DiamondRock Hospitality Co Q4 FY2023 Earnings Call

Good day, and thank you for joining us. Welcome to the DiamondRock Hospitality fourth-quarter 2023 earnings conference call. I would now like to introduce your first speaker today, Briony Quinn, Chief Accounting Officer and Treasurer. Please proceed.

Good morning, everyone, and welcome to DiamondRock's fourth-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 for our earnings call and our outlook for 2024. We are pleased that we will be reintroducing guidance on this call. Let's jump in. 2023 was another successful year for DiamondRock across several fronts. The company generated total shareholder returns of just over 16%, as our portfolio of high-quality hotels and resorts achieved total revenue of $1.1 billion, a new record for DiamondRock. As a testament to the success of our investment strategy, total comparable revenue was 11.3% higher than 2019, among the best of any full-service lodging REIT. And full-year hotel adjusted EBITDA was $19 million higher than 2019. Solid results from the DiamondRock portfolio led to full-year 2023 comparable revenues increasing 4%, adjusted EBITDA of $271.7 million, and adjusted FFO per share of $0.93. In the fourth quarter, adjusted EBITDA was $57.3 million and adjusted FFO per share was $0.18. All these results are in line or ahead of management's expectations provided in our last earnings call in November, where we said we were comfortable with consensus estimates. I'll briefly provide some highlights from the fourth quarter so we could see more time to discuss our outlook and allow time for your questions. In the fourth quarter, there were a few notable trends. First, resorts, which have been the biggest winners in travel since the pandemic, had some pullback earlier in 2023 as they settled into the new normal. Resorts found some firmer footing in the fourth quarter, and we believe resorts still have the best long-term setup. Let's look at some encouraging resort trends. Quarterly RevPAR at our resorts troughed at 87% of 2022 peak RevPAR in the second quarter, improved to 92% in the third quarter, and improved even more to finish the fourth quarter at 96% of 2022 comparable peak. On a revenue basis, the sequential performance was even better. The resorts progressed from 92% of 2022 in the second quarter to finish the fourth quarter at 98%, or down just 2% to the 2022 peak revenue. The Florida Keys turned a corner, with our three resorts collectively delivering positive RevPAR and revenue growth of 7% and 8%, respectively, in the fourth quarter. Elsewhere in South Florida, the Westin Fort Lauderdale generated 5.8% comparable RevPAR growth. It is worth noting that our Vail Luxury Collection Resort experienced some headwinds from late snowfall in the fourth quarter, but RevPAR turned positive in January. Overall, we were relatively pleased with the resort portfolio in 2023. But we are most proud of the efforts of our asset managers working closely with our operators in maintaining tight cost controls to keep full-year total expense growth at our resorts to just 1.7%. That's a fantastic result. As we look to 2024, we expect our resort portfolio will improve as the year progresses, with various resorts finding their footing in early 2024 so that the overall resort portfolio can achieve a more uniform return to growth. Resorts should benefit as competitive pressures from luxury revenge travel to Europe lessen this year. Moreover, South Florida and the Florida Keys look poised to deliver growth in 2024 after finding their new normal in 2023. Although South Florida was an early and robust beneficiary of pandemic leisure travel trends and peaked in late 2022, other resort markets did not peak until mid-2023. These other resort markets are now finding their new normal several months later than we saw in Florida. For example, the wine country and Charleston markets saw RevPAR growth months after South Florida's peak. So it is understandable that comparisons will not likely turn positive until we lap those initial declines later this year. Specific to DiamondRock, I did want to mention that there's little around the rooms number at the Henderson resort, which took into its room inventory a number of adjacent condo units that were recently delivered by a master developer. This is good for our long-term profits, but the optics are a little noisy as we get those units into our room count during the seasonally slow period. So overall, for resorts, we are positive about the outlook as we expect near-term headwinds on comparisons will reverse as the year progresses and consumers continue to prioritize leisure travel. Let's turn to our urban hotels. We are fortunate to have an urban footprint concentrated in better performing cities. We have largely avoided impaired markets like San Francisco, Portland, and downtown LA. Instead, we have focused our urban exposure more on markets like Boston, New York City, Chicago, Salt Lake City, Dallas-Fort Worth, and San Diego. In the fourth quarter, comparable total revenue at our urban hotels climbed nearly 2%, bringing the top-line revenue to over 102% of 2019. That's a stat we think compares very favorably among our peers. Looking a little deeper, The Dagny Boston, our biggest repositioning in 2023, was a key performer in the quarter, generating top-line revenue $870,000 above our operator budget, with 233 basis points of stronger EBITDA margin growth. In December, The Dagny's RevPAR index to the competitive set increased 15 points to a 110% index premium, surpassing our penetration last year at the Hilton. The initial results from The Dagny have exceeded our expectations, and we'll discuss this more when we move to our 2024 outlook. There were other stars in the fourth quarter, such as our Kimpton Phoenix increasing total RevPAR to 34%, our Marriott Salt Lake City increasing total RevPAR by 9.8%, and our Westin San Diego increasing total RevPAR by 7.2%. Of course, group success bolstered overall urban results. DiamondRock's group room revenue for 2023 surpassed 2019 by more than 3%. We had positive contributions from a number of our hotels. The Westin Fort Lauderdale was up 23%, the Westin Boston was up 2%, the Westin City Center DC was up 18%, and the Hilton Burlington was up a whopping 70% on a small base. Over the course of the year, we saw group momentum within the portfolio continued to build. In Q2, group room was flat to 2019. In Q3, it was up 3.8%. And in Q4, it was up nearly 7%. Compared to the prior year, 2023 group room revenues were better by 13% on nearly 4% higher rates. Growth in group room volumes and group room rates also improved sequentially throughout 2023. As we look out to 2024, DiamondRock's group story is a major reason for our optimism and gives us the foundation to reintroduce guidance today. Our group revenue pace is up 21% versus this time last year. Our urban portfolio is particularly well set up for 2024 with a very favorable geographic footprint, leveraging some of the best group markets this year, a key advantage for DiamondRock. Markets like Boston, Chicago, Washington, DC, San Diego, New Orleans, Denver, and Fort Lauderdale are all expected to have stronger city-wide calendars in 2024 than they did last year. And Phoenix and Fort Worth are also within striking distance to see gains. We expect our urban hotel portfolio will deliver slightly stronger RevPAR growth in the second half of the year than in the first because of city-wide calendars and on-the-books events. The main driver behind this timing is a significant shift in the convention calendar in Chicago and, to a lesser extent, Washington, DC. In Chicago, the city-wide demand was fairly bunched up in 2023 with peak activity in Q2. In 2024, the city-wide room nights are steady after Q1 in Chicago. This means the Q2 city-wide room nights in Chicago are lower than last year, but the Q3 and Q4 activity is much stronger, almost two times stronger. In Washington, DC, the group room nights are up each quarter across the year, but most significantly in the second half of the year, up over 100% in Q3 and up 36% in Q4. Before turning the call over to Jeff to get into more details on the financials and a balance sheet update, let me provide you with our outlook. We are pleased to reintroduce guidance. Based on current trends, we believe that the lodging industry is likely to experience RevPAR growth in the range of 2% to 4%. With that backdrop, we expect DiamondRock to have similar RevPAR growth, but with the advantage of another 50 to 75 basis points of higher total revenue growth as our focus on outside-the-room spend initiatives bear fruit. Although January RevPAR was up 5.4% for our entire portfolio, we expect the first quarter to be lumpy and that the strength of the portfolio's results will be weighted toward the back half of the year because of the layout of the city-wide convention calendars in our markets and increasingly beneficial comparisons for our resorts. On the expense side, we have been hard at work managing expenses at our properties. On the positive side, we believe some of the difficult culprits will be much easier in 2024 as hotels are fully staffed to their new but more efficient levels; giant property insurance increases are largely behind us; real estate tax increases will greatly moderate this year; and cost pressures will lessen from improved supply chains and lower inflationary pressures. However, wages and benefits, our largest cost categories, are likely to increase mid-single digits. And while other cost categories are moderating, some are still likely to increase above inflation. Accordingly, if DiamondRock's portfolio generates RevPAR growth in the middle of the 2% to 4% range, we expect the company to generate adjusted EBITDA of approximately $275 million and adjusted FFO per share of $0.95. I'll turn it over to you, Jeff.

Thanks, Mark. Recall that in our third-quarter earnings commentary and follow-up, we felt RevPAR would be in a range of flat to down 100 basis points. And we were comfortable with the then full-year consensus estimates of $270 million of adjusted EBITDA and $0.93 per share of funds from operations. Operating and financial results were in line or slightly ahead of our expectation. In the quarter, comparable RevPAR contracted 60 basis points from the prior period and total RevPAR increased 30 basis points, both in line with our expectation. Moreover, full-year adjusted EBITDA was $272 million, and FFO was $0.93 per share. The 30 basis points of total RevPAR growth in the quarter stems from a 2.4% decline in our resorts portfolio and 1.8% growth in our urban portfolio. It is important to highlight the steady improvement you saw in our resorts. Comparable total revenues at the resorts declined 8% in the second quarter of 2023, 4.6% in the third quarter, and just a 2% decline in the fourth quarter. We are optimistic we can continue this improving trend and pivot to growth in 2024. Moving on to profits. Comparable gross operating profit, or GOP, was $94 million, or a 36% margin on $261 million of comparable total revenue. This means our asset managers were able to keep same-store controllable operating expenses to just 3% growth despite 110 basis points of higher occupancy from the prior period. In fact, the growth in controllable operating expenses over the past three quarters has averaged just 3% despite a 150-basis-point average rise in occupancy. Hotel adjusted EBITDA was $65 million with a 24.7% margin, and corporate adjusted EBITDA was a little over $57 million. Hotel adjusted EBITDA margins were 500 basis points lower than Q4 2022 for a few reasons we discussed on our prior earnings call. First, the property tax headwind in Chicago was over $6 million or a 242-basis-point margin impact. Second, our insurance costs were $2.2 million higher in the quarter due to unfavorable industry conditions last year, and this accounted for an 80-basis-point impact. Finally, we elected to accelerate the one-time purchase of new brand-standard bedding in our Westin-flagged hotels to obtain discounted pricing. The $1.5 million bedding expenditure negatively impacted the margins in the quarter by 55 basis points. Collectively, these items explain about 375 basis points of the margin change from the fourth quarter of the prior year. The group segment remained a bright spot in the quarter, with group room revenue up 4% on gains in both room volume and average daily group room rates. As we discussed in the call last quarter, both of our Chicago hotels had difficult comparisons in late 2023 due to a shift in city-wide calendars compared to 2022. Overall, comparable full-year room revenues in the group segment were $21 million stronger in 2022 and exceeded 2019 by $6 million. However, group room nights were still 10% or 78,000 nights below 2019 results. 2024 is shaping up to be strong. Our group revenue is pacing up 21.4% 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 8% and the Chicago Marriott is up over 30. Outside of our two largest group hotels, the strength of our group revenue pace is broad. Group revenues at the Worthington, The Hythe in Vail, Westin Fort Lauderdale, and Westin San Diego Bayview are each up over 30%; and our Westin DC is up 80%. We believe the strength and breadth of our group setup for 2024 is a key point of differentiation for DiamondRock. Turning to capital allocation, there were no acquisitions or dispositions during the quarter and we did not repurchase any shares. However, we continue to explore dispositions, the proceeds of which can fund equity repurchases, ROI projects, or fund external growth. Maximizing shareholder value is the singular focus behind our capital allocation decisions. We remain committed to having a flexible balance sheet. Our leverage is conservative, as demonstrated by the low net-debt-to-EBITDA ratio of 3.9 times trailing four-quarter results. Our liquidity is strong with $122 million in corporate cash, $102 million in hotel-level cash, and a fully available and undrawn $400 million revolver. Importantly, our current liquidity is 140% of our debt maturities through year-end 2025. We have provided RevPAR and adjusted EBITDA guidance ranges in our press release. As Mark said, it is our expectation that total RevPAR growth will be approximately 50 to 75 basis points better than our RevPAR forecast. In addition, we have provided preliminary ranges for corporate expenses, interest expense, and income taxes and our available room count. As Mark indicated, we expect the second-half growth will be stronger than the first half, owing to an evenly distributed convention calendar in our urban hotels segment that last year was more concentrated earlier in the year. In the resort segment, that should improve as we move through the year for the reasons discussed. In the first quarter, there was about $2 million of unfavorable impact for work at Hotel Champlain in Burlington and our Westin San Diego. Later in the year, we expect approximately $1 million of impact from renovation work at the Bourbon in New Orleans. In total, the displacement and disruption is consistent with prior years. On the expense side, we expect labor-related costs will remain the dominant industry headwind as we put rising staffing levels, a hard insurance market, and property tax true-ups in the rearview mirror. And with that, I can turn the floor back to Mark.

Thanks, Jeff. We believe DiamondRock is well positioned for the future with a high-quality portfolio that aligns with some of the best long-term trends in travel. Our portfolio, the least encumbered of any full-service public lodging REIT, commands a net asset value premium. We also have a fortress balance sheet that gives us significant dry powder to take advantage of acquisition opportunities that should emerge this cycle. Even better, one of the things that I think is a little bit of DiamondRock's secret sauce for superior future performance is our extensive list of ROI projects. While there's a fuller list in our investor presentation available on our website, I'll just hit a few. The Dagny Boston, converted only six months ago from a $30 million investment, should outperform for the next several years as it ramps to its full potential. The Hilton Burlington will undergo a transformation this year to a lifestyle resort named The Champlain with a specialty restaurant led by a James Beard-nominated chef. We are excited about this one. In the Florida Keys, we are in the final permitting process to build a high-ROI marina. And in 2025, we plan to expand our Lake Tahoe resort by adding 20% more rooms and building new group meeting space. And finally, our most exciting project, we are working diligently to transform the 77-room Orchards Inn into the Cliffs at L'Auberge de Sedona with a new mountainside pool and restaurant with some of the best views of the Red Rocks in all of Sedona. This should allow us to double the property's revenue, and it will become one of the true gems in our portfolio. To wrap up, these continue to be exciting times at the rock. And while we believe that this will be a good year for the travel industry, we are encouraged with the setup for 2025 and 2026 as the economy is likely to reaccelerate against a backdrop of exceptionally low hotel supply. Our well-balanced portfolio is ideally suited for the most dynamic trends in travel over the next decade. And we are happy to lean into our strategy focused on the data that supports that traveler preferences will make hotels in markets like ours, Vail, Boston, New York City, Sedona, and Marathon Key a smart capital allocation for long-term outperformance and NAV growth. At this time, we would like to open up the call for any of your questions.

Your first question comes from Dori Kesten from Wells Fargo Securities.

Thanks. Good morning. Can you talk about the quantity of assets you deem of interest in a relatively small experiential that are in your pipeline today? And just given your comfort in providing guidance, is it fair to say that you may be more acquisitive this year with, perhaps, fewer uncertain variables?

Good morning, Dori. It's Mark. Good questions. I think the acquisition pipeline and our acquisition team led by Troy Furbay here, they're always looking at deals. We have focused on off-market transactions, as you know, over the last several years. But those transactions go on their own timeline based on the individual owners' circumstances. So we continue to maintain an active pipeline of those deals. Given our cost of capital and the discount to NAV of our stock, they have to be exceptional deals and continue to need to be exceptional deals to be able to do them. We are actively looking at things now, but we need to be sensitive to our cost of capital. We certainly have the dry powder and the balance sheet to do interesting deals, and we would hope to find one or two transactions this year.

Okay. We've talked in the past about your likelihood of selling a large urban box. Do you think the pricing you've received today would be fair? And is there enough, I guess, capital out there interested in acquiring upwards of $100 million?

We've observed larger trades recently. Our view is that the debt markets are improving, and we anticipate lower rates next year compared to the end of this year. With a bit of patience, it's likely that someone will be willing to pay a higher amount for a significant asset. Overall, we believe that while the market may face some challenges, these transactions are more likely to happen either late this year or in 2025.

Okay. Jeff or Briony, what is the status of your NOLs today? And what pace should we expect for dividends to return in the medium term? Your earnings forecast for this year appears to be quite similar to when you were issuing $0.50 annually.

Yeah, I'll take the NOL piece, and I can defer to Mark on the dividend. That's something that we discuss with our Board. But on the NOLs, there's about $140 million of NOLs remaining at this point in time.

On our dividend policy, we actually have a Board meeting next week, and we review the dividend regularly with them. I think where we are now and looking at other alternatives of capital while we think about modestly, potentially, increasing the dividend, the focus really is on other uses of the capital that might drive the stock price.

Hi, thanks. I guess just following up on some of your last comments, Mark, about uses of capital. You mentioned your perception that the stock is below NAV and stuff like that. So why not have a more robust share repurchase program at this point?

No, it's a great question, Smedes, and it's something we're actively talking to the Board about what the right level of that is. We wanted to make sure we have plenty of balance sheet capacity for all maturities for the next couple of years. But as the debt markets have opened up and gotten much better and rates seem like they're going to head south, we're more comfortable using that balance sheet capacity. So that will be something we have a conversation with on the Board meeting next week.

Okay. I wanted to follow up on The Dagny gaining market share and the RevPAR index gains. Are these figures based on the same competitive set as when it was a Hilton, or do they change when it becomes independent?

That's a relatively consistent set. There are always renovations happening at our hotels, which adds some variability. I should note that we took a risk mitigation strategy by bringing in some group and contract business, which will benefit us more during the winter months, typically the low-demand season. We made this decision intentionally as we transitioned from the brand conversion. We do not expect to achieve a premium for the full year 2024 compared to our time at Hilton. We believe it will take a couple of years to close that gap, and that represents the potential upside of the asset as well.

Okay. And then just final question. It sounds like you're building maybe 15 rooms or so at the Lake Tahoe asset. What are you thinking about in terms of the costs per key there?

Jeff, do you want to go and take that one?

Yeah, we think we're probably all in about a key for the 14 incremental, where we are utilizing an existing building that has been out of service for some time and then building six of those in a new purpose-built building in addition to adding some meeting space.

Okay. So pretty small overall capital to that.

About a $7 million project.

Yeah, it's a small project.

Large, relative to scale the resort, but small in the aggregate.

Right. Okay. Thank you.

Thanks, Smedes.

Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets.

Thanks. Good morning, everybody. Just wanted to start off with the group pace of plus 21%. I'm curious, first of all, how much is on the books today versus this time last year? And what does your guidance assume for RevPAR growth for that segment as you see that ratchet down through the year on the pace front?

Jeff, do you want to take that?

Sure, happy to. As we look at our current position compared to last year, we have a significant increase in group rooms. We anticipate this will level off throughout the year due to concerns about space availability. Our goal is to shift our segmentation by about two points towards the group categories. Last year, group rooms accounted for roughly 28%, and we expect to end this year around 30%. Additionally, we see the pace of growth spreading across our portfolio, not just benefiting our largest group venues. Our resort segment, although a smaller part of our overall business, has also increased by about 20%. This is a result of our focused efforts to reorganize our sales teams and generate additional demand for the resorts as leisure demand softened somewhat last year.

And then what are you assuming within the RevPAR guide before for the group segment for growth this year?

It is likely that at the higher end, it will be approximately two-thirds of the growth.

Got it. And then last quarter, you guys had highlighted about a $4 million lift you expected from The Dagny. Did I hear you correctly that you expect other disruption this year to fully offset that amount? Or are those apples-to-apples comparisons? Just wanted to clarify.

Yeah, you heard that correctly, Austin. I would say typically, every year, we have about $3 million to $4 million of disruption and displacement. But you're right, we do expect to get a lift at The Dagny. But as we always are looking at ROI projects in the portfolio, there's always some noise that comes up, and it's the assets that I mentioned that will be in the first quarter and third quarter. Last year, The Dagny was predominately affected in third-quarter impact.

Got it. So I guess The Dagny offsets a little bit. But with the group then, does that imply that RevPAR growth for the leisure BT-type segments is in the low single-digit range for the full year? Am I thinking about that correctly?

Yeah, leisure is on the lower end; the group's on the high end. But it's what you think about the revenue breakdown for the year. So the group is clearly going to carry the RevPAR growth there and carry the weight of it in 2024.

Good morning, everyone. A question on the South Florida performance and commentary that you guys gave. What was the driver of that improvement? Was it just comparison to last year? Did you actually see a sequential acceleration in demand and/or pricing in that market?

All of those factors contributed. The comparisons became easier since South Florida experienced its peak earlier and more significantly. This created a positive effect. However, demand exceeded our expectations, especially in the keys as we moved into the fourth quarter. We were very pleased with the performance. At the Westin, we added some group business, but the story for the Florida Keys is particularly promising.

Got it. Okay. And then a follow-up just on inbound international travel to your major markets. I mean, where do you think that's at for your portfolio today versus pre-pandemic levels? And what are you seeing in the booking curve that would suggest improvement in '24? Could you quantify that improvement based on the bookings you're seeing? Thanks.

Yeah. Mike, it's hard to give the specific data because we don't track it for the individuals. We just see on the macro data. We believe that last year, we probably under-indexed, particularly in the high-end traveler that went to Italy. And this year, at places like Sedona, we would expect to benefit from as much international coming in, which is really coastal positive, but more of the domestic travelers, particularly the well-heeled domestic travelers deciding to vacation in the United States versus their revenge trip to Europe.

And Mike, I would just add on. I think, pre-pandemic, if you just did a market-by-market analysis for us, we were mid-single-digit exposure. It's not a guest-by-guest analysis, but just exposure to geography, I think, were mid-single-digit exposure or demand from international sources.

Got it. Understood. And then maybe just zoom in there on the group bookings. Can you tell if you're seeing more demand from international groups coming to your gateway markets? Presumably, you can track that much easier than the transient traveler? And that's all for me. Thank you.

Yeah. I mean, I think we don't necessarily see a lot of groups that are completely international. You have attendees that are coming in from international destinations for domestic, group-oriented business. So it's not necessarily a stat that we honestly parse through. When we get rooms booked from groups, it typically doesn't have a destination for the consumer. So hard for us to quantify, honestly.

Thank you. For the resort markets in your portfolio, where would you expect the highest growth rates to be this year? I mean, you clearly sound a little bit more upbeat on Florida. But as you look across the portfolio, what do you think would outperform and what would you expect to lag on the resort side?

Yes, in our prepared remarks, we mentioned South Florida and expressed our optimism about markets like Charleston, which have been performing well. However, we anticipate a slight pullback in those areas this year. Additionally, we have observed ongoing pullback in other markets, such as wine country in Sonoma. As a result, we expect those regions to experience lower growth rates, contributing to a balanced performance in our resort portfolio. Great question. Jeff discussed our balance sheet and capacity. We believe we currently have ample resources, so that is not a concern. Our balance sheet is strong, we have cash on hand, and our credit line is completely available, with excellent metrics overall. The issue isn't capacity; it's about finding the right opportunities. Considering we believe we are undervalued, the most beneficial acquisitions at this time will be aligned with our core strengths. We are focused on opportunities where we can apply our expertise or where an owner/operator hasn't kept pace with market trends in pricing or labor efficiency. We're not interested in well-managed luxury assets emerging through competitive bidding as they won't provide value for our shareholders. We believe the best acquisition targets will be experiential and unique properties in markets that are challenging for new supply to enter. We anticipate that the consumer and traveler in the coming decade will be drawn to offerings that deliver distinct and memorable experiences.

Good morning, everyone. Mark, I appreciate the insights you've shared so far. Could you elaborate on your thoughts regarding summer this year? You mentioned it briefly earlier. Last year, there was a bit of a surprise with how much domestic travel was directed outbound. Are you anticipating more inbound travel this year, or do you think people might opt to stay home? Is there any confidence you can offer us, perhaps any current bookings for the summer that make you feel more optimistic?

I feel more confident because this will be our strongest group quarter. This year, we've focused on securing group bookings rather than depending on short-term bookings like we did last summer. We're actively placing groups wherever we can. As mentioned earlier, the strength from our current bookings will likely peak in Q3. We are optimistic about our position, but we're also taking a cautious approach by maximizing group bookings where it's beneficial and avoiding over-reliance on short-term leisure and corporate travel, as we did last summer.

Okay, great. And then obviously, a strong, strong job on the cost front '23. And it sounds pretty benign for '24. You did mention labor. I guess, do you have any labor situations, any union markets, even though you wouldn't be union? Any markets later in the year that you're keeping an eye on for a reset next year?

We're continually assessing the market to ensure our wages remain competitive across both union and non-union hotels. Last year, we focused primarily on the situation in LA. As for Chicago, we reached a mutually beneficial agreement during negotiations. We're hopeful for a similar outcome in Boston in the near future. However, there isn't anything significant on our radar that would raise our concerns about expenses as we progress through the year or that would particularly alarm us for 2024. We are constantly monitoring the market to ensure our wages remain competitive across both union and non-union hotels. Last year, the focus was primarily on Los Angeles. In Chicago, we reached a fairly positive agreement during negotiations. We are hopeful for a similar outcome in Boston soon. Currently, there are no concerns on our radar that we expect to discuss frequently as the year progresses, and we do not foresee any significant worries regarding expenses in 2024. Let's turn to your last question, which you asked about how the market has developed and where it's at right now. We are seeing some improvements overall, and we think there are some favorable dynamics at play.

Your next question comes from the line of Floris van Dijkum from Compass Point.

Good morning, everyone. I appreciate you taking my question. Mark, as I listened to you and Jeff discuss the appeal of your shares, I noticed that you haven't engaged in stock buybacks like some competitors have, while also considering investment opportunities. Could you elaborate on your leverage ratio and your comfort level with it potentially increasing? Currently, it seems modest at around 3.9 times. Would you feel at ease operating up to 5 times, with the intention of reducing it through asset sales or possible equity in the future?

Well, Jeff, why don't you start off just talking a little bit about capacity? And then I can chime in maybe at the end?

Yeah. Yeah. Floris, right now, we're about 3.9 times debt to EBITDA. We have about $525 million of liquidity, including our revolver. We certainly do look at share repurchases, as you suggested. It is a leveraging event. And so we just try to be mindful about striking that balance between getting a good return on investment, but, at the same time, recognizing that it does push up your leverage. And historically, that can weigh on your valuation over time. It's one thing, I think, we try to put a lot of effort into and something that we regularly discuss with our Board is where's that appropriate ceiling on leverage. And Mark can speak to this, too. But I would say that historically, the lending community, in trying to maintain a good relationship with them, I think there's comfort that you're going up to around the level that you spoke to, around 5 times, because you could probably go through a pretty severe downturn and still not run afoul of your credit agreements. And that I guess is how would you think about that. I think we do have capacity, but it's also balancing against the opportunities that we like to believe are coming down the road, either in ROI opportunities in our portfolio or potential acquisitions.

I would just add that Jeff did an excellent job describing that. However, five times is probably the upper limit of where we'd feel comfortable. If you've modeled a worst-case scenario like the great financial crisis, you would still be fine. We do have cash reserves, and we believe that maintaining low leverage is an essential strategic move. However, if we never utilize our cash reserves, they aren't very valuable. So yes, if we identify strong acquisition opportunities, we would be open to taking on some debt. We are optimistic that cash flows in 2025 and 2026 will be good, and that growth alone would help reduce our debt. For now, we continue to follow a conservative and prudent approach to capital allocation. Our debt metrics are improving, which makes us somewhat more aggressive. If we discover valuable opportunities for shareholders, we will pursue those deals. Currently, we aren't seeing many prospects, but we are actively working to find them.

Thanks, guys.

Your next question comes from the line of Anthony Powell from Barclays.

Hi. Good morning. We haven't talked a lot about corporate transient on call yet. So maybe you could tell us where it ended up as a mix of your revenues in 2023, where that was versus '19, and where you're seeing that business going forward?

Yeah. The corporate transient, it's a tricky one. It's obviously the one that's been the hardest, we'll call it, post-pandemic new normal. It's probably down about 20% from where we were at a pre-pandemic level. On the positive side, special corporate rate negotiations have been up year over year. And the small corporates, so-called non-special corporates, corporate travelers, that's actually trading at above 100% of what it did in 2019. But the big special corporate, a lot of the big consulting companies and the ones that generate hundreds of thousands of room nights a year, a lot of those are down 30%, 40%, 50% from where they were in a pre-pandemic world. And we're seeing that heal gradually and slowly. And what's built into our guidance is that it continues to get a little better every quarter, but not a big upshift in the level that we're at today.

What markets does that decline in the consulting and whatnot? Where did that hit you the most?

It's broad-based. In New York City, we benefited from a reduction in supply and other factors that helped offset the situation. However, especially in the corporate sector, this trend is felt throughout the entire United States. The top 25 markets are likely more affected by large special corporate clients, but whether you're in Boston, Chicago, or Miami, it will influence all major markets across the country. The good news is that the small business traveler is significant; the overall economy is $3 trillion larger than it was in 2019. Historically, business travel has typically grown alongside the overall economy, and we've seen this trend with small business travelers, which is promising. However, there have been fundamental shifts in how large special corporate clients travel, including the number of travel days and travel patterns on Mondays and Fridays. Some of these changes will have a lasting effect. As business travel continues to evolve, and with the economy expanding, we will likely return to 2019 levels, but not when adjusted for inflation.

Got it. And maybe one more for me on some of the deals you've done. I know, at Lake Austin and the Kimpton Fort Lauderdale, there are some, I guess, issues at acquisition with managers or whatnot. Can you talk about how those have progressed and maybe talk about how Chico Hot Spring has done relative to your expectations?

Chico's is our most recent acquisition, which we closed in August of last year. We also purchased the adjacent ranch. For the Chico Hot Springs, our budget for this year is about an eight-cap, and we're very pleased with the acquisition. We're looking forward to exploring the possibilities with the extra 600 acres of land we now own. This asset remains intriguing for us. Regarding other properties, at our Kimpton in Fort Lauderdale, we replaced the roof and added a rooftop hotspot, which occupied much of last year during the transition. We expect to see significant growth this year despite it being slightly below our rating. For Lake Austin, we believe it will be the only hotel ever located on the lake, making this a unique opportunity in that location. While there were some challenges with new systems being implemented, as we've mentioned in earlier calls, we remain hopeful about the asset's performance in the coming years, though the ramp-up will take longer than initially anticipated.

Thank you. Your next question comes from the line of Bill Crow from Raymond James.

Hey, good morning. Thanks. Mark, I'm curious. The TSA screening growth year over year has been running about twice the growth or maybe more than twice the growth of hotel demand. And I'm wondering how much of that we should attribute to business travel shifting from a four- or five-day-a-week travel environment to on, two, or three days a week. Is that the primary driver? Is that still outbound, international? Or how should we think about that relationship?

That's an interesting question. To be honest, we haven't really thought about it much. We're examining the demand generators affecting our individual hotels and monitoring those patterns. We observe the enplanements and TSA throughput as well. We're noticing some increases in enplanements and passenger loads, but they don't quite align with the demand at our hotels. I need to think through that and analyze it further before providing a detailed response. Thank you. Well, first, before we conclude, let me just shout out that its National Hospitality Workers Day. So we extend our appreciation to everyone that works in the hospitality industry for taking care of the customers and making it such a great industry. We appreciate our investors and analysts for tuning in today in today's call, and we look forward to updating you next quarter. Take care. Have a great day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.