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Diamondrock Hospitality Co (NYSE:DRH)
Q3 2020 Earnings Call
Nov 6, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the DiamondRock's Third Quarter 2020 Earnings Call. I will now hand the call over to Ms. Briony Quinn. Please go ahead.

Briony R. Quinn -- Senior Vice President and Treasurer

Thank you, Tiffany. Good morning, everyone. Welcome to DiamondRock's third quarter 2020 earnings call. Before we begin, let me remind everyone that many of the comments made on this call are considered forward-looking statements and not historical fact. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.

In addition, on today's call, we will discuss certain non-GAAP financial information. A reconciliation of this information to the most directly comparable GAAP financial measure can be found in our earnings press release.

With that, I am pleased to turn the call over to Mark Brugger, our President and Chief Executive Officer.

Mark W. Brugger -- President, Chief Executive Officer and Director

Good morning, and thank you for your interest in DiamondRock. 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. Accordingly, I want to acknowledge the efforts of everyone at our hotels and everyone on our team that has put in countless hours. 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.

As you can see in the tables in our press release, which is on our website if you have not had a chance to review it, hotels open and operating in the entire quarter have delivered consistent gains in occupancy, RevPAR and total RevPAR. 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. There are a number of other ROI projects recently completed or getting done throughout the portfolio, but there isn't enough time on this call to get into detail on all of them.

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.

Now, let me turn the call over to Jeff Donnelly to discuss our balance sheet.

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Thanks Mark. 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. This is 14% better than the $16.8 million estimated in our early September Investor Presentation on a comparable basis. 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.

Mark W. Brugger -- President, Chief Executive Officer and Director

Before we take your questions, I wanted to make a few comments about two events we announced in the quarter and conclude with our perspective on the future.

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.

Let me conclude the prepared remarks by saying that these are challenging times, but we are prepared to meet them and determined to prosper on the other side. 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.

On that note, we'll now open up the call and happily take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Rich Hightower with Evercore. Please go ahead.

Rich Hightower -- Evercore ISI -- Analyst

Hi, good morning, everybody.

Mark W. Brugger -- President, Chief Executive Officer and Director

Good morning, Rich.

Rich Hightower -- Evercore ISI -- Analyst

A couple of questions here. I was -- Mark, I was intrigued by the additional comment that you might be looking for a joint venture partner for Frenchman's. And I guess, in the same context of not wanting to issue common equity at current prices, you're still giving -- you would still sensibly be giving up some equity in the project that's worth something, and there is a cost obviously associated with that new capital. And so, just help us understand maybe the cost of that equity contribution, the dollars that you're envisioning. Would you take on project level debt? Just some of the contours of what a deal might look like there.

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure, Rich. I would say, our thought right now is that we'll engage an advisor or a broker over the next year and go out and seek joint venture partner, which would essentially use their capital to fund the balance of the construction of the redevelopment and then share in the economics of the deal. That's kind of our plan A now. I think it could take a variety of structures and shapes. So it's probably premature to kind of speculate exactly what that will look like. But our thought is, it probably makes more sense to use someone else's capital for the reconstruction. That will be debt and equity to share the upside but also share the risk and the balance sheet capacity as we move forward.

Rich Hightower -- Evercore ISI -- Analyst

Okay. And would you contemplate taking some sort of a management fee or a promote or anything like that just as we understand some of those economics?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah. I think we are very open to whatever structure maximizes value for us. So, it could take a variety of forms. I'd hate to kind of lead you down one path because I think we're uniquely flexible to make sure we can maximize profit.

Rich Hightower -- Evercore ISI -- Analyst

Okay, got it. And just in regards to the addition of Mike Hartmeier to the Board, just the fact that you sort of called it out in the prepared comments, is there anything that we should infer from that in terms of corporate strategy for DiamondRock in the time ahead?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah. I think the point we're trying to make is that the Board added someone that's really got great M&A experience. And certainly, as we look out and for the next couple of years, we think the well-capitalized companies like us are going to be in good shape to create value and want to make sure we had voices in the boardroom that we're going to explore and be able to maximize those opportunities.

Rich Hightower -- Evercore ISI -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Smedes Rose with Citi. Please go ahead.

Jeff -- Citigroup -- Analyst

Hi, good morning. This is Jeff [Phonetic] on for Smedes. Just about -- you touched on group business a little bit. But what kind of rebooking activity are you seeing? And I guess more specifically, what periods are you seeing that activity in?

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure. So, group volume, the leads is actually picking up. As you would expect, the cancellation rates have declined, but still there's not much group business for the balance of this year. And the stuff that is booking early next year is pretty tentative. So the strength we're seeing in rebookings is really the second half of next year and really 2022 when people are more confident that we'll be on the other side of the healthcare crisis.

Jeff -- Citigroup -- Analyst

Okay, thanks. And then on the -- we've seen a lot of the cost containment from the owners' side as well as the brands. Is that changing anything from the brand fee structure that will help owners over the long term?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yes. So that's -- it's a great question. So the brands have been, I would say, great partners overall in trying to figure out how we can minimize cost and go through this. So, while the franchise and management fees remain consistent, there's a lot of other costs that are allocated out to the properties. They come under the umbrella of different terms called program services fees and other things. And they've done, I think, a very good job of moving rapidly at the onset of this crisis to reduce headcount and reduce allocated cost out to us, and we are seeing that. And in fact, they've either cut it by 50% in some categories or eliminated it or they're going to have periods where they're not going to charge it at all, early next year. So, I think our opinion is they're doing a great job and they are doing things that are benefiting the costs that are allocated out to our hotels.

Jeff -- Citigroup -- Analyst

Okay, thanks.

Operator

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc. Please go ahead.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Great, thanks. Good morning, everybody. I wanted to circle back to the Frenchman's Reef and your comments around seeking a JV partner. Would you guys like to maintain control of the asset? And curious what's holding you back from just an outright sale. And then, also curious if this is a partnership that you think you would consider additional investments beyond just the Frenchman's deal?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah. So there is a lot there. So I would say, we think this is a spectacular piece of real estate and it's opportunity we see a lot of upside in. I think the idea of the joint venture is that we can kind of have our cake and eat it too a little bit in that we can bring someone in that can help use their balance sheet to finish the project and hopefully we can stay in for an equity position and realize some of what we think is going to be great upside over the next three or four years. So that's the kind of impetus of going down that path.

I think to your -- kind of the second part of your question, this probably isn't the ideal deal to do a broader joint venture. We have had a number of inquiries from institutions that have -- wanted to explore doing joint ventures to take advantage of distressed debt -- distressed hotel opportunities in this environment. There might be something that's interesting. But those folks probably -- there's not a lot of overlap for people that want to do Caribbean development deals.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Understood. And then, just thoughts on an outright sale? Is it just really just the upside that you talked about than you just wanting to maintain that as EBITDA ramps over time?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah. We're flexible. Everything is for sale. So, if there's someone who want to pay us 100% of what we think the future value is, we would gladly sell the hotel. But I think that in this environment, we believe that there is value there. So we're likely to maximize our view of value versus what someone may pay us, probably the way to do that is through a joint venture.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Okay, got it. And then, appreciate all the detail you provided and the thoughts on some of the near-term ROI projects like -- you mentioned Barbary Beach and some other F&B initiatives. But maybe focusing more on some of the larger projects you've outlined, Frenchman's you mentioned is on hold. And then, you've got some restrictions, I believe, under the amended credit agreement. So how much of those nearly $40 million to $50 million of ROI spend you've specifically outlined like adding keys at The Landing or the Boston Hilton are targeted maybe for 2021? And how are you prioritizing some of those projects?

Mark W. Brugger -- President, Chief Executive Officer and Director

So, we can progress [Phonetic] better. We had a lot of front-end loaded ROI projects in this year, which got completed as the crisis was coming on. So we did Worthington. We did a big project and created a celebrity chef restaurant there. We build out one in Charleston. Just across the portfolio, we had a number of things that got completed. Right now, the big focus is Barbary Beach House, which we think is a big opportunity that we're completing. Vail will be the number one big project, if you will, from an ROI perspective in 2021. And there's a variety of smaller projects. But big spend projects like this -- like the additional keys in Boston Hilton or the 17 additional keys at The Landing will probably get pushed into 2022.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Got it. Thanks for the time.

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure.

Operator

Thank you. Our next question comes from Chris Woronka with Deutsche Bank. Please go ahead.

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning, guys. Wanted to drill down a little bit into the resort performance, which obviously was really strong, especially on the rate side. When you think about slightly more normalized times, and it will be great for you and for the entire industry, but I guess, is there going to be a little bit of an offset? I don't know if you've been able to drill down into your database to see if these customers who are staying maybe on a Thursday at a resort for $700 are going to go back to paying $200 under the corporate rate on a Wednesday. So not to nitpick, I'm just curious if you've been able to drill down and see if some of these customers are swapped leisure -- business for leisure.

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah, it's a good question. I think overall, in the resort portfolio, when you think about -- we've had some, what I'd call, medium-size resorts that usually have some group components that will probably offset as demand comes. But inevitably, we're probably capturing people at luxury resorts like L'Auberge that otherwise would be flying to Paris or going to Lake Como or something. On a Saturday night, in Sedona, it's $1,400 a night. That's a traveler who can go a lot of places. I think we're optimistic that we are getting a lot of new customers that have never been to these resorts, and we think that there are terrific experiences. So I think the offset to when the kind of pandemic passed and people can go to more locations is that more people have been introduced to our resorts than ever before, and I think they're having great experiences. So, not only will they come back, but they'll tell other people and there's kind of a multiplier effect on that. So, we're relatively optimistic that a lot of this business in this rate sticks even over the next couple of years.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, that's helpful. And then, on New York, now that you have the option to be out of the branding contract on the Lexington, does that potentially accelerate any plans to market? I don't know where you guys see the market for New York right now. And also, just your opinion on where the city is shaking out in terms of hotels closing and that potentially making assets like yours more attractive to longer-term buyers.

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah. New York is an interesting market. I think New York stays bad -- it's going to be really bad for a while, and then at some point, it's going to turn to be really good. Our concentration of real estate in Manhattan is mostly in Midtown East. There is negative supply in that market. We've had two of our largest competitors either close -- I guess, two have closed permanently and a third may close. I think we're looking at negative 9% supply, competitive supply for the Lexington at the moment. So I think that's very encouraging.

The other really encouraging sign for us is, the Autograph now will be just about the only full-service Marriott option in Midtown East now that the flag is coming off the Marriot [Phonetic] side. So as you can imagine, the -- that we have a huge funnel of Marriot customers that will then have less options in Midtown East. And hopefully, that will drive outperformance of that hotel once New York City opens up again. But listen, between -- the next couple of quarters are going to be -- they're going to be very difficult in New York like they are in San Francisco and some of these other markets. And that's the world we're living in today. But I think we're -- if you had a five-year hold, we're tremendously positive on New York over that period because I think on the other side, supply does get constrained. But in the next couple of quarters, it's going to be very difficult in New York.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very good. Appreciate all the detail. Thanks Mark.

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure.

Operator

Thank you. Our next question comes from Lukas Hartwich with Green Street.

Lukas Hartwich -- Green Street Advisors -- Analyst

Thanks. I just have one. As time goes on and operators get a better handle on operating expenses, can you talk about the confidence levels being able to operate more efficiently in a normal environment? And maybe just touch on where those savings will come from.

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure. Never waste a good crisis, as they say. We are doing things that we've never done before. We've combined jobs we've never combined before. We're running at efficiency levels on low occupancy we've never done before. I think the brands are testing new models for distribution of allocated cost, do we need all these costs or people? Can technology replace what we had before? It's a once-in-a-generation opportunity to reinvent a lot of their programs, right, because if you've furloughed or laid off people, you can really then restaff and rethink the whole model, which I know they are doing on a number of fronts. So I think -- and they are incentivized to get their cost as low as possible. Remember, their whole business model is making sure that they're delivering value so people continue to sign up for their brands. And in this environment, if they want their pipeline to stay, they're going to have to continue to work on making that model as profitable as possible for real estate owners. So I think a lot of that sticks.

There is a number of things that we're doing today that won't stick. We can't close down the restaurants and not have any F&B at a full-service hotel forever. We can do things. Can we run all the F&B out of the [Indecipherable] breakfast and close the -- convert the fine dining restaurant. There will be some of those changes. But we are certainly doing things in this environment that are not sustainable. But I'm very encouraged that on the allocated cost, which is millions of dollars to us a year, that those will be reduced on the other side of this, even when we're back to normalized cash flows.

Lukas Hartwich -- Green Street Advisors -- Analyst

Great, thank you.

Mark W. Brugger -- President, Chief Executive Officer and Director

Absolutely.

Operator

Thank you. And our next question is from Stephen Grambling with Goldman Sachs. Stephen, your line is open.

Stephen Grambling -- Goldman Sachs -- Analyst

Hi, there. So as you think about -- and thanks for taking the question. As you think about the small resort property strategy that you've been executing on ahead of this and seeing it really play out well -- you mentioned this comment about going on offense at some point. It seems like valuations on that side of the hotel space have been a little bit more resilient. So, as you're thinking about continuing to execute on that strategy, how do you position yourself as an advantaged buyer and/or do you feel like the resilience of the business is making you rethink what the appropriate valuation is within any process?

Mark W. Brugger -- President, Chief Executive Officer and Director

Good question. So, a couple of thoughts. One is, certainly this downturn has validated what we've been doing over the last number of years in buying small resorts, seven of our last eight acquisitions, and frankly, I wish our entire -- 100% of our portfolio was small resorts at the moment. No, we're still bullish on resorts. We're still bullish that they're going to outperform. There is less distress certainly in that market. But I do think we have an enormous head start. We've kept our entire acquisition team in place. They, over the last five or five years, have built a pretty impressive database and relationships in a lot of these resorts in, what I'd call, micro markets like Sedona and Sonoma and Lake Tahoe, where I think we have a head start again because we've been there and we've been building these relationships, monitoring these potential deals. We're not going to get the same kind of discount to pre-COVID, but frankly, that's because the values are still there. Their cash flow hasn't gone down as much and the upside still remains. So we still think that that will be the bulk of our external growth over the next several years.

Stephen Grambling -- Goldman Sachs -- Analyst

Fair enough. And one quick follow-up just related to that. And maybe I missed this in the opening remarks, but select larger properties reopened a little bit later in the quarter. And if I look at the dispersion of cash burn, can you just elaborate a little bit more about how cash burn is different -- has been different across the portfolio, and also, how that might evolve moving into the fourth quarter?

Mark W. Brugger -- President, Chief Executive Officer and Director

Sure. And I'll let Jeff jump in here too. It's -- as you would imagine, our small resorts have been the best. And then, as you get to the larger resorts that rely on some group, it kind of fades a little bit. And then, the worst performing assets are the big box hotels. So, the bigger hotels, just there is no large group meetings happening in the United States, and there is relatively big property taxes and other fixed cost with those boxes even if they are closed. So those have the toughest burn rates.

Jeff, do you want to jump in?

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Yeah, sure. Hey, Stephen. Yeah, the thing I would add and maybe just reiterate from Mark's remarks earlier in the call is, a lot of our burn rate is really concentrated in our larger hotels, as Mark said. I think during the month of September, for example, I think the three closed hotels, plus the Westin Boston and Chicago Marriott that just reopened in the quarter, collectively those were the vast majority of our hotel-level burn. I think in rough numbers, it was sort of $8 million of burn. Probably 90% of that, or if not more, was really concentrated in those larger chunkier hotels. I think the 25 other operating hotels, which are pretty heavy in the resort area, collectively almost broke even. So I think that's kind of interesting indication for how things are progressing. It's hard to say it will hold that way each and every week or month as we move forward in the remainder of the year. But I think it shows the disparity there.

Stephen Grambling -- Goldman Sachs -- Analyst

Great. Thanks so much.

Operator

Thank you. Our next question comes from Anthony Powell with Barclays. Please go ahead.

Anthony Powell -- Barclays -- Analyst

Hi, good morning. I wanted to focus a bit more on your -- I guess your urban lifestyle luxury properties like the Palomar Phoenix. Maybe The Gwen fits in there. You were acquiring or developing some of these a few years ago. We haven't heard you talk more about them recently. Is that all part of your strategy going forward? Some of these hotels have done relatively better than the larger big box hotels in the urban markets.

Mark W. Brugger -- President, Chief Executive Officer and Director

Yeah, it's a great question. So they are part of our strategy. I would say that as we think about our external growth strategy, the focus still remains trying to get to 50% resorts in total. So when we sit down and we look at our pipeline, that's still magnetic north on priorities. But hotels like the Emblem in San Francisco or The Gwen, we still believe in small or medium-size lifestyle hotels in those markets. But as you think about our portfolio and portfolio rotation, we're more likely to sell urban hotels and buy more resorts as we continue to reposition the portfolio. I think that'll drive outperformance over the next five to seven years. So still part of our strategy. The big boxes are probably the least part of our strategy going forward that we will not buy another big box hotel. I just don't think that's where the outperformance is going to be going forward. So you'll see us much more committed to continue to focus on small resorts first and then urban lifestyle, what I'd call, medium to small lifestyle hotels in the urban markets, second.

Anthony Powell -- Barclays -- Analyst

Got it. Thanks. And on that topic, big box hotels are, I guess, out of favor or. But there are some companies, including RIETs, who are still investing in these properties. So could you maybe, I think, see yourself selling some of these larger big box properties in the future even to peers as they kind of go to that strategy?

Mark W. Brugger -- President, Chief Executive Officer and Director

Yes. The short answer is, we'll continue -- and clearly, that would be the fastest route to getting to some of our -- what we think is the kind of model portfolio allocation for DiamondRock through subtraction as well as addition. But yes, we're open to that. I'm not sure now is the best on sell a big box hotel. But as we kind of think about where do we want to be five years from now, I'm not sure -- they will probably shrink as a percentage of the Company as we grow in any event because we're not going to buy any more big boxes. And we only really have two, and we like them. But at the right price, we would certainly be sellers.

Anthony Powell -- Barclays -- Analyst

Great. Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Briony R. Quinn -- Senior Vice President and Treasurer

Mark W. Brugger -- President, Chief Executive Officer and Director

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Rich Hightower -- Evercore ISI -- Analyst

Jeff -- Citigroup -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Lukas Hartwich -- Green Street Advisors -- Analyst

Stephen Grambling -- Goldman Sachs -- Analyst

Anthony Powell -- Barclays -- Analyst

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