DRH - NYSE

Good day and thank you for standing by. Welcome to the DiamondRock Hospitality Company Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Briony Quinn, Chief Financial Officer of DiamondRock Hospitality. Please go ahead.

Thank you, Daniel. Good morning, everyone, and welcome to DiamondRock Hospitality's third quarter 2024 earnings call-in webcast. Joining me today is Jeff Donnelly, our Chief Executive Officer, and Justin Leonard, our President and Chief Operating 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 what we discussed 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. We are pleased to report another solid quarter with results largely in line with our expectations. Comparable RevPAR growth was 2.8% over 2023, which was 60 basis points stronger than the quarter before, and comparable total RevPAR growth was 2.3% over 2023. As we discussed on last quarter's earnings call, we anticipated that the growth in out-of-room spend would be significantly lower in the second half of the year due to a shift toward citywide-driven group business at our larger group hotels. While the portfolio did not sustain any material damage from Hurricane Helene in September, cancellations and business interruption held back our RevPAR and total RevPAR growth by approximately 35 basis points. Our urban hotels led the portfolio with comparable RevPAR growth of 4.2% in the quarter. Average daily rates were up 5.6%, offset by a percentage point decline in occupancy. While group demand continued to show strength, transient pickup, particularly on the weekends, was slightly weaker than we anticipated. Comparable RevPAR at our resorts declined 80 basis points from 2023. The 35 basis points of portfolio headwind from Hurricane Helene translated to an 86 basis point reduction to our resort RevPAR and total RevPAR growth. Despite this headwind, our resorts delivered total revenue growth of 1.6%. A few highlights in the resort portfolio include Cavallo Point delivering RevPAR growth of over 18% on a very strong group quarter and Sonoma delivering RevPAR growth of 7% despite the headwinds in San Francisco. Chico Hot Springs delivered RevPAR growth of 16%, all driven by an increase in ADR as our revenue management strategies for this hotel are playing out. Group continued to be our strongest segment in the third quarter, increasing 15.7% over 2023 driven by an 8.8% increase in rate and a 6.3% increase in roommates. The strength in group was not limited to our urban hotels. Group revenues in our resort portfolio increased approximately 15% as we continue to add base at these hotels in order to preserve our transient pricing. As we mentioned previously, we had a significant shift to citywide group in the quarter which caused a decline in banquet and catering revenue compared to the third quarter of 2023 and was a reversal of the double digit growth in food and beverage revenue that we saw in the first half of this year. But as we talked about the last two quarters, it was that growth in lower margin F&B revenue that had been driving our higher headline expense growth numbers. With the leveling out in F&B revenues, total expense growth dropped from the over 5% growth rate we saw in the first half of the year to 2.6% in the third quarter. Comparable hotel adjusted EBITDA was $82.3 reflecting 2.2% growth over 2023 on a 9 basis point lower margin. Corporate adjusted EBITDA increased 3.3% to $75.6 million. Last quarter, we provided an update on our technology initiatives, including a new ERP system alongside a robust enterprise analytics platform. These systems have greatly enhanced our ability to perform detailed custom analyses and forecasts with greater speed and precision. Moving forward, we are focused on strategically leveraging technology across operations, financial management, and ESG reporting to achieve meaningful savings in both workforce resource and time across the organization. Before I turn the call over to Jeff to discuss our outlook and strategy, let me touch on our capital markets activity and balance sheet. During the quarter, we continued activity under our share repurchase program, buying back an additional 700,000 shares at an average price of $8.14 per share. To date, we have repurchased 3.1 million shares with a weighted average price of $8.33 per share for total consideration of approximately $26 million. Turning to our balance sheet, we ended the quarter with a net debt-to-EBITDA ratio of 3.7 times. In early August, we repaid the $73.3 million mortgage loan secured by the Courtyard Manhattan Midtown East. The loan was repaid with cash on hand, and our liquidity remains strong with over $75 million in corporate cash and full availability on our $400 million revolver. Also during the quarter, we took advantage of the steep decline in the forward rate curve and executed several swaps that will take effect in the fourth quarter and early 2025 to fix SOFR at an average rate of 3.2%. The forward curve has flattened considerably since those swaps were executed, and similar swaps would price much wider in today's market. As a result of these transactions, we will enter 2025 with approximately 57% of our debt at fixed rates. We also exercised the one-year extension right on our $300 million term loan, which now matures in January 2026. Our next debt maturity is now in May of 2025, and we continue to assess all available options to us, both secured and unsecured. And we'll continue to keep you updated on that front. As Jeff will elaborate on further, we are actively working on both asset acquisitions and dispositions as part of our capital allocation strategy, and continue to evaluate share repurchases and high return internal investments. With that, I'll turn the call over to Jeff.

Thanks, Briony, and thank you all for joining us this morning. I want to thank our entire team, who again, worked hard to deliver strong third-quarter results, all while focusing on planning for 2025 and executing capital plans. Before I start, I want to highlight some recent accolades we recently received. Lake Austin Spa Resort was awarded number one destination spa by Conde Nast Traveler Reader's Choice Awards. La Fuga, the restaurant at Kimpton Shorebreak Fort Lauderdale Beach Resort, was awarded TripAdvisor 2024 Traveler's Choice Best of the Best winner. Lastly, the Gwen was designated a one-key hotel by the Michelin Guide as a symbol of excellence and was named one of the top hotels in Chicago for the fifth time by Conde Nast. We also want to announce that DiamondRock has been awarded Hotel Global Sector Leader status by GRESB for the fifth consecutive year as part of its annual real estate assessment in recognition of our continued dedication to our corporate responsibility program and ESG transparency. So, congratulations to our team for these and many other hard-earned and prestigious distinctions. Turning to an update on our capital and ROI projects, the conversion of the Dagny in Boston, which was completed a year ago, has been a big success. The Dagny is consistently ranked as the number one or number two hotel in TripAdvisor as an independent, up from a ranking in the mid-50s when it was branded. The hotel is performing in line with our underwriting and we remain optimistic there will be significant cash flow growth in the years ahead. The hotel delivered at 13.5% of RevPAR growth in the quarter and continued to pick up share from its competitive set. The debut of the Hotel Champlain in Burlington was completed in July for a total cost of $9 million and our outlook is positive. In the third quarter, we generated over a $0.5 million more revenue than last year from our new F&B outlets. We completed a comprehensive room renovation at the Western San Diego Bayfront in June, totaling $16 million, which was almost $2 million below our budget. Guest feedback has been very positive and since completion, the hotel has been taking share on ADR relative to peers. The Bourbon Orleans room renovation was completed in September and we expect a refresh of the public areas to be completed by early 2025, ahead of the Super Bowl. Finally, we completed the addition of a new bar at Havana Cabana in Key West, which opened subsequent to quarter end. The bar replaces a rarely used fitness center with views of the water and will be a driver of incremental profit. So while you won't be able to work out at Havana Cabana any longer, you will now have two places to drink and we think that is a better fit for this hotel's clientele. We hope you all get a chance to visit these special places. We aren't done. We continue to have a strong pipeline of high ROI opportunities, including projects like the combination of our two Sedona resorts in 2025 and the New Marina at Tranquility Bay. We are constantly innovating to uncover value-add opportunities while re-examining our capital expenditure plans to maximize efficiency. In that regard, we are reducing our full-year capital expenditure guidance to $85 million from the previous range of $90 million to $100 million. This reduction is the result of cost savings from reassessment of pieces of projects or entire projects, as well as better planning and execution. Our projected spend equates to approximately 7.5% of revenue, much lower than the double-digit levels typical of the industry. Now let's talk a little more about the outlook for the rest of the year and beyond. We are affirming the midpoint of our EBITDA guidance for the full year and narrowing the range based on the impact from recent hurricanes, as well as our outlook on the current economy and near-term demand. The midpoint of our full-year adjusted FFO per share guidance increases slightly. This updated guidance does not consider any unanticipated impacts to the business or operations. We are tightening guidance on our comparable RevPAR growth to a range of 1.5% to 2% compared to our previous guidance of 1.5% to 3%, and continue to expect full-year total RevPAR growth to be about 150 basis points higher than RevPAR growth. 2024 adjusted EBITDA is expected to be between $281 million to $287 million, compared to $278 million to $290 million dollars previously. We now expect full-year adjusted FFO to be between $205 million to $210 million dollars, compared to $201.5 million to $213.5 million. Finally, the adjusted FFO per share range increases to $0.97 to $0.99 per share, a $0.05 increase at the midpoint versus the prior range of $0.95 to $1. I want to commend my partners at DiamondRock for delivering strong performance this year, consistently at or above our original expectations. This year hasn't been easy. Slowing economic growth, the result of sharp interest rate increases by the Fed in 2022 and 2023, presented a difficult backdrop. Hotel demand is evolving. It's not quite like 2022, but it's not like 2019 either. Group has been the winner this year, and for DiamondRock, group revenues have surpassed pre-pandemic levels on a comparable volume of room nights. Looking ahead, our group booking pace for 2025 is currently down over 3% compared to the same time last year, but we are seeing meaningful positive growth in pace for the first half of 2025, as we continue to lean into more groups that are smaller, leisure-oriented assets, whose groups typically have a short booking window. Business transient remains well below pre-pandemic levels, and while it is improving, it has a ways to go. I think BT demand parallels the return to office trend. Cities that have been quicker to return to office, such as Manhattan, have seen a more robust recovery in midweek demand, whereas cities like San Francisco, Portland, or Minneapolis that are only now seeing a return to office, have seen a slower hotel recovery thus far. Leisure has been the winner over the cycle, and while growth may have slowed, broadly speaking, resorts are holding on to pandemic-era gains. I remain optimistic on resorts. They were a beneficiary of secular and demographic trends prior to the pandemic, so it is not surprising they delivered premium cumulative growth these past few years, well ahead of inflation. It's because of those drivers I expect resorts can hold on to much of their gains and return to premium growth. We're in the middle of our budgeting process for 2025, so I don't have any color to share at this time. But looking at the bigger picture, I am personally optimistic that 2025 is going to feel progressively better as we move through the year. Monetary policy shifts usually need a year to take hold in business fixed investment and personal consumption. SOFR increased on average 350 basis points in 2023, and we're feeling its impact in 2024. This year, however, SOFR is only up about 25 basis points over last year, and we've already seen the first rounds of what is expected to be several more rounds of rate cuts. That leads me to believe that as we progress through 2025, mainstream will feel what Wall Street is experiencing now. Consider the cadence of RevPAR. On whole, comparisons are easier in the second half of 2025 than in the first half. Looking at the demand segments, my instinct is they will line up similarly to 2024, although I wouldn't be surprised if the pace of growth in group decelerates at the margin that business transient picks up some of that slack as more employees return to office. I expect leisure grows as rate cuts take pressure off consumers and comparisons get easier. We remain focused on driving free cash flow. To me, that begins with culture. Internally at DiamondRock, we talk about being all-in and scrappy. They're key parts of our core values that speak to how we are aligned to focus on driving performance. Operations are, of course, the core of our success, and we manage to maximize profit and ultimately cash flow. However, it doesn't stop at hotel-adjusted EBITDA. Our board took action to make our G&A more efficient. And we're working to preserve those savings while making investments in systems to make us more effective. We are working to maximize our financial flexibility while keeping our overall financing costs low. Capital allocation is critical, so we're evaluating capital expenditures to be more efficient and more impactful. To be clear, it is not about ignoring critical items, but ensuring those precious dollars are well spent on both thoughtful cycle renovations and ROI projects. We're evaluating assets for disposition that we believe are a good source of capital that, in turn, can be reinvested accretively to cash flow per share. As part of that effort, we are working to enhance the marketability of non-core assets by extending ground leases, pre-negotiating PIPs, and vetting financing options. Reinvestment could be, of course, in share repurchases or perhaps at another hotel with a significantly higher free cash flow yield. From an asset perspective, destination resorts have an appeal for the long-term growth and differentiation that they provide, but we also see value in targeted urban assets. In fact, we are close on a small acquisition that satisfies the criteria we are seeking. I'm hopeful we can share more in the future. In my career, the industry is focused on owning the largest hotels or generating the highest absolute RevPAR. Several peers have a stated focus on high EBITDA. It hasn't worked. As a group, hotel REITs are infrequent outperformers. FFO per share growth has been the missing ingredient. The industry is economically sensitive. That cannot be changed, but DiamondRock can take steps to reduce our risks and volatility to enhance our performance. We focus on segments such as resorts with stronger long-term secular drivers. In urban centers where competition is high, a low investment basis well below replacement costs can reduce risk of new supply or outsize property tax assessments. Capital expenditures are our single largest cost, so we want to control how and when that money is spent, which is partly why we have leaned into independent as well as third-party managed hotels. Driving free cash flow per share is paramount. It is my strong belief that an intense analytical focus on free cash flow per share growth is our path to premium FFO per share growth, premium dividend growth, and ultimately narrowing our discount to net asset value. At this time, we would like to open it up so Justin, Briony, and I can take your questions.

[Operator Instructions] And our first question comes from Dori Kesten with Wells Fargo Securities. Your line is open.

Thanks. Good morning. As you look forward at your list of ROI projects slated over the next three years, are there others where changes are likely just given your rerun of return expectations? And should we somehow shift how we're thinking of your total spend? I think you mentioned kind of high single digits versus double digits as a percentage of revenue.

Yeah. On the first part, I think you're right. I mean, we've tended to be in the high single digits, and I think we're aiming to be in that. It won't be perfect every year, but I think we're aiming to kind of remain in that 7% to 9% of revenue range going forward in terms of how we think about our total capital spending. We're always looking at projects. There are projects out there, I guess, that are contemplated, but we haven't necessarily advertised to the market. And I think there are some of those that even within that pipeline that I think we think about when's the right time to undertake those and what's the magnitude of investment. Yeah. So I would say nothing that's necessarily immediate, but it is something that we're thinking about.

Okay. And I know the situation's a bit fluid, but if you could take a crack at where labor costs may be over the next year versus the current year, just what some initial thoughts may be.

I think fluid is a good way to put it, Dori. I think one of the positive signs we've seen is that sort of the rampant growth in our resort markets, we've really seen a cooling of the labor pressure there. I think in the quarter in the resorts, wages for us were only up about a 1.5 points, benefits were up a higher number. The flip to that obviously is on the urban side where we have seen a number of the union contracts and major markets roll. And I think we'll probably see slightly higher, 3% to 5%, depending on market wage growth for a lot of those hotels over the course of the next 12 months. So I think for us, given our leisure orientation, we don't think it will be as much of a margin pressure as maybe we've seen over the last two years, but definitely something we're watching.

Okay. And just last, if you can kind of walk through your major convention markets for next year, just where there may be initial signs of strength or weakness for ‘25.

I think we do have a bit of a weakness in Chicago, which tends to be a little bit of an even odd convention market and has for a long time. Boston, I think we see generally flat on a year-over-year basis. And DC for us is less of a citywide market, but DC also has a bit downward trend. So I think portfolio-wide, we have a slight negative bias versus this year.

Yeah, that's why some of our smaller properties have been really kind of leaning more in the group as we head into the next year.

Got it. Thank you.

Thank you. And our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Jeff, you had highlighted in your prepared remarks the optimism about resorts, but kind of referenced the strategic focus on booking group business at some of the smaller assets to build a base, as well as I think you guys had highlighted some weakness in weekend demand. So I guess, how does this continued mixed shift and any change in trend line for some of the transient side of the business impact kind of the outlook as you think about next year and really what trend line that business is on here, but maybe more in the near term?

Yeah, well, I guess on my point on the focus on sort of leisure and resort assets is really more of a long-term statement. Because frankly, we're in a situation where we really haven't built resorts in this country in a very long time. And I don't think that's going to change for a very long time. So just the removal of that supply headwind on the resort side to me is very powerful. And then at the same time, and I won't go through all the points, but I do think there's going to continue to be a demographic benefit, much as you've seen in other property types that will continue to help lodging over the next few years as people age and what sort of their peak spending for travel. So to me, it's longer term, that's what makes sort of the resort or leisure segment so appealing. Nearer term, I think the reason why there's some challenges is that, as I mentioned, I think the economy is at a point now where there is a lot of pressure on consumers, but I think that pressure will continue to be -- we'll see it abate as interest rates continue to come down. Lodging or leisure, I think, has priced itself very aggressively over the last two, three years. That's why I said where it's run very far over the course of the pandemic. It's clearly been the winner in terms of total RevPAR growth, but it's vastly outperformed inflation. And so there's probably going to be -- I think we've seen much of it this year, is a little bit of pause on growth in the leisure segments vis-a-vis some of the others like group or business transient, which have only recently begun to reclaim where they once were. So I don't know if that quite answered your question, but that's just kind of how I think about it, is that it's run very far. I think it still has great legs long term, but I think in the near term, it's been a slower grower just because of its strong relative performance.

Yeah, that's all helpful commentary. So with the focus on kind of maximizing cash flow growth and recognizing there's things you can and can't control from a business cycle perspective, does the focus change any portfolio allocation goals so that you're not over leveraged any specific market or segment?

Not necessarily. I mean, I think there's still appealing ways to be in urban markets and in leisure markets. Maybe there's going to be some of the markets that you'll choose. You're trying to minimize what I guess I would call like the factors that tend to be the angle biter issues that nibble away at you, whether it's jurisdictions that tend to surprise you as tax increases or sort of there's higher labor costs over time. There's different things that we can do.

And then just last one, I don't believe you gave anything on group pace, recognizing it's a little bit of a more challenging year. But can you just kind of give us where you're at from a pace perspective on group for next year? And maybe what percent of that is on the books versus where you were at this time?

I said in my remarks that I think our group pace for full year 2025 is down a little over 3% where we are today. I mean, the nature of our hotels, just given their physical size, our group tends to be a little bit shorter in the window. So, if you actually look in the first half of next year, our group pace is actually positive year-over-year. And I think in the first quarter it's high single digits. So, we tend to be a book much closer in than I think some of our peers.

Got it. Sorry, I must have missed that. Thanks for the time.

Okay. Thanks, Austin.

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

Hi, thanks. I just wanted to go back a little bit where you talked about you're seeing a little bit of slowdown in the transient trends thus far in the fourth quarter. And is there any more color you can provide maybe as to what's causing that? Is it maybe more of an election impact than you were expecting or is there something else kind of going on? And I guess how long would you expect it to lead into next year?

I think it was really a comment predominantly driven by what we saw in the third quarter. We did see some weakness, particularly in our urban hotels on the weekends. Weekend transient occupancy for us was down about 3% in the urban portfolio. And we saw that particularly in the back half of August and in September. And it was definitely a trend that was concerning to us if it was pointing to a more price-sensitive leisure customer, but we actually saw it reversed in October. So, we were up 3% transient over the weekends in our urban hotels in October. So, I'm not sure there's necessarily a read-through.

Okay. And then I just wanted to ask, in New York, I think they passed what's called the Safe Hotels Act or something. But since your hotels in New York are already union, I guess this would have no impact on you or is there anything that we should be thinking about there?

No, we don't really see any meaningful operational impact from the ordinance for our Safe Hotels.

Okay. Thank you.

Thanks, Smedes.

Thank you. Our next question comes from Duane Pfennigwerth with Evercore ISI. Your line is open.

Hey, Jeff and team. Good morning. Any more color on the booking curve? I guess to say that first half group pace is up meaningfully, but you're down a little bit over 3%. Can you just comment on the booking curve year over year? Is it changing? Is it getting more close in relative to last year? And what would be the drivers of that?

I think some of it's the cadence. When you think about the year over year trends, for example, the fourth quarter in the back half of this year, Chicago is going to look very strong. So when you flip to 2025, Chicago, which is arguably our largest group hotel, has a difficult comp that it's climbing over. But conversely, some of our smaller hotels that we've continued to group up, I think, look a little bit better in the first half of next year. It's low to mid single-digit next year in the first half of the year, positive. So I don't want you to have the expectation that it was double digit or something like that. And that really is what's driving that cadence is that Chicago just has difficult comps. The end of next year, as Justin said, there tends to be this three-year cycle, if you will, where you have a couple of good years and then sort of a tough year in Chicago.

That's helpful. And then just on the CapEx, it feels like this is maybe the second time you've revised it lower. Can you just give some insight into what that evaluation looks like? What are the specific projects that you're either cancelling or pushing? And clearly, there's more focus on capital discipline. But if you could just help us understand the evaluation process a little bit and what's changed. Thank you.

Yeah, I mean, some of the projects we mentioned, I mean, at the midpoint, we're down $10 million. And some of the projects we mentioned before have been like, for example, Bourbon, New Orleans. We really revisited the scope of the project that involved F&B outlets and what the lobby would look like. And we just determined that that would not be a good use of the incremental capital. In San Diego, we did a rooms renovation that was just effectively coming in below budget and working to drive incremental savings on what was effectively a cycle room renovation. There's other pieces of projects that are underway where I think we can drive those savings. So that's really kind of how that revision has come down. And then I think as projects we look at going forward, whether they're sort of the cycle type renovations or they're ROI projects, we're just trying to make sure they're as efficient as possible in terms of minimizing our capital out the door, but achieving what you want to achieve.

Thank you.

Thanks.

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

Hey, good morning, everyone. Thanks for taking the questions. Jeff, I think I generally agree with your thesis. There's a little bit more return to office coming in some of the non-Northeastern markets. But I guess the question, by definition, someone can only be one place at once. And I guess if they replace a four-day weekend at a resort with a business trip, are your rates in urban markets, do you think there's kind of this almost negative swap effect? I mean, if you look at your BT rates versus your resort rates, would that actually kind of be diluted to RevPAR, all else equal?

Yeah, that's a good question. I mean, I don't see us going back to a five-day work week. I think a lot of the cities that you're seeing people coming back to are ones where -- and it's surprising, I think, for a lot of people on this call to hear this. But I think there's still employers out there that are coming back from folks who are just merely encouraging people to be the office, where oftentimes they're in there fewer than one to two days a week. And they're trying to get them back to three days. Or there's some where they're two to three days, and they're trying to get to four. So I don't think that's going to have a material impact on that leisure trend where folks might have ended up sort of traveling on a Friday, Saturday, Sunday, and adding a few more long weekends or what have you. I'm not as concerned about that as a margin. I think a lot of those cities where they've been lagging on return to office, that's the trend that we're seeing. It's more of the two days going to three or two days going to four than it is people going from four to five.

Okay. Got you. That's good to hear. And then kind of on the CapEx commentary, it's certainly directionally encouraging that you're taking a hard scrub on everything and finding some opportunities to reduce a little bit. I guess along those lines, though, are those same analyses being done? I'm thinking maybe you're talking a little bit more about your independence. Can you do that same level of analysis or negotiation with the branded product? Is that an area that's kind of off limits in terms of maybe scaling back on renovations?

It's definitely more of a negotiation, but I think we've seen our brand partners be a little bit more willing than they were pre-pandemic. I think there's definitely a recognition that fundamentals in some of these hotels have not returned nearly as fast as the cost of renovations have. So I think we are starting to see some more willingness and flexibility on renovation cycle times and ultimate scope. But I think that's some of the savings that we were able to pull out in a few of the recent renovations is negotiations of what a pertinent scope should be for some of our larger assets that we renovated like Salt Lake and San Diego.

Okay. Thanks, Justin. Just final one for me is, I think this year you had a pretty good outcome on, if I recall, on insurance renewal. I guess early to think about next year, but with the storms that have come through. And I think there's probably an expectation in the industry that it may be a headwind again next year. Can you just remind us when you renew? If you have any thoughts based on what maybe happened in ‘22, which I think was also a bigger storm year, just some early high-level thoughts not looking for a specific number. Thanks.

Sure, Chris. We renew our program on April 1. I think we obviously are watching closely the market given the storms that have happened, but early signs are that it may not be as impactful as we might have feared. So, I'm hoping we're up in sort of the mid to high single digits next year, but that's obviously very preliminary.

Sure. Understood. Thanks, Briony.

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

Thanks. Good morning, everyone.

Hi.

Just on this smaller deal that you referenced, maybe take a picture in relation to this deal. Talk about, remind us of sort of underwriting parameters, return expectations, and then how you internally think about doing a deal with a potentially lower initial yield and ramp up on a good per key basis.

Yeah, that's a great question. I mean, I think ideally what you'd like to find is a property that really kind of checks all the boxes. One that's relatively newer, one where you can get attractive yield both on, I'll call it conventional sort of cap rate, but more on like an after capital yield right out of the blocks, and you can also get a very attractive basis. So, I think to the extent you can check all those boxes and be doing it in a way that we think is accretive to our story, that's something you'd like to see because that way it's effectively superior to your existing portfolio and I think has to grow longer term.

Understood. And then on a similar note, but related to buybacks, it doesn't look like you bought any stock back post-August earnings even though the stock was lower than where you had repurchased it. I guess was this pending acquisition in the works then and that's why maybe you had a slightly higher hurdle to buyback stock and you didn't? Anything to read into there?

Yeah, no, Austin, we, I mean, sorry, Mike, we did a purchase just a little bit, but you're right, it was nominal post-reporting. But as you recall, we have that mortgage that we were paying off with cash on hand. And you're right, we have been evaluating a number of different alternatives, including this potential acquisition. So, you're right on that front.

Understood. Thanks.

Thank you. Our next question comes from Chris Darling with Green Street. Your line is open.

Thanks. Good morning. Touching on the Orchard Inn repositioning, can you walk through the anticipated EBITDA disruption for next year, assuming that you think it'll be a headwind? And then taking a step back, the ADR gap between the Orchards Inn and the L'Auberge, it's pretty sizable today. Just curious if you could frame how much do you need that gap to close that ADR gap in order to achieve your underwriting there?

Good question. Chris, thank you. Actually, work on the Orchard last week.

Yeah, it just began last week. So, I think a big chunk of the disruption that we would expect to see is going to be in the fourth quarter. I think it's about a $0.5 million on EBITDA. Not of a level, though, that I would say is, it's real, but it's not a level that's particularly notable. And I think every year we've always said we have somewhere between $2 million and $4 million of earnings disruption. I would say this roughly falls within that. I think one thing to point out when we think about L'Auberge is L'Auberge is roughly half suites. And so, even within the L'Auberge ADR, there's a pretty large gap between where our standard rooms are and where our suite inventory is. I think the goal here is really to position Orchards in the middle of those two products, maybe a little bit closer towards our standard room inventory given room size. So, we think a $250 ADR lift for Orchards should be easily achievable. We put it in line, if not slightly below, where our standard room inventory is now. So, that's sort of our expectation as we ramp up with the ultimate goal that we can get those rooms to a place that's in between the suite inventory and the standard room inventory that sits at Sedona today.

Okay. That's helpful to frame it. And it sounds like, just to follow up there that because the bulk of activity, construction activity, would take place in the fourth quarter that this may even be a tailwind to performance going into next year.

I think we think about it as roughly flat. We will certainly have some disruption over the first six months of the year between the two in the aggregate, but then we will have a significantly improved product in Orchards for the back half of the year that will hopefully make up that disruption over the first half. So, when we look at it, I think, from an EBITDA perspective, the goal is to be roughly flat for this year.

Okay. Understood. And then just one more for me. You've talked a little bit about this, but just as you've been active in the transaction market. Just broadly, I'm curious if you could speak to current conditions, any observed changes in pricing that you've seen across the types of assets that you own.

There haven't been, I was going to say, there haven't been a lot of transactions out there. That's really been the struggle, I think, the last few years, quite honestly, is there's been what, $4 billion or $5 billion of transactions each year for the last few years. It's probably 10% of what the industry used to do. And I think when you really drill into that, probably a third of that has been sort of these $400 million or $500 million plus transactions. And so, I would almost say the depth of the transaction market is not really all that deep. I think there's definitely been a lot more public hope in the sense that I think the brokerage community is advertising that they're seeing more activity coming. So, it does feel like it's on the verge of changing. I think there's a lot of desire out there to transact for both buyers and sellers. But thus far, there haven't been a lot of --

We really haven't seen a lot of significant transactions. And I think, look, the messaging from a lot of the PE community is that we're waiting for rates to come down so we can actually get accretive financing for some of these transactions. And if you look at where we are, there was definitely a lot more optimism a couple of months ago after the first wave of rate cuts. And we actually saw that SOFR curve move down significantly. But we're in a 10-year that's significantly above where we were before rate cuts started. So, I think that may have abated some of the optimism in the short term until we see a continued move down in the cost of capital.

All right. Understood. Thank you all.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Jeff Donnelly for closing remarks.

Well, thank you, everybody for joining us today. And stay on the road and keep traveling.