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DiamondRock Hospitality Company (NYSE:DRH) Q4 2021 Earnings Conference Call February 18, 2022 9:00 AM ET

Company Participants

Briony R. Quinn - SVP and Treasurer

Mark W. Brugger - President and CEO

Jeff Donnelly - EVP and Chief Financial Officer

Thomas Healy - COO and EVP, Asset Management

Conference Call Participants

Smedes Rose - Citi Research

Austin Wurschmidt - KeyBanc Capital Markets

Anthony Powell - Barclays

Rich Hightower - Evercore

Chris Woronka - Deutsche Bank

Michael Bellisario - Robert W. Baird

Chris Starling - Green Street

Floris van Dijkum - Compass Point

Stephen Grambling - Goldman Sachs

Operator

Good day and thank you for standing by. Welcome to DiamondRock Hospitality's Fourth Quarter 2021 Earnings Release Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer. Please go ahead.

Briony R. Quinn

Thank you. Good morning everyone. Welcome to DiamondRock fourth quarter 2021 earnings call. With me on the call today are Mark Brugger, our President and Chief Executive Officer and Jeff Donnelly, our Chief Financial Officer. Before we begin, let me remind everyone that many of our comments today are not historical facts and are considered to be forward-looking statements under Federal Securities Laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those expressed or implied by our comments today. In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release. With that, I'm pleased to turn the call over to Mark Brugger. Mark.

Mark W. Brugger

Thank you again for joining us today for DiamondRock’s earnings call. In 2021 we saw travel demand dramatically rebound shortly after the national mass mandate recommendation was lifted in May. In July our portfolio recovered 91% of its 2019 total RevPAR and in December we were covering nearly 99%. The emergence of new COVID-19 variants during 2021 made for choppy recovery but the undercurrent pushing the wave of travel demand is clearly strong. National numbers of COVID infections are rapidly declining once again. States are relaxing mass mandates and more workers are returning to the office. If trends continue we estimate that the travel recovery timeline was delayed just a few months from Omicron. As we look ahead we remain very confident in the future of travel and the brisk return of pent up hotel demand.

For DiamondRock, the fourth quarter and full year 2021 hotel results significantly exceeded our initial expectations. One factor among many stands out as a testament to the creativity and success of our team. In 2021 the portfolio generated nearly $2900 per key of AFFO. According to consensus estimates that is over three and half times more than average for the five largest full service REITs. Our focus on driving cash flow is the culmination of strategic decisions on market exposure, balance sheet structure, and the innovative sales strategies and tight cost controls implemented by our operators in partnership with our leading asset management team.

Looking at the company's results more closely, in the fourth quarter we were able to drive RevPAR up 232% over the prior year, which is just 13.8% below 2019. Moreover, on a comparable basis to 2019 the monthly progression of total RevPAR was down 18.9% in October, down 17.1% in November, and down just 1.5% in December. These rebounding levels of RevPAR allowed DiamondRock to generate fourth quarter hotel adjusted EBITDA of $43.1 million and AFFO of $0.09 per share. Our industry in 2021 started seeing a recovery in business transient and group bookings which Jeff will discuss in more detail in a moment.

The positive results for the fourth quarter and the full year were powered by DiamondRock’s large portfolio of drive to resorts. Several resorts achieved record breaking room rates in 2021 and we're seeing this trend continue. Even compared to 2019 our resort portfolio had positive full year RevPAR with RevPAR increasing almost 24% in the fourth quarter. In fact, a dozen of our resort and lifestyle hotels beat 2019 RevPAR levels last quarter led by properties like the Henderson Beach Resort, L'Auberge de Sedona, Orchards Sedona, The Hythe Vail Mountain Resort, The Lodge at Sonoma, our two Key West resorts, and the Kimpton Shorebreak. These good results were largely the product of a decision we made several years before the pandemic to pivot and focus our external growth on drive to resort and lifestyle hotels. Since that pivot, we have completed more than $1 billion in transactions to assemble the portfolio that today defines DiamondRock. We acquired Havana Cabana Key West, the Westin Fort Lauderdale Beach Resort, the KIMPTON Shorebreak, Margaritaville Key West, the Kimpton Phoenix Palomar, L'Auberge de Sedona, Orchards Sedona, The Landing Lake Tahoe, Cavallo Point in Sausalito, and our most recent acquisitions the Bourbon Orleans in the French Quarter, Tranquility Bay in the Florida Keys, and the two Henderson Beach Resorts.

We remain all in on our thesis that superior profit growth can be achieved from experiential resorts and lifestyle hotels. Going forward we attempt to exclusively focus our investments on similar assets while opportunistically recycling non-core branded urban hotels to fund and accelerate our strategic direction. A critical point of differentiation for DiamondRock from our peers which is often overlooked is that in the past few years DiamondRock’s portfolio has transformed in another important way. It has gone from over 80% of the portfolio being encumbered by long-term brand management agreements to today less than 10%. In other words, today only two of our 33 hotels are subject to long-term management agreements. We believe that this gives us a huge competitive edge in controlling expenses at the hotels and increases NAV at the hotels by over 15% on average because unencumbered hotels can generally be sold for a 100 basis point cap rate premium versus encumbered hotels. No other public full service lodging REITs has executed this transformation or has less brand managed hotels. As we continue our external growth initiatives you should expect more of the same on asset selection and direction.

In 2021 we stayed laser focused on our strategic transformation as the team executed on dispositions and acquisitions to keep DiamondRock out ahead. In total we sold $220 million of hotels at a 5.3% cap rate on 2019 NOI and probably a much lower cap rate on 2022 NOI for those hotels. And what do we do with that freed up investment capacity, we reinvested the proceeds into four independent experiential properties totaling $293 million at a 7.5% cap rate on 2022 budgeted NOI and ramping to an 8% or better stabilized yield. We estimate that last year's disposition acquisition change alone will add well over $20 million of incremental EBITDA to our 2022 results. In fact, the two major acquisitions Bourbon Orleans and Henderson Park Inn were ahead of initial underwriting in 2021 with Henderson Park Inn delivering a 9% NOI yield. In December we acquired Henderson Beach Resort, a luxury property with enormous upside and we kicked off 2022 with the acquisition of the Tranquility Bay Resort in the Florida Keys at an 11% trailing NOI cap rate.

How do we find these great deals in a competitive market place, mostly because we don't rely on brokers. Rather we have spent years building relationships with the owners of Orange strategy hotels in micro markets like Sedona and Destin Beach that fall outside the mainstream. Off market transactions provide the time to solve the seller’s partnership, debt or legal issues to our benefit. We're optimistic we can close a similar volume of transactions in 2022. In fact, we are actively working on four deals right now at some stage of evaluation. Half of those are off market through long standing relationships.

While we have been executing on external growth we were also intensely focused on creating value at our own portfolio through repositionings. In 2021 we completed the repositionings of The Lodge at Sonoma, The Hythe Vail Mountain Resort, and the Margaritaville Key West. The returns on these investments are projected to be a big catalyst to our 2022 earnings. Here's a powerful fact, these three repositioned resorts are budgeted to collectively increase profit by $12 million in 2022 over 2019. That's more than a 50% increase in profit versus pre-pandemic levels as a result of our efforts and strategic locations. And we are not close to being done. We have two more repositioning and rebrandings happening in the first quarter of 2022 and behind that, there are two more ROI conversions underway that will debut in 2023. We consider the ability to identify and successfully execute these high ROI projects as a key part of the DiamondRock value proposition. Now I will turn the call over to Jeff to discuss operations in more detail and to review the highlights of our balance sheet strength. Jeff.

Jeff Donnelly

Thank you, Mark. We finished the quarter with $441 million of total liquidity, comprised of $39 million of corporate cash, $93 million of hotel level cash, and $310 million of undrawn capacity on our revolver. Leverage remains conservative with only $1.15 billion of debt against over $3.5 billion of resorts and hotels. We have no debt maturities in 2022. Earlier this month, we amended our credit facility to obtain additional covenant waivers and extend our relaxed covenants to a final testing date of August 2023. Moreover, we increased our gross potential acquisition capacity to 550 million, there was no change to our pricing grid from this modification.

Let me turn to more detail on our operating results. Fourth quarter results were sharply ahead of our original forecast. Total revenues and hotel adjusted EBITDA were 190 million and 42.7 million respectively, beating our original expectations by 20 million in revenue and over 5 million in hotel adjusted EBITDA. Profit flow through was excellent. Hotel adjusted EBITDA profit margins were 22.5% and over 40 basis points above our forecast. The 12% upside to rooms revenue was driven primarily by stronger than expected average daily rate, partially offset by softer than expected occupancy from last minute cancellations from the emergence of Omicron. The rate driven upside pushed room profit margins over 200 basis points above forecast. FB and other revenues were also 12% above expectations but food inflation and labor pressures constrained FB margin to 24%, which was below original expectations.

Resort revenues were 85 million in Q4 2021 or $13 million ahead of 2019. Resort total RevPAR was 18% ahead of 2019 levels and resulted in hotel adjusted EBITDA margins of 30%, 240 basis points stronger than 2019. For the full year, resort revenues were 286 million, matching 2019. The story here is hotel adjusted EBITDA margins were over 380 basis points higher on similar revenue. Urban hotels improved during the year, but remained well below 2019 levels. Urban hotel revenues were 105 million in the quarter, with total RevPAR 30% below 2019, leading to margins of 16%. For the full year, urban hotel revenues were 281 million, down 333 million or 54%, resulting in a 90% decline in hotel adjusted EBITDA in a low 6% margin. Clearly, there is significant opportunity for recovery in 2022.

Business transient continued to show slow improvement during pockets of the fourth quarter, but plans for a more ambitious return to business travel in January did not come to fruition due to the spike in Omicron. The business we are seeing is mostly from top consulting companies as well as project work. Based on feedback from corporate accounts, we believe Omicron likely pushed out the start of a major recovery in business travel by three to four months. Compared to Q4 2019, room nights were 22% lower, but rates held steady and even showed sequential improvement from earlier in the year.

On group business, there are some good indicators of future strength. Q4 brought over 12,000 leads for 2 million group room nights, matching third quarter’s production during what is typically a seasonally slower period. We booked 135,000 definite room nights during the fourth quarter, 8% more than Q3, of which 85% of these nights were for 2022. Momentum was very strong as 40% or 53,000 of these room nights were booked in December. In January we've seen an encouraging trend that bodes well for 2022. Sales lead volume and lead room nights, even despite the impact of Omicron, were up 5% and 33% respectively, as compared to the average month in the first -- in the fourth quarter. This means January points to a Q1 2022 sales lead pace that meets or exceeds Q1 2020 and February is showing continued improvement, clearly a sign of good things to come.

Citywide room night activity in our major urban markets remains strong. In 2019, Boston's convention centers generated 349,000 room nights, and they currently project 330,000 room nights in 2022 and 438,000 nights in 2023. Chicago generated 1.1 million nights in 2019 and is expected to generate 1.2 million room nights in 2022 and already has 1.1 million nights on the books for 2023. Collectively, the convention centers in Boston, Chicago, San Diego, DC, and Phoenix have as many citywide room nights on the books in 2022 and again in 2023 as they had in 2019, and booking activity is poised to accelerate in April.

Leisure demand is off the charts. Leisure comprised 50% of our room revenues during the quarter, compared to 38% in Q4 2019. Compared to Q4 2019, leisure segment room rates were nearly $290, up 19% over 2019 on a 7% decline in rooms. This is an acceleration from quarters earlier in the year. Performance of our recently upgraded resorts, as well as our advanced bookings in key leisure markets, leads us to expect continued robust strength in this segment.

Overall, portfolio profitability was significantly aided by operating efficiencies due to a number of efforts put in place by our teams. Occupancy was 30% lower in full year 2021 than in 2019, but our hotels managed to hold costs per occupied room to just a 4% increase, resulting in a room's margin of 74.4%, which is only 100 basis points below full year 2019. Hiring, training, and retaining high quality associates is perhaps the greatest challenge for our hotels. U.S. labor force participation has been sluggish to recover due to a combination of temporary and structural factors, but economists expect people to return to the workforce in the second half of 2022. To maximize efficiency, our hotels have provided dynamic and incentive based compensation structures during this hopefully temporary tight labor market. Some competitors have been more inclined to make permanent changes. To remain competitive our hotels may ultimately need to make some adjustments.

Based on our current data we are adjusting our outlook for long term margin expansion potential for U.S. full service hotels. While increased productivity, better labor models, and more efficiencies from brands will help improve stabilize margins, rising base wage and benefits costs will likely offset some of that improvement. Accordingly, we now see the long term margin improvement potential for U.S. full service hotels to be in the range of flat to 100 basis points that is 50 basis points lower than our prior estimate. We believe DiamondRock has an added advantage over our peers. The six managed to franchise conversions provide approximately 50 basis points of long-term margin enhancement that is unique to Diamond Rock. Hence, we think Diamond Rock's margins have the potential to be 50 to 150 basis points above prior levels once demand has fully recovered.

Looking to the future, we do not have sufficient clarity today to provide full year earnings guidance for 2022. However, we do believe our unique segmentation, geographic footprint, recent rebrandings and acquisitions, and other beneficial portfolio enhancements will collectively drive robust revenue and cash flow growth. We expect our resorts will continue to deliver strong revenue and margin performance and our urban hotels have significant upside potential as we move past Omicron and corporate travel demand follows a return to office.

Omicron resulted in $17 million of group cancellations, of which approximately 13 million occurred in Q1, and much of it early in the quarter. As a result of Omicron, we expect the change in total revenue and hotel adjusted EBITDA margin as compared to 2019 will be softer in Q1 than in Q4. Preliminarily, January total revenues were down 23% compared to January 2019. Encouragingly, February is looking better and early indications point to an acceleration of these trends into March. With that let me hand the floor back to Mark.

Mark W. Brugger

Thanks. As Jeff mentioned, travel trends are clear and the desire to travel is certainly robust. As you look at 2022 and beyond we are confident that DiamondRock has competitive advantages. I like to just highlight a few before opening the call for your questions. First, our drive to leisure focus. The world is positioned to embrace a more hybrid work structure which lends itself to increased be leisure travel. Our leisure focused destination resort and urban lifestyle hotels are prime beneficiaries of this trend. They were strong performers in 2021 and we expect this trend to persist. Second, acquisitions. We successfully executed four Orange Strategy acquisitions in the last year alone with strong initial yield of 7.5%. Behind that we have an active pipeline of deals.

Third, up brandings. The up brandings in 2021 of The Lodge at Sonoma, The Hythe Vail Mountain Resort, and the Margaritaville Key West will power those resorts to collectively grow EBITDA over 50% from their 2019 levels. Fourth, balance sheet. We have a great balance sheet with low leverage and ample capacity to continue aggressively leaning in to our strategy to assemble a unique portfolio of resorts and lifestyle hotels. Fifth, group set up. Our footprint is good for 2022. Group revenue on the books at are two most important group hotels, the Westin Boston and Chicago Marriott is three times more than in 2021. I will note that we are fortunate to have less than 1% of our rooms in the troubled San Francisco market. Sixth, management conversions. We converted six brand managed hotels to franchise hotels in 2020. That will ultimately boost portfolio profit margins by 50 basis points over pre-pandemic levels. And increases NAV by 15% at those six properties. And the final competitive advantage for DiamondRock that I will mention is ESG Excellence. We were once again ranked number one by GRESB as hotel listed sector leader and awarded ESG Prime Status by ISS, a designation held by the top 5% of the real estate sector worldwide. If ESG is important to you as it is to us, DiamondRock is a leading choice among all public lodging REITs.

To wrap up, we are still in the very early stages of an emerging travel recovery with significant pent up demand. And with that backdrop we are confident DiamondRock has the portfolio, the strategy, and the balance sheet to continue to distinguish itself in 2022 and going forward. At this time, we would like to open it up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Smedes Rose from Citi. Your line is now open.

Smedes Rose

Hi, good morning. I wanted to ask you just some clarification on the groups that you talked about and I am just wondering just to put it in context, are you able just to say for 2022 kind of what percent of group nights are on the books relative to say 2018 going into 2019 and maybe 2017 going into 2019, so thinking about 2022 and 2023?

Mark W. Brugger

Tom, do you want to grab those.

Thomas Healy

Sure. Currently on the books we are about 29% behind 2019 on room nights. Rate is about flat and the new bookings that are coming in we're seeing increased rate as new bookings come in. So it has been, we are about 165,000 behind where we need to be for the full year and historically we picked up about 250,000 rooms in the year for the year. So we feel pretty good about where we are right now with the pace for the portfolio and then as I mentioned historically we pick about 250,000 group rooms in the year and we need to get about another 165,000 in the year for the year to make our currently projected number. So, I think we're in a good position.

Smedes Rose

Okay, thank you. Mark, I wanted to ask you just as you look at the performance of urban hotels, it looks like they're starting to get a little better. I mean do you have any thoughts on how is it critical that folks return to the office in order for urban hotels to really start to perform much better or do you think that they can gain sort of positive traction even if we don't really -- go back to the office the way that we did pre-pandemic?

Mark W. Brugger

Smedes, it is a good question. I think there's going to be a correlation between return to office hybrid, lowering of mass mandates, and obviously declining COVID numbers. But it's not So that people need to be in their office to business travel but I think those things will correlate towards businesses or seen as now, getting people back on the road and being comfortable approving corporate travel. But it's going to be a little different this year. We'll see some of the traditional stuff come back as people are returning to office but actually there has been a two-year hiatus on small team meetings, building culture. I think as you talk to always our base corporate customers, what they're saying is even for hybrid that probably means we need to get our small teams together more. We need to focus on culture, how are we going to conduct business if we have less people in full time. Some of that kind facility travel didn't exist before and then I think there's obviously this pent up demand of people that haven’t been together in almost two years that need to see their clients, need to get their groups together. And so I think you'll see this kind of burst as we move through the 2022 based on those trends.

Smedes Rose

Okay, and just last one, do you have a sense of where wages benefits will track in 2022 and what percent would you expect to increase that by?

Mark W. Brugger

Yeah, we're seeing wages probably in the 4.5% to 5% range in 2022. Benefits are still coming in but somewhere in that range this year which is a little higher than we would have projected from last year for 2022 and that's kind of revision where we think the peak margins come out on the other side as Jeff was referring to in prepared remarks.

Smedes Rose

Great, alright, thank you.

Operator

Thank you. Our next question comes from the line of Austin Wurschmidt from KeyBanc. Your line is now open.

Austin Wurschmidt

Yeah, good morning. So Mark you reference kind of how DiamondRock set out on a strategic shift seven years ago which has continued to evolve and I recognize it’s probably constantly evolving. But I guess what are the biggest opportunity or changes that lie ahead that maybe could continue to expand upon the margin opportunity and just strategic goals for the company moving forward?

Mark W. Brugger

Yes, it is going to be more of what you saw last year. So it's going to be selling these branded urban properties and moving more into these what I will call medium sized lifestyle hotels and lifestyle markets and whether that's a true resort market like Henderson Beach or Charleston or New Orleans. We're going to continue to go in as markets are generally higher rated hotels and frankly they have more levers to push and really where we can apply our creativity whether to Vivian Howard Restaurant in Charleston or the Michael Mina Restaurant in Sonoma repositioning resorts in very creative ways that can drive incremental revenue. We just see a lot more revenue potential at this kind of hotels and you have seen our portfolio when you go through the property specific results that the resorts have really allowed us to really use all the tools in our tool belt to drive revenues and profitability. So we're going to continue to focus on those kind of hotels going forward.

Austin Wurschmidt

Got it and then you discussed though that there may be some -- given the lack in the urban recovery there maybe potential for urban hotel performance or have a little bit more significant upside. It sounded like but I think Jeff you mentioned also some acceleration and performance in the resort assets and even though you're not giving guidance can you just give us a sense of how you think RevPAR and margins relative to 2019 between those two groups could perform in 2022, just broad ranges or where you see the most opportunity?

Mark W. Brugger

Jeff, you would like to take that.

Jeff Donnelly

Yeah Austin, I mean we're not going to give full year numbers for 2022 by segment. I think right now that is still influx to some degree. But I think when you think about margin upside obviously it is going to be significantly greater in the urban side of the portfolio just because they are coming off such a low base of revenue that I think you're going to see much greater flow through at the margin of dollars coming in from revenue flowing to the bottom line is as demand comes back. On the resort side, they're performing very well. They are actually at a very high level of profitability and strong revenue production. That's not to undermine or look down upon our resort portfolio, they're doing very well. But I would say from this point forward, probably more of the dollar upside is going to fall to our urban portfolio.

Austin Wurschmidt

And so was the rate improvement for the overall portfolio, which was seemingly more urban assets. You saw December, it seemed to be sticky in January, should we just assume that that kind of continues, as sort of the midweek corporate travel starts to re-accelerate again, potentially over the next month or so?

Mark W. Brugger

Yeah, well January from Omicron you'll see a pullback. We talked about our January numbers and then we think in February, we start accelerating each…

Austin Wurschmidt

But the ADR, I guess, the ADR is the plus 20% or so on ADR and then you kind of saw again in December relative to what October, November did whereas resort relative to 2019 was sort of stable, the overall portfolio saw a pretty significant leg up in ADR and I'm just curious if that is attributable to the urban hotels and the sustainability of that kind of sequentially through the year?

Mark W. Brugger

It's both. I mean in the fourth quarter we saw obviously, the resorts were on fire as we talked about. The urban markets result is really driven more by leisure than it was midweek. We saw the kind of the Thursday through Sunday business being driven by leisure and urban properties as well in the fourth quarter. So that'll lesson a little in January at the urban hotels, and then I think you'll see an acceleration with the return of BTN Group as we move particularly into the second and third quarters of this year.

Austin Wurschmidt

Yeah, that's what I was wondering. Alright, very helpful. Thank you.

Operator

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

Anthony Powell

Hi, good morning. I guess question on the launcher margin, I guess discussion that you've started, you're seeing more wage inflation I guess resulted in a 50 basis point decline. But there's also inflation in room rate. So I would have thought that would have maybe cancel each other out. So I'm just curious how you think pricing power is over the long run and how that relates to margin expansion?

Mark W. Brugger

This is Mark, I will start it off and then maybe kick it over to Jeff or Tom to add on to it. So we're still saying we think margins on the other side [indiscernible] peak are going to end up better. And that's from productivity and labor model, and, frankly, a lot of learnings that we have from going through the worst downturn in the history of the industry. So we're still constructive on where margins are, but wages are higher than we would have anticipated a year ago. They're not, I think a lot of the things that have caused them to go up, are now getting better as we move through the years. More people turn to the labor and workforce. But they are a little higher than we thought. So we kind of adjusted our estimates to reflect that. But I think, if DiamondRock ends up at 50 to 150 basis points better off than prior peak margins I think that's a pretty remarkable result and we're still very positive about that.

Anthony Powell

So I guess wages are higher but aren’t your room rates also going to be higher than you thought or is that still are you a bit more cautious they are given kind of the urban recovery and whatnot?

Mark W. Brugger

No, we still feel very good about the rate side of it, that would get us to the 150 basis points of margin expansion on the other side of this.

Anthony Powell

Okay, alright. I guess switching gears maybe to transactions, the resorts have done well since you have bought them. Are you seeing sellers increase their pricing expectations given kind of just the overall strength in the resort market setup that even you and others have seen?

Mark W. Brugger

I mean, it's a highly competitive market. People like resorts, they're probably on a risk adjusted basis, still the preferred investment by us and by others. And the cash flows have been excellent and we think a lot of that is sticky. So the prices on those hotels have increased. And the urban hotels, I would suspect, as the year goes on, the trailing cash flows will get stronger, the debt markets for those kind of hotels will improve, and you'll have more and more private equity and others want to return to urban hotels despite the cycle. So that probably becomes a more and more active market, and those prices probably rise as we move through the next 12 to 16 months.

Anthony Powell

Alright, thank you.

Operator

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

Rich Hightower

Hi, good morning, guys. So Mark, you laid out sort of a tantalizing comment in the prepared comments in terms of an exclusive focus on resort and leisure assets going forward. So what I just want to confirm that that is indeed the plan forever going forward into the future. And then as far as the recycling efforts in terms of selling the urban assets eventually, what's the timing on that and what are the guiding factors, I think you mentioned a couple earlier, but besides basically cash flow improving from the currently depressed period for operations at those hotels?

Mark W. Brugger

Sure. So yeah, we want to make clear to investors that we do have clear strategy and we continue to try to differentiate our story from other stories in the marketplace by buying the hotels that we're buying for the last seven years. And that's going to continue to be the kind of hotels that we buy for, and going forward I don't know about forever. But clearly, that's the trend line that we think will outperform for the next several years and that's where we want to allocate our investments going forward. And we do have a number of urban hotels, we think we have some terrific gateway hotels, but we will probably reduce that exposure as we go forward and use proceeds from some of those sales to fund the strategic direction that we're taking the company.

As far as timing on some of the urban sales, I would say it feels a little early at the moment. I do think that the pricing and the kind of the competitive marketplace for bids on those will improve as we move through the year. Trailing cash flows, as I mentioned and you reiterated, is going to get better as the financing markets will get better as the trailing cash flows get better. So I think as we move towards later in this year, and early next year, we'll get kind of more full pricing for those kinds of assets -- right now.

Rich Hightower

Okay, that makes sense. And maybe just a broader question on leisure, but I think a lot -- what a lot of us are trying to figure out in terms of the underwriting on such assets, obviously, resorts have extremely strong pricing power in 2021 and it sounds like the same is going to be true in 2022. But as we think about lapping sort of the extraordinary stimulus in the economy last year, as we think about international markets and borders reopening, and obviously there's a given a take there, but how do you sort of underwrite against those potentially opposing forces as you think about what stabilized operations at a U.S. resort property would look like not just this year, but beyond?

Mark W. Brugger

Yeah, it's a great question. I think, for 2022 we feel very confident that we're seeing the advanced bookings are incredibly strong throughout all of 2022. I think there's a couple observations, we have this internal debate as well. One is a lot of these shorter seasons at these resorts have kind of, I think, permanently changed to be strong. People can work remotely, so Henderson Beach or Vail, what used to be shorter seasons, they're just much stronger. And that's a permanent change I think from the hybrid work structure, we'll see more demand and that'll improve four year RevPAR at those resorts. And I think you have discovery at L'Auberge de Sedona. You have a whole new set of people that have seen it, talk to their friends about it, discovered it, I think that's permanent. We'll have a lot to return business at those kinds of resorts. And then we've retrained the customer. And so we're relatively bullish on the stickiness rate. But time will tell. I mean, there will be some leakage out as the Caribbean reopens, and Europe kind of reopens on some of this. We think these drive to resorts domestically are permanently a much higher baseline going forward.

Rich Hightower

Got it. Thank you, Mark.

Mark W. Brugger

Thanks, Rich.

Operator

Thank you. Our next question comes from the line of Chris Woronka from Deutsche Bank. Your line is now open.

Chris Woronka

Yeah, hey. Good morning, guys. Wanted to see if we can maybe get a sense for what the cost -- how the cost structures differ kind of across your resort portfolio versus your urban portfolio at a high level, not into any individual market or anything, just trying to figure out if the wage inflation that you've seen is there any between -- is there any big difference between those two categories and is there one that could still -- is there still risk that they need to catch up or do you think we've got the wages, do you think we're at a level where they can stabilize across all the segments?

Mark W. Brugger

Tom, you are close to that one. You go and give it a short.

Thomas Healy

Hey, Chris. We think when we look at our resort portfolio, profit margins we believe this year projects out to be somewhere around 41% as compared to about 39% in 2019. We continue to -- the interesting thing about labor in the resort markets is they've always been challenged, right? Typically, where resorts are, housing costs are expensive. So we've always had the need for H2B's, and additional labor and managers kind of doing multitasking. But I think as we look forward into coming out of COVID, what we've learned is we can complex with technology a lot of positions. We've started to look across the portfolio, like for example, I'll give you one specific example. We have a lot of luxury hotels, you pick the ball and we look at the luxury travel agent and the travel market and targeting the virtuosos of the world. We said, why do we need a specialist that targets those travel agents in every hotel, let's cluster that position, let's put it over all of our luxury hotels, regardless of brand, regardless of manager. So we'll take one specialized high performer, and spread that individual over 10 properties, and that individual represent all of our hotels regardless of location. So those are the type of things that we've evaluated, and those are the type of things that are working as we move forward, and they're sticky, they're going to stay. When you look at our total management, fixed management positions, we were down about 106 FTE from 2019. And we believe that sticks, that's a budgeted number where we think we land for the portfolio. So I think the fixed piece is what we're working on.

And then as its mentioned earlier, we got to drive the revenue, right. We can't save our way to profit so we're going to drive revenues, we continue to look at ADR, we continue to perform, and when we look at the resort portfolio, that's another example. Our rates are about $270 in 2019, we're about $350 in 2022. And, you know, the biggest driver of Q4 profits, the ADR was up $76 in our resorts for the resort portfolio in Q4. And ADR was up 38% in Q4. So it's working our pricing, our strategies, our revenues, our investments in restaurants. We are up about $11 million to $12 million in incremental revenue in our investments in our restaurants. So it's really a focus of the bottom and also the top.

Mark W. Brugger

I will just add on them, on the wages. So I think generally, our wage increases bring us to fully up to where we want to be at our property this year. There's not a second leg up that we think we need to be competitive in the market places. Some of the markets, it varies by market and market like New York City still has a multi-year marketing agreement ahead of it. So wage increases aren't going to be as dynamic in a market like that, these are already fixed by long term contract. And then other markets, we think we're in pretty good shape with where we've adjusted wages this year. And as Tom mentioned, the resort markets particularly will be easier to, we think adjust the rates to more than make up for the wage increases at this particular property.

Chris Woronka

Yeah, thanks, guys. That was super helpful. Appreciate all the color. Follow-up is on, Mark, some of the be leisure business you talked about, I guess there may be no clean way to answer this. But are we sure that we're not going to be double counting kind of return to office, right, and some of this maybe day of week, Monday, Thursday, Friday, stuff that people may -- they can't be two places at once, maybe they're back in the office more, they're not at the resort Monday or Fridays or if there's any way you've looked at your customer data and tried to figure out if people are going on a corporate code during the week, is there any way to just think about that at a high level?

Mark W. Brugger

Yeah, it's a good question and we've talked about it internally. I think that the right answer is, we don't think the risk is that high because we think the pie is going to expand so much. So there's so many people that haven't been on the road in the last two years, that the overall pie is just going to be bigger. So the be leisure, you're going to go to Chicago and you're going to stay over Sunday night, and work -- you end early or stay late and work from the hotel room and enjoy the city maybe with your significant other, maybe not. We just think that trend is going to persist and the pie is just so much bigger with the pent up demand of travelers that are going to hit the road that if even if some of the leisure folks that have been on the road last year, that kind of offset, the bigger pie is going to more than overwhelm that double counting impact, if you will, but we don't have a great way to track that at the moment.

Chris Woronka

Okay, fair enough. Thanks, guys.

Operator

Thank you. Our next question comes from a line of Michael Bellisario from Baird. Your line is now open.

Michael Bellisario

Thanks. Good morning, everyone. I just want to go back to the margin comments one more time. And I know you're using a broad brush there but maybe can you provide any color on how you see the range in terms of margin expansion, how that might differ, I know you sort of talked about resorts but resorts versus urban, encumbered versus unencumbered hotels, because your portfolio today is not necessarily like the average U.S. full service hotel, that you're kind of quoting there for that range?

Mark W. Brugger

Yeah, I mean, Mike, I would say I really don't want to get into giving full year guidance, but maybe I can circle back with people later. I do think the opportunity for the upside is going to be much greater from the urban hotels, just simply because they ended up finishing the last year is materially lower than our resort hotels or resorts. I think finished the year 2021 with margins about 300 basis points better than they were in 2019 whereas the European hotels are dramatically lower. So we're going to be providing some updated information as we go into the upcoming conferences and I will see what additional color I can provide you guys at that time. But off the cuff, I don't have the figures handy to share with you.

Michael Bellisario

Yeah, but my question was more on the long term target. That range you guys gave, not the 41 to 39 for the resorts. Just are there puts and takes, urban, suburban urban resort, just where do you guys differ versus the average kind of broad brush range that you guys just provided?

Mark W. Brugger

So a couple observations on there. The 50 basis points of portfolio expansion from the brand managed conversions, the six hotels are primarily urban hotels. So that'll be representing our urban portfolio. The resorts we think stabilized at much higher rates. So you should expect the flow through and profitability ultimately to settle out at a higher level at those. So there's more opportunity within the resource portfolio to stabilize at higher post pandemic margins and pre-pandemic margins. So that's the greater opportunity on average.

Michael Bellisario

Got it, helpful. And then switching gears just on CAPEX to maybe talk about plans in Burlington and Sedona and then I think maybe more importantly, how are you balancing increased CAPEX spending and then some likely renovation disruption at these better performing properties this year?

Mark W. Brugger

Yeah, so I guess we're super excited about what we completed in 2021. That was a big year for us with those three conversions. We have two conversions happening in the first quarter of this year, which aren't terribly capital intensive, but will probably come like $10 million or something to get those done. And then the big ones that we have coming up over the next, let's say 18 months will be the Boston Hilton, the Burlington Hilton, which we're hoping to convert to a curio next year. And then the repositioning of Orchards. And so the seasonality of the Boston Hotel will allow us to really keep disruption to a minimum there. Orchards will have some which are seasonally slow and it's a relatively small asset on overall portfolio. So we think that that's very manageable. And Burlington, we can do offseason as well. So we're not anticipating significant disruption from our capital programs in 2022.

Michael Bellisario

Thank you.

Operator

Thank you. Our next question comes from the line of Chris Starling from Green Street. Your line is now open.

Chris Starling

Thanks. Good morning. Just going back to those ROI projects that you just talked about, maybe any future projects in the pipeline. Can you discuss the impact of any of that construction cost increases and snags in the supply chain they have had, as it caused you to perhaps delay or maybe even rethink the viability of any projects at all?

Mark W. Brugger

Well, we completed a number of those three positions in mid late last year, and there were supply chain issues and we navigated through them. Fortunately, most of these are really repositions with FFE and millwork and those kinds of things. They're not building a new building. It tends to be the bigger issue on the supply chain issues. Going forward, when we look at what we will have to converted this quarter so those are costs out in good shape. And then as we're looking forward to or just in Burlington and Boston Hilton, we think we have good swimmer [ph] and pricing it from general contractors on most of it. Again, most of the cost, the overall cost is going to be FFE which isn't as big of an issue as getting construction workers and doing some new build. So we think we have it under control. Yeah, we will have like everyone we will have some issues on lighting and other components, I'm sure that we'll have to make sure we're doing more advanced work and ordering things probably two to three months earlier than we would, what I call normal times. But the advanced plan that we're doing and having enough lead time should help us mitigate the supply chain issues. And then on the cost, the nature of our work should lead our ability to control those costs in a relatively efficient manner. But there clearly has been some costs increase but we think we have that reflected in our current estimates.

Chris Starling

Okay, understood, appreciate those thoughts. And then just one more, now that you have control of the Henderson Beach Resort, does that in any way kind of change how you view the opportunity to densify the Henderson Park Inn down the street?

Mark W. Brugger

Yeah, so we have the ability on the Henderson Park Inn as you know to develop a tower, beachfront tower on that. We don't currently -- we just bought the Henderson Resort in December. So we're still getting our arms around that opportunity. But the game plan for 2022 is just there's a lot of low hanging fruit at Henderson Resort. It's to make sure we've kind of picked all that low hanging fruit and then down the road, we always have the opportunity to do development, but it's not on the near term hit list for us.

Chris Starling

Got you, thank you.

Operator

Thank you. Our next question comes from a line of Floris van Dijkum from Compass Point. Your line is now open.

Floris van Dijkum

Good morning guys. Wanted to change tact just a little bit. Obviously, talk about the balance sheet here. You're in a pretty decent position. Jeff, maybe if you can touch upon how close you got -- I know you guys just got the extension, but how close are you from emerging from the covenant waivers, is there an opportunity there starting in the second quarter, you could be free and clear and what implications would that have on dividend payments going forward?

Jeff Donnelly

Yes, it's a good question, Floris. I mean obviously, it's a function of how well our performance and specifically how well specific hotels perform as we move through the year. But I would say our internal projections today would say that we can be in compliance with our covenants in the middle of the year. So I do think we're on a good trajectory on that point. As far as the advantages that come, I would tell you that I think the one of the greatest points of flexibility is that you end up with a lot more flexibility on how you're allocating your capital, whether it's recycling assets, acquisition capacity, it's really the flow of funds and capital you raised and what you can use it for, I think that's very valuable. As far as dividend payments, that will ultimately be -- I'll defer to Mark on that, but I think that's ultimately going to be the decision of the Board. From our standpoint right now, I think we have a really attractive uses of capital in our portfolio for ROI projects and some of the acquisition opportunities that we're looking at. And from a practical standpoint, we have the operating losses that would effectively allow us to not have to pay a dividend. Electively we could, but I don't expect we will be obligated to pay a material dividend this year.

Floris van Dijkum

And then if I can follow-up, I was just looking at the EBITDA contributions from some of your -- the largest EBITDA contributions for some of your hotels in the fourth quarter. A couple of things which struck me obviously, Margaritaville has been a huge winner. I think for the year, you had like almost $14 million of EBITDA and this had $5 million in 2019. How does that make you think about other potential Margaritaville conversions? And then also, maybe you can touch upon the Worthington Fort Worth, which seemed like it had almost all of its EBITDA coming in the fourth quarter. Was there some anomaly there or was there anything else going on and how should we think about that hotel, what should be the run rate going forward?

Mark W. Brugger

So Floris, maybe I'll start with the Margaritaville and then turn it over to Tom to talk on the Worthington. So Margaritaville Key West, it's been terrific. It's the highest-rated Margaritaville in their system. So Jimmy Buffett was there, Tuesday this week, taking pictures with guests and [indiscernible] our resorts, so we talk about that. So yes, we would do more Margaritaville. That market also is the -- I can't imagine there's a better market to do Margaritaville Key West. But we've been very pleased with our partnership with them. We're very pleased with the results, and we think we'll be able to set records on rate and FB sales in 2022 there. So far, so good very pleased with our partnership there. For Worthington, I'll let Tom speak on kind of the trends on why the fourth quarter was the strongest quarter there. Tom?

Thomas Healy

Sure thanks, Mark. Worthington it was very simply two things. We actually had groups in. It was a pretty active group season for the hotel, a fair amount of activity with the colleges and games and football. And then the repositioning of the lobby and the Toro Toro restaurant in the lobby generated about $3 million in revenue. And certainly, that was partially with due to a lot of holiday events in the space. So really, it was a two things group and then the investment in the Toro Toro restaurant that drove performance at that hotel.

Floris van Dijkum

And that's a sustainable run rate, you think, going forward?

Thomas Healy

Listen, we did a -- we had a pretty strong room. Rooms flow-through was about 85%, and food and beverage flow-through is about 50%. When the business -- if the group comes back like it should in this market, the flow-throughs will -- and the margin will be just fine. I mean we're still down. We're projecting it down about $93 million in banquet -- food and beverage for the portfolio in 2022 versus 2019. Once the group comes back, banquet revenues is our second highest margin, right. So as that comes back, our margin and our profitability and our flow-through should continue to improve. So, there's certainly runway there.

Mark W. Brugger

Yes, I would just add just on 2022 expectations, we expect Worthington year-over-year versus 2021 to be one of our strongest performers.

Floris van Dijkum

Thanks guys.

Operator

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

Stephen Grambling

Hi, thanks. I guess a couple of questions on the MA environment. First, given the strength in the lifestyle leisure transaction market, how do you think that's impacted your NAV versus pre-pandemic and I know you mentioned you're more focused on ROI and see also potential acquisition targets as well but what would make a buyback perhaps more interesting as an alternative? And then second, are you seeing any or expecting any impact on rising rates on the financing market at this point, whether for purchasing existing assets or even broader hotel development?

Mark W. Brugger

So we think MA will be active this year. I think hotels on a relative basis still remain a very interesting asset class, and we're getting lot of, there's a lot of chatter in the marketplace. On NAV, trying to hear your questions one at a time, NAV our resorts on average are probably up more than 20% versus pre-pandemic levels, so much more than that. So they clearly had the biggest increase in NAV. Some of our urban hotels are flat to down. I'd expect the urban to recover as the cash flows recover. We will gain more confidence in the BT and group returning as we move through 2022. Financing, we're not seeing that significant change in financing rates. There's a lot of active available debt for hotels. The bigger challenge is getting the trailing cash flow so you can get the loan value of proceeds that are required to get an active market for these urban hotels. So I think it's going to be less about rate on driving the urban hotels and more about the return to cash flow, so people can get the leverage levels that they need to create the true liquidity in that market.

Stephen Grambling

And then perhaps as a quick follow-up, given how efficient you were there. I guess, would you be willing to consider the, some of the -- if a portfolio comes out of the gate here that could be in the market if it wasn't just focused on resorts or is that just too much of a headache to get through some of the urban stuff that could come with some of those?

Mark W. Brugger

I guess to give you an evasive answer, it depends. So no, if we had a portfolio that we loved and it had five resorts and two urban hotels that wouldn't necessarily deal killer. Our preference probably would be to partner going into that, but that would mean we wouldn't do that deal. So there's a couple of portfolio deals that are on the market now. We're looking at them. We wouldn't do something that would significantly change the strategic direction that we're headed in now. But if it's complementary and had a couple of deals that were not an exact fit, but were still quality, that would be a portfolio that we'd be interested in looking hard at.

Stephen Grambling

Awesome, thanks so much.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mark Brugger for closing remarks.

Mark W. Brugger

Thank you, everyone. We appreciate you tuning in for our earnings call today, and we look forward to updating you on our next quarterly call. Take care.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.