Diamondrock Hospitality Co (DRH) 2022 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the DiamondRock Hospitality Company's Fourth Quarter 2022 Earnings Conference Call.

(Operator's Instructions)

Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Briony Quinn, Senior Vice President and Treasurer. Ms. Quinn, please go ahead.

Good morning, everyone. Welcome to DiamondRock's Fourth Quarter 2022 Earnings Call and Webcast. Before we get started, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed in or implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning, and thank you for joining us today. I'm here with our entire executive team, and we'll be happy to take your questions after the prepared remarks. The fourth quarter kept off the best year in the history of DiamondRock, with record revenues, record margins and record profits. For the full year, comparable hotel adjusted EBITDA was $319.8 million. This was an increase of 121.9% or $175.7 million over 2021. Results even surpassed pre-pandemic 2019 with comparable RevPAR better by 5.5% and comparable hotel adjusted EBITDA better by $38.4 million. Importantly, comparable profit margins were 31.36%, surpassing our pre-pandemic peak by 184 basis points. These tremendous operating results were made possible by the consistent execution of our strategy to curate a portfolio that is uniquely focused on the leading secular travel trends.

The portfolio we have assembled is comprised of irreplaceable experiential resorts and urban destination hotels that are tailored to be the hotel of choice in their particular markets. Our focus is paying off as our portfolio performance has been among the best in the lodging REIT sector. And while the superior operating performance led to strong relative total shareholder returns during the past few years, our stock today nevertheless trades at more than a 30% discount to consensus net asset value. We are proud of what we have built at DiamondRock, and we will continue to work diligently to close that discount. For example, during the fourth quarter, we repurchased 1.6 million shares at an average price of only $7.81 per share.

Going forward, we will use the power of our low leverage balance sheet and ample liquidity to capitalize on these types of opportunities. Let's look a little closer at the company's accomplishments in 2022. First, we completed numerous ROI projects, including the Clio luxury collection conversion, the Bethea Suites brain conversion and executing on our business plans for the repositionings completed in late 2021 of the high luxury collection in Vail, the Margaritaville Resort in Key West and the Lodge Resort in Sonoma. Second, we acquired 3 incredibly high-quality lifestyle hotels in 2022 with an average RevPAR of over $450 and a stabilized NOI yield averaging over 9%. And third, we completed our largest ever financing by favorably recasting $1.2 billion in bank debt. DiamondRock is also well positioned for the future.

We entered 2023 with a number of advantages, including: one, an optimally balanced portfolio to the leisure group and business demand segments. Note that our earnings mix in 2023 is projected to be about 60% from our urban markets and just over 40% from our resort markets. Two, a high number of ROI projects completed and pending that should deliver double-digit returns; three, a portfolio that is the least encumbered of all the full-service public lodging REITs, which gives us enhanced liquidity, control and exit value. And fourth and finally, a balance sheet advantage with nearly $600 million in liquidity to opportunistically drive incremental shareholder value. On the topic of external growth, we expect to have an advantage on acquisitions this year as the debt markets are likely to remain very challenging for PE firms and other private buyers in 2023.

With our significant dry powder, we are to pounce on opportunities that emerge. While there is a low volume of deals currently on the market, a core skill of our team remains in finding off-market deals and unique opportunities. Our most recent acquisition just a few months ago illustrates that point. The deal for the Lake Austin Spa Resort came about through a relationship that we had cultivated over a number of years with a well-known private equity firm. This firm had originally uncovered the opportunity and was very excited about it. That actually placed the property under contract, completed due diligence, and we're about to go hard on their deposit when their lender walked from its loan commitment as the debt markets froze up last summer. We were then their first call, and this created an opportunity for us to quietly come in and negotiate for the resort with a multimillion dollar discount as the seller did not want to have a second failed deal. Lake Austin is a spectacular acquisition for us.

We bought a high-end resort at a trailing NOI cap rate of nearly 9% and almost unheard of yield for a luxury property, one which will generate our highest total RevPAR and EBITDA per key. As good as that is, since closing on the deal, we have confirmed that there are considerable expansion possibilities on the site, which will really make this one a home run. As we go forward, these are the kind of deals that we are looking for: high quality, great returns and value-add opportunities. I'll now turn the call over to Jeff to discuss the numbers in greater detail. Jeff?

Thanks. As Mark said, it was a record quarter and a record year for DiamondRock. Total comparable revenues for the company were $257 million in the quarter, an increase of $47 million or nearly 23% over the comparable period in 2021. Comparable RevPAR for the portfolio in the fourth quarter was $196 or 6.7% higher than 2019. This growth was driven by run rates over 19% above 2019. Occupancy is down 780 basis points to 2019. Closing this gap remains one of several sources of future growth. Other revenue, which speaks directly to our asset management team's creativity in identifying and expanding new income streams was up 31% or $5.1 million over 2019. F&B revenue was over $5.2 million above 2019, driven by the repositioning of several F&B outlets during the pandemic. We will share with you soon several new or upgraded outlets we are working on for 2023 and beyond that will continue to drive profits to new levels.

Comparable hotel adjusted EBITDA was $77 million, which beat fourth quarter 2019 by $11.2 million or 17%. Comparable hotel adjusted EBITDA margins were 30%, up 724 basis points over 2021 and 192 basis points to 2019. Adjusted EBITDA was $67.4 million, nearly $5 million over fourth quarter 2019. And finally, FFO per share was $0.23 or 85% for the fourth quarter of 2019. Demand across the portfolio remained robust in the fourth quarter, but it was specifically the demand at our urban hotels that surpassed our expectation in the fourth quarter as it has throughout 2022. Recall that at the end of the third quarter, we expected our RevPAR in our urban hotels to finish at 80% to 85% of 2019 levels. Short-term group and business transient demand, however, drove urban RevPAR to 97.5% of 2019, outperforming our forecast.

Short-term group and business transient continue to improve, and we still have significant room for further gains as the citywide calendar across our footprint is stronger in '23 and '24 than it was in '22. Resort performance remained strong with total RevPAR up nearly 29% over the same period in 2019, driven by a greater than 40% increase in room rates. It is important to note that Q4 occupancy was still 8 percentage points behind 2019, which means we have room to run in 2023 and '24 at our resorts. Our fourth quarter resort profit margins were 341 basis points above 2019. We are confident resorts will hold on to premium performance going forward because of the strong secular demand for experiential travel and high barriers to new competitive supply. So let's talk about the demand segments. Leisure revenues were great, up 26% in the quarter compared to 2019 on a 29% increase in average daily rates.

The resort markets had some variations. We expect healthy growth this season in markets like Vail and Huntington Beach. Additionally, group-oriented resorts, like our Fort Lauderdale Beach Resort can mix shift group up and lock in performance. Key West continues to show strong growth in peak demand weeks, but it's giving back a little occupancy relative to 2021 in the lower-demand shoulder periods. Nevertheless, Key West remains at dramatically higher performance levels than in 2019 with great flow-through and incredible profit margins. BT is probably the most interesting story. Business transient revenues were $47 million in the quarter. That's up 22% over the fourth quarter of '21, driven by a nearly 32% increase in average daily rate. Fourth quarter BT revenues were nearly 90% of the same period in 2019, but on a 21% higher room rates.

We believe BT will continue to be a significant source of growth for DiamondRock. BT was over 25% of rooms sold in Q4 '22 versus 34% of rom sold in Q4 '19. In full year 2021, BT revenues were roughly 50% of 2019 levels. And in 2022, BT revenues were 77% of 2019. So no matter how you look at the data, there is significant room for continued growth from the burgeoning of return of corporate travel. Group demand was strong in the quarter. Fourth quarter group revenues were nearly 103% of the same period in 2019, an acceleration from 91% of 2019 for full year 2022. The group room rate was up nearly 13% in the quarter, an improvement from 10% growth in full year 2022, banquet revenue is at nearly 99% of 2019 levels and the quality of our group is improving, and we expect total group spend to accelerate as we move through 2023 and '24. When groups come and they are coming, they are spending significantly outside the room.

We have a terrific setup for 2023 and beyond. Citywide calendars in our core markets are already in line or ahead of total room production in 2022, pointing to a stronger base of business in the market. Boston, Phoenix, Washington, D.C., Chicago and San Diego are all well positioned. Specific to our hotels, there are over 450,000 group room nights on the books at the start of this year with an expected total production of nearly 740,000 room nights budgeted for 2023. This compares to approximately 540,000 room nights on the books at the start of 2019 and final total production of 782,000 room nights in 2019. Given the increased availability in our calendar and a strong citywide calendar, we expect to see outsized growth in short term in the year for the year group sales just as we saw throughout 2022. Switching gears, we continue to be excited by the growth of our ROI projects.

We upbranded 4 hotels in the past 2 years, including the Hysan Vail, the Logan Sonoma, Margaritaville in Key West, Maceo and Cherry Creek. Collectively, these 4 hotels are producing $15.5 million more profit than they did in 2019. This is a 56% increase in hotel adjusted EBITDA and 50% ahead of initial underwriting. This year, we will convert the Hilton Burlington to the lifestyle Curio collection. This will involve completely reimagining the arrival and lobby experiences as well as adding a new restaurant overseen by a local James Beer award-winning Chef. In Boston, a major repositioning of the Hilton is underway. And later this year, we will unveil what will be the most exciting lifestyle hotel in downtown serving both Fanalhaul leisure and financial district business travelers. There is more to come down the road, franchise agreements at our Courtyard, Denver, Downtown and Westin Boston Seaport expire in the next few years and will present value creation opportunities.

An exciting transformation involves the opportunity to reinvent the Orchards Inn and Sedona. Last year, the Orchards ran at a $700 night discount to our adjacent obesidona resort. And the Orchards has unparalleled panoramic views of Sedona's Red Rock formations. So our plan is to reposition that hope to capture much of that rate differential. We will have more to share as our master plan develops. We have been active acquirers in the past 18 months and performance of our new hotels have been strong. Our 2 resorts in Destin collectively generated NOI of over $10 million in full year 2022, exceeding initial underwriting by 15%. In Marathon, EBITDA at the Tranquility Bay Resort was ahead of initial underwriting by 51% or $2.7 million. In fact, Tranquility yielded 12.5% on its purchase price in its first year. The Bourbon in New Orleans is right in line with pro forma expectations. And just like the short break in Fort Lauderdale, we are executing on our 3-year business plan to enhance positioning to achieve new levels of profitability.

Lake Austin, which Mark spoke about, was acquired in late November and still managed to surpass initial underwriting in the final weeks of 2022. Switching briefly to ESG matters. We are proud to be named the hotel sector leader in the Americas by GRESB for the third consecutive year. We introduced new environmental and social targets for 2030 as well as our goal to become a net zero company by 2050. This and much more can be found in our 2022 corporate responsibility report we published to our website in December. As Mark mentioned earlier, we recast and expanded our credit facility in 2022, we have nearly $600 million of total liquidity between our cash on hand and our undrawn revolver, which is fully available to us. During the quarter, we placed $150 million -- I'd say, during the first quarter, we placed $150 million of incremental interest rate swaps. As of this moment, 68% of our total debt and preferred capital is either fixed or swapped.

The most effective way to manage interest rate exposure is, of course, to maintain low leverage from the start. And on this point, we concluded 2022 with net debt-to-EBITDA of 4x and a weighted average debt maturity of 3.7 years. We have no material near-term debt maturities and 31 of our 35 assets are unencumbered by debt. Moreover, we have no significant deferred maintenance, which can be a hidden pressure on the true investment capacity and leverage of the company. These qualities put DiamondRock in a unique position, particularly for a company our size, to be opportunistic on capital allocation, whether that is taking advantage of pricing dislocation of our common or preferred securities, pursuing value-added ROI projects are capitalizing upon opportunities in real estate markets. We continue to review accretive recycling opportunities within our portfolio, but we are being prudent to maximize shareholder value. On that note, I will turn the floor back to Mark.

Thanks Jeff. Our outlook remains constructive. Importantly, we are starting from a position of strength. Our portfolio recovered quickly as our portfolio's favorable composition led to all-time record performance. We also ended 2022 with great profit margins, 184 basis points above prior peak. For 2023, the significant variability of the overall U.S. economy, in our view, makes providing guidance of little value at this time. Like the rest of the industry, we do expect some challenges this year to profit growth margins from rising property taxes and insurance costs as well as from increases in hotel staffing and wages that occurred progressively throughout 2022. By the end of 2023, we expect expense comparisons to normalize. Also for this year, we are projecting corporate G&A to be approximately $32.5 million and interest expense to be roughly $61 million. However, despite these headwinds, travel demand continues to be very strong, and our operator prepare budgets show growth in every segment of the business in 2023.

We will strive to set new records for comparable total revenues and hotel adjusted EBITDA again this year. As we look out even further, we remain optimistic on travel generally, and we expect the industry decline to new heights this cycle. We remain bullish on the future of leisure travel in particular. Experiences are one of the most highly valued and sought-after assets in the world and travel is unique for its ability to satisfy that consumer need. Leisure was on a long-term outperformance trend line well before the onset of the pandemic. And we believe that this positive trend will only continue in the years to come. This gives us high conviction that our resort properties will maintain a significant premium to 2019 performance and build upon that base going forward. Our urban hotels, which still constitute the majority of our portfolio, have an attractive footprint that will drive a second tailwind for DiamondRock.

That, combined with the already achieved success at our resorts has the power to take us to new highs in revenues and profits. The group funnel for future business at our urban hotels looks great as the need to get teams together is more necessary now than ever. As for business transient, there is still room for improvement and uncertainty on where demand will ultimately settle out, but there's clearly positive momentum. To wrap up, 2022 was a record year for DiamondRock, and we believe that we are well positioned for this cycle with a model portfolio, a focused strategy and ample liquidity to move quickly. It remains a great time to be in the travel industry. Now we would like to open it up for your questions.

Thank you.

(Operator's Instructions)

Our first question will come from Smedes Rose of Citi.

I wanted to ask you, Mark, and Jeff, you talked a little bit about the GAAP to occupancies in 2019, and it sounds like you believe that, that gap can continue to close in '23. And I'm just wondering kind of what gives you confidence there? Do you feel like it's more on the business side or just more on the leisure side? And I guess if you could maybe just couple that with your remarks around margin pressures in '23, and I kind of lost you right there at the end. I mean, are you expecting margins to be flat or kind of decline in '23 versus '22? If you could just speak to that a little bit.

So to take the first question on occupancy, yes, we expect the majority of the gain this year to be in occupancy, particularly the urban hotels. If you look at just January is a harbinger, occupancy was up versus last year at 15.8%. And we're seeing almost all of that come through the urban properties. So there's room to run there. group's going to be a big part of that component. And we sell the momentum building as Jeff talked about in the prepared remarks, as we move through 2022, concluding the fourth quarter at almost parity to where we were in 2019. So I think the data and the momentum and the trend line are pretty clear that occupancy gains are going to be significant as we move into 2023.

On margins, there are pressures, I mentioned in my concluding remarks, that we are seeing, like the rest of the industry, wage, pressures, property insurance, taxes, the kind of normal country of things that are going to be affected by inflation. We are offsetting those by productivity gains. We do have less managers of the properties. We are doing things differently. We have a number of energy initiatives. We have tight cost controls on food. We've changed menus to eliminate the more expensive food items and replace us with things that haven't had the kind of inflationary pressures. So we're doing a number of things to try to mitigate the inflation pressure on expenses. I think on total, if we looked at 2023, if we could hold GOP margins flat, we would consider that a success.

So can you just say -- just to follow up, what sort of percent increases are you expecting, I guess, in wages and benefits kind of at the property level for '23?

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

Our next question comes from Dany Asad of Bank of America.

Mark, just clarifying, I think in your prepared remarks, you were talking about operator prepared budgets are showing growth in every segment for 2023. Does this hold true for all 4 quarters of the year? Or is this 1Q kind of driving a lot of that?

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

And then my other question for you is how are you underwriting leisure rates for this year as kind of in your budgets kind of as we look at the -- for all of '23?

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

And our next question will come from Michael Bellisario of Baird.

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

Sure. I mean we continue to see growth in group demand throughout the portfolio. And I think as Mark mentioned on the resort side, maybe first, part of our success going forward is as we've seen a little bit of falloff in leisure transient some of our ability to grow profit. So the group growth there is actually going to be just as significant as you see on the urban side, if you really replace the leisure traveler and the post groups, I mean, we're filling incremental demand. But we did about 7% incremental group bookings in the fourth quarter versus the same quarter in 2019 at rates that are over 10% higher. So we continue to see the group booking trends accelerate throughout the portfolio. And just given that shorter booking window and given our larger space availability throughout the portfolio, we're pretty excited about group opportunity as the year progresses.

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

We've disclosed on the asset in November, but we've been working with the land use attorneys and others in evaluating the rights that we have with the property. So we think we have significant -- we've confirmed with the lands that we have significant expansion opportunities. It will probably take a couple of years to actually get through that. There's an extension of the sewer lines, some of the things that would need to get done. But we feel fairly confident that we have the ability to do it, and we are going to evaluate this year the kind of the master plan and get it locked in and then be able to execute on it.

Our next question will come from Anthony Powell of Barclays.

I guess a question on revenues and margins. If you could maybe get into what you think need RevPAR growth to be this year for your portfolio to get to those flat GOP margins. And maybe talk about that more on an ongoing basis given wage pressures, insurance costs and whatnot on an ongoing basis?

Sure. It's haven't we're not giving specific guidance. But the industry, if you look at STR, they're saying the industry is up about 3.7%. -- upper upscale, up about -- a little over 8%. We think those that kind of environment generally for upper upscale, we'd be able to hold margins for the industry kind of GOP flat. So that's the environment. It will depend how the economic outlook plays out. But right now, I think that's kind of a fair assessment on margins. Jeff, do you have anything else to add on that?

No, that's the comment I was going to make as well just because earlier, you mentioned that we should be expecting sort of high single-digit expense increases. So same -- to get high single digit -- to get flat margins, GOP margins you would need actively high single-digit revenue growth.

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

Yes. So I would say a couple of comments on the group piece. So we saw in the fourth quarter, as Justin mentioned, the acceleration of bookings in the quarter, fourth quarter and in the quarter for 2023. So we crossed over the end of the year with good momentum. The window for booking group remains shorter than prepandemic. So if people are booking even large groups on relatively short time lines, that seems to be the world order that we're in this year. I think we're really encouraged on not only the momentum that we experienced in the fourth quarter, but the fact that the availability that remains in 2023 is still on some very attractive dates, sometimes when we have -- we cross over, we have sold the best date -- all the best states, if you will. But we still have very attractive dates like summertime in Boston, summertime in Chicago that are still available, and that gives us more confidence in the ability to close the group booking gap and the fact that we're going to be able to put high-quality groups into those open periods.

Our next question will come from Duane Pfennigwerth ,Evercore ISI.

Just with respect to the -- I think you put out a January up 10.5% relative to 2019 in your investor deck. Sorry for the short-term question, but could you put sort of January in context from a comps perspective relative to February and March, the balance of the March quarter?

Yes, this is Mark. I'll make a couple of comments on Q1. So we did preannounce January. So the results, as you mentioned, were up 10.5% over '19, up 39.6% over '22. We do anticipate that Q1 will be the biggest year from the easy comp to Q1 of '22 with the overcome impact -- but we're expecting the entire quarter to be fairly robust. And all the urban markets, in fact, we expect total RevPAR to exceed 2019 levels at our hotels in markets like Salt Lake City, Dallas, Fort Worth, New York and Phoenix. So that's going to help power our Q1 overall. And even the resorts, as I mentioned, while Florida Keys may be moderating from being up over 50% from 2019, we still expect robust growth in Q1 from resorts in Vail, Huntington Beach and Sonoma, among others. So we expect to finish, I think, in total Q1 with total RevPAR that is up double digits, low double digits in 2019. So I would say January is not out of line with what we expect for the quarter. We expect those overall results for the quarter versus 2019 will probably put us at the front of the pack among the peer set.

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

On the Florida Keys, let's say, we can't own enough Florida Keys in some ways. So we're talking about rates that are 50% higher than they were in 2019 with incredible ability to flow that higher rate to the bottom line. So it's an incredibly profitable place to be. What we're seeing is I think the impact last year of Omocron where people could -- all of a sudden, they got their another 60 days of work from home that they didn't anticipate, and they were trying to figure somewhere where they could drive and take advantage of the last gas of work from home before they had to go back to the office a couple of days a week. And the floors where they really participated in that surge, if you will, from the last-minute pushback caused by the macro variant. So what we're seeing now is, yes, Christmas week, we can still push it. But that unusual surge that we saw is moderating a little bit. And when I mean moderating it, it's not like it's going back to anywhere close to 2019. We're talking small percentage declines. And our strategy is to maintain rate. We've retrained the traveler to pay rates that are 50, sometimes 100% higher than they were 4 years ago. And we're not going to get back $1 of that very easily. So that's our strategy.

Our next question will come from Patrick Scholes of Truist Securities.

Most of my questions have been answered. Just when we think about comparable margins versus 2019 and ability to have permanent margin increase. What are your latest thoughts on that? I know it may not be specifically you folks, but if we go back 6 months a year ago, sort of the industry was thinking plus 100, maybe 200 basis points. Is that -- would that something like that still be on the table?

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

Yes. I was also going to just chime in on that, Patrick, that I think on the resort side of the portfolio, as Mark mentioned earlier, that's where our rate growth has been highest and our flows have been strongest. And I think that's going to be the area to where you continue to see our premium performance on margins holding out better. There's a lot of structural reasons for that as it relates to -- for everything from taxes and insurance to labor costs in those markets that drive that. But I think that's probably where you'll see those premium margins more apt to be held in relative to '19.

Thank you. Our next question will come from Chris Woronka of Deutsche Bank.

Mark, I think you mentioned in the prepared comments, you still have a lot of room to go even at the resorts on occupancy. And the question would be, do you think -- can you get that at the rates that you want to get? Or is it -- is there going to be a function of eventually rates come down, OpCos up, which obviously is a little tougher for margins. I mean how do you get that full occupancy back in the resorts?

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

And then I was hoping we could go back to the comment about group and still having some prime dates. I thought that's a little bit unusual, maybe different than what we've heard from others. I mean, are those -- again, are those open because the rates are at a level where there's more selective demand. And I mean do you worry at all that you're going to miss it, but something changes in the macro, and it's too late to even get close in.

That's a good question. I think it's more of the fact that our portfolio -- a lot of the prime data in markets like Chicago and Boston are still 6 months out 5, 6 months out. And the nature of group bookings stays a little shorter window. So I think it just happens to be the geography of our portfolio. We're actually super super happy with the way it's laying out on a calendar basis this year, but I'll let Justin add any details for other question.

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

Thank you. Our next question will come from Floris Gerbrand Van Dijkum of Compass Point LLC.

I know you're not providing guidance, but you're hoping to keep margins the same, and you're saying that some of your costs could go up, your operating costs could go up by 8%-ish or somewhere in that range, which would essentially mean that your EBITDA would have to go higher as well. I mean, put another way, is there -- under what scenario do you see EBITDA going down, barring a hard-landing recession, what scenario do you see DiamondRock posting negative EBITDA growth in '23? That's my first question.

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

I just I guess my second question is, I noticed you still had last year, 2 hotels that actually posted negative EBITDA. Your Embassy Suites in Bethesda and your Kimpton and Fort Lauderdale. Maybe talk a little bit about that and maybe also touch upon actually your highest EBITDA producer, which doesn't really fit into, I think, where you want to take the company, which is your Chicago Marriott, which represents over 10% of your EBITDA. How should we think about that hotel going forward? And how would you replace the lost income, if you were to trade out of that asset?

Okay. So on the 2 that you mentioned, Bethesda Suites had a brand transition, which was disruptive. So that's the reason how EBITDA and it's ramping back up this year. The Shorebreak in Fort Lauderdale, we acquired, we're repositioning that asset. So as anticipated, where we're doing the roof and that repositioning won't be done until probably ended the second quarter of this year. And it's all -- both of these are tiny assets for the overall portfolio. But both were in transition. That's the reason. Famer, it had a great year. It exceeded our expectations. The market and the ability for us to bring leisure in over the summer and then the group rebound as the year went in Chicago were ahead of our expectations.

And so we're very pleased with the performance of that asset. As you mentioned Chicago, we do think about monetizing some of our Chicago assets as we move forward, thinking about portfolio composition and clearly having the better results puts us in a better position to do that. Right now, the market is not very accommodating for large asset sales given the inability to secure large loans. But that will probably change as the year progresses on. So we'll continue to monitor the debt markets and think about those things in capital recycling. And if we did monetize a branded hard branded asset, it's going to be continuing putting that dollars back into the areas where we think there's going to be outsized growth over the next decade.

And that's in lifestyle experiential assets in very high barrier to entry markets. So it's going to be more of what we've been buying. It's going to be more from Lake Austin. It's going to be more Henderson beaches. It's going to be unique assets like the Bourbon Orleans in the French quarter. We continue to move the company in that direction, and you're seeing it. Our results were tremendous in 2022, in large part because we've been in positioning the portfolio for those demand trends that have been really compelling over the last couple of years.

Thank you. Next question will come from Chris Darling of Green Street.

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

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

And then shifting gears, Mark, you mentioned there's not too much available in the transaction market today, but curious if you've considered putting capital to work, maybe in the form of mezz debt, preferred equity, just thinking about other ways to maybe get a foot in the door of assets you might like to own over the longer term?

We do have kind of strategic conversations all the time about capital deployment. But we love our balance sheet. We love the clean story that DiamondRock is today. And frankly, there's a lot of competition from private equity in doing mezz debt and tranches of buying tranches of debt in other places. And actually, the competition there is fairly intense. So we're most likely to keep it relatively simple, not that we wouldn't do something creative on that front, but I think that it has to be a very high bar to overcome for us to move down that. And frankly, we find opportunities that we found that 6 opportunities of great acquisitions in the last 24 months. And while the volume is low on the market, we're having active conversations about deals, primarily off-market deals right now. So it's not like it's zero -- and one of the advantages of having only 35 assets to be in our size, if we could do a few deals this year, it can really move the needle for us. We don't need to do $1 billion of acquisitions to be the top-performing REIT in 2023. So I think we'll continue to find smart deals. One of the things we've been able to do is find off-market deals. And looking at our pipeline, we have a number of those that we're in active dialogue on today.

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

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

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

Yes. Mark, we did have like, I think, most of our competitors more cancellation versus '19, but it was a little over $2 billion more than we had in '19. So it's not that material to over $1 billion in revenue. I think it's less material to us, but it has probably some of our others with the larger group component.

And one moment, please for our next question. Our next question will come from Bill Crow of Raymond James.

And Jeff, one for you. If we just think about revenues up in the mid- to high single-digit range, which I think you've established and -- or the industry and then we think about expenses up in a similar amount, we kind of get to a flattish EBITDA number, maybe a slight positive bias. But you did -- you have made transactions over the course of the year. I'm just thinking about how the portfolio changes would then be additive to kind of the baseline number?

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

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

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

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

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

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