Good day and thank you for standing by. Welcome to the DiamondRock Hospitality Company's Fourth Quarter 2022 Earnings 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. And I would now like to hand the conference over to your speaker today, Ms. Briony Quinn, Senior Vice President and Treasurer. Ms. Quinn, please go ahead.

Thank you, Chris. Good morning, everyone. Welcome to DiamondRock's fourth quarter 2022 earnings call and webcast. Before we get started, 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 in 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, our President and Chief Executive Officer. Mark?

Good morning and thank you for joining us today. I'm here with our entire Executive team, and we'll be happy to take your questions after the prepared remarks. The fourth quarter capped off the best year in the history of DiamondRock, with record revenues, record margins, and record profits. For the full year, comparable hotel adjusted EBITDA was $319.8 million, this was an increase of 121.9% or $175.7 million over 2021. Results even surpassed pre-pandemic 2019, with comparable RevPAR better by 5.5% and comparable hotel adjusted EBITDA better by $38.4 million. Importantly, comparable profit margins were 31.36%, surpassing our pre-pandemic peak by 184 basis points. These tremendous operating results were made possible by the consistent execution of our strategy to curate a portfolio that is uniquely focused on the leading secular travel trends. The portfolio we've assembled is comprised of irreplaceable experiential resorts and urban destination hotels that are tailored to be the hotel of choice in their particular markets. Our focus is paying off. As our portfolio performance has been among the best in the lodging REIT sector. And while the superior operating performance led to strong relative total shareholder returns during the past few years, our stock today nevertheless trades at more than a 30% discount to consensus net asset value. We are proud of what we've built at DiamondRock and we will continue to work diligently to close that discount. For example, during the fourth quarter, we repurchased 1.6 million shares at an average price of only $7.81 per share. Going forward, we will use the power of our low-leverage balance sheet and ample liquidity to capitalize on these types of opportunities. Let's look a little closer at the company's accomplishments in 2022. First, we completed numerous ROI projects, including the Clio Luxury Collection Conversion, the Bethesda Suites Brand Conversion, and executing on our business plans for the repositionings completed in late 2021 of The Hythe, Luxury Collection in Vail, the Margaritaville Resort in Key West, and The Lodge resort in Sonoma. Second, we acquired three incredibly high-quality lifestyle hotels in 2022 with an average RevPAR of over $450 and a stabilized NOI yield averaging over 9%. And third, we completed our largest-ever financing by favorably recasting $1.2 billion in bank debt. DiamondRock is also well-positioned for the future. We enter 2023 with a number of advantages, including: one, an optimally balanced portfolio to the leisure group and business demand segments. Note, that our earnings mix in 2023 is projected to be about 60% from our urban markets and just over 40% from our resort markets; Two, a high number of ROI projects completed and pending that should deliver double-digit returns. Three, a portfolio that is the least encumbered of all the full-service public lodging REITs, which gives us enhanced liquidity and control and exit value. And fourth and finally, a balance sheet advantage with nearly $600 million in liquidity to opportunistically drive incremental shareholder value. On the top of external growth, we expect to have an advantage on acquisitions this year as the debt markets are likely to remain very challenging for private equity firms and other private buyers in 2023. With our significant dry powder, we are ready to pounce on opportunities that emerge. While there is a low volume of deals currently on the market, a core skill of our team remains in finding off-market deals and unique opportunities. Our most recent acquisition, just a few months ago, illustrates that point. The deal for the Lake Austin Spa Resort came about through a relationship that we have cultivated over a number of years with a well-known private equity firm. This firm had originally uncovered an opportunity I was very excited about. They had actually placed the property under contract, completed due diligence, and were about to go hard on their deposit when their lender walked from its loan commitment as the debt markets froze up last summer. We were then their first call. And this created an opportunity for us to quietly come in and negotiate for the resort with a multi-million dollar discount as the seller did not want to have a second sale deal. Lake Austin is a spectacular acquisition for us. We bought a high-end resort at a trailing NOI cap rate of nearly 9% and almost unheard of yield for a luxury property, one which will generate our highest total RevPAR and EBITDA per key. As good as that is, since closing on the deal we have confirmed that there are considerable expansion possibilities on the site, which really make this one a home run. As we go forward, these are the kind of deals that we're looking for: high-quality, great returns, and value-add opportunities. I'll now turn the call over to Jeff to discuss the numbers in greater detail. Jeff?

Thanks. As Mark mentioned, we experienced a record quarter and a record year for DiamondRock. Total comparable revenues reached $257 million for the quarter, marking a $47 million increase or nearly 23% compared to the same quarter in 2021. The comparable RevPAR for our portfolio in the fourth quarter was $196, up 6.7% from 2019. This increase was fueled by room rates over 19% higher than in 2019, although occupancy decreased by 780 basis points compared to 2019. Closing the gap in occupancy is a key area for future growth. Other revenue, which reflects our asset management team's ability to discover and develop new income streams, rose by 31% or $5.1 million compared to 2019. F&B revenue exceeded $5.2 million over 2019, driven by the repositioning of several F&B outlets during the pandemic. We will soon share details about new or upgraded outlets planned for 2023 and beyond that will contribute to increasing profits. Comparable hotel adjusted EBITDA was $77 million, surpassing the fourth quarter of 2019 by $11.2 million or 17%. The comparable hotel adjusted EBITDA margins stood at 30%, an increase of 724 basis points from 2021 and 192 basis points from 2019. Adjusted EBITDA was $67.4 million, nearly $5 million more than in the fourth quarter of 2019. Lastly, FFO per share was $0.23, which is 85% of the fourth quarter of 2019. Demand across our portfolio remained strong in the fourth quarter, with urban hotels exceeding our expectations, consistent with the trend throughout 2022. At the end of the third quarter, we anticipated our urban hotels' RevPAR would reach 80% to 85% of 2019 levels. However, demand from short-term groups and business travelers drove urban RevPAR up to 97.5% of 2019, outperforming our expectations. Both short-term group and business transient demand are improving, and we still have significant potential for further gains given the stronger citywide calendar in 2023 and 2024 compared to 2022. Our resort portfolio performed strongly, with total RevPAR up nearly 29% compared to the same period in 2019, attributed to a greater than 40% increase in room rates. It’s worth noting that Q4 occupancy was still 8 percentage points lower than in 2019, indicating potential for further growth in 2023 and 2024 at our resorts. Our fourth quarter resort profit margins were 341 basis points above 2019 levels. We are confident that resorts will maintain premium performance due to strong secular demand for experiential travel and substantial barriers to new competition. Now, regarding demand segments, leisure revenues were quite strong, up 26% in the quarter compared to 2019, supported by a 29% increase in average daily rates. The resort markets experienced some variations, but we anticipate healthy growth this season in places like Vail and Huntington Beach. Additionally, group-oriented resorts such as our Fort Lauderdale Beach Resort have the potential to shift group bookings and enhance performance. Key West continues to show significant growth during peak demand, although we expect some decline in occupancy compared to 2021 during lower demand periods. Nonetheless, Key West remains significantly above 2019 performance levels with excellent flow-through and profit margins. Business transient demand is particularly noteworthy. Business transient revenues reached $47 million in the quarter, up 22% from the same quarter in 2021, driven primarily by a nearly 32% increase in average daily rates. Fourth quarter business transient revenues were almost 90% of the same period in 2019, despite being on 21% higher room rates. We believe business transient will continue to be a major growth driver for DiamondRock. Business transient accounted for over 25% of the rooms sold in Q4 2022, compared to 34% in Q4 2019. In full-year 2021, business transient revenues were approximately 50% of 2019 levels, and in 2022, they reached 77% of 2019 levels. This data clearly indicates substantial potential for continued growth as corporate travel rebounds. Group demand was also strong in the quarter, with fourth quarter group revenues nearing 103% of the same period in 2019, showing an increase from 91% for the entire year of 2022. Group room rates rose by nearly 13% in the quarter, an improvement over the 10% growth in the previous year. Banquet revenue hit nearly 99% of 2019 levels, and the quality of our group bookings is improving, leading us to expect total group spending to increase as we progress through 2023 and 2024. When groups book with us, they are significantly spending outside of their room costs. We have a strong outlook for 2023 and beyond, with citywide calendars in our key markets already matching or surpassing total room production from 2022, indicating a stronger business foundation. Our specific hotels have over 450,000 group room nights booked at the start of this year, with a planned total production of nearly 740,000 room nights for 2023. This is compared to roughly 540,000 room nights booked at the start of 2019, alongside an eventual total production of 782,000 room nights that year. With increased availability in our calendar and a strong citywide calendar, we expect notably high growth in short-term group sales just as we experienced throughout 2022. Shifting focus, we are excited about the growth of our ROI projects. In the last two years, we upgraded four hotels, which include The Hythe Vail, The Lodge in Sonoma, Margaritaville in Key West, and the Clio in Cherry Creek. Collectively, these hotels generated $15.5 million in additional profit compared to 2019, reflecting a 56% increase in hotel adjusted EBITDA and exceeding initial projections by 50%. This year, we plan to convert the Hilton Burlington into the Lifestyle Curio Collection, which will involve completely reimagining the arrival and lobby experiences, including a new restaurant managed by a local James Beard award-winning chef. In Boston, a major repositioning of the Hilton is underway, with plans to unveil an exciting lifestyle hotel downtown later this year, catering to both leisure travelers at Faneuil Hall and business visitors in the financial district. More developments are coming, as our franchise agreements for the Courtyard Denver Downtown and the Westin Boston Seaport will expire in the coming years, presenting opportunities for value creation. We see major potential in reinventing the Orchards Inn in Sedona, which last year operated at a $700 nightly discount compared to our adjacent L’Auberge de Sedona Resort. Since the Orchards offers unparalleled panoramic views of Sedona's red rock formations, our aim is to reposition it to better capture that rate difference. We'll have more details to share as our master plan progresses. In the past 18 months, we've been active purchasers, and the performance of our new hotels has been promising. Our two resorts in Destin collectively generated more than $10 million in NOI for the full year of 2022, which is 15% above initial underwriting expectations. At the tranquility BAY Resort in Marathon, EBITDA exceeded initial projections by 51% or $2.7 million, yielding 12.5% on its purchase price in its first year. The Bourbon in New Orleans has aligned closely with pro forma expectations, similar to the Shorebreak in Fort Lauderdale as we execute our three-year business plan to enhance positioning for new profitability levels. Lake Austin, mentioned by Mark, was acquired in late November and also surpassed initial underwritings in its final weeks of 2022. Briefly addressing ESG matters, we are proud to have been recognized as the hotel sector leader in the Americas by GRESB for the third year in a row. We have set new environmental and social objectives for 2030, alongside our goal to achieve net-zero status by 2050. More details are available in our 2022 Corporate Responsibility Report, which we published on our website in December. As Mark pointed out earlier, we expanded and recast our credit facility in 2022. We currently have nearly $600 million in total liquidity available from cash reserves and an undrawn revolver. During the quarter, we executed $150 million in additional interest rate swaps. At this moment, 68% of our total debt and preferred capital is either fixed or swapped. The best way to manage interest rate exposure is to maintain low leverage initially. Closing out 2022, we had a net debt to EBITDA of 4 times and a weighted average debt maturity of 3.7 years. We have no significant near-term debt maturities, and 31 out of our 35 assets are free from debt. Additionally, we have no major deferred maintenance issues that could affect our investment capacity and leverage. These factors uniquely position DiamondRock to be opportunistic in its capital allocation strategy, whether that involves taking advantage of pricing dislocations in our common or preferred securities, pursuing value-added ROI projects, or capitalizing on real estate market opportunities. We continue to evaluate accretive recycling opportunities within our portfolio, but we are being cautious to maximize shareholder value. I will now turn the call back over to Mark.

Thanks, Jeff. Our outlook remains constructive. Importantly, we are starting from a position of strength. Our portfolio recovered quickly as our portfolio's favorable composition led to all-time record performance. We also ended 2022 with great profit margins, 184 basis points above the prior peak. For 2023, the significant variability of the overall US economy in our view makes providing guidance little value at this time. Like the rest of the industry, we do expect some challenges this year to profit growth margins from rising property taxes and insurance costs, as well as from increases in hotel staffing and wages that occurred progressively throughout 2022. By the end of 2023, we expect expense comparisons to normalize. Also for this year, we are projecting corporate G&A to be approximately $32.5 million and interest expense to be roughly $61 million. However, despite these headwinds, travel demand continues to be very strong and our operator-prepared budgets show growth in every segment of the business in 2023. We will strive to set new records for comparable total revenues and hotel adjusted EBITDA again this year. As we look out even further, we remain optimistic on travel generally, and we expect the industry to climb to new heights this cycle. We remain bullish on the future of leisure travel in particular, experiences are one of the most highly valued and sought-after assets in the world, and travel is unique for its ability to satisfy that consumer need. Leisure was a long-term outperformance trend line well before the onset of the pandemic, and we believe that this positive trend will only continue in the years to come. This gives us high conviction that our resort properties will maintain a significant premium to 2019 performance and build upon that base going forward. Our urban hotels, which still constitute the majority of our portfolio, have an attractive footprint that will drive a second tailwind for DiamondRock. That combined with the already achieved success at our resorts has the power to take us to new highs in revenues and profits. The group funnel for future business at our urban hotels looks great, as the need to get teams together is more necessary now than ever. As for our business transient, there is still room for improvement and uncertainty on where demand will ultimately settle out, but there is clearly positive momentum. To wrap up, 2022 was a record year for DiamondRock, and we believe that we are well positioned for this cycle, with a model portfolio, focused strategy, and ample liquidity to move quickly. It remains a great time to be in the travel industry. Now we would like to open it up for your questions.

Thank you. One moment please for our first question. Our first question will come from Smedes Rose of Citi. Your line is open.

Hi. Thanks. Good morning. I wanted to ask you, Mark and Jeff, you talked a little bit about the gap to occupancies in 2019, and it sounds like you believe that that gap can continue to close in 2023. And I'm just wondering kind of what gives you confidence there? Do you feel like it's more on the business side or just more on the leisure side? And I guess, if you could maybe just couple that with your remarks around margin pressures in 2023? I kind of lost you right there at the end. I mean, are you expecting margins to be flat or kind of decline in 2023 versus 2022? If you could just speak to that a little bit.

Hi, Smedes. This is Mark. Good morning. To address the first question on occupancy, we anticipate that most of the growth this year will come from occupancy, especially at the urban hotels. January has shown some promising signs, with occupancy increasing by 15.8% compared to last year, and almost all of that improvement is coming from urban properties. There is potential for further growth in this area. Group bookings will play a significant role in this aspect, and we are experiencing a building momentum, as Jeff highlighted in the prepared remarks, as we progress through 2022, with the fourth quarter nearly matching our performance in 2019. The data, momentum, and trends indicate that we can expect significant occupancy gains as we enter 2023. Regarding margins, as I mentioned in my closing remarks, we are facing some pressures similar to the rest of the industry, including wage pressures and property insurance taxes, which are impacted by inflation. We are countering these pressures with productivity gains, reducing the number of managers at our properties and making operational changes. We have implemented energy-efficiency initiatives, maintained strict cost controls on food, and altered our menus to replace more expensive items with those that have not experienced the same inflationary pressures. We are taking various measures to mitigate the impact of inflation on our expenses. Overall, if we can maintain GOP margins at 2023 levels, we would view that as a successful outcome.

So, can you just say and just to follow up, what sort of percentage features are you expecting I guess in wages and benefits at the property level for 2023?

So, we've not given specific guidance, but we've seen it ranges from 4% to 18% in our properties. So, it's a little bit misleading on the percentages, some of the low-cost markets the percentages actually been higher. So you might move from $14 to $17. And then in some of the higher wage markets you might be at $28 already. So, the increase is smaller, but it's on a much larger base. So we're seeing wide variability within the portfolio. But we would expect the industry to be up high single digits, certainly, in expenses this year.

Okay. All right, thank you.

Thank you. One moment please for our next question. One moment again. Our next question will come from Dany Asad of Bank of America. Your line is open.

Hi, good morning everybody. Mark, just clarifying. I think in your prepared remarks, you were talking about operator prepared budgets are showing growth in every segment for 2023. Does this hold true for all four quarters of the year or is this 1Q kind of driving a lot of that?

The growth in this year, given the comps for last year is going to be weighted towards the first half of the year. Certainly, the 40% increase we had in RevPAR in January isn't going to be consistent for every month of this year, but it looks good. I mean, every segment whether it's group business or resorts, we're showing growth on the operating prepared budgets. So, we're encouraged by that trend.

Awesome. Great. And then my other question for you is, how are you underwriting leisure rates for this year in your budgets as we look into all of 2023?

Yeah, it's interesting. Leisure is very disparate this year. So while, for instance, Jeff talked about in the prepared remarks, Key West in the shoulder seasons is getting a little softer. We're going to see new record performance and very strong performance in Q1 at Vail, Sonoma, Huntington Beach, all continue to accelerate in their ability to charge higher rates. So, I think as we look at underwriting to your specific question, it's really very market-specific and what the individual leisure demand drivers are in that particular market.

Got it. Thank you very much.

Thank you. Again, one moment please for our next question. Our next question will come from Michael Bellisario of Baird. Your line is open.

Thanks. Good morning, everyone. Mark or maybe for Jeff, just on group trends. I was hoping you could perhaps differentiate what you're seeing in terms of spend and booking behavior at your big box hotels versus what you're seeing on the group side of your resort properties?

Jeff, do you want to take that one?

Sure. I mean we continue to see growth in group demand throughout the portfolio. I think as Mark mentioned on the resort side, maybe first, part of our success going forward is as we've seen a little bit of fall-off in leisure transient, we're filling incremental demand. But we did about 7% incremental group bookings in the fourth quarter versus the same quarter in 2019 at rates that are over 10% higher. So, we continue to see the group booking trends accelerate throughout the portfolio. And just given that shorter booking window and given our larger space availability throughout the portfolio, we're pretty excited about group opportunities as the year progresses.

Helpful. And then just a follow-up on the Lake Austin acquisition. Mark, you touched on a little bit, can you provide maybe some timing or maybe your initial thoughts on the timing of some of those longer-term ROI projects and redevelopment potential there at the property?

Sure, this is Mark. We disclosed an asset in November, and we've been collaborating with land use attorneys and others to assess our rights regarding the property. We believe we have significant expansion opportunities confirmed by the land user. However, it will likely take us a couple of years to navigate through this process. There are extensions needed for the silver lines and other tasks to be completed, but we are quite confident in our ability to move forward. This year, we plan to evaluate the master plan, finalize it, and begin executing it.

Mr. Bellisario?

That's all from me. Thank you.

Thanks, Michael.

Thank you. One moment please for our next question. Our next question will come from Anthony Powell of Barclays. Your line is open.

Hi, good morning. I have a question about revenues and margins. Could you discuss what you believe is necessary for RevPAR growth this year to maintain flat GOP margins for your portfolio? Additionally, could you elaborate on this in light of ongoing wage pressures, insurance costs, and other factors?

Sure. It's hard, because we are not giving specific guidance. But the industry guidance they're saying the industry is up 3.7%, upper upscale up about 8% to grow over 8%. We think that kind of environment generally for upper upscale would be able to hold margins for the industry to kind of GOP flat. So that's the environment. It will depend how the economic outlook plays out. But right now, that I think that's kind of a fair assessment on margins. Jeff, anything else to add on that?

No, that's the comment I wanted to make as well. Earlier, you mentioned that we should expect high single-digit expense increases. Similarly, to achieve flat margins, we need high single-digit revenue growth.

Got it. And I guess more on the economic outlook. I mean you talked about the opportunity to have good short-term bookings later this year. I guess given the uncertain environment, how certain are you in your ability to drive some of those short-term bookings in group throughout the year?

I would like to make a few comments about the group segment. In the fourth quarter, as Justin mentioned, we experienced an acceleration in bookings, which gives us good momentum as we enter 2023. The timeframe for booking groups is still shorter than it was before the pandemic, with people making even large group reservations on relatively short notice. This seems to be the trend for this year. We are encouraged not only by the momentum in the fourth quarter, but also by the availability of attractive dates in 2023. Typically, when we move into a new year, we have sold out the best dates, but we still have appealing options available, such as summer dates in Boston and Chicago. This gives us confidence in bridging the group booking gap and successfully filling those open periods with high-quality groups.

Great, thank you.

Thank you. And one moment please for our next question. Our next question will come from Duane Pfennigwerth of Evercore ISI. Your line is open.

Good morning. Thank you. Regarding the January figures, which you mentioned increased by 10.5% compared to 2019 in your investor presentation, could you provide some context for January in relation to February and March, considering the remainder of the March quarter?

Yeah. Duane, good morning. This is Mark. I'll make a couple of comments on Q1. So, we did pre-announced January. So the results as you mentioned, were up 10.5% over 2019, up 39.6% over 2022. We do anticipate that Q1 will be the biggest year from the easy comp to Q1 of 2022 with Omicron impact. But we're expecting the entire quarter to be fairly robust and all the urban markets, in fact, we expect total RevPAR to exceed 2019 levels at our hotels in markets like Salt Lake City, Dallas Fort Worth, New York and Phoenix. So, that's going to help power our Q1 overall, and even the resorts, as I mentioned, while Florida Keys may be moderating from being up over 50% from 2019, we still expect robust growth in Q1 from resorts in Vail, Huntington Beach, Sonoma among others. So, we expect to finish, I think total Q1 with total RevPAR that is up double digits, low double digits from 2019. So, I'd say January is not out of line with what we expect for the quarter and we expect those overall results for the quarter versus 2019 will probably put us at the front of the pack among the peer set.

That's helpful. Helpful color. Thank you. And then just the comment on the Florida Keys and maybe what we're seeing is just sort of normal seasonality coming back relative to a period of time where there was no seasonality was sort of peak forever. I'm just wondering, is your approach to revenue management different in these off-peak shoulder seasons? Is there something through the pandemic that you learned that changes your approach to off-peak versus the past? And thanks for taking the questions.

Hi, Duane. Regarding the Florida Keys, we feel there's a strong demand for them. Currently, we're observing rates that are significantly higher than in 2019, with a notable ability to increase profits. This region has become highly lucrative. Last year's impact from Omicron led to unexpected additional remote work days for many, prompting people to seek nearby locations to enjoy the last moments of working from home before returning to the office. This surge in demand was significant, driven by the situation with Omicron. Right now, we can still leverage this demand, but the extraordinary spike we experienced is starting to stabilize. When I say stabilize, it seems to be trending back toward 2019 levels, with only slight expected declines. Our plan is to maintain our rates, as we have conditioned travelers to accept rates that are significantly higher than four years ago, and reclaiming those lower rates is not an easy task. That’s our approach.

Thank you very much.

Thank you. One moment please for our next question. Again, one moment, please. Our next question will come from Patrick Scholes of Truist Securities. Your line is open.

Hi, good morning. Most of my questions have been answered. I'm curious about comparable margins compared to 2019 and the potential for a permanent margin increase. What are your current thoughts on that? Reflecting on six months to a year ago, it seems like you were considering the industry trend plus 100 to 200 basis points. Is that still a possibility? Thank you.

Yeah. I’ll let Jeff explain the details, but we ended 2022 184 basis points above 2019. So I think DiamondRock proves that we can operate hotels with higher margins. Now in 2023, there will be some expense pressures. So there'll be some pressure against that margin increase. But we're already substantially higher than we were in 2019. Jeff, do you want to jump in with some details?

I wanted to add that on the resort side of the portfolio, as Mark mentioned, we've seen the highest rate growth and strongest flows. This area is likely to continue showing better performance on margins. There are several structural reasons for this, including factors like taxes, insurance, and labor costs in those markets. Therefore, you can expect those premium margins to be maintained compared to 2019.

Okay. Thank you. I'm all set.

Thank you. One moment please for our next question. Our next question will come from Chris Woronka of Deutsche Bank. Your line is open.

Good morning, everyone. Mark, you mentioned in your prepared comments that there is still a lot of potential for growth even with the resorts' occupancy levels. My question is whether you believe you can achieve your desired rates, or if it will depend on fluctuations in rates, which could complicate margins. How do you plan to restore full occupancy at the resorts?

Hi, Chris. It's a great question. The resorts are really their own micro-businesses, and it's going to be different at different kinds of resorts. In Fort Lauderdale, for instance, Justin was saying we're grouping up to replace some of that leisure. So the way we're going to get back to that kind of max hotel like Fort Lauderdale, which has a great group meeting platform is that we're going to supplement in more and more group than we had last year, and that's going to allow us to close that gap. Some other hotels, if you have a 100-room hotel that has no group, it's going to be harder to recover that and we're going to have to play with the rate strategy there a little bit to figure out where the maximum profit mix is on revenues. So, the overall goal is to continue to maximize profits. We'll close some of the occupancy gap through adding group throughout the portfolio, but it might not close entirely in 2023.

Thank you, Mark. I wanted to revisit your comment about group bookings and the availability of some prime dates, which seems a bit unusual compared to what we're hearing from others. Are those dates open because the rates are set at a point that encourages more selective demand? Are you concerned that you might miss opportunities if the macro environment shifts and the situation changes significantly?

That's a good question. I think it's more the fact that our portfolio, a lot of the prime dates in markets like Chicago and Boston are still six months out, five to six months out. And the nature of group bookings days is a little shorter window. So I think it just happens to be the geography of our portfolio. We're actually super happy with the way it's playing out on a calendar basis this year. But I'll let Justin add any details for the question.

I think it also comes down to average group size. I mean, our portfolio may be a little bit smaller than some of our competitors and those average groups that are maybe 50 to 150 rooms are going to book shorter rather than maybe of the larger hotels that are 500 and plus. So, it gives us the ability to sort of look towards a higher percentage of our business from that short-term booking window.

Okay, very helpful. Thanks, guys.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Floris van Dijkum of Compass Point LLC. Your line is open.

Thank you for taking my question. I understand you're not providing guidance, but you're aiming to maintain margins while indicating that some of your costs might increase by around 8%. This suggests that your EBITDA would also need to rise. In other words, under what circumstances do you foresee EBITDA declining? Excluding a severe recession, what scenarios could lead to DiamondRock reporting negative EBITDA growth in 2023? That's my first question.

First of all, we're not giving guidance. But as we mentioned earlier, STR has a guidance of 3.7% for the industry and high single digits for upper upscale. In that environment, we think we can hold GOP margins flat if that's kind of the economic scenario that they're utilizing. That's how the industry plays out. We think we can do well in that environment. So hopefully that's helpful.

I noticed that last year, you had two hotels that posted negative EBITDA, namely your Embassy Suites in Bethesda and your Kimpton in Fort Lauderdale. Can you discuss that situation? Additionally, I’d like to hear about your highest EBITDA producer, the Chicago Marriott, which seems to diverge from your overall strategy since it contributes over 10% of your EBITDA. How should we view that hotel moving forward, and what are your plans for replacing the income if you decide to sell that asset?

The Bethesda Suites experienced a brand transition that caused some disruption, which is why we saw negative EBITDA, but it is expected to improve this year. As for the Shorebreak in Fort Lauderdale, we have acquired it and are in the process of repositioning the asset, including roofing work. This repositioning likely won’t be completed until the end of the second quarter. However, both assets are relatively small in the grand scheme of our portfolio, and their transitions are the reason for their current performance. On a positive note, the Chicago Marriott had an exceptional year, surpassing our expectations. The market conditions and our ability to attract leisure guests over the summer, along with a rebound in group bookings later in the year, all contributed to its success. We are pleased with how that asset performed. Moving forward, we are considering monetizing some of our Chicago assets as we think about optimizing our portfolio, especially given the strong results we’ve seen. However, the current market does not favor large asset sales due to difficulties in securing significant loans, though we anticipate this may change as the year progresses. We will keep an eye on the debt markets and explore options for capital recycling. If we decide to sell a hard-branded asset, we plan to reinvest the proceeds in areas that we believe will experience significant growth in the coming decade, particularly in lifestyle experiential assets located in markets with high barriers to entry. This aligns with our ongoing strategy to acquire more properties like those in Lake Austin and Henderson Beach, as well as unique assets like Bourbon Orleans and in the French Quarter. Our focus continues to be on positioning the company to meet compelling demand trends, which significantly contributed to our strong results in 2022.

Thanks, Mark.

Thank you.

Thank you. One moment please for our next question. Next question will come from Chris Darling of Green Street. Your line is open.

Thanks. Good morning, everyone. Related to staffing levels, are you more or less running at the right headcount today or is there more work to be done in terms of hiring across the portfolio?

Justin, do you want to take that one?

Yeah. I think generally, we're running at required staffing levels to what we anticipate the business levels to be. As we progressed through the year, we will have some comparables that are not perfect on a year-over-year basis just given where business levels were same time last year with Omicron sort of worked its way through the country in early 2022. But I think by the end of last year, we're pretty much fully ramped from a staffing perspective in terms of where we see operating fundamentals going forward. But those levels are in a lot of cases, significantly below 2019. We've been able to really rethink and streamline the business as we ramp these fast back up from what was a pretty significantly reduced level during the pandemic. I think our hotel, the Westin in Boston, is probably a great example of that. We're forecasting about 20 fewer managers in 2023 budget versus 2019 operating level. So, we've really found ways to complex roles throughout the portfolio, especially in some of the larger assets to find a more efficient and streamlined business model.

Got it, that's helpful. And then shifting gears, Mark you mentioned there's not too much available on the transaction market today. But curious if you've considered putting capital to work maybe in the form of net debt, preferred equity. Just thinking about other ways to maybe get a foot in the door of assets you might like to own over the longer term.

That's a great question, Chris. We regularly have strategic discussions about how to deploy our capital. We are very satisfied with our balance sheet and the current narrative surrounding DiamondRock. There's notable competition from private equity in acquiring debt across various sectors, and this competition is quite strong. As a result, we are inclined to keep our approach straightforward, although we remain open to creative opportunities. However, any shift in strategy would require a very high threshold for us to consider. Over the past 24 months, we've identified six excellent acquisition opportunities. While the overall market volume is low, we are actively engaging in discussions about deals, mainly focusing on off-market opportunities. This indicates that we are not completely sidelined. One of the benefits of managing only 35 assets is that executing a few strategic deals this year could significantly impact our performance without the need to pursue $1 billion in acquisitions to be the leading REIT in 2023. We will continue to seek smart deals, particularly off-market ones, and our current pipeline includes several of these ongoing discussions.

Got it. I appreciate the thoughts. That's all from me.

Thanks, Chris.

Thanks, Chris.

Thank you. One moment for our next question, please. Our next question will come from Stephen Grambling of Morgan Stanley. Your line is open.

Hi, thanks. The comments on the first quarter were helpful. Are there any additional thoughts you can provide on the quarterly cadence for the remainder of the year as we think about big citywide or other factors to consider for whether it's revenue or margins by quarter? And as it related to follow-up, whether were cancellation fees in 2022, outside is there any way to think about how cancellation fees may have contributed on a quarterly basis last year?

Jeff, do you want to take that one?

Yeah. I mean, I'd say, see, we're not going to give guidance on revenues and margins by quarter. But as Mark said, our first quarter is probably going to be significant in terms of revenue growth. I actually think that EBITDA growth year-over-year is probably going to be more front-end weighted, just given the comparisons to last year and how the business ramps over the last year. So I think from a risk-adjusted standpoint, having our earnings more front-end weighted is an encouraging sign. I'm looking at Justin, I'm not sure if we have the cancellation fee revenue handy or if we can always follow up with you offline.

Yeah. We did have, like, I think most of our competitors, more cancellations versus 2019, but it was a little over $2 billion more than we had in 2019. So it's not that material to over $1 billion in revenue. And I think it's less material to us, but it has probably some. Some of our others with the larger group component.

Makes sense. That's it from me. Thanks so much.

Thank you. And one moment please for our next question. Our next question will come from Bill Crow of Raymond James. Your line is open.

Thank you. Good morning, Jeff. I have a question for you. If we consider revenues in the mid to high single-digit range, which you mentioned and is also reflective of the industry, and then look at expenses increasing by a similar amount, we might end up with a relatively flat EBITDA number, potentially with a slight positive bias. However, given the transactions you've made throughout the year, I'm curious how these portfolio changes could contribute to the baseline figure.

Yeah. I guess I would say, Bill, that we tend to think of all this on a comparable basis. I mean, I guess when we're giving guidance or talking about the portfolio in that way, it is called the same store on that level. So I wouldn't think of the acquisitions as sort of incremental or outside of that. We're trying to be as transparent as possible and adjust the transactions that we've already made in our past numbers and how we think about the year going forward. So, I don't know if that's helpful to you.

I guess, but in Austin for example, you only owned it for a short period of time, right? So, you're going to get that benefit rolling through this year?

Certainly, it's a very profitable asset. But when we think about our year-over-year growth, we obviously looked at the historical contributions that asset would have made to the extent we had owned it for all prior periods.

Okay, all right. That's it. Thank you.

Thanks.

Thank you. And speakers, I see no further questions in the queue. I would now like to turn the conference back to Mark Brugger for closing remarks.

Thank you. For everyone on the call, we appreciate your interest in DiamondRock, and we look forward to updating you next quarter. Have a great day.

This concludes today's conference call. Thank you all for participating. You may now disconnect and have a pleasant day.