Good morning, everyone, and welcome to DiamondRock Hospitality's third quarter earnings conference call. Before we begin, please note that many of the comments made on today's call are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.
Good morning, and welcome to our earnings call. The third quarter was a strong one for DiamondRock. Hotel profits hit their highest levels since the inception of the pandemic. In fact, hotel RevPAR was within 20% of the comparable quarter in 2019, with 12 of our 31 hotels actually exceeding the comparable quarter results in 2019, and five hotels setting all-time highs. The strength of these results exceeded our internal expectations. Our portfolio benefited from its geographic footprint and a concerted effort by our team to maximize the benefits from the resurgence in travel demand. Our portfolio took nearly 1,300 basis points of RevPAR index from our competitors in the third quarter. Moreover, having the industry's highest percentage of full-service hotels with short-term management agreements also played to our advantage in managing costs and driving profit flow through.
In total, this powerful combination enabled DiamondRock to generate a healthy $38.9 million of adjusted EBITDA and $0.10 of positive adjusted FFO per share. In the quarter, we saw travel demand increase in all travel segments, with leisure leading the way. Group and business transient also showed meaningful acceleration. There were some real positives for business travel trends in the quarter. We saw BT revenue jumped to 84% of the comparable 2019 levels, with occupancy up 26 percentage points over the second quarter. Encouragingly, business transient ADR was just 1% below Q3 2019 levels. The outlook for group is equally encouraging. Lead generation in the third quarter grew to over 12,400 leads, representing over 2.1 million future room nights.
July was the best month for lead volume, with over 750,000 room nights. While the Delta variant that emerged late summer led to a drop-off in activity in August, meeting planners appear to have shrugged off the headlines as production snapped back close to July's pace by September. In addition to strong operating trends, which Jeff will discuss in a moment, DiamondRock continues to make tremendous progress on internal and external growth initiatives to drive outsized cash flow growth in 2022. Let me highlight a few of the bigger ROI projects. Our Vail resort is finishing a $40 million repositioning. By the end of this month, the resort will be relaunched as The Hythe Vail Resort and Spa, a Luxury Collection hotel. The repositioned resort is expected to generate several million dollars of incremental EBITDA.
Our Barbary Beach House Key West Resort will also complete its conversion in November. It will be relaunched as the only Margaritaville Resort in the Florida Keys. We expect the repositioning to allow us to push average rate by $15 and to generate several million dollars of incremental retail and bar sales. The last ROI project I'll highlight is in Denver, where we are underway with the up-branding of the JW Marriott to a Luxury Collection hotel to be named The Clio. This one should be completed in the first quarter of 2022. These ROI repositionings are expected to deliver IRRs north of 30%. As you might have guessed, we are big believers in these type of projects, and our past success gives us great confidence.
As a testament to DiamondRock's track record, I'm proud to announce that The Gwen was named in Condé Nast Traveler's 2021 Readers' Choice Awards as the No. 1 hotel in Chicago and No. 8 in the world, the highest ranking of any REIT-owned hotel. In addition to The Gwen, Condé Nast also recognized several of our other outstanding hotels, including Cavallo Point in Sausalito, both of our hotels in Key West, and L'Auberge de Sedona in Sedona, Arizona. As a final comment on ROI repositionings, I'll just mention that we are working on several other up-branding opportunities within the portfolio. We hope to share those with you in coming months. Let's turn to acquisitions and dispositions. We have been active in upgrading and focusing the portfolio. In the third quarter, we successfully recycled proceeds from our second quarter dispositions.
Our two new acquisitions are the Bourbon Orleans Hotel in the French Quarter of New Orleans and the Henderson Park Inn, a beachfront resort in Destin, Florida. These acquisitions align with our strategy to focus on hotels that resonate with today's traveler as they are experiential and leisure-oriented lifestyle hotels. I am pleased to announce that both hotels are forecasted to exceed our underwriting for 2021. In fact, the Destin beach resort, that deal is now tracking to be an 8.8% cap rate on 2021 NOI. While this is great, we are not resting on our success. We are actively pursuing several unique hotel investment opportunities that are located in attractive lifestyle markets. I'll now turn the call over to Jeff for more details on our results and balance sheet. Jeff?
Thanks, Mark. I'll start by highlighting DiamondRock's excellent liquidity. We finished the quarter with $538 million of total liquidity, comprised of $67 million of corporate cash, $71 million of hotel-level cash, and $400 million of capacity on our revolver. Leverage is conservative with only $1 billion of total debt outstanding against roughly $3.5 billion in hotels and resorts. Overall, the balance sheet remains very strong. As Mark mentioned, we expect to remain an active but disciplined acquirer of on-strategy properties. We have over $300 million of investment capacity today while operating within our long-term leverage targets. Let me share a few success stories in our portfolio this quarter. Midweek occupancy at our urban hotels was up 26 percentage points over the second quarter. The up-branding of the Lodge at Sonoma to the Autograph Collection has been very well received.
Since completion early in the third quarter, total RevPAR is nearly $460 a night, with ADR up over $100 a night from the second quarter. Third quarter ADR is 22% higher than 2019, whereas prior to renovation, ADR was 4% below 2019. Performance has exceeded our expectations, and the Lodge is expected to meaningfully exceed our budget for 2021. The Hilton Burlington generated one of the three biggest upsides to budget during the quarter on strong RevPAR and margin gains. Average daily rate was over $300 per night and among the 10 best in the portfolio. For those who have never been, Burlington is a terrific college town that has quietly evolved into a foodie destination, anchored by some of the highest-rated craft breweries in the United States.
Our pair of hotels in Key West continued to deliver strong performance, with third-quarter EBITDA margins 3,000 basis points above 2019 levels. I must recognize the Henderson Park Inn, our newest acquisition, for beating our underwriting with the third highest total RevPAR in the quarter, $777 a night. Triple sevens. Third quarter would have been even better if not for the impact of wildfires in Northern California, which forced a six-week closure at The Landing Resort & Spa and resulted in $1.8 million of lost profit. The resort is fine and back open now. We filed an insurance claim and hope to collect lost profits in the coming months. As for our Bourbon Orleans Hotel, I should note that while Hurricane Ida did impact New Orleans, we were fortunate not to have any material damage.
In fact, our team quickly restored power to the Bourbon Hotel, one of the first hotels back online in New Orleans, allowing us to opportunistically book first responders. We expect to beat original underwriting here for 2021. Let's talk about profit flow through in labor costs. Third quarter wages and benefits were 30.4% of revenue, just 50 basis points higher than 2019, owing to a 2% improvement in man-hours per occupied room. Despite slightly higher overall labor costs, our asset management team and operators were able to develop several creative offsets to maximize overall profitability by optimizing revenue management for the labor environment.
This is how we held gross operating profit flow through at a constant 45% in the third quarter versus the second quarter, and why comparable third quarter hotel EBITDA margins were up over 300 basis points from the second quarter. We think this is a great result in this environment. Turning to group, our geographic footprint is a real advantage for group trends in 2022 and beyond. Group revenue on the books for 2022 increased 14% from the second quarter, an acceleration from 8% in Q2. Group revenue on the books for 2022 is now nearly 50% above the forecast for 2021.
Group rates for 2022 are $50 a night higher than 2021 year to date, owing to the fact many of DiamondRock's key group markets, like Boston, Chicago, San Diego, and Phoenix, have strong convention calendars next year. Across the entire portfolio, citywide room nights for 2022 increased 7% from the second quarter. Compared to 2019, citywide room nights for Boston, Chicago, and San Diego collectively are up 3% in 2022 and up 5% in 2023. With that, let me turn the floor back to Mark for concluding remarks.
Thanks, Jeff. Before we take your questions, I wanted to touch on our ESG performance and discuss our outlook. Recently, DiamondRock was again named the hotel sector leader by GRESB and number one among all lodging REIT peers. Being a good corporate citizen and aligning these objectives with our business is a high priority for DiamondRock. I wanna thank everyone on our team whose dedication made this achievement possible. Let's turn to DiamondRock's setup for 2022 and beyond. We think DiamondRock has four major competitive advantages over many of the peers. First, our portfolio market exposure is uniquely favorable in three ways. We have numerous resorts benefiting from the boom in leisure travel. Our well-located urban properties are poised to expand on group and business transient trends as the second leg of the recovery kicks in.
Our group recovery should be above industry average because of our geographic footprint with the convention calendars in our most important group markets, all very strong through 2023. The second advantage we have is the multiyear benefit from our hotels that have recently completed repositionings, such as the Lodge at Sonoma, The Hythe Vail, Margaritaville Key West, and the Clio Denver. The third advantage is our industry-leading percentage of third-party terminable operating agreements. This gives us more control and ability to manage costs than many of our peers. This benefit is amplified by last year's conversion of nearly 20% of our portfolio from Marriott brand management, which should add over 50 basis points of portfolio margin expansion alone. The last advantage I'll point out is our best-in-class asset management team's ability to implement strategies to gain market share.
There's no better evidence than stealing nearly 1,300 basis points of share last quarter. I'll conclude the prepared remarks by saying that we are excited about our future and see things improving more rapidly than on our last call. At this time, we're happy to take your questions.
Thank you. If you have a question at this time, please press Star then One on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Rich Hightower with Evercore. Your line is open. Please go ahead.
Hi, good morning, everybody.
Good morning, Rich.
Morning. I'd like to go back to the sort of acquisitions environment for DiamondRock, and you did make some references to this in the prepared comments. You know, just in terms of the deals you're looking at currently, you know, the ones that you've transacted on, the ones that you've maybe passed on or didn't quite make it to the final round. I mean, just give us a little more color on, you know, some of the differences within that pool of assets at this point.
Sure, Rich. This is Mark. We said in the prepared remarks we're comfortable with about $300 million of balance sheet capacity towards acquisitions. I think currently, to give you a little history this year, I think we've lost every bid in a broker deal this year, because there is a ton of capital chasing hotels. It is a highly competitive environment. You know, every private equity firm is chasing hotels. They like the recovery story, and some other REITs have stretched much more than we would have on certain acquisitions, with just different assumptions and outlooks. Currently, we have, I think, five written offers out, for most of those are off-market deals. I think of those five, four are resorts, one that's not a resort. They kind of unique lifestyle market.
We're spending most of our time on off-market deals because it is a very competitive marketplace, and trying to use our relationships and sometimes different visions for the property's repositioning to try to do deals that make sense for our shareholders.
Okay. Appreciate the color there. Maybe, Jeff, just to go back to the comments on group, I was sort of furiously typing, and I think I missed a couple points, but are you able to kinda tell us where group booking pace for 2022 is at this point as compared to same point in 2019?
Yeah. In 2022, our pace for 2022 compared to 2019 is down about 25% from where it was at that time. Is that useful?
That is useful. Thank you.
Yeah, Rich, I would just tell you.
Thank you.
I'm sorry. Let me tag on before we take the next caller just on the group. The convention calendars for our properties are one of the reasons we're relatively constructive next year is Chicago and Boston are our two most important markets. Chicago has 1.25 million citywide room nights scheduled for 2022, which is actually 100,000 more than 2019, and Boston has almost exactly the same number of room nights for next year as it did in 2019. Phoenix is ahead of 2019. San Diego is within 5% of 2019. D.C. is above Salt Lake City is solid. We see things really picking up, particularly after the first quarter of 2022, and we think our footprint's gonna be an advantage for DiamondRock next year. With that, happy to take the next call.
Great, thanks.
Our next question comes from the line of Smedes Rose with Citi. Your line is open. Please go ahead.
Hi. Thanks. Mark, I wanted to just ask you know, obviously, a theme this year has been this, you know, rebound in leisure and leisure resort properties doing better, significantly better than what they saw in 2019. How much, I mean, do you think that can continue over the next couple of years? Do you think operators just sort of realize, you know, we can have better pricing power here, and we're not going back, and even if it means maybe slightly lower occupancies? Or do you think, you know, it kind of settles down and reverts back to kind of the, you know, pre-COVID world?
No, it's a great question, Smedes. Our view, I guess, is multilayered, but we think a lot of it is sticky. Some inevitably as the world opens up, particularly at the very high end, you know, people paying over $1,000 a night can clearly go anywhere. As the Amalfi Coast in Italy opens up and the South of France, inevitably some of that's going to leak out. I think people have permanently valued leisure higher. I think there's been some retraining on what the rates are at a lot of these properties. I think the work from anywhere environment particularly is gonna create, you know, that Thursday through Sunday, you know, they'll arrive Thursday and leave Monday, and it'll create periods of travel that just didn't exist before.
You know, people can fly in from the East Coast to go to Sedona that, you know, for a four-day stay. They couldn't have done that if they had to leave Friday night and come back Sunday night. I think a lot of it stays. I think you gotta be careful because I think different levels will be stickier than others. I do think there's a retraining of what the acceptable price is, for a resort. I do think that there'll be changes in the kind of the paradigm that will allow a lot of this to remain.
Okay. Then, Jeff, I just wanted to go back to your comments on labor, and we can kind of maybe parse that out a little bit. But could you maybe just talk about increases, I guess, in hourly worker wages that have been, you know, mentioned on some other calls, and it sounds like there's definitely been some upward movement, but maybe you guys haven't seen that, or could you just kind of speak to that a little bit?
Yeah. Thanks, Smedes. There's a few factors going on. I think there have been some small increases in wage rates around the country, and we've been trying to be creative in managing that, either by providing some incentives to employees in terms of attracting new labor, you know, such as benefits that you'll get bonuses if you recruit your friends, things like that. Also, you know, providing incentives that are more tied to revenue production. For example, in a restaurant, if you know, restaurants achieve certain levels of revenue production in a week or a month, there's sort of like a tip pool, if you will, that gets split among employees so that we can better modulate our labor costs relative to the revenues.
Yeah, I would say there's a couple of factors going on. Another one actually is somewhat the mix of labor. I would tell you that, you know, as you've pared back headcount in the last year, in some situations, you're gonna have your less experienced employees that maybe were furloughed or laid off, and that left you with some of your more experienced employees who had higher wage rates. When you think about the mix in labor costs year over year, it's gonna optically look like your wage rates are rising, but that's not necessarily the sole driver there. I don't know, Tom, if you have any other comments.
No.
No? Okay.
Thank you, guys.
Thank you. Our next question comes from the line of Dori Kesten with Wells Fargo. Your line is open. Please go ahead.
Thanks. Good morning. When you look at the improvement in midweek demand in your urban markets, can you call out markets that are leading and lagging? Just how did corporate rates trend, July to October?
Do you want to-
Yeah, sure.
Hi, Dori. This is Tom. The markets vary. You know, it's still a little bit anemic on that side, but Chicago really is a standout. The Gwen, 18% of our rooms at the Gwen in the quarter were BT. That was a really significant growth compared to the comp set, which is about 6.5%. We've seen production out of producers in the quarter have been the usual suspects, Deloitte, PricewaterhouseCoopers, Ernst & Young, Boston Consulting Group. The consulting groups are coming back, and that's very positive. The question is: How fast do they come back?
We certainly believe once we get into Q1 of 2022, when we get through that and all the vaccines get done, we believe that we should see a real big spike up in business activity, business transient activity. We are also seeing a lot of short-term pharmaceutical group. If you think about back in the nineties, pharmaceutical drove the hospitality business, training, pharmaceutical business. We are seeing across the portfolio a lot of activity on the pharmaceutical side, which is very positive. I think that's just the nature of what's going on in the world, right? With all the drugs and the training and the rollout. It's really a positive story.
Yeah. Great.
Oh, thanks.
Let me add on to that a little bit if I could. I mean, we saw the biggest gains in market share in our portfolio in Boston, Chicago, and New York in the third quarter, which are clearly more business transient driven. If we just look at, you know, current trends. You know, I was just looking at our October results. Our Boston hotels ran 89% and 84% occupancy in October. In The Gwen in Chicago, which Tom was noting, did 78% in October. The New York hotels ran, you know, a couple of them ran 90% occupancy. We're seeing some pickup. You know, the rate's a little challenging in some of the business that we're picking up, but clearly there's signs of life in the BT. I don't think it's gonna be roaring until we're into 2022. It was more encouraging in Q3 than Q2.
When you noted the two recent acquisitions that they're exceeding initial underwriting. What were your initial expectations for the year and where are they now? Is that upside on the top line or through cost savings?
It's different for two different properties. Henderson Park wildly outperformed our October expectations. The leisure was better, the rate was $100 higher than our underwriting for October. And that's making the difference. I mean, you know. My only regret is I wish that hotel was bigger, but it's been a home run for us so far. I mean, it'd be an 8 NOI cap rate for a super high quality global resort. New Orleans was different. You know, obviously, there was a hurricane with Hurricane Ida that blew through there. We were fortunate that we were one of the first hotels to get power back, and our team, I think, did a just exceptional job of securing the first responders and kind of sucking up that business.
as we kind of move through the year, you know, that's obviously gone now, but the experiential aspects of New Orleans, and it's still, you know, it's still challenging in that market, but it's kind of tracking as we expected. I think we got a little bump from the first responders, and then we're kind of tracking in Q4 versus our underwriting expectations.
Okay. Thank you.
Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open. Please go ahead.
Great. Good morning, everybody. Mark, given kind of your view on the stickiness of the leisure traveler and some of these ADR trends, are you underwriting the current paradigm for these five acquisitions? Or, you know, what level of conservatism, I guess, are you assuming?
It's different in different markets. It's a great question. It's one we talk a lot about. I think as a general rule, we're looking at 2019, we're seeing how much it's increased since 2019. Generally, we're saying it's peaking in 2021, and we'll give back some of the, what I call the peakiness, right now from the COVID, but it will maintain substantially higher than 2019. That's our typical resort underwriting. Some of the markets, depending where they're coming from and how affluent the travelers are, we think it's stickier. You know, clearly the super high-end ones, that traveler just has a lot more options. They were the ones who were going to Europe last year.
Although they've been reaching on price domestically, that's probably gonna face a little more pressure than, you know, the Key West resorts, for instance. We're trying to be thoughtful market by market, customer, you know, what kind of customer is coming to that particular resort. We certainly think it's substantially higher than where these resorts leveled off in 2019.
Very helpful. To the extent you hit on one or more of these deals, presumably you won't wanna spend the entire $300 million without, you know, maybe having something else lined up. What's sort of the most attractive source of funding today? Or OP unit to consideration, any assets that you've got kinda teed up and waiting to the extent that it looks like, you know, you're gonna move forward with, you know, one or more of these deals?
Nothing's enormous. I mean, we have five earnouts out. I think the totality of those five is about $350 million, so nothing's giant within the pipeline. We're sitting on substantial cash, and we have the revolver available. We have talked to people about OP units, but we're trading, we believe, below NAV, so we have to figure that out and adjust the purchase price accordingly. But the tax advantages can be substantial for a seller. We have had some of those conversations. Jeff, do you want to talk a little more about sources?
Yeah. No, I think you hit the nail on the head. I think immediately we would probably be using that cash on hand that we have. As Mark said, we have you know pretty abundant capacity to fund the acquisitions, even the ones that we're looking at, assuming we hit on every single one. You know beyond that I think you know I guess all options are open, but you know we're pretty stingy about equity issuance at prices that are below NAV.
No, that's helpful. Thanks for the time.
Thank you. Our next question comes from the line of Dany Asad with Bank of America. Your line is open. Please go ahead.
Hey, good morning, everybody. My question is on your non-room revenues, right? Like, specifically like the other revenue component that's not F&B. It's, you know, approaching 2019 levels pretty rapidly at this point, and like, well, like much quicker than, you know, the like your RevPAR. I guess my question is, can you just help us understand some of the bigger drivers of that component and its sustainability into the coming months and quarters?
Well, I'll let Tom handle this question because it's really a testament to all the things he's been doing, particularly on the, you know, it's resort-focused, and the resorts have a lot of ancillary income. Successful implementation of resort fees and really the F&B programs have been a large contributor. One of, I think, Tom's true skills is finding every lever to find ways to create revenue sources at hotels. Tom, I'll turn it over to you because it's your-
Sure.
Really your testament to what you've been doing.
Yeah. Once again, it's how do we maximize revenue per square foot in the hotel once we have them captured? You know, the mix is different certainly with heavy occupancy and usage on the leisure side. They're there, and when they're there, how do we maximize the spend and target them? Resort fees, other incremental fees, services, partnering with vendors, packaging are all things that we're thinking about. When we look at revenue, you know, a lot of. We look at RevPAR and how do we maximize our, you know, our ADR and our RevPAR.
We also look at if we're 120% of rate, why isn't every one of our other price categories in the hotel 120%? Everything in the property needs to be yielded. Food and beverage, the parking, services, spa, everything should be yielded based on demand. A Saturday spa pricing should be different than a Tuesday. When we take that approach and you yield everything, those incremental revenue streams actually add up. When we've been the beneficiary of cancellation fees and, you know, focusing on other revenue streams as well, room rental and where we can get it. I think it's just a team effort, and we're happy with the results.
Awesome. My follow-up is actually on something that Jeff was talking about earlier. Jeff, your comment about group pace in 2022 being down 25% versus 2019. Do you know off the top of your head what that number would have been, you know, call it 90 days ago?
I don't have it with me. I'm looking at Tom if he might have it.
We had about 300,000 group rooms on the books 90 days ago, and now we have about 350,000 group rooms on the books for 2022. We had very positive movement. We had really strong prospects. Our lead and our prospects for the quarter were as strong as we've seen in the last probably eight quarters. We're really feeling pretty good about that. You know, when you compare that to for 2019, 'cause that's what we're comparing against. In 2019 we were around 400,000 rooms, and we picked up about 70,000 rooms quarter-over-quarter in 2019. Our gap is we're close.
We picked up roughly 50,000 versus, you know, versus 70,000. We're in the ballpark. Yep.
Got it. Okay. Thank you.
Yeah.
Thank you. Our next question comes
That's okay. You can continue.
Our next question comes from the line of Michael Bellisario with Baird. Your line is open. Please go ahead.
Thanks. Good morning, everyone.
Morning.
Tom, another question for you. Just as your hotels are signing new group business and new BT contracts today, what are you seeing in terms of changes that might be being made to those contracts and what are or aren't meeting and travel planners asking for today?
You know, that's an interesting one. We've been a lot more aggressive in how we look forward at washing the contracts. If historically speaking, we washed a contract by 20%, we're saying as we look forward into 2022, let's wash it by 50% to be more conservative. Certainly the management companies have their terms and their standard contracts, and that's what they use. We obviously wanna make sure that those clauses and contracts stay consistent. We have seen a lot of shifts over the last couple of years, right? You know, when you start moving contracts one year and then moving it again another year because it does, you know, COVID doesn't break, you start
Contracts, we have to be cognizant of the fact that they're getting a little bit looser on attrition clauses. We actually, the team does contract audits. We've actually gone out to all of our properties and started to look forward at group contracts and do contract audits to make sure that the contracts aren't toothless and that we're protecting, you know, certainly protecting shareholders and protecting future pace. That's a priority for us. We are monitoring it, and then certainly it's market by market. You know, if a big company, if AT&T comes in and says, "This is our terms, take it or leave it," you really have to make a decision. It's a business decision at that point.
The contract, the terms of the contract, do you want the business or do you not want the business? It's an ebb and flow, and I think, you know, we're paying attention to it, and we're aware of it, and we're trying to make sure that we minimize our risk going forward.
Got it. That's helpful. Just in terms of group cancellations that might have occurred during the third quarter, what was the total there, and then for what periods were those groups canceled or maybe even rebooked for?
Yeah. Mike, this is Jeff. We had about $7 million of group revenue that was canceled really in the third quarter related to Delta variant. I think more than half of that, I think, was rebooked into 2022 in different periods. I think there was a small amount of cancellation and attrition income that was collected. I think off the cuff, I think it was about $1 million or $2 million that was collected during the quarter. Yeah, I think we've done a very good job at making sure that we can reschedule those bookings, you know, that we're seeking cancellations and trying to push that revenue off into 2022.
Like we had about 35,000 group rooms canceled. We moved about 15,000. About 50% of those rooms we shifted into the future, which is great. We collected about $2.6 million of cancellation fees. Once again, it's a priority. It's the nature of the business, and we have to pay attention to it.
Helpful. Thank you.
Thank you. Our next question comes from the line of Chris Darling with Green Street. Your line is open, please.
Thanks. Good morning, everyone. I wanna go back to the favorable citywide calendar that you mentioned in, you know, Boston, Chicago, and several other markets. First, I'd be curious to understand how you're thinking about those markets on a longer term basis. Secondly, just, you know, given the favorable backdrop next year, does that maybe provide you sort of a window of opportunity to sell into that strength and redeploy capital elsewhere?
It's a great question. I think short term, we're pretty constructive on all those markets. I think we're particularly constructive on markets like Phoenix and Salt Lake City. Boston, we really like our two hotels in that market. We like our locations, the quality of those assets. Chicago is a market that probably over time, we would look to, shrink our exposure to, given that it's always had supply challenges, and it's much more rate sensitive, than a market like Boston. Yeah, it could provide us an opportunity when cash flows are returning to potentially reduce some of that exposure. As we articulated in the prepared remarks, we continue our strategy that we've had for the last seven or eight years of moving more into these lifestyle experiential properties and submarkets like Sedona and Huntington Beach and Vail.
Selling something like a Chicago asset would certainly be consistent with executing on that long-term strategy.
Okay. I appreciate the thoughts.
Thanks for the question.
Thank you. Our next question comes from the line of Bill Crow with Raymond James. Your line is open. Please go ahead.
Yeah, thanks. Good morning. Maybe Tom, for you, talking about the strength of BT travel in Chicago and Boston, there are still seasonal factors at work, right? We're now November, and I'm just, you know, 90 days from now, are we gonna be talking about the lack of business travel in those markets because of seasonal factors? Or just how do we think about kind of the fourth quarter and early into the first quarter?
Yeah, it's gonna be consistent and flat. Yeah, as you said, Bill, it's, we're getting into seasonality, so we certainly see the slowdown in Q4 and Q1. That's why I said it earlier in my comments that I think Q2 and Q3 2020 really expect us to spike up. We're still going through that negotiation process now with the big brands, right? Marriott, Hilton, and all our managers are actually looking at 2022 rates and how we're gonna be. You know, it's hard to know, but my point earlier was more of a micro market on Chicago, and that we saw positive movement and positive activity versus the market.
You know, if you provide the service and you have the quality, you could get. We believe we can get outsized performance versus the set. It doesn't mean that it's coming back at significant levels, but we are outperforming our peers, and that was the point I was making.
Yeah, Bill, it's Mark. I'll just follow on that. I think we see the recovery in business transient really too. It's not a Q4 story, it's a 2022 story. I think we're optimistic. Look, frankly, I mean, there's some good things going on. This morning's announcement about Paxlovid, the Pfizer pill. That's a real positive. I think even more importantly, this week's announcement about the January fourth date for the OSHA requirements for, you know, to cover two-thirds of the workers in the United States. It's gonna potentially provide what we'll call the magic date for C-suites to tell their employees it's safe to get back on the road, it's safe to get back to your office. This is kind of the magic politically acceptable date in corporate America, and that could be the real pivot point for business transient travel.
This January fourth date could, you know, when we kind of look back six months from now, what are we gonna say was the important fulcrum points in the recovery? I think January fourth could be the one for BT that really starts the shift in mentality and activity in the United States.
I hope so. I hope so. Hey, Jeff, just quick modeling question. The tax line created a little bit of noise this quarter. I'm wondering what you're thinking going forward.
Yeah. The short answer is, there was a little bit of a switch there. As you know, we effectively are trying to accrue for income taxes on an annual year target, if you will, based upon how our outlook is changing. We switched from an income tax benefit in Q2 to an income tax expense in Q3. On a full year basis, I think we're looking for income tax, you know, in the fourth quarter to be about $500,000, you know, $1 million, expense in the fourth quarter. A little less than we saw in the third quarter. It's a volatile figure, but I think that's how you should be thinking about it in the fourth quarter line.
Great. Thank you.
Yeah. Year to date, I think it's about $1 million-$1.5 million of cash. That's cash income taxes, sorry.
Thank you.
Thanks.
Our next question comes from the line of Stephen Grambling with Goldman Sachs. Your line is open. Please go ahead.
Hi. Thanks. I know you referenced trading below NAV. I'm curious if you've actually kind of set the bar on where you estimate NAV is and how that's evolved over the past quarter. Then as you referenced, private equity has been very active. I'm curious to hear what themes you are seeing and where they're focused and how that may even influence NAV going forward.
Sure. Let me take the second question first. So interesting, there is a ton of private equity chasing hotels, and I think it's the traditional, like, traditional players, whether that's, you know, KSL that raised the fund or Blackstone. I think the interesting dynamic that they're getting financing. I know we bid against one of the largest PE firms on a resort, but they were getting financing, I think 65% LTV at L plus 180. So that's pushing up pricing as well. I mean, the debt markets for cash flow in hotels is really robust, and the PE firms can take advantage of that.
I think the permanent pricing change. I think one of the interesting dynamics is these REITs that, you know, Blackstone and, you know, Starwood and others have created that are raising. I think we're just between the two of those $2.5 billion-$3 billion a month, and they're putting away kind of on a permanent basis, right? $5 billion-$10 billion of real estate. As things go into that, we'll call that lockbox, there's just less product on the market, which makes everything more valuable that's still out there. You look at the reference points of hotels versus multifamily, industrial, and other choices in the real estate food chain, and hotels simply haven't compressed like the other sectors.
I think they're, you know, our view is NAV is increasing for hotels and that there is potential for it to increase more, both on an absolute basis because of availability and on a relative basis versus the other asset classes out there. We continue to, our NAV every quarter, really consistently for a number of quarters now, has gone up pretty substantially. We think our NAV has increased in the last 3-6 months. We do spend a lot of time thinking about what the NAV is. You never really know till you go to market. But I tell you, every time we lose one of these bids, we realize our NAV internally is too low. But we haven't published NAV. We haven't in a long time since the onset of the pandemic.
Continue to look at that, and we'll think about publishing that, but we wanna be very thoughtful before sharing that.
Fair enough. Maybe an unrelated question. As you've moved the mix to more independent lifestyle hotels and changed a lot of the terms in terms of the management contracts, does that change, I guess, how you would maybe think about M&A, you know, for more of like portfolio properties and/or thinking about consolidation within the broader REIT space?
Yeah, I mean, I think we've worked really hard to build something that's very unique in the public markets, right? There's no other public company you can buy in the full service sector that has as many short-term terminable management agreements. We think that on exit, that's probably worth 10% more on NAV, right, 50-100 basis points in exit cap rate. We think that, you know, there's a story to articulate about why we should have a higher valuation multiple there. Frankly, it's just more enticing for a lot of reasons to have control, more control over the independent operators. I think as we think about M&A opportunities, we think this model is a more liquid, higher value model.
It's something you could price as you look at other companies, right? I mean, it is something that you can think about and put into the pricing. We really like where we've gotten to, and we've spent a lot of time getting here. It, you know, nothing's off the table.
Awesome. Thanks so much.
Thank you. Our next question comes from the line of Chris Woronka with Deutsche Bank. Your line is open. Please go ahead.
Yeah. Hey, good morning, guys. I guess question for Mark, and it's kind of bolt on to that last question, but maybe take it in a slightly different direction, which is, Mark, you know, you're seeing the public REITs get a little bit more active, I think, overall buying, you know, buying hotels. Just talked about private equity pricing and how much capital they're raising and disconnect between public and private pricing. The question is, from a high level industry standpoint, do you think this makes, you know, public-public M&A more... Is there more of a more compelling reason to do that? Again, just thinking about it at a very high level.
Well, listen, we're not scared of private equity, and we'll. We're fiduciaries for our shareholders. We'll always do what's right. If that means, you know, if we get a big offer and sell the company at a premium, it's certainly something that would be the right thing to do for our shareholders. To merge to avoid that would not be a strategy we'd employ. I mean, we're fine doing what's right for shareholders, but we wanna get full value, certainly for the company, if we went down that road.
I think mergers in the public to public makes sense if you can articulate a clear strategy after the merger, and you clearly articulate that you didn't pay too much and that the savings from the G&A, because you probably wipe out, you know, 85% of the G&A of the target company. You know, you put a multiple on that, and you say, "Okay, on the other side of this, between G&A savings and other synergies, I think it's a clear strategy and the stock price should be higher," that's fine. We're in a space that bigger hasn't proven by itself to create value. We don't buy into that thesis.
Certainly if you could do something where the math works. You can come out the other side from a combined company with a clearly articulated strategy, yeah, that's something we should look hard at.
Okay. Very good. Yeah, I guess the other question would be DiamondRock has always been a pretty, like to keep the structure pretty simple, right? You guys have been one of the easier companies to follow and analyze and understand. We have seen some of your peers go a little bit more down the JV route. Is that something you guys would consider if there was a, just hypothetically, a larger, if it's public or private, some kind of portfolio? Are you willing to kind of step outside of those bounds a little bit and do something a little bit non-traditional for DiamondRock?
Hey, Chris, it's Jeff. I mean, I don't think you can ever rule that out, but I do think we like the simplicity and the control that comes from holding, owning our assets. I think having joint ventures can be complicating from a balance sheet standpoint and from an underwriting standpoint, you know, from your perspective or from investors' perspective. I would never preclude us from entering into an attractive investment if a joint venture is necessitated, but I think our preference is to wholly own our assets and really kind of keep a clean balance sheet and control.
Okay. Very good. Appreciate the thoughts. Thanks, guys.
Thank you. Our next question comes from the line of Anthony Powell with Barclays. Your line is open. Please go ahead.
Hi, good morning. First a question on pricing. You know, we've seen obviously very strong pricing on leisure and resorts. Does that change how you approach pricing next year for business transient and group? Is there more of an opportunity to tick up pricing in those segments, or are you more interested in just kind of filling the hotels with those customers?
It's a great question. I think, well, let's take the three segments. Leisure, like this festive week coming up, I almost think we can't charge enough. I mean, there's a lack of ability and there's just tremendous demand for those. I think we should push even harder than we have been pushing on pricing. When we look at business transient, I think it's really encouraging. In the third quarter, we were within 1% of business transient rate from Q3 in 2019. You know, it's really not a rate game. It's, you know, is the company comfortable getting people on the road or aren't they? It's not like, oh, well, we'll put them on the road if it's $10 cheaper.
I think we've adopted the philosophy and instructed our hotels that this is a safety issue, if you will, for them, not a pricing issue. Discounting doesn't get you any more rooms, so hold rate. I think generally that's the pervasive kind of viewpoint and philosophy of the hotel industry. I'm relatively optimistic on pricing for BT. Now, we're gonna have some mix shift next year. We do wanna put heads in beds. Will we take, you know, more of the lower rated BT mix to fill it? Because that ultimately leads to a more profitable. Yeah. Then as demand returns, we'll start yielding that stuff out. We're not trying to discount to get BT in. We will have to have some mix shifts, so you'll see some RevPAR deterioration.
Again, I think it's a safety issue, not a pricing issue. Our group, you know, our group right now, I think we're looking at 2022, even though we're down in room nights, we're actually up almost 2% in rate. Again, with the same philosophy that these groups are meeting, it's not. They're not gonna meet because it's $10 cheaper to meet at your hotel. They like the space. They haven't met in two years, sometimes three years, and they need to get together. Also you think about from, especially from the corporate side, everyone's at record profitability in the United States. You know, it's not like the CFOs are sitting there at Pfizer or Procter & Gamble and saying, "Oh, you know, things are. These are tough times. We really need to cut the travel budget and training budgets." They're saying, "We need to grow our revenue.
We're at, you know, terrific profitability. We need to get training. We need to hire people. We need to take care of our associates. We need to get them together." I think all those things play pretty favorable into rate integrity next year. I do wanna indicate there will be mix. You know, we are gonna have to layer in some of that lower rate of BT and then yield it back out as things get stronger and stronger. You will see that phenomenon in 2022.
Got it. Thanks. Going back to the NAV question, do you have more clarity on the value of, let's say, kinda urban business transient-focused hotels and urban group hotels? I mean, there have been fewer transactions in those types. I'm curious what you're seeing, and the value for those properties.
Yeah, I'd say it varies by market. It can be, you know, it depends what you call an urban market too. Like, Austin's up right in a NAV versus 2019, whereas in a market like Chicago is probably down 10% plus. You know, these urban markets, you know, I think it's a little wait and see from the buyer's perspective. There's clearly appetite and people that wanna play that thesis, but you need better trailing cash flows so that the private equity folks can get better debt, and then you'll see NAVs recover more rapidly in the urban markets.
We anticipate that the gap starts shrinking, you know, over the next 12 months as you start seeing cash flows really return in the urban markets because the financing just gets better, which makes the acquisition work from a larger pool of buyers.
Okay. Thank you.
Thank you. I'm showing no further questions at this time, and I would like to turn the conference back over to Mark Brugger for any further remarks.
Great. Thank you. Thank you and everyone on this call for your interest in DiamondRock, and we look forward to updating you on our next quarterly call. Have a great day.
This concludes today's conference call. Thank you for participating. You may all disconnect. Everyone, have a great day.