DiamondRock Hospitality Co Q1 FY2023 Earnings Call

Thank you. Good morning, everyone. Welcome to DiamondRock's first quarter 2023 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 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.

Thank you for joining us today. The first quarter results from the DiamondRock portfolio set records for both revenues and total profits. In the quarter, comparable RevPAR increased 16.9% and comparable revenues increased 18% over the prior year. Hotel adjusted EBITDA increased $8.5 million or 15.9%. The results were also well ahead of 2019, with comparable RevPAR up 13.8% and hotel adjusted EBITDA up 19.5%. These record results speak to the quality of our real estate, our favorable geographic footprint and our strategy to have a portfolio of differentiated hotels and resorts. It is the DiamondRock portfolio that is our competitive advantage. The DiamondRock portfolio distinguishes itself from its public peers by having only two of its 35 hotels, subject to long-term management agreements. This increases both the liquidity and the NAV of these unencumbered properties. The portfolio today is comprised of 35 properties, 20 in urban gateway markets and 15 in prime resort locations. It's a well-balanced portfolio. By full year revenue, it is about 60% urban and 40% resorts. We believe that we have carefully curated a unique portfolio that can outperform the industry averages over the long-term because of our focus on the right markets and the favorable experiential travel trend. Our urban properties are concentrated in some of the most desirable submarkets of the best gateway cities. These submarkets include New York's Times Square and Midtown East, Boston Seaport and Financial Districts, Chicago's Magnificent Mile, Denver's Cherry Creek District, San Diego's Little Italy and Salt Lake City's Temple Square. Just as importantly, we have largely avoided markets like San Francisco, Portland and Los Angeles, where values have been crushed due to post-pandemic structural changes in demand, new transfer taxes and reduced operating efficiencies from recently adopted hotel ordinances. Our resorts like our gateway hotels are situated in prime locations, like the Vortex among the Red Rock Sedona, the snow-capped mountains of Vail, the Wine Country in Sonoma or the beaches of the Florida Keys. Collectively, these resort markets are positioned to outperform in the coming decade from the accelerated paradigm shift towards more leisure travel that is combined with little to no supply increases. Let's get into the trends that we are currently seeing within the portfolio. The group segment is showing considerable strength. Compared to the first quarter of last year, room revenue increased 59% and in-quarter activity was up nearly 15%. The benefit of owning well-maintained hotels in key submarkets is readily apparent in the performance of our group-centric hotels. RevPAR at the San Diego Westin increased 71% over Q1 2022. And RevPAR at the Chicago Marriott increased 62%. Similarly, RevPAR at the Boston Western Seaport increased 40% over the first quarter of 2022, which impressively was more than 10% over its prior first quarter peak. Business transient demand has also rapidly recovered. Midweek business transient occupancy at urban properties increased 50.8% in the first quarter from the comparable period. This strong business transient demand helped set records for our trio of select service hotels in Manhattan, which were stars in the first quarter with RevPAR increasing at an average of 45.6% over Q1 2022 and 8% higher than the comparable period in 2019. Business transient demand also propelled results at the Hotel Emblem, which cemented its status as the number one TripAdvisor ranked hotel in San Francisco. This tiny boutique delivered nearly an 80% increase in RevPAR over last year and double-digit RevPAR growth compared to 2019. Just as encouraging was the intra-quarter momentum for BT. In January, business transient occupancy at our urban hotels was 51.7% compared to 2019 levels. And by March, it was 16 percentage points higher at 67.7% of 2019 levels. However, it is really the resort segment that continues to be the big long-term beneficiary of travel trends that began before the onset of the pandemic. There is a fundamentally favorable imbalance of robust leisure demand for the limited number of resorts in the US. This imbalance underpins our belief that resorts remain a great capital allocation choice for the coming years. In fact, it is now obvious that the more resorts you acquired prior to the pandemic, the better off you are now. As you know, DiamondRock nearly doubled its number of resorts prior to the pandemic through the acquisition of seven different resorts in the five years prior to 2020. It was this delivered capital allocation that helped fuel our record-setting performance. For our entire resort portfolio, the results in the first quarter were very strong with RevPAR that was 30.4% higher than 2019 and adjusted EBITDA that was 47% higher than 2019. This operating outperformance yielded enormous NAV increases for our resorts where we estimate NAV increased by nearly $200 million or about $1 per share since 2019. For the industry, STR reported that the resort segment in the US increased year-over-year RevPAR by 12.9% in the first quarter. As the world settles down post-pandemic, each resort market is establishing a new normal baseline, which began happening around September of last year. Encouragingly, in this first quarter we saw record RevPAR performance from our luxury collection resort in Vail up 18.8%, our Hilton in Vermont up 13.5%, the lodge at Sonoma up 11.5% and the Kimpton Shorebreak in Huntington Beach, which is another number one ranked TripAdvisor hotel. After experiencing explosive growth during the last few years, we are seeing the resorts in Destin Beach and the Florida Keys stabilizing at their new normal, still behind last year, but still more than 38% above 2019. We expect this new normal adjustment will continue until we get to lap this trend in late 2023. And when leisure is likely to resume its outperformance headed into 2024 and beyond. That's a good transition to give you an update on the acquisition market more generally. While Jeff will discuss our current capital allocation options, including share repurchases at steep discounts, we remain active in trying to find more acquisitions of the kind that have worked so well for us: unique experiential hotels, generally owner-operated and held by non-institutional owners. We've been focusing on these types of deals for almost a decade and have a first-mover advantage. DiamondRock's well-honed skill set for identifying and unlocking value at these types of properties puts us in a great position to create value when we can pry them loose. Of course, a deal we would do this year will have to be something that we really love, but there are a few special opportunities out there where we are actively engaged in conversations. For broadly marketed deals, we expect the low transaction volumes to begin slowly picking up later in 2023, and into next year. Before turning the call over to Jeff to discuss our fortress balance sheet and earnings in greater detail, we do want to provide comments on our outlook. Regarding group in full year 2022, we generated 83% of prior peak group room nights. Clearly, there is significant room for improvement and we are making excellent progress. In the first quarter, group room nights were 88% of prior peak and our current forecast is to finish 2023 at 94% of peak group room nights and 102% of peak group revenue. We are aggressively closing in on that target. Our group revenue booked in Q1 for the remainder of 2023 was up 28% over the last year with the strongest gains to be found in the next two quarters. Our full year forecast has group room rates up 14.5% to 2019, but it's still about 46,000 room nights behind prior peak; closing that gap and capturing those rooms could add $20 million of incremental revenue to our 2024 results. On leisure, it's been the top-performing segment over the past few years. In 2023, we expect each market will reach a different level of new normal, after which leisure will likely return to its long-term secular growth trend line but off of a much higher base with the new normal 2023 resort NOI about 50% higher than 2019. As one point of additional opportunity for our resorts, they are projected to end 2023 at four percentage points of occupancy below prior peak and closing that gap next year could be worth another $24 million in revenue. Finally, business travelers are clearly getting back on the road, but we are seeing that positive BT trend line moderate a little on the demand side while we continue to push rates to maximize profitability. I'll sum up by saying that while the economic outlook is still too volatile to provide investors with useful earnings guidance, we continue to expect DiamondRock to achieve record revenues in 2023. With that, let me turn it over to Jeff.

Thanks. As Mark said at the onset of the call, it was another strong quarter for DiamondRock. Comparable total revenue was up 18% over 2022 and 14% over 2019. Hotel adjusted EBITDA increased 16% over last year. This enabled us to generate corporate adjusted EBITDA of $55.4 million and adjusted FFO of $0.18 per share. Comparable RevPAR for the portfolio in the first quarter was $185, or nearly 17% higher than 2022 and nearly 14% higher than 2019. This growth was driven by a 23% increase in room rates over 2019. Occupancy was down 540 basis points compared to the first quarter in 2019, but this is a 240 basis point sequential improvement from Q4 2022. Closing this gap remains one of several sources of future growth for DiamondRock. F&B and other revenue increased 14.1% or over $10 million on a combined basis, to nearly $83 million driven by several repositioned F&B outlets and new income streams created by our asset managers during the pandemic. We will share with you soon several new or upgraded outlets we are working on that will continue to drive profits to new levels in 2024 and beyond. Comparable hotel adjusted EBITDA was $61.9 million, which beat the first quarter of 2019 by $10.1 million or nearly 20%. Adjusted EBITDA was $10.5 million and 23% better than 2022, and FFO per share was 28.6% better than 2022. Profit margins remain a great story for us. Comparable hotel adjusted EBITDA margins were 25.8%, up 117 basis points compared to 2019. Our resort portfolio finished the first quarter with a comparable hotel adjusted margin of 34.9% or 379 basis points higher than the same period in 2019. Importantly, this performance expanded upon the 341 basis point improvement reported by our resort portfolio in the fourth quarter of 2022. Comparable hotel adjusted EBITDA margins at our urban hotels were 18.2%, up 823 basis points over 2022. Urban hotels have yet to see demand recover to 2019 levels, so while we rebuild profitable corporate business, we are identifying permanent efficiencies to amplify our ultimate recovery. Operating efficiency is a critical factor in all aspects of capital spending on rooms, outlets and even back-of-house design. A more immediate example of efficiencies can be found at our Chicago Marriott Magnificent Mile, which now operates with 20% fewer managers than it did in 2019. Our goal for 2023 is for hotel adjusted EBITDA margins to be roughly flat to 2019. Portfolio-wide increases in property insurance and property tax are expected to be headwinds for the industry and for DiamondRock. Looking at the remaining three quarters of 2023, we expect total expense growth at our resorts will increase in the low single digits over 2022. For our urban hotels, expense growth is likely in the range of 12% to 13% for the remainder of the year, as we grow banquet business and fill positions as we rebuild occupancy. We are working hard to offset these increases through aggressive asset management, converting contract workers back to full-time employees and more efficient staffing models. Moving to capital allocation, as discussed in the prior earnings call, in early February, we executed two hedges to end the quarter with 64% of our total debt fixed or swapped. Subsequent to quarter end, we acquired the fee simple interest in the remaining land parcels under the Worthington Renaissance parking structure for approximately $1.8 million. We now own a 100% fee simple interest in the hotel. The transaction enhances the liquidity and financeability of this asset and more importantly, reinforces DiamondRock's low exposure to ground lease assets. At the end of March, we acquired 56,400 shares of common stock at $7.26 per share before our window closed. This price represents nearly a 10.5% cap rate on trailing NOI or $270,000 per key of enterprise value, which is less than half our replacement cost. We were disappointed we could not be more active at these levels. Share repurchases are a key component of our capital allocation opportunity set, and we constantly evaluate repurchases against external growth opportunities as well as the high yields and long-term value creation from our ROI pipeline. Speaking of ROIs, the portfolio continues to drive cash flow and create value as we execute our high ROI repositioning plans. In the last 24 months, we have completed the conversion and up-branding of the Vail Marriott to The Hythe, a Luxury Collection Hotel; the JW Marriott Denver to Hotel Clio, a Luxury Collection Hotel; the Key West Sheraton Suites to the Margaritaville Beach House; and The Lodge at Sonoma to An Autograph Collection. In the first quarter, these four hotels alone generated a collective RevPAR increase of 46% over 2019, with hotel adjusted EBITDA up 75% since 2019. Importantly, net asset values increased at these hotels, and we are seeing a handsome return on our investments. Since 2021, we have, or will execute, a total of $90 million of ROI projects at 16 of our 35 hotels, creating and executing these types of repositionings is a core competency for DiamondRock. We are currently underway with three more ROI repositionings: the Hilton Boston to a lifestyle hotel that will be completed late summer; the Hilton Burlington to a lifestyle hotel to be named Hotel Champlain, a lakeside resort to be completed this fall as part of the Curio Collection; and the Bourbon Orleans repositioning to a premium urban lifestyle hotel in the French Quarter to be completed before the Super Bowl and Mardi Gras in early 2024. We also have plans to create significant value at several other properties including our Orchards Inn Sedona, our Lake Austin Spa Resort and our Landing Lake Tahoe Resort. These will allow us to grow value and drive premium core growth in future years. There is more to come, so stay tuned. Turning to the balance sheet: We remain committed to having a strong and flexible balance sheet. Our leverage is conservative as demonstrated by the low trailing four-quarter net debt to adjusted EBITDA ratio of 3.8 times. Our liquidity is very strong at $585 million, including $185 million of cash. Our $400 million revolver is undrawn, but just as critical, the $400 million is fully available to us even under our most restrictive debt covenants. Moreover, we expect to generate over $215 million of cash this year before capital expenditures and dividends. We have a few demands on our balance sheet and this allows us to play offense at a time when others may be forced to sell at depressed prices. Conversely, and to be clear, this is not our expectation, if real estate capital markets were to remain choppy for an extended period, we project we will have the capacity to retire all debt maturities, fully fund all capital expenditures, fund all pending ROI projects and pay projected preferred and common dividends through 2025 from current liquidity and retained cash flow. This scenario was not our house view of the future, but we believe it is an important point of differentiation for DiamondRock. We believe our well-maintained portfolio, low leverage, flexible and liquid structure, long weighted average maturity and strong cash flow are distinct and material advantages. Moreover, unwinding our balance sheet does not create a drag on our NAV. With that, let me turn the call back to Mark.

Thanks, Jeff. Let me end by saying that we remain bullish on the future of travel. Travel is one of the most highly valued assets in our society and around the world. Leisure demand enjoyed a strong period of outperformance that began before the pandemic and we see that secular trend of outperformance continuing in the coming years. On group, the funnel for future business looks very strong. On business travel, while there is still some uncertainty as to where demand ultimately settles, there clearly has been positive momentum, and we are primed to take share from other hotels because of our excellent locations and from repositionings like the Clio, Denver, Luxury Collection hotel or the upcoming conversion of our hotel in Boston. To wrap up, the first quarter of 2023 was a record for DiamondRock's portfolio in terms of both revenues and profits. Moreover, we believe that we are well positioned for this cycle with a very high-quality portfolio, a focused strategy and careful liquidity to move opportunistically. At this time, we would like to open it up for your questions.

Thank you. The first question comes from Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Thanks and good morning. Mark can you just put some further details around your comment that BT is moderating. I'm just curious if that's specific to any markets? Do you think this is a little bit of an air pocket, or are we actually seeing BT stall given what's happening maybe just more broadly given the macro backdrop?

Good morning, Austin. In comparison to other segments, leisure has performed very well, significantly above prior peak levels. The group segment is recovering, and as we mentioned, our group revenues are expected to surpass prior peak levels this year. Business travel, on the other hand, is recovering more slowly than the other two segments. We experienced positive momentum in the first quarter, but we do not anticipate it reaching previous peak levels this year. It may settle at a level below the demand we saw in 2019. We had a strong growth of 16 percentage points from January to March, but we do not expect to maintain that same pace for the remainder of the year.

Okay. Got it. And then just on group. I know you gave some stats but what percent of group revenues on the books relative to budget? And how much do you expect to pick up I guess in the quarter for the quarter over the balance of the year? And can you just talk a little bit about how the short-term leads are today relative to maybe what you saw last year?

So I'll take the front of that question and maybe I'll hand it over to Justin to talk a little bit more about group. So we have today we ended the quarter with about 80% of the group room nights already under contract that we need to hit our forecast for the full year. So we feel good about the position that we're sitting in for group. Justin, do you want to add some comments on the group?

Yes. I think we hit it in our highlights and we've seen group as an area of strength just in the industry generally. And in full year '22 we did 83% of prior peak. Q1 was 88% of prior peak and our current forecast is to get back to 94% of prior peak just in group room nights and we're expecting to exceed that in volume. But I think more importantly what we're seeing is in the year for the year pickup is actually accelerating. So in Q1 our in-the-quarter pickup for the remainder of 2023 was up 28% just in room night volume versus Q1 2019. So we continue to see that velocity while being somewhat short term expand over what we saw last year. And so we're optimistic that we can even further close that room night gap to what we're projecting for full year '23.

Got it. Thanks, Justin. Thanks, Mark.

Thank you. One moment for our next question. Next question comes from the line of Dori Kesten with Wells Fargo. Your line is now open.

Thanks. Good morning. You talked a bit about your appetite to apply this year Mark. Should you transactionally assume you acquire pretty similar to what you have over the last several years like relatively small relationship potentially owner-managed?

Hey, Dori, that's a great question. We're still focused on not pursuing any major deals at this time. We believe we have sufficient liquidity, and any opportunities we consider would need to offer relatively high returns, especially since there's considerable private equity interest in deals. Our competitive edge lies in the relationships we've established, particularly in unique resort markets with owner-operators. That remains the primary focus of our discussions, as we see potential for value creation there. We aim to make purchases that align with our cost of capital. However, in the broadly marketed deals we've observed, pricing remains competitive, and the current pricing likely does not work for us. Thus, we are concentrating on areas where we believe we have an advantage.

Okay. And some peers have talked about selectively reducing (FTEs) in the near term. Do you feel the need to do so, or is your focus more on offsetting contracts with permanent workers?

Justin do you want to talk about the efforts we have for maintaining our margins?

Sure. We're implementing several strategies regarding labor. Mark mentioned our unique collection of small independent experiential resorts. We're exploring ways to run these businesses more efficiently by pooling resources. This approach enhances our margins and positions us well for potential acquisitions. For instance, we're building relationships with luxury travel agents and optimizing online placements, utilizing external third-party resources instead of on-site staffing for some of these smaller operations. This allows us to access top-quality resources at a lower cost and reduce on-site full-time employees compared to the owner-operated model. Regarding contracted labor, we are aiming to decrease our reliance on contract workers across the board. In the recent tight labor market, we've had to rely on all available labor sources, but the costs for contract labor have risen more sharply than wages in many areas. These costs now represent a premium to bring those workers onto our teams, particularly when considering turnover and training. Thus, we're looking to increase the number of full-time employees at our individual properties. For example, since acquiring Lake Austin, we've completely phased out contract labor in our spa operations, which has positively impacted both spa expenses and guest service, and importantly, it provides better pay for our associates.

All right. Thanks.

Thank you. One moment for our next question. Our next question comes from the line of Duane Pfennigwerth with Evercore ISI. Your line is now open.

Hey. Good morning. Thanks. Just on F&B, one of the trends we've seen really across lodging this sector is higher F&B relative to room revenue. I wonder if you could just provide some context on what you think is driving that. And again, from an industry perspective, if you see it as sustainable?

Sure. This is Mark. I'll start by saying that we are experiencing better than expected spending on banquets. The groups that have joined us over the past six months have generally exceeded our expectations in terms of AV rental and event-related expenses, such as food. There's a strong belief among event planners that if they're bringing people together, the experience must be meaningful and ensure attendees feel valued, especially given the current tight labor market. We are very pleased with this trend. Specifically regarding the DiamondRock portfolio, we set new records for outlet performance last year. We have intentionally enhanced guest experiences by introducing several specialty restaurants in our hotels, such as Richard Sandoval’s Toro, Michael Mina’s restaurant, and Vivian Howard in Charleston. These partnerships have significantly boosted our food and beverage revenue, particularly in our outlets, and we believe this improvement is sustainable. This variety makes our hotels more appealing and continues to resonate with today’s travelers. Justin, do you have anything to add on food and beverage?

I think on the resorts, we're pretty pleased to see continued growth in outlets, in food and beverage, I think due to some of those repositioning. I do think that comparable on a year-over-year basis will probably moderate for the urban. I mean there were a few of our urban assets. And I think there's just in the industry generally where the outlets were not fully open in Q1 of 2022 and we didn't have, for example, room service installed in Q1 of 2022. So, I do think some of that fruit of average growth will probably moderate just in terms of outsized revenue growth as we go through the year.

Thanks. And Mark, maybe I'll stick with you. When we were together in Bethesda with investors in late March, you had talked about increased dialogue with private equity firms, kicking tires on the sector and potentially kicking tires on DiamondRock specifically. Can you give us an update on that kind of the tenor and the pace of those conversations?

Sure. We always have ongoing discussions with private equity firms. Recently, I've seen that approximately $230 billion has been raised to invest in real estate, and hotels are increasingly viewed as an attractive asset class by these firms. We are consistently engaging in conversations with various stakeholders, and while I can't share specific details about those discussions, I can assure you that the interest in this sector remains very strong.

Thank you.

Thank you. One moment for your next question please. Our next question comes from the line of Smedes Rose with Citi. Your line is now open.

Thanks. I wanted to ask about the return to the new normal in Florida. Would you apply that to what you're observing at the Lake Austin property, which seems to have experienced significant year-over-year declines? Are you still confident in the initial guidance and underwriting for those assets when you acquired them?

Sure. Let me start by discussing leisure generally. We believe leisure demand is currently at an all-time high. According to the STR data, the year-over-year revenue per available room for the first quarter increased by 12.9%. Recently, we listened to airline and cruise line CEOs who highlighted robust demand. The airlines likely possess the most reliable data, and we are confident that leisure demand will continue to grow. Some visitors who might have gone to the Florida Keys last year were hesitant because of COVID, and they may have instead opted for a cruise or a trip to the Caribbean. However, the overall market is expanding, and we see this trend as a wise opportunity for capital investment. Specifically regarding Lake Austin Spa, the property experienced a $500,000 impact on its earnings due to an ice storm in the first quarter. Nevertheless, we are maintaining our first-quarter underwriting through cost-saving measures, and we feel positive about our position. Justin mentioned some labor adjustments we made there. We are updating the systems we discussed when we acquired the property by transitioning from a basic owner-operator pricing model to more sophisticated systems with top-tier operational tools. Due to delays in implementation, they are now being rolled out in April and May, and we expect significant returns from these improvements along with our ability to manage and optimize the revenue of that property moving forward.

Okay. Thanks. And then I just wanted to ask you regarding Sonoma, you were up but I was just wondering did you guys see any weather impact out there from the rating activity during the quarter that may depressed results at all or?

No. We thought Sonoma performed well. It hit our expectations, actually exceeded our expectations a little bit. So we didn't see any weather impact.

We had some minor disruption maybe day and a half, but it wasn't significant to the overall quarter.

Okay. Thank you guys.

Thank you. One moment for our next question. And our next question comes from Floris Van Dijkum with Compass Point Research & Trading. Your line is now open.

Thanks. Good morning everyone. I have a question about your redevelopment assets. You have a couple of hotels that you're rebranding, and I wanted to know what the plan is for the Boston Hilton. Could you share your thoughts on whether it will be a soft brand or a lifestyle unbranded hotel, and what the potential cost benefits are? We understand that while soft brands, such as Autograph or Curio, may have been more affordable two years ago, they may not be as cheap now. An update on that would be appreciated.

Sure. Well, one, we think it's a fabulous location in Boston. It's a seven-day-a-week location, which gives us a lot more optionality. We're not dependent on the brand and the brand channel of that particular location. We're spending about $31 million on the property this year. Now it was due for a rooms redo, so that's not all incremental to the repositioning. But we'll have it repositioned brand new spectacular gym that we built out, as well as the meeting space lobby, everything redone. So we think it's a unique special property. We probably will go independent at that property this summer. Jeff, do you want to give some numbers? I know you have an analysis in front of you.

Yeah. How are you doing, Floris? As Mark mentioned we're looking at the path we ultimately take with that asset this summer. I think there will be some displacements depending on whether or not we go fully independent or remain within the Hilton system; just the change is going to cause some disruption. I think the figures we looked at for the full year is probably going to be around $5 million to $6 million on sort of a revenue and EBITDA impact from the plan. But as we grow back, we'll be able to pick up substantially more than that just because I think that in that particular location and being able to appeal to a leisure customer being so close to Altisource destinations, but also a business customer in the financial district having more of an independent field to that hotel will be able to command a much higher rate premium than we have in the past and ultimately better profitability. So, it could be several million dollars more than the disruption we'll realize this year in terms of earn back on NOI in the future.

Thanks. And maybe my follow-up. I looked at the EBITDA contribution of your Worthington Fort Worth Hotel and your Salt Lake and they jumped up significantly. Was the Worthington increase due to the buying out of the ground rent or what was behind the big jump in performance from those in particular those two hotels?

Let's focus on Worthington specifically. The ground lease was relatively small, involving only tens of thousands of dollars in lease payments, and it didn't significantly affect the earnings results; in fact, it had no impact on Q1. We're pleased to have covered part of the expenses, and it's great to eliminate the ground lease, giving us complete control over the property. Looking ahead, there might be additional opportunities for that location. Overall, we consider this a positive outcome for DiamondRock. Worthington is well-positioned in good markets like Fort Worth and Salt Lake City, which are performing exceptionally well as some major markets become less appealing. These cities are likely to gain traction against San Francisco in this economic climate. We’re noticing that the demand for office space and the types of companies wanting to establish themselves there are outpacing nationwide trends, benefiting those locations.

Thanks Mark.

Thank you. The next question comes from the line of Michael Bellisario with Baird. Your line is open.

Thank you. Good morning everyone. Mark just wanted to go back to some commentary on the resorts and performance during the quarter. Maybe just give us your view of in aggregate how they perform versus your internal expectations? And were there any particular markets that were better or worse than forecasted during the quarter aside from the commentary you already provided on Sonoma?

Yes, I mean in addition to Sonoma, Vail and Huntington Beach were ahead of our expectations. I think the ones that were kind of different than our forecast at Lake Tahoe. There is obviously a record amount of snow and that impacted performance a little but it's a tiny asset so it doesn't move our overall numbers. And I would just say, except for Fort Largo, which we were able to group up very effectively, the Florida Keys were behind our expectations for the first quarter as things kind of normalized. We're significantly ahead of 2019; we think we're establishing the new normal for the Florida Keys in 2023, and hopefully, we'll be able to grow from that as we move into 2024.

Got it. Thanks. And then just a follow-up and switching gears on margins. Just wanted to dig into the commentary there. Did you say flat margins for the remainder of the year, or is your expectation that the full year 2023 is roughly flat at the hotel EBITDA level? And then any quarterly cadence 2Q to 4Q that you could provide to help with modeling would be appreciated. Thanks.

Hey Mike, this is Jeff. I would say that for the full year, the expectation is that margins will be roughly the same as they were in 2019, which was about 29.5% on a comparable basis. As for the timing, if I had to look at it quickly while we're discussing, I think that the second quarter will likely be our most challenging period in terms of margin improvements. This is mainly because last year's second quarter had strong revenues that were increasing throughout the year, so those comparisons are going to be tougher. Additionally, last year saw an earlier rise in wages and staffing that correlates with the recovery in occupancy. Therefore, I believe that the first half of the year generally presents more challenging margin comparisons for us compared to the second half.

Yeah. Just to add on to that. On the resorts, if you look at the Sedona and the South Florida markets, you can see the new normal kind of getting into place starting September of last year. So those comps also get easier which I think will help the overall margin story as we move into the fourth quarter and start 2024.

Helpful. Thank you.

Thank you. One moment for your next question. The question comes from the line of Anthony Powell with Barclays. Your line is now open.

Hi. Good morning. I guess a follow-up on the fourth quarter and then leisure kind of reaccelerating. Is that based on booking trends you're seeing, for the holiday period? And do you expect the growth to be more in occupancy or rate?

Great question. So leisure doesn't usually book out six to nine months. But what we're seeing and kind of what we were watching in real time September, October, November, December of last year particularly in Sedona in South Florida as we could kind of see the world reopen. So while demand was robust, generally for leisure, people felt comfortable traveling to alternative destinations. So kind of got to that new normal, I think as the world was opening up the people were comfortable. So our expectation is that, that comp gets much easier when we approach the fourth quarter both on probably evenly split between knock-in rate is our expectation right now.

Got it. Thanks. And then, maybe one more in terms of dispositions, we talked about maybe selling some group hotels in the past. But given what you said about group being kind of a strong segment does it make sense to retain the group hotels that you currently own or even add more in the future?

Yes. We like group probably by room type about half of our hotels, by room number are about 49% of our hotel rooms are in group-centric hotels over 400 keys. I think it's fine. I mean, I think group will continue to be good this year and next year. We still like the leisure segment probably the best over the next five to 10 years. But this year our group hotels are doing excellent; probably the value of all those hotels increases over the next 12 months. And for large hotels, it still remains a difficult debt market. So, those things combined to lead us to it's probably better to hold any group hotel in 2023.

Thank you.

But that said, everything is for sale at the right price.

Thank you. And currently showing no further questions at this time, I'd like to hand the conference back to Mr. Brugger for any closing comments.

Thank you, Operator. Well, thank you to everyone on this call. We appreciate your interest in DiamondRock. And we look forward to updating you next quarter. Take care. And have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.