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Text: As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.
Since our last earnings call, we have made outstanding progress on multiple fronts.
I'll highlight just four.
First, we increased our total liquidity and decreased our total debt through a successful preferred equity offering.
Second, we reduced our monthly burn rate, significantly beating our prior expectations.
Third, we reopened five additional hotels.
And fourth, we struck a sweeping deal with Marriott that not only increased the NAV of our portfolio by $50 million but distinguishes DiamondRock's portfolio as the least encumbered by long-term management agreements among all full service public lodging REITs.
Now, while we have made good progress and remain optimistic about the future of travel, the pandemic we are living through has obviously created tremendous dislocation in near-term demand.
In the third quarter, there were some encouraging early signs of a recovery in travel demand.
The relative bright spot has been in leisure travel, which of course is elective travel.
Guests have been checking into the drive-to resorts DiamondRock is known for.
In contrast, business travel and group business demand has only marginally improved and is likely to remain very constrained until there is a healthcare solution such as a vaccine, effective therapy or a massive national testing program.
Interestingly, we are seeing signs of pent-up demand.
So, we believe there is a chance for a meaningful snap back on the other side of the healthcare solution.
Personally, this is my fourth downturn, and we know how to manage through these environments.
That experience is why DiamondRock has always embraced a low-leverage and conservative balance sheet strategy.
We currently have more than enough liquidity to carry the Company until such time as we are cash flow positive once again.
History shows that travel demand always eventually surpasses the peak of the prior cycle, and we remain optimistic that this recovery ultimately will be no different.
But make no mistake, this is the most difficult operating environment of modern times and requires almost herculean efforts to ensure guest and employee safety first, while trying to preserve cash flow.
Although the environment required significant reductions in staffing, we were able to soften the blow to hotel associates with nearly $8 million in severance paid out this year.
Rest assured that we are doing everything possible to be responsible fiduciaries and community citizens while making certain that DiamondRock is set up for future success.
Let's turn specifically to DiamondRock's third quarter.
Hotel adjusted EBITDA in the quarter was a $17.4 million loss, a marked improvement from the $30.4 million loss in the second quarter.
Corporate adjusted EBITDA was a $24.4 million loss as compared to a $37 million loss in the second quarter.
Third quarter adjusted FFO per share was a loss of $0.22 as compared to a loss of $0.20 in the second quarter.
Two items worth noting with these results: one, they exclude $7.4 million in onetime severance costs; and two, this one is important, adjusted FFO per share was negatively impacted by a non-cash income tax valuation allowance recognized in the quarter of $12.4 million or $0.06 per share.
In other words, our third quarter AFFO would have been a loss of only $0.16 per share without that tax adjustment.
Moreover, in the quarter, we successfully reopened five more hotels and had nearly 90% of our rooms available to sell at the end of the third quarter.
To illustrate the progress, that 90% figure compares to just 58% at the end of the second quarter.
Furthermore, portfolio occupancy jumped over 1,000 basis points from the second quarter to 18.6%.
Recall that we ended the second quarter with just 22 hotels open and operating.
We opened a 23rd hotel, our Lodge at Sonoma Resort, on the first day of the third quarter.
Those 23 hotels saw occupancy rise from 26% in July to 28% in August, and finally, to 31% in September.
In July, we reopened two other hotels besides The Lodge at Sonoma that included Hilton Boston Downtown and the Hilton Burlington on Lake Champlain.
Our decision to reopen hotels has been and continues to be dynamic and data-driven.
We reopen hotels if we can lose less money doing so.
Based on this approach, the data led us to keep three of our New York City hotels closed but to reopen our two big box hotels, the Chicago Marriott and the Boston Waterfront Westin in early September.
Now, as you'd expect, nightly occupancy is comparatively lower at these two big box hotels than the balance of the portfolio.
But a resilient base of contract business and aggressive cost controls has thus far confirmed that reopening was the right decision.
For the entire portfolio, total revenue decreased 79% in the quarter as a result of an 81% decline in RevPAR, that was partially offset by a smaller decline in food and beverage revenue.
Total revenues were $50 million in the quarter as compared to just $20.4 million in the second quarter.
Over the summer, monthly revenues showed steady progress, rising from slightly over $11 million in June to over $14 million in July, to over $16 million in August, and finally, reaching almost $20 million in September.
Encouragingly, revenue in October looks to be coming in even a little bit better at over $22 million.
Okay, let's talk about profitability.
To maximize absolute profit, our asset managers are working closely with our operators to aggressively drive revenue while implementing strict expense controls.
In the third quarter, every department, rooms, F&B and other, saw material improvement in profitability as compared to Q2 with sequential acceleration in flow-through that surpassed internal forecast.
For example, the rooms department margin rose from 45% in the second quarter to 64% in the third quarter, driven in large part by a 25% sequential reduction in the cost per occupied room.
Over the course of the quarter, we saw the number of hotels achieving breakeven profitability continue to expand.
In June, we had 10 hotels generating positive gross operating profit, or GOP, and this figure rose to 18 hotels by the end of September.
Over that same period, GOP margin moved from a negative 35% to a positive 9% margin as a testament to our ability to drive revenue while constraining costs.
On an EBITDA basis, six hotels in June were operating profitably, and that figure rose to 10 hotels by September.
What you cannot see, however, is an additional 10 hotels were, on average, approximately $100,000 from breakeven EBITDA in September.
Here's one other additional data point I think you'll find interesting.
If we exclude the two big box hotels, the Chicago Marriott and the Westin Boston, from the 27 hotels we had open in September, the remaining 25 hotels collectively would have been within $200,000 of breakeven EBITDA.
Clearly, the portfolio is near a favorable tipping point for profitability, and much of the source of that strength is DiamondRock's drive-to resort portfolio.
Our resorts are performing very well and generated positive and growing EBITDA every month in the quarter.
Let me share with you a couple of highlights from just two of our resorts to give you an idea of the pockets of strength we are seeing.
The Landing in Lake Tahoe saw a 19% increase in RevPAR over the third quarter 2019 with an ADR of nearly $500 per night and total RevPAR approaching nearly $560 per night.
EBITDA margins at this hotel increased nearly 1,400 basis points as compared to the third quarter in 2019.
The L'Auberge de Sedona saw a 21% increase in RevPAR over the third quarter in 2019 with total RevPAR approaching nearly $675 per night.
Moreover, we are taking steps to ensure this success continues.
For example, subsequent to the quarter-end, we completed a new Michael Mina restaurant in Sonoma as part of the larger ROI up-branding of that resort from a Renaissance to an Autograph.
The restaurant opened strong, and in just the first month of operation, generated nearly $325,000 in revenue.
We also expect the restaurant to create a halo effect at that resort, which will allow us to increase room rates.
Another example of strength is likely to come from the almost complete renovation of the Barbary Beach House in Key West, which will be done before year-end.
This former Sheraton has been reimagined into a very special lifestyle boutique that is already getting rave reviews.
And we are optimistic about our ability to drive rate this winter season.
Switching gears, let's look at each of our segments of demand in the quarter.
Leisure is unquestionably the strongest performing segment in the portfolio.
The resort portfolio performance increased strongly and steadily over the quarter from 36% occupancy and $141 in total RevPAR in July to over 43% occupancy and nearly $191 in total RevPAR in September, a $50 per night jump.
For the third quarter, ADR at our resorts increased 2.2% as compared to last year with September showing good strength and up 5%.
The resilience of rate at our resorts tells us price is not a gating issue in making the travel decision.
This is an encouraging data point that the same people will ultimately be prepared to travel when their employers feel comfortable letting them get back on the road.
As for business transient, our current thinking is that we will not see a material change until there is an announcement of a vaccine or broad distribution of a therapy.
For our portfolio, business transient remained soft but it did improve.
In the 3rd quarter, business transient revenue and rooms more than doubled from their contribution in the second quarter.
In fact, business transient rooms were 23% of total rooms sold in the third quarter, up from only 19% in the second quarter.
Similarly, the group segment remains a relative soft spot.
Outside of social gatherings such as weddings, we continue to expect that large corporate group events will be the final segment to recover.
Nevertheless, there are some encouraging data points to share with you.
The first data point is that DiamondRock saw approximately 250,000 room nights of leads generated each month during the quarter, with most of the inquiries for 2021 and 2022.
Interestingly, RFP conversion ratios to awarded business are at near normal rates.
Also, sports teams are playing.
DiamondRock has arrangements with seven professional football and baseball teams, Several NCAA sports teams and even a PGA golf tournament.
Another good data point is that according to Cvent, September was the strongest month of RFP activity since March.
September volume is up 18% versus August, and October is on pace for a strong performance, too.
Cvent also reports that overall group rates are down approximately 5% to 10% in 2021 but up 5% to 10% in 2022.
Looking at 2021, rates are softer earlier in the year when uncertainty is the highest and quickly approach pre-pandemic levels by late 2021.
Group rate integrity in RFPs has been relatively more resilient in New York City, Boston and Chicago than it has been in San Francisco.
Again, an encouraging trend, given our geographic mix.
Before handing the call off to Jeff, I did want to touch on our capital investments.
We held capex spending to $8.6 million in the quarter, which is inclusive of approximately $0.5 million for Frenchman's Reef.
Outside of life safety projects or emergency repairs, our primary focus remains conserving capital.
However, we did prioritize projects that can produce a near-term earnings benefit and high return on investment.
These projects include the F&B repositioning initiatives at our hotels in Sonoma and Charleston, as well as completing the conversion renovation at the Barbary Beach Resort in Key West.
We expect these investments will be measurable earnings contributors in 2021, and the average IRR for these projects is expected to exceed 30%.
Before leaving capex, I did want to remind everyone that we have paused the reconstruction of Frenchman's Reef.
Our current plan is to look for a joint venture partner for this project over the next year before restarting construction in order to preserve our balance sheet capacity.
Let me start by talking about our liquidity.
We improved our liquidity in the quarter by nearly $71 million as a result of the successful preferred offering -- preferred equity offering.
At the end of the third quarter, we had approximately $435 million of total liquidity, including corporate-level cash, hotel-level cash and undrawn revolver capacity.
I'm pleased to report, we are beating our original estimates for monthly cash burn rates, and we continue to make significant gains.
Before capex, our average monthly burn rate in the third quarter, pro forma for the preferred dividend, was $14.7 million.
Let me walk through the sources of the $2 million improvement.
The net operating loss at the corporate NOI level was $10 million per month in the quarter, as compared to our earlier estimate of $11.5 million, a $1.5 million per month improvement, owing, among other reasons, to improving top line, strict cost controls and the decision to reopen additional hotels.
Debt service was $4.1 million per month in the quarter, as compared to a prior estimate of $4.5 million.
The $3,000 to $4,000 per month savings is a result of forbearance that will reverse in the coming months.
The straight line capital expenditure budget in both cases is $3 million per month.
Including capex, our total Company burn rate was $17.7 million during the quarter and implies a cash runway through late 2022.
As Mark mentioned at the start of the call, we strongly believe that we have more than enough liquidity to carry us through to a point where we are cash flow positive, and that is why we took the step of issuing preferred equity last quarter so that we would not be pressured into a common equity offering in the future.
As it relates to the outlook for our burn rate, we are not providing specific guidance.
However, remember that Q4 and Q1 historically see weaker demand levels, and there is a risk that the recent increases in COVID cases throughout much of the US could lead to municipalities rolling back the operating guidelines that have allowed us to reopen.
While we will continue to do everything within our power to minimize loss and maximize profitability, I encourage you to consider that sequential revenue and profit growth could prove challenging in the next two quarters.
We updated our analysis of breakeven profitability and estimate that on whole, the portfolio will achieve breakeven profitability at 25% occupancy on a gross operating profit basis and 40% on a net operating income basis.
This is about 500 basis points lower occupancy than our original -- or I should say, our earlier estimates of breakeven occupancy.
The average daily rate assumed in this analysis is approximately 20% to 25% decline from 2019 levels.
Individual hotels can, of course, vary from the average.
We ended the third quarter with $111 million of cash and over $300 million of undrawn capacity on our revolver.
We executed a $119 million, 8.25% Series A preferred offering in August and elected to use $50 million of the proceeds to pay down our revolver, which remain available to us, and retain the remaining net proceeds from the offering in cash.
At the end of the quarter, we had $605 million of non-recourse mortgage debt at a weighted average interest rate of 4.2% and $500 million of bank debt, comprised of $400 million of unsecured term loans and just under $100 million drawn on our unsecured revolving credit facility.
As you've heard me say many times in recent months, our debt composition and maturity schedule is perhaps our balance sheet's greatest strengths.
In general, banks are reluctant to commit new capital at this time, and they are keenly focused on: one, curtailing over-reliance on bank debt; and two, addressing 2020 to 2022 maturities without meaningfully impairing existing liquidity.
Not surprisingly, these factors are the impetus for many travel and leisure companies entering the high-yield bond market, and I expect those conditions will remain a driver for capital markets activity in the industry in 2021.
For DiamondRock, bank debt is less than 50% of our net debt and net debt is just 22% of our estimated replacement cost of our hotels.
We have just one mortgage maturity in early 2022, which has an extension option.
More critically, our revolver matures in 2023 and our term loans mature in 2024.
Each has extension options, too.
In short, we are not seeking new debt capital commitments from our lenders at this time.
We believe these facts, in combination with our strong liquidity and declining burn rate, greatly improve the likelihood DiamondRock can avoid the issuance of dilutive capital and pivot to offense at the appropriate time.
With that, I will turn the floor back over to Mark.
In late August, we announced a sweeping transaction with Marriott International that has several features.
Let me hit the highlights of that deal.
Most significantly, we converted five of our managed hotel contracts to franchise agreements.
These conversions were completed in September, and we have engaged a variety of leading third-party managers that are uniquely suited to each asset.
In addition to the 50 basis point to 100 basis point improvement in residual cap rate for the five hotels that generally [Indecipherable] to franchise properties, we believe the change will produce approximately $2 million of incremental profit on stabilized cash flows.
We've already started reaping benefits from the change, as we consolidated finance and management roles in Alpharetta, Denver, Sonoma and Charleston that will yield almost $400,000 of annual savings.
The second biggest value creator from the deal is a new franchise agreement to up-brand the Vail Marriott Resort to a Luxury Collection brand upon completion of the renovation next year.
As you recall, we had undertaken the renovation of this hotel to a luxury standard over the past few years, and the lobby renovation next year is the final phase.
We expect it to be done in late 2021 in time for the ski season.
Consistent with prior expectations, we estimate this repositioning and sale could result in $3 million of incremental EBITDA, given the significant rate differential that exists today between the resort as a Marriott and the luxury competitive set.
The third benefit of the deal is that we have the right, but not the obligation, to convert the JW Marriott Cherry Creek to a Luxury Collection brand with a small renovation.
We are currently reviewing the ROI on this opportunity.
The final benefit to us is that we secured an explicit right to terminate the Autograph Collection franchise agreement encumbering the Lexington Hotel for a termination fee.
We believe that this improves the residual cap rate of the property by greatly expanding the universe of potential buyers.
In the aggregate, we calculate that the sweeping agreement adds at least $50 million of net asset value to the DiamondRock portfolio.
No cash payment was associated with this agreement.
Instead, DiamondRock agreed to standard renovation scopes that will be completed over the next three to five years for the converted hotels at cost generally consistent with our normal internal expectations.
In addition, we provided franchise extensions at our Westin D.C. and Westin San Diego properties at market terms, ensuring that these hotels will remain dominant hotels in their respective markets.
The second announcement we made in late August was the addition of Mike Hartmeier to the Board of Directors, effective October 2020.
Mike is one of the most experienced lodging M&A bankers in the industry, and we believe he will be a valuable, unbiased voice in the boardroom to pursue options that maximize value for shareholders.
Turning to our outlook, while we saw improvement in the third quarter, we do not expect the industry to significantly rebound until there is a healthcare solution to the pandemic.
Our current view is that at least one of the 11 vaccines in Phase III trials could announce positive findings in the next 90 days with broad distribution by mid-2021.
This, in combination with improved patient outcomes and broader acceptance of safety protocols such as social distancing and wearing masks, should lead to increasing travel activity and improving financial performance.
Once profitability is restored, we expect to see a handful of well-capitalized lodging platforms pivot to exploit what could be an extended period of accretive investment opportunities.
We have a solid balance sheet to allow us to withstand the substantial downturn and then pivot to offense at the right time.
We have great assets, strong industry relationships and an experienced management team that has successfully weathered numerous prior downturns over the prior 30 years.

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q3 adjusted ffo loss per share $0.22.
is not providing updated guidance at this time.

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