RLJ Lodging Trust

Welcome to the RLJ Lodging Trust Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in the 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 Bala, RLJ's Vice President and Treasurer of Corporate Strategy and Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to RLG Lodging Trust 2021 Second 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 you're having a great summer and contributing to the surge in leisure demand by taking the opportunity to travel yourself. Throughout the second quarter, the widely anticipated strong leisure demand not only materialized but also surpassed our expectations, while business transient and group demand also improved on a relative basis, all of which allowed our portfolio to meaningfully outperform. While the COVID variants are a risk, we are encouraged by the acceleration of demand trends so far into the third quarter. We are optimistic that pent-up demand will continue to drive improvements in fundamentals. We saw evidence of pent-up demand throughout the quarter. The industry achieved new highs in occupancy each month, with the second quarter recovering to 87% of 2019 levels. Our portfolio achieved occupancy in line with the industry and outperformed the top 25 markets as we gained market share. We believe we will continue to deliver strong performance relative to the industry as a return of business transient demand should benefit our urban-centric portfolio. During the second quarter, our strong top-line performance enabled our entire portfolio to generate positive hotel EBITDA, which came in ahead of our expectations. Additionally, we've been very active since our last call, executing on a number of initiatives to strengthen our balance sheet, recycle capital, and further enhance our growth profile. We have refinanced $600 million of debt, including issuing $500 million of high-yield bonds and amending our credit facilities. These transactions further laddered our debt maturities and extended our financing covenant waivers. We also continue to be active portfolio managers by selling a few additional non-core assets which represented less than 1% of our 2019 EBITDA. And we recycled capital by deploying disposition proceeds into a high-quality asset in the growth market of Atlanta. Additionally, we have made progress towards unlocking the value from the embedded growth catalyst within our portfolio and provided color on how our initiatives will enable us to drive incremental growth throughout this cycle. With respect to our operating results, our open hotels achieved second-quarter occupancy of 61%, representing the highest of any quarter since last year. Occupancy at our hotels improved each month, with April achieving 59.1%, May achieving 60.3%, and June achieving 63.6%. Underscoring the high quality and favorable construct of our portfolio, our hotels also gained approximately 600 basis points of market share during the second quarter. our strong performance was broad-based, with our resort properties achieving 83% occupancy, with ADR and REF PAR exceeding 2019 levels. Our drive-to markets achieved 67% occupancy, with many markets such as Austin, Charleston, and Orlando nearing 2019 occupancy levels. And our all-suite hotels achieved 63% occupancy, while gaining nine points of market share compared to 2019. With respect to segmentation, As we expected, our leisure-oriented drive-to markets such as Charleston and South Florida benefited from the surge in leisure demand and drove not only robust occupancy of 86% and 83% respectively, but also achieved 2019 REVPAR levels during the second quarter. Leisure demand drove our absolute weekend occupancy to 74% and our ADR to $155, both of which are 87% of 2019 levels. Our weekday occupancy was 55%, which improved by 13 points from the first quarter, and our weekday ADR of $134 increased by 17%, aided by an increase in business transient and group demand. While business transient remained significantly below 2019, we were encouraged to see a quarter-over-quarter increase of 65% in revenues as more employees turned to offices. We also saw group demand expand beyond primarily social groups. To now include more corporate meetings and training sessions, which led to a nearly 50% increase in our group revenues from the first quarter, our hotels will continue to be attractive to small groups as demand improves. The overall step-up in demand during the second quarter allowed our portfolio to drive ADR to 75% of 2019 levels. ADR for our open hotels increased by approximately 19% from the first quarter, with our urban markets seeing the strongest improvements. Our ADR also improved each month with nearly 20% of our hotels exceeding 2019 levels in June. We remain encouraged by our industry's ability to maintain rate discipline, which also has positive implications for ADR growth throughout the cycle. The combination of strong ADR performance and our ability to manage costs led our hotel EBITDA to grow significantly ahead of our revenues, enabling us to achieve positive cash flow sooner than most of our peers. Assuming current trends do not wane, we expect to remain cash flow positive moving forward. Now turning to capital allocation, we believe that our strong balance sheet provides RLJ with a competitive advantage to drive both external and internal growth. Relative to external growth, we recently acquired the newly built Hampton Inn & Suites in Midtown Atlanta for $58 million in an off-market transaction. Atlanta is expected to be one of the top growth markets throughout this lodging cycle. The Midtown Atlanta submarket is seeing significant new development activity and an influx of new companies, including Google, which is currently building a new office just three blocks from our hotel. We are confident that the hotel will achieve a stabilized NOI yield of 8% to 8.5%. This acquisition aligns with all of our objectives of owning rooms-oriented, high-margin, premium-branded hotels located in the heart of demand while generating accretive red par and margins relative to our portfolio. Our acquisition pipeline of attractive opportunities is growing, and we are confident in our team's ability to continue sourcing additional accretive acquisition targets while maintaining price discipline. With respect to internal growth, our embedded catalysts are unique and compelling, given the magnitude to which they have the potential to drive incremental EBITDA growth throughout this cycle. In June, we provided an update highlighting our portfolio's specific initiatives which are expected to generate incremental hotel EBITDA of $23 to $28 million. These initiatives are well underway and include a conversion of the Wyndham Santa Monica into an independent lifestyle hotel and the transition of the Wyndham Charleston and the Embassy Suites Mandalay Beach to Hilton's Curio Collection. These three conversions are expected to generate $7 to $10 million of incremental EBITDA on a stabilized basis. These projects remain on track to be completed and relaunched in 2022. Our initiatives also include revenue enhancement projects, such as space reconfigurations related to guest rooms, F&B outlets, and other underutilized areas, which only require small investments while generating significant returns and are expected to generate $9 to $11 million of incremental stabilized EBITDA. And we have margin improvement opportunities, which are primarily derived from contract amendments to reduce management fees, These amendments are expected to create 50 basis points of margin improvement or $7 million of incremental stabilized EBITDA. It is important to note that our margin opportunity of 50 basis points is in addition to any industry-wide post-COVID margin expansion. We believe that our ability to drive external growth and our value creation opportunities will elevate our performance throughout this cycle. Looking ahead, although the strong momentum for the second quarter continued into July, We recognize that the COVID variants create some uncertainty with respect to the near-term trajectory of the lodging recovery. While it is too early to draw firm conclusions, it is worth noting that we have not seen a meaningful impact to our portfolio. We believe that in the absence of a pullback in demand caused by the variants, the positive economic backdrop we have with a strong consumer and healthy corporate profits should continue to lead to improving fundamentals. As we get past Labor Day, Taking into consideration normal seasonality, we expect that leisure demand will come off of the summer peak but remain healthy in light of the continuing flexibility in hybrid work environments. We believe that the next leg of the lodging recovery will be driven by business transit, which we anticipate will see a step change at some point post the Jewish holidays, the order of magnitude of which will be predicated on the pace of offices reopening and children returning to schools. With respect to group, we are continuing to see relative improvement in bookings, which should gain further momentum in 2022. Putting any uncertainty aside, the dynamics of the early phase of the recovery thus far demonstrate that when a sustained recovery takes hold, it will be stronger and faster than originally expected. Overall, we cannot be more pleased with our relative positioning, which we believe will allow RLJ to outperform in each phase of the cycle. As the lodging recovery enters its next leg, which will be driven by an acceleration in business transient, our urban-centric portfolio will benefit given the appeal of our hotels to business travelers and our traditional exposure to this segment. Additionally, our portfolio is poised to deliver EBITDA growth that is above and beyond the growth that is derived from the recovery to pre-COVID levels. This will come from the deployment of our balance sheet capacity towards acquisitions in high-growth markets, and the incremental EBITDA generated from our embedded value creation initiatives. Finally, our strong liquidity, lean operating model, and our ability to generate incremental growth will drive significant free cash flow and NAV appreciation, enabling us to create meaningful shareholder value long-term. I will now turn the call over to Sean. Sean.