DiamondRock Hospitality Company (DRH) Q2 2021 Earnings Call Transcript

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DiamondRock Hospitality Company (DRH -0.33%)
Q2 2021 Earnings Call
Aug 6, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

I would now like to hand the conference over to your speaker today, Briony Quinn, Senior Vice President and Treasurer. Please go ahead.

Briony Quinn -- Senior Vice President and Treasurer

Thank you. Good morning, everyone. Welcome to DiamondRock Hospitality Company's Second Quarter Earnings Conference Call and Webcast. Before we begin, please note that many of the comments made on today's call are considered to be forward-looking statements under federal securities laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ materially from those implied by our comments today.

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

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

Mark W. Brugger -- President and Chief Executive Officer

Good morning and welcome to our earnings call. Second quarter financial results were very strong and significantly surpassed our internal expectations. The DiamondRock portfolio benefited from several positive attributes, including, one, the portfolio's over-weighting toward experiential properties and resort locations; two, our best-in-class asset management; and three, our ability to control cost by having the highest percentage third-party operated portfolio of any full service lodging REIT. This powerful combination enabled DiamondRock to generate $19.8 million of adjusted EBITDA and $0.05 per share of positive adjusted FFO in the quarter.

Demand increased in all travel segments. Leisure remained the strongest performance segment. Both group and business transient are now showing meaningful gains. Business transient room revenues increased 173% from Q1 in the second quarter on a 24% sequential increase in ADR to $195. The clearest indication that business travel is increasing can be seen in the dramatic uptick in midweek occupancy, which doubled at our urban hotels during the quarter from 25% in April to 50% in June. We expect an accelerating trend line of business demand in the fall and into next year.

The outlook for group is equally positive. Incremental lead generation accelerated sharply in the second quarter, with over 11,000 leads for 1.7 million room nights. That's a dramatic increase from the 7,000 leads for 1.2 million room nights in the first quarter. The 50% plus increase in leads is the strongest we've seen since the start of the pandemic and lead generation is now at 95% of pre-COVID first quarter 2020 levels.

The group set up for 2022 is good for our geographic footprint. In the quarter, we converted 63% more definite group room nights, with most of the activity for 2022 and beyond, a positive sign of meeting planner confidence is returning. We are excited to see that group rates are 8% higher in 2022 than they were in 2019. Our 2022 is being boosted by the fact that many of DiamondRock's key group market have strong convention calendars next year, like Boston, Chicago, San Diego and Washington DC.

In addition to strong operating performance, which Jeff will discuss more of in a moment, DiamondRock made great progress on internal and external growth initiatives that we are confident will drive outsized cash flow growth in 2022, an increase in net asset value. I'll touch on just a few internal projects. The Lodge at Sonoma was reimagined into a luxury Autograph Collection resort over the last year with a new Michael Mina restaurant. We expect our $10 million investment here will generate a 25% internal rate of return. This resort has been a home run for us with NAV increasing well north of $100 million over our total investment.

The major repositioning of our Vail Resort is underway and will be complete in time for the upcoming ski season. It will reemerge as a Luxury Collection hotel and will be named The Hythe Vail Resort and Spa. We expect the resort will command a materially higher rate in peak season and generate several million dollars of incremental EBITDA starting in 2022.

The JW Marriott Denver will also be converted into a Luxury Collection Hotel and will be named the Clio. The conversion is expected to take place at the end of this year, so we can start benefiting in 2022.

Additionally, this fall, we will convert our beach front resort in Key West to the only Margaritaville Resort in the Florida Keys. Collectively, our investment in these four repositioned hotels is expected to have an IRR of well over 30%.

Turning to capital recycling. In the quarter, we successfully sold two hotels -- the Lexington and Frenchman's Reef -- for total proceeds of $220 million for a 5% cap rate on combined 2019 actual NOI. We are recycling a portion of these proceeds into two great new acquisitions, both of which were off market and have the strategic characteristics that we are looking for. They are fee simple real estate. They are unencumbered by both brand and management. They're experiential and leisure oriented. Both have significant ROI potential and they are accretive conservatively underwritten yields.

First off, the Bourbon Orleans is located at the best street corner in the historic French Quarter. The number of hotels in the French Quarter that are large, fee simple and unencumbered can be counted on one hand and they rarely become available. The moratorium on new construction means there will not be another hotel built in the French Quarter.

The Bourbon was purchased at a little over a 7% NOI cap rate on 2019 results and we expect it will have a robust growth in 2022 with the return of Mardi Gras, jazz fest and the NCAA Final 4. New Orleans will also benefit by being the host of the Super Bowl in 2025.

Moreover, we see enormous upside from professional management as it was owner operated and there are numerous ROI opportunities at this property. We expect that the Bourbon will stabilize at an 8% NOI yield.

Our second acquisition is the Henderson Park Inn, a luxury boutique resort in Destin, that sits on one of the most desirable beaches in Florida. This resort is rated the number 1 hotel in Destin on TripAdvisor because it provides guests such a great experience.

The resort was purchased at a nearly 7% cap rate on trailing 12-month NOI and the combination of bringing in professional management and enhanced revenue management strategies provides a clear path to at least an 8% NOI yield, which is terrific for such an exceptionally high quality real estate. This is our fourth ocean front resort of Florida and our eighth waterfront hotel.

I'll now turn the call over to Jeff for more details on our results and balance sheet. Jeff?

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Thanks, Mark. I'll start by highlighting DiamondRock's excellent liquidity. We finished the quarter with $639 million of total liquidity, comprised of $193 million of corporate cash, $46 million of hotel-level cash and $400 million of capacity on our revolver.

Leverage is conservative with only $1 billion of total debt outstanding against roughly $3.5 billion of hotels and resorts. Overall, the balance sheet remains very strong.

Let's talk about investment capacity. We've been active on the acquisition front. And we expect to remain a disciplined acquirer of on-strategy properties like those Mark discussed earlier. With the strength of our balance sheet and high liquidity, we estimate we have over $300 million of investment capacity today, while still operating within our long-term leverage targets.

Looking at profit margins. We remain confident we will have stronger stabilized profit margins when we fully emerge from the pandemic. To illustrate this point, let's look at the math on our resort portfolio. Total revenue in our resort hotel portfolio in the second quarter was $70 million. While this was $2 million better than the same period in 2019, hotel EBITDA was nearly $7 million higher. This exceptional profit flow-through resulted in a 39.3% resort portfolio margin in the second quarter as compared to a pre-pandemic margin of 30.5%.

My intent is not to suggest that the margin opportunity is as large as 880 basis points described here, but to highlight that our asset managers and their partners at the hotels have thoughtfully reconsidered the operating model from top to bottom to grow revenues and enhance profit without detracting from the guest experience. Importantly, despite these tight cost controls, our overall TripAdvisor score once again showed sequential improvement.

So, why do we believe DiamondRock can stabilize operations at higher margins? I want to emphasize that DiamondRock has distinguished from its peers, in that all but two of our hotels are subject to short-term management agreements. This means we have greater control over operations and are already seeing the benefit of that flexibility in our results. Also, don't forget, we converted six hotels in 2020 from brand managed to franchise and that alone is projected to lead to 50 basis points of better portfoliowide margins.

And finally, adding reduced above property charges, new labor models and increased use of technology, and we believe we have the ingredients to outperform on stabilized margins.

Let me share a few success stories. The Lodge at Sonoma repositioning that Mark touched on earlier has been a big success. The project was completed on time and on budget and the resort increased RevPAR market share by over 20 points year-to-date versus 2019.

The Landing Resort, Lake Tahoe is having a record year with RevPAR up 44% year-to-date compared to 2019. Our asset management team designed a new labor model for this boutique resort that has reduced labor hours per occupied room by 40% compared to 2019, while increasing room revenue 83%.

Our Barbary Beach House Key West Resort is also having a record year and saw a 22 point rise in the market share this quarter compared to 2019 on a 91% increase in room revenue. While we are on Key West, in case you missed it, our Havana Cabana Resort was named by TripAdvisor as the number one most saved resort in both the US and the world.

Of course, all of the success is due to the combined hard work of our best-in-class asset managers, working with hand selected operators. As a result, our portfolio RevPAR share was up nearly 4 points in the quarter over 2019. This market share gain is even more remarkable when you consider the tight cost controls. Overall, rooms department cost per occupied room was reduced to under $55 per night or a 4.5% improvement from 2019. This was driven by a 7.2% decline in total labor per occupied room in our open hotels. As you can imagine, we are very proud of what we have achieved in the second quarter.

Looking ahead, DiamondRock is well positioned to continue our leading pace of growth. Group revenue on the books for the second half of 2021 increased 10% in the quarter and is now 2.5 times greater than the first half of the year.

Group revenue on the books for 2022 increased 8% in the quarter and is 44% higher than the forecast for 2021. Group rates on the books for 2022 are nearly $250 as compared to $220 in the back half of 2021. Citywide room nights on the books for 2022 are up 5% compared to 2019 in our six largest urban markets. Boston, Chicago, Fort Worth, Salt Lake, San Diego and DC have seen an 8% increase since the start of the year.

2023 is already on pace to match 2019 with the strongest growth in Boston, Salt Lake City, San Diego and Phoenix. We are also benefiting because of our very low exposure, less than 1%, to probably the worst urban market in the US, which is Downtown San Francisco, where return to office is low and convention room nights aren't expected to approach 2019 levels until sometime after 2023.

Looking forward, we expect to continue to generate significant positive quarterly EBITDA and AFFO per share for the rest of the year. Cash burn is just so 2020.

The positive momentum in the portfolio can be seen in the change in quarterly revenues compared to 2019, which are rapidly improving on a sequential basis. Revenues were 64% lower in Q1 and improved to 50% lower by Q2. Encouragingly, during the second quarter, monthly revenues compared to the same period in 2019 improved from down 58% in April to down 50% in May to down only 41% in June. July was amazingly strong for the DiamondRock portfolio with RevPAR down only 11.8%.

Looking to the third quarter, we expect quarterly revenues to get even better. We are projecting revenues to be about 20% to 25% greater than the second quarter. G&A and total financing costs, that is preferred dividends and interest expense, will be roughly similar to the second quarter.

We recognize there is increased focus on the Delta variant and some areas of the country have reinstated mask mandates. But we are yet to see an impact on our business. As we have in the past, we will stay close to these trends. Nevertheless, we remain cautiously optimistic on the pace of the recovery.

With that, I will turn the call back over to Mark.

Mark W. Brugger -- President and Chief Executive Officer

Thanks, Jeff. Before we take your questions, I want to touch on our recent transactions and our outlook. The two announced transactions strongly demonstrate that we are strategically repositioning the portfolio to lean into our long-held thesis that experiential and drive-to resorts will outperform over the next decade.

While the acquisition market remains competitive, we intend to target more opportunities consistent with our experiential drive-to resort and urban lifestyle focus. We are particularly focused in targeting hotels that are synergistic with our existing hotels in markets like Sonoma, Vail, Lake Tahoe and Sedona.

Let's talk a little more about the outlook. Overall, we feel very good about the setup for DiamondRock. Our portfolio is well positioned to capture the continuing robust leisure demand as well as the coming rebounding group and business transient activity.

We think DiamondRock has three major competitive advantages versus many of our peers. First, our portfolio market exposure is favorable with our numerous resorts benefiting from the boom in leisure demand and our well-located urban properties poised to expand on the group business transient trends as the second leg of the recovery kicks in. Also, the convention calendars in our most important group markets look very strong in 2022.

Second, our best-in-class asset management is benefiting us in gaining market share through creative revenue management strategies, execution of ROI projects, and enhanced profit improvement implementations.

Third and finally, our high-weighting of third-party terminable operating agreements gives us more control and ability to be creative at running the hotels. The conversion of the multiple Marriott brand managed hotels last year will add rocket fuel to our margin growth over the next few years.

This concludes our prepared remarks. We are excited about our future and see things improving more rapidly than on our last call. We have a great portfolio, a great balance sheet and a great team to be able to deliver shareholder value. Thank you for your continued interest and we are happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from the line of Dori Kesten from Wells Fargo. Your line is now open.

Dori Kesten -- Wells Fargo -- Analyst

Thanks. Good morning, everyone. Can you walk through the asset management opportunities that you see at Bourbon Orleans and Henderson Park with new management in place?

Thomas Healy -- Chief Operating Officer and Executive Vice President of Asset Management

As Mark mentioned, at Henderson, really, we'll do our rate efficiency model. It's kind of what we did in Sedona and all the other resorts, looking at room types, lead times and basically trying to price it appropriately. So, there's just a lot of little opportunities in Henderson with rate. We think we can do that. That's pretty easy lifting.

And then, there is a fair amount of opportunities -- there's a lot of demand in that market and we think there's opportunities to enhance the food and beverage experience and drive more incremental value from not only at the property, but off property and on the beach. So, that'll be the focal points there.

And then at Bourbon, it's very similar. It's rate strategies, putting technology in place where you can monitor behavior, taking advantage of demand when there are citywides. And then, we're looking at all of the other opportunities in and around the space. There's amazing historic ballroom with a history that we could certainly enhance and try to create more awareness. I think with all the website designed to be more nimble, with the website -- user generated content on the website, things that we can't do with branded hotels, with the independent hotels, we can do. So, it gives us a lot of flexibility to enhance pictures, generate user generated content, which makes it more relevant. So, at Bourbon, there's a host of things that we think there's opportunity at.

And then, we have some retail spaces down on Bourbon Street and in and around there. There is some unused spaces that are -- they're amazing spaces and we're still trying to evaluate what to do with them because they're that good. At Bourbon, there's a small little house with an outdoor patio and they use it right now for offices and there's not a whole lot of use to it. So, we're trying to see, how do we monetize that. We have a bar that sits on Bourbon Street that basically does de minimis revenue and we think we could open that up and kind of do what we did in Ft. Lauderdale with Lona, create and energize that whole space and drive revenue through. So, there's a lot of things. So, that's it, Dori. But I think that covers it, right?

Dori Kesten -- Wells Fargo -- Analyst

Is there the ability to expand or I mean increase room count at Henderson Park?

Mark W. Brugger -- President and Chief Executive Officer

Troy?

Troy Furbay -- Executive Vice President and Chief Investment Officer

Yeah, well, it's interesting you say that. The site is zoned for a five-story building and you could build 150 rooms on the site. That's not in our underwriting and certainly not our immediate plan, but you could dramatically increase the size of this property by rebuilding it.

Dori Kesten -- Wells Fargo -- Analyst

Okay. And if you separate your urban and resort hotels, where are you on demand versus '19? If you can compare April to July?

Mark W. Brugger -- President and Chief Executive Officer

April to July, well, just mid-week, if we think about business transient, we talked about doubling that, say, on Tuesday, Wednesday at urban properties from really April through the end of the second quarter. So, we're at 50% or so on Tuesday, Wednesday. So, we're seeing business transient come in. Group's lagging a little bit and obviously leisure is above 2019 levels. And then, if you look at our -- I was just looking at our July numbers, we're down. We're dramatically better in the urban demand. We're only down 30%, but that's 20 points higher than we were a couple of months ago. And then resorts are running above where they were in '19.

And just looking at July, to give you some context on some of the urban markets, I'm looking here, Boston, we were running our two Boston Hotels in July. We're running 89% and even the convention center hotel, the Boston Westin ran to over 64% and Chicago -- obviously, an urban market -- we ran 73% at the [Technical Issues]. And even the 1,200-room Marriott was running 58%.

So we're really seeing the urban markets starting to kick in as we're moving through summer and entering into Q3.

Dori Kesten -- Wells Fargo -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Smedes Rose from Citi. Your line is now open.

Smedes Rose -- Citigroup -- Analyst

Hi, thank you. I wanted to ask, you mentioned that, in the third quarter, you're looking for 20% to 25% increase sequentially in revenue. Could you talk about maybe your margin expectations as well? Would you expect it to be the same as what you put up in the second quarter? Or are you continuing to kind of restaff or having to pay higher? What are kind of the puts around what we should look for operating margin?

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Yeah. Hi, Smedes. This is Jeff. Yeah, I would say, when we look out to the third quarter, generally speaking, I think our margin opportunity in the third quarter compared to the second quarter is going to be the same to slightly better, maybe upwards of 200 basis points better sequentially. I think we're just trying to be realistic, given that we're going into a period of time where you're going to see some transition between leisure and business transient. But we're optimistic we're going to get a little margin improvement on a sequential basis.

Smedes Rose -- Citigroup -- Analyst

Mark, I wanted to ask you a couple of more questions on your -- the transactions you did. It sounds like there's kind of a second lag potentially to the Destin acquisition. But I just wanted to understand a little bit more behind -- making an acquisition of a hotel with 30-something rooms. It doesn't really move the needle a lot for you. I guess, it looks like a good investment, but relative to your overall portfolio, it's certainly very small.

But then, bigger picture, we've seen more activity from the public REITs in the transaction market. I'm just wondering, is there anything in general that you think is bringing more attractive assets to market?

Mark W. Brugger -- President and Chief Executive Officer

Sure. So, let me answer this two-part question. So on Destin, it is a relatively small deal for us. Although proportion to kind of enterprise value, you've seen some other companies doing things that are of relatively similar size. I think the way we view it is, it was an off-market deal. It gives us a foothold in a market that we think is one of the better markets in the United States, best in Rosemary Beach area. We think has terrific fundamentals. It has incredibly high barriers to entry vis-a-vis probably nothing else built on that strip of beach. So, it has all the characteristics. And frankly, it's not going to be -- the value add that we have of changing revenue management, bringing in, it's just not that asset management intensive. So, those are all favorable for doing an asset like that.

And we think it gives us the ability to lever some, let's call it, nearby assets that we may be able to build upon this. And then, the ability -- with the entitlements, the ability ultimately to do something bigger there. That's not our plan A at all. But one way to think about it, if you could do 150 units there, basically, we got a hotel for the land value and the hotel is free. So, it's a good opportunity. We think it's additive to the portfolio. We think it gives us a foothold. But at our basis, we've already created value.

To your second question, I would say the overall environment remains incredibly competitive for hotels. The stuff that's been broadly auctioned, I can tell you we haven't come close to winning because we just -- I think people are being maybe -- they're stretching on some of these deals where there's a lot of competition. Again, 15, 20 offers. So it's a competitive environment. A lot of people want to hotels, private equity, family office, international buyers. We have seen in the last 60 days, I'd say, an uptick of properties coming to market. I think they're getting drawn out by the per key numbers on some of the -- particularly the resort assets. And I think that there is just -- the bid-ask spread, there's more certainty as the mask mandates went away in June and fundamentals got better. I think the buyers said now feels like a better time to be a seller. So, I think the environment just feels better from that side. And I think some of these trades and some of the assets have brought more buyers out of the woodwork. So, all that's kind of in play right now.

Smedes Rose -- Citigroup -- Analyst

Thank you.

Operator

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

Rich Hightower -- Evercore ISI -- Analyst

Hey, good morning, guys. So, Mark, I want to go back to one of your prepared comments. I just want to confirm, the 1.7 million room night leads achieved during the second quarter, is that a same store metric or is that not the same-store metric? And then also, typically, what portion of leads get translated into actual stays and do you expect any changes in that ratio as things are maybe still a little bit choppy out there over the next few quarters?

Mark W. Brugger -- President and Chief Executive Officer

Yeah. So, it is same-store for clarification. And then you could see -- I mentioned in the prepared remarks that we're -- our close rate of 63% on the business we're fetching. I think the broader message is just to see the sequential improvement in the lead generation. So, things are really taking off from a group lead standpoint. Others are for future periods. So, some of that's -- probably the bulk of it's 2022 and even some 2023 booking activity makes up the bulk of what we're seeing.

But if you look at the Cvent and the major channels, we are seeing increases in group demand, meeting planners. There's a lot of pent-up demand. So, I think all of that directionally is very encouraging.

And then, I think our footprint for convention center calendars next year is also adding to the volume a little bit because Chicago and Boston and some of these markets have calendars that are as good or better on room nights than they were in 2019. So, that's going to get booked into our hotels.

Rich Hightower -- Evercore ISI -- Analyst

Okay, great. Thanks for the clarification. And then, just another question on a lot of the capex. The DiamondRock is undergoing or completing in the various assets in the portfolio. I guess, as we think about the landscape of hotels that you're competing with that are probably heavily under capex-ed at this point, given what's happened over the last year-and-a-half, at what point do you sort of start to see those -- the benefits from all that spend showing up in your index scores, your Trip scores, how long of a time period would that normally take? What are your expectations?

Mark W. Brugger -- President and Chief Executive Officer

Yes. If you step back to last year, when we made the strategic decision to pursue the high ROI capex projects and position the balance sheet to do so, so that's getting done and completed this summer, into the fall. And the idea was to position to see the results starting in 2022. So, Sonoma got completed in June, Vail will get completed in November, the conversion to Margaritaville in Key West will occur by November, the Luxury Collection conversion in Denver will be done, hopefully, at the end of this year. So, all of that, we should see the cash flow and the returns really starting beginning -- Sonoma, we are already seeing it with the market share gains. But you'll see that really trickle into starting in Q1 and next year you should see pretty meaningful returns on those capital investments.

Rich Hightower -- Evercore ISI -- Analyst

Great. Thanks, Mark.

Mark W. Brugger -- President and Chief Executive Officer

Thanks, Rich.

Operator

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

Chris Woronka -- Deutsche Bank -- Analyst

Hey, good morning, guys. Mark, it sounds like the strategy is really kind of a focus on leisure and we might take that to mean resorts. It sounds like you're open to leisure centric hotels in traditionally urban markets, so that could still keep pretty much every -- most markets out there on the map? Is that correct?

Mark W. Brugger -- President and Chief Executive Officer

It is. We're not going to add -- we have sufficient in New York, Chicago, Boston. So, we're not going to be additive in those markets. San Francisco is red lined in our opinion for the next several years. And markets that we're likely to expand in that are not [Indecipherable] resorts are going to be more markets like Charleston. That's a market that has some business and some [Technical Issues] having a fairly large presence in that market, but also lends itself to be predominantly leisure. We think that those markets are going to outperform New Orleans. French Quarter, particularly, it's an experiential market while it benefits from strong convention calendars. We think that travel trends that are going to outperform are going to tend to be more experiential, whether that's urban or pure resorts.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, helpful. And second question is, you guys have obviously restored a lot of liquidity. But as we think about acquisitions going forward, can you remind us where you are on ATM? And is there a thought toward just kind of over equitizing acquisitions, even if you theoretically could bring on property debt or use cash or something like that?

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Yeah. Hey, Chris. It's Jeff. As we said at the end of the last quarter, at that time, we said we had $112 million remaining on our ATM and that ATM program actually expires in August. So, we said at that time, you'll see us replace that ATM program. So, that will be recharged, effectively, but I think, technically, today it's $112 million and you'll see that go back up to a higher amount.

We do have the ability to acquire assets using debt. But right now, we've been looking at recycling the proceeds from the dispositions that we've made, and so effectively using cash on hand. They've been funded all cash or effectively all the equity.

Chris Woronka -- Deutsche Bank -- Analyst

Okay, very helpful. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Patrick Scholes from Truist Securities. Your line is now open.

Patrick Scholes -- Truist Securities -- Analyst

Hi. Good morning, everyone.

Mark W. Brugger -- President and Chief Executive Officer

Good morning.

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Good morning.

Patrick Scholes -- Truist Securities -- Analyst

So far this year, you've been running room margins in the mid 70%. It sounds like 3Q might not be so different. From a high level, and I think this is true for most of the hotel REITs, how long can that last? I think that's something that's surprised many of us how you're pretty much back there on room margins. Is that sustainable? Or as we get into the lower leisure season post Labor Day, does that start to slip back? And then, the whole issue of rising labor costs. Interested in your thoughts around that. Thank you.

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Sure, Patrick. I'll take a shot. So, I guess, certainly into the third quarter and for the balance of the year, we see maintaining profit margins with a continued recovery. And we think that margins, we've just gone through -- let's talk about why margins are good and why they may currently be better on prior peak. The labor model is the most -- for the industry, the labor model has fundamental changed. We've never had to go through something like this where we zero based every single hotel and we've gotten rid of positions, we permanently changed positions, FTE counts as an industry. So, that benefits us, technology is benefiting us. Mobile key, less people at the front desk, other sophisticated tools to monitor productivity, above property charges from the brands at the branded hotels have been reduced. So all of those are helping margins.

I think what's going to be unique to us and what is already helping us is the conversion in the comp to the brand managed hotels, the six of which we had last year. So, given the example of one change at Salt Lake City, we've been able to reduce the managers from 18 to 11 and we think we can maintain it roughly at that level. So, that's 39% less managers at that hotel. So, you can imagine how that runs through in profitability and margins not only now, but as we kind of return to prior peak too.

So, we're relatively optimistic on the margin front. There clearly is a nationwide shortage of labor and we are dealing with that, like everyone else. But I think there's a lot of reasons to be optimistic on the flow through and maintaining margins.

Patrick Scholes -- Truist Securities -- Analyst

Okay, thank you. Good to hear your thoughts on the topic.

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Thanks, Patrick.

Operator

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

Michael Bellisario -- Robert W. Baird -- Analyst

Thanks. Good morning, everyone.

Mark W. Brugger -- President and Chief Executive Officer

Good morning.

Michael Bellisario -- Robert W. Baird -- Analyst

Mark, I just want to go back to the acquisitions, kind of high level, looks like you're assuming roughly a 7% cap or 7% caps that go to 8% caps, not that much growth though. So, maybe two parts. Why is the stabilized 8% cap the right number to target? And then, I know you gave some details about what's not in your underwriting, but how should we think about maybe to stretch yields that you guys think you could get to over time on these deals?

Mark W. Brugger -- President and Chief Executive Officer

Yeah, you never want to over promise. So, I think stabilized 8% is accretive to growth NAV of the assets. It creates value for our shareholders. I think if you can get to an 8% on high quality real estate, it's additive in the public company format.

I think Henderson is a fairly straightforward deal. It's irreplaceable real estate. While it's small, it is beachfront, impossible to build in. And I think by the time we're done with it, it will be worth a lot more than we paid for it.

Bourbon too, it's got more creative aspects. We can employ to grow NAV. We haven't built in -- when we talk about that 8% yield, we haven't built in a lot of things Tom was talking about. So, the change in the retail, reconfiguring the F&B, taking advantage of the separate buildings that come with the acquisition and turning those into unique banquet and wedding spots, all that would be incremental ROI to that 8%. And so, hopefully, we're going to do better.

Take Barbary Beach, we're looking at the Key West, yeah, that's an asset that is 35% or more above our underwriting. We put a 6% cap on that -- I think I was looking at -- total investment -- our yield on that this year will be something like 11.5% on our total investment, and that doesn't include being used for the conversion to the Margaritaville. So, put a 6% cap on that number on $30.5 million this year, that's like $225 million for an asset we have a $117 million basis in. So, hopefully, it will be successful like that asset. But I think we don't want to build in the ROI stuff when we talk to investors on the initial underwriting. We'd rather communicate to you what we think is probably the straightforward clear path to stabilized yield. And then, as we approve and finalize ROI projects, we'll communicate that to the investment community.

Michael Bellisario -- Robert W. Baird -- Analyst

Got it. So, it sounds like 8% kind of a baseline and you'll work higher from there, hopefully, right?

Mark W. Brugger -- President and Chief Executive Officer

That would be our hope. Yeah.

Michael Bellisario -- Robert W. Baird -- Analyst

Got it. And then, just switching gears, maybe one for Tom. Can you help us get our arms around what you've seen for BT in the fall, where this special corporate booking is occurring and are you seeing the booking window extended out at this point?

Thomas Healy -- Chief Operating Officer and Executive Vice President of Asset Management

I've got to tell you, Mike, we've seen a little bit of growth in BT. We went from like 5% -- we grew about 1 point a month in the second quarter, up to about 7%. The portfolio as a whole, across all the hotels, runs about 15%. And then, obviously, in the urban, we're doing as much as 30% to 40% mid-week when things are good. So, we're seeing a little bit of movement. There is nothing in the future. There's no future pace that shows anything -- that shows that there is no significant change at this point. I think we're still too far out. And I think a lot of it's going to really come around to how does -- the kids go back to school, how do things play out in the fourth quarter. But there are no indicators that things are dramatically improving or going backwards. Right? So, I think we're just monitoring.

Mark W. Brugger -- President and Chief Executive Officer

Yeah. Mike, this is Mark. I would just add a couple other things. So, we did see mid-week increasing, which is both leisure and BT, as we mentioned in the prepared remarks. If we look at our July results for our major markets -- Chicago, New York, Boston -- we have a lot of hotels that are running 70% to 90% midweek. So, that's encouraging.

And then, if you look at travel policies, what's happened over the last 45 days, you've seen travel restrictions lifted at PwC and the consulting companies and a lot of companies have lifted travel restrictions. All that portends well for BT as we move into the fall. So, I think the reduced travel restrictions are encouraging.

The expectation -- we look at like Delta Airlines CEO and they have they more pure data, I would say, that we do because a lot of our -- one of the phenomena that's happening now, a lot of people are booking around their traditional special corporate. So, it's harder to for us to track the business traveler, but they were saying it was 20% earlier this year. It's running about 40% versus '19 levels and they hope it to be -- based on what they're forecasting and seen in their systems post Labor Day, getting 60% plus of what it was in '19. So, the trend line is encouraging. We're extrapolating from those data points that the airlines are seeing because they have better visibility because of the way people are booking around in the hotel business.

So, I think that's encouraging, but it's not like BT books for December right now. So, I can't give you definitive numbers, but the trend line seem like they're going in the right way.

Michael Bellisario -- Robert W. Baird -- Analyst

Thanks for all that.

Operator

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

Anthony Powell -- Barclays Capital -- Analyst

Hi. Good morning. We've seen a lot of transactions in the space, but very few on the big box group side. What's your view on the values there and investment demand for those types of assets kind of look?

Mark W. Brugger -- President and Chief Executive Officer

Yeah, this is Mark. So, I'd say there just aren't any for sale. We just were at [Indecipherable] recently, just looking at what's in the market. I can't think of one big box that any broker has listed at the moment. So, I think the general attitude, if you own big boxes, is that it's not the right time to market. Group will come back. I think people are pretty optimistic on the group front. But it doesn't feel like it's the time to market that asset. So, with no trades in the market, it's hard to hard to give you a perspective on exactly where value is on the big boxes.

I suspect that, this time next year, we'll see group recover, maybe a little bit better than people expected, and that will bring buyers and sellers together next year on those kind of assets.

Anthony Powell -- Barclays Capital -- Analyst

Got it. And you talked about maybe marketing one of those at some point. I'm guessing, by your commentary, next year is when you could consider that maybe. Is that correct?

Mark W. Brugger -- President and Chief Executive Officer

If you were going to market a big box, next year would certainly be a much better time than right now. I think there's just more certainty. And I think we're fairly optimistic on the group recovery scenario. So, I think we wouldn't want to be premature and bringing any large hotel to the market right now.

Anthony Powell -- Barclays Capital -- Analyst

Got it. And just on the acquisition side, what's the total opportunity set for you with kind of smaller resorts and maybe more leisure focused urban hotels? Could you do maybe 10 of those deals over the next couple of years? It takes a lot of them to replace a Lexington or a big box resort. I'm just curious what you see kind of the velocity of deals over the next few years?

Mark W. Brugger -- President and Chief Executive Officer

Yeah. There is a lot of hotels that work between $50 million and $100 million that fit in this category. I think the real advantage that we have is our team here, Troy and his investment team, have been focused on this for over five years. So, we've built a pretty sizable database of about 50, we'll call, micro markets. That's the Sedona, Vails of the world, Park City, Jackson Hole, we know every hotel. We've been talking to many, many of the owners for years now. And that's how we're uncovering off-market deals. And looking at our internal pipeline, it has a lot of those in there. Could we do 10 over the next couple of years? Sure. There is plenty of them. I think we have unique insights into that. And we really want to be focused on doing off-market unique deals. And I think a lot of these auction deals, as I mentioned -- we just saw one that is happening right now and we were $15 million shy of the winning bid and we thought we were -- we thought we were stretching.

So, we want to create value with our acquisitions. And I think continuing to focus on the strategy is the way that DiamondRock is going to create value and others may have to overpay in doing these auction deals.

Anthony Powell -- Barclays Capital -- Analyst

Got it. Maybe just one more quick one, how are distribution costs for the small independent resorts? The margins seem to be very strong. So, it seems like you're able to overcome any OTA fees at these properties. I'm curious how you're sourcing customers at a Sedona or a Havana Cabana.

Mark W. Brugger -- President and Chief Executive Officer

Tom, you want to take that?

Thomas Healy -- Chief Operating Officer and Executive Vice President of Asset Management

Sure. All the tools are in place for us to access customers, especially with a brand like Sedona where there is brand equity and people -- it's relevant. But we use all the tools, we use the OTAs, we use a layered approach with regards to luxury travel agents. We have a luxury travel agent strategy -- Virtuoso, Signature, Fine Hotels -- on those type of resorts. And then, we don't have the brand fees. Think about an independent hotel, we're not paying 10% for the brand. We're not paying all the brand marketing fees. And so, we can allocate a portion of that and attack the customers directly, right? We're not -- we focus -- we try to keep our portfolio focused on nothing in the aggregate, but only specifically to our assets. And so, when we allocate dollars, we're targeting our specific asset, not a grouping of hotels, like the brands do. And so, that gives us a lot of nimbleness.

You'll see in -- like Havana Cabana, we're number one website in the nation, right? Most saved website in the world. And it's kind of funny, you say, how does Havana Cabana and Key West become the number one saved website in the world. And it's because we have the ability to take the user generated content and retarget the customers. And so, people save it and they use it and they share it with their friends. And it's very powerful. Independent hotels and our sales and marketing team, we have all the resources on our team at DiamondRock and we do it for ourselves versus relying on the brands. And I think that's a very powerful tool. It gives speed to market and it reduces our costs, which is why we like the independent hotels so much.

Anthony Powell -- Barclays Capital -- Analyst

Thank you.

Operator

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

Floris van Dijkum -- Compass Point -- Analyst

Thanks. Good morning, guys. Wanted to get your thoughts. It's intriguing to -- as competitors have bought assets near your assets at high prices, and Mark, maybe get your thoughts on, first of all, the value of your assets and also put that in perspective. How is that value of your net worth -- the company's net worth, I should say, or NAV change since December when you issued some -- a small amount of equity on your ATM. Maybe if you can give some more thoughts on that, that would be great.

Mark W. Brugger -- President and Chief Executive Officer

Sure. So, let's take both parts. So, we did issue a little bit on the ATM last fall, but that was to position for the ROI projects. So, that funded the Vail repositioning, that funded the Sonoma repositioning, that funded the Margaritaville conversion, that's funding the Luxury Collection conversion in Denver. So, that capital has been spent or being completely spend right now and will position us for outsized growth in 2022. So, it wasn't really steaming [Phonetic] on NAV as much as we had a very high use, 20%, 30% IRRs on those projects, and we thought that relative, they made a lot of sense.

As we look forward on acquisitions now and the use of capital and NAV, as far as our current state of value, so I think the NAVs are going up. I think if you look at our assets in markets like Key West and you look at our markets in like Sonoma and Sedona where we've seen other trades, those assets now are breaking through the probably record pricing. Our Barbary Beach is worth more $1 million a key. Sonoma is probably worth more than $1 million a key. And that compares to basis. That is, our basis in Sonoma is roughly $270,000 a key. It's probably worth $1 million plus a key now. Barbary Beach, we're probably up 70% from our basis. So, with these numbers that are getting paid up by others in the marketplace, it's increasing our NAV.

So we're always reevaluating. It's hard to -- it's always hard to know exactly where it is. But the private markets are paying a lot more than the public valuations and there is a big disconnect right now between these valuations.

Floris van Dijkum -- Compass Point -- Analyst

Thanks. I appreciate that. And I was actually pretty intrigued. You made the comment that your returns on your Key West assets are in the double digits. Obviously, there is more to come on the rebranding to the Margaritaville. If you were to back solve from your original acquisition costs, how much value has been created and how much has the value per key improved over your whole period?

Mark W. Brugger -- President and Chief Executive Officer

So, let's take Barbary Beach or Havana Cabana. They're both double-digit returns on our investments. So, if you put a 6% cap on those, [Indecipherable] kind of where things -- what they're trading down there, that put Barbary Beach on this year's numbers, it's something like $225 million versus a basis of $117 million. So, I can't do the math in my head, but a 90% increase in value and about $1.2 million a key. Havana Cabana, put a 6% cap on what we think it will do this year, that puts it about $90 million. I think our basis is $55 million. So, that's up 60%.

So, again, I think what we're seeing is a lot of our thesis that we've been trying to articulate to investors over the last five to seven years playing out. Right? The trend lines and high barriers to entry, there's no new supply, and what do customers want, the assets we've been buying, particularly over the last five to seven years, those two are really playing out and we're seeing massive increases in NAV of those assets.

Floris van Dijkum -- Compass Point -- Analyst

Thanks, Mark. Appreciate it.

Mark W. Brugger -- President and Chief Executive Officer

Absolutely.

Operator

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

Mark W. Brugger -- President and Chief Executive Officer

Thank you, everyone, for joining us today on our earnings call. And we look forward to updating you next quarter. Take care. And have a great day.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Briony Quinn -- Senior Vice President and Treasurer

Mark W. Brugger -- President and Chief Executive Officer

Jeff Donnelly -- Executive Vice President and Chief Financial Officer

Thomas Healy -- Chief Operating Officer and Executive Vice President of Asset Management

Troy Furbay -- Executive Vice President and Chief Investment Officer

Dori Kesten -- Wells Fargo -- Analyst

Smedes Rose -- Citigroup -- Analyst

Rich Hightower -- Evercore ISI -- Analyst

Chris Woronka -- Deutsche Bank -- Analyst

Patrick Scholes -- Truist Securities -- Analyst

Michael Bellisario -- Robert W. Baird -- Analyst

Anthony Powell -- Barclays Capital -- Analyst

Floris van Dijkum -- Compass Point -- Analyst

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