RLJ Lodging Trust

Welcome to the RLJ Lodging Trust Fourth Quarter 2020 earnings conference call. As a reminder, all participants are in listen-only mode as the conference is being recorded. After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Nikhil Bhalla, RLJ's vice president and treasurer of corporate strategy and investor relations. Please go ahead.

Thank you, operator. Good morning and welcome to RLJ Lodging Trust 2020 fourth quarter and year-end earnings call. On today's call, Leslie Hale, Our President and Chief Executive Officer will discuss key highlights for the quarter. Sean Maloney, our Executive Vice President and Chief Financial Officer will discuss the company's financial results. Tom Bardenett, our Executive Vice President of Asset Management will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-K and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. I would like to start by saying that we are saddened by the loss of Arnie. He was an exceptional leader for Marriott and the entire hotel industry. He was a mentor to many, myself included, but more importantly, he was an exceptional person and it was truly an honor to have had the privilege of knowing him. He will be profoundly missed and our prayers are with his family. As the new year continues to unfold, We sincerely hope that everyone remains safe and healthy. We remain deeply grateful to our frontline associates, whose tremendous efforts and personal sacrifice helped us navigate an extremely challenging year. We would also like to thank our management companies and our lenders, who were also instrumental in helping us through these uncertain times. Given the severity of the impact of the pandemic on our industry and the entire country, I am very proud of how well we responded. Our team was nimble and quickly pivoted to adjust the cost structure of our operating model and to preserve our liquidity position. We are not only positioned to benefit early during the recovery, but also to outperform throughout the entire cycle as we advance our long-term growth opportunities. During the year, we executed on a number of fronts. First, we took decisive actions at the corporate level to preserve liquidity relative to our dividends Capital Expenditures, and G&A Expenses. Second, we developed and executed a framework for operating with minimal cost in a low occupancy environment, allowing us to end the year with 95 of our hotels open. Third, we positioned our portfolio to benefit early as demand recovers, which allowed our open hotels to generate positive hotel EBITDA for each of the last two quarters. We reduced our cash burn rate throughout the year, ending the year near the low end of our most recent guidance. And finally, we completed multiple amendments to our unsecured debt at favorable terms while retaining balance sheet flexibility to continue executing our growth initiatives. The successful execution of all of these efforts allowed us to end the year with over $1 billion of liquidity. which will enable us to take advantage of both internal and external value creation opportunities. As it relates to our fourth quarter performance, we achieved 34.1% occupancy for our entire portfolio. We were pleased to see the continued sequential improvement in occupancy as our results exceeded the third quarter despite demand in November and December moderating due to seasonality and increased restrictions given the rise in COVID cases at that time. Our open hotels achieved an absolute occupancy of 37.5%, which was ahead of our expectations and exceeded the urban segment of the industry by 470 basis points. Additionally, our open hotels also gained over 900 basis points of market share during the quarter, further highlighting the overall quality and appeal of our portfolio. From a segmentation standpoint, our leisure-oriented markets continued to outperform With markets such as South Florida, Orlando, and Charleston achieving occupancy of 50% or more, our portfolio mix once again enable us to capture pent-up leisure demand, especially during weekends and around the holidays. Our fourth quarter weekend occupancy of 47% at our open hotels continues to meaningfully outperform weekday occupancy, highlighting our portfolio's broad appeal to the leisure demand segment. We also saw the continuation of a positive uptick in both business transient and group demand. Our fourth quarter business transient and group rooms revenue increased 12% and 4% respectively from the third quarter, evidencing that both of these segments are beginning to see a small level of improvement. Business transient demand continued to be primarily generated from industries such as healthcare, insurance, and government. and our group demand continued to benefit from our hotels being attractive to small social groups such as weddings and sports teams. Overall, our fourth quarter results underscore the favorable positioning of our portfolio as a recovery unfolds, illustrated by our resort hotels achieving 56% occupancy, our all suite hotels, which represent nearly 50% of our rooms, achieving 42% occupancy, and finally, our drive-to markets achieving 41% occupancy. The level of our occupancy combined with the continuation of our aggressive asset management initiatives led to our entire portfolio achieving positive gross operating profit during the quarter and our 95 open hotels generating positive hotel EBITDA. We achieved these milestones for the second consecutive quarter which highlights our ability to quickly return to profitability as fundamentals continue to improve. The positive operating cash flow generated by our hotels allowed us to lower our fourth quarter cash burn. Over the nine months of the pandemic, our average monthly cash burn was $23.6 million which was in line with the low end of our most recent guidance. The magnitude of our cash burn reduction throughout the year as well as the low absolute cash burn per key continues to validate our lean operating model and affirms our ability to get back to profitability sooner. Now looking forward, we continue to believe that the pace of the vaccine distribution and the reopening of offices will be critical to the recovery of our industry. There has been significant progress towards the rollout of the vaccine since our last call. Given this progress, Our confidence relative to the recovery accelerating during the back half of 2021 is incrementally more positive today. As the current year unfolds, we were encouraged to see fundamentals in January improve sequentially from November and December. Leisure demand in January was strong in all of our Florida markets, while our properties in DC benefited from demand related to the presidential inauguration. These trends led our January results to come in ahead of our expectations. We expect February to continue to see similar positive trends. As it relates to overall segmentation trends, we expect leisure to continue to be the dominant driver of demand and anticipate incremental strength throughout the year. We expect local and regional corporate demand to continue to see some gradual improvement. And finally, We are encouraged that group leads have continued to improve during the first quarter, which could give rise to gradual improvement in small group bookings. Based on the sequencing of these trends, we expect the first and second quarters to be similar to the back half of 2020. However, we expect demand to gain momentum starting in third quarter as a greater percentage of the population becomes vaccinated. We believe that if the current pace of vaccinations leads to a meaningful improvement in schools and offices reopenings. It could allow for a step change in fundamentals during the second half of the year. Overall, we view 2021 as a year of transition, but one that could lay the foundation for a stronger 2022. As we demonstrated throughout 2020, our lean operating model and our portfolio mix will continue to provide RLJ with key advantages in the early stages of this recovery. Our transient-oriented hotels will continue to benefit from leisure demand as well as a recovery in business travel as it unfolds. Our hotels are proving to be very attractive to the small group demand that is continuing to emerge. Our hotels have smaller footprints and are less complex operationally, which will continue to allow our hotels to minimize our cash burn. Our lean operating model will allow us to achieve break-even and profitability quicker. and the efficiencies we have achieved during the past year will enable us to return to pre-pandemic EBITDA sooner. More importantly, our portfolio is poised to outperform throughout a sustained recovery given that our liquidity of nearly $1.1 billion and our lower burn rate will enable us to emerge with a healthy balance sheet, which we will use to pursue our growth strategy. Our large asset base will provide significant optionality to recycle capital without meaningfully shrinking our EBITDA base. Although we do not have a liquidity need to sell assets, as evidenced by our recent asset sales, we will remain active portfolio managers and will evaluate select dispositions that create incremental capacity for growth. Additionally, the improved long-term growth profile of our portfolio will allow us to thrive throughout a sustained recovery as the business transient and group segments return. And finally, our EBITDA growth throughout this cycle will be amplified as we unlock our embedded growth catalyst. We are currently on track to complete the repositioning conversions at Mandalay Beach, Santa Monica, and Charleston in 2022. And we are continuing to advance the plans and the timing of the other conversions. These catalysts position us for both internal and external growth With respect to external growth, we are actively monitoring the transaction market and expect to be in a position to deploy growth capital as recovery takes hold. We expect the acquisition window to remain open for several years, and we remain extremely disciplined as we underwrite acquisitions. Finally, we could not be more pleased with our relative positioning. While the road to recovery will span several years, we're confident that our industry will fully recover. Our portfolio construct will allow us to grow revenues earlier, achieve overall profitability quicker, and position us to take advantage of growth opportunities sooner, all of which will create significant value for shareholders throughout this cycle. I also want to take a moment to express my sincerest gratitude to our corporate team for their tremendous efforts and unwavering commitment during these challenging times. I will now turn the call over to Sean. Sean.

Thanks, Leslie. I would like to echo Leslie's comments on the passing of Arnie, an outstanding leader and visionary in our industry. We were pleased to see the continued sequential improvement in our occupancy for the fourth quarter and continued improvement in the fundamentals so far this year. Our pro forma hotel operating results include the 102 hotels that we owned as of December 31st, despite having seven suspended hotels throughout the fourth quarter. Pro forma numbers exclude the residence in Sugarland, which was sold during the quarter, but include the Courtyard Sugarland, which was sold in early 2021. Our reported corporate adjusted EBITDA and FFO include operating results from sold hotels during RLJ's ownership period. Our fourth quarter portfolio occupancy of 34.1% represented a 490 basis point improvement from the third quarter. The fourth quarter marked our highest quarterly occupancy since the start of the pandemic. Factoring in normal seasonality in November and December, our portfolio's monthly occupancy was relatively stable at 37.3% in October, 33.2% in November, and 31.7% in December, which was stronger than we expected and provides further evidence that our portfolio is well positioned to capture demand in the current environment. Additionally, despite several of our large urban assets in New York City and San Francisco remaining suspended throughout the quarter, our portfolio generated $15.8 million of positive GOP during the quarter. Our ability to continue generating positive GOP is affirmation of how we expected our portfolio to perform during the early stages and throughout a sustainable recovery. The fourth quarter results for our 95 open hotels were meaningfully better with occupancy of 37.5% and average daily rate of $111. We were especially pleased that our open hotels generated $1.6 million of positive EBITDA during the fourth quarter. representing the second consecutive quarter of positive EBITDA. Similar to the overall portfolio, our monthly open hotel occupancy was relatively stable during the quarter at 41.2%, 36.5%, and 34.9% in October, November, and December respectively. We are encouraged that demand during the first quarter has been stronger than our expectations. During January, our open hotels generated occupancy of 37.1% and ADR of approximately $111, which was ahead of our open hotels results for December. We expect February demand to remain consistent with January, which benefited from the continued strength in leisure and recent unexpected demand from responses to the tragic storms in Texas. Turning to the bottom line, Our fourth quarter hotel EBITDA and adjusted EBITDA were negative $7.3 million and negative $12.8 million, respectively. And adjusted FFO per share was negative 28 cents. For the full year, we delivered adjusted EBITDA of negative $41.1 million and adjusted FFO per share of negative 98 cents. As Leslie mentioned, We remain committed to monitoring operator compliance with the aggressive cost containment initiatives that we instituted at the beginning of the pandemic. Underscoring our relentless focus on controlling costs, our fourth quarter total hotel operating costs declined approximately 59% versus last year. Our team was vigilant on controlling variable costs during the quarter, resulting in a 64% reduction in wages and benefits from 2019. Additionally, with demand generally stable, we were also able to continue operating the hotels with minimal operating costs during the fourth quarter. Specifically, while fourth quarter revenues increased 8.7% from the third quarter, our operating costs only increased approximately 2.5%, which allowed our portfolio to increase the bottom line by approximately $4.9 million. Our team remains focused on cost-containing initiatives to minimize cash burn in the current environment. Turning to liquidity, I would like to re-emphasize that we entered the year in a strong position with approximately $900 million of cash and an undrawn line of credit. In responding to the COVID crisis, we took the necessary steps to preserve liquidity. Our efforts continue to be laser focused not only on ensuring that ROJ continues to maintain adequate liquidity, but also ensure that our portfolio is well positioned to take advantage of opportunities to drive outperformance during the recovery and beyond. To that end, while we continue minimizing capital allocation initiatives until we have more clarity on fundamentals, including certain ROI projects, We successfully completed our in-flight 2020 capital projects and will continue to prioritize high-value projects, such as the addition of new rooms in Emeryville and Buckhead, conversions in Santa Monica, Charleston, and Mandalay Beach, as well as our less capital-intensive ROI initiatives, such as parking and contract renegotiations. We were encouraged that our fourth quarter monthly cash burn was significantly lower than expected. which was driven by our portfolio generating positive operating cash flow for the second consecutive quarter. Our fourth quarter hotel level operating cash flow was approximately $10 million better than our expectations at the beginning of the quarter which was primarily driven by stronger than expected revenue at our open hotels and the continuation of our cost containment initiatives with continued success in labor and benefits. Overall, Based on our portfolio's lean operating model, our hotels are expected to continue to perform substantially better than portfolios comprised of traditional full-service hotels. Our hotel fixed costs and corporate-level outflows, including dividends, debt service and G&A, were also approximately $10 million lower than our expectations at the beginning of the quarter, which was primarily attributable to lower property tax payments during the quarter. These factors enabled us to exceed our cash burn estimates again this quarter. For the nine months of the pandemic, our average monthly cash burn was approximately $23.6 million, which came in near the bottom end of our prior estimated range. Based on our December 31st liquidity and continuing at our 2020 cash burn rate, we have approximately 47 months of total runway. Since providing our initial cash burn estimates in May, We actualized the cumulative cash burn that was over $100 million below the high end of our initial estimates. Looking forward, we expect first quarter monthly cash burn of $20 million to $24 million, which will be towards the low end of the range if first quarter lodging demand remains at current levels and the high end of the range if first quarter lodging demand contracts from current levels. As a reminder, Our cash burn estimates exclude RLJ-funded capital expenditures, which we estimate will be between $75 million to $85 million for the full year 2021. Turning to our solid balance sheet, we ended the quarter with approximately $0.9 billion of unrestricted cash, $200 million of availability on our corporate revolver, $2.6 billion of debt, and no debt maturities until 2022. Our significant liquidity provides us with close to four years of runway based on the actual 2020 monthly cash burn, which ranks us among the best positioned lodging REITs and provides the flexibility to take advantage of potential external growth opportunities. We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, approximately 81% of our debt is fixed or hedged, and 82 of our 101 hotels are unencumbered. During the quarter, we further enhanced our financial flexibility and amended our corporate line of credit and term loans for a second time. The latest amendment provided three additional quarters of financial covenant waivers, which now go through the end of 2021, and also continued the reduction of certain financial covenant thresholds through mid-2023. We continue to place great value on our lender relationships and have remained aligned with our lending partners throughout the process. As we look ahead, despite all the uncertainty facing our industry, ROJ remains well-positioned with a flexible balance sheet, ample liquidity, lean operating model, and a transient-oriented portfolio with many embedded catalysts. Thank you, and this concludes our prepared remarks. We will now open the lines for Q&A. Operator?

Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question is from the line of Austin Wunderschmidt with KeyBank. Please receive your questions.

Hey, good morning, everybody. Leslie, you flagged that you guys have a tremendous amount of opportunities within your existing portfolio, and you're sequencing those based on risk-adjusted return profile. So as we start to think about the opportunities on the acquisition side, are those going to be more newer operating assets that just have kind of attractive demand generators and growth ahead? or will they be more of the ilk that, you know, what's within the portfolio and requires some additional heavy lifting like the conversions that you've got, you know, that you've been talking about now for the last several years?

Hey, Austin, good morning. Thanks for the question. Well, I would say that it will be a combination of all of the above given the fact that we have demonstrated the ability We've demonstrated the ability to create value in all the assets that we've purchased, and we continue to do that. Today, where we sit, we have a greater amount of conviction in the types of assets that we invest in, rooms-oriented, high-margin, premium-branded assets. We've demonstrated their resiliency today, but also we believe that how they will perform in a recovery situation. is another reason why we would focus in on those assets. And so what I would say is that, yes, we'll be looking at younger assets, but we will also not be afraid to look at assets that require a deep turn because we have an in-house team that has demonstrated capacity and capability to do that. And we will do that also on our conversions that we've highlighted that we're working on right now as well.

Sean, you outlined you expect to spend $75-$85 million on RLJ funded capital expenditures this year. How much additional maintenance spend are you anticipating and can you expand a little bit on some of the most notable projects that are in that pipeline?

Sure. So, Austin, the lion's share of the $75 to $85 million in 2021 is related to the three big conversions in Mandalay Beach, Charleston, and Santa Monica. The incremental maintenance capex will be in line with what it was over the last couple years and a relatively small component of that capital. And so, When we think about where we're deploying capital in 2021, we're focused on these conversions, which we think are high value add. As Leslie mentioned, we have more conviction around those today in light of the fact that we believe leisure is likely to outperform throughout the next cycle. And so positioning these assets to benefit from that leisure outperformance is critical. And if you step back and look at those markets, and Amanda Lake Beach wanted to Tilton Hotels along the California coastline, a great box that has fantastic opportunity with which to shift to a curio, eliminate the comp F&B, drive rate, remix the hotel. We have great conviction there. And on that asset, because of that unique location, Charleston and Santa Monica, both great, also leisure-centric locations where we're converting from the existing brand, one going to an independent in Santa Monica and Charleston going to one of the global brands, lifestyle brands. Both of those locations should be in great position to benefit from that uptick in leisure as well. I'll also add that all three of those assets during the pandemic have performed beautifully for us and have really shown the conviction that the leisure customer likes those even as is and so gives us even more conviction that Reposition that the upside is there.

And when do you think you're going to give some additional detail on the Charleston global lifestyle brand and any key money that may go along with that?

Sure. So we've made tremendous progress on all fronts with respect to discussions and negotiations with all of our stakeholders, scope setting, negotiation contracts, etc., and we look forward to being in a position sometime this year to provide more clarity around scope, return expectations, capital, etc. But that's something that we're going to roll out later this year. But we acknowledge that the market is excited about getting that information and we're excited to present it because we think these are going to be really compelling ROI opportunities for us.

Great. Thanks for taking the questions.

Our next question is from the line of Michael Belisario with Baird. Please proceed with your questions.

Good morning, everyone. Good morning.

Leslie, just as you're evaluating the growth opportunities that you referenced, maybe a big picture, what signals, data points, macro indicators are you looking for in order for you to say, yes, let's put more money to work or now is the time to move faster?

So Mike, as we've said before, one of the key things for us was to be able to have visibility to be able to underwrite an asset to at least break even so that we weren't taking on assets that were burning incremental cash. Additionally, we wanted to make sure that we had conviction in our underwriting. Based on the way that fundamentals have continued to show positive signs early on in this year, we feel that that where we sit today, we have a greater amount of confidence in our ability to underwrite an asset getting back to pre-COVID levels. Now, we may be off a little bit on the initial ramp here or there, but our confidence in the ability of the asset to return to pre-COVID levels is something we feel greater confidence today. Additionally, given how our portfolio has performed in achieving break-even at our open hotels, We feel that we can also underwrite that as well. And so we are entering that zone of comfort in terms of being able to move on external growth, Mike.

Got it. Very helpful there. And then just one more from me on your closed hotels in New York, Chicago, San Francisco. How far away do you think we are on the fundamental front from

We're encouraged by some of the news about restrictions being lifted in both of those markets. I think most recently New York talked about opening movies. While that's not a big demand driver for us, but it does tell us about the psychology of what's going on in the broader market. Look, we developed a framework that allowed us to operate hotels in a low occupancy environment. We will apply that same framework to these assets, and as we see the demand, appropriate demand arriving or emerging, rather, within those markets, we'll open these assets. I mean, obviously, San Francisco and New York are higher cost structure markets, which therefore requires and many more. Thank you. Our next question comes from the line of Neil Malkin with Capital One. Please receive your questions. Hey, good morning everyone.

Good quarter. Can you elaborate on, you know, you had very good expense controls, like you said, far better than you expected. Maybe could you elaborate on, you know, how you think about, for example, you know, FTEs, you know, in the current environment and particularly as demand normalizes and, you know, how you kind of look at that labor structure given that you've had a lot of success Good morning, Neil. This is Tom. What I would say is we've been, as Leslie spoke earlier, really monitoring the model and taking control of how many FTEs are allowed at each asset.

and we have the luxury of benchmarking because of the amount of assets we have to be able to understand what that model should look like no matter where it is in the country. So first and foremost, we kind of looked at the first quarter as the threshold to compare to as we looked at the quarters in two, three and four in 2020 to be able to understand what we came from and where we are today. and then we looked at what we were actually doing at the property level from food and beverage closing outlets to a breakfast in an environment that's no buffets and so you drastically reduced FTEs in the food and beverage area. When we think about rooms and protocol and housekeeping, we also really identified the productivity opportunities related to the fact that no longer are you cleaning on every stayover, you're actually cleaning on checkout. So we also looked at FTEs knowing that productivity would improve in those areas, even though we had to do more cleaning in the housekeeping area, in the lobby areas. But at the end of the day, we think when we come out of the recovery, we will be at less FTEs than we were when we started in quarter one 2020. So as we gradually increase and ramp up in occupancy, we also have a model in regards to when to put those FTEs back. The biggest relationship will be when food and beverage starts to open outlets and sales and marketing comes back in regards to group business and BT when we start to look at the management payroll. But on the actual associate payroll, we feel very good about where we're at, running similar levels in Q1 that we did in Q4. And then we'll gradually ramp up as occupancy ramps up, knowing that we don't want to get back to the ultimate level we started in Q1 2020. Sean, you want to add to that?

Yeah, and Neil, to provide some data points around that, so for the fourth quarter, our cost per occupied room at the room's departmental level was down roughly 24%, which was split roughly two-thirds of that was wages and benefits savings per occupied room, and the other third of that was around commissions and other costs per occupied room. So we think that Not only have we successfully limited the cost of the business, but when you look at it on a per occupied room basis, which is a proxy for getting more efficient, that's helpful. In addition, on the F&B side, we were super proud this quarter. Our revenue on the F&B side was down 90%, but we actually still made a profit at the F&B departmental level, which was an incredible accomplishment for our team in the sense that we were able to manage those costs. We feel good that we're able to demonstrate that as we look forward. We do believe that there will be synergies that come out of this, which is an underlying question around the overall cost structure, and labor is going to be a big part of that. Leslie?

No, no. I think Sean put a bow on the very end there in the sense that we've been operating this low-occupancy environment for over nine months. and we have a greater amount of confidence in our ability to have some of these cost efficiencies sustained past the recovery. And you heard Tom talk about food and beverage and housekeeping and we also believe that the conversations we've had with brands on above property costs relative to shared services, we also think that we've been operating within some of these clusters. We've always done clustering in assets that were close proximity but we've expanded the clustering to include assets that are further away, assets that are with other owners and we think that there's an opportunity for some of those cost savings to sustain themselves past recovery as well. So I think overall we are incrementally positive on the ability to see some benefits here.

Interesting. Well yeah, I think that's already working so look forward to Thank you for having me. Markets that you feel like you maybe want to lighten up on in the form of acquisitions in other places. You mentioned you expect leisure to outperform this cycle. And just given that, I think a lot of paradigms have changed for a lot of coastal markets and post-COVID in terms of people leaving, remote work, et cetera. How does that go into your calculus of how to move the portfolio forward over the next, say, five years?

So I think you had a couple of questions embedded in there, Neil, on the disposition side. I think that there's really no – we're generally happy with our overall portfolio given the amount of dispositions we did in 2019. We did a lot of heavy lifting there and feel that we'll continue to be active portfolio managers and look at deals opportunistically, but there's no markets that we're looking to exit at this time. as we sort of think about how the recovery will unfold and look at acquisitions, we're going to rely on our traditional lens. We've always looked at markets that are going to be outperform or have catalysts for higher growth relative to the overall industry. We look for markets that fit well within our existing footprint and are creative that way and where we don't have enough exposure we feel We also look at how we think the recovery is going to unfold with leisure being the dominant demand driver throughout this cycle and obviously with BT coming back in a staggered way and group coming on the heels of that. So we want to make sure that the types of assets that we look at have the ability to draw multiple segments of demand. We don't want to build a church just for Easter Sunday. Okay, thank you guys. Thank you.

Our next question is from the line of Tyler Badry with Janney Capital Markets. Please proceed with your questions.

Hey, good morning. Thanks for taking my questions. Apologies that this was already addressed. I wanted to go back to the capital allocation discussion and interested as you're looking at things, how does paying down debts or looking at something creative potentially with the preferred, how does that fit in? I'm curious what you think about those as options to create value.

Great, thanks. Good question around capital allocation there. I think from our perspective today, we think the most valuable capital allocation returns we're going to get are around a combination of both internal growth within our portfolio, conversions being the biggest driver there, as well as acquisitions as a subset of that for external growth. On debt and deleveraging, We think that our leverage levels that we entered into are appropriate. We understand that this was a once in a thousand year flood or whatever. And we think that our balance sheet actually was able to allow us to thrive on a relative basis during this pandemic. And so I think that actually validates our view around where our leverage levels were. And so I think from a balance sheet perspective, our priorities are around thinking through our debt maturities. Thankfully, we don't have any until 2022, but the markets are accommodating, so we're looking at proactive and opportunistic financing opportunities, but that's going to be around the opportunities in the marketplace today, specifically around the preferreds. Under our credit agreements, we're not allowed to buy back preferreds, even if we'd want to. And so I think that, you know, on a relative basis, you know, that's really not an option for us today. Historically, pre-COVID, they always traded at a premium to par. And so that made the math difficult around that, even if that was something that we want to pursue.

Great. Very helpful. And just as a follow-up question, on your revenue management sales strategies. Can you talk a little bit more about what you're doing right now? But I'm also interested how those strategies might evolve over the next several months here as some demand starts coming in. And then also interested if you have an idea of potentially roughly how many hotels in some of your markets, some of your competitors, how many are still closed and if there are instances where properties have reopened recently, what that is doing to market trends.

I'll start with the revenue management question, Tyler. And what I would say is we're still in a heads and beds philosophy today. And the reason that is, is going into the fourth quarter, we still had predominantly, when we look at segmentation, leisure was the dominant player, as Leslie stated. When we look at group, it was still in the 7%, 8% level in quarter four. What's interesting now is you're starting to see the mix shift just a touch as we get out of the gate in quarter one. We're grouped for the first time up to almost 11%, so we're starting to see some of what Leslie mentioned about earlier, which is social, weddings, sports groups, and things like that. We're still hopeful that BT will start to show its head, but we're still around 12% on corporate in regards to what's happening, and that's mostly medical, pharma, Insurance and project-related group and government business that's coming in in that category. So what I would say to you from a revenue management standpoint is where restrictions are being lifted, we are automatically seeing opportunities to raise rates in those markets. For instance, warm weather climates like Key West, South Florida, where we see that the demand is there, we are having an opportunity to mix a little bit more on the average rate side than we were, let's say, if we're at 30 or 40%. So as demand starts to book and the pace starts to pick up, we're seeing slight opportunities to start to get a little bit more average rate. But when we're still in the 30% or 40% occupancies midweek, we're really just trying to fill with that last-minute demand that's coming zero to three days, which hasn't changed in some of those markets. We are encouraged, though, that the group, we're seeing more leads, as Leslie mentioned, and we're seeing more bookings. For instance, as an example, in the month of March, we are – Think about last year at this same time. All the pro seasons canceled the second week of March. We now have bookings for the NBA All-Star Game in Atlanta. We have some bookings in the NCAA Tournament in Indianapolis because they're allowing some of the folks to go back into the stadiums. And lastly, I would say spring training. So as we start to see more group and start to see the opportunities to mix manage where there's occupancy increases, will continue to press the accelerator on average rate and change the mix that way. In regards to open hotels, closed hotels, for the most part, when we think about our select service assets in most of our markets, almost all hotels are open. The last to open are still the large convention center hotels and some of the urban markets that we talked about earlier, which was primarily New York and San Francisco. But if you look at Star, there's very few hotels that aren't open that are in the select service world and compact full service similar to us. So it's really market that's driving that, which is the high-cost model that Leslie referred to earlier.

Okay, very good. That's all for me. I appreciate the detail. Very helpful.

Thank you. Our next question is from the line of Chris Ferranca with Deutsche Bank. Pleased to see you with your questions.

Hey, good morning, everyone. I think you mentioned that you're going to be going ahead on working on three of the Wyndham conversions and repositionings later this year. I guess, is there any appetite to begin working on more than three given that you're still going to be running kind of below peak occupancy probably for most of the year? Are you able to accelerate some of those even if you don't have the final brand decision made yet?

Yeah, Chris, great question there. I think, first of all, it's actually only two of the three are Wyndhams. The other is Embassy Suites in Mandalay that we're converting to Ocurio. We think that from a sequencing standpoint, we want to sequence the relaunch of all these hotels to coincide with the updraft in Fundamentals. and so we think the sequencing of Santa Monica, Charleston as well as Mandalay Beach coming out in 2022 will be positioned to benefit from the upgrade. I think from a standpoint of sequencing, These are incredibly complicated projects to make sure that as we're relaunching and converting from Wyndham's, which have performed beautifully, by the way, as you can see by the numbers in the supplemental during the pandemic. But as we remix these hotels, it takes a lot of work to get the design right, to get the rebranding, et cetera. We don't want to frankly rush that process. And so what we did from a prioritization standpoint is Charleston and Santa Monica were the two that we prioritized because we believe that those hotels, the opportunity was more short-term and the ability to capture that immediately was there. We would expect to sequence these in a way where we would have a couple the following year and a couple the following year after that. And so we think a couple per year is the right level where we're able to devote the right attention and sequence the rollouts in a way where it's going to provide not only a short-term catalyst for ROJ, which is important, but also as we roll out these incremental conversions, that provides lift to our fundamentals in the out years as well. And so we want to make sure that we provide that.

Okay, appreciate that. And then I think we've heard a trend coming out of COVID could be less office space in certain urban areas and more, but the need for more meetings in areas close to those cities and you guys own properties there. And I'm specifically thinking about maybe the embassies don't know what kind of the meeting space situation is at a lot of those right now. But do you think there's An opportunity to capture if this happens, this kind of regional smaller meetings. Are you able to capture that or would that require some reconfiguration?

Yeah, I would say that what you're describing is sort of some of the puts and takes, right? As if people work from home more, their need to visit the home office increases or team offices increases. and I would tell you that our product type and our overall portfolio, that type of meeting is right in our sweet spot. You know, group historically has only represented 20% of our contribution but small meetings have represented 65% of our demand and so that, what you were describing, is right in the sweet spot and as we think about 2021, you know, the trend that is emerging is small group Thank you.

Our next question comes from the line of Gregory Miller with Truist Securities. Please proceed with your questions.

Thank you very much. Good morning. I'd like to follow up on one of my favorite topics, given many mornings that I've spent at the breakfast buffet lines at brands such as NBC Suites and Residence Inn. Last quarter, I believe we heard from Tom that you were having conversations with the brands on revised F&B standards. Could you update us on that timing, given that customers may become more demanding for normal buffets as we emerge from the pandemic?

First of all, I just want to say that Tom owes me a dollar because I betted him that this question would come up, but I'll let him answer.

It's an important work for someone like me, I promise.

Frank, we will feed you again. I'll just let you know when and how. First and foremost, as you know, everybody, whether you're a full-service hotel, select service hotel, has really modified the breakfast experience because that was the first thing to go to. So as you think about the current environment that we're in, and this is an update in regards to what the brands are thinking about after we all kind of start to move past, let's say, 30%, 40%, 50% occupancy is kind of the threshold to make a change. But the first current environment that we're in is still doing a A bottle of water, a yogurt, maybe a breakfast sandwich, just to be able to say that here's something for you if you gave free breakfast in the past. The ramp up is all being looked at as the second phase because we're still not to hotel profitability, as you all know, until you start to get into the 40, 50% occupancy range where you start to feel like you can put services back and the customer actually, the consumer is changing too. As Leslie mentioned earlier, it's a significant leisure customer, and your core customer, BT and group, has not come back to the great degree that we want it to be. So what the ramp is going to do is now start to move towards more of what I would call a served breakfast. So Greg, in the past, you would go and you would have that buffet opportunity to malander around and decide what you wanted to grab and go. Now you have to go and actually have it served primarily because of sanitation and the safety protocols that we have in place. We also believe, though, that's a good thing long term because it's going to remove waste and it's also going to change the amount of labor that you're going to have by having people go to have it served to you versus having it be a free-for-all. What I would think is going to happen over the next 60 to 90 days is what's that future going to look like after the ramp. that's where the brands are spending time and energy right now and I can tell you that it's not going to be what it was it'll be less than what it was so for instance evening reception for an embassy suite you know what we're talking about is the potential of having an hour and a half with a two drink maximum and having the opportunity to upsell at our you know bars that are open for people to purchase alcohol so I think It's evolving. The brands are really taking it seriously because they know not only the hours of operations that Leslie spoke to in regards to when to open and how long, but the actual deliverable that happened. But I do think, Greg, it won't be what it was, and we adjust at the end of the day in regards to how that gets to that final phase when we get back to the 70s and 80% occupancies as the portfolio used to operate at.

I appreciate all that information. All that insight, and I hope I don't contribute too much to the labor costs when I get a chance to get back to traveling again. My second question is a variant of Neil's first question. We've received questions from investors recently, RLJ investors, relating to the differences in post-COVID margin expansion opportunities at compact full-service hotels versus select service hotels. And while I recognize that your portfolio has a broad geography with labor and operating models that are not uniform across markets or city centers versus suburbs. Could you provide some high level thoughts on if you anticipate more long term margin expansion opportunities from your compact full service hotels or from your select service hotels?

Yeah, let me start, Greg, and then I'll turn it over to Tom on that. I mean, so net-net, we don't see a really material difference between the performance of a select service hotel or a compact full service. I mean, that's the beauty of the compact full service model is that we run them with lean operating models as if they're select service from a cost structure standpoint. But with respect to where we expect cost to be long-term, you know, we do believe, as Leslie described, indicated in her prepared remarks that we believe that there's an opportunity for the EBITDA to get back to pre-COVID levels in advance of revenue getting back, which naturally implies some level of margin expansion. We have not quantified and won't quantify what we think that is because it's too many years in advance and we just think that there's a lot of moving parts there. But we do have confidence that there is costs that are going to be taken out of the model post-COVID and pre-COVID. From what kind of buckets that they fall into, the F&B question that Tom just addressed is one of them. Labor is certainly going to be a driving force there. I mean, if you recall leading into COVID, labor cost pressures were several-year phenomena within our portfolio and industry-wide, and so we expect to have some level of ability there. . In addition, the complex thing that Leslie mentioned, and to be able to expand the scope and just the number of hotels as well as how deep that goes within the portfolio. Sorry, within the individual hotel, it used to be just a GM or an engineer, and now we can complex deeper into the hotel is also one of the drivers. And the last driver from potential cost synergies is going to be around some of the corporate allocations from the brands which historically were less, you know, eat what you kill or sort of pay for play within those. And we think that the model going forward is going to be, you know, you're going to choose, you're going to opt in for those as opposed to opt out. And then the last on a subset of labors around housekeeping. And I'll let Tom or Leslie sort of talk specifically about housekeeping around synergies there.

Yeah, so I would just add one more thing. And that is... When we looked at labor throughout 2020, 60% is rooms, about 15% R&M, and 12% food and beverage. So when you think about the labor side, rooms is your dominant player. And what Leslie mentioned earlier, which I think is worth repeating, is the take rate. And the way the consumer acted in the past is they went to the desk and we had to ask them if you didn't want your room clean. Now it's role reversal in regards to you need to ask if you want your room clean. So that productivity is really the driver no matter you're a compact full service or you're a select service hotel. And so I just think if you pinpoint where the most opportunity is, it's probably in that category. And we'll have to see when BT comes back as well as group because they're going to be a different consumer paying a higher average rate and probably have a preference potentially where that take rate might go up. So I think that's what we're going to monitor and evaluate as we go forward, Greg.

I think the things that we have identified that give us incremental confidence in the ability for the efficiencies to sustain past recovery are universal to all hotels. They are not specific to full service or limited service. So the housekeeping, the F&B, the above property cost, the clustering, that is agnostic to the type of hotel.

Great. Thanks, everyone. I appreciate all the excellent insights.

Thank you. Our next question is coming from the line of Anthony Powell with Barclays. Please proceed with your questions.

Hi, hello everyone. Question on CapEx and the renovations. I was modeling a bit higher for CapEx this year, so I was wondering if the scope of the Windermann and also the Manly Beach renovations has been changed at all, and looking past 2021, what kind of annual just absolute CapEx should we be just expecting for you guys as you renovate the properties.

Yeah, Anthony, the scope around those renovations has not changed. I mean, we think that we continue to, you know, our branding choices haven't changed based on what sort of our baseline is. So, you know, we feel we don't have a common, we don't know what you modeled. So, but from our internal perspectives, they have not. From a normal run rate, We've historically in total capital been around $100 million for a portfolio our size. I think from a long-term modeling perspective, that's probably as good a baseline as you can model. That being said, there are years where we've accelerated capital in markets that we thought We should position the hotel for our performance there, and we could do that in the future as we think about the sequencing of the capital. But over a long-term run rate, the $100 million is a fair proxy.

Got it. Okay. And a balance sheet question. I guess before the pandemic, you were planning to maybe refinance your 6% notes due 2025. I guess during the pandemic, pricing didn't make that happen. I guess a smart transaction, but we've seen some of your peers do converts at a very low coupon. So could that be an option for you to maybe do a convert and take out those notes at good pricing?

Yeah, Anthony, that's one of the options in front of us. I mean, I think from a financing perspective, the 2022 maturities are sort of first on our hit list with respect to opportunities. In addition, The incremental capital that we raise, we believe, today is more valuable on the internal catalyst conversions, et cetera, as well as acquisitions. But relative to the Felcorp debt, that is on a relative basis at the 6% among our highest cost of debt. But we would look at that opportunistically. I think you're right. The high yield and convert markets are both. have been very receptive this year. And so we would never say never to that, but it is not as high up on the priority list as it would have been last year. Last year's opportunity there was going to be around bank debt and the arbitrage between the 6% and new bank debt, which we were modeling roughly we could borrow at 3%. That isn't back there yet, particularly on bank debt, but That's something that we will continue to monitor around opportunities. You should expect us to be active and opportunistic around all elements of our capital structure. Thank you.

Thank you. At this time, we've reached the end of our time for today. I'll turn the floor back to Leslie Hale for closing remarks.

Thank you everybody for joining us. We hope that all of you are able to get your vaccine soon as we sort of move into the brain air of the year and that everybody sort of stays safe and healthy. Thank you again for joining us.

Thank you. This does conclude today's conference. You may disconnect your lines at this time and we thank you for your participation.