RLJ Lodging Trust

Welcome to the RLJ Lodging Trust first quarter 2021 earnings conference call. As a reminder, all participants are in a listen-only mode and 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 Thala, 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 2021 First Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Bartnett, 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-Q 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. We hope that everyone continues to remain safe and we also hope that you have a vaccination plan in place. It is a meaningful step towards all of us getting back to normal again. The current backdrop today is starkly different than where it was a year ago at this time. Although we have a ways to go, we are encouraged by the acceleration in lodging demand that we saw throughout the first quarter, which has continued into the second quarter. Lodging fundamentals have benefited from the significant increase in vaccination rates and the easing of restrictions that have allowed many markets to reopen, as well as the passing of additional economic stimulus. These positive developments allowed the industry to benefit from significant pent-up demand during the first quarter and drove our results to exceed our expectations. During the first quarter, we continued to execute on a number of fronts, and our portfolio's relative performance unfolded as we thought it would. Our relative performance confirmed our expectations that our portfolio would be an early beneficiary as the recovery starts to take hold. Our continued market share gains illustrate this and highlights the appeal of our brands, product type, and footprint. Additionally, we continue to operate with a minimal cost structure. Our lean operating model enabled our entire portfolio to generate positive hotel EBITDA during the first quarter for the first time since the pandemic unfolded, while our open hotels generated positive hotel EBITDA for the third consecutive quarter. We also materially improved our average monthly cash burn for the quarter relative to our estimates, and we continue to maintain significant liquidity which is providing the capacity to advance our growth initiatives. And finally, we made meaningful progress on each of our three conversions, including finalizing the design and scope of our renovations for the Wyndham Santa Monica, the Mills House Charleston, and the Embassy Suites Mandalay Beach. With respect to our operating performance, our open hotels achieved occupancy of 46.4% during the first quarter and gained over 500 basis points of market share. occupancy improves sequentially each month, achieving 56.1% in March, which represents the highest monthly occupancy level since the start of the pandemic. We were pleased that the occupancy for our open hotels exceeded the overall industry during February and March, demonstrating the benefit of our portfolio construct and geographic footprint. These improving trends enabled our entire portfolio to generate positive hotel EBITDA each month of the quarter. We are pleased to see this positive momentum continue into April, which is expected to be even better than March. From a segmentation standpoint, our leisure markets continue to outperform, with drive-to markets such as South Florida, Charleston, and Orlando benefiting from significant pent-up leisure demand throughout the first quarter, including robust travel trends driven by an extended spring break in March. Additionally, there were several markets that benefited from unique catalysts during the quarter, such as the Super Bowl in Tampa, the biannual legislative year in Austin, and inauguration-related demand in Washington, D.C. With all of our markets benefiting from some incremental leisure demand, our portfolio achieved weekend occupancy of 56.5%, the highest of any quarter since the beginning of the pandemic. In light of the work-from-anywhere flexibility for many, our brands and product type are allowing us to benefit from elongated weekends, which now include Thursdays. This past quarter, we also saw another uptick in both business transient and group demand. Our hotels are capturing increased demand from small groups such as sports teams, educational or training groups, and weddings, allowing our group revenues, which represented 10% of our first quarter room revenues, to nearly double from the fourth quarter, albeit from very low levels. We are also encouraged by the continued improvement in corporate demand, which increased 27% from the fourth quarter and was a contributing factor to the sequential improvement in our weekday demand trends from last quarter. Corporate demand is still largely concentrated in local and regional accounts from such industries as insurance, healthcare, and government. In conjunction with the improving pace of demand, ADR at our open hotels also improved each month, and we are encouraged to see the relationship between demand and pricing hold. For example, The nearly 19-point increase in occupancy at our open hotels from January through March was accompanied by nearly 12% growth in ADR, resulting in REVPAR growing by 69% during this period. Our strong relative performance during the first quarter once again demonstrated the benefit of our portfolio CONSRA, which should continue to allow us to outperform as the recovery unfolds. For example, Our resort properties achieved 70% occupancy. Our all-suite hotels achieved 50.1% occupancy and also gained 11 points of share. And finally, our drive-to markets achieved over 50% occupancy. Our portfolio's ability to gain market share while continuing to operate under aggressive cost containment initiatives enabled us to achieve positive adjusted EBITDA for the first time during this pandemic. Our improving performance enabled us to continue to reduce our average monthly cash burn, which was 30% below the low end of our first quarter guidance. We expect our average monthly cash burn for the year to continue to improve. Now looking ahead, the strong start to the year has increased our confidence in the strength of the recovery of demand. Leisure will remain a dominant demand driver, and we expect the pace of vaccinations, additional loosening of restrictions, and recent stimulus to drive continued significant pent-up travel demand. Additionally, continuing work from anywhere flexibility should allow leisure demand to remain elevated during the summer. With respect to business transient and group demand, we are encouraged by the sequential improvement in trends we are seeing, but our expectations relative to the ramp of these segments have not significantly changed since our last call. We continue to expect employees to begin returning to offices during the summer, with the pace increasing in the fall as schools return to in-person learning. which should lead to a step change in business travel in the latter part of the year. We also expect small group demand, which accounts for the majority of our group business, to continue to ramp up as vaccination rates increase and size restrictions on gatherings loosen during the second half of the year, which should drive incremental demand from sporting and other special events. Although the group booking window remains short, both our leads and conversions are continuing to strengthen, especially for the summer. Our more positive outlook for demand growth is also supported by the recent trends we are already seeing, such as the airline passenger volume rising to the highest level since the start of the pandemic, as well as the pace of employees already returning to offices in some markets, and the number of venues and attractions with high attendance that are already open. The overall momentum from the first quarter bodes well for the underlying strength of the lodging recovery and could result in outperformance relative to our expectations for the balance of 2021. As these improving trends unfold, we could not be more pleased with our overall positioning, which will continue to allow us to outperform. As we have demonstrated thus far, our exposure to drive-to leisure markets and the overall attractiveness of our hotels is allowing us to gain market share. Our transient and urban hotels are positioned to benefit as business travel improves. Our hotels continue to be favored by small groups that have begun traveling. Our less operationally complex hotels with smaller footprints are currently generating positive cash flow, and our more efficient operating cost model should allow us to return to pre-pandemic EBITDA sooner. Additionally, the continued strength of our balance sheet is allowing us to remain well-positioned to outperform long-term, given that, Our strong liquidity of over $1 billion in low burn rate is enabling us to emerge with a healthy balance sheet and allowing us to pursue our growth strategy sooner. As our dispositions demonstrate, we continue to be active portfolio managers and are pursuing opportunistic sales that will create incremental capacity for growth without meaningfully shrinking our EBITDA base. Additionally, we are seeing the benefits of our portfolio's improved growth profile in our relevant performance and expect to thrive as business transient and group segments improve. And finally, we are moving closer to unlocking the embedded value from our conversions that are expected to amplify our EBITDA growth throughout this cycle. In addition to unlocking our growth catalysts, we are continuing to actively underwrite acquisition targets and remain well positioned to deploy growth capital during what we believe will be a multi-year window for acquisitions. We remain confident that our seasoned team will be able to source attractive acquisitions for RLJ this year as our pipeline of opportunities has grown since our last call. That said, we will remain extremely disciplined as we underwrite opportunities. Overall, we are encouraged by the improving backdrop we are seeing and are incrementally more positive about the potential for further improvement in lodging demand for the rest of the year. Moreover, We are pleased to see that our portfolio's recovery and our outperformance is unfolding as we expected. Long-term, we are energized by our strong positioning, which will enable us to unlock our embedded growth opportunities and create significant shareholder value throughout this cycle. Finally, and more importantly, we remain deeply grateful to our frontline associates who are instrumental in helping us navigate the recovery as it unfolds. I will now turn the call over to Shawn, Sean.

Thanks, Leslie. We were pleased with the first quarter results, which have continued to improve so far during the second quarter. Our pro forma hotel operating results include the 101 hotels that we owned as of March 31st, despite having four suspended hotels throughout the first quarter. Pro forma numbers exclude the Courtyard Sugarland, which was sold during the quarter. Our reported corporate adjusted EBITDA and FFO include operating results from any sold hotels during RLJ's ownership period. Our first quarter portfolio occupancy of 43% represented an 880 basis point improvement from the fourth quarter. Our portfolio's monthly occupancy accelerated throughout the quarter at 34.2% in January, 42.5% in February, and 52.2% in March. which was stronger than we expected and provides further evidence that our portfolio is well positioned to capture demand in the current environment. The strengthening demand provided our hotel operators with the ability to yield rates, resulting in average daily rate growing by 11.6% from $111.49 in January to $124.43 in March. In markets with the highest demand, such as Key West, Charleston, Fort Lauderdale, and Miami, our hotels also achieved higher pricing throughout the quarter, providing us with confidence that historical pricing dynamics will continue as demand returns post-COVID. Additionally, despite several of our urban assets in New York City and San Francisco remaining suspended throughout the quarter, our portfolio generated positive hotel EBITDA each month We are encouraged that both of these markets are beginning to show signs of recovery, which is allowing us to have more constructive view on reopening our suspended hotels. The improving trends during the first quarter led our entire portfolio to achieve hotel EBITDA of $11.5 million, which also represented the first quarter of positive hotel EBITDA since the start of the pandemic. Our ability to generate positive hotel EBITDA is affirmation of our high expectations for our portfolio's performance during a sustained recovery. With respect to our 97 open hotels, these properties achieved occupancy of 46.4%, average daily rate of $119, and $18.5 million of hotel EBITDA, representing the third consecutive quarter of positive hotel EBITDA. Similar to the overall portfolio, our monthly occupancy accelerated during the quarter at 37.1 percent, 46 percent, and 56.1 percent in January, February, and March respectively. Finally, as we expected, our open hotel portfolio outperformed as demand returned and gained over 500 basis points of market share during the first quarter. We are encouraged that second quarter demand trends have started off stronger than our expectations. During April, our portfolio is expected to generate occupancy of approximately 55% and ADR of approximately $132, which both represent improvements over March. Turning to the bottom line, our first quarter adjusted EBITDA was $3.6 million and adjusted FFO per share was negative 18 cents. We were pleased that our portfolio was able to generate positive corporate adjusted EBITDA for the first time since the start of the pandemic, which affirmed our assertion that RLJ would be one of the earliest to return to profitability due to our lean operating model and portfolio construct. As Leslie mentioned, while demand accelerated throughout the first quarter, we remained vigilant in monitoring operator compliance with the aggressive cost containment initiative instituted during the pandemic. Underscoring our relentless focus on controlling costs, our first quarter total operating costs declined approximately 49.5% versus last year. Our team also remained vigilant on controlling variable costs during the quarter, resulting in a 51% reduction in wages and benefits from the first quarter of 2020. The benefits of these stringent cost control measures are also evident in our quarter-over-quarter performance. While our first quarter revenues increased 31.7% from the fourth quarter, our operating costs only increased approximately 10.1%, which allowed our portfolio to increase the bottom line by approximately $18.7 million. Turning to liquidity, against the backdrop of improving fundamentals, we paid down $200 million of the outstanding balance on our line of credit in March with cash on hand. Even after this repayment, we ended the quarter with approximately $648 million of unrestricted cash, $400 million of availability on our corporate revolver, $2.4 billion of debt, and no debt maturities until 2022. We continue to maintain significant flexibility on our balance sheet, As of the end of the quarter, approximately 95 percent of our debt is fixed or hedged, and 82 of our 101 hotels are unencumbered. We were encouraged that our first quarter monthly cash burn was significantly lower than expected, which was driven by the portfolio's accelerating demand growth throughout the quarter. Our first quarter average monthly cash burn was approximately $14 million, which was 30 percent better than the low end of our estimated range. Looking forward, we expect the second quarter average monthly cash burn to be in the range of $16 to $20 million, which includes approximately $14 million in semiannual interest payments on our senior notes during June. Based on our liquidity and low cash burn rate, we remain among the best positioned lodging REITs to take advantage of ROI investment and external growth opportunities. As a reminder, our cash burn estimates exclude RLJ-funded capital expenditures, which we continue to estimate will be between $75 to $85 million for the full year of 2021. Looking ahead, our portfolio's lean operating model and portfolio construct should allow our hotels to continue performing substantially better than portfolios comprised of traditional full-service hotels. Even as fundamentals are improving, Our efforts continue to be focused on maintaining adequate liquidity while making prudent capital allocation decisions to position our portfolio to drive out performance during the recovery and beyond. To that end, we are continuing to prioritize high-value projects, including completing the rooms additions in Emeryville and Buckhead and finalizing the planning for the conversions in Santa Monica, Charleston, and Mandalay Beach. We will also continue to prioritize less capital-intensive ROI initiatives, such as parking and contract renegotiations. As we look ahead, RLJ 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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. 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 using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

Good morning, everyone. Good morning, Mike. Leslie, I wanted to start with a big picture question for you. Your comments in the prepared remarks, it makes it sound like you're looking more closely at acquisitions today, but maybe could you help us understand your desire and maybe any sense of urgency you're feeling to put some money to work today toward acquisitions, given the improvement in the fundamental outlook?

Well, first of all, let me just say, you know, obviously, you know, we are pleased to be able to focus on growth as opposed to preserving capital. We have ample liquidity to do both internal and external growth, so we're well positioned for that. What I would say, Mike, is that, you know, we do believe that the acquisition environment is going to be a multi-year window, but we do appreciate that early cycle acquisitions tend to create more value. Having said all of that, we will be very disciplined with how we underwrite and make sure that the types of assets that we're looking at are in our strike zone, which we still have conviction on our investment model, and we want to make sure that the deals we're doing are accretive on a number of fronts, whether it is accretive on its complement to our portfolio, our operating metrics, the quality of our assets, and, of course, the returns. So we're going to remain disciplined, although we do appreciate that early cycle acquisitions can tend to create more value.

And then as a follow-up there, how would you, or maybe for Sean, if he wanted to jump in here, how would you rank your different sources of capital today in terms of cost or relative attractiveness?

Sure. Thanks, Mike. I think when today the internal growth catalysts are extremely compelling and we think is probably the the most valuable capital allocation source we have today, or sorry, use today. Acquisitions, because of the early cycle nature and the ability to create value, have gained a tremendous amount of steam as fundamentals improved. And so I would view that as a silver medalist, if you will, in the hierarchy. But the beauty of our capital structure is we have the ability to do both. And you would expect us, as we deploy our capital, to be able to do both on that front.

And then just in terms of sources of capital?

Yeah, so from a source perspective, you'd expect us to use our existing capacity first. You know, we're sitting on, you know, a tremendous amount of liquidity at over a billion dollars, including roughly $6.50 of cash. You know, that would be our, you know, certainly our principal use. In addition, under our Under our line of credit, we have capacity because we did use $200 million to repay the line, which was a sign of our confidence around the recovery during the quarter. And so we now have $100 to $200 million of capacity under our line of credit covenants to be able to deploy as well. But we have more than that in balance sheet capacity. So we feel very well positioned.

Got it. Thank you.

Thank you. Our next question comes from the line of Austin Worshmut with KeyBank Capital Markets. Please proceed with your question.

Great. Thanks. Good morning, everybody. So you guys had previously said you were running a heads and beds type strategy earlier this year. You referenced you saw a 27% increase in corporate demand. So just curious, one, what does corporate demand represent today as a percent of overall room nights? And how does that stack up versus pre-pandemic levels? And then secondly, I'm just curious, you know, we've talked about the sort of local business traveler being, you know, the primary driver of that. But how much upside is there still from, you know, more of the local regional type corporate customers?

So, Austin, in the first part of your question, BT is contributing about 11% to 12%. of our contribution, and that's about 20% of 2019 levels. You know, we continue to believe that, you know, for the balance, you know, of the year, you know, VT will ramp gradually and that in the near term, it's going to be, you know, your insurance government kind of health care players. We think that, you know, business travel is really going to be, you know, an increase of that is really going to be contingent upon offices reopening, which we don't really anticipate to see that in a meaningful way until after Labor Day. And we could see, you know, a step change in demand following that. But in general, that's what we sort of view as a cadence. And we think that, you know, obviously, rate and occupancy have continued to hold its relationship. And as we've been able to drive occupancy, we've been able to drive rate. And we think the same thing will happen, you know, as BT ramps appropriately. But it's still at a very pretty, you know, anemic level that only 20% of 2019 levels.

And then, so do you think there's still upside simply from the corporate, you know, the local and regional, you know, corporate customer? Or, you know, does it really need to broaden out for you to see a more meaningful shift in the mix?

Yeah, I would say, Austin, this is Tom. Good morning. The local and regional is where it's starting, and we definitely feel like that's a good beginning. But to have the type of demand come back to the levels that we're used to. It's going to have to be more national as well as visitation that's going to go state to state versus internal. So what we think is, as Leslie's previously stated, when offices start to open, we think that not only will they go to their own office, but people will be allowed to visit their office. And that's where you'll start to really see the uptick. The encouraging thing is weekday demand is picking up. Some of that is leisure and some of that is BT. So as we look at the type of travelers that's coming in today, you know, pharmaceutical, medical, insurance, government that's related to corporate, we think it's going to have the uptick more on the Q3, Q4 timeframe when offices truly are opening and people are visiting more on a national level versus local and regional.

Got it. Appreciate the additional detail, Tom. And then expenses this quarter, you had some pretty significant variable cost savings. You mentioned the cash burn coming well below what you had anticipated. How sustainable are those savings and how do we think about the ramp through the year a little bit?

Well, I think that Austin, we obviously believe that's There are efficiencies that we have gained through this pandemic that we think will carry over. Clearly, we're going to have to put some of the costs back in as occupancy continues to improve, but we've been very thoughtful about making sure that the costs we put back in is occupancy appropriate. So whether it's an F&B incremental offerings that we have or even on the labor side, all of it has been occupancy appropriate. We still have a ways to go from a recovery perspective, so we're being very thoughtful and disciplined around that.

Understood. Thank you.

Thank you. Our next question comes from the line of Tyler Batori with Jannie Capital Markets. Please proceed with your question.

Thank you. Good morning. First question I have is to go back to the cost side of things. I'm interested in what you're seeing on the labor front. And I'm also curious if you could discuss focus service versus compact full service on the labor side of things and perhaps quantify the labor requirements at those property types and perhaps how they differ.

Yeah, I mean, sure, Tyler. Everybody obviously knows that there's a staffing issue within the industry. It's not just a lodging industry. It's a service industry overall. And clearly, that's being influenced by the extended benefits that associates are receiving, lack of child care because some students are not in school, or just the inability or the flux in occupancy, which doesn't give us ability to offer 40 hours a work week. We think that Those are temporary and transitory, and as occupancy continues to improve and we get past September as it relates to the benefits that some of this labor pressure slips aside, we think our team is doing a great job in terms of dealing with the shortage of staffing and being able to meet the needs of the customer and the consumer despite the lack of staffing in some areas. but we think it's sort of a general industry issue and not specific. And I think Tom can comment more on the select service versus full service, but in general, we're not seeing a difference in labor shortage across either asset type.

Yeah, Tyler, I would add that we've been tracking FTEs since the pandemic, and when we think about quarter four, and I'll get into full service versus select service, but if we look at overall portfolio first, You know, we were running around 38% of FTE levels compared to pre-pandemic when we were at around 34% occupancy. And just as we increased in quarter one to about 41% of pre-pandemic at 43% occupancy. So you can see a little bit of a stair step. But the controls around FTEs has been pretty significant, both in select service and full service. Where we see the most need, obviously, is housekeeping as we're ramping up in occupancy. And as Leslie stated earlier on the food and beverage front, you know, we're gradually opening up outlets as occupancy increases and the consumer preferences are out there when you're running 80 or 90 percent in some of our resorts. So we are, you know, putting FTEs back in that area. The one area I'd also say that, you know, we've been very cognizant around making sure that we maintain our assets is we have been very careful not to save on the rooms and maintenance side where we've only had around 22 percent compared to on the labor front because we want to make sure our assets are in good shape, getting ready for the demand that's going to be coming this summer, and we've been very thoughtful around that. And the last point that I would say on full service and select service is we really haven't noticed a difference because we've always run our compact full services with, you know, that select service mindset. We haven't seen a major differential because most of our compact full services are 300 keys, you know, with maybe 5,000 to 10,000 square feet of meeting space. So we run it more similar to what we would say a select service margin would be able to acquire.

Okay, that's very helpful. And as a follow-up, can you talk more about weekday versus weekend performance in the portfolio? Has that gap started to narrow when you look at results in April or March compared with earlier in the first quarter or even the fourth quarter?

Yeah, I would say that there's still, you know, a meaningful gap there because this is obviously leisure is driving the demand here. We think leisure is going to continue to drive demand, you know, in the second quarter and third quarter. So our week in occupancy in the first quarter was 56%, and our week day was, I think, 42%. And so you can see the meaningful gap there. We continue to see that into April, you know, as well and would expect that to generally hold.

And one thing I would add to Tyler is, you know, in April, the bounce that we're seeing on weekends is, for instance, we had 36 hotels that had occupancy higher than 2019 levels. And so when we're able to push rates, we're really dialing into those opportunities where we see the demand is there, where the relationship between rate and occupancy is giving us that opportunity to try to drive some ADR index at the same time. So we do also see a differential, not only in occupancy, but ADR on weekends versus weekday.

Yeah, and the one thing to add on there, we are seeing an uptick in weekday occupancy. We saw a strong performance in April of an increase in weekday occupancy as well as weekend, but I think the perspective on how the portfolio is performing from an occupancy perspective is that both weekend and weekday are improving, which is encouraging to us as demand continues to accelerate.

Great. That's all from me. Appreciate the detail. Thank you.

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

Hi, good morning. Just in terms of acquisitions, what are you seeing, I guess, on the market in terms of potential deal flow? Are you seeing single assets, portfolios, and who's kind of the typical potential seller for your type of product?

I would say generally, Anthony, that there continues to be kind of a limited volume of high-quality assets that we want to purchase. What I would say is that a number of conversations for us have increased. We're very focused on off-market or limited bid type of transactions. As you know, the types of assets that we're looking at are generally positive cash flow at this point, and so there's less pressure for those types of sellers. But we're seeing You know, the opportunity has really shifted from, you know, say, you know, level discount to access to opportunity. And so we're seeing conversations where there is a owner-operator, high net worth individuals, PE. We're seeing it from a variety of different angles. Institutional owners who, you know, maybe not feel like the asset, even though it's a great asset, may not fit their four plans. And so we're seeing it from across the spectrum. And, again, I think, you know, we're encouraged by the increase in number of conversations that we are having.

Thanks. And how close are your brand partners to announcing this new brand standards for your various brands? Because I'm concerned that as more people start to travel that they're going to expect a certain level of amenities that may not be available or may not be coming back at all. So I'm just curious, in your conversations with Hilton and Marriott and Hyatt, Are they close to really just announcing new standards so that customers can know what they're expecting?

Yeah, Anthony, good morning. We've had a very collaborative relationship with all three brands that you mentioned, Marriott, Hilton, and Hyatt. What's been interesting is they've started to see the ramp. They've started to really think about what does the new future look like because we're getting closer to that, which is encouraging, right, if you come out of first quarter and starting to see occupancies in the 50% and 60% in April. We are starting to see the consumer have different requests as they come in as you have more demand. What we're noticing is they are definitely keyed in on trying to do a reset. For instance, how they can actually take a look at hours of operations, efficiency of operations, and most importantly, the actual food and beverage deliverable as an example. When you think about the breakfast in our world where we either have a complimentary breakfast or a buffet or even evening receptions, there are modifications that are coming through. So it's not gonna go back to pre-pandemic levels, but we're very encouraged that they're taking a look at what was waste, what was their area of opportunity to try to minimize the selection so that you actually are focused on what people actually like. So we're thinking that there's gonna be a change, it's gonna be after Memorial Day, but occupancy levels will drive that, and we'll see that they'll be below pre-pandemic levels. The last thing that I would say is on the housekeeping front, everybody is staying firm in regards to the current situation where it's more of an opt-in. And that's encouraging as well as we're going into, you know, cleaning after checkout versus on a stayover. And as we look at the take rate, that's continuing to climb a little bit, but that's one of the biggest areas of opportunity, as you know, because we are a rooms-oriented portfolio.

And I would just sort of just want to emphasize, you know, what Tom was saying about occupancy. I think the brands are being very thoughtful to ensure that that whatever brand standards that they put back in place are occupancy appropriate. And that's key because they're partnering with owners around this topic. Thank you.

Thank you. Our next question comes from the line of Danny Assad with Bank of America. Please proceed with your question.

Hey, good morning, team. We touched on this a little bit through different questions this morning, but Just trying to put it all together, if we think about the four-wall operating model of your specific hotels, just relative to last cycle, how do we think about RLJ's margin potential this cycle? When we know you've done a lot on the cost side on one hand, but at the same time, we keep hearing about labor constraints, inflation, and just costs as an emerging risk here.

Thanks, Danny. I think there is clear benefits to sort of what we call the all-weather strategy of the RLJ portfolio in the sense that, you know, from an operating cost standpoint, our lean operating model allows us to perform well in low-occupancy environments, but also our locations within our portfolio provide us with the urban exposure to be able to have ADR lift and similar upside to some of the more full-serve eccentric portfolios within the market. And so, where we think our portfolio sits today is a portfolio that has the downside protection of the stability of more stable occupancy and tighter and more robust margins while maintaining that upside potential of the higher rate through our urban locations. And so I think ROJ's positioning, you know, post, you know, over the last several years has been to be a portfolio that we believe should be able to perform throughout the cycle. That's a combination of just organic growth within the portfolio, but also the ability of our internal growth catalyst and the capital that we're deploying within the portfolio. And so we're excited about our positioning. I think that our portfolio should be an outperformer throughout the cycle because of how we position the portfolio and what we have left to go.

And Sean, just to follow up on that, so with everything you see in front of you right now, do you feel confident or comfortable that we could hit higher, like relative to last cycle's margin peaks, we can hit higher margins this cycle with everything that's been done?

Yeah, listen, I think you would expect RLJ's portfolio, as the the cycle evolves, if the operating model is lower, we believe it will be, you would expect RLJ's portfolio to be within the mix of the margin expansion. We have not publicly provided what we think that margin expansion is, other than we are confident that costs will stay out of the business. We're confident that our portfolio will Margin expansion will be in line, you know, certainly within the other portfolios, but we have not publicly given a range for that other than our confidence around the ability that there will be margin expansion. Understood. Got it. Thank you.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, everyone. Good morning. You know, first question, Leslie, you know, in your commentary today and written in the release last night, you talked about your increased confidence in the lodging recovery and, you know, totally see that on the leisure side. But, you know, I guess in terms of your market, maybe, you look at, you know, you have reasonable size exposures to, you know, Chicago, California, NYC. You know, these are very reliant on international travel, you know, the larger corporate accounts, group activity. And these also have some of the most aggressive unions as well. So, you know, just kind of curious if you can maybe parse that statement that you made or maybe kind of, you know, just disaggregate that statement from, you know, with the markets that I'm talking about. I'd be interested to get, you know, how you view that. you know, in comparison to some of your drive-to, you know, leisure-oriented markets and hotels?

Yeah, I think the way to sort of think about it is sort of think about, you know, our portfolio diversification. You know, I appreciate the puts and takes that you sort of articulated, but, you know, we generally think that our portfolio, because of our footprint and our exposure to the various segmentations of the leisure exposure that we have, as well as how we're positioned relative to BT and small group, that we're positioned to outperform. And we've seen that in our performance as far, and as recovery unfolds, we would expect that relationship and relative performance to continue, despite the individual market puts and takes, because we're looking at it on a portfolio basis. We've seen, we still expect leisure to drive, it's going to be a leisure-centric uh, recovery. And so we like our exposure there. Um, we think that, you know, BT will, you know, real rebound and we love, we like our, how our portfolio is positioned, particularly in our urban select service component. And we think that, you know, small group will lead the way and we're positioned for that. And that's across our portfolio. Appreciate the puts and takes on some of the markets, but I think in aggregate, our portfolio is going to be an outperformer as we've demonstrated this quarter.

Uh, okay. Thanks. And then, um, Just in terms of Sean's comments about internal repositioning ROI projects as being the best use of capital as you guys sit here today, I'm just wondering, given that and your commentary, again, being more bullish on the recovery, do you think or are you more willing to think about pulling maybe some of the Wyndham conversions forward? just kind of getting them ready to take advantage of what should be probably record levels of domestic leisure travel over the next 12 to 18 months or so.

So let me start, then I'll kick it over to Leslie with respect to the timing of the renovations. We've been very strategic about how we wanted to sequence out the Wyndham renovations. When we got this opportunity, which we accelerated from what should have been a year and 22 opportunity to a year and 19 opportunity, we thought that the best way to sequence these was to renovate and relaunch a couple of those per year. you know, one to two based on where those markets were, you know, relative to the recovery. And so we've accelerated Cinemonic and Charleston because when we looked at the assets that we saw, leisure-centric markets, and we wanted to prioritize those, they were first. But, you know, we have a sequencing of a couple per year, you know, within that. We don't think that the that the timing of the pandemic or COVID will change up sequencing because we want to make sure that, you know, we have the expertise to do it, and we want to make sure that when we relaunch these things, they relaunch in a way that's strategic. And so, anyway.

Okay, so, yeah, so kind of no change from before.

That's right. That's right.

Okay. Okay, thank you.

Thank you. Our next question comes from the line. Please proceed with your question.

Good morning, guys.

Thank you for taking my question. I'm just trying to ask, I guess, touch upon some previous questions, but maybe phrase it a different way. Because I do think that While you talk about outperformance, obviously, the investors compare you to your full service peers who also happen to have broken even on an EBITDA basis. And so I think it's a relative value game for a lot of them. And so how do you stand out? And how do you tell the story to help you make you stand out? I'm just thinking about it, and Leslie and Sean, maybe if you can, I know you guys haven't talked about this, but I think it would be helpful to the market to understand. You had $450 million of adjusted EBITDA in 2019. What do you think your stabilized EBITDA will be once we get through this? I realize this could be four years down the road, and then quantify some of the The cost savings, the permanent cost savings that have been taken out of the system, your ROI conversions or your ROI investments, your wind-in conversions, and sort of your general index improvements relative to peers, what do you think your earnings power will look like once we get to the other side?

So there's a lot impacted in there. We'll start with a piece of it, and if we miss a piece of it, just follow up on it. But, look, I would generally say that the thing that gives us confidence about our ability to outperform is the nature and types of assets that we own. We own assets that when the recovery unfolds and BT and groups start to take hold and rate really starts to drive, we have assets that are going to tuck right up under where the full servers are on the rate side. but that have very attractive margin profile like select service assets. These assets generate significant free cash flow and are more resilient, and the resiliency has been demonstrated through this pandemic. And we think that's going to drive operating performance from that perspective. We think that our portfolio is positioned to perform throughout the cycle. We think early in the cycle, we're demonstrating that on a relative basis to what we believe is our true peer group, that we're going to outperform operationally, which we are. If you look at our occupancy, you look at not so much the fact that it's positive EBITDA, but the level of EBITDA, and therefore the inference of the ability to get back to 2019 levels sooner. Additionally, we think that the conversion opportunities and ROI opportunities that we have will allow us to get above recovery growth, not just simple growth from the recovery taking hold, but growth from the incremental value that we are getting from our conversions. And then finally, the types of assets that we own today will also allow us to get back to, because of the free cash flow that we own, to get back to paying a dividend sooner as well relative to our full-service peers or who we think is sort of our true comps. So you have to look at it throughout the cycle. We think that we have benefits at every element of the recovery, early in the recovery, the middle of the recovery, on the back end of the recovery as dividends become more prevalent. is we believe that our model, our asset type, our footprint is going to serve us well throughout that component.

But, Leslie, are we talking about 10% EBITDA improvements down the road, or are we talking about 15% EBITDA improvements? If you can quantify any of that, I think that is what would help. investors and get them more comfortable about the upside potential here for RLJ.

So Florence, you're breaking up pretty badly and I apologize. So I'm trying to do my best to interpret because I'm missing every other word. But what I would say to you is this, is that we're pretty confident that our ability to generate EBITDA above our 2019 levels We think that our conversions are going to play a key role on that. We think that the improved growth profile that we garnered when we sold about a third of our assets in 2019, all of those things will allow us to achieve EBITDA that's above our 2019 EBITDA adjusted for obviously asset sales. We think we have a much better portfolio today. We think that the investment that we're going to make in the Wyndhams will generate significant returns there. You know, we remain, you know, excited about all of our conversions, but in particular the two conversions that we mentioned earlier, Santa Monica and Charleston. You know, these things are on target to start the renovations at the end of the year. You know, we look forward to relaunching those assets in 2022 as a start of our conversion pipeline, which is going to coincide with the return of the higher-rated customer. You know, we have a greater conviction today – As it relates to the returns on these assets, because we have a leisure-centric recovery that's coming, and we expect the returns to be well north of 40% on each of these assets. This is an example of the nature and types of conversions that we have in our portfolio. We're very pleased to be able to deliver these conversions at least two years earlier than we would have been able to deliver relative to the structure that was on these assets. So we think that the embedded value in our conversions and ROI properties are going to allow us to push past 2019 in addition to just the normal recovery.

Thanks, Leslie. Maybe one follow-up in terms of the dividend.

You touched upon it. Can investors expect a resumption of the dividend in the second half of this year?

Yes. I mean, Flores, that's obviously a board decision. I think based on the current pace of recovery, I wouldn't expect lodging REITs to be returning to paying cash dividends outside of if there's taxable income for 2021. But clearly, that's a board decision.

Thanks, Sean.

Appreciate it.

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Yeah, thanks. Good morning. Leslie, there have been discussions out there that the double-free MET is on the market, and I was wondering if you could give us an update on that asset as well as the NIC.

Yeah, so look, Bill, I think that we have a 100-asset portfolio, and we're active portfolio managers. As we have demonstrated, we sold two assets at the end of 2020. We have two other assets that are pending. and we continue to looking at our portfolio. You know, we will, you know, evaluate, you know, opportunities as opposed to other assets if and when it becomes necessary to discuss. But, you know, at this time, we don't have anything to discuss on New York relative to it. Okay.

Thank you.

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

Thanks. Good morning. I apologize if this question has already been asked. I lost connection for a minute. I'm curious to hear your latest thoughts on the financial distress of franchisees that lack your liquidity and how that distress may impact RLJ. For example, do you anticipate a greater number of lender takeovers of privately owned hotels this year, if that's forthcoming, or perhaps mergers of private owners as well?

Look, I think that there's going to be an elongated window of how the impact of the pandemic unfolds. Between the banks being accommodating for a period of time, between owners being able to access their reserves that are utilizing their balance sheet, the impact of that will take several years to see. But what I would say is that the type of assets that we are most interested in, they're already They're already generating free cash flow. And so, therefore, as I mentioned before, there's less pressure on those types of sellers. Having said that, you know, we do think that there will be some assets that shake loose as a result of individual balance sheets and how the pandemic has affected them. But let's be clear, there isn't a single industry that was severely impacted where balance sheets aren't going to have to be reshaped in some form or fashion. Lodging is not agnostic to that. Um, but it's going to take a while to see how it ultimately unfolds. Uh, and you know, part of that's going to be predicated on, you know, the ramp of the recovery. Um, but we will see some, uh, owners, uh, um, sell assets, you know, will be considered a stress sale, um, that will to be determined, but there will be, you know, some level of pressure as of the pandemic, but we have to watch it unfold.

Okay, great. And then I would like to shift to the demand side for a minute. In recent quarters, you've spoken to a short booking window. I'm wondering if you could share your latest impressions on the length of the booking window today and perhaps the types of hotels or markets that are seeing more advanced bookings. If it's leisure specific, are you seeing it on the corporate side, urban markets versus leisure oriented markets?

I'll start and I'll let Tom give some more color. What I would say is that our booking window continues to be relatively short. We're most encouraged on the small group side where we've seen our leads improve and we saw our conversions on on, you know, short conversions increase as well. You know, an example of that, as we mentioned earlier, you know, small group represented about 10% of our revenues in the first quarter. A third of that was booked in the quarter for the quarter, just as an example of how to sort of think about, you know, the booking window.

And, Greg, I'll start on the transient side and move over to group. So, for instance, booking window is still strongest, as you can imagine, same day and one to three days because it's leisure and they're making those last-minute decisions. And, for instance, in the last four weeks, they've been actually almost above 2019 levels, somewhere between 90% and 110% of 2019 levels. And, obviously, there's more inventory because leisure is the main traveler. What is interesting, though, the 31 plus days is about 80% of 2019 levels. And that's encouraging because people are starting to put their toe in the water and thinking about booking longer out. So for instance, markets like New Orleans, Charleston, the leisure markets where people are saying, I want to go, they're actually making reservations sooner than last minute in some of those markets because they're higher demand markets, similar to like what we have in Key West, where people know it's going to be busy down there. On the group side, to Leslie's point earlier, What we're seeing is short-term bookings are happening. For instance, about 40% of our bookings into 2021 actually happen in the quarter for the quarter when we look at what happened in first quarter. And then when we look at the rest of the year, most of that business is going into 2021, not 2022. When I think about the type of groups that are coming, it is still within our power alley. Peak night demand for group lead volume is roughly between 10 and 25 rooms or 25 and 50 rooms. And that's almost predominantly the major amount of groups that we're seeing on the booking pace. And the little color around group, to give you an example, in some of our markets, it is related to leisure, but we're also seeing some opportunities where we're encouraged based on what's happening in Q3 and Q4. For instance, on the leisure front, we have a maintenance team that's going to put a roller coaster together in Northern California. So it's the first time that we're going to see some of demand come out from that. In the future, we're excited about Tampa, for instance, where we had the Super Bowl. They've really got some good press, and we put about 4,000 room nights at our Embassy Suites Tampa with group association in Q3 and Q4. So that's encouraging. And then lastly, I would say we've all been talking about sports and weddings and training. That's the activity that we're seeing in our small group, which, again, kind of bodes well for our type of portfolio.

Terrific. That all sounds very promising. Thanks very much.

Thank you. We have reached the end of our question and answer session. I would like to turn the conference back over to Leslie Hall for any closing remarks.

Thank you all for joining us. This year has gotten off to a strong start, which is encouraging. We're optimistic that that momentum will carry into the back half of the year. We hope everybody remains safe and look forward to hopefully seeing you all in person at some point in the near future.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.