RLJ Lodging Trust (RLJ) Q3 2021 Earnings Report, Transcript and Summary

Welcome to the RLJ Lodging Trust Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Nikhil Bhalla, RLJ's Vice President and Treasurer of Corporate Strategy and Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2021 Third Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter; Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results; Tom Bardenett, our Executive Vice President of Asset Management, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us today. We hope that many of you are back in the office. And for those of you with children, we hope that the transition back to school has been smooth this fall. We were pleased that the recovery of the lodging fundamentals continue during the third quarter, despite some choppiness caused by the Delta variant from mid-August through early September. Although the industry's RevPAR growth was primarily driven by leisure demand, the improvement in business travel and group trends also contributed, which was evident in the quarter-over-quarter pace of growth of both the urban and top 25 markets relative to the overall industry. We are encouraged that these positive trends have continued through October. During the quarter, the composition of our portfolio allowed us to capture these improving trends, which drove our strong performance. With the backdrop of the lodging recovery gaining momentum, we executed on multiple strategic initiatives. Since our last call, we have continued to actively recycle proceeds from noncore dispositions into high-quality acquisitions. We further enhanced our already solid balance sheet by raising an additional $500 million of high-yield bonds and repaid the 6% FelCor senior notes, while further laddering our debt maturities and increasing our acquisition capacity under our credit agreements, and we continue to advance on our internal growth catalysts. These efforts have further enhanced our portfolio and created incremental balance sheet flexibility, positioning us to leverage multiple channels of growth to drive outperformance throughout the entire cycle. With respect to our operating performance, our open hotels achieved 63.8% occupancy during the third quarter, which was a 310 basis point increase over the second quarter, achieving 79% of 2019 levels. July recorded the strongest occupancy of the pandemic, while August and September moderated due to a combination of normal seasonality and the impact of the Delta variant. We were encouraged with our ability to maintain rate during the quarter. Our portfolio achieved an ADR of $160, which represented nearly 90% of 2019 levels. We were also able to demonstrate pricing power, with over 25% of our portfolio exceeding 2019 ADR, which gives us optimism that consumers can absorb increased pricing when demand normalizes. The continuation of strong leisure demand drove our weekend occupancy to 76.8%, which was a 280 basis point increase over the prior quarter and our weekend ADR improved by nearly 12%. Given the elevated leisure demand, our resort hotels achieved RevPAR that was 114% of 2019 levels with ADR exceeding 2019 levels by 20%. Additionally, a number of our drive-to market exceeded 2019 RevPAR such as Charleston in South Florida, which achieved 130% and 117%, respectively. We were also encouraged by the sequential improvement taking hold in both business transient and group. As an indicator of improving business travel momentum, our weekday occupancy grew to 58.5% during the third quarter, a 320 basis point increase from the prior quarter. Our urban hotels also benefited from this trend, achieving 76% of 2019 occupancy, resulting in a 400 basis point improvement over the second quarter. Overall, we were pleased to see our business transient revenues improve by 44% since the last quarter, led by markets such as Atlanta, L.A. and Boston. The growth of our group revenues was the strongest of all of our segments, increasing by 54% since the second quarter with room nights improving by 34%. We benefited from continuing improvements in small social groups, such as weddings and sports teams, which are attracted to our product type. The pace of recovery is another positive sign, given the significant momentum in our business transient and group revenues, which recovered to 43% and 46% of 2019 levels, respectively, nearly doubling from the prior quarter. Overall, our portfolio is well positioned, as evidenced by our third quarter market share gain of 340 basis points, which highlights the competitive strength of our high-quality portfolio. Our top line grew by 21%, while our relentless focus on managing costs allowed our hotel EBITDA to grow by 37%, demonstrating the benefits of our lean operating model. Now relative to capital allocation, we continue to be very active, recycling capital and advancing on our internal growth catalysts. Since late last year, we have sold several noncore assets and are currently under contract to sell the DoubleTree Metropolitan, which is subject to a significant nonrefundable buyer deposit. We look forward to providing additional details after this transaction closes. Including this transaction, we will have sold 8 noncore assets at a highly accretive multiple of over 22x 2019 EBITDA. We are on track this year to accretively recycle over $200 million of proceeds generated from noncore asset sales into 3 high-quality acquisitions in markets positioned to outperform throughout this cycle. In August, we acquired the Hampton Inn & Suites Midtown Atlanta, which is already outperforming our underwriting. We recently closed on the AC Hotel by Marriott Boston Downtown. This hotel recently opened in 2018 and is located within the ink block development in Boston's highly desirable South End neighborhood. Boston is a growing hub of the life sciences industry and the AC sits in an A+ location that is central to the surrounding office and laboratory development. This was an off-market transaction and was acquired at a discount to pre-COVID values and replacement costs. We are also under contract to acquire a recently constructed hotel located within the heart of the upscale Cherry Creek submarket of Denver. We are excited to enter into this highly sought-after and difficult to enter submarket of Denver and look forward to providing additional details after this acquisition closes. Each of these acquisitions consistent with our strategy of acquiring premium-branded, rooms-oriented hotels located within the heart of demand in high-growth markets. Each of these hotels will also generate RevPAR and margins which are accretive to our current portfolio and are expected to enhance our growth profile. By match funding these acquisitions with proceeds from noncore assets sold at a substantially higher multiple, we have locked in significant value. In addition to driving our external growth, we are continuing to make meaningful progress towards unlocking our unique and compelling internal growth catalysts, which we continue to expect to generate $23 million to $28 million in incremental EBITDA. We remain on track to relaunch our 3 conversions in Santa Monica, Mandalay Beach and Charleston in 2022. The Mandalay Beach renovation is in full swing. For Santa Monica and Charleston, we've completed the model room design and we'll be starting these renovations shortly. We have made significant strides towards driving multiple channels of growth with our capital recycling and internal growth initiatives, further strengthening our ability to drive EBITDA growth that is above and beyond the cycle recovery. Our balance sheet continues to be a competitive advantage and allows us to execute on our internal growth catalysts and acquisition pipeline while remaining disciplined. Looking ahead, we are encouraged by the moderating COVID cases and the generally positive economic backdrop supported by a strong consumer and rising corporate profits, but also acknowledge concerns around inflation. That said, for the fourth quarter, we expect leisure to follow normal seasonality patterns but remain healthy given the continuing flexibility and hybrid work environment. We also believe that the reopening of our borders to international travel will provide incremental tailwinds for urban markets. We expect business transient to continue to gradually improve through the remainder of the year as offices reopen. We also anticipate continued improvement in small social group bookings which is supported by the fact that our group pace for the fourth quarter improved by 28% since our last call, and we booked close to 25% of our forecasted fourth quarter group revenues during the third quarter. We are already seeing these positive trends in October's strong performance. As we look out to 2022, we expect a meaningful step forward for the industry with leisure continuing to be strong, while group and business transient accelerate as office reopenings gain traction. These positive trends should especially benefit urban markets, which should also see tailwinds from increased international travel. These trends, combined with the rate discipline our industry has maintained and the operational efficiencies achieved during the pandemic, give us cause to be optimistic about the potential margin improvement that our industry can achieve as the recovery advances. With respect to the improving backdrop and the broadening of the recovery to urban and key gateway markets, we remain well positioned given our favorable portfolio composition, the ramp-up of our recent acquisitions and the unlocking of $23 million to $28 million of incremental EBITDA from our embedded catalysts. We believe that all of these factors have positioned us to outperform throughout the entirety of this cycle and will drive significant long-term shareholder value. I will now turn the call over to Sean. Sean?

Thanks, Leslie. We were generally pleased with our third quarter results despite the impact of the Delta variant. The third quarter results meaningfully accelerated from the second quarter and have been strong so far during the fourth quarter. Pro forma numbers for our 97 hotels include the acquisition of the Hampton Inn & Suites Atlanta Midtown and exclude the sales of the 3 noncore hotels in Hammond, Indiana, which were sold during the quarter. Additionally, our pro forma numbers have not been adjusted to reflect the acquisition of the AC Hotel Boston Downtown, since this transaction closed after the end of the quarter and will be incorporated into our pro forma numbers starting in the fourth quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold hotels and one acquired hotel during RLJ's ownership period. Our third quarter portfolio occupancy of 61.5% represented a 3.9 percentage point improvement from the second quarter. Our portfolio's third quarter occupancy exceeded 75% of 2019 and was impacted by both normal seasonality and the delta variant. Occupancy hit a pandemic peak of 66.3% in July, with August and September finishing at 60.4% and 57.7%, respectively. These results were better than we expected as our portfolio continued to capture demand in the current environment. Strong summer travel demand provided our hotel operators with the ability to yield rates, resulting in average daily rate growing over 12% from the second quarter to $160 during the third quarter. Our leisure markets such as Key West, Charleston and Miami generated ADRs in excess of 2019 by 47%, 31% and 31%, respectively. The improving operating trends during the third quarter led our entire portfolio to achieve hotel EBITDA of $67.4 million, which improved to over 60% of 2019 levels. We are encouraged with our ability to report strong operating margin of 28.8%, which were only 280 basis points behind the comparable period of 2019, despite revenues being 33% below 2019. Our recent margin performance provides us with confidence that our portfolio should be able to generate margins above 2019 when revenues return to pre-pandemic levels. During the third quarter, 95 of our 97 hotels were open. The DoubleTree Metropolitan New York remains closed, and the Hotel Indigo in New Orleans is also temporarily closed as a result of damage from Hurricane Ida. During the third quarter, our open hotels achieved occupancy of 63.8%, average daily rate of $160 and generated $70 million of hotel EBITDA, representing a 30% improvement from the second quarter. We are encouraged that the post Delta momentum that started during the second half of September has continued into the fourth quarter. During October, which is expected to be the strongest month of the quarter, our portfolio is forecasted to generate occupancy of approximately 64% and ADR of approximately $166, which will result in 11% RevPAR growth from September. Importantly, October ADR is forecasted to represent the highest ADR since the start of the pandemic, providing evidence that higher-rated customers are returning. Turning to the bottom line, our third quarter adjusted EBITDA was $60.1 million, an increase of $16.6 million or approximately 38% from the second quarter. Third quarter adjusted FFO per share was $0.17, an increase of $0.10 from the second quarter. As Leslie mentioned, while third quarter demand was strong throughout the quarter, we remain vigilant in maintaining cost containment initiatives that are appropriate for the current environment. Underscoring our continued focus, our third quarter total operating costs remained more than 30% below the comparable period of 2019. With all that being said, we are continuing to monitor the current labor challenges and are focused on implementing best practices to remain competitive in our local markets. On a relative basis, our portfolio is better positioned to operate in this environment as a result of fewer FTEs required in our hotels, given our lean operating model and smaller footprints with limited F&B operation. Overall, we expect the tight labor environment to persist near term, although we are encouraged by early successes in attracting applicants and filling open positions. We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital during 2021. These activities include: raised $1 billion through 2 high-yield bond offerings that were both oversubscribed with annual coupons of 3.75% for the 5-year bond and 4% for the 8-year bond, which represented the tightest pricings ever for a non-investment-grade lodging REIT; use these proceeds to repay 2022 and 2023 maturing debt and fully redeem the $475 million, 6% FelCor senior debt, which was our most expensive debt; extended the maturity date of a $100 million term loan from January 2022 to June 2024; added a 1-year extension option on $225 million of our 2023 maturing term loans and amended our corporate credit agreements to extend covenant waivers through the first quarter of 2022; increase our acquisition capacity to $450 million; and add flexibility to retain certain proceeds for general corporate purposes. The execution of these 2021 transaction is a testament to our strong lender relationships and favorable credit profile. These initiatives resulted in the expansion of our weighted average maturity to 4.5 years and a reduction of our weighted average interest rate by approximately 50 basis points. Turning to liquidity. We ended the quarter with approximately $625 million of unrestricted cash, $400 million of availability on our corporate revolver, $2.4 billion of debt and no debt maturities until 2023. We continue to maintain significant flexibility on our balance sheet. Currently, 100% of our debt is fixed or hedged and 83 of our 97 hotels are unencumbered. As we expected, our portfolio generated positive corporate cash flow during the third quarter. We are on track to generate positive operating cash flow for the full year 2021 based on the actual year-to-date results and assuming the current trends in lodging fundamentals continue. We maintain a disciplined approach to managing our balance sheet. Even as fundamentals are improving, we remain focused on maintaining adequate liquidity while making prudent capital allocation decisions to position our portfolio to drive outperformance during the recovery and beyond. We remain among the best positioned lodging REITs to take advantage of ROI investment and external growth opportunities, which we demonstrated through our recent acquisitions. Additionally, we are continuing to prioritize high-value revenue enhancement projects, margin expansion initiatives and our 3 2022 conversions. We continue to estimate RLJ-funded capital expenditures will be between $75 million and $85 million during 2021. In closing, RLJ remains well positioned with a flexible balance sheet, ample liquidity, lean operating model and a transient-oriented portfolio with many embedded catalysts. We will continue to monitor the financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt and increase our overall balance sheet flexibility. Thank you, and this concludes our prepared remarks. We will now open up the line for Q&A. Operator?

[Operator Instructions]. Our first question comes from the line of Michael Bellisario with Baird.

Let me just -- first question on the -- what are the conditions to closing and getting that deal done?

Mike, this deal is subject to normal customary closing conditions. The buyer has a sizable deposit. And so just normal and customary closing conditions.

Any financing contingency for the buyer?

No.

And then a question for Tom, I want to dig into the customer mix that you guys saw across the portfolio in October. Maybe can you provide some details? Where was BT? Where was group versus 2019 levels? And then where have you seen OTA and discount nights trending recently?

Yes, Michael. So here's what we see in October. The continuation of leisure as a strong demand generator was present in October, which is similar to what we stated in Q3. Group, again, started to become a little bit more of the mix in regards to what we're seeing is the growth from Q2 to Q3, and that continued into October. So we benefited quite a bit from small groups, as we stated in the release as well as sports and weddings. And then you see a lot of sporting activities where we're picking up group business going into the fourth quarter with October being the strongest of the 3 months. And then BT continued sequential improvement. So we're seeing that mix continue to rise, and we're enjoying the average rate that comes with that. For instance, small and regional corporate accounts have been pretty significant in Q3. And now we're starting to see the national corporate accounts start to pick up speed and see the average rates coming along with that. So we're seeing that in markets like Silicon Valley, Atlanta, Boston and Los Angeles, where we're seeing quite a bit of the national corporate accounts start to travel as well.

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

Great. Piggybacking on that, so for the October ADR and RevPAR, can you compare those versus '19 for us? And then is there an occupancy level you've historically had more leverage to drive rate more meaningfully by yielding out lower-rated business versus just benefiting from the buildup in BT and the rate that comes along with that?

Sure, Austin. I'll start, and then I'll turn it over to Tom to provide some details. So relative to 2019 levels, our rate was down about 14% and occupancy was down roughly 25%. And so both of those were sequential improvements from September on a trend-wise perspective, but that's where we were in October relative to 2019.

And then on your second part of the question, in regards to ADR and some initiatives that we're focused on to make sure that we're driving average rate through this recovery is the benefit of the revenue management systems is allowing us to really lean in with an example of that is we got about 32% of our portfolio that's Hilton. And for instance, Austin, we have what's called continuous pricing now, which allows you to change pricing more often, 3 times as much as you used to, which is also giving us more confidence where you can set it and trust it. So that's one of the angles on the BT side. The other thing that I would say is a good setup for 2022 is all the brands are really moving towards negotiating dynamic pricing, which is all about setting your rate off a bar or retail versus fixed. So as we go through the RFP process, not only in Q4 as we're negotiating for 2022, you got a rollover of rates from 2020 to '21 and now to 2022, which allows us to have rate integrity out of the gate. And then in the dynamic pricing, you'll have the opportunity to set your bar rates and then float off of that versus the fixed discount, which could be anywhere from 10% to 25%. And lastly, on the group side, we're seeing rate levels at 2019 prices for 2022 versus 2019 and rate continues to grow in Q3 and Q4 with group where we're getting closer to 90% of rate levels. So we're encouraged by what's happening from a rate integrity standpoint and leaning in on the revenue management systems when it comes to transient to give us some sustainable ADR growth.

That's really interesting. And then Leslie, with the sale of the DoubleTree Met pending, in New York, where does that leave you as far as target exposure within the New York City market? And are you comfortable with sort of the current positioning in the market from a product type and submarket perspective? And then separately, how should we think about pricing upon that deal closing off of '19? Or should we kind of look back a little bit further, given the performance of that market leading up to the pandemic?

Yes. I would say that Austin, overall, with the disposition of DT Met, we have generally rightsized our exposure to New York. It's less than 3% of our EBITDA for 2019. We recognize and acknowledge that New York is going to be slower to recover, but you have to really look at it on an asset-by-asset basis, a submarket perspective. There's no broad strokes you can take on New York. We think that The Knick, which is an iconic asset in an iconic location, is leisure centric. It has a different cash flow profile. The Upper East side, Marriott, has its own demand generators being right next to the hospital. So we think that those 2 assets make for a decent footprint relative to New York and sub-3%, we think, is the right size. In terms of -- on a valuation, what I would say is that you should expect the valuation to be in line with trades for similar assets of age, cost structure and capital needs for this asset. But it's really just giving us on the disposition for DT. It's really given us an ability to be -- to do accretive recycling. If you look at the acquisitions that we're doing, they're accretive on a growth, on margin, the quality of the use of the asset -- and all of that is giving us the ability to drive above cycle growth in EBITDA. And so we feel very good about the trade and what it's allowing us to do.

Our next question comes from the line of Dori Kesten with Wells Fargo.

Your margins are getting pretty close to '19 levels despite RevPAR remaining about 30% below. Can you give us an update on your view on where margins may be able to settle out on '19 revenues?

Yes. So Dori, the conventional wisdom for the industry is that it's somewhere in the 100 to 200 basis points of margin expansion because of the COVID synergies. We continue to believe that RLJ is well positioned to be within that range. And so we're comfortable with that. And I think what we've seen on the early indications of our ability to get to the margins even with being 30-plus percent below 2019 levels gives us confidence around that conviction. The other -- the other factor around margins is about the cost structure that we're implementing and we've gone over that in the past with respect to housekeeping, limited F&B as well as the ability to complex all those things, we continue to remain confident, are alive and well in this environment.

Yes. I mean, Dori, what I would sort of add on to that is that, I mean, generally, our peers and ourselves have sort of talked about the 100 to 200 basis points. And I think we talked about the categories which Sean covered: F&B, housekeeping, clustering it really is going to boil down to who's got a portfolio and a mix that's going to allow it to be sticky? And who can train their customer? And we think our portfolio is aligned for that. If you think about the fact that we've got the chain scales that we are in, which allows us to train our customers you think about our Hilton exposure, where Hilton has sort of committed to the opt-in structure, you think about our length of stay, you think about our fixed food service model, all of those things give us a higher probability of being able to achieve those efficiencies that the industry has been talking about.

And the add-on to the add-on is around our margin enhancement projects that we talked about earlier in the summer where we have 50 basis points of incremental margin on top of the industry with respect to a lot of the initiatives that we outlined earlier in the summer on contract renegotiations, et cetera, which are unique to RLJ intangible. And so I think that's the other part is that there's industry plus what we've done in the portfolio.

Okay. And can you remind me what your exposure is to international demand?

Historically, international across our portfolio was sub 3% or sub 2% to 3% across our portfolio. Now obviously, that would be higher in a San Francisco, New York and South Florida.

Our next question comes from the line of Neil Malkin with Capital One Securities.

Just going back to The Met for a second. Lastly, really don't know how much you can say, but the fact that you're selling this relatively soon, and given the fact that I think everyone is aware of the issues plaguing New York even before COVID. And I can't imagine that pricing is -- was great. And if that's the case, what does that kind of say about your view on the Manhattan or that sort of submarket over the next 2 to 3 years, given the need to transact now versus maybe when prices, ADRs, margins have recovered somewhat?

So Neil, first of all, we have been very thoughtful in the process that we've run. And obviously, because we haven't closed yet, we're limited on how we can sort of describe it. What I would say is that our team has been very good at identifying buyers and maximizing value. Obviously, within light of the context in which we sort of fit in here today. What I would say is that our selling this asset is -- there's no read-through on the balance of our assets in the market. What I would say is that this was an asset based on its age, its cost structure and its capital needs that make it different relative to the assets that we will continue to hold within this market. As I mentioned before on a prior question, I think The Knick is an iconic asset. It's in a talent location. Its cash flow profile was fundamentally different. And so there's no read-through from our perspective from this trade. This is really giving us the ability to recycle out of this asset into very accretive acquisitions, and allowing us to drive above cycle EBITDA growth as a result of repositioning that EBITDA.

Yes. And then the other part, this is part of a broader strategy around repositioning the portfolio as Leslie mentioned, and to be able to do it accretively. I mean, for us, this is a critical component of our ability to fund -- to self-fund our acquisitions at a very accretive way. So we will -- where we're selling at is over 10 times -- turns higher than where we're buying at today, both on an apples-to-apples basis. And so we believe that, that ability to very accretively and effectively fund our acquisition initiatives with dispositions, while improving our portfolio quality, while improving our metrics and while improving our growth profile, is a -- and preserving our existing dry powder that we had for acquisitions because it's self-funded is a critical part of how we're shaping the portfolio for growth throughout the cycle.

Yes. Okay. Just I guess, really quick, is the reason that the timing related to the covenant waiver positioning? In other words, would you have maybe been a little bit different in how you approach that if you hadn't had to be compliant in terms of liquidity restrictions from the waivers?

So I would say the timing of this was aligned with the expiration of the management agreement and the franchise agreement, Neil. And so again, this has to do with us being thoughtful about our process and timing it relative to the exploration of those 2 agreements was important to us.

Yes, and that was the driver of the timing. The timing was not influenced by where we stood on the covenant waivers.

Last one for me is actually just more about acquisitions. So obviously, in '19, you sold a lot of your portfolio, really focused it, improved the quality, et cetera. But that also gave you a very large cash balance. And another way to say that is a lot of earnings potential and EBITDA growth potential. And so I think you've done a great job of laying out and highlighting the internal levers you can pull. But maybe could you talk about the things that you're seeing? It sounds like it's heating up a little bit, but on the acquisition front, over the next, call it, 12 months, if you see yourselves being more aggressive in the market, particularly, I imagine you'll exit waivers over the next quarter or 2. So talk about that and then potentially looking at some portfolio opportunities to kind of put the bulk of that cash to work.

So you are right. We did come into the pandemic with meaningful amount of cash, and that has given us the ability to look at both internal and external growth opportunities. What I would say, Neil, your question is, one, if you sort of step back for a minute, we have a better line of sight to the recovery and there's generally consensus around that. We started to see more deal flow come to the market, and it's increasing across all product type. There continues to be a lot of capital chasing deals. But with more deals coming to market, that has started to sort of balance out. We've seen the sellers move from motivated sellers to more opportunistic sellers, and that's starting to emerge. And we think that's going to create a multiyear buying window. A lot of deals are being bid out. That's not where we focus at. We focus on off-market deals. We focus on the asset first and then leverage our relationships to get to the asset. And that's given us access to the deals that you've seen us close on. I think that Atlanta and Boston are great examples of that, Cherry Creek, which we alluded to is going to be in line in terms of the quality of the asset, the youth of the asset and the submarket is consistent with the growth profile that we're looking at. So our team is going to continue to be disciplined around those things and making sure that the deals are accretive on all fronts, accretive to our operating metrics, accretive to -- from a returns perspective as well. And so while we do have the capacity and there is incremental deal flow from our perspective, we're going to remain disciplined about how we deploy that.

And then the second part of your question with respect to the line of credit and the waivers. Once again, because of our strong lender relationships as well as our liquidity, the limitations around our acquisitions have not really inhibited our ability to execute our plan. The way that the credit agreements work is that it's a net acquisition number within the $450 million. And so net-net, if we execute everything that we've talked about today, we would start at 0. And so we still have that full capacity. And so that -- getting in or out of the covenant waivers is not really influencing our ability to execute. Now we do believe based on our expectations is that when we first measure covenants, which is going to be in the second quarter of 2022, that we should be in a good position to get out of the covenant waiver period but that is not inhibiting our ability to execute our plan.

Our next question comes from the line of Gregory Miller with Truist Securities.

My first question just relates to staffing. Could you provide roughly how close you are to normalized staffing levels for your corporate-focused hotels? Versus your leisure-focused hotels?

What I would say, Greg, is that overall, in our portfolio, we're running at about 55% of our 2019 labor, and that's on 64 -- kind of, call it, 64% occupancy. At our hotels that have been -- that have had the highest occupancy, which have been the leisure hotels, we're running about 75 plus or minus percent of 2019 levels. But we really think that, that demonstrates, because those hotels are running above 2019 occupancy with lower staffing really demonstrates, our ability to confirm and have confidence that we're not going back to 2019 levels. I know there's a lot of discussion around wage pressure, et cetera. We still think there's opportunity for efficiency related to labor as a result of not going back to 2019 levels.

My other question is related to what's going on in cold weather markets today? And we're seeing some data indicating some strengthening of holiday bookings in the cold weather markets. I'm not sure if it's related to pricing and warm weather markets over the holidays or just a leisure demand behavioral shift back to the northern markets and the urban markets, we have some concentration. So curious if you could provide any initial impressions on how Thanksgiving and the December holiday bookings or pricing power is progressing in some of the cold weather markets relative to pre-pandemic levels and perhaps anything you might be able to share about the Knickerbocker package pricing for New Year's versus 2019.

Greg, it's Tom. And first of all, I'm an upstater New Yorker, so I know a lot about cold weather markets. What I would say is what's interesting is -- If you think about the consumer and what they're interested in doing, they haven't been able to get together in last year with Thanksgiving, the holidays and larger crowds. And so we do think that's actually creating a surge in bookings. And certainly, we're seeing that on the shopping weekends as well. For instance, Leslie mentioned Boston as well as New York, and I'll give you some -- a little bit of detail around that. With the Thanksgiving parade being back, it's driving significant demand in New York. When you think about shopping weekends, not only in Chicago as well as New York, we have minimum length of stay restrictions because leisure is booking further out because they're concerned about availability. So that's encouraging where we can drive pricing power. And then to your last question about New Year's Eve, we are seeing the highest average rates that we have even compared to '19 and prior for The Knick. For instance, as you know, The Knick's rooftop actually overlooks the ball drop. So we're in a prime real estate to be able to drive rate and demand is coming in at better levels on the average rate side and similar pace levels from the past. So I would say that the cold weather markets are going to fare well with the holidays and the future bookings that we're seeing on the transient and leisure side are is what's going to drive that.

Yes. And this is really showing up in our urban stats, Greg. We've seen -- our urban rate growth has been the strongest rate growth so far this year. Our ADR has grown, and this is through current data, a little under 70% from the beginning of the year, and that's outpaced the entire portfolio by approximately 2,000 basis points. And so we're seeing strength in our ability to drive rate in these urban markets. And of the leading markets, markets like Boston are up 160% from year-end. New York is up 150%, Austin is up 120%. So we're seeing, in these urban areas, the ability to drive rate within our portfolio. And I think cold weather is -- 2 of the 3 that I mentioned are in cold weather climates.

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

This is Allison on for Anthony. So we've seen strong pricing on the leisure segment this year. How do you approach pricing business transient and group next year? And are you more focused on filling rooms? Or do you think you could push rate in those segments?

So on the BT pricing, a couple of things that we're considering. One is, as we talked about earlier about dynamic pricing, we think that's a benefit for all the markets. And when you start to see that once DAR and retail go up, you're floating off of that versus fixed pricing. So I think that that's a strong move to have more than 60% of your accounts on dynamic pricing versus, in the past, it might have been 50%. The second thing that I would say for the fixed pricing is you have -- most of the brands are all trying to roll over those rates from 2020 to 2022. So in past recoveries, you were discounting rates to try to get back to those levels. Now with the rollover, that allows you to position yourself when they start to travel at a better plateau, if you will, coming out of that floor versus in the past. And on the BT side, we are seeing that, that already is starting to come in at higher levels in Q3 and Q4 going into 2021, so there's no inability to try to continue to see that in 2022. On the group side, we're already at 2019 levels based on our booking pace of what we're seeing, and we're seeing that in the small groups, let alone when citywide and compression dates and things start to come back, we know that that's going to give us additional power on pricing to be able to see the combination between group and transient and the effects when both of those are traveling. And lastly, leisure. We do think there's some sustainability on leisure in some of the markets. The consumer has been obviously very -- had a pent-up demand, but there's also the opportunity to realize that with inflation and pricing, people are looking to go and travel again and domestic as well as international coming back, we think that there's going to be pricing power around that as well.

Our next question comes from the line of Tyler Batory with Janney Montgomery Scott.

This is Jonathan on for Tyler. First one from me, I wanted to follow up on the labor side. what kind of guest feedback are you hearing? And do you think you'll need to add labor or many of these to meet guest needs? Are you still providing ample services in this lower occupancy environment?

Yes. So what I would say is consumers are obviously very interested in getting a good experience and want to come back after receiving that. What we've noticed is with the new reimagined deliverables, both in food and beverage and housekeeping opt in, there's gradual changes taking place. For instance, as you know, hot breakfast was launched by Marriott. Hilton's getting back into providing that at all the select service and full-service properties. So we're reimagining what we're providing. Now one of the things that Leslie mentioned was the construct of our portfolio, it's a little easier to accept when it's free and it's in the rate what that deliverable is going to be. And so adjusting that offer and having a reduction of those items is actually providing still a great value and what I would call it is high quality versus high quantity. So we're getting pretty good acceptance levels in regards to with customers coming back, and that's primarily been leisure. As BT is starting to arrive again, they're appreciative of the fact that breakfast is there. As you remember, in 2020, it was more of a bag breakfast as we were going through those tough times. So we are getting back to normal levels, but a reimagined food and beverage experience. On the housekeeping front, I would say that the take rate is increasing, but it's still at historic lows. The tight -- or excuse me, the tidy and the light clean is being accepted and the efficiencies that we're getting benefit from a consumer having to go into the room just to take out the trash, give them additional linen or make the bed is still being well received in comparison to not cleaning at all. And so I think that, that's educating the customer to understand that that's the new way in regards to it's an opt-in versus an opt out. And lastly, because of our portfolio with our length of stay and 50% suites, we already have a built-in extended stay where it's 5-plus nights for many of our hotels. So that customer is already prepared for that project business where that expectation is it's kind of their second home while they're staying on a long-term project. And so, so far, I think our guest satisfaction scores are enabling us to see that there's momentum and improving based on the reimagined model that we're rolling out at the property level.

Yes. I mean all of Tom's comments really sort of encapsulate what I was talking about earlier in the sense of our portfolio mix, allowing us to really sort of capture some of the efficiencies because of the ability to kind of retrain our customer.

Okay. Great. I appreciate all the detail there. And then kind of a follow-up on the transactions and a bigger strategic question here. You've done the 2 transactions in Atlanta and Boston. Is that broadly a sign of confidence in the recovery in those urban markets and maybe a shift in thinking in the portfolio composition? Or is it more of a byproduct of where pricing remains rational and where you're finding the best value?

No. I mean these acquisitions are kind of right in the middle of the fairway in terms of how we're positioning our portfolio. These are great examples of what we want to -- want our portfolio to comprise of. It's young assets, high quality. They're premium branded. We've shown that we can do hard brands versus lifestyle brands. They're rooms oriented with 80% of the revenues coming from rooms. They're transient-centric with very small medium space. And so we think that we show great conviction in terms of what we have historically buying what we're looking to sort of position our portfolio at today.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

I had a question about the -- sorry, the repositionings you're working on. I know you've got 3, but you've either started or about to start soon. For the other, and I think you said that those are going to be minimally disruptive to operations. For the other 5 or 6 that are still to come, is it going to be the same kind of scope? Or are they still going to be very limited in terms of their disruption? And then is there any -- do we have any concerns about rising costs on labor or materials for those upcoming repositionings?

Yes, I think on the -- to affirm your initial comments around the 2022 conversions, we are on track for those by the end of '22 and we are well underway on Mandalay Beach and about to get underway on Charleston and Santa Monica. On the future conversions, we -- what we said is that we will likely launch a couple per year for the next several years. I would think, from a conversion scope, et cetera, they're going to be comparable scopes to what we've done thus far. It's going to be asset specific. It's going to be brand specific, et cetera. But our view around the value creation is that there's -- they will have significant ROI associated with the conversion, otherwise we wouldn't allocate capital to them. And so I think, from a cadence perspective, it's going to be a couple of years, and it's going to be high-quality sort of core hotels that we believe there's -- the theme around being able to capture incremental rate through a brand conversion will likely be the driver of incremental conversions as well. With respect to concerns around construction costs, labor costs, et cetera, which are real in the marketplace today, when we provided the ranges of the budgets that we provided to the market, we obviously provided a range for a reason. We baked in a lot of those factors into those ranges to factor in, which was still at the time a challenging both labor as well as materials environment.

Okay. Great. And just a follow-up to that. The Cherry Creek acquisition that's under contract, is that going to require any capital over the near term?

No. It's a very young recently-built asset.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Ms. Hale for any final comments.

All right. Thank you, everybody, for joining us today. We do look forward to talking to some of you guys next week at Nareit. For those of you who we won't see, we wish you a happy holiday as you move into the holiday season. Thank you, everybody.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.