RLJ Lodging Trust

Welcome to the RLJ Lodging Trust fourth quarter 2021 earnings call. As a reminder, all participants are in 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 RLJ Lodging Trust 2021 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 Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Barnett, 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 reconciliation 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 today. We are pleased that Lodging Fundamentals continued their recovery relative to 2019 throughout the fourth quarter, with the industry's faster-than-expected recovery being the most significant event of 2021. Against this accelerating recovery, our portfolio achieved strong operating performance throughout the year. Additionally, our team successfully executed on all of our strategic priorities, which included acquiring three high-quality hotels during the year, which were accretively match-funded with proceeds from non-core dispositions, generating strong operating results, which allowed us to achieve positive corporate cash flow for the full year, advancing our value creation initiatives, which are expected to deliver an incremental $23 to $28 million of hotel EBITDA, and actively managing our balance sheet to increase flexibility, extend covenant waivers, further ladder debt maturities, and lower our cost of debt through the refinancing of over $1 billion of debt. Our confidence in our strategic initiatives was bolstered by the industry's recovery throughout the year, with REVPAR sequentially improving each quarter culminating with the fourth quarter ending at nearly 97% of 2019 levels. The recovery during the year was driven by the continuation of robust leisure demand, which is well documented and at levels exceeding 2019 in many resort markets. Just as important, there was clear evidence of an acceleration in recovery in both group and business transit demand as business travel volume increased, and in many cases, in advance of returning to corporate offices. This trend was particularly noticeable with respect to small and medium-sized companies. Finally, we were encouraged that international travel picked up in gateway markets after the borders reopened in early November. Although short-lived due to the emergence of Omicron, the quick ramp-up provided us with a strong indication of significant pent-up demand to visit the US. With respect to our operating performance, Our portfolio outperformed our expectations during the fourth quarter and also gained 340 basis points of market share. Our portfolio REF part achieved 75% of 2019 levels, representing an improvement of approximately 400 basis points from the third quarter. We were encouraged by our ability to drive ADR with almost a third of our portfolio exceeding 2019 levels and our overall portfolio achieving 91% of 2019 levels. representing the strongest quarter since the start of the pandemic. Our portfolio ended 2021 having significantly closed the gap to 2019, with our December red part achieving 87% of 2019 levels. Importantly, our ADR was 99% of 2019, with particular strength in our leisure markets such as Charleston, Key West, Miami, Mandalay Beach, and New Orleans, as well as many of our urban markets including Atlanta, San Diego, Pittsburgh, and Los Angeles, despite the slower recovery in our Northern California market. The ability to drive ADR underscores our capability to continue to push rates, which will allow us to capture the meaningful rate upside in our segments. In particular, there was positive momentum in the recovery of our urban hotels, which represent two-thirds of our portfolio. Our urban portfolio achieved 83% of 2019 REVPAR in December, We believe that the continued momentum in the recovery of our urban hotels will be the driving force for our portfolio's growth going forward, and we expect outsized growth in business transient and group demand throughout the year. We saw evidence of the recovery of these segments throughout the fourth quarter as improved business transient demand drove our weekday occupancy to 78% of 2019, a 400 basis point increase from the third quarter. while our group revenues improved significantly, up 20% quarter over quarter, as we benefited from the travel of small, social, and sports-oriented groups. These trends have further bolstered our confidence in the positive trajectory of these segments. Now turning to capital allocation, we advanced our internal and external growth objectives, which improved our growth profile and key operating metrics, such as REVPAR, EBITDA per key, and margins, while enhancing our overall positioning for this cycle. Our capital recycling initiatives this year alone led to a 150 basis point improvement in our pro forma margins over 2019. Specifically, during the fourth quarter, we closed on the acquisition of the AC Hotel Boston Downtown, which opened in 2018 and boasts an A-plus location within the ink block development of Boston's highly desirable South End neighborhood. We also closed on the acquisition of the Moxie Cherry Creek in Denver, which opened in late 2017 and is located in the heart of the highly desirable Cherry Creek submarkets in Denver. And we completed the disposition of a Doubletree Metropolitan in New York City. This disposition was highly accretive and reduced our concentration in New York City to less than 3.5%. In total, we have deployed nearly $200 million to acquire three high-quality hotels located in top-growth markets at an aggregate stabilized EBITDA multiple of approximately 12 times. These acquisitions were accretively match-funded with proceeds from non-core dispositions during the year, which were sold at an aggregate multiple of approximately 30 times 2019 Hotel EBITDA. The net impact of match funding will result in an incremental $8 million of stabilized Hotel EBITDA. We are pleased to report that all three of our recent acquisitions are already outperforming our underwriting. with the aggregate 2022 hotel EBITDA expected to exceed our underwriting by approximately 35%. By fully matched funding our recent acquisitions, we were able to retain our acquisition capacity, which will prove valuable given our robust acquisition pipeline. We expect to be an net acquirer this year and are encouraged by the quality of our assets within our pipeline, which includes several off-market opportunities. On the internal growth front, We are continuing to make progress towards generating an incremental $23 to $28 million in stabilized EBITDA from our embedded value creation opportunities. These include $7 to $10 million from our three conversions, which remain on track, $9 to $11 million from our revenue enhancement opportunities that are being completed as part of our normal cycle renovations, and $7 million, representing 50 basis points of margin expansion from management agreement amendments that we are finalizing. which will be incremental to any industry-wide margin efficiencies from post-COVID operating synergies. Our efficient capital recycling and the unlocking of our internal growth catalyst have created multiple channels of growth to drive EBITDA expansion throughout this cycle, and our balance sheet provides us with the capacity to fund the opportunities to drive internal and external growth initiatives. Looking ahead, We are seeing a resurgence of demand in February as the industry moves past Omicron. This reinforces our confidence in the expectation for strong, accelerating growth in lodging fundamentals this year, especially in urban markets, which we believe will drive the next leg of the lodging recovery. This improving backdrop is being driven by the release of pent-up demand across all segments. We believe that, in addition to the continued strength and leisure that is expected throughout the year, Business travel should see meaningful improvement, especially in the back half of this year. This will be driven by the continuation of strong demand from SMEs and the reemergence of travel from global companies such as Wells Fargo, Bank of America, and Microsoft, who have pulled forward office reopenings and eased travel restrictions. The return of the traditional corporate traveler represents an outsized runway for growth in urban markets. Group demand should accelerate throughout the year as well, with the mix of corporate groups increasing. Our confidence in the momentum of the group recovery has increased with our definites currently representing 68% of 2019 levels. Within the first 30 days of this year, we saw an impressive in-the-year, for-the-year booking pace, which is already at 25% of last year's in-the-year pickup. Finally, an uptick in international volume while the borders were open late 2021 provides us with a cautious optimism that international travel could provide a surprise to the upside if travel restrictions are eased, which would benefit gateway markets such as New York City, San Francisco, Boston, and Miami. As we think about the cadence of the recovery, we expect trends to improve sequentially each quarter, with growth accelerating in the third and fourth quarter as recovery broadens to urban and key gateway markets. Our portfolio is well positioned in 2022, given our geographic footprint, with two-thirds of our EBITDA generated in urban markets. As we look at the overall cycle, our outsized EBITDA growth will come from the recovery of both business transient and group, which will significantly benefit urban portfolios like ours, the ramp-up of our recent acquisitions, as well as future acquisitions funded with existing capacity. Our lean operating model, which will allow us to operate with fewer FTEs compared to full-service portfolios and be less impacted by the current inflationary wage environment. The realization of incremental EBITDA from our embedded growth catalyst and our strong balance sheet, which provides a competitive advantage as well as the flexibility to pursue both internal and external growth opportunities. Over the last three years, we have significantly enhanced the overall quality of our portfolio which is evidenced by an 8% increase in absolute red bar, a 12% increase in hotel EBITDA per key, and a 50 basis point improvement in hotel EBITDA margins, we believe we are well positioned to achieve outsized growth this year and beyond. Finally, I would like to thank all of our hotel associates, our management companies, and our entire corporate team for their hard work, commitment, and support during this recovery. I will now turn the call over to Shawn. Shawn.

Thanks, Leslie. We were pleased with our fourth quarter results, which further narrowed the gap to 2019 and represented the closest quarter to 2019 since the start of the pandemic. As expected, fourth quarter results followed normal seasonal patterns around the holiday season, with October being the strongest month of the quarter. Pro forma numbers for our 97 hotels include the acquisitions of the AC Hotel Boston Downtown and the MOXIE Denver Cherry Creek, and exclude the sale of the DoubleTree Metropolitan, which was sold during the quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. Our fourth quarter portfolio occupancy of 62.2% was 83% of 2019 levels. which represented a 340 basis point improvement from the third quarter and was better than expected. The continuation of strong leisure demand, the return of more traditional corporate customers, and strong demand from social and sports groups provided our hotel operators with the ability to yield rates during the fourth quarter, resulting in average daily rate growing approximately 2% from the third quarter to $163 during the fourth quarter. Our leisure markets such as Key West, Charleston, Tampa, Mandalay Beach, and Miami generated ADRs in excess of 2019 by 32%, 22%, 11%, 15%, and 24% respectively. Our progress towards 2019 improved throughout the year. with fourth quarter RevPAR at approximately 75% of 2019 levels. Our portfolio RevPAR recovery to 2019 accelerated throughout the quarter at 69% in October, 73% in November, and 87% in December, which was stronger than we expected at the beginning of the quarter. Turning to segmentation performance, strong leisure demand continued throughout the fourth quarter and was at 96% of 2019 levels. Business transient revenues continued recovering and improved to approximately 50% of 2019 levels, which was a result of demand at 62% of 2019 and average daily rate at 79% of 2019, representing the strongest quarter since the start of the pandemic and a 1,200 basis point improvement from the third quarter. And group revenues also continued to recover and improved to approximately 60 percent of 2019 levels, which was the result of demand at 67 percent of 2019 and average daily rate at 88 percent of 2019. The improving operating trends during the fourth quarter led our entire portfolio to achieve hotel EBITDA of $64.8 million, which improved to 64 percent of 2019 levels. We are further encouraged with our ability to drive strong operating margins of 27%, which were only 425 basis points behind the comparable period of 2019, despite revenues still being 25% below 2019. During January, which is expected to be the weakest month of the quarter due to both Omicron and normal seasonality, Our portfolio is forecasted to generate occupancy of approximately 49.4% and ADR of approximately $158, which represents REVPAR growth of 99% over last year and 64% of 2019 levels. Turning to the bottom line, our fourth quarter adjusted EBITDA was $54.7 million and adjusted FFO per share was 14 cents. As Leslie mentioned, while fourth quarter demand was strong throughout the quarter, we remained vigilant in maintaining cost containment initiatives that are appropriate for the current environment. Underscoring our continued focus, our fourth quarter operating costs maintained more than 20 percent below the comparable period of 2019. Within operating expenses, wages and benefits which represent 38% of total fourth quarter operating expenses, or 25% below the comparable quarter of 2019. On a relative basis, our portfolio is better positioned to operate in this challenging labor environment as a result of fewer FTEs required in our hotels, given our lean operating model and smaller footprints with limited F&B operations. While our portfolio occupancy was at approximately 83% of 2019 levels, our hotels operated with approximately 40% fewer FTEs from the comparable period of 2019. Overall, while we expect the tight labor environment to persist near term, we are increasingly encouraged by recent positive momentum with success in attracting applicants and filling open positions at our hotels, which we expect to continue to improve throughout 2022. We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital since the beginning of 2021. These accomplishments include raising a billion dollars through two high-yield bond offerings that were both oversubscribed with annual coupons of 3.75% for the five-year bonds and 4% for the eight-year bonds. Using the bond proceeds to repay all of our 2022 and a portion of 2023 maturing debt and fully redeem the $475 million 6% Felcor Senior Notes, which represented our most expensive debt. Extending the maturity date of a $100 million term loan from January 2022 to June 2024. Adding a one-year extension option on $225 million of our 2023 maturing term loans. amending our corporate credit agreements to extend covenant waivers through the first quarter of 2022, increase our acquisition capacity to $450 million, and add flexibility to retain certain proceeds for general corporate purposes, and recently repaying the remaining $200 million outstanding on our corporate revolver. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. These initiatives resulted in extending our weighted average maturity to 4.5 years and reducing our weighted average interest rate by approximately 50 basis points. Turning to liquidity, we ended the quarter with approximately $665 million of unrestricted cash, $400 million of availability on our corporate revolver, $2.4 billion of debt, and no debt maturities until 2023. We continue to maintain significant flexibility on our balance sheet. Currently, 100% of our debt is fixed or hedged, and 82 of our 97 hotels are unencumbered. As we expected, our portfolio generated positive corporate cash flow during the fourth quarter, and we were pleased that we also generated positive corporate cash flow for the full year of 2021. We maintain a disciplined approach to managing our balance sheet. Even as fundamentals have recovered, we remain focused on making prudent capital allocation decisions to position our portfolio to drive results during the entire lodging cycle. We remain among the best positioned lodging REIT to take advantage of ROI investment and external growth opportunities, which we demonstrated through our recent acquisitions. Additionally, we continue to prioritize high-value revenue enhancement projects, margin expansion initiatives, and our three 2022 conversions. Looking ahead, we estimate ROJ capital expenditures will be approximately $100 million in 2022. In closing, ROJ remains well positioned with a flexible balance sheet, ample liquidity, lean operating model, and a transient-oriented portfolio with many embedded catalysts. We will continue to monitor the financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt, and increase our overall balance sheet flexibility. Thank you, and this concludes our prepared remarks. I will now open the line for Q&A. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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. Our first question comes from the line of Austin Werschmitt with KeyBank Capital Markets. Please proceed with your question.

Hey, good morning, everybody. Leslie, you referenced the new acquisitions are expected to exceed your underwriting by 35% in 2022. And I'm just trying to understand, you know, what that 35% outperformance is. reflects or what, you know, how it compares to the initial underwriting? Is it, you know, extrapolating performance simply from 4Q, or do you have some additional pickup beyond what you achieved in 4Q21? Any detail would be appreciated.

Sure, Austin. This is Sean. I'll hop in there. I mean, so the bottom line out performance of the 7 McCall was 35%. It was really a combination of of quicker ramp in these assets, you know, particularly in the urban markets like a Boston that is recovering quicker than we thought in our underwriting, which is driving a lot of the outperformance. But also, as we've gotten into these assets and implemented sort of what would be institutional quality asset management initiatives, we found you know, more synergies on the cost side to do things more efficiently, but also more revenue opportunities within each one of these hotels to drive the top line. And so when you put that all together, it was outperformance really across all three of the acquisitions.

What was the period you underwrote for stabilization across the assets? And does that, you know, pull it forward? You know, does it pull that forward pretty significantly?

So we underwrote stabilization somewhere in the three to four year time frame from acquisition. And so this, you know, I think it more is a function of our view on the ability of these hotels to compete in the marketplace. I'll break it into two pieces. The ramp up in the market like a Boston is a 2022 specific outperformance because, you know, our house view on Boston is, has evolved and has gotten more bullish since we underwrote the asset. Whereas the asset management initiatives, which are meaningful, are something that's going to be a permanent enhancement to both the top and the bottom line. So I think it's a combination of both of those things, Austin. Some of it is the timing of 2022 specifically, and some of it is there's more opportunity within these assets than we initially underwrote on the asset management side.

I think it also demonstrates often, you know, our continuous discipline in terms of how we underwrite. You know, we're pretty conservative in general.

Yeah, no, that's very helpful. And I'm curious, then kind of just switching over to the portfolio, within Northern California, you know, you're clearly upbeat about the, you know, recovery in urban markets. This market is clearly lagged, certainly no secret there. But One, I'm wondering if there's been any notable dispersion in performance across the region in various sub-markets you're in, and what's the expectation for that market relative to, you know, your other urban markets?

Yeah, also, I mean, obviously there's, you know, no secret that, you know, San Francisco CBD is going to struggle. It needs to see production from BT city-wise and international, which is all sort of challenged at this point in time. But, you know, keep in mind that our portfolio only has two assets in the CBD, and as you sort of articulated, we've got a much broader footprint. We are seeing the non-CBD assets start to perform a little bit better as we're starting to see BT pick up, you know, this year. And so we do expect our non-CBD to outperform the CBD assets. Having said that, we still expect all of Northern California to recover slower than the broader markets.

And Austin, I would add one thing to that, and that is with the office reopenings, what we notice in Northern California is they're the same national accounts that we have across the board. So when you start to see Microsoft, BOA, Wells Fargo starting to move their offices forward, that's an encouraging sign. And to Leslie's point about our footprint, we've already seen pickup in Silicon Valley just over the last three weeks, which is encouraging because of those offices reopening and the type of demand that we know can come with that on the national accounts versus the SMEs that we talked about in our script.

And then I think the last point on Northern California and San Francisco specifically is we do continue to be believers in the market long-term. Despite the short-term headwinds and it's going to be a lagging market in the recovery, it doesn't change our overall view of on the dynamics within that market. You know, the airlift, the, you know, it's a world class city, the demand generators, the business and all those things still are positive long term for San Francisco. It's just a function of it where, you know, the ramp is just going to be longer in that market.

Got it. And then just last one, assuming the next leg of the recovery continues in the months ahead, do you guys expect to be a net acquirer in 2022?

We do expect it to be a net acquirer. You know, our pipeline continues to be robust and active. And, you know, as I've mentioned in previous calls, you know, we are very focused on off-market transactions. And so our pipeline has continued to grow, and we feel pretty good about being a net acquirer for this year.

Thank you very much. Appreciate the time.

Thank you. Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.

Thank you. Good morning, everyone.

I just wanted to follow up on that last question from the transaction front. Has your view changed at all on dispositions? Your commentary is much more focused on acquisitions this year. Any change in your view given the heavy lifting that you did last year maybe in a rearview mirror?

Mike, you broke up a little bit, so I want to make sure that I understood your question. You're asking about our house view on acquisitions relative to our portfolio, I believe. Sorry. I'm sorry. Dispositions. Yeah, dispositions. Thanks. Yeah, got it. What I would say is that clearly we did heavy lifting in 2019, and we continue to be an active portfolio manager and disposing of assets as we see trends in a particular market that we want to move away from. So we sold... seven assets last year, including the DT Met, which we've obviously given color on that as well. I would say that as we look forward, we'll continue to be active portfolio managers, but it's going to really be more opportunistic. For example, if we want to reposition ourselves in a particular market, as a way I would sort of think about dispositions for this year, you know, we still may have some, but I wouldn't expect it to be, you know, similar volume in terms of what we did last year.

Got it. That's helpful. And then just Back to your comments about the reacceleration and demand in booking trends over the last few weeks. Any markets or customer segments, excuse me, in particular that you're seeing a faster reacceleration in?

You know, it's actually broad-based, Mike, which is what's giving us confidence that, you know, Urban's going to outperform this year. We think that both BT and Group are going to be strong and accelerate in And it's looking at all of the trends, looking at the fourth quarter trends, looking at the current trends we're seeing in February and our forward bookings. And also keep in mind where we're starting those two segments at at the beginning of this year is from a lower base. So all of that gives us confidence in it being moving forward. But let me give you a couple of data points. On the BT side, we're definitely seeing midweek pick up in February. And if we look at our numbers most recently – You know, month to date, you know, we're seeing occupancy at 60%. The most recent week, we were at 68%. Over the weekend, most recently, obviously because of the holiday, we were at 80%. So February is proving out to be strong. And within that timeframe of February, we're seeing a pickup in GDS contribution, which is really telling us that not only are SMEs giving us production, but also national accounts are giving us production as well. And that's across all markets, including we're seeing what Tom mentioned in Northern California as well. So our transient pace, our BT contribution, we feel the pickup and what we're seeing is broad-based. I would also say that's also on the group side as well. We started the year at 60% pace relative to 2019. We're now at 68%, which is an eight-point pickup, and we're only two months into the year. We've already booked 25% of the in-the-year, for-the-year contribution that we picked up last year. And when we look at the mix of what we're getting from a contribution, corporate group is representing 50% of what we're booking today. I will tell you that was running 5% to 10% prior to this year. The other thing that's interesting for us is that the booking window continues to be short. And so that means that in the quarter, for the quarter production, we expect to continue to be strong. And just to give you a data point, we picked up 20% of our group in the fourth quarter. And so When we look at all of the data points, the momentum and the pace of it, and the fact that it's broad-based, we feel pretty good about the trend lines that we're seeing for BTN Group.

How helpful. Thank you.

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

Good morning, everyone. First question, you know, maybe for Tom or Sean, but if you think about what the new operating model, kind of the enhanced brand standards, all those things, you know, I'm just wondering if you can give your kind of thoughts on the difference between sort of select service and full service in terms of, I guess, you know, the net benefit or most to gain. I'm just, you know, curious, you know, thinking about your portfolio, a lot of extended stay You know, mostly room housekeeping and F&B are the largest parts. But then if you kind of, you know, juxtapose that to the group side where there's so many more outlets. So, you know, kind of like that a lot more fat to cut type of thing. So, you know, I know, Sean, you've had experience on both in both models. So if you could maybe just kind of elaborate on your thoughts there and how, you know, a portfolio like RLJ would would fare compared to a larger group focused portfolio. Yeah.

Hey, Neil, I'll start, and I'll let Tom add incremental color. I would generally say that our house view about the overall industry being able to pick up 100, 200 basis points of margin expansion has not changed. We recognize that wage inflation may affect where we end up in that range, but overall we feel very confident that there's been cost taken out of the industry on a permanent basis. We do believe that RLJ and our portfolio is in a better position to see sustained savings. And it's a lot of what you were articulating. The segmentation that we play in, largely in the limited service space, allows us to be able to, what I would say, have our customer adapt to those changes more at a higher level than they would see at a traditional full-service hotel. I would also say the length of stay for us is also a benefit relative to those savings The F&B you touched on as well, we have generally a fixed food service model in a significant portion of our portfolio, which also gives us an advantage relative to being able to maintain the savings. And then lastly, if you think about the size of our overall portfolio and the average size of the footprint of our asset, that allows us to continue to cluster and allow for employees to do job share when you have a smaller footprint. So when we think about our portfolio at all, in aggregate, relative to where we play in segmentation, our length of stay, the size of our portfolio, the F&B model, all of those things are giving us confidence that our RLJ will be able to benefit from that savings at a higher level than many of our traditional full-service peers. The other thing that I would remind you of is that we have 50 basis points of margin expansion from our value creation that's above and beyond you know, what we're expecting from the industry, you know, as well.

And, Neil, what I would say, just adding on to what Leslie talked about, these last two years have been very informative in regards to how we complex. As you know, prior to the COVID, we were complexing on the same pad locations where we'd have a residence in and a courtyard and shared services. And that could be, you know, one GM, shared a sales office, potentially some engineering teams, What we've done after is we've really focused on a wider geographic area, even across ownership groups. And so we feel we're coming out after these last two years with a whole different FTE model in regards to how to run our business. And so we think that's sustainable, and we've seen the benefit of that by having a great skill set, oversee more and have more accountability and responsibility in a wider net. And so that shared services and expansion of that role gives us confidence that in our select service model and compact full service model, we'll continue to have that margin increase based on those sustainable efforts.

That's great. Super helpful. The other one for me, it's kind of on, I guess, balance sheet related. You guys have been, Leslie, Sean, since I've known you guys, just really good stewards of you know, capital or especially, you know, just having a good balance sheet, being very active, managing at low leverage, et cetera. I mean, you guys have, you guys went into, you know, COVID with a very low leverage and a ton of cash, you know, just thinking about, you know, the, the business and your, and your balance sheet, how do you guys think about, you know, the decision with, with waivers, you know, when to bring back the dividend, how much, And, you know, how do you kind of weigh the priorities of the elevated cash balance and liquidity that you have in a pivotal year like 2022?

Well, Neil, thanks for the feedback on the balance sheet, which we appreciate. Obviously, we take it, you know, very seriously with a CFO and an ex-CFO on the call. Recovering. Recovering. Sometimes, occasionally still going into our old discipline model, but You know, I think on the dividend specifically, and then I can talk about capital allocation second, right? It's a very timely question. You know, it's a live discussion right now going on with both boards as well as management teams on the dividends. You know, let me sort of start by framing, you know, what's the ROJ House view on how we think about dividends, right? I mean, I feel obligated to reiterate the fact that dividends are a board decision and But when you think about dividends, it's core to the REIT model and a critical tool for us to return capital to shareholders. Obviously, it's also a key driver of our long-term TSR for our shareholders. I think from ROJ specifically, what allows us to differentiate ourselves a little bit is that we've got an operating model that generates more free cash flow as well as the balance sheet and liquidity with which to provide us optionality on the dividends. And that's an important distinction within the lodging REIT community. I think the way we're thinking about dividends in the post-COVID world is that we're going to have more discretion in the post-COVID world because of the NOLs that were generated during COVID with respect to dividend policy. So pre-COVID, dividend policy was generally dictated by taxable income and distributing at 100% of taxable income. Because of the NOLs, that's going to provide management teams with more flexibility around how we pay dividends, sequencing structure, et cetera. And it's going to increase the importance of relative yield as well as FFO payout. And so there are things that are going to be within our arithmetic. It's important to note that our dividends, by the way, when we come out of the waivers, which will be after the second quarter, is when really the hourglass turns for us on dividends. Because until we're out of the waivers, our dividends will stay at current levels. But after the second quarter when we're out, that's really when things change from a standpoint of having the ability under the line of credit. But I will say that dividends are important to us. It's a live discussion. It's something that we're taking very seriously, and we believe that companies like RLJ with our model should be in the early movers in the dividend game. Shifting to capital allocation and balance sheet, I think the one benefit that we have because of our liquidity, as you mentioned, from the 2019 sales as well as what we've done since, provides us with the ability to pull multiple levers. And I think we've demonstrated that through our internal value creation initiatives that we've outlined, the acquisition strategy that we've outlined, as well as the ability to pay dividends. And so we're going to continue. Our cost of capital gets marked to market every day. And so as we make any capital allocation decision, we're going to make the decision that's best based on our cost of capital at that moment in time. But the beauty of our balance sheet is that it provides us with the liquidity and the capacity to pick, you know, to not just choose one of those options.

Okay. Thank you. Appreciate the thoughts.

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

Hi. Good morning. This question on the pipeline of acquisitions, you seem to be – favoring urban markets now. Can you maybe tell us kind of what markets you're targeting and how pricing is trended for urban flex service given, I guess, the improving outlook for the segment?

Sure. What I would say, you know, about pricing just in general, Anthony, is that, you know, we saw, you know, pricing increase over summer last year and coming into the fourth quarter and And then we saw pricing stabilize in the fourth quarter. And part of that, what was driving that was that we moved from motivated sellers to opportunistic sellers who were seeing the amount of capital and volume for demand for hotels, particularly given on the yield side. And so they were being opportunistic and seeing how far they could push pricing. That's stabilized, and we continue to see it stabilized. What I would say about us, we locked in a lot of our deals prior to that ramp, and so we feel very good about the pricing that we got relative to where pricing sits today overall. I would just generally say that when you look at the overall what's coming to the market, there's been an increase in deals, but it's still limited in Mindful. Obviously, anything that's sort of leisure-oriented is getting a lot of looks and, again, opportunistic sellers there. On the urban side, there's more product coming to the market because you can now point to the green shoots of demand recovering. And, you know, keep in mind that Urban Select Service has been cash flowing for a while, you know, throughout the pandemic. So there's a lot of demand for those assets. And, you know, given the yield, there's a lot of players who are chasing the assets. Many of them are not necessarily traditional hoteliers. And so between the demand, limited supply, you know, values have continued to remain, you know, above, you know, 2019 levels is the way I would put it. But what I would focus in on is how we approach the transactions. One is that we focus on off-market transactions. We leverage unique relationships and situations to allow us to get to assets that we might not otherwise, and that's played out in the value and the yields of the deals that we've acquired most recently.

Thanks. And I guess on Boston, you seem bullish on that market. Could that – makes sense because it makes sense maybe to pull forward the Wyndham, I guess, Boston renovation given the strength in the market so you can maybe benefit from the recovery there a bit earlier?

I mean, we're evaluating all of our conversions to make sure we hit the right time. But keep in mind, you know, that the Wyndham Boston does have a ground lease that we're working through. We would want to make sure that we extended that before we execute the conversion.

Okay. All right.

Thank you.

Thank you. Our next question comes from the line of Tyler Vittori with Jani. Please proceed with your question.

Thank you. Good morning. Question on CapEx spend. I think you said $100 million for this year. As much as for conversions versus other projects, are there any deferred CapEx assumed in that number this year? And how are you thinking about a run rate for CapEx, whether it's a percent of revenue or an absolute number going forward?

Tyler, this is Sean. You're right. We said we expect a total spend of $100 million in 2022. This is going to include normal cycle renovations. And what we've done is we've allocated that really to markets and hotels that we expect to outperform during the cycle. So that's going to include hotels in Miami, Deerfield Beach, Phoenix, Orlando, and Los Angeles. It also includes spillover from our 2021, you know, the three conversions, which are on pace to launch by the end of the year. And so there's just, you know, the timing of the capital there will spill over. And that's a subset of the $100 million as well. As a reminder, you know, our midpoint of our range last year was $80 million. We ended up at about, you know, a little under $50 million at CapEx. And so, you know, that accounts for a lot of that spillover. It's just, you know, the timing of when that's going to when that's going to happen. But I think with respect to how we think about CapEx and our portfolio, I think the beauty of what we've done over the last several years and we have planned for 2022 is that we're going to emerge with a broadly renovated portfolio you know, in good shape and are well positioned to compete. We've done a lot of the heavy lifting, you know, particularly in renovating a lot of the assets that we bought as part of the Felcore merger. And so we're through the vast majority of those assets, or we certainly will be by the end of 2022. And so, you know, our portfolio is well positioned and set up for, you know, to compete.

Okay, great. And then apologize if I missed this earlier. You know, interested your thoughts or updated thoughts perhaps on leverage and leverage targets a little bit longer term. You know, obviously think business is moving in the right direction. Certainly seems like some normalization coming here. I mean, once we kind of get into the more normal post-COVID period, you know, how are you thinking about leverage and kind of how are you evaluating, you know, where you might shake out? I mean, you're kind of looking at a, net debt to EBITDA metric in terms of a target or some sort of a gross assets ratio as well. Just interested in any updated thoughts there.

Sure. Our view on sort of the appropriate leverage for lodging REIT has not changed. Our view is that it should be at or below four times net debt to EBITDA, which is a metric based on sort of stabilized EBITDA. You know, we are on track to, you know, to get back to that level through growth of EBITDA, but our view is that is the appropriate metric and the appropriate level for a lodging REIT. So it has not changed, and we are on track through just improved operations to hit that number.

Okay, great. That's all for me. Thank you for the detail.

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

Thanks. Good morning. I'd like to start off on the macro front, given the current events in Ukraine. We have received investor questions on how the geopolitical situation translates to domestic demand impact. Based on what you know today, and I recognize the situation is fast moving, How material are rising gas prices or other macro factors to your near-term hotel demand, say, looking out to March or April?

So, I mean, obviously the events are unfolding today. We think on the domestic side, which has been driving the vast majority of our demand today, we don't think there's an impact. Clearly, you know, on the international travel, you know, that could have a significant impact just in terms of what's happening on a macro and geopolitical perspective. You know, what I would say, though, is that, you know, we have not baked in any international into our general house view this year. As we said in our prepared remarks, that international could surprise to the upside, but that was generally in the back half of the year, Greg. So, you know, from our perspective, Clearly, macro events could have all kinds of unseen intent and ramifications, but as we sit here today, based on the way we've built our budgets and what we're seeing, we don't see an immediate impact. We also haven't necessarily talked about the fact that there could be an incremental variant, and so all of the marks that we've given today are in absence of that as well. Clearly, there are macro things that could occur, but what we see today from a domestic perspective, we're not necessarily seeing an impact from that.

Okay, thanks. Second question is a bit offbeat, but I thought to ask, given your portfolio is diversified by product type and geography, when your hotel associates are allowed to not wear masks, I'm curious about the operational impact. Have you noticed any changes to guest satisfaction scores or employee retention or even operational efficiencies positively or negatively? And, you know, is this impact pretty broad-based across the portfolio?

Hey, Greg, it's Tom. What I would say is obviously every state, every city, every municipality is a little bit different on how they're reacting to the mask mandate lists. So first and foremost, before we get into the associate side of it, what we have seen is because of these mask mandate lists, it's an immediate opportunity to be able to see pace pick up, both transient, group, And so there's more activity when those cities that have all been talking about doing it at the 28th of February, beginning of March, all that has been transpiring into what you're seeing on the Pace side where more people are traveling. It is a new normal, and we're all having to adjust to that, not only with guests but offices as well as the associate. And so what I would say initially is I think there's an excitement out there in regards to the new normal for associates to be able to smile and greet guests in a way that they used to do it on a regular basis, first and foremost. The second thing that I would say is because there's more demand midweek, we're starting to see some of the same customers that we used to see on a regular basis on those national corporate accounts that we talked about that are now traveling again because those were the road warriors that we had that relationship with versus a transaction in the past. So I think it's early to say any impact on that, but and the concern about health and safety and security, we take that very seriously, and working with our management companies to make sure that we're making those right decisions at each and every level, depending upon where our portfolio sits.

And Greg, the other thing I would just sort of add, which is much more broader, is that, you know, the psychology around, you know, COVID as a result of Omicron, given how widespread it was, the number of people who were impacted, and the less severity of it, has really changed the general psychology. And so, people are more mobile in all aspects of their lives, not just sort of travel, right? And so that is generally changing the overall, you know, reflex when you see somebody without a mask. And so I just generally think that we're moving to a point of being an endemic and less of a you know, less of a concern for most people. Now, again, all of that, I'm saying in the absence of something else spiking, but I think in general, the psychology around mask wearing actually is a benefit. I'm sorry, the lifting of mask wearing is a benefit for the psychology for people and mobility in all aspects of their lives.

Thanks, everyone. Appreciate it.

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

Thanks. Good morning. Just a quick one for me on CapEx, a follow-up to the prior discussion. I'm just curious whether the brands are starting to push back on deferred CapEx. Not so much, Leslie, in your portfolio, but more broadly speaking, whether that doesn't eventually free up more acquisition opportunities.

I think it's a great question, Bill. I do think that we are going to have a multi-year buying opportunity, and I do think as a result of owners having to put more capital into assets, that's going to flush some owners who had to survive off of their FF&E reserves and who had to dip into different proceeds not wanting to put more capital in. I don't think that it's necessarily going to be driven by the brands. I think the brands continue to be accommodating and working with owners. I think it's going to be a function of preserving the operations of the asset and that the longer that you go in terms of not putting in the capital that's needed, the degradation that that may cause, somebody's going to want to get ahead of that. And then eventually the brands will put pressure on it. I don't see that in the next 12, 24 months. based on the accommodations that the brands are trying to make. But I do see that being an eventual push. But I think it's going to be more the necessity in order to maintain, you know, the competitiveness of an asset.

How sensitive – thank you for that, by the way. How sensitive are the brands to guest satisfaction scores, and how much at risk are the changes to – guest-facing services that have been implemented in reaction to the pandemic to these changes and get satisfaction scores. So I think you know what I'm getting at is just if we start to see dissatisfaction, do these savings start to get eroded?

Yeah. So I think that it's an evolving question, Bill, because the brands are sensitive to to the guest satisfaction scores, but they've also adjusted the guest satisfaction scores to accommodate the current environment we see today. But those guest satisfaction scores benchmarks will push back up over time, so keep that in mind that there has been some adjustments, but they are increasingly becoming sensitive. But what I would say though is, and I'll let Tom give some more color on specifics, I do believe that our portfolio, because of where we play from a segmentation perspective, the nature of our customer, we will be able to have customers who adopt to the changes in a way that doesn't affect our guest satisfaction scores, as you may see in some of the higher-end segments that we don't play in.

Yes. So, Bill, just to give you some specifics around that, you know, you think about the guest experience, it comes down to obviously wanting to have their room clean and the type of clean that they were getting. And I think The adjustment that the brands were making are real positive, giving the option to the consumer to ask. And I think what we're finding is that interaction between the employee and the guest is giving us an opportunity to have that chance to ask questions about how they want to view their stay and the length of stay that Leslie mentioned. really gets you into a relationship with somebody, because we have suites and 50 percent of extended stay, that you're asking them how they'd like to view that opportunity when they're with us. The second thing that I would say, because of the collaboration around food and beverage, I think there was a good opportunity to reshift and reimagine that experience. So, for instance, yes, our cost per occupied room is down because we've removed some items, but there was so many significant items on there that people didn't actually take. that I think it was more of what they really wanted versus what they needed, if you will, in the past. And so those changes, in addition to hours of operations, have been met with, you know, I think a welcome experience in regards to that we're giving them what they're looking for and having the hours of operations be acceptable to the fact that they know they still can rely on it when they come in that area. And then lastly, to Leslie's point about our footprint versus full service, we feel that our customer is a little bit more accepting of that because they only have maybe one outlet or they have an opportunity that breakfast is included in the rate so it's more of an experience versus the optionality of a full service hotels where they're going to have room service or two or three different outlets when they come in their expectations are going to be a little bit different in regards to the level of services being provided when they experience that yeah all right listen i appreciate all the color that's it for me thanks

Thank you. Our next question comes from the line of Flores Van Dykem with CompassPoint. Please proceed with your question.

Thanks for taking my question, guys. You know, getting back to the balance sheet, Sean, I know you don't have any maturity, so presumably that's going to get deployed into acquisitions. You're massively earnings enhancing, even if you're buying at low cap rates. Is that the right way to think about it?

You broke up a little bit, Floris, and so I just want to make sure I understand your question, which is because of the liquidity that we have on the balance sheet today, you would expect us to be in a better position to deploy that on external growth? Is that the question?

Yeah, that's right.

Okay. All right. Thanks for that. Yeah, so you're right. I think we are uniquely positioned because of the heavy lifting that we did in 2019 and the liquidity that we have on our balance sheet today to use acquisitions as one of the sources. I mean, in 2021, we were active on the acquisition front, but it was all self-funded with dispositions. And so the capacity that we had at the beginning of 2021 is the same as it is today. So acquisitions are certainly one tool that we have at our disposal to create value. I do think on the comment around being able to buy lower cap rate things, I think you'd expect us to continue to be disciplined and underwrite deals in a way that allows us to deliver returns. I mean, the data point that we provided and we talked about earlier on the call on the outperforming underwriting is a good testament of that, of our ability to underwrite conservatively, get the deals, and sort of have the strong returns. But on the acquisitions front, you would expect, and then the other point on acquisitions is that, as Leslie mentioned, we're going to be net acquirers this year. So we are, you know, we have a pipeline. We're actively looking at acquisitions, and we're going to remain disciplined. And we think with our liquidity, we have the capacity to do that. But I want to just add the additional point is that acquisitions are just one of the tools we have at our disposal. Because we have liquidity, we can do the acquisitions. We have, you know, within our base case model, the internal acquisitions growth catalyst with the conversions and the CapEx, et cetera, is also, you know, is going to deliver outsized returns for us, you know, within our ROI initiatives. And then lastly, as I mentioned earlier, we have the liquidity at, you know, when, you know, when dividends resume and returning capital through shareholders, that is also an option that is in our toolkit. So, you know, we have the liquidity for all of it is how we think about it.

Thanks. And maybe if you could also comment on your value and where, you know, obviously investors have been, you know, thinking potentially you could be one of the more attractive options for private equity being select service.

Sorry, you cut out. Finish your question.

If you could just comment on where you think your underlying value is, that would be helpful.

Sure. Thanks, Mark. So it's important to affirm our strong view that we are trading at a discount to both consensus NAV as well as our internal view of NAV. From a public NAV perspective, the discount is in the 35% range today. Obviously, today is a tough day in the market with the global things going on. But the discount is even wider based on our internal view of our NAV as well as replacement cost. Our internal view of our internal value is really based on the fact that when we look at what comparable assets are trading at, us at around $200,000 a key or slightly more than $200,000 per key is materially below where comparable assets are trading today in the marketplace. That gives us confidence around the value of the underlying assets. We also have seen, you know, as Leslie mentioned in her remarks, is that the assets are trading at or above 2019 levels, which also gives us confidence around value. There are areas that we believe the market is not giving us credit for today, you know, and that's, you know, the overall quality of our portfolio, which, you know, is this, you know, from a red par and metric standpoint, the strongest it's been in our life as a public company. You know, we also, you know, to your earlier question, we have investment capacity to deploy, right? You know, that's, you know, we think that needs to get factored in. Also, we have discussed the $23 to $28 million of incremental EBITDA, right? We think that's a, you know, we need to, you know, to put points on the board and to demonstrate that, you know, so that's future credit, if you will, within our value. And then finally, you know, we have a pipeline of, you know, internal, you know, ROI initiatives as well as future conversions that we're continuing to work on. And so there's more value within our portfolio. Okay. All that being said, we're going to work hard and continue to work hard to bridge that gap to NAV through executing these initiatives. It's important to ROJ for us to bridge that NAV gap, and you would expect us to act in a commercial manner to make sure that we take steps to bridge that gap.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Hale for any final comments.

Well, I just want to say thank you to everybody for joining us today. We look forward to providing updates throughout the year as the recovery continues to unfold, and we look forward to being able to provide an update on our progress relative to that. Have a good rest of the week.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.