DiamondRock Hospitality Company (DRH) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the DiamondRock Hospitality First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer. Please go ahead, ma’am.

Thank you, and good morning, everyone. Welcome to DiamondRock’s first quarter 2020 earnings call. Before we begin, I’d like to remind everyone that many of the comments made today are considered 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 am pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Good morning and thank you for your interest in DiamondRock. I want to start by extending our thoughts and prayers to those, who have been affected by the ongoing pandemic. At our core, we are about bringing people together and sharing experiences. It is personally painful to see people isolated and hotel associates out of work. Based on the current flattening trend lines, we are hopeful that the U.S. has seen the worst of the pandemic. Together, we will make it through this and we eagerly look forward to welcoming back the thousands of valued hotel associates and the tens of thousands of hotels through the front doors of our hotels and resorts. Today, I’ll focus my remarks on the steps we’ve taken here at DiamondRock to respond to the COVID-19 crisis. After which, I’ll turn the call over to our Chief Financial Officer, Jeff Donnelly to review first quarter results and our liquidity. I’ll then conclude with a few thoughts on the future. In understanding, DiamondRock’s COVID-19 action plan, it is helpful to review, where we were before the epidemic started impacting us. Probably, most importantly, as of the end of 2019 DiamondRock had low leverage with about 30% debt to asset value. Net debt-to-EBITDA of only 3.7 times, no preferred equity, and fixed charge coverage on our debt with nearly 3.5 times. We also had $325 million untapped on the credit facility and only one small debt maturity in the next three years. Operationally, pre-crisis, our high-quality and diverse portfolio was outperforming. Our geography and ROI projects were paying off with portfolio RevPAR up 13.9% in January and 7.2% in February. This strong starting point did not slow us from rapidly responding to the impact of the healthcare crisis that gripped the U.S. with unprecedented force starting in March. Almost immediately, we enacted far reaching action plan to fortify our balance sheet by building cash and dramatically, curtailing costs at every level. Let me review for you the steps we have taken thus far. Action item one was to build cash. In March, we drew down our revolver. Our cash balance at the end of the first quarter was $388 million. Second, we preserved $100 million of cash over the next year by suspending our common dividends, including the first quarter dividend, those that we have no preferred equity in our capital structure. Third, we reviewed every plan capital projectline by line, item by item. In total, we have canceled or deferred 70% or $80 million of projects originally in our 2020 capital budget. The remaining expenditures are focused on four main categories; one, projects underway that are more cost-effective to complete than delay; two, critical expenditures to preserve and protect your investment; three, projects that were going to be highly disruptive, so now provides a unique opportunity to complete them; and four, a few select high impact ROI projects. The fourth action item was to review the ongoing rebuild of the Frenchman’s Reef Resort. Prior to COVID-19, Frenchman’s Reef was on pace to reopen in late 2020. However, with the priority on liquidity and the likely pushing out of demand in the USVI. We made the decision to suspend the rebuilding effort. The rebuild is halfway complete and there’s about $170 million remaining to complete the project. We are excited about the long-term prospects here, but is prudent to push it out given the current environment. Okay, let’s discuss our most difficult action step to dramatically reduce the cost at the hotels given the lack of travel demand. We temporarily suspended operations at 20 of our 31 hotels between March 17 and April 10. Collectively, these represent 61% of our rooms. Five of the suspensions were the result of government mandates. These include Cavallo Point, our two resorts in Key West, Burlington Hilton, and the Charleston Renaissance. The remainder were based on the simple fact that it was more cost-effective to close them than to keep them operating. One of the most painful parts of the pandemic is that regardless of whether operations were temporarily suspended or kept a hotel open with minimal services. We had to significantly reduce hotel staffing levels across portfolio. Budgeted monthly payroll across the portfolio was $25.5 million. Today, it is just under $6 million. This 80% reduction in our monthly payroll expense equates to over $230 million of savings on an annualized basis. We have placed full-time security and building engineers in every one of your assets to preserve and protect asset value. We are also preserving a minimum level of sales associates to capture future business, so that we can bounce back quicker. In fact, in April, we generated nearly 1,300 leads for 360,000 roommates spanning late 2020 and beyond. Our sales team and asset managers have been hard at work identifying alternate demand generators with good success. We have provided housing for healthy personnel in our nation’s military, first responders, medical staff, and even diplomatic groups. Thus far, these initiatives have generated several million dollars of incremental revenue, and we continue to seek ways to drive a non-traditional business until more travel demand returns. The cost savings were not just at the hotel level. At DiamondRock, our 2020 cash G&A costs will be reduced by approximately 20% through lower executive compensation, reduced employee headcount and numerous other smaller, but aggressive reductions such as rebuilding contracts, renegotiating with vendors, and outright termination of third-party services. Another major action item we have taken as a company relates to our secured financings and ground leases. For example, we secured a 50% reduction in the payment for a ground lease at the courtyard in New York. On our seven CMBS loans, we are seeking accommodations such as permission to tap FF&E reserves for hotel working capital and debt service. Ironically, to date, we have not received much relief as the CMBS lenders have said DiamondRock is too well capitalized to receive relief. Nevertheless, we will continue to be proactive on this front. While we have diligently pursued all these major action items, it is by no means an exhaustive list. I’m very proud of the relentless effort taken by my team to leave no stone unturned in pursuit of cost savings. Let me now turn the call over to Jeff, who will talk more about our financial liquidity. Jeff?

Thank you, Mark. I will provide a brief overview of first quarter results and take you through the steps we have taken to maximize liquidity and lengthen our runway. Before I continue, let me comment that we spent considerable time to understand the myriad of public assistance programs provided as part of the CARES Act. We believe it is important that DiamondRock and its affiliates did not submit any applications under the payroll protection program. We felt that given our low leverage, large cash balance and access to the capital markets, an application to the loan program clearly designed to support American small businesses would draw scrutiny. We will, however, certainly pursue appropriate programs. For example, we are evaluating the employee retention credit program, including the ability to defer payroll withholding taxes for one year. Let’s briefly turn to our first quarter results. The first quarter was on pace to provide very strong performance before the impact of the response to COVID-19 took hold. Year-to-date through February, total RevPAR increased 10.8% on a 10.4% increase in room RevPAR and a 4.4% increase in average daily rate. The portfolio was firing on all cylinders. Group hotels such as Chicago Marriott in Western Boston, saw 39% and 30% respective increases in RevPAR. Our focus on building out our drive to resort portfolio the last several years delivered, but the Charleston Renaissance, L’Auberge de Sedona and Havana Key – Cabana and Key West, growing total RevPAR in the range of 10% to 20%. First quarter adjusted FFO per share was $0.04. Total RevPAR declined 17% on a 19% decrease in room RevPAR. GOP margins were a little better than 24% and hotel adjusted EBITDA margins were 10.5%. For me, the biggest takeaway in our first quarter was that our asset management team rapidly pivoted from generating robust 10% plus RevPAR growth to abruptly suspending operations instill the portfolio gains 700 basis points of RevPAR share in the quarter. We continue to look for ways to grow NAV. As of March 2, we now own a fee simple interest in the Kimpton Shorebreak Resort. We eliminated the ground lease by acquiring the remaining tenant and common interest in the ground lease for $1.6 million including transaction costs. This purchase price represented an 8.3% capitalization rate on forward 12-month ground rent. The additional fee simple interest should be a value to those, who maintain detailed NAV models. Now, let’s talk about our balance sheet and liquidity. Our only upcoming maturity in the next two and a half years is the $52 million non-recourse bank loan secured by the Salt Lake city Marriott that matures November 2020. The loan had no extension options; however, we have executed a term sheet to extend the maturity until early 2022 with a performance option to push maturity a year beyond that. I want to extend our gratitude to the PNC team for working with us expeditiously towards the solution. Let’s talk about the credit facility. First, let me just say that DiamondRock has strong relationships with its lenders, many of which date back over a decade and several of which have been with the company since its IPO over 15 years ago. Our lenders appreciate that DiamondRock has been a good partner and conservative borrower. Importantly, we were compliant with all our financial covenants at the end of Q1 2020. under our covenants, leverage was 34% and our fixed charge coverage ratio was 2.9 times. However next quarter, we do not expect we’ll satisfy these covenants. As a result, we have negotiated a term sheet with Wells Fargo, our administrative agent, to amend our credit agreements to provide for a waiver of all financial covenants for four quarters. Our conservative financial leverage provides the negotiating leverage to reflect upon the amendments filed by those, who have been compelled to go before us and then craft an amendment customized for our needs. Since we are in active discussions, I cannot go into more details at this time, but I expect to finalize our credit facility amendment in the coming weeks. As Mark mentioned, we drew down our revolver in March, and held $388 million of cash as of the end of the first quarter. We believe we are in good liquidity position to ride out this storm. So, let’s look at the math. Even in this scenario, our operations at 20 of our 31 hotels remained suspended. We estimate the monthly cash use or burn rate across the portfolio to conservatively be in the range of $18.5 million to $19 half million excluding capital investments. This is based upon hotel level cash use of $11 million to $12 million per month, corporate level G&A of approximately $2 million per month, and monthly principal and interest costs on all outstanding debt of approximately $5.5 million. based upon this cash burn rate and the assumption we finalized the Salt Lake City mortgage extension, we conservatively estimate DiamondRock has approximately 20 to 21 months of runway in a scenario, where operations are essentially suspended. In summary, our historically conservative leverage posture has provided us with a strong liquidity position. With that, let me turn the floor back to Mark, who will talk about our outlook.

Thanks, Jeff. We remain confident that travel and travel demand for our kind of hotels will return. However, we are realistic that the shape of the recovery will be driven by the virus, identifying a vaccine and the quality of the economy thereafter. The only certainty is that forecast will be wrong, either too optimistic or too conservative. Accordingly, we are prudently preparing our balance sheet and the hotel operating models for the potential of a protracted and gradual recovery that may take several years to return to 2019 levels of demand. As for 2020 outlook, we expect the second quarter will be the worst period and we will see a recovery very slowly build in the second half of 2020. leisure is likely to lead the way in returning demand. I guess we are fortunate that 14 of our 31 hotels are resorts. We expect drive to markets such as key West, Fort Lauderdale, Vail, Sonoma, Sedona and Lake Tahoe to be among the first to see recovery and demand. after resorts, we expect business transient will be the next category to recover followed by small group. The last demand segment to return is likely to be large group for self-evident reasons. It is important to note that most full-service portfolios generate about one third of rooms revenue from group. But all group is not the same. Everything from weddings to large conventions fall into the group categorization. In 2019, our room revenue segmentation for the entire portfolio was 37% business transient, 33% leisure, 27% group, and 4% contract or other. of our 31 hotels, we have just four big box hotels in the portfolio, and a 100% of the group room revenue at these four big box hotels contributed just 13% of our overall revenue last year. The fact that the majority of our group room revenue is generated by smaller groups such as board meetings and weddings is a key point of differentiation for DiamondRock. Let’s look at the other side of the supply demand equation. On the supply side, we expect new construction not already out of the ground will essentially evaporate in the U.S. due to a dearth of financing and the uncertain profit outlook. Similarly, we expect private accommodations platforms such as Airbnb; we’ll see a sharp decline number of host willing to invite strangers into their homes. Another phenomenon worth watching is the potential that hotels that cannot be profitably operated may simply not return. For example, there’s discussion that over 2,000 rooms in Midtown East Manhattan, where roughly 10% of the supply may never reopen and instead convert to alternative uses. This could benefit the remaining hotel owners like DiamondRock. We continue to monitor this situation very closely. Looking forward, we are carefully evaluating the hotel reopening process. We believe the process of reopening hotel is a function of when and how. For the when, it will be based on when governors and mayors lift restrictions and when demand is sufficient to open hotel such that it loses less money than staying closed. For the how, we are working on detailed staffing models at each property to address the levels of critical personnel, we will require at various levels of occupancy. We are entering a new world in many ways. Many things are going to change. There will be new protocols. We expect consumers will demand a lower touch experience and standardized cleaning protocols when we reopened. It is our view that brand affiliation will offer a distinct advantage due to low touch innovations such as Marriott’s mobile key. Brands also give consumers confidence that they will hear to robust new cleaning protocols. By comparison, Airbnb will find it difficult to enforce a common cleaning standard. Speaking about brands, they are aligned with ownership and are using this opportunity to undertake a comprehensive review of brand programs to help balance customer needs with owner profitability in this more challenging environment. Everyone wants to get hotels open and a better, more efficient model lets us accomplish that goal sooner. We were optimistic that we could emerge from this period with a better business model. On a related point, the U.S. has just transitioned from the tightest to the loosest labor market we have seen since the great depression. for the last several years, we have had outsized wage increases in light of the new environment and everyone’s joint motivation to get hotels reopened. We expect less wage pressure and more flexible works rules. Overall, we believe the industry will reinvent the operating model to run hotels with greater efficiencies than ever before. Now, while we take aggressive defensive steps to weather this crisis, we are looking to the future and are focused on taking aggressive advantage of opportunities to add value for shareholders. Last quarter, we addressed five areas to drive shareholder value and these remain just as true today; one, resort focus. There is a broader understanding today that drive two destination resorts is an attractive niche and our focus in this area is unique. We believe this concentration will accelerate DiamondRock’s recovery. Two, ROI projects, we may have curtailed our capital spending, but we are nevertheless carefully undertaking value add projects while this has minimized. three, re-launching Frenchman’s, we have delayed the reconstruction of Frenchman’s Reef, but we believe this is only a pause in our schedule and we remain excited about the long-term prospect for this project when travel resumes. Essentially, Frenchman’s is a nugget of future value for our shareholders. four, opportunistic recycling near-term, we do not expect patients to make sense, but we do believe we will be well-situated to take advantage of distressed hotel opportunities as we move through this recovery; and five, asset re-positionings. Finally, we continue to pursue several initiatives to drive the strategic transformation of the portfolio. These opportunities include initiatives such as buying out the ground lease at the Shorebreak Kimpton or going it at our Key West Suites Hotel, soon to be known as the Barbary Beach House. We are always looking at opportunities within the portfolio to mind value at our existing hotels. I’ll conclude our prepared remarks by reiterating that these are the most difficult days for lodging in our lifetime, but through prudent balance sheet management, strong asset management and solid strategic execution, we remain confident in DiamondRock. On that note, we’ll now open up the call and take any of your questions.

Thank you. [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc. Your line is now open.

Good morning, everybody.

Good morning, Austin.

Hi, good morning. Hope you’re all well. First, as it relates to the eight or so resort assets that, that you highlighted as being the first to recover, can you give us a sense of what percent of demand previously was driven by – drive two guests as opposed to inbound flights?

Yes. So, I give you some more color on the drive to resorts and what we’re seeing there. The resorts really vary on, none of them fly to only destinations and seasonality will make a difference. For instance, in Fort Lauderdale, Q1 is more fly to and the rest of the year is really drive to. And we don’t have any, any that have more than about a 20%, 25% fly to business on a full calendar year. Just to give you a couple of highlights of what we’re seeing with some of those resorts today. And as I mentioned in my prepared remarks, leisure represents about 33% of our total revenues in a normal year as the bears, which is in Sedona. It’s really ramping up in a little over a week since the Arizona governor allowed restaurants to reopen. We’ve seen demand return. may is forecasted to be, right now rates about $525 and accuracy is about 20% for may. but more encouraging two weeks ago and that week we booked $225,000 of business, all of which will be pretty much in the next 45 days. And rates we’re getting were between 1,000 and 1,408. That’s up in rate about 10% higher than last year, although we still have quite a bit of billability. We’re holding rate. And even better just last week we booked another 226,000 in business in Sedona. And that, that’s at a rate about $85 higher. So, we’re holding rate that there will be obviously be at lower occupancy levels, but it’s encouraging trend lines Shorebreak Kimpton, on Huntington Beach we had 40% occupancy last weekend. And looking out there, the U.S. open, for surfing was moved back to August, but we are a good bookings for that week with rates up $14 and I think 85 more rooms on the books for that week than we did for the event last year. Landing transient books, bookings are up at small numbers about 30%. Now, we sold about 20% of the rooms for Memorial day weekend, but it’s starting to build Fort Lauderdale Western beach resort. We had about 100 rooms occupied last weekend and the beach isn’t even open there yet. In Charleston, we’re going to reopen that probably this Friday. South Carolina’s reopening and Memorial Days were about 30% of the rooms sold for Memorial Day in Charleston. And then our key last resorts, we’re waiting for the government to reopen that market. But looking at the advanced bookings, they’re about the same in July and August as they were this time last year. So that’s very encouraging for key West. So, we’re seeing a number of positives throughout the resorts, not huge numbers, but certainly we think it will be the first segment, first assets to recover.

That’s really helpful. Could you kind of sum that all up a little bit and say what level of occupancy that would equate to on some of these forward bookings that you just provided and sort of in total?

Yes. I mean they’re small numbers often. So, I don’t have them total about that, but I can get back to you at that number.

Okay. That’s helpful. And then just last one for me. I mean, you guys have – you’ve published your net asset value estimate in early 2019. Earlier this year, you stated it was stock at around 10%, 50%, it was trading at a 25% to 40% discount to your estimate of NAV. And I’m curious where you’d take your best guests today as to where you think NAVs have moved and then how you might balance that with your view of where replacement cost is today versus maybe, just a few months ago.

Yes. So, I think replacement cost is the same. So, construction costs are frankly – haven’t subsided at all. So, land prices may have declined a little bit, but there’s not enough transactions to know. So, I would think on the replacement costs, we’re still trading at a kind of absurd discount to replacement costs. That is tough to kind of figure out right now, because there’s so few trades in the market. And debt financing is generally unavailable on single assets today. So, it’s a little hard to know exactly where values are. They’re clearly down 10% to 20%, but it’d be hard to give you a real accurate number given the lack of transparency with the transaction environment.

Yes, that’s fair. okay. Thank you.

Thank you. Our next question comes from Chris Woronka with Deutsche bank. Your line is now open.

Hey, good morning, guys. Mark, wanted to ask you, I know one of your peers yesterday or a couple of days ago had a pretty big write-down of a New York hotel and I know that was a very kind of unique circumstance, but what is your view on that market longer-term and is there a place, at which you want to exit the market if price has come back a little bit or do you think the market’s kind of permanently impaired and those values are likely to be down for a long time?

Great question. So, I think there’s no comparison with the individual asset sale at one of our peers. They had a lot of unique circumstances. So, we don’t have any impairments in any of our New York assets. I think New York say listen, it’s the epicenter right now for this healthcare crisis. So it’s getting hit very, very bad and we anticipate that certainly for the balance of this year, it’s going to be one of the tougher markets in the United States. Hopefully in the fourth quarter we’ll start seeing some level activity return. Now, the longer term prognosis for New York City, I think one of the interesting things to think about is the supply picture. So in Midtown East, as I mentioned in prepare remarks, there’s potentially a 10% decline in supply with hotels that just won’t be economically viable and we’re barely economically viable pre-crisis that may get never reopened to make it convert to alternative uses. So that would dramatically impact the future on that market. Now, we to stay coming back later, but that could be a bigger snapback, and then Airbnb, which, had up to 30,000 room nights in New York City. I think the future of what hosts do and the comfort of people staying at Airbnbs in the city, that’s a dramatically different picture than it was three months ago. And so you could see a decline in supply on those alternate platforms. So, those things I think are our positives. But we do anticipate New York will come back later. I think the, two, three years from now, I think will be decent. Hopefully this is what does it to stop the supply over the next five years in New York City. It’s still a very expensive place to construct hotels. So we’re still relatively positive in long-term prospects, but we’re pretty bearish certainly for the balance of 2020.

Okay. Appreciate that color. And then on the four big boxes, group boxes you do have, is there a point – how do you decide when to reopen those? Do you need the big groups to come back or do you think you can backfill enough with smaller groups and transient business, transient leisure to open them this year or the summer?

Yes. So, I think they’ll all be open this year and most of them probably this summer. But so if you look at four big boxes in our portfolio, last year on rooms revenue, it was about 48% group, which means it was, 52% transient. So they’re very good transient location. Salt Lake City for instant sits on two blocks from the temple and it’s kind of A+ location. Worthington and Fort Worth sits on Sundance Square, which is the main, the main retail food and beverage outlets kind of area. Westin Boston, Seaports, a very good location. And Chicago Marriott is one of the best transient locations, I think in the city. So they are big hotels. But, about half the businesses group half is non-group. We think that there’ll be the ability to attract the transient. We’re not going to be able to backfill all the loss group. But we will have some small group and we will have the transient, so we’ll be able to get it back open.

Okay. Very good. Appreciate it. Thanks, Mark.

Thank you. Our next question comes from Daniel Asad with Bank of America. Your line is now open.

Hey, good morning guys, and thanks for taking my question. Mark, so you’ve talked about brands taking a closer look at balancing act between, the customer experience in order to profitability. So, I guess my question is like, what do you think is on the table that the brands can help owners with here today?

Yes, there’s a lot. I mean, we’re in conversations and I think they’re doing a very good job of really talking through all the different aspects of their business. So, on the high level, I think they’re looking at their allocated costs and trying to reduce what they have to allocate out to the hotels by skinning up some of the programs and finding efficiencies there. So the less program services fees and less things they have to reallocate, the lower they can make those costs, the better it is for our profitability. They’re looking at the regional staffing models. I think we’re all looking at the operating models of the individual hotels to figure out what the right, optimal staffing models are, do we need an assistant general manager? Do we need an assistant FNB person? Can we do sales in a cluster versus individual hotel level staffing model? There’s a lot of things to look at there. We’re trying to consolidate engineering for a whole city also sub market versus having them at individual hotels. And then I think the big push has been what can technology provide that can help reduce our cost structure. So what efficiencies can we put in place? So, all that I think is on the table with them and then we’re going to have to look at the other cost items what the brands, they’re trying to help on purchasing and contracting and just really every avenue of expense that we have with the properties.

That’s great. And then, I guess sticking to those brands. So, obviously there’s been with the big push towards, just helping with like the distribution channels and the direct bookings. Now, this could be a little bit different, and so in terms of your distribution, [Technical Difficulty] tells me open and there a little bit more leisure, bend to the demand patterns today. So what are you going to be leaning on, is there, what is that going to look like different from, I guess pre-COVID in terms of distribution.

Why don’t we move on to the next question? We’ll come back if Danny calls back in.

Thank you. And next question comes from Michael Bellisario with Baird. Your line is now open.

Good morning everyone. Mark, maybe a question for you or for Tom, but those 2019 figures you gave the 37% business transient, 33% leisure. Just to clarify, is that room’s revenue or is that total revenues that you quoted?

Total revenues.

Got it. And then just the similar on the big box hotels, 48% is rooms revenue? How should we think about group contribution to the F&B and other revenue lines there? Is it higher than that 48% or how much more profitable are the groups on those two line items?

Yes, so the banks are going to be driven by the groups of the bank would contribution, which comprises a meaningful part of the F&B will be higher. I don’t know if these x percentages in front of me, but I can get them for you.

Okay. Yes, that’d be helpful. And then just a separate topic, the April leads that you mentioned, what type of customer is booking or rebooking today and, then how are you handicapping or what are you telling your operators about any of that business, at least in the near term, eventually materializing?

Tom?

Hey, Mike, this is Tom. It’s a mixed bag. A lot we’re seeing some shifts with regard to the group. We’ve had some significant – $94 million has canceled since the outbreak. But we have seen some shifts into the fourth quarter. Interesting enough, like our fourth quarter room night pace actually improved in the first quarter for about 105,000 rooms to 114,000. The, the big shift of that is the big four hotels, about 75,000 rooms, so that’s where all the groups landing. And so when you, when you look at that mix, some of the shifts, a lot of shifts happen in Boston, but it was – we had some groups canceling in the second and third quarter moving to fourth quarter and then obviously other groups moving into the next year. It’s, hard to really know what the third and fourth quarter will do at this point, especially the fourth quarter that we’re looking at. But I believe that the bigger, the bigger events, we’ll probably peel back and you’ll have less pickup horrible canceled, and then we’ll rely on the smaller stuff, wedding blocks and different smaller group meetings if you know, if and when they occur. But I think that I think that’s that.

So I just add Mike, so Q3 right now is just ended up working pace is down about 11%. Q4 is up to actually up about 14%, but you can’t take too much hard in that given that most of the cancellations occur about 60 days out. So we expect that those numbers materially deteriorate. Citywide, some people are leaving the business on there until we get closer. But it’s hard to see a big citywide happening in 2020.

And then just one more follow up on that same topic in terms of the type of groups and the type of businesses rebooking have you seen any differentiation, healthy industries, healthy companies, probably the industries. What’s your thought?

I don’t, I think it’s a, it’s a mixed bag. I think it all the group right now is concerned. I don’t know that it’s healthier or not healthy. I think it’s more about getting gathered there as the issue. So I don’t know that we’re seeing a shift or a change by any segment of group. I think it’s just it’s either red light, green light.

Got it. That’s helpful. Thanks for the color.

Thank you. Our next question comes from Stephen Grambling with Goldman Sachs. Your line is now open.

Thanks. Just a couple of quick follow-ups. First, how does the theoretical value brands are bringing to the table or bringing back to the table and make you reconsider some of the independent properties in your portfolio?

Two questions. So, we’re big believers that brands at certain hotels are a lot of value, and I think particularly on the urban big box hotels their credit meaningfully accelerate the recovery. And we think that the redemption points, et cetera, will really prime the pump for a lot of return business, smaller independents, they’re still going make sense. If you’re take our Key West Barbara Beach, I still think that for a kind of a small resort people are going look for that experience. We are going to have to assure them that in the cleanliness and that’ll be a little bit more of a battle than it will be with the brands. But I still think on select hotels, that makes sense. So, we’re trying to make sure we’re being thoughtful and putting brands on the hotels that make the most sense but still on the small hotels where they’re kind of a unique lifestyle hotel. We still think it probably makes sense.

And then you mentioned that some of the assets in New York potentially being converted, I guess to other uses. What do you think some of those other uses are? And you mentioned New York specifically, but are there other markets where you’re seeing that or hearing that?

A New York subprime one? So for instance, we know there’s a 700-room hotel within two blocks of our property, Lexington that they’re talking about knocking down, converting to an office building and selling it on an FAR basis. Separately, the Hyatt Grand Central Station has been talked about getting knocked down and converted to a mixed use development, coming back with a much hotel product. But office is going to be the primary converted use. Now, some of them may turn into, condos or other things in the future, but those economics, the less it’s worth as a hotel, the more it’s worth is alternative use on a relative basis.

Got it. Thanks so much.

Thank you. Our next question comes from Rich Hightower with Evercore. Your line is now open.

Hey, good morning, guys. Hope you can hear me.

We can. Good morning, Rich.

Okay. good morning, Mark. Just a quick point of clarification earlier on 20 months to 21 months of liquidity runway, Jeff, I think you said with suspended operations, does that mean is currently operating or its every hotel have shut down? Just to be clear on that?

Jeff?

Yes. I can take that. Rich, the runway figures that I gave you was as the hotels are currently operating, although if we went the extra step of assuming every single hotel was closed, it would make a pretty minor change. The difference between being, having two-thirds of our hotels closed, and one-third at single digit occupancy are all of them closed at right, is pretty immaterial. I would say, it’s probably about a month, if you will, in our runway and calculation.

Okay. Yes. Thanks for that. And then not a whole lot of other questions, we’ve covered a lot of ground, but some companies have given breakeven occupancy for their portfolios. But I’m wondering for DiamondRock, if we split that across sort of the big box segment, the smaller resort segment and sort of I think in between are there materially different levels of occupancy that would get you to those breakeven even levels, just so we kind of understand the – sort of how the business works in that regard?

Jeff, if you want to take that?

Yes. Rich, I mean, I would say overall, when we look at our breaking an occupancy across the portfolio in its entirety, I was hit at the figures on a GOP line. I’ll give you a few numbers. On the GOP line to cover our variable costs, it falls probably between 20% and 30% occupancy. On the hotel EBITDA line, it’s close to about 40% occupancy. And I think at the corporate EBITDA line between 45% and 50% occupancy. Maybe, I can tap Tom on this, but I would say off the cuff, I would imagine that some of our resort hotels, which generally tend to be a little bit smaller, it might have more flexibility of breaking even at lower levels than some of the larger group ones. But I’ll let Tom Healy expand on that.

Yes. I think the smaller hotels are efficient and have less operating moving parts. So, if we get lower occupancies, we actually could even probably somewhere around 5% to 10% and then it ramp up from there on the GOP line. And then EBITDA is, as Jeff just mentioned, I think EBITDA is probably somewhere around 30% to 40%, depending on the market and the real estate tax, the insurance costs, the labor costs. So there, it varies by hotel, and we are –we’re measuring each hotel. We have metrics for each of the hotels that break even when we’ve created plans for 5%, 10%, 15%, 20% occupancy, how we bring back bodies, we’re measuring the FTEs, we’re measuring the labor, we’re measuring all the different costs when we bring back services. We’ve been breaking down restaurants. When do we open restaurants? At what point, do we open restaurants? And so each of them are being evaluated case by case, market by market. But I think that covers it, yes.

Okay, great. Thanks for the color, guys.

Thank you. Our next question comes from Smedes Rose with Citi. Your line is now open.

Hi. Thank you. I just wanted to go back to you, Mark; you’ve talked about changing the operational model at hotel. I guess, I wanted to ask just a little bit more about your thoughts around labor specifically, kind of the cost to clean a room, if you think it’s going to go up or down, I guess in the sort of the post-COVID environment and I’m thinking of the brand protocols that have been called out in terms of extra cleaning, but then there’s talk about, having less cleaning while the guest is in a room. So, how do you think all that kind of balances out?

Good morning, Smedes. great question. So, I think obviously, the more labor to do the more extensive with deep clean between guests. And so we’re actually running tests running that right now to see how much more in minutes per room that means. But as to think that the offset, as you mentioned is, I don’t know how you feel, but right now, I don’t really want people coming into my room when I’m staying at the hotel while I’m staying there. Traditionally, they would come in and move your toothbrush and your razor, and put it on hotel next to the sink very nice and neat. I think today’s customer doesn’t want anyone coming in touching their toothbrush while they’re staying there. So, we envision it’s a much more low touch environment and during your stay, it’s a lot less operationally intensive. For instance, I think towel swaps is probably the primary need that folks are going to have. Maybe shampoo and conditioners, and how do we do that and how do we accommodate people’s desire to make it as hygienic as possible. So, right now, we’re actually running some tests to understand the efficiencies and how many rooms per day housekeepers can clean with the deep clean on room turns versus the less intensive efforts while guests are staying at the rooms. I don’t have any exact answer for you, but we’re monitoring it and working on it right now.

Okay. And then I just wanted to ask, I appreciate the RevPAR breakout by property, but are you guys longer going to provide hotel operating results in terms of your total revenues and EBITDA by asset or is this just sort of a temporary suspension given what’s going on?

Jeff, you want to talk about our reporting?

Yes, no, I think Smedes, for this particular quarter, it didn’t seem like it was particularly useful, but I think in the future we’d like to bring that back. I think the disclosure is good practice for us.

Okay. Thank you, guys.

Thank you. Our next question comes from Anthony Powell with Barclays. Your line is now open.

Hi, good morning. Can you hear me?

We can.

Great. Great. Just a question on CapEx. I understand the Frenchman’s delay, but there are a couple of other projects that were scheduled for next year. The Orchards Inn, Lexington and Vail renovation, are those still on schedule? Or that’s a little bit delayed as well.

Yes. So, on CapEx, as I mentioned in the prepared remarks, kind of went project by project to figure out what was rationale. This year, well completed the Michael Mina restaurant in Sonoma and Richard Sandoval restaurants at both the Worthington and the JW Marriott Cherry Creek, Denver as well as some other upgrades and some other ROI items. We do anticipate that Vail with the repositioning, we’ll complete that as planned next year. We will get the conversion to Barbara Beach done and that’ll happen in June in Key West. But Orchards probably gets pushed off an additional year that’s probably a 2022 project at this point.

Got it. Thanks. And in terms of your overall property mix, I think, you’ve targeted 50% resorts overtime. Did that go up as it role to this kind of event or are you still looking to have, half your business being more corporate stranded driven?

Yes, Anthony. probably, I wish we were a 100% resorts today. but now, we’re continuing to move to that direction. I think when we get to 50%, we can re-evaluate where the world is. But we’re going to continue our focus at dispositions and acquisitions over the next two years. We’ll continue to move us in that direction. So yes, we’d like to be at least 50% potentially more over time.

Okay. Great. Thank you.

Thank you. Our next question comes from Dori Kesten with Wells Fargo. Your line is now open.

Thanks. Mark, do you expect your independence to invest in technology to go lower touch with a mobile check in or food ordering? Or should we expect their lower touch to be more about the fewer FTEs in the near term?

I think it’s going to be a – Dori, good morning. I think it’s going to be a mix. So there are some third-party providers that do things like mobile key. So, we’re working on that. We haven’t implemented that yet. But that’s something we’re trying to evaluate and make sure that from a security standpoint in the kind of a technology access that we can utilize those. But – they are not going to have the size platform. They’re not going to have the tech budgets that the brands have. So, we’re going to have to address some of that just customize services at the hotel. So certainly, we can do a lot of the cleaning protocols. Similarly, at the independence that we can at the brand, but I think that there’s going to be a different process around giving customer insurance. And I think the technology, there’s going to be some trade-offs independence just aren’t going to be able to deliver the same kind of efficiencies and same kind of technology and we just have to acknowledge that and hopefully, more than make up for customer service.

And is it the receipt of both the key money and the theme money for Frenchman’s? Is that tied to the app via opening date?

The key money is due when we open the property. So yes, it’s tied to the opening date. The theme application, if it’s approved, is tied to the completion of the construction of that one wing of the hotel that could serve as a future hurricane shelter for the Island.

Okay. And there’s no plans to move that forward for this hurricane season?

No. It would take over a year to complete. So, it couldn’t be done for this hurricane season and all of that.

Okay. Thank you.

Thank you. Our next question comes from Thomas Allen with Morgan Stanley. Your line is now open.

Hey, good morning. Just a follow-up on the question about breakeven earlier, what ADR declines or you’re assuming in those breakeven.

Jeff, you want to take that?

Yes. I can circle back with you to get more detailed on it, but I think the numbers that we’re assuming that are behind are sort of double digit declines. So, sort of in the teens on rate to come up with those, but I can circle back with a few up with you, Tom if you like, the reality is it’s going to vary by hotel and over time that we’re forecasting and effectively, when we hit those breakeven points.

Okay. And then this is a tough question to answer, but 2020 was supposed to be a great citywide year for your portfolio. Can you just think about like when the next time you could have a really good citywide line-up? I guess it’s a two-part question in terms of like, can you just – can cities backfill or fill in. today, we have enough empty spots to fill in prior years, conventions into future years and then just any estimate on when you think things could go back to normal?

Well, Thomas, I think the one thing is go back to normal probably depends a lot on healthcare remedies, right. So, when are the treatments available, when is the vaccine available? I think until there’s a vaccine immunity in the next couple of years, you’re not going to see things get all the way back to normal. It’s just not realistic. As far as groups returning, listen, we’re setting a very low benchmark this year. So, the year-over-year increases could look terrific. These were kind of come off of a base of virtually no citywides, I think, for the back half of this year, generally citywides take about three years to plan. But we’re going to go into unprecedented uncharted water here. There’s going to be plenty of availability at convention centers and at big box hotels on relatively short notice. So, could you put together a citywide instead of three years in six months? Yes, because we’re going to have enormous availability in the United States over the next couple of years. So, we would envision that a lot of these citywides are they’re orchestrated by people, who make their living organizing conventions. So they’re highly motivated to get them done. It’s a matter of survival for their business model. So they’re going do everything they can to get them back up and running. So, we envisioned that you’ll start seeing it ramp up pretty quickly when people are comfortable meeting in large groups again. When that date is, again, we can’t give you assurance a specific depend on the healthcare evolution as we move forward. But we do think it’ll come back relatively quickly from low levels, but it won’t return to normal for a number of years.

Helpful. Thank you.

Thank you. Our next question comes from Lukas Hartwich with Green Street Advisors. Your line is now open.

Thanks. Just one left for me. I may have missed this earlier in the call, but can you talk about demand trends for markets that are starting to open back out from shelter-in-place?

Yes. So, the small resorts we’re seeing, I mentioned some stats earlier in the Q&A. We’re starting to see some pretty good, again off of very small numbers, some pretty good demand in Sedona and Huntington Beach and Lake Tahoe, again, off of very small numbers. So, the demand in the last couple of weeks is certainly improved. If you look across our portfolio so in April, when things started to loosen, the cadence got a little better as we went through. So week by week give you the four weeks in April, it starts the 10.9%. Second week, 12.5%. Third week was 19.1% and now we’re almost 21%, the last week of April. So, as things loosened up, we saw a little better occupancy that’s at our open to 10 opened hotels, but nothing too exciting as we are encouraged by the call volume in the last two weeks at the resorts and then for the urban business transient, it’s very small numbers at those hotels. We are getting some group for group inquiry. But on the business transient side, even the call volumes they’re up a little bit still at very low levels.

That’s really helpful. Thank you.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Mark Brugger for closing remarks.

Thank you. Thank you everyone on this call. We appreciate your continued support for DiamondRock. Please stay safe and we look forward to updating you on the next quarter. Take care.

Ladies and gentlemen, this concludes today’s conference call. Thank you and you may all disconnect.