DiamondRock Hospitality Company - Q4 2023

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality fourth 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. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Briony Quinn, Chief Accounting Officer and Treasurer. Please go ahead.

Briony Quinn (SVP, Treasurer and Chief Accounting Officer)

Good morning, everyone. 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'll 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 Brugger (President and CEO)

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 $57.1 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 can save 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 dropped 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 its new normal in 2023. While 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 peak 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 a little oddity around the rooms number at the Henderson Beach 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 L.A.

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 as a 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 in Phoenix, increasing total RevPAR 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 D.C. 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 continue 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, leveraged some of the best group markets this year, a key advantage for DiamondRock. Markets like Boston, Chicago, Washington, D.C., San Diego, New Orleans, Denver, and Fort Lauderdale are all expected to have stronger citywide 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 the citywide 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, D.C. In Chicago, the citywide demand was fairly bunched up in 2023, with peak activity in Q2.

In 2024, the citywide room nights are steady after Q1 in Chicago. This means the Q2 citywide room nights in Chicago are lower than last year, but that the Q3 and Q4 activity is much stronger, almost two times stronger. In Washington, D.C., 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%-4%.

With that backdrop, we expect DiamondRock to have similar RevPAR growth, but with the advantage of another 50-75 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 towards the back half of the year because of the layout of the citywide convention calendars in our markets and the increasingly beneficial comparison 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. 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%-4% range, we would expect the company to generate Adjusted EBITDA of approximately $275 million and Adjusted FFO per share of $0.95. Turn it over to you, Jeff.

Jeff Donnelly (CEO)

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 expectations. 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 expectations. 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 we 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 points 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 fourth quarter 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 points 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 points impact.

Finally, we elected to accelerate the one-time purchase of new brand standard bedding at our Westin-flagged hotels to obtain discounted pricing. The $1.5 million bedding expenditure negatively impacted the margin 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 citywide 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 Hyatt 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 50-75 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 hotel segment that last year was more concentrated earlier in the year, and a 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 the 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 upticks in the rearview mirror. With that, I can turn the floor back to Mark.

Mark Brugger (President and CEO)

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 convert 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.

While we believe that this will be a good year for the travel industry, we are encouraged for 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, smart capital allocation for long-term outperformance and NAV growth. At this time, we would like to open up this call for any of your questions.

Operator (participant)

Thank you. As a reminder to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from the line of Dory Kesten from Wells Fargo Securities. Your line is open.

Dori Kesten (Director)

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, you may be more acquisitive this year with perhaps fewer uncertain variables?

Mark Brugger (President and CEO)

Good morning, Dory, 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 kind of go on their own timeline based on the individual owner's circumstances. So we continue to maintain an active pipeline of those deals. Given our cost to capital and the discount to NAV of our stock, they have to be exceptional deals, and they 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.

We would hope to find one or two transactions this year.

Dori Kesten (Director)

Okay. We've talked in the past about your likelihood of selling a large urban box.

Mark Brugger (President and CEO)

Mm-hmm.

Dori Kesten (Director)

Do you think pricing you'd receive today would be fair? And is there enough, I guess, capital out there interested in acquiring upwards of $100 million?

Mark Brugger (President and CEO)

Yeah, so we've seen some bigger trades, the Biltmore and some other big trades over the last six months. I think our opinion is the debt markets continue to improve, and the rates will be much lower next year than they are this year or the end of this year. So that you're likely to get someone to stretch and pay a bigger number for a bigger asset if you have a little bit of patience. So our overall view is, while we may test the market, more likely that those transactions will occur either at the end of this year or sometime in 2025.

Dori Kesten (Director)

Okay. And Jeff Donnelly, where are your NOLs today, and should we expect dividends to return? I guess, what pace should we expect dividends to return over the medium term? Your earnings outlook for this year looks pretty similar to when you were paying out $0.50 annually.

Jeff Donnelly (CEO)

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. You want-

Mark Brugger (President and CEO)

Sure. On dividend policy, we actually have a board meeting, next week, and we'll review, we review the dividend regularly with them. I think where we are now and looking at other alternatives to 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.

Dori Kesten (Director)

Okay, thank you.

Operator (participant)

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

Smedes Rose (Director)

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

Mark Brugger (President and CEO)

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. You know, 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 gonna head south, you know, we're more comfortable using that balance sheet capacity. So that'll be something we have a conversation with on the board meeting next week.

Smedes Rose (Director)

Okay. I just wanted to follow up, when you talked about the Dagny gaining, I guess, relative market share, and you mentioned some of the RevPAR index gains. Is that on the same competitive set from when it was a Hilton, or when it goes independent, did they change the set that you're competing against?

Mark Brugger (President and CEO)

Yeah, that's a relatively consistent set. I mean, there's always renovations going on at peer hotels, so there's a little bit of noise in that. I should mention that we did take a, what we thought was a risk mitigation strategy at the hotel to put some group in there, I mean, some of the contract business in there, which will benefit us more in the winter months, which is the, you know, the lower demand season. And that was something we wanted to do consciously as we ramped up from the brand conversion. So we would not expect to command a premium for the full year 2024, versus our time at the Hilton. We think that that will take a couple of years to close that gap, and that's really the upside performance of the asset as well.

Smedes Rose (Director)

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

Mark Brugger (President and CEO)

Justin, you wanna go ahead and take that one?

Justin Leonard (President and COO)

Yeah, we think we're probably all in about $400-$425 a key for the 14 incremental. We're reutilizing an existing building that has been out of service for some time, and then building about 6 of those in a new purpose-built building, in addition to adding some meeting space.

Smedes Rose (Director)

Okay, so pretty small overall capital commitment, I guess.

Mark Brugger (President and CEO)

Yep.

Justin Leonard (President and COO)

Sure, about a $7 million project.

Mark Brugger (President and CEO)

Yeah, it's a small project.

Justin Leonard (President and COO)

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

Smedes Rose (Director)

Right. Okay. Thank you.

Mark Brugger (President and CEO)

Thanks, Smedes.

Operator (participant)

One moment for our next question. Our next question will come from the line of Austin Werschmidt from KeyBanc Capital Markets. Your line is open.

Austin Wurschmidt (VP and Equity Research Analyst)

Thanks. Good morning, everybody. Just wanted to start off with the group pace of +21%. Curious, first off, 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 kind of ratchet down through the year?

... on the pace front.

Mark Brugger (President and CEO)

Justin, you want to take that?

Justin Leonard (President and COO)

Yeah, happy to. So, we're, as we sit here today, I think we're sitting with about 530,000 group rooms versus 450,000 last year. So we're sitting in a significantly, you know, increased position on a relative basis. We obviously think that's going to tail off in the year, for the year, just given space availability concerns. But I think the goal is for us to sort of shift segmentation about two points into the group category. So it was about 28% for us last year. You know, we're hoping to end at about 30%. And I think what we consider to be, you know, equal if not maybe more significant, is that we're seeing that pace increase spread throughout the portfolio.

It's not just driven by good years in our big group boxes. Our resort portfolio, though, it makes up a much smaller piece of the segmentation, is also up about 20%, as we've really leaned in to kind of reorienting our sales teams and trying to drive some incremental demand into those resorts, as we saw leisure demand tail off a bit last year.

Austin Wurschmidt (VP and Equity Research Analyst)

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

Justin Leonard (President and COO)

It's probably at the top end. It probably ends up being about two-thirds of the growth.

Austin Wurschmidt (VP and Equity Research Analyst)

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, you know, kind of apples to apples comparisons? Just wanted to clarify.

Jeff Donnelly (CEO)

Yeah, you heard that correctly, Austin. I would say, typically, every year, we have about $3 million-$4 million of, I'll call it, disruption and displacement. But you're right, you know, we do expect to get a lift at the Dagny. But, you know, 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 had mentioned that'll be in the first quarter and third quarter. Last year, the Dagny was predominantly a second and third quarter impact.

Austin Wurschmidt (VP and Equity Research Analyst)

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

Mark Brugger (President and CEO)

Yeah. Leisure is on the lower end, the group's on the high end. But, you know, kind of when you think about the revenue breakdown for the year. So the group is clearly going to carry the RevPAR growth. They're going to carry the weight of it in 2024.

Austin Wurschmidt (VP and Equity Research Analyst)

Great. Thanks for the detail.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Mike Bellisario from Baird. Your line is open.

Mike Bellisario (Senior Research Analyst)

Good morning, everyone.

Jeff Donnelly (CEO)

Mike.

Mike Bellisario (Senior Research Analyst)

Question on the South Florida performance and, and commentary that you guys gave. What was the driver of that improvement? Was it just, comparisons to last year, or did you actually see a sequential acceleration in, demand and/or pricing in that market?

Mark Brugger (President and CEO)

All of those, really. I mean, the comparisons got easier. South Florida peaked first and most robust, so the comps, you know, is kind of think about the lagging effects helping it. But demand was better than we anticipated, and, and certainly in the Keys, as we moved through the fourth quarter. So we were very encouraged about the performance. At the Westin, we did layer in some group, there, but, you know, I think the Florida Keys story is a very encouraging one.

Mike Bellisario (Senior Research Analyst)

Got it. Okay. And then, follow up just on inbound international travel to, 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, you know, improvement in 2024? At least, you know, could you quantify that improvement based on the bookings you're seeing? Thanks.

Mark Brugger (President and CEO)

Yeah, Mike, it's hard to give the specific data because we, we don't track it for the individuals. We do see it 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, 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 kind of revenge trip to Europe.

Jeff Donnelly (CEO)

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

Mike Bellisario (Senior Research Analyst)

Got it. Understood. And then maybe just, you know, 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.

Jeff Donnelly (CEO)

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

Operator (participant)

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

Duane Pfennigwerth (Senior Managing Director)

Hey, 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?

Mark Brugger (President and CEO)

Yeah, sure. So I think in our prepared remarks, we talked about South Florida, we were encouraged on. Markets like Charleston, which have been terrific, we would expect that to pull back a little bit this year. Trying to think what other markets that was, kind of go through that with Wine Country, Sonoma, we're seeing some pullback continue there. So we expect those to be on the lower end of the growth scale, to kind of give you barbell on the resort portfolio.

Duane Pfennigwerth (Senior Managing Director)

Okay, thanks. And then just on the just to follow up on the prior questions on acquisitions, should we assume that a big disposition would need to happen first? And if you get that done, how would you be looking to shape the portfolio? You know, where, where do you feel that you're under-indexed?

Mark Brugger (President and CEO)

Sure, great question. So, Jeff went through our balance sheet and our capacity. We feel like we have excess dry powder right now, so that's not the hesitation. It's not a dry powder issue. We have a very attractive balance sheet, and we have, we're sitting on cash and a completely undrawn revolver, and our metrics are excellent. So it's not a capacity issue, it's really an opportunity issue. And then when you think about what kind of opportunities, given that we think we trade at a significant discount to NAV, would be accretive to shareholders at this point, it's going to be more of the kind of things that we think are our core capacity.

So we're looking at things where we think we can put our estimates to best practices, where they might be an owner-operator who doesn't, you know, hasn't kind of kept up with the market on moving rates, or may not be efficient in in labor practices and other things that we can bring to the table. Those are then efficiencies. We're unlikely to buy a, you know, a luxury asset that's well run in a competitive process. That's just not going to be accretive for our shareholders. So we're going we think the best acquisition opportunities and the best accretive opportunities remain the kind of assets worth buying, which are these really expensive, experiential, differentiated assets, generally markets that are incredibly hard for new supply to enter.

We think that the consumer and the traveler today and over the next decade, where the outsized growth is going to be, is where you can provide something that's really a unique and differentiated experience for that traveler.

Duane Pfennigwerth (Senior Managing Director)

Great. Thank you.

Operator (participant)

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

Chris Woronka (Director and Senior Equity Analyst)

Hey, good morning, guys. So, Mark, appreciate all the color so far. Can you maybe talk a little bit about how you're thinking about summer this year? You kind of hit on it a few minutes ago, but last year, you know, I think there was a little bit of a surprise at how much domestic travel went outbound, and maybe the expectation is you're going to get more inbound this year, or maybe you think folks are going to stay home. But is there any kind of confidence you can give us, any kind of, you know, what bookings you have right now for summer that make you feel better?

Mark Brugger (President and CEO)

Yeah, I mean, I think the fundamental thing that makes me feel better is that it's going to be our strongest group quarter. So, unlike last summer, what we've done this year is to really take the group and not rely on that short-term transience showing up. So to the extent we can put a group in there, we're putting a group in there. And then if you, you know, as we talked about in the prepared remarks, a lot of the strength and certainly our strongest quarter based on the current bookings is going to be Q3.

So we feel good about our positioning, but we are taking a little bit of defensive position that we're trying to group up where it makes sense to group up, and not be reliant like we were last summer on a lot of that short-term both leisure and corporate travel.

Chris Woronka (Director and Senior Equity Analyst)

Okay, great. And then, obviously, strong, strong job on the cost front, 2023, and, you know, sounds, sounds pretty, pretty benign for 2024. You, you did mention labor. I guess, do you have any labor situations, any union markets, even though you, you wouldn't be union, any markets later in the year that you're keeping an eye on for, you know, for a reset next year?

Mark Brugger (President and CEO)

I mean, we're always looking at the markets and making sure that our wages are staying competitive with the set, whether they're union or non-union hotels. You know, last year, the story was really the L.A. story. There are some. Chicago got, you know, that was a relatively mutually win-win agreement, I'll call it, their negotiation, and we're optimistic that we have that in Boston as well coming up. But there's nothing that's on the radar now that we think we'll be, you know, talking a lot about as we move through the year, or that makes us particularly nervous on the expense side in 2024.

Chris Woronka (Director and Senior Equity Analyst)

Okay, appreciate that. Last one is just kind of on the acquisition disposition. You know, I hear you on expectations of lower rates. That may be up for debate a little bit, but, you know, I guess the question would be, we're also hearing about more distressed or semi-distressed stuff kind of hitting the market. I mean, I assume that that's a good thing if you're a buyer, but you mentioned some non-core sales, maybe not necessarily the best thing if you're a seller. Any thoughts on how it could play out?

Mark Brugger (President and CEO)

Yeah, I mean, I think what we're seeing in the marketplace generally is the stuff that's of quality is getting pushed another year. The lenders are working with folks. I think the consensus view, and again, it could be wrong, but between both lenders and owners, is if you have a quality asset, you're more likely to get a higher price, in the market the end of this year or next year. And I think people are working towards that timeline versus bringing things to market now. There's not a lot on the market now. Worst is first is certainly a motto for now. The stuff that is coming in, I would say, the distress that's in the market are really pretty terrible hotels that have things that are unfixable, generally.

We're not seeing quality assets come to market right now that are distressed. We're seeing people that, you know, they'd be motivated if they can get a decent price, but we're not seeing the kind of assets that we own, we're not seeing those come to market under distressed terms right now.

Chris Woronka (Director and Senior Equity Analyst)

Okay. Hey, very good. Thanks, Mark.

Operator (participant)

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

Floris van Dijkum (Managing Director and Senior Research Analyst)

Hey, morning, guys. Thanks for taking my question. Just, Mark, as I listen to you and Jeff talk a little bit about, you know, the attractiveness of your shares, and obviously, you haven't bought back stock, unlike some of your peers, but also weighing some opportunities on the investment side. Maybe if you could talk about your leverage ratio, and how comfortable would you be to see that leverage ratio trend a little bit higher? You're pretty modestly levered today. I think it looked 3.9x or somewhere around that level. Would you be comfortable operating up to 5x, and then with the eye of reducing that with asset sales or potential equity down the road?

Mark Brugger (President and CEO)

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?

Jeff Donnelly (CEO)

Yeah. Yeah, Floris, right now, we're about 3.9 times, you know, debt to EBITDA. We have about $525 million of liquidity, including our revolver. Yeah, we certainly do look at share repurchases, as, you know, 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. You know, 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 is that appropriate ceiling on leverage?

You know, Mark can speak to this, too, but I would say that, you know, historically, the lending community and trying to maintain a good relationship with them, there I think there's comfort with you going up to around the level that you spoke to, around 5x, because you could probably go through a pretty severe downturn and still not run afoul of your credit agreements. And I guess that's how we think about it. I'd say we do have capacity, but it's also balancing against the opportunities that we'd like to believe are coming down the road, either in our ROI opportunities in our portfolio or potential acquisitions.

Mark Brugger (President and CEO)

Yeah, I would just... Jeff did an excellent job describing that. But yeah, five times is probably the high end of where we'd be comfortable going. Again, if you model down the Great Financial Crisis, you'd still be okay in that situation. We do have dry powder. We think having low leverage is a core strategic move, but if you never use your dry powder, it's not really that valuable. So yeah, we would. If we found great acquisitions, we'd be willing to lever up a little bit. Hopefully, cash flows, we're optimistic that cash flows in 2025 and 2026 are pretty good, and that growth alone would deleverage the company. But right now, you know, we continue to maintain a fairly conservative, prudent capital allocation strategy.

The debt markets are getting better, that does make us a little bit more aggressive. And if we find great opportunities that we think create value for shareholders, we're gonna do those deals. We're just not seeing a ton of those at the moment, but we continue to work hard to try to uncover them.

Floris van Dijkum (Managing Director and Senior Research Analyst)

Thanks. And maybe my follow-up for you guys. Obviously, you've done, you know, a bit of investing in your portfolio, and I, I'm... The Cliffs of Sedona, I think, are gonna be on my bucket list, it sounds like, once you guys are done there as well. Can you just remind us, what percentage of your EBITDA has been touched since 2019?

Mark Brugger (President and CEO)

Since 2019.

Jeff Donnelly (CEO)

I know. I was thinking about it because we've probably touched probably 15 assets in terms of upbrandings and just even types of- different types of renovation products, projects. I'm, I'm estimating here, I'd say probably it's about 30%-40% of our EBITDA, it has had some work done at the assets. I can circle back to you, Floris, on that, just to, so I'm not, just shooting from the hip.

Mark Brugger (President and CEO)

I would guess in the last six years, we've put about $500 million into our portfolio.

Jeff Donnelly (CEO)

Yeah.

Mark Brugger (President and CEO)

Something like that. So we've invested fairly significantly, both to maintain our assets at first-class status, but also to make sure we're maintaining them to brand standards and assets that customers want to return to again and again. So we look for ROI opportunities. We've done a number. The nature of our assets lend themselves to do that. So whether that's taking the JW Marriott at Cherry Creek and converting that to the Clio Luxury Collection, or taking a Marriott in Vail and making that a Hyatt luxury hotel, you know, that's the nature of having these experiential hotels. It gives you more of those kind of opportunities. So probably have touched more than a number of our peers just because, you know, there is more ROI opportunities to reposition these kind of assets, because they are not standard boxes, often in our portfolio.

Floris van Dijkum (Managing Director and Senior Research Analyst)

Thanks, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Anthony Powell from Barclays. Your line is open.

Anthony Powell (Senior Equity Research Analyst)

Hi, good morning. We haven't talked a lot about corporate transient on the call yet, so maybe you could tell us where it ended up as a mix of your revenues in 2023, where that was versus 2019, and where you're seeing kind of that business going forward?

Mark Brugger (President and CEO)

Yeah, the corporate transient, it's a tricky one. It's obviously the one that's been the hardest, kind of. I'll call 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, I'll call the non-special corporates, but corporate travelers, that's actually penetrating above 100% of what it did in 2019. But the big special corporates, you know, a lot of the big consulting companies and the ones that generate, you know, 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.

We're seeing that heal gradually and slowly, and, you know, what's built into our guidance is that it continues to get a little better every quarter, but not a big up shift in the level that we're at today.

Anthony Powell (Senior Equity Research Analyst)

All right. What markets does that decline in the consulting and whatnot, where does that hit you the most?

Mark Brugger (President and CEO)

It's broad-based. I mean, you know, in New York City, we benefited from supply contraction and some other things that have offset it. But special corporate, it, it permeates the entire United States. Obviously, the top 25 markets are probably more attuned to the big special corporates. But whether you're in Boston, Chicago, Miami, you know, it's gonna impact all the, all the major markets in the United States. I think the good news is that the small business traveler is really... You know, the overall economy is $3 trillion bigger than it was in 2019, and business travel, generally, on kind of historic terms, has correlated with the growth of the overall economy. So we saw that correlation happen with the small business traveler, which is great.

But there's been fundamental changes in the way that big special corporates travel, the number of days they travel, whether they travel on Mondays or Fridays. So, you know, some of that's gonna be a lasting impact. And as the business travel evolves, and it always evolves, and the general economy gets bigger and bigger, yeah, we'll probably get back to 19 levels, but not on an inflation-adjusted basis.

Anthony Powell (Senior Equity Research Analyst)

Got it. And maybe one more from 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 and whatnot. Can you talk about how those have progressed and maybe talk about how Chico Hot Springs has done relative to your expectations?

Mark Brugger (President and CEO)

Yeah. So it's Chico is our most recent acquisition. We closed that in August of last year. It came, we also bought the adjacent ranch. So if you just take the Chico Hot Springs, we bought it on cap rate, I think this year, on budget for just the Hot Springs Resort, it's about a cap rate. So we feel great about the acquisition. We're excited to figure out what we can do with the extra 600 acres of land that we have. So that's continues to be a very interesting asset for us. On some of the other ones, Fort Lauderdale, the Kimpton we have there, we redid the roof and added kind of a, we call it roof hotspot.

So that took a lot of, a lot of last year in that transition, so that continues to ramp up this year. We think we'll see significant growth. It is a little under our, behind our underwriting. And then Lake Austin, we think is the, you know, it's the only hotel that will ever be on Lake Austin, so we think it's, you know, a truly kind of a once in a career opportunity to own something in that location. But there was some transition as new systems got implemented, which we talked about on prior calls, but we remain optimistic about the performance of that asset over the next couple of years. But there's been, you know, it'll be a longer ramp than we originally had arrived.

Anthony Powell (Senior Equity Research Analyst)

Okay, thank you.

Mark Brugger (President and CEO)

Sure.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Bill Crow from Raymond James. Your line is open.

Bill Crow (Managing Director)

Hey, good morning, thanks. Hey, 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 4 or 5 day a week travel environment to, you know, 1, 2, or 3 days a week. Is that the primary driver, or is that still outbound international, or how should we think about that relationship?

Mark Brugger (President and CEO)

That's an interesting question. To tell you the truth, we haven't really contemplated it that much. I mean, we're looking at the demand generators that are coming into our individual hotels and tracking those patterns, and we look at enplanements and, which obviously TSA throughput tracks as well. And we're seeing the enplanements up and the passenger loads up, but not corresponding to the demand at the hotels. Gonna have to noodle through that one and look a little deeper and get back to you.

Bill Crow (Managing Director)

All right, fair enough. Appreciate it. Thanks.

Operator (participant)

Thank you. I'm not showing any further questions in the queue. I would now like to turn it back over to Mark Brugger for any closing remarks.

Mark Brugger (President and CEO)

Thank you. Well, first, before we conclude, let me just shout out that it's 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.

Operator (participant)

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