DiamondRock Hospitality Co Q3 FY2023 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the DiamondRock Hospitality Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I'll now hand the conference over to your speaker host, Briony Quinn, Senior Vice President and Treasurer. You may begin.

Thank you. Good evening, everyone. Welcome to DiamondRock's Third 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. Mark?

Thank you for joining us. Global travel demand remains strong. Annual hotel stays in the United States are expected to surpass the pre-pandemic record of 1.3 billion room nights. 2023 is also setting a new normal in hotel patterns as the changes to the way global citizens travel settle in post-pandemic. During this recovery, DiamondRock has been a leader, and we believe we are well positioned to outperform going forward. Our confidence stems from our high-quality portfolio. We have spent more than a decade renovating, repositioning, and recycling our portfolio to curate a collection of hotels and resorts specifically designed to attract today's travelers. By full year revenue, our portfolio remains approximately 60% urban and 40% resort. An important aspect of our strategy, which distinguishes DiamondRock from its peers, is that nearly 95% of our properties are unencumbered by long-term management contracts. This gives us greater control over operations at the properties and higher values upon sale. These portfolio advantages are a key element that has enabled DiamondRock to deliver solid results. Total revenue for our portfolio in the third quarter is up 12% as compared to 2019 and just over flat to last year. We were pleased with these results, which were modestly ahead of our expectations. RevPAR in the third quarter contracted 1.1% compared to the same period in 2022. Compared to 2019, RevPAR in the quarter was up 7.6%, which is more than 100 basis points ahead of the midpoint of our expectation. While urban total RevPAR was up 2.9% in the quarter over last year, it was the sequential improvement in resorts that exceeded our expectations. As measured by total RevPAR, we saw strength at the Landing Lake Tahoe Resort up 15.2% last year. Tranquility Bay Resort in the Florida Keys, up 10.4% to last year and our luxury resort in Vail, up 9.3% to last year. Of course, some resorts continue to adjust and were down compared to the prior year, but we are encouraged that the year-over-year decline in our resort revenue improved 340 basis points sequentially from last quarter and are still nearly 26% higher than 2019. Moreover, we expect additional sequential year-over-year improvement in resort revenues for the fourth quarter. Overall, total revenues for DiamondRock's entire portfolio in the third quarter were $277.1 million. While up only modestly from 2022, it was still a new record for DiamondRock as it marked the highest third quarter revenue in the history of the company. This led to hotel adjusted EBITDA in the third quarter of $81.1 million, which was $6.6 million or 8.9% and ahead of 2019. It is worth noting that we achieved these third quarter 2023 revenue and adjusted EBITDA results despite about $2 million of disruption impact stemming from renovations at the Salt Lake City Marriott and Hilton Boston repositioning to the Dagny Boston. In reviewing the quarter, let's look a little closer at the trends that we saw. At our urban hotels, year-over-year RevPAR increased 2.2% and exceeded 2019 by 2.1%. The group segment at the urban hotels was up modestly across the portfolio. However, we did have several stars on the group side in the quarter. On a year-over-year basis, group business in the third quarter was terrific at the DC Westin, up 33%. The Westin Boston up 10.4%; the Westin San Diego, up 15.6%; the Worthington Fort Worth, Texas, up 15%; and the Phoenix Palomar, up high single digits. This strong group performance from our stars was somewhat offset by lower group business from the softer convention calendar in Chicago this quarter, as we discussed last earnings call, along with the anticipated renovation impact from the Salt Lake City Marriott. Business transient in the third quarter saw demand increase 5.6% as compared to Q3 2022. Over the summer, the business demand landscape evolved quickly. We worked closely with our operators to aggressively adjust and we were successful in executing our revenue maximization strategies. This business transient strategy involves channel shifts and carefully calculated occupancy for rate trade-offs. As we move beyond Labor Day and into the fall, we are seeing gradual gains in business transient demand, but at levels that remain well below prior peak. For our resort portfolio, third quarter resort RevPAR increased nearly 24% over 2019 despite contracting 8.2% compared to last year. Encouragingly, the year-over-year quarterly decline in resort RevPAR improved a full 500 basis points from the prior quarter. Importantly, we expect that year-over-year quarterly comparable RevPAR will improve yet again in the fourth quarter as we settle into the new normal secular travel patterns for resorts. Clearly, resorts have been a big winner for DiamondRock. In the third quarter alone, our resorts had adjusted EBITDA that was 23% higher than in 2019. Going forward, despite some near-term adjustments, it looks like resorts are likely to outperform the industry over the next decade from the acceleration and adoption of hybrid work in the U.S. Remember that there have been 2.7 billion more days of locational flexibility created post-pandemic from the average worker being in the office 3.35 days per week from the prior 4.4 days per week in 2019. To put this into context, the number of nights of locational flexibility is two times the annual demand for all hotel rooms of all types in the United States, and resort hotels specifically comprise just 10% of the existing supply. And resort supply in many of the resort markets is likely to remain near zero from legal restrictions like in Key West or the unavailability of developable land like Huntington Beach and Coastal California. As you can tell, we remain constructive on the long-term outlook for resorts. Okay. Let's turn to internal growth. While DiamondRock has always invested in its assets to keep them highly competitive, spending more than $0.5 billion over the last five years. One of our biggest competitive advantages is derived from the large number of high-impact ROI opportunities within the portfolio. These ROI projects drive cash flow and lead to outsized NAV increases. In the last 24 months, we have delivered on a number of projects, including the conversion and up-branding of The Hythe Vail to a Luxury Collection, The Clio Denver to a Luxury Collection, The Key West House to a Margaritaville, and The Lodge at Sonoma to an Autograph. Those four hotels alone generated a collective RevPAR increase of 27.4% over 2019 in the third quarter, with the hotel adjusted EBITDA up 42.8%. We will continue to benefit from the completion of these and a number of other recently completed ROI projects. In the last 36 months, we have executed a total of $58 million in ROI projects that touched more than a third of our hotels. The benefits of these projects often play out for several years, and we should continue to reap market share gains and increase profits that will bolster overall portfolio results. And we're not done. DiamondRock has a strong culture of excellence that has driven our quest to identify and execute additional value-add ROI opportunities. For example, on August 1st, we announced the successful conversion of The Dagny Boston, which marks our 15th independent hotel. The Dagny is projected to increase its EBITDA by $4 million next year and ultimately stabilize in excess of $15 million of annual EBITDA. Additionally, we are actively underway with other ROI repositioning. The Hilton Burlington is in the process of being converted to a lifestyle hotel to be named, Hotel Champlain, a member of the Curio Collection. It is on track to be completed during the summer of 2024. The Bourbon Orleans is also underway with its repositioning to be the Premier Urban Resort in the French Quarter of New Orleans. This ROI project is expected to be completed late next year. And behind these, DiamondRock has a large pipeline of future opportunities. I'll list just a few. At Orchards Inn Sedona, we are in the permitting process to move that hotel to a luxury level and make it part of the adjacent L'Auberge de Sedona Resort. The repositioning is projected to increase ADR there by $300. At The Landing Tahoe, we have the opportunity to add almost 20% more keys. At the Chico Hot Springs Resort, we are evaluating adding more cabins on our 748-acre property. At Tranquility Bay, we are seeking permits to build DiamondRock's first Marina with about 30 suites. These are just some examples and there are many more. So stay tuned. That's a good transition to give you an update on the acquisition market. While Jeff will discuss our capital allocation options in a few moments, we have been disciplined in working to find more of the transactions that have worked so well for us. Owner-operated experiential hotels, often in unique destinations. We have a deep well of understanding about unlocking value at these types of properties, which puts us in a great position to create value when we can, pry them loose. However, as we said last call, any deal we would do this year will have to be something we really love. Our one deal this year, the Chico Hot Springs Resort in Paradise Valley, Montana, certainly fits that deal. This independent owner-operated hotel has lots of upside opportunities. We bought it at an 8.1% NOI cap rate. And in the third quarter 2023, comparable RevPAR grew a robust 10.8% for our period of ownership. We project our investment in the Chico Resort will ultimately stabilize north of a 10% NOI yield, just from the implementation of our best practices and a modern revenue management system. While the Chico Resort was a special opportunity, we continue to vigorously work our proprietary database of opportunities with similar characteristics. I should also mention that we are testing the market with a few potential dispositions, but we will remain disciplined with release prices. Now, let me turn it over to Jeff, for more details on the quarter.

Thanks Mark. Starting at the top, DiamondRock's RevPAR contracted 1.1% in the quarter from the prior period, exceeding our guidance of a 1.5% to 2% decline. This better-than-expected performance was largely due to the improving performance of our resorts. Food and beverage and other revenues saw mid-single-digit growth, pushing same-store portfolio revenue up slightly versus last year. The growth in comparable total revenue breaks down between the 2.9% increase for our urban hotels and a 4.6% decrease in our resort portfolio. It is important to highlight the steady improvement we are seeing in our resorts. Comparable total revenues at the resorts declined 8% in the second quarter, just 4.6% in the third quarter, and in September, they declined only 2.8%. We expect this trend to continue in October. Compared to 2019, comparable total revenue at our urban hotels was 5.8% higher with steady mid-single-digit gains each month over the quarter. Comparable total revenue in our resort portfolio finished the third quarter nearly 26% above 2019, and September was the strongest month with nearly 32% growth. Before I move on to profits, I want to spend a moment on the group segment. We expected group revenue gains in the third quarter to be softer than the strong results seen in the first half of the year. We discussed in our last conference call that this was mainly due to the shifts in the citywide calendar in Chicago. Third-quarter group revenues were in line with our original expectation, but group room rates were slightly stronger than forecast. We expect comparable group revenue will exceed 2019 levels this year, but we forecast group room nights will still be 10% or 79,000 room nights below 2019. Next year is shaping up to be very strong, with group revenue pacing up over 23% compared to the same time last year. Our footprint continues to serve us well. In our largest group markets, the Westin Boston's group revenue is pacing up nearly 18%, and the Chicago Marriott is up over 40%. Several other stars on the group side are emerging. Group revenues at the Worthington, Westin D.C., Westin Fort Lauderdale, and Westin San Diego are collectively up over 60% compared to the same time last year. We believe the strength and breadth of our group setup for 2024 is a unique advantage for DiamondRock. Moving on to profits. Comparable gross operating profit or GOP was $111 million or a 4.2% margin on $277 million of comparable total revenue. To put this in context, this means our asset managers were able to keep same-store hotel operating expenses to just 1.4% growth, despite the disruption of renovation and flat revenue. Hotel adjusted EBITDA was $81 million and a 29.3% margin, and corporate adjusted EBITDA was $73 million. Hotel adjusted EBITDA margins were 210 basis points lower than the third quarter of 2022. The adjusted EBITDA comparisons were made more challenging mainly by two events that we discussed in the last earnings call. First, disruption and displacement mainly at the renovations; and second, the property tax relief in Chicago last year. Without these two factors, we estimate our hotel adjusted EBITDA margin would have been 170 basis points higher than reporting results. Let me reconcile variances to the third-quarter hotel adjusted EBITDA compared to 2022. The disruption and displacement shaved better than $2 million from the quarter, and we had a successful tax appeal in Chicago in 2022 that resulted in a $2.8 million increase in our property taxes in the third quarter this year. Remember, we will face a $6.2 million increase in property taxes compared to last year in the fourth quarter. Our insurance policies renewed on April 1, so our third-quarter results reflect a full quarter impact of higher costs, which was up $1.9 million over 2022. Finally, wages and benefits were up 2.8% year-over-year. Labor cost growth is slowing because we are fully staffed, and wage inflation has moderated. You can see this trend in the sequential comparisons where second-quarter labor costs rose 6.5% over the prior year versus just 2.8% in the third quarter. These costs were offset by aggressive asset management initiatives that increased other income by 8.5% as the team aggressively pursued opportunities to rebid parking agreements, adjust resort fees, and promote our spots. I'd like to point out a few stars in the quarter. The Dagny in Boston officially opened on August 1, and the on-site team has done a superlative job keeping the project on schedule and on budget and the hotel looks fantastic. Importantly, third-quarter EBITDA was 5% ahead of our internal expectation after conversion. Collectively, our luxury resorts held EBITDA margins nearly flat despite the competitive pressures this season from Europe and cruise alternatives. For example, the Hythe in Vail posted a nearly 400 basis point EBITDA margin increase on a nearly 5% increase in RevPAR. Returning to Boston, RevPAR at our Westin Seaport was up 7.6%, which is 4.8% higher than 2019. Moreover, the Westin had a very strong quarter for advanced bookings, helping us set up for a successful 2024. Tranquility Bay posted a 4.8% increase in RevPAR and a 10.4% increase in revenue during what is otherwise a slow seasonal period for the Keys. As Florida returns towards historical seasonal patterns, our occupancy-focused revenue strategy allowed us to drive year-over-year EBITDA growth and an EBITDA margin change that surpassed the portfolio average. The same strategy was successfully deployed at the Landings in Lake Tahoe resulting in a 19% year-over-year increase in EBITDA and over 150 basis point margin increase. Finally, I want to point out that comparable food and beverage profit margins were excellent in the third quarter at 30.7%. That's 50 basis points better than in 2022 despite food inflation. By making smarter choices on the menu along with rigorous changes in competitive sourcing, we improved food costs year-over-year. We also had success growing beverage profits too, with margins up 140 basis points. This was achieved from an increased focus on selling more profitable cocktails and utilizing lower-cost providers. Let's talk about capital allocation. We prioritize capital towards the highest IRR opportunities on a leverage-neutral basis. We constantly evaluate internal ROI projects, common and preferred share repurchases; and finally, external growth opportunities. Beyond the ROI projects Mark has already spoken about, in the past four months, we have repurchased over 1.8 million shares for approximately $14.7 million or $7.77 per share. We are exploring dispositions, the proceeds of which can be used to fund additional repurchases, ROI projects, or external growth. Regardless of the ultimate capital allocation, our focus is on maximizing shareholder value. We remain committed to having a flexible balance sheet. We are conservatively leveraged, as demonstrated by the low net debt-to-EBITDA ratio of 3.8 times trailing fourth-quarter results. Our liquidity is very strong at over $0.5 billion, comprised of $102 million in cash and an undrawn $400 million revolver. Importantly, our current liquidity is nearly 140% of our debt maturities through 2025 and nearly seven times our 2024 maturities. Let me provide a few building blocks on our 2023 numbers. Our corporate overhead remains on track to be around $32.5 million. Debt service costs are expected to be about $63 million. Preferred equity dividends are at $9.8 million. I also want to note that Westin is rolling out its heavily bet 2.0 program. By committing to the new bedding package in the fourth quarter, we can secure a 30% price reduction. This will result in an expense of $1 million in the fourth quarter to better position our Westins in 2024. Looking ahead to 2024, we expect several expense comparisons to get easier as we put inflation-fed wage growth, rising staffing levels, a hard insurance market and property tax scrubs in the rearview mirror. With that, let me turn the call back to Mark.

Thanks, Jeff. Overall, travel trends remain solid, but the current environment continues to adjust as the market establishes its new normal in 2023. We expect fourth quarter comparable RevPAR to be approximately flat year-over-year. This represents a 100 basis point sequential improvement from the third quarter, largely due to improving performance at our resorts. We are also pleased that our current full-year forecast is generally consistent with Wall Street analyst estimates. For 2024, while the U.S. economy will certainly impact actual industry results, we believe that the industry has the potential to perform relatively well. This belief is based on a few factors. ADR is likely to increase at or above inflation. Corporate transient should continue to improve, albeit gradually, but with special corporate rates up mid to high single digits. Group demand should continue to stay strong as forward bookings nationally are solid. Lastly, limited hotel supply in most markets provides a good backdrop for fundamentals. Now for DiamondRock, we like our particular setup. Let me give you a few specifics. First, we have room to run for our hotels to get back to prior peak occupancy; we expect to end 2023 about 5.5 percentage points of occupancy behind the prior peak. Closing that gap is worth $57 million in incremental room revenue. Second, there is an opportunity on group. Our geographic setup is good for 2024 with terrific convention calendars in important markets for us like Chicago, DC, and San Diego. If group room nights just get back to 2019 levels, that is worth over $34 million in incremental room revenue and concomitant outside-the-room spend. As Jeff noted, DiamondRock has strong group pace for 2024, up over 23%. Lastly, ROI projects will continue to fuel results. For example, the Dagny Boston repositioned in 2023 is expected to experience a 50% profit growth in 2024 with EBITDA projected to increase by $4 million. As you can tell, we remain constructive on the future of the travel industry. Travel is one of the highly valued assets in our society and around the world, and we believe that DiamondRock is well-positioned for this cycle with a model portfolio, focused strategy, and ample liquidity to move opportunistically. At this time, we would like to open it up for any of your questions.

Thank you. And our first question coming from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Thanks and good morning everybody. Just starting off, I wanted to clarify a couple of items around the recent trends in resorts you referenced. Is the sequential improvement in resort performance a reacceleration in year-over-year growth that you're alluding to? And does that include the Fort Lauderdale Kimpton Beach? And then separately, I'm just curious, is it fair to say that you think the normalization period in resorts is kind of starting to improve and that you expect it to reaccelerate again in 2024?

Yes, Austin, this is Mark. It's a great question on resorts. I think it's a mix. So at some resorts like the Florida Keys, we're seeing stabilization. We're also seeing easier year-over-year comps in some of the markets that started correcting to the new normal patterns earlier. We're getting into the comparable periods for those now. But there are other resorts that are, I would say, we saw good footing year-over-year, ones we called out. And we are adjusting some of the strategies, given the shift in some of the demands, so I would call out Lake Tahoe, our asset, the Landing there, where we did some carefully calculated rate for occupancy trade, which led to substantial outperformance on revenues, but also importantly, on profits. So I think it's a combination of all three. So it's easier comps in some markets. It is some markets that are, I would say, stabilizing or reaccelerating. But really, some of that is, I would say, more focused asset management revenue strategies being executed successfully.

So if you were to stack up, I guess, the three segments of your business without pinpointing '24 guidance between group, leisure, you mentioned kind of a gradual continued recovery in BT. I guess how would you rank those three segments as it stands today?

For 2024, we are currently in the process of consolidating the budgets. It’s a bit early to provide any specific details, and we will have more information in about 30 days after we review the budgets. I’d prefer not to jump to conclusions before that.

Thank you. Our next question coming from the line of Smedes Rose with Citi. Your line is open.

Hi. Thanks. It sounds like you just have some improved visibility, I guess into 2024 as the world kind of continues to normalize and some of the asset management tools that you've talked about. Would you consider at some point sort of reintroducing a more kind of formal guidance for the full year? Or are you thinking more in terms of just kind of giving some color around the next quarter as far as you've been doing?

Good morning, Smedes. As the situation in the world stabilizes, we'll have a clearer picture by February. We'll definitely address this in our board meeting. Currently, there are two ongoing conflicts, the uncertainty with the Federal Reserve, and various other factors at play. I'm hopeful that by February, things will be more defined, allowing us to provide a more forward-looking perspective. For now, it seems best to approach it one quarter at a time.

Okay. And then can I just ask you, I know it's a relatively small piece of the overall portfolio, but it was the Lake Austin was a big quirky investment and I think when you bought it, you had expected this year's contribution to be around $7 million. It looks like it's running significantly below that. And I was just wondering what kind of went wrong relative to your initial forecast? And do you think it can reach the $7 million contribution at some point next year?

Sure. Yes, I think we've had a little bit of struggle in Austin sort of going from an owner-operated resort to more of an institutional set of revenue management tools, while we saw some falloff in high-end leisure demand. So, we've come back from a pricing strategy, that's a little bit more occupancy. We've seen a lot of success there. And I think a lot of the things that we saw as opportunities going from an owner-operated resort in terms of increased group contribution and really group as a significant part of the segmentation, which has never really been there. We've seen a lot of inroads going. So, I think we're still confident about our overall underwriting, especially on the group and through the connection to GDS, which didn't previously exist. Just taking a little bit longer to implement, I think some of those revenue growth strategies that we saw at acquisition.

Thank you. Our next question coming from the line of Peter Laske with Evercore ISI. Your line is open.

Hey, this is actually Duane for Peter. How are you guys? Good morning.

Hey Duane.

As you think about trends into 2024, just a follow-up on an earlier question, which markets do you think have the most headroom, which ones would you expect to lag? You mentioned, I think, for a couple of quarters now, a good building convention calendar in a market like Chicago, how would you see that market trending in total?

I believe we have the most clarity for 2024 on the group side. We can examine the forward bookings at our hotels and the citywide convention calendars. For example, in Chicago, our forward bookings are up significantly, over 40%, for next year's revenues, and the citywide events are projected to surpass the room nights from 2019. That's promising. Boston is also performing well this year, with next year expected to stay well above 2019 levels in room nights. Our forward bookings there are in the low double-digits, which is encouraging. Washington D.C. appears to be on track for excellent results, significantly outpacing both last year and 2019. San Diego is similar, anticipating another exceptional year well above previous peaks. All these markets are particularly appealing, and our forward bookings align with the strength in those areas. This is currently where we see the most visibility. We'll start the budgeting process at our individual hotels this week, and in about 30 days, after spending more time with the properties and reviewing detailed budgets, we'll gain a clearer picture of how 2024 will unfold.

Thanks. And then just on the conversion to independent like The Dagny, can you talk about how your mix changes and any changes you see on distribution channels? For example, how much of the prior demand was staying on points and what do you backfill that demand with? And is it really as you convert to independent, is it really OTAs that pick up share when you transition to an independent? Thanks for the thoughts.

I think it's going to be a base-building exercise over a couple of years of building market awareness. We have put some contract business, which I think got on really sort of a rate parity basis that will supplant probably slightly in excess of the amount that we were getting from redemption out of the Hilton system. And we've got a significant amount of volume out of that system, but the rate wasn't actually that great on an annual basis. So we've really traded like-for-like there with some contract business, which is a more consistent base throughout 12 months. And now we're just in the process of establishing a name for the hotel with a lot of our local partners on the business transient side, which we've seen some encouraging results on. I think we're up about 60% in group for The Dagny specifically. It's not a huge group hotel, unlike the Westin that we have in Boston. But we've seen some good inroads with the renovated product from some of our local corporate customers.

Appreciate. Thanks.

Thank you. And our next question coming from the line of Dori Kesten with Wells Fargo Securities. Your line is open.

Thanks. I believe you said that Q3 expenses were up 1.5% with flat revenues and now looking into 2024, there are some expense tailwinds. Are you able to give just any more detail on what the potential run rate could be as we're looking into 2024?

Hi, Dori. This is Mark. We're not really giving 2024 guidance, but we are seeing expenses, particularly on comparisons to fully staffed hotels, better food costs. I think a number of the labor initiatives we put in are also helping our productivity per room. So as you saw, sequentially, the expenses have come down substantially on a year-over-year basis. That's a trend ex some uncontrollables like property tax that we expect to continue the year and hopefully, as we move into 2024, the comparisons continue to get better. But we do anticipate that we'll have higher banquet revenues in 2024 from the strength of our group book. So there will be some associated expense as we layer the banquet back into 2024 as well.

Okay. And what's the quick math on Q4 margins based on your comment that you're comfortable with that?

Yes, that's a good question, Dori. I would explain it this way. Year-to-date, our margins for hotel adjusted EBITDA have decreased by about 200 basis points year-over-year compared to 2022. The fourth quarter will see a larger decline because, as you recall, we had the tax relief in Chicago last year, which will not repeat. This accounted for roughly a 240 basis point benefit that we won't have this year. Additionally, the property tax insurance renewal this year is expected to create about a 75 basis point drag. I also mentioned expenditures on projects like the Westin Landing and other small items, which are about a 40 basis point drag. Taking all this into account, if you consider the 200 basis point change we've seen previously, you're likely looking at a nearly 500 basis point difference compared to the margins we achieved in the fourth quarter of 2022.

Okay. And then you mentioned testing the market on dispositions. Should we assume that that's going to be primarily in urban markets? And then I guess, second, is it a good time yet to test pricing on larger boxes?

So we generally don't like to talk too much about pending dispositions, because we always assume that the potential buyers are listening to these calls as well. But I will say the assets that we are testing the market on are all urban assets, so that's a correct assumption. I think it's really deals below $100 million, where there seems to be more liquidity and volume. The bigger deals, just because of where the debt markets are and the more difficult large loan market that exists today, it's just hard to get those deals done.

All right. Thanks.

Thank you. One moment for our next question. And our next question coming from the line of Chris Woronka with Deutsche Bank. Your line is open.

Good morning, everyone. Thank you for the information shared so far. Mark, I heard that one of your acquaintances recently sold a hotel in Boston, which is likely to be converted to a Hilton. Looking ahead a couple of years, do you see this as a net positive? Does it pose any challenges for you, considering you just converted your Hilton in a different neighborhood? What about the Westin, and what are the long-term plans there? Could you provide some insights on the potential impact of this situation?

Sure. One, I thought a good cap rate, and that's a good, I think that's a good comp to have in the marketplace for assets in Boston. So I thought that was a favorable read-through. On the Hilton branding, one of the reasons we want independent is we have a seven-day-a-week kind of location that lends itself because of the kind of consistent demand in our location in Dagny. And it avoided what would have been a problem if Hilton had decided to put another Hilton brand on 1,000 rooms not too far away from our hotel. So I think in a lot of ways, it vindicates our decision to not be exposed to new Hilton supply within this market. We feel good about our decision. We feel good about the prospects of the Dagny. It had a very good August, which was ahead of our original anticipated pace. September looked good and for given just on underwriting. So we feel really good about that.

Okay. I appreciate that, Mark. And then I really just want to follow up on a couple of quick ones from the prepared comments. One is corporate transient I think a pretty good comment about pricing. Questionnaires, are there any volume guarantees associated with those maybe relative to 2019? And then the second part of it is I think you talked about some cost comps being easier, especially you mentioned insurance there. I guess that caught me a little bit by surprise given what we're seeing. Is that because you have insurance for next year locked in? Or you're just more optimistic in general?

Well, taking this in reverse order, then property insurance, our renewal is April 1, so we're locked in until April 1. I think that's what we're trying to convey in the prepared remarks is that we know what our costs will be through that. We had a substantial increase last year. Hopefully, the market will be more accommodating when we get to April, but we'll see when we get there. On the BT, I think the surveys that I've seen come back from the largest special corporates, is that they intend to travel more in 2024 than they did in 2023 at this time. That's helpful. Most of our BT special corporates don't have minimum guarantees, but we're taking some comfort from the fact that the initial surveys indicate that they are intending to travel more than the restricted levels that they're at in 2023. But we don't expect a rapid reacceleration of BT as we move into 2024, and certainly not the way we're engineering the mix is at our hotels.

Okay. Super helpful. Thanks, guys.

Thank you.

Thank you. And our next question coming from the line of Floris Van Dijkum with Compass Point. Your line is open.

Hey, good morning guys. I had a question for you on the capital markets and how that's impacting your business. And obviously, you're testing the market with some asset sales. Should we presume that you're testing the market in sales below $100 million? Or because of the difficulty in getting debt on some of these larger transactions? Or does the Sunstone news make you more positive on some of the bigger potential dispositions? And then the follow-up, I guess, is on the fact that the debt markets are more accommodating for smaller transactions, are you seeing more competition for the types of asset that you've been buying like the Chico and the resort-type assets?

Floris, let me address those various questions. In our portfolio, we are open to selling, and it appears there is a disparity between private market values and public market implied values. I want to take advantage of that disparity. However, it's not an ideal time for sellers, so we need to be careful to ensure we are acting in the best interest of our shareholders regarding sale prices. We are actively exploring the market, and for deals under $100 million, we have observed increased interest from lenders and potential bidders. There is a higher likelihood of attracting multiple bidders for smaller to mid-sized deals compared to the $200 million offerings currently available. We believe the best opportunities still lie in dispositions under $100 million. On the other hand, as you noted, there is heightened competition for acquisition opportunities in this space, which is why we focus on off-market transactions. My previous point about our proprietary database, developed over the last decade to identify unique opportunities like Chico and Lake Austin, reflects our commitment to targeting these areas for growth.

Great. And maybe my follow-up question is you have a mortgage on the Courtyard in New York that's coming due next year, $74 million, which has a relatively low interest rate; you could consider selling that as one of your options. This way, you wouldn't have to manage the mortgage. Otherwise, would you just pay down the mortgage and expand your unsecured borrowing capacity?

I don't believe it increases the likelihood of selling the asset; debt can be managed across different assets. If we decide to sell another asset, we would certainly utilize the funds. However, we ended the quarter with $102 million in cash along with our undrawn revolver, so we have the ability to cover that mortgage with our available cash. This gives us the necessary flexibility. One of the reasons we maintain a strong balance sheet is to ensure we can handle such situations without imposing any stress on the company.

Thanks. That's it for me.

Thanks, Floris.

Thank you. And our next question coming from the line of Anthony Powell with Barclays. Your line is open.

Hi, good morning. Just a question on business transient. I think you talked about some sluggishness there in the third quarter. Were there any particular markets or, I guess, categories that drove that decline? And what revenue management strategies to implement to counteract that?

Good morning, Anthony. It's Mark. Just to clarify, we didn't observe a decrease in business transient. We mentioned that it remained significantly below 2019 levels. What we're seeing, which has also been noted by major brand companies as well as some small business travelers, is that their activity is still quite strong and above pre-pandemic levels. However, the larger corporates, like the consulting firms, are traveling at much lower volumes compared to before the pandemic. This trend has persisted through the second and third quarters. The comparisons were easier relative to last year, but they remain at those lower levels. We're noticing a gradual improvement after Labor Day, but overall conditions are still subdued.

Got it. Thanks. And maybe one on cash flow for next year. I mean, you talked about some more developments, redevelopments in 2024. Do you expect the CapEx budget to remain where it is? And also on the dividend, do you have any net operating loss that keeps your dividend at the current level, or maybe the dividend go up next year as income continues to increase?

Hi, Anthony, it's Jeff. Right now, I mean, as Mark said earlier, we're still pulling together our budgets. I think our CapEx will generally remain as what it was originally contemplated to be this year, which I think is about $100 million. It's a pretty consistent number for us. It might flex a little bit simply because there's timing issues between when projects are started and completed or carryover from the prior year, but it will be about $100 million. And as for the dividend, right now, we paid $0.12 a share per year. I'll defer to Mark on that where the Board had that, but I think that's the plan going forward in 2024. Yeah. And we have sufficient net operating losses that we can continue to use to offset the need to pay a dividend, I believe, through much of 2024, if not all of 2024. So I think we have the ability to keep it at that level.

Yeah. I'll just add on the dividend policy. It's something we'll review with the Board every quarter. But right now, it looks like the highest and best use of our capital is in other places, while we value the dividend and know it's an important component of long-term returns for lodging REITs. Right now, given where the stock price is trading, we just think that there are higher and better uses generally for that capital, but it will be something that we talk about every Board meeting and we'll evaluate quarter-to-quarter.

Thank you. And our next question coming from the line of Dany Asad from Bank of America. Your line is open.

Hi, good morning guys. We've heard airlines commenting during this earnings season that they're seeing strength on peak holidays, but outside of those windows, there's been a little bit more weakness in between. Are you seeing any similar behavior in your booking patterns and maybe why or why not we could be different than what we're seeing on the airline side?

Dany, I think we are starting to establish new normal patterns this year. There is some Florida fatigue, and while we experienced exceptional shoulder seasons, they are returning to more sustainable levels than pre-pandemic, which we can build on moving forward. We are implementing strategies to adapt to this reality. For instance, at the Henderson Beach Resort, which we have invested in and has excellent meeting space, we locked it up last year and barely utilized it. As we approach 2024, we plan to be more aggressive in booking high-end groups during the midweek to maximize hotel profits. It’s essential to understand the demand channels and be proactive in how we set our revenue strategies, particularly for midweek groups. I believe we have done well in this regard so far and aim to stay ahead of the curve as we navigate the shifting patterns of the new normal.

Thank you very much.

Thank you. And our next question coming from the line of Bill Crow with Raymond James. Your line is open.

Hey, good morning. Jeff, let me start with you and recognizing you're still rolling up budgets, but also recognizing that you opened the subject of 2024 expenses and margins in your prepared remarks. So let me frame it this way. One of your peers recently suggested that in order to achieve flat EBITDA margins next year, they need about 4% RevPAR growth. Is there any reason to think that DiamondRock will be materially different than that one way or the other?

I think we have some sort of unique factors going on for us because I mentioned, like with the Dagny that's going to be coming on and adding some significant EBITDA that ramps back up. I think for a portfolio that's maybe a little more static if you will. I think that's probably in the vicinity. It's going to vary, of course, portfolio to portfolio, but I think that's probably sort of a good industry note.

Great. Thanks for answering that. Mark, maybe a subtle question here. But when we look at leisure, is it normalizing? Or is the consumer weakening?

It's difficult to determine exactly what's happening. We are observing some normalization. While there may be signs of consumer weakness, we are not seeing that currently. The share of wallet remains significant, with individuals prioritizing spending on experiences rather than material goods. They seem to reduce their physical purchases before cutting back on travel expenses. However, pinpointing the exact factors influencing this behavior can be challenging. People are traveling, and I expect a strong holiday season ahead. Overall, we feel relatively optimistic, but it is clear that behavior has settled into new patterns in 2023.

Thanks. Appreciate it. Thank you, guys.

And our next question coming from the line of Chris Darling with Green Street. Your line is open.

Thanks. Good morning. Mark, can you touch on what's been pretty strong fundamental performance in New York City and how sustainable that might be going forward? And then is it fair to suggest that New York is one of those rare markets where values might actually be up in recent months despite the movement in the tenure?

Yes, I’ll address your detailed questions. The interest from investors in New York City remains consistently strong. It's a market that attracts international attention, and I anticipate an increase in value as people trust in New York's potential. The fundamentals are solid, with many positive developments occurring. Notably, there has been significant supply removal, with large properties like the 1,000-room Roosevelt being converted into migrant housing and other properties being repurposed for student housing. This has been very beneficial. The M1 rezoning is also advancing, which will limit the construction of nonunion hotels after 2026, acting as a positive catalyst. Recently, changes in Airbnb regulations have reduced the number of available units significantly. There are many reasons to be optimistic about New York. Additionally, the finance sector has been particularly proactive in ensuring employees return to the office four or five days a week, in contrast to tech-centered cities like Seattle or San Francisco, where the return-to-office rates have lagged, affecting visitation there. Therefore, there are strong reasons to view New York positively, and we plan to maintain that outlook as we prepare our budgets for 2024. Overall, it feels promising.

And any commentary you would have on the investment sales market in New York or?

There have been some recent trades, particularly smaller select service hotels and at the high end that have gone off. Again, I think the feedback from the brokers that we talk to that participate in this process is that there was fairly robust demand for those offerings. I think people are interested in that market, as I mentioned. And New York is one of those markets you will always get the international and high-net-worth individuals interested in. So I think it's a constructive market for dispositions. Thank you, Chris.

Thank you. And our next question coming from the line of Mike Bellisario with Baird. Your line is open.

Thanks. Good morning, everyone.

Hi, Mike.

Just first on the monthly cadence. Just was September really the main driver of 3Q upside versus your expectations? And then can you provide any color on what you saw in October, particularly relative to what you thought the month was going to look like?

Yes. So September did come in a little better than we anticipated. We gave our expectations about two months ago. So September was the kind of the variable and that came in a little better portion the resorts that we had forecasted. October is a strong month. It will be the strongest month of the fourth quarter for us. The way groups laid out their major markets was particularly focused in October. So we were at or ahead of our expectations for October. We don't expect November, December to have the same group strength. So they probably won't be additions on a comp basis as strong as October was. But so far so good this quarter. Thank you.

Thank you. And I see no further questions in the queue at this time. I will now turn the call back over to Mr. Mark Brugger for any 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.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.