Diamondrock Hospitality Co (DRH) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to DiamondRock Hospitality's Fourth Quarter Earnings Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions) I would now like to hand the conference over to your host, Senior Vice President and Treasurer, Briony Quinn. Madam, you may begin.

Thank you, Latif. Good morning, everyone. Before we begin, please note that many of the comments made on today's call 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 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.

Thank you, Briony. Good morning, everyone. Before we begin, on behalf of DiamondRock, I want to take a moment and extend our condolences to the Sorenson family following the unexpected and heartbreaking news of Arne's passing. Over 2 decades ago, I began my career in lodging by working under Arne when he was a relatively new CFO at Marriott. I will dearly miss his friendship, but I take comfort knowing that the light he brought to his family, his friends and the industry will continue to shine well into the future.

As we look towards that future, we are more optimistic today about the coming and likely robust recovery of the hotel industry. We are certainly more optimistic than at any point over the past year. In the short time since our last earnings call, multiple COVID-19 vaccines have been approved and over 65 million doses have been administered in the U.S. since distribution began in mid-December. Daily vaccinations have doubled in the last month and they are projected to exceed 2 million shots per day in coming weeks. Encouragingly, the Johnson & Johnson vaccine is set to receive approval next week and President Biden has publicly said that the U.S. should have enough vaccines for everyone by early summer. We are optimistic that the combination of the rapid declining cases over the last 6 weeks and the increasing pace of vaccinations will lead to an easing of governmental restrictions and the untethering of pent-up travel demand.

The current data points to continued strength in leisure demand and an emerging modest trend of coming improvement in the group and business transient segments. DiamondRock's unique focus on drive-to resorts has been a source of strength for our company throughout the pandemic. Almost half of our hotels, 14 of 31, are leisure oriented. Getting that favorable weighting was a result of a multiyear strategic initiative, as demonstrated by the fact that 7 of our last 8 hotel acquisitions squarely fit into this category.

I'm proud that our team was early to recognize the trend here and we remain committed believers. We are certainly glad to have a head start on competitors that are now jumping on the bandwagon.

Leisure revenue in our portfolio increased 17% sequentially in the fourth quarter, building on a positive trend. In the third quarter, our resort portfolio generated $4.6 million of positive hotel adjusted EBITDA. In the fourth quarter, we saw this earnings production increase nearly 50% to $6.8 million at a 30% GOP margin. In January alone, hotel adjusted EBITDA at our resorts was $2.5 million. To put this in context, our resorts are on pace to generate nearly as much EBITDA in the first quarter of 2021 as they did in the entire second half of 2020.

Encouragingly, over Presidents' Day weekend, 10 of our hotels saw daily occupancy surpass 75%. We are optimistic that summer 2021 is well positioned to outperform summer 2020 due to the easy comparisons, vaccination progress and pent-up consumer demand. Let me point out that consumers are sitting on plenty of money to scratch their travel itch. Aggregate personal savings in the U.S. have increased 100% in 2020 to $2.4 trillion.

Turning to the group segment. The data suggests we are seeing early signs of improvement. Many of our hotels are now seeing activity levels that they haven't seen in months. For example, future bookings for larger groups, those needing more than 100 room nights, are making up a larger and larger share of the group pipeline. We're also seeing a return of incentive activity from corporate accounts looking into the back half of the year.

In the fourth quarter, we received 700,000 room nights of leads across the portfolio, a 7% increase over the third quarter. In just the past 4 weeks, we have received over 400,000 room nights of leads for future quarters. This is a 72% increase from the average 4-week pace in the fourth quarter and the highest pace that we've seen since last March. Moreover, these leads today are predominantly new business, whereas back in Q2 2020, activity was largely rebookings.

Top producing hotels were the Westin Boston, Chicago Marriott, Westin Fort Lauderdale and the Renaissance Worthington. Ultimately, our success in booking group will depend largely upon the vaccination time line. We expect that cancellations will continue for events scheduled for the first half of 2021, but we are cautiously optimistic that we are trending towards fewer cancellations for the second half of 2021 because meeting planners are showing growing confidence to book into late 2021 and even more so for 2022.

As for business transient, the booking window remains extremely short. However, most of our top accounts are telling us that they expect their business transient activity to start picking up late in the second quarter, but really gaining momentum as we move into the fourth quarter of 2021. Looking back at the fourth quarter of 2020, business transient rooms and revenue saw a modest 5% to 6% growth over the third quarter. This may not seem material, but compared to Q3, Q4 did sequentially better despite a number of headwinds, which include the increased holidays and bad weather as well as diminished demand from the presidential election headlines, a reduction in social activity as consumers bubbled up before returning home for the holidays and a big resurgence in COVID-19 cases at the end of the year.

In short, the fourth quarter overcame a lot and was better than we originally projected. As we look forward to 2021, the outlook is highly dependent upon the vaccine's rollout and other external factors beyond our control. While we do not expect to be profitable in the first half of the year, sequential improvement in quarterly earnings over the course of 2021 has the potential to turn the portfolio profitable as early as the third quarter.

Looking back, DiamondRock made outstanding progress in the fourth quarter of 2020 on multiple fronts. Let me highlight a few achievements: one, we reduced our monthly burn rate, significantly beating our third quarter pace as well as our own expectations for the fourth quarter; two, we increased our total liquidity. We actually ended 2020 with less total debt than we had at year-end 2019. Three, we've raised $87 million through use of our ATM program to fund attractive ROI projects and pursue our pipeline of acquisitions; four, the major Marriott multi-property deal done at the depth of the crisis is already delivering tangible benefits from converting Marriott management to Marriott franchise. In total, we converted 6 hotels during 2020.

And the last highlight I'll mention is that subsequent to quarter end, we completed a favorable amendment to all of our $800 million in bank debt that waives all financial covenants through full year 2021 and relaxes covenant test into early 2023.

Let's turn specifically to DiamondRock's fourth quarter financial results. Hotel adjusted EBITDA in the quarter contracted $7.6 million, which was a marked improvement from the $17.4 million loss in the third quarter. Corporate adjusted EBITDA was a $14.9 million loss, dramatically better than the $24.4 million loss in the third quarter. Fourth quarter adjusted FFO per share was a loss of $0.04, improving from the loss of $0.22 in the third quarter. Even adjusting for the $2 million in pandemic insurance proceeds we successfully negotiated in the quarter, the fourth quarter results were still well ahead of the third quarter and our internal expectations.

During the fourth quarter, we had 27 hotels open throughout the quarter, comprising nearly 90% of our total rooms. Including the 3 closed hotels in New York, occupancy for the portfolio was 21.8% or about 56 points below the prior year. However, it is important to recognize that this was a real improvement compared to the 18.6% occupancy level in the third quarter, which was 64 points below the prior year.

Subsequent to quarter end, we closed 1 additional hotel for the slow winter season, the Chicago Marriott on Magnificent Mile. As we have said in the past, it is our duty to reopen or reclose hotels if we can lose less money doing so. Total revenue for the portfolio decreased by 75% in the fourth quarter. However, we are encouraged by the steady progress we've seen as measured by the year-over-year improving declines in revenue.

In April, the first full month we felt the pandemic's impact, year-over-year revenue declined 96% as compared to 2019. By June, we were a little better at down 87%. September improved modestly to down 77% and December was even a little better at down 72%. And we expect that January 2021 will show continued improvement.

Let's talk about profitability. Our asset managers always oversee operations with the goal of maximizing absolute profit through a combination of strict expense control and aggressive sales strategies. The fourth quarter was no exception. Total revenues were $59 million or $9 million ahead of the third quarter, with 60% of this growth coming from rooms revenue. This translated into $6.6 million of gross operating profit for the portfolio, double the $3.4 million earned in the third quarter.

GOP margin was 11%, up from just under 7% in the third quarter. These trends are encouraging. The number of hotels generating positive GOP in the fourth quarter increased to 16, up from 14 hotels in the third quarter. On an adjusted hotel EBITDA basis, 10 hotels were profitable in the fourth quarter as compared to 7 hotels in the third quarter.

Let me share with you some positives from the portfolio in the fourth quarter. L'Auberge in Sedona saw a 25% increase in RevPAR over Q4 '19, with total RevPAR surpassing $975 per night and EBITDA margins up over 1,100 basis points. The resort hit a new record for average room rates in the fourth quarter.

The adjacent property, the Orchards, saw a 4% increase in RevPAR over Q4 '19, with EBITDA margins up nearly 1,300 basis points. The Landing at Lake Tahoe saw a 6% increase in RevPAR, with ADR of nearly $330 per night and EBITDA margins increasing over 700 basis points as compared to Q4 '19. The resort also hit a new record for average room rates in the fourth quarter.

We also saved $1 million in disruption during the fourth quarter by accelerating the final phase of the repositioning of the Barbary Beach House in Key West into Q4. This had the added benefit of making more high-rated rooms available for the peak season. In the quarter, CapEx spending for the portfolio was $9.8 million. Outside of ordinary maintenance, our primary CapEx focus remains on prioritizing projects that can produce high returns. These projects have recently included the ROI initiatives at our hotels in Sonoma and Charleston as well as completing the conversion at the Barbary Beach. We expect these ROI investments to be measurable earnings contributors in 2021, with average IRRs exceeding 30%.

Before handing the call off to Jeff, I want to touch on our environmental, social and governance, or ESG, achievements in 2020. DiamondRock was recognized by the Global Real Estate Sustainability Benchmark survey, or GRESB, as Global Listed Sector Leader among all public lodging REITS and received 5 Green Stars. Additionally, DiamondRock achieved ISS' ESG Corporate Rating of Prime in early 2020, a performance-based rating reserved for the highest-performing real estate companies worldwide.

Finally, DiamondRock continued its leadership position for high-quality ESG disclosures, receiving ISS' QualityScore ratings for Environmental, Social and Governance, all within the top 1/3 of the real estate sector. We are deeply committed to being good corporate citizens and we expect to have more good news to share in 2021.

Now let me turn the call over to Jeff Donnelly to discuss our balance sheet.

Thanks, Mark. To start off, we successfully amended all of our bank debt subsequent to quarter end. There are several notable features in our amendments that benefit the company. First, we extended our financial covenant waivers for the entire year. Our next scheduled covenant test will not be conducted until second quarter 2022 using results from first quarter of 2022.

Second, we extended our relaxed covenant period thereafter to early 2023. This is 5 quarters beyond the waiver period and 2 quarters longer than we had in our earlier amendment.

Third, we secured the ability to sell certain hotels and recycle those proceeds into new acquisitions. Fourth, we have the ability to use all the cash raised from the $115 million preferred and $87 million of common equity on our ATM for new acquisitions.

And fifth, we were pleased that the interest rate on our term loans only increased 5 basis points. I believe this may be the lowest increase of any non-investment-grade hotel REIT.

These company favorable terms speak to the excellent and long-standing relationships that DiamondRock has with its lenders. We appreciate their continued support and believe that the amendment gives the company the ability to operate our business and focus on creating value for our shareholders, both through internal investments and new acquisitions.

The balance sheet is in great shape. We ended the third quarter with $112 million of cash and $345 million of undrawn capacity on our revolver. At the end of the quarter, we had $598 million of nonrecourse mortgage debt at a weighted average interest rate of 4.2% and $455 million of bank debt comprised of $400 million in unsecured term loans and $55 million drawn on our unsecured revolving credit facility.

Our maturity schedule is also in great shape. We have just one small mortgage maturity in early 2022, which has an extension option. More significantly, our revolver matures in 2023 and that, too, has a 1-year extension option. Our $350 million of term loans mature in 2024 and a $50 million term loan matures in late 2023. Our extended maturity schedule means that we are not under pressure today to address debt maturities. Nevertheless, we will continue to be opportunistic in reviewing debt capital opportunities to reduce our borrowing costs, raise liquidity and extend our weighted average maturity.

Moving on to liquidity. We concluded the quarter with $482 million of total liquidity, including corporate-level cash, hotel-level cash and undrawn revolver capacity. Our liquidity was bolstered by the issuance of 10.7 million shares of common stock under our ATM program at an average price of $8.23 per share for net proceeds of $86.8 million. We raised our goal amount and no shares have been issued after quarter end.

We also preserved liquidity by pausing the reconstruction of Frenchman's Reef early last year. To further derisk our exposure and create shareholder value, in late 2020, we engaged a consultant to identify a capital partner to help fund the completion of the rebuild. We expect to complete that process later in 2021. In the fourth quarter, we recognized a GAAP impairment loss of $174.1 million related to Frenchman's Reef. Under U.S. GAAP rules, we are required to recognize the impairment loss as a result of a determination that it was more likely than not we would not hold the property for its remaining useful life.

Turning to our burn rate, I'm extremely pleased to report that we are beating our original monthly cash burn estimate. Before capital expenditures, our burn rate in the fourth quarter averaged $10 million per month. This is 27% better than the midpoint of the $13.5 million to $14 million monthly range we provided at NAREIT and 32% better than our third quarter pace.

Let me explain why we were roughly $4 million a month or nearly $12 million for the quarter, ahead of our expectation. First, hotel net operating income in the quarter was over $6 million better than we had projected, representing half of the beat. Second, we received a onetime business interruption payment of $2.2 million related to a pandemic insurance claim. Third, we received reductions in 2020 property tax assessments for our Chicago hotels that reduced our accruals by $3.4 million in the quarter.

Unlike the onetime insurance payment, we should continue to benefit from the lower tax assessments in 2021. These 3 items collectively explain the $12 million beat in our Q4 burn rate. If I adjust for the onetime insurance payment, our average monthly burn rate still represented a 22% improvement over our expectations and a 27% improvement over our Q3 pace. Including capital expenditures, but again, excluding the onetime insurance payment benefit, our total company burn rate was $13.7 million per month during the quarter and implies a runway that extends to nearly 2024.

For the obvious reasons associated with the uncertain trajectory of the recovery, we are not providing earnings guidance for full year 2021. However, we do expect our monthly cash burn rate for hotel NOI and corporate G&A combined to be around $8 million to $8.5 million in the first quarter, which is flat with our prior estimate for the fourth quarter. Now this cash burn estimate for Q1 is a little higher than what we realized in the fourth quarter, but recall that the fourth quarter benefited from the onetime insurance payment and the favorable change in tax accrual. Moreover, first quarter 2021 began with the travel restrictions that were put in place only towards the very end of the fourth quarter.

Adding $5.5 million for debt service and preferred dividends and roughly $4 million for average monthly CapEx, we expect the total company burn rate will be $17.5 million to $18 million in the first quarter of 2021.

With that, I will turn the call back over to Mark.

Thanks, Jeff. Before we take your questions, I want to cover 3 additional points. First, as Jeff mentioned, we opportunistically raised $87 million through our ATM program in late December. We accessed these funds to fund our pipeline of high ROI capital projects and position ourselves for external growth.

Together with our previous preferred offering, today, we have $200 million of capital available for acquisitions. We are currently actively underwriting a number of resort properties, mostly in our existing markets, that have the potential to generate returns that exceed our cost of capital. We will update you when we have more details to share.

The second point that we wanted to cover was that in August 2020, we struck a sweeping transaction with Marriott that we estimate created more than $50 million of NAV in our portfolio. The deal, among other factors, led to the conversion of 5 brand-managed hotels to franchise agreements. This deal came on the heels of another deal we struck with Marriott earlier in 2020 to convert the 793-room Boston Westin from brand management to a franchise as well. These changes were, in many ways, transformative for DiamondRock as we now have the least management-encumbered portfolio among all full-service lodging REITS. And we are already experiencing revenue and cost reduction benefits from these changes.

In total, all these managed to franchise conversions are going to give DiamondRock a significant and unique tailwind coming out of the pandemic. In fact, they are projected to add an incremental 50 basis points to the entire portfolio's full year profit margins upon stabilization.

The final highlight I'll cover is that we are not standing still in rebranding opportunities within the portfolio. In fact, we are exploring the potential up-branding of 6 of our hotels over the next year. Let me point out a few of those for you. The Lodge at Sonoma will convert to an Autograph brand after it completes its $15 million renovation this summer. Our Vail resort will convert from a standard Marriott to a Luxury Collection brand this fall as it completes its $42 million multiyear renovation.

Additionally, today, we were excited to announce that we are proceeding with the conversion and up-branding of the JW Marriott Denver to a Luxury Collection brand. Now while we cannot provide additional details at this time on other opportunities, we expect to have many more exciting details for you and announcements later this year. Finding value creation opportunities at our owned hotels is an obsession of ours.

That concludes our prepared remarks. We are happy to close the door on 2020 and we are encouraged by the trends we are seeing of an emerging recovery in 2021. We have great assets, a solid balance sheet, strong industry relationships and an experienced management team that has weathered numerous prior downturns over the last 30 years.

DiamondRock is in good shape to outperform going forward. On that note, we'll now open up the call and are happy to take your questions.

(Operator Instructions) Our first question comes from the line of Austin Wurschmidt of KeyBanc.

I wanted to start out on the group side and I'm really most interested in activity at the Boston Westin and Chicago Marriott. And I was hoping you could provide some additional detail and comparisons on how group room nights in the back half of this year or even 2022 are stacking up versus 2018 or 2019. And then any rate comparisons that you can provide as well would be helpful.

Austin, this is Mark. I'll start off and then kick it over to Tom for some comments. But if you look at the convention calendars for both Boston and Chicago for 2022, they're both very encouraging. In fact, room nights from conventions citywide are actually over 2019 levels as we move into 2022. So that feels very good. We are still experiencing short-term cancellations as people get in their cancellation window in Q1 and Q2. And we expect to see momentum build in the back half of the year.

As I mentioned in the prepared remarks, momentum has really picked up in the last 4 weeks. So we are seeing increased activity, increased lead volume and we'll still have to close a lot of that business. So that trend has really been a fairly recent phenomenon as people, I think, have more confidence with the vaccine rollout and I think more confidence in when the full vaccination of the U.S. will occur in early summer, so they're feeling more and more confident booking really mid-summer, really September on. And certainly, the greater strength is in 2022. So Tom, do you want to make some comments on what you're seeing at the individual hotels?

Sure, sure. Just at a high level, we -- when we look at the pace we have been comparing, I think the first half of 2021 is going to behave like the second half of 2020. So we're heavily focused on Q3 and Q4 and what we can salvage and what we can shift into those months. On a positive note, we have about 78,000 room nights on the books for Q4. And to compare that to '19, we had 79,000 group room nights on the books for '19. So that bodes well.

Now you've heard a lot of people talk about ghost cancels and groups waiting to get inside their contract terms and to use force majeure to get out of their contracts. We've had a lot of that in Q4. As Mark mentioned, we had some significant cancels in Q4 for Q4 and also for 2021. And much of the cancels that occurred in Q4 for 2021 were in the first half of the year. So once again, that goes back to the point we're focusing on Q3, Q4, which are holding up. And 2022 looks very positive right now. 2022, we have about 268,000 rooms on the books. That's up from 217,000 rooms when we spoke last quarter.

To give you an idea, we actually had -- in the quarter, we had about 700,000 room nights prospects come up for future months. So that's extremely positive. Some Cvent trends that we've been monitoring is January momentum kept up through the month. The last 3 weeks were the highest in the U.S. since March. Awarded RFPs were up week over week each week in January and into February. So momentum looks strong there.

The last 2 weeks of January, the average booking window improved almost back to pre-COVID booking window levels. Larger meetings of 100 rooms or more are growing in share. We continue to shift towards second half of 2021 and '22 arrival dates, which looks very positive. We're seeing the bookings even through Cvent shift in the same way we're seeing at the property level. And generally, the booking window is back to normal. The largest markets, demand is still down, pace is about 44% for '21 and 58% for '22, and then re -- but positive year-over-year for 2022.

And social, leisure and education is still showing the most strength in the segmentation, based on what's coming. There really are no significant changes to -- with corporate pickup yet at this point, not that we can see, but we know that corporate is very short term and it will come. To give you an example, we had 525,000 rooms on the books in 2019 and then we finished the year at 777,000. So we picked up about 250,000 in the year for the year in 2019. That bodes well for us, the back half of this year and certainly as we move into 2022.

And then other notes on 2022 I think are important. When we look at the citywide pace, Boston has about 362,000 room nights on the books. That is up 42%. To give you a benchmark, 2019, at the same time, we had 349,000 room nights on the books. So Boston is actually ahead of '19's pace. Chicago has about 1.26 million rooms on the books. That's up 32% compared to '19, which is another important metric was 1.142 million. So Boston and Chicago's citywide pace are both up to '19. As compared to like San Francisco, which has about 648,000 on the books, now that shows that it's up significantly to prior year, but it's still down significantly to 2019, about 845,000. So D.C. is up 416,000 room nights on the books. That's up 48% compared to '19, which was at 387,000.

And then some other highlights, markets that were looking positive. San Diego's up about 739,000 rooms. That's up about 44% compared to '19 at 732,000. So it's a very positive -- 2022 is shaping up to be pretty positive and we're seeing good activity in our portfolio.

A lot of great detail in there. I wanted to transition to the acquisition pipeline and opportunities you have before you. And I guess, could you give us a sense of where you are in the process of, I guess, the comfort level of moving forward with transactions? How would you characterize competition and pricing for these types of assets, which have increased? Certainly, you were there early, but it feels like others are increasingly looking for these same types of deals. And then when you -- if you were to transact, can you give a sense of where that would get you towards your kind of targeted exposure that you've talked about to resorts?

Sure, Austin, this is Mark. So a lot of sub questions in there. So first on the comfort level. So we are comfortable shifting from defense to offense at this point. I think we feel comfortable that we can see the light at the end of the tunnel. We can underwrite the vaccine rollout. We're not going to get the exact trajectory right, but I think we have enough confidence that we kind of have a good feel for where it's going to go.

So also with comfort level, we're comfortable with the capital we have today to go out and deploy $200 million in acquisitions. We do have a pipeline. It is a competitive environment. As I mentioned in the prepared remarks, one of the things that we're doing there is to focus on a number of the existing markets that we're in, where it's both strategic and synergistic with assets we already own, so that we can underwrite those deals. And often, we have relationships within those markets of owners of other assets to try to encourage off-market transactions.

So we have a pipeline. It is competitive. We're hoping that our head start and kind of -- we've been working a number of these owners and off-market assets for years, frankly, and that we'll be able to pry some loose and create some deals in this environment.

And then just with respect to kind of where this would put you, I guess, with your targeted exposure?

Yes. So we're about 1/3 resort leisure. We'd like to get to 50%. So it's obviously all incremental. And at some point, we'll probably lighten up on some of our urban assets over the next couple of years as well to get to that shift as well.

Our next question comes from Smedes Rose of Citi.

I wanted to ask you just a little bit more about the potential to turn positive, I think you mentioned at the portfolio level in the third quarter. And I was just wondering, could you talk about what sort of occupancy levels do you think you need to achieve and rates in order to do that? And when you say portfolio, is that -- that's not at the corporate level? And maybe you could just talk about what you need to get to at the corporate level breakeven as well.

Jeff, do you want to take that?

Yes. Smedes, we had talked in the past that we gave some different thresholds on occupancy about where we would need that to be in order to break even, both at the hotel level and at the corporate level. I think the figures that we are looking at is on a GOP level, I think the occupancy was kind of in the low to mid -- or in the mid-20% occupancy level. I think at the corporate EBITDA level, I think the figures we are looking at is kind of around 40% to 45% occupancy. And that presumes that rates are down probably 15% to 20%.

Okay. So the -- I mean it seemed like the cost savings are better than what you were anticipating, certainly rounds up to our model, and you mentioned that the fourth quarter was better than your internal expectations. So -- but that doesn't change those forecasts in terms of getting to breakeven?

I'm sorry, you broke up a little bit on the last part of your question.

It seems like the fourth quarter expense savings was better than what you guys had expected. And I'm just wondering, is that just -- does that just give you more confidence in being able to get to breakeven at the levels you mentioned? Or do you think you could maybe -- it could maybe be at even lower levels, given a better rate of savings?

Yes. Thank you. Sorry. It's a good question. I would say compared to the start of the pandemic, we have seen our threshold for breakeven measured by occupancy trend lower over time. And I think some of that is, as you pointed out, that we've had more confidence and more success around the expense side. And I think that's a good way to explain it. I think as we roll forward, obviously, it's a function of the mix and where that occupancy materializes within our portfolio, because every hotel has sort of its own unique breakeven point. But we have been encouraged about our ability to control cost in this environment.

And then, Mark, could you just talk a little bit about given the heightened interest in leisure assets, does that extend to Frenchman's? And are you having a lot of, I guess, constructive conversations around bringing in a partner there? Or kind of what are -- what's the kind of feel at the [macro] market level?

Sure. I think the macro environment is people are hunting for deals, right? There's been a lot of capital raised and a lot of interest in particularly leisure-oriented assets. So we mentioned on the last call, we've engaged an investment adviser to go out and seek a capital partner that could fund the balance of the rebuild with us. That process has been -- I think the amount of interest exceeded our initial expectations. So that's positive. And I think for the reason that you cited, which is people recognize that leisure is going to be strong and more durable and probably more willing to stretch on those kind of assets.

And so yes, we have more interest than we originally expected. We're working that process now and we hope to get that resolved in the coming [months].

Our next question comes from Thomas Allen of Morgan Stanley.

So with your covenants, it allows you to sell assets and retain those proceeds to make acquisitions. How are you thinking about potential disposition?

Tom, this is Mark. So we like our balance sheet position, so we're not feeling compelled, but we are getting a lot of inbound inquiries on a number of assets. And so I guess every asset is technically for sale at the right price. So we'll continue to evaluate it. Having the flexibility to sell particularly urban assets and redeploy those into more leisure-oriented assets is certainly consistent with our strategic goals. So we'll evaluate those and kind of work individual, mostly inbound inquiries, over the balance of 2021 to see if we can find the arbitrage and kind of keep at our strategic transformation.

Helpful. And then just on the business interruption insurance, I think it's been pretty uniform that companies haven't been able to get business interruption insurance because of COVID. How were you able to get it?

Well, everyone's got a -- yes, Jeff, I can jump in here. I mean everyone's got a different insurance policy. We negotiated for a pandemic insurance with a -- deployed some specific sublimit. So -- and yes, we were able to track the cancellations of bookings to kind of work into that claim. So we were entitled to it. We negotiated for it when we get our policy, which was pre pandemic. And we're happy that the insurers agreed with our claim.

Do you think you'll be able to continue using it? Or is this kind of it?

There's a sublimit per property. So we've hit that sublimit for the Boston Westin, which is where the claim was related.

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

A lot of the ADR growth at some of the resorts has been pretty impressive. Do you think we'll be able to hold on to that growth both this year and in future years as more options for travel kind of reemerge?

Yes. I think generally, yes, there will probably be some [get backs]. I think for '21 and for '22, domestic travel is going to still be the beneficiary of people not going abroad. And I think people are discovering some of these resorts that didn't discover them before. So I think we brought in the audience and I think they're telling their friends and colleagues. And so I think that the great -- and they're having great experiences. I mean if you read the reviews of the people who stay at these resorts, even at these higher elevated ADRs, they're having good experiences.

The other piece of it, I think, that may backfill if there's a little [ebbing] over the next couple of years is that we basically have no small groups at these resorts. So to the extent we might lose a little bit of rate

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go to the South of France instead of Sedona, we were able to put in some high-rated incentive and some high-rated group. That just doesn't exist right now. So it's probably that washes out. So we're pretty encouraged about the future for these kind of assets.

And I guess a follow-up. I mean you mentioned you're doing some more up-branding in some of your hotels. You identified 3 and you said 3 more. Does that -- I mean are you just seeing a better rate opportunity across the portfolio than you expected? Or what's kind of driving these up-branding decisions you're making?

Yes. I think we've had good success. I think particularly Marriott's shown a lot of willingness if we come up with good designs and good plans and good execution on operating models to allow us to move into higher categories with more luxury rated brands. So we think it's a really good use of our money. I mean if you -- we put out an updated investor deck last night and if you look at the ROI page on -- I think it's Slide 11, the average return IRR on these projects, a number of them are in there, is 47% in all of our ROI projects. So I mean that is -- it's hard to buy an asset where you can get a 47% IRR. So we remain excited about those. They're some of the best investments we can make. And so the team is super focused on finding more of those high-return opportunities within the portfolio.

Our next question comes from Michael Bellisario of Baird.

Just first question on the ATM usage. Could you help us think about the issuance price versus what you've earmarked the proceeds for? I know you've talked about the ROI returns, but just the relative return there? And then secondarily, if you're opportunistic with the issuance in December, maybe why haven't you been opportunistic year-to-date with the stock 20% to 25% higher?

Yes, Michael, great question. So again, it kind of relates back to the ROI project schedule. So we have -- if you look in the deck we put out last night, we have $67 million of identified ROI projects. So we have about another $30 million on top of that, that are in the evaluation stage, including the 3 other repositionings that we -- we're trying to finalize now. So it just seemed like very smart capital allocation to be able to raise the money and redeploy it at 40% plus IRRs, that, that relative trade was good.

We don't have an unlimited amount of those. I wish we did. So we thought that the amount we raised was sufficient to match-fund it with the high-value ROI projects that we had and just further positioned us as well to start the shift from defense to offense as we have more clarity and are more optimistic about the recovery in lodging.

Got it. And then just back to the group and the big box hotels. Can you help us kind of get our arms around -- or how you're getting your arms around values, underlying real estate values of your group-focused hotels today and also your expectation for both the ramp-up in fundamentals, but also the underlying real estate value that you see or that maybe prospective buyers would see are underwriting in those big box group-focused hotels?

Yes. I would say of all the assets, well, I think New York and San Francisco have been hard on valuation to kind of figure out where value is. Resorts have probably been the easiest. And I think big boxes would fall into the spectrum of tough-to-understand value. We are seeing good group pace in the last 4 weeks, so we'll continue to get clarity, but I think it's a big check generally for these hotels. And so it's more risky because it's a singular investment with that big check.

So I think it's hard. There's been virtually no trades of big boxes in the U.S. I think it will be dependent city by city. Some of these cities recover much quicker than other cities. I think we're more optimistic on our 2 big box hotels because of the citywides in Boston and Chicago in 2022. But valuation is still, I think, still uncertain on these kind of assets right now, exactly where it's going to shake out.

Our next question comes from the line of Lukas Hartwich of Green Street.

So there seems to be pretty decent odds that we'll see an increase in the minimum wage. I'm just curious what your thoughts are around that issue.

Yes. I mean if you look at where our assets are concentrated, generally, those markets already have increased minimum wage. And I mean I bet less than 2% of our workers in our hotels make minimum wage. So it shouldn't be a major impact on us. There will be some markets where it probably is more impactful, but if you think about where the bulk of our assets are located in those markets, raise the minimum wage to $11 to $15 isn't going to have a major impact. I mean our housekeepers in New York City probably make about $28 an hour, plus. So it's more pressure on the cost structure, but I don't think you'll see a major hit to profitability of the hotels in the kind of markets that we're in.

Do you think that maybe if the minimum wage increases, it kind of forces that ratio, if employees are earning a wage above the minimum wage today, the minimum wage increases, that ratio kind of goes down. Does that ratio change? Or does it stay constant, which would put upward pressure on these employees earning above the minimum wage?

Yes. I'm sure there's some upward pressure for the employees that make $2 above the new set of minimum wage when you bring in new people. So that's basic economics. Again, we don't have that many people around minimum wage, so it's probably -- there'll be some impact, but it's not 1 of our top 10 concerns on cost containment right now.

Got it. And then last one for me. So last year, there was an expectation that we'd see supply reductions in some markets, most notably in New York, but also in some other markets. So I'm just curious if -- I think we're seeing some evidence of that in New York, but are you seeing evidence outside of New York of supply being converted to other use?

No, we're not. It's very market specific. I mean New York is obviously the poster child for that opportunity, but we're really not seeing it in other markets. I mean there's a little in student housing conversion in some of our markets where it might happen to be right next to a university, but by and large, it's a New York City phenomenon at this moment.

Our next question comes from Chris Woronka of Deutsche Bank.

You've talked about potentially lightening up on certain urban assets in coming years to focus on resorts. I'm curious as to whether you think there's a major difference in how you underwrite a recovery and/or value in some of those urban markets relative to how potential buyers are underwriting that same recovery or value.

Yes, different point of view makes the market. So yes, I mean I don't want to talk against any of our assets that we might consider selling, but yes, I mean we're going to have different views. I mean I think we have a different view on San Francisco, probably more negative than some other people out in the marketplace. New York is an interesting market. We think it's very submarket dependent. Midtown East we're more bullish on. I think south, The Battery and that kind of area, Financial District, we're probably more bearish on.

So yes, there are funds being raised with specific themes. I mean frankly, I had a call yesterday from a broker who was representing a fund that was just focused on big box hotels as they raised money just to buy those. And so I talked to another investor group maybe 2 weeks ago that it just raised money just to invest in New York City and a New York City recovery thesis. So people are going to take different positions. It's a competitive environment out there. I think you'll see people take relatively aggressive, pretty narrow-focused trade thesis and deploy those. And inevitably, some of those are going to be different than our perspective. And hopefully, there's arbitrage there that we can lighten up with some of our urban assets and redeploy those into more leisure-oriented assets over the next couple of years.

Okay. That's helpful. And then also, Mark, we hear the brands certainly talking about a lot of conversion opportunities, and it seems like many of those go to soft brands and you're doing a few of them yourselves. How do you think about that? Obviously, it's not new supply, it's not new rooms, but if it's within the same brand family, do you think a hotel across the street from your hotel that goes to a soft brand, is that a net positive or net negative to your hotel?

Yes. So I guess it depends a little bit on the unique circumstances. So if we had a hotel and we are a Hilton and there was another -- a property across the way that was already there, but was not in the Hilton system and becomes a Curio. Yes, that's going to have an impact, certainly much less of an impact than if they built a brand-new hotel and made it a Curio. It's dramatically smaller, but it will have an impact.

When they manage -- there is some rate integrity. So if they can bring in an independent, let me use that same example. So let's say there, we own a Hilton. Across the street, there's a 300-room independent and it's been problematic in that they don't have a big enough funnel to have rate integrity. And it goes in and becomes a Curio and it's got a much bigger pipe in, it can be and I've seen this, it can be synergistic in that both -- you don't -- now you don't have this hotel right across the street at $50 lower rate. There's more parity because it's got the stronger brand channel and it actually helps your hotel.

So I think it just depends on the unique circumstances. Clearly, if they're converting thousands of rooms nearby, it will dilute the pipe going into your building. But it can also help take independents that are struggling on rate, especially in this environment, and get that rate up and that can help your hotel because you're not being undercut on the rate.

Our next question comes from Bill Crow of Raymond James.

Mark, I'm curious how far down the path of an asset sale or multiple asset sales you went before deciding to raise equity in the fourth quarter? There were reports out there in the media that you were marketing the Lex, as an example. And I'm just curious whether you were down that path that Sunstone and Pebblebrook and others have gone through?

Yes. It's a good question and capital is all relative to what you can sell, what you can redeploy. Our sense of the market, and I think NAVs have gone up considerably probably in the last 45 to 60 days, was the mark on some of the assets, where they were versus the ability to issue equity and the certainty of having the funds to deploy in these high ROI opportunities, it was just a clearer path. And I think selling last year at kind of the prices that people were talking about, just thought we could get a lot more for the assets if we waited another 3 to 6 months until the vaccine was out and the rollout and there was clarity.

And it seemed smarter to issue a little bit of equity to fund -- to match-fund these ROI projects, than sell something that we thought was too much of a discount when we could see that pretty soon, the NAVs would be rising in the private markets and we'd be able to take advantage of that if we chose to.

Okay. Maybe going back to Tom Healy on group in 2022. I'm just curious on the new book group meetings versus those that were already on the books, how is the pricing different?

Bill, I think we're seeing 2022 pricing is stable. It's not -- as I mentioned earlier, what's going on the books is probably at or around '19's pricing level. So I think we feel good about the pricing for 2022. As I mentioned, citywides are up. That gives the property teams more confidence in a lot of our markets. Our pace is not -- it's in good shape. And we think in the year for the year, as there's pent-up demand, it's going to be positive and we're going to certainly push rate further.

Is there any -- sorry, go ahead.

Go ahead. No, go ahead.

I was just curious whether there's any sense on your part that maybe the meeting planners are starting to get worried about losing prime dates for next year. Or is it just too early for that concern?

I think it's too early to tell. There's so many -- as mentioned, the ghost cancels and such, there's so many shifts. We've seen -- of the cancels, we're seeing -- we saw in Q4 about 27.4% of the groups that cancel got rebooked and they're pushing out. They're pushing into Q4 and into 2022. So there's a lot of noise with shifting right now. I think everybody is still trying to -- the challenge is, is what -- is what's on the books going to stay? And then is what's on the books going to pick up? So there's no history at this point for like a citywide block. Historically speaking, it's 10,000 rooms. And will it come in at 10,000 rooms or will it come in at 5,000 rooms? And all of a sudden, you know how that works. In the -- when it actualizes and it starts to come in, all of a sudden, everybody reacts to -- if it doesn't pick up its block, there's a reaction and rates drop. So -- and then you're trying to backfill with self-contained group. So it's a tricky puzzle. And I think we're focused on rate because that's where our profit is going to come from. And we see things good, yes.

Good. Good. One more for me -- for you, Tom, is are you getting more requests for hybrid meetings?

I can't say that we've heard -- you'll hear of that on -- especially with the groups, the associations, that these meetings are -- they make revenue, they're revenue generators for them. So they want to do hybrids to get -- to continue the meetings and their shows. We're hearing that. I'm not sure that, that trend continues. I just -- I think they -- I can't see that occurring long term. I think it's a short-term phenomenon.

Our next question comes from Floris Van Dijkum of Compass Point.

Mark, I just -- one is maybe if you ask -- if you could maybe provide some additional comments on the equity raise. We understand the proceeds were used to fund the high ROI and obviously maintain balance sheet integrity. But in hindsight, it appears like it was really expensive equity. Do you have a better sense of DiamondRock's NAV than the Street? Shouldn't you have a better sense of where your NAV should be? And did you really think that NAV was in the mid 8s when you raised that?

Yes. So all fair questions. I think we looked at it, it's not a statement of NAV. It's a statement of use of proceeds. And so again, if our IRRs are correct on this underwriting, we can get a 40% return, then that's a smart equity issuance, given that relative -- even at 8.23, you're not getting to a 40% IRR on that return. It's a good, smart trade of raising equity and redeploying into those high value opportunities.

It's hard to know where your stock is going at any point in time, right? There's a lot of cross currents. I do think NAVs have increased, as I mentioned earlier, over the last 45, 60 days. We can see that. We've -- we had a -- it's interesting, we track inbound inquiries and there are some brokers that represent people that have been chasing assets in our portfolio. And I would say within the last 3 weeks, people have come back to us with prices that are 10% to 15% higher than they were in November, December last year.

Great. Great. I was just -- another follow-up maybe. As you build a war chest, obviously, one is to sell some of your existing assets, which you guys have talked about. And that makes strategic sense and also protects the integrity of the balance sheet, again. Have you thought about pursuing converts similar to one of your peers to build a war chest and maybe signal to the market, "Actually, guys, this is where our NAVs are significantly higher"?

Sure. Jeff, do you want to take that?

Yes, happy to. Yes, I recognize that some of our peers have explored converts and it's something that we do look at on an opportunistic basis as ways to push out our debt maturities. The one point I would raise is that thus far, there's probably been 3 or 4 of our peers who've done bond deals and convert deals. And those proceeds have really been to refinance existing debt that was maturing in the next 12 to 24 months. For us, to explore a convert, which is viewed as debt, it is unsecured debt, but it is nevertheless viewed as debt and puts more pressure on your covenants. For us to raise convert proceeds today, if I'm assuming your example is to raise convert to use that for the ROI projects, I appreciate that's an attractive return on capital as well. It's a favorable spread, but it is a leveraging event. You are leveraging up to do that. And I recognize there might be a time in the future where we'll look back and say, that's -- it was an ideal time. But on the other hand, we're still not out of the woods as an industry yet. And I think folks are trying to find ways to ensure that we will be compliant with covenants. So there is risk inherent in leveraging into the environment right now, I would say.

Fair enough. I appreciate the comments. Maybe if you can provide some additional comment on the pricing for resorts. Again, rumors of the Four Seasons Calistoga going for $2 million a key. Presumably, you're not willing to pay those kinds of prices. What type would you like? And does pricing for resort hotels actually make sense right now in your view?

Yes. It's the hot flavor for the right reasons in today's marketplace. So yes, I think some of the -- listen, some of the -- there will be bad deals that will be made on some resorts. Our focus has been really on deals that we've been chasing for a long time and unique individual relationships we have and particularly places where we have an advantage because we have existing assets. And so it's not only strategic, but there's synergies as well, where we can complex things and make it -- even if it's a little bit pricey, the cost savings from the synergies make it a really compelling deal for our company. So that's how we're trying to distinguish ourselves. I think it's good that we've been doing this for a number of years before other people are starting to get into it. I think that gives us a little bit of an edge. But pricing is full in a lot of these assets. We're going to have to work hard to make sure we're doing very solid deals. I think we have a good strategy to do that. We certainly have the right team. And I think our head start is going to kind of give us that distinguishing feature where we can uncover some deals that actually work and create value where other people that are just, I will call, new to the game, may be forced to overpay a little bit.

Our next question comes from Dori Kesten of Wells Fargo.

Is there an internal preference to JV Frenchman's versus an outright sale? And has engaging a consultant to find capital partners resulted in an increase in inbound calls for an outright sale?

Dori, it's a great question. So our adviser has been out there with the primary goal of finding someone that can help fund and get this hotel open as soon as possible. And then what we've told folks and partners is we're flexible on the structure. So we believe in it. So are we happy to stay in and take more of a back-end? Sure. And different investors have come to us with, I would say, probably 6 to 8 different structures have been presented to us. So they all have kind of trade-offs of how much risk we take on the construction versus the purchase price versus more involvement or less involvement, more back-ended, more front-ended. So I think the kind of the broad outlines are we still believe in the pro forma. We would be happy to take a more back-ended piece in a structured deal. And we are going to accommodate the capital partner who can move the fastest and also provides the highest NPV for our shareholders to do a structured deal.

Our next question is a follow-up from Austin Wurschmidt of KeyBanc.

Just one quick one. A little bit of a follow-up on Bill's question around dispositions. You guys amended the franchise agreement at the Lexington Hotel last year to include a termination right option up until, I believe, this April. Could you just give the latest update on that?

So first on the -- so we did amend the Lexington agreement as part of the sweeping transaction with Marriott, and it gives the ability to terminate that franchise agreement at any point in the future. They actually -- the cost ratchets down over time. The owner has, whether it's us or a subsequent buyer, and certainly substantially increases the marketability and flexibility of that asset going forward. So that's an asset we probably won't own 5 years from now. But that certainly helps on the disposition side and certainly makes it more marketable. And that was the primary goal in negotiating that feature with Marriott. It's a good observation.

Our next question comes from Stephen Grambling of Goldman Sachs.

Given your focus on more independent resort properties, how would you evaluate a soft brand like Curator, launched by your peer Pebblebrook, as a way to potentially further increase that edge that you referenced in operating needs? And then as a related follow-up, what are the barriers to entry for someone like you launching something similar given your niche?

Yes. So I don't really want to comment on someone else's deal. The deals that we've done, we've been able to find a lot of synergies through our operators. So whether that's purchasing power or the ability to get lower OTA, negotiate fees or credit card fees, by having the right operator in there, I think we can realize almost all of those synergies. So I don't think by creating something on our own, probably the cost of setup in doing that, it offsets any small incremental difference there. And frankly, it'd be hard to get the buying power of some of the managers that we use.

So that's not a road we're going to go down. We are focused on soft brands and independents and lifestyle hotels. We've had a lot of success with those. I mean the things that we're touting on is the kind of the stars in the portfolio right now are The Landing in Lake Tahoe and L'Auberge in Sedona. Both of those are independent. We are getting the benefit of the operators there and their synergies with all their buying power within their system. So we already realized those in our P&L. So I don't think that there's incremental profit from trying to create or recreate the wheel on that.

At this time, I'd like to turn the call back over to President and CEO, Mark Brugger, for closing remarks. Sir?

Thank you. Everyone on this call, we appreciate your continued interest in DiamondRock and we look forward to updating you on the next call. Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.