemic?

Smedes, it is a good question. I think there's going to be a correlation between return to office, hybrid, lowering of mass mandates, and obviously declining COVID numbers. But it's not so that people need to be in their office to business travel but I think those things will correlate towards businesses, or seen as now, getting people back on the road and being comfortable approving corporate travel. But it's going to be a little different this year. We'll see some of the traditional stuff come back as people are returning to office but actually, there has been a two-year hiatus on small team meetings, building culture. I think as you talk to always our base corporate customers, what they're saying is even for hybrid, that probably means we need to get our small teams together more. We need to focus on culture, how are we going to conduct business if we have less people in full time. Some of that kind of facility travel didn't exist before and then I think there's obviously this pent-up demand of people that haven’t been together in almost two years that need to see their clients, need to get their groups together. And so I think you'll see this kind of burst as we move through 2022 based on those trends.

Okay, and just last one, do you have a sense of where wages benefits will track in 2022 and what percent would you expect to increase that by?

Yeah, we're seeing wages probably in the 4.5% to 5% range in 2022. Benefits are still coming in but somewhere in that range this year, which is a little higher than we would have projected from last year for 2022 and that's kind of revision where we think the peak margins come out on the other side as Jeff was referring to in prepared remarks.

Yeah, good morning. So Mark, you referenced kind of how DiamondRock set out on a strategic shift seven years ago which has continued to evolve and I recognize it’s probably constantly evolving. But I guess what are the biggest opportunity or changes that lie ahead that maybe could continue to expand upon the margin opportunity and just strategic goals for the company moving forward?

Yes, it is going to be more of what you saw last year. So it's going to be selling these branded urban properties and moving more into these what I will call medium-sized lifestyle hotels and lifestyle markets and whether that's a true resort market like Henderson Beach or Charleston or New Orleans. We're going to continue to go in as markets are generally higher rated hotels and frankly, they have more levers to push and really where we can apply our creativity whether to the Vivian Howard Restaurant in Charleston or the Michael Mina Restaurant in Sonoma, repositioning resorts in very creative ways that can drive incremental revenue. We just see a lot more revenue potential at these kinds of hotels and you have seen our portfolio when you go through the property-specific results that the resorts have really allowed us to really use all the tools in our toolbelt to drive revenues and profitability. So we're going to continue to focus on those kinds of hotels going forward.

Got it. You mentioned that due to the slow urban recovery, there might be a chance for urban hotels to perform significantly better. Jeff, you also noted some improvement in the performance of the resort assets. While you’re not providing specific guidance, could you give us an idea of how you anticipate RevPAR and margins for those two categories will compare to 2019 in 2022? Just a general overview or where you see the greatest potential?

Jeff, would you like to take that?

Yeah, Austin, I mean we're not going to give full-year numbers for 2022 by segment. I think right now that is still in flux to some degree. But I think when you think about margin upside obviously it is going to be significantly greater in the urban side of the portfolio just because they are coming off such a low base of revenue that I think you're going to see much greater flow-through at the margin of dollars coming in from revenue flowing to the bottom line as demand comes back. On the resort side, they're performing very well. They are actually at a very high level of profitability and strong revenue production. That's not to undermine or look down upon our resort portfolio, they're doing very well. But I would say from this point forward, probably more of the dollar upside is going to fall to our urban portfolio.

And so was the rate improvement for the overall portfolio, which was seemingly more urban assets. You saw December, it seemed to be sticky in January, should we just assume that that kind of continues, as sort of the midweek corporate travel starts to re-accelerate again, potentially over the next month or so?

Yeah, well January from Omicron you'll see a pullback. We talked about our January numbers and then we think in February, we start accelerating each…

But the ADR, I guess, the ADR is the plus 20% or so on ADR and then you kind of saw again in December relative to what October, November did whereas resort relative to 2019 was sort of stable, the overall portfolio saw a pretty significant leg up in ADR and I'm just curious if that is attributable to the urban hotels and the sustainability of that kind of sequentially through the year?

It's both. I mean in the fourth quarter we saw obviously, the resorts were on fire as we talked about. The urban markets' result is really driven more by leisure than it was midweek. We saw the kind of the Thursday through Sunday business being driven by leisure and urban properties as well in the fourth quarter. So that'll lessen a little in January at the urban hotels, and then I think you'll see an acceleration with the return of business transient and group as we move particularly into the second and third quarters of this year.

Hi, good morning. I guess a question on the long-term margin discussion that you've started, you're seeing more wage inflation I guess resulted in a 50 basis point decline. But there's also inflation in room rate. So I would have thought that would have maybe canceled each other out. So I'm just curious how you think pricing power is over the long run and how that relates to margin expansion?

This is Mark, I will start it off and then maybe kick it over to Jeff or Tom to add on to it. So we're still saying we think margins on the other side peak are going to end up better. And that's from productivity and labor model and, frankly, a lot of learnings that we have from going through the worst downturn in the history of the industry. So we're still constructive on where margins are, but wages are higher than we would have anticipated a year ago. They're not, I think a lot of the things that have caused them to go up, are now getting better as we move through the years. More people turn to the labor and workforce. But they are a little higher than we thought. So we kind of adjusted our estimates to reflect that. But I think if DiamondRock ends up at 50 to 150 basis points better off than prior peak margins, I think that's a pretty remarkable result and we're still very positive about that.

So I guess wages are higher but aren’t your room rates also going to be higher than you thought or is that still are you a bit more cautious they are given kind of the urban recovery and whatnot?

No, we still feel very good about the rate side of it that would get us to the 150 basis points of margin expansion on the other side of this.

Hi, good morning, guys. So Mark, you laid out sort of a tantalizing comment in the prepared comments in terms of an exclusive focus on resort and leisure assets going forward. So what I just want to confirm that that is indeed the plan forever going forward into the future. And then as far as the recycling efforts in terms of selling the urban assets eventually, what's the timing on that and what are the guiding factors? I think you mentioned a couple earlier, but besides basically cash flow improving from the currently depressed period for operations at those hotels?

We want to assure investors that we have a clear strategy to differentiate ourselves in the market by acquiring specific types of hotels, a trend we've followed for the past seven years. This approach will continue as we believe these properties will outperform in the coming years, guiding our investment allocations. Although we currently own several urban hotels and some excellent gateway properties, we anticipate reducing our exposure in that area and using the proceeds from those sales to support our strategic direction. Regarding the timing of urban asset sales, it feels a bit premature right now. However, I believe that pricing and competition for those bids will improve as the year progresses. The trailing cash flows are expected to enhance alongside improvements in the financing markets. Therefore, as we move toward the end of this year and into early next year, we expect to see better pricing for these types of assets.

That makes sense. I have a broader question about leisure. Many of us are trying to understand the underwriting of these assets. Resorts demonstrated very strong pricing power in 2021, and it appears that will continue in 2022. As we consider the effects of last year's extraordinary economic stimulus, the reopening of international markets, and the interplay between those factors, how do you approach underwriting in light of these potentially conflicting influences when thinking about the stabilization of operations at a U.S. resort property, both this year and in the future?

Yeah, it's a great question. I think for 2022 we feel very confident that we're seeing the advanced bookings are incredibly strong throughout all of 2022. I think there's a couple of observations: We have this internal debate as well. One is a lot of these shorter seasons at these resorts have kind of, I think, permanently changed to be strong. People can work remotely, so Henderson Beach or Vail, what used to be shorter seasons, they're just much stronger. And that's a permanent change I think from the hybrid work structure, we'll see more demand and that'll improve for your RevPAR at those resorts. And I think you have discovery at L'Auberge de Sedona. You have a whole new set of people that have seen it, talk to their friends about it, discovered it, I think that's permanent. We'll have a lot to return business at those kinds of resorts. And then we've retrained the customer. And so we're relatively bullish on the stickiness of rates. But time will tell. I mean, there will be some leakage out as the Caribbean reopens, and Europe kind of reopens on some of this. We think these drive-to resorts domestically are permanently a much higher baseline going forward.

Good morning, everyone. I wanted to understand the differences in cost structures between your resort portfolio and your urban portfolio at a high level, without getting into specific markets. I'm curious if the wage inflation you've experienced varies significantly between these two categories, and if there's any risk that one might still need to catch up. Do you believe we have reached a level of wages that can stabilize across all segments?

Tom, you are close to that one. You go and give it a short.

Hey, Chris. When we examine our resort portfolio, we project profit margins this year to be around 41%, compared to about 39% in 2019. One interesting aspect of labor in resort markets is the consistent challenges we face. Typically, these locations have high housing costs, leading to an ongoing need for H2B visas and multitasking managers. However, as we emerge from COVID, we've learned that technology can handle many roles. For instance, we realized we don’t need a dedicated specialist for luxury travel agents in every hotel. Instead, we've centralized that role across our luxury hotels, allowing one high performer to represent multiple properties, regardless of brand. This approach is proving effective and sustainable. Currently, our total fixed management positions have decreased by about 106 full-time equivalents since 2019, and we believe that number will remain stable. The focus is on driving revenue, as we know we can't rely solely on cost-saving measures to achieve profitability. We are actively working on average daily rates and overall performance. For example, our rates increased from about $270 in 2019 to around $350 in 2022. In the fourth quarter, ADR rose by $76 across our resort portfolio, reflecting a 38% increase. We're also seeing about $11 to $12 million in additional revenue from our restaurant investments, demonstrating our commitment to enhancing both the top and bottom lines.

I will just add on the wages. So I think generally, our wage increases bring us to fully up to where we want to be at our property this year. There's not a second leg up that we think we need to be competitive in the marketplaces. Some of the markets, it varies by market and market like New York City still has a multi-year marketing agreement ahead of it. So wage increases aren't going to be as dynamic in a market like that, these are already fixed by long-term contracts. And then other markets, we think we're in pretty good shape with where we've adjusted wages this year. And as Tom mentioned, the resort markets particularly will be easier to, we think adjust the rates to more than make up for the wage increases at this particular property.

Thanks. Good morning, everyone. I just want to go back to the margin comments one more time. And I know you're using a broad brush there but maybe can you provide any color on how you see the range in terms of margin expansion, how that might differ, I know you sort of talked about resorts but resorts versus urban, encumbered versus unencumbered hotels, because your portfolio today is not necessarily like the average U.S. full-service hotel that you're kind of quoting there for that range?

Yeah, I mean, Mike, I would say I really don't want to get into giving full-year guidance, but maybe I can circle back with people later. I do think the opportunity for the upside is going to be much greater from the urban hotels, just simply because they ended up finishing the last year much lower than our resort hotels or resorts. I think finished the year 2021 with margins about 300 basis points better than they were in 2019, whereas the urban hotels are dramatically lower. So we're going to be providing some updated information as we go into the upcoming conferences and I will see what additional color I can provide you guys at that time. But off the cuff, I don't have the figures handy to share with you.

Thanks. Good morning. Just going back to those ROI projects that you just talked about, maybe any future projects in the pipeline. Can you discuss the impact of any of that construction cost increases and snags in the supply chain they have had, as it caused you to perhaps delay or maybe even rethink the viability of any projects at all?

Well, we completed a number of those three positions in mid-late last year, and there were supply chain issues and we navigated through them. Fortunately, most of these are really repositions with FF&E and millwork and those kinds of things. They're not building a new building. It tends to be the bigger issue on the supply chain issues. Going forward, when we look at what we will have to convert this quarter, so those are costs out in good shape. And then as we're looking forward to or just in Burlington and Boston Hilton, we think we have good swimmer and pricing it from general contractors on most of it. Again, most of the costs, the overall costs are going to be FF&E which isn't as big of an issue as getting construction workers and doing some new builds. So we think we have it under control. Yeah, we will have like everyone we will have some issues on lighting and other components, I'm sure that we'll have to make sure we're doing more advanced work and ordering things probably two to three months earlier than we would what I call normal times. But the advanced planning that we're doing and having enough lead time should help us mitigate the supply chain issues. And then on the cost, the nature of our work should lead our ability to control those costs in a relatively efficient manner. But there clearly has been some cost increases, but we think we have that reflected in our current estimates.

Good morning everyone. I wanted to shift the discussion a bit. Let's talk about the balance sheet. You're in a solid position. Jeff, could you share how close you are to emerging from the covenant waivers? I know you've just received an extension, but is there a chance you could be free from these waivers starting in the second quarter? What would that mean for future dividend payments?

Yes, that's a great question, Floris. It's really dependent on our performance and how individual hotels perform as the year progresses. However, our current internal projections indicate that we should be able to comply with our covenants by the middle of the year. I believe we're on a positive path in that regard. Regarding the advantages we gain, one of the significant points of flexibility is that we can allocate our capital in various ways, whether through recycling assets or acquisition capacity. It's all about managing the flow of funds and capital we’ve raised and how we choose to utilize it, which I consider highly valuable. When it comes to dividend payments, I’ll leave that to Mark, but ultimately, it will be the Board's decision. From our perspective, we currently have attractive opportunities for capital investment in ROI projects and acquisitions we’re considering. Practically speaking, our operating losses could mean we’re not required to pay a dividend. We could choose to, but I don’t anticipate that we will be obligated to pay a significant dividend this year.

I was examining the EBITDA contributions from some of your hotels in the fourth quarter, and I noticed that Margaritaville has performed exceptionally well, generating nearly $14 million in EBITDA compared to just $5 million in 2019. How does this impact your thoughts on potential Margaritaville conversions? Additionally, could you provide insights on Worthington Fort Worth, which seemed to generate most of its EBITDA in the fourth quarter? Was there any specific reason for that, and what should we expect for its run rate going forward?

So Floris, I'll begin with Margaritaville and then hand it over to Tom to discuss the Worthington. Margaritaville Key West has been outstanding; it’s the highest-rated Margaritaville in their network. Jimmy Buffett visited this past Tuesday, taking photos with guests at our resorts, which we think is noteworthy. We plan to expand our Margaritaville presence because that market seems ideal for Margaritaville Key West. We have been very satisfied with our partnership and the results so far, and we anticipate setting records in rates and food and beverage sales there in 2022. Everything is going well, and we’re happy with how things are progressing in our partnership. Now for Worthington, I'll let Tom elaborate on the trends that made the fourth quarter their strongest. Tom?

Sure thanks, Mark. Worthington, it was very simply two things. We actually had groups in. It was a pretty active group season for the hotel, a fair amount of activity with the colleges and games and football. And then the repositioning of the lobby and the Toro Toro restaurant in the lobby generated about $3 million in revenue. And certainly, that was partially due to a lot of holiday events in the space. So really, it was a two things: group and then the investment in the Toro Toro restaurant that drove performance at that hotel.

And that's a sustainable run rate, you think, going forward?

We had a strong performance with room flow-through at about 85% and food and beverage flow-through at around 50%. If the group business returns as expected in this market, the flow-through and margin will improve. Currently, we're anticipating a decline of about $93 million in banquet food and beverage revenue for the portfolio in 2022 compared to 2019. Once group business picks up, banquet revenues, which are our second highest margin, will also recover, leading to improvements in our margins, profitability, and flow-through. There is definitely potential for growth there.

Yes, I would just add just on 2022 expectations, we expect Worthington year-over-year versus 2021 to be one of our strongest performers.

Hi, thanks. I guess a couple of questions on the M&A environment. First, given the strength in the lifestyle leisure transaction market, how do you think that's impacted your NAV versus pre-pandemic and I know you mentioned you're more focused on ROI and see also potential acquisition targets as well but what would make a buyback perhaps more interesting as an alternative? And then second, are you seeing any or expecting any impact on rising rates on the financing market at this point, whether for purchasing existing assets or even broader hotel development?

So we think M&A will be active this year. I think hotels on a relative basis still remain a very interesting asset class, and there's a lot of, there's a lot of chatter in the marketplace. On NAV, trying to hear your questions one at a time, NAV our resorts on average are probably up more than 20% versus pre-pandemic levels, so much more than that. So they clearly had the biggest increase in NAV. Some of our urban hotels are flat to down. I'd expect the urban to recover as the cash flows recover. We will gain more confidence in the BT and group returning as we move through 2022. Financing, we're not seeing that significant change in financing rates. There's a lot of active available debt for hotels. The bigger challenge is getting the trailing cash flow so you can get the loan value of proceeds that are required to get an active market for these urban hotels. So I think it's going to be less about rate on driving the urban hotels and more about the return to cash flow, so people can get the leverage levels that they need to create the true liquidity in that market. I guess to give you an evasive answer, it depends. So no, if we had a portfolio that we loved and it had five resorts and two urban hotels, that wouldn't necessarily be a deal killer. Our preference probably would be to partner going into that, but that would mean we wouldn't do that deal. So there's a couple of portfolio deals that are on the market now. We're looking at them. We wouldn't do something that would significantly change the strategic direction that we're headed in now. But if it's complementary and had a couple of deals that were not an exact fit but were still quality, that would be a portfolio that we'd be interested in looking hard at.

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

Thank you, everyone. We appreciate you tuning in for our earnings call today, and we look forward to updating you on our next quarterly call. Take care.

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