RLJ Lodging Trust

Welcome to the RLJ Lodging Trust's second quarter 2022 earnings 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 Bala, RLJ's Senior Vice President, Finance, and Treasurer. Please go ahead.

Thank you, Operator. Good morning and welcome to RLJ Lodging Trust 2022 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 10Q 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 today. I hope everyone is having a great summer so far. Our portfolio's second quarter performance exceeded our expectations as fundamentals saw a robust acceleration with lodging demand benefiting from summer travel ramping business demand, stronger citywide attendance, and urban markets being fully open. These tailwinds drove Lodging Fundamentals to strengthen throughout the second quarter, with this strong momentum continuing into July. In addition to delivering strong operating results, we successfully completed a number of strategic initiatives whose execution was made possible by our strong balance sheet. Most notably, we accretively recycled capital into share repurchases. We recently acquired a high quality boutique lifestyle hotel in the high growth market of Nashville. We successfully exited our financial covenant waivers. We materially advanced our three conversions and our board of directors recently authorized a meaningful increase to our quarterly dividend, which demonstrates confidence in our portfolio's ability to generate sustainable free cash flow. The execution of these initiatives has further strengthened our relative positioning and demonstrates our ability to create tangible value for our shareholders. Against an overall positive industry backdrop, our portfolio's recovery to 2019 was significantly better than expected throughout the quarter, with June REF PAR achieving 94% of 2019 levels. Accelerating demand across all of our markets led to strong pricing power as our second quarter ADR surpassed 2019 levels, sequentially improving each month. with June ADR achieving 105% of 2019. Our outperformance this quarter was driven by stronger than expected business travel, greater citywide attendance, and robust leisure demand, particularly in our urban markets. Our urban hotels, which represent two-thirds of our EBITDA, had the strongest growth this quarter, achieving a new high of 95% of 2019 REVPAR in June. The significant step up in urban demand allowed us to drive rate with June ADR achieving 106% of 2019 levels. This robust momentum carried into July, which improved to 107%. Our ability to achieve new highs in ADR ahead of the full recovery of our urban markets is an indication of the run room that exists to drive rate. Our urban markets were a major beneficiary of the rapid improvement of business transient demand, robust short-term corporate and social bookings, and returning city-wide, which materialized in many of our markets such as Boston, Washington, D.C., Orlando, and Miami, as well as the return of leisure demand as many venues that were not open last year were fully open this year. The pace of the recovery from business transient improved significantly this quarter as demand broadened beyond SMEs with the return of traditional industries such as financial services, consulting and technology companies and new sources of demand emerged from the hybrid work environment. This allowed our business transient revenues during the second quarter to increase significantly by over 50% from the first quarter, which accelerated each month with June achieving 71% of 2019, a new high watermark. Further evidence of the strength and the recovery of business travel is a positive momentum in weekday results. which achieved 88% of 2019 REVPAR during the second quarter, a substantial improvement of 40% from the first quarter. These weekday trends are driving the underlying recovery in urban markets. Group demand also accelerated during the second quarter, with group revenues increasing materially by 50% from the first quarter. Driven by ADR, which exceeded 2019 levels, group demand benefited from increasing city-wise with greater attendance. but continues to be driven primarily by the growth in small and medium-sized groups, which is our core segment. Finally, as expected, our leisure revenues exceeded 2019 during the second quarter, driven by ADR that was 20% above 2019. ADRs in our key leisure markets of Key West, Charleston, and Miami exceeded 2019 by an average of 40%. Notably, our robust leisure demand in the second quarter was bolstered by the strengthening of urban leisure and emerging leisure demand. As demand improved materially throughout the second quarter, we maintained tight operational controls despite current inflationary headwinds, which enabled our portfolio to achieve 91% of 2019 hotel EBITDA and EBITDA margins, which were only 60 basis points below 2019. Now, with respect to capital allocation, We remained very active and executed on multiple internal and external objectives that are expected to enhance our overall growth profile throughout the cycle. In particular, we entered the final stages of the conversions for Mandalay Beach, Charleston, and Santa Monica, which are on track to debut during the second half of this year. We took advantage of the dislocation in our stock price and accretively redeployed $50 million of disposition proceeds into share repurchases at a meaningful discount to our underlying value. We also expanded our footprint into Nashville, a top growth market with the acquisition of a unique boutique lifestyle hotel. The hotel sits in a bullseye location within downtown Nashville, a seven-day-a-week demand submarket. This hotel is projected to generate REVPAR that is two times our portfolio average and a stabilized NOI yield of 8% to 8.5%. With significant development underway, we believe both Nashville and our hotel are positioned to outperform throughout the cycle. Additionally, we successfully exited our financial covenant waivers, which will further enhance our capital allocation flexibility. And lastly, our Board recently authorized the increase of our quarterly dividend to $0.05 per share, which reflects our confidence that our portfolio can generate sustainable free cash flow throughout all phases of this economic cycle. We continue to view dividends as an important component of the total return we seek to provide investors. Our capital deployment not only underscores our highly disciplined approach to capital allocation, but also demonstrates the tremendous optionality our strong balance sheet provides. Furthermore, we believe the recent increases in dividends validates our commitment to returning capital to shareholders. Looking ahead, we believe that lodging fundamentals should remain strong during the second half of the year, which will be driven by the recovery of urban markets. We expect demand in urban markets to continue to ramp, benefiting from further improvements in business transient and group demand. The current trends in urban markets gives us confidence that their recovery is taking hold, despite the uncertainty in the macro environment. In fact, we are seeing evidence of strong trends from the second quarter continue thus far into the third quarter, as seasonality normalizes. Specifically, our REVPAR and leisure-oriented markets remained elevated in July. We expect leisure to remain healthy, especially since urban markets are fully open and should continue to benefit from the emergence of leisure travel. Our July business transient revenues improved further from June. We expect corporate travel to continue to strengthen throughout the remainder of the year. Our third quarter group booking pace is currently tracking at 90% of 2019 levels, with recent in-the-quarter, for-the-quarter booking trends, providing us with confidence that their recovery in groups should continue to improve for the remainder of the year. And finally, we believe that the recent uptick in international demand could provide further upside in urban markets. Overall, our portfolio remains extremely well positioned with several unique catalysts to drive incremental growth, including the post-conversion ramp of our conversion hotels, the continuing ramp of our recent acquisitions, Our urban-centric footprint, which is ideally positioned to benefit during this current phase of the recovery as growth shifts to urban markets. Our portfolio's efficient footprint with fewer FTEs is well-positioned in this inflationary environment. And finally, our strong balance sheet, which continues to provide significant optionality with respect to capital allocations. We believe that our overall positioning will allow us to drive significant value throughout this cycle. I will now turn the call over to Shawn. Sean?

Thanks, Leslie. We were pleased with our second quarter results, which exceeded our expectations, significantly narrowed the remaining gap to 2019, and accelerated through June, which was the strongest month since the start of the pandemic. Pro forma numbers for our 95 hotels exclude the sale of the Spring Hill Suites in Westminster, Colorado, which was sold during the quarter. Additionally, our pro forma numbers have not been adjusted to reflect our recently announced acquisition in Nashville since this transaction closed after the end of the quarter and will be incorporated into our pro forma numbers starting in the third quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. Our second quarter portfolio occupancy 74.7 percent, which was 90 percent of 2019 levels. Accelerating demand allowed second quarter average daily rate of $196 to grow over 11 percent from the first quarter and was approximately 103 percent of the second quarter of 2019. June was the strongest month of the quarter and also generated ADR of $196, which represented 105 percent of 2019. Growth was strongest in our urban markets, as we benefited from pricing power throughout the quarter. We are encouraged by the fact that RevPAR was robust in our most significant urban markets and were at or above 2019 levels, such as 105 percent in Austin, 108 percent in San Diego, 96 percent in Manhattan, 99% in Louisville, and 126% in New Orleans. In our leisure markets, demand and pricing power continued as these markets benefited from seasonally strong demand, allowing ADR in our key leisure markets to continue to exceed 2019. Our second quarter REVPAR was over 92% of 2019 levels, was stronger than we expected at the beginning of the quarter, and accelerated from 91% of 2019 in April, 92% of 2019 in May, and 94% of 2019 in June. This sequential improvement was primarily driven by outperformance in our urban markets. Turning to segmentation, our second quarter leisure remained strong as evidenced by our resorts achieving 110% of 2019 REVPAR. and our group revenues significantly improved to 90% of 2019. The increasing group demand from both city-wides and returning corporate travel allowed group pricing power during the quarter, which achieved 102% of 2019 levels. Finally, we are increasingly encouraged by the growth of Business Transient, with second quarter BT revenues achieving 64% of 2019 levels, which represents and 1,800 basis point improvement from the first quarter. The improving operating trends during the second quarter led our portfolio to achieve hotel EBITDA of $118.6 million, which represented 91% of 2019 levels. We are encouraged with our ability to drive strong operating margins of 35.9%, which were only 60 basis points below the comparable quarter of 2019. despite revenues of approximately 92% of 2019 levels. Our hotel EBITDA improved throughout the quarter and was $38.5 million in April, $39.1 million in May, and $40.9 million in June, which represented 94% of 2019 levels and generated hotel EBITDA margins of 36.9%, which represented the highest profitability and margin of the pandemic. Preliminary July results are forecasted to be in line with June, benefiting from the continuing strength in demand and pricing power. For July, we are forecasting occupancy of approximately 75% and ADR of approximately $190, resulting in rev par of $142, which will be at 95% of 2019 levels. Importantly, our July ADR is expected to continue to exceed 2019 levels, at 106%, while our operating margins are expected to be in line with 2019 levels. Turning to the bottom line, our second quarter adjusted EBITDA was $111 million, and adjusted FFO per share was 49 cents. As Leslie mentioned, while demand accelerated throughout the second quarter, we remained vigilant in maintaining cost containment initiatives that are appropriate for the current environment. Underscoring our continued focus, our second quarter operating costs remain below the comparable period of 2019. Within operating expenses, wages and benefits, which represent 38% of total second quarter operating costs, were approximately 10% below the comparable quarter of 2019. On a relative basis, our portfolio remains better positioned to operate in the current labor environment as a result of fewer FTEs required in our hotels given our lean operating model, smaller footprints with limited F&B operations, and longer length of stay with suites representing 50% of our room's inventory. While second quarter occupancy was at approximately 90% of 2019 levels, our hotels operated with approximately 23% fewer FTEs than we operated with pre-COVID. Overall, we are encouraged that the labor environment is improving. We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital so far this year. These accomplishments include exiting the covenant waiver period on our corporate credit facilities, which will reduce our interest costs on our line of credit and term loans by over 80 basis points. amending our corporate credit agreements to allow share repurchases during the covenant waiver period, repurchasing $50 million of stock under our share repurchase program, repaying the remaining $200 million outstanding on our corporate revolver, and exercising the first of two one-year extension options on a $200 million secured loan, which extended the maturity to April 2023. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. Our weighted average maturity is 3.9 years, and our weighted average interest rate is 3.9%. We are benefiting from the successful execution of our prudent balance sheet strategy to mitigate refinancing and interest rate risk. As of the end of the second quarter, we have no debt maturities until 2023, and 100% of our debt is fixed or hedged under valuable swap agreements, which protect us from the current rising interest rate environment. We continue to maintain significant flexibility on our balance sheet, and 81 of our 96 hotels remains unencumbered. Turning to liquidity, we ended the quarter with approximately $511 million of unrestricted cash, $600 million of availability on our corporate revolver, $2.2 billion of debt and no debt maturities until 2023. Now turning to capital allocation, we previously announced a new $250 million share repurchase program and the amendment of our corporate credit agreements to allow share repurchases during the waiver period. We were active under our share repurchase program during the second quarter, where we repurchased approximately 4.2 million shares for $50 million. at an average price of approximately $11.93 per share. Additionally, as mentioned before, the Board recently approved an increase of the quarterly dividend from a penny to five cents per share, starting with the third quarter dividend. The combination of the share of purchases and increased dividend demonstrate the strength of our balance sheet, our confidence in the sustainability of healthy lodging fundamentals, and our commitment to return capital to our shareholders. We continue to 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 still estimate RLJ capital expenditures will be approximately $100 million during 2022. In closing, RLJ 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. We will now open the line for Q&A. Operator?

At this time, we will 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 cell will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Austin Warschmidt with KeyBank Capital Markets. You may proceed with your question.

Yeah. Hi. Good morning, everybody. Thanks for taking the questions. So you guys have hit it on sort of the rate momentum that you've seen across the portfolio. You talked about July hitting 106% of 2019 levels. And I think, Leslie, you suggested that you see significant rate opportunity in your urban markets in particular. So can you just help us understand what that upside opportunity looks like? maybe what segments, you know, are really, you know, driving that or have the most upside and, you know, where you think we could kind of see that track through the back half of the year?

Sure, Austin. I think that, you know, obviously in general, urban did relatively well from a standpoint of the acceleration and the pace. And that was driven both by BT and group and obviously the return of leisure and But when you look at BT, it was only at 64% of revenues for the second quarter, where group was at 90%. So the upside is really on the BT side, both on a rate and demand perspective. And keep in mind on a couple things on the rate, right? So we have, from a revenue management perspective, We're smarter today. We have more courage in terms of how we are managing our inventory. The consumer has been conditioned at the higher rates. And then lastly, you've got your least price-sensitive customer in BT coming back. Those are the things that give us confidence that there's upside in the recovery of rates. And our ability to drive rate above 2019 levels in urban, despite the fact that we're not fully back yet, the combination of all of that is what's giving us confidence in our ability to drive incremental rate.

So just following up on that, I mean, I think BT was like 46% of revenue in the first quarter. You said it went to 64% this quarter. I mean, how has that trended month to month and then into July, specifically on that BT component?

We've seen sequential improvement throughout our portfolio and all the segments on the revenue side, Austin.

Got it. And then just one on the Nashville acquisition. I mean, certainly the market certainly fits with some of the recent purchases that you've done, but supply has been a talking point, you know, um, for Nashville, you know, for some time. And so I'm just curious if you could speak to kind of how you underwrote that deal, what types of asset management opportunities you see and how easily do you think, or how conservatively did you underwrite to get to that eight to eight and a half percent?

So I would say, let me, let me talk about your question on supply. I think when you can't just look at supply, you have to look at the demand side as well. Um, it's important to understand that for the last 10 years, the demand has been growing at two X supply in the Nashville market. So think about that. There's a ton of demand that's coming into the Nashville market. You know, RevPAR has grown at 8% per annum for the last 10 years. We expect it to grow another 7% to 8% this year alone. When you think about the multiple demand drivers that are in the Nashville market, you've got significant corporate expansion. Oracle's building a campus there. Amazon's in the market. It is an entertainment hub, as we all know. And it's a regional group powerhouse. And so there's a lot of demand that is going on in the market. You know, there's airport expansion that's taking place today. The passenger volume is ahead of 2019 levels. And then this particular asset, you know, sits in, is a bullseye location in downtown, which is a seven-day week demand market that has tremendous urbanization that's underway. And that's reflected in the rate. So we think that while there is some incremental supply coming to the market, demand is significantly outstripping that and will continue to do that. There's a lot going on in Nashville. In terms of the underwriting side, we are generally relatively conservative in our underwriting. Keep in mind that the current recent deals that we did are all ahead of their underwriting. We expect our national assets to take the same trajectory because we're generally conservative, which is why we don't compete in bidded processes. Again, this was an off-market transaction for us. and you could expect our underwriting to reflect, you know, a conservative nature that we have.

Thanks for the time.

Our next question comes from the line of Michael Bellisario with Baird. You may proceed with your question.

Thanks. Good morning, everyone. Good morning. Leslie, just one more for you on Nashville. Maybe just can you give us some color or background on the deal, just kind of how and when it came together, given everything that's gone on in the market the last 90 plus days, and then also how you got comfortable with the 21C brand, and if you have any optionality there, and kind of how you think about that brand relative to the real estate value for that property.

Yeah. So I'll take the first part, and my team will jump in on a few of these parts here as I'd say in terms of the actual transaction, Mike, as we've said before, we focus on off-market transactions, and those deals take a little bit longer to curate. This is a deal that was coming together for us at the beginning of the quarter, and there was a prior buyer who fell out of bed, and we were able to jump in and, again, use our balance sheet, given that there was some complicated debt that was on the property that we were able to solve. And so that gave us a unique window to jump in and take advantage of the asset. Obviously, you know, we think that the basis at which we are getting this asset is very attractive. If you look at most recent trades that have happened in the national market and the yield that we're underwriting to, as well as the fact that it's accretive on our overall portfolio with the REVPAR being 2x what our portfolio average is and clearly is expanding us into a market that we're not in today. You know, as it relates to the brand, you know, first of all, this asset itself, fits into the core of what we own and what we've been buying. It is a young asset. It's high quality in a growth market. And it continues to be a rooms-oriented asset with 124 keys. The brand is a lifestyle brand. 21C is tucked within the lifestyle division of Accor. And so when we looked at the asset, we looked at the market, we looked at the sub-market, we looked at Accor's global distribution, and we looked at our asset management and we believe there's operational upside associated with this asset. For those who are not familiar with the asset, kind of think about it from a standpoint that the branding fits between sort of an autograph and a tribute or a curio and a tapestry, and that's right within our wheelhouse and sweet spot of where we think about lifestyle. So we feel very good about the combination of the global distribution, the brand, and our asset management being able to drive incremental operational upside. I'll let Tom add. some more color on the branding.

Yeah, so good morning, Mike. What we were really impressed with was their ability to compete in this market, and if you think about Nashville, we're really close to the heart of the entertainment district, and there's a significant amount of seven-day demand that comes from different avenues. So when we look at this particular brand, and you see what's happened on 4th Avenue between Printers Alley, Bankers Alley, It's almost a row of independence now. And to Leslie's point, there's a tribute there, autograph. And we know that when we look at rate opportunities, we feel very comfortable. As this just started to ramp before COVID as it opened in 17. And in 19, it actually won an award for U.S. city finalists for the asset itself. So it's in great condition. We feel very strong about not only the brand and the asset, but its location, as Leslie mentioned. And the development that's going to happen in that area is quite significant. Obviously, Leslie mentioned the Oracle Campus, the new Amazon million square feet, the Ops Center of Excellence. And then most importantly, there's going to be a significant amount of development near the riverfront that's going to be funded by the city and the commitments over $13 billion for the new riverfront park. So it's all coming towards us in addition to already being a great location to begin with. So we're pretty high on the opportunities. Within the brand and the asset itself, there's great square footage for group business midweek, and then obviously we benefit from weekends, which is a high leisure market. So we're pretty pleased with where we're at in the location as well as the brand and what we think we can do with it.

And then, Mike, the last point is on the encumbrance and optionality. It is encumbered by a short-term management contract with a core company, that will provide us with optionality. We're excited about the core relationship, but the contract itself has optionality embedded within it.

Got it. Thank you. And then just one more first, just on Northern California. Again, just maybe provide the latest update there. What's changed on the ground? What are you seeing in terms of fundamentals? And it really looks like rate is what's lagging there. What gets that turned around for your assets on a go-forward basis? Thank you.

Yeah, I mean, I'll let Tom provide some color, but overall we are encouraged by the pace of recovery there. You know, REF PAR improved by 80% quarter over quarter and stands at about 70% of 2019 levels and rates at about 82% of 2019 levels. But the improvements have been faster than what we expected, and we're seeing BT ramp up and city-wide improve, you know, as well. And the mayor is addressing, taking actions to address some of the structural and social issues there continually.

And before Tom jumps in, just from a rate perspective, actually the rate in the market is improving every month, Mike. And so we've gone all the way up until within the market, 91% of 2019 rates within the market, which has improved 1,000 basis points over the last three months or so. So the trajectory of the rate, which was an issue earlier on in 2022, is really accelerated.

So I think the details around What's happening on the ground, Mike, is the inventory has reopened in San Francisco, as we all know. So there's a good sign that everybody's back. And I'm talking supply as well as demand now. It's starting to come more meaningful improvements actually happening from the Microsofts, the Extensions, Amazon, Salesforce, and Chevron. So you're starting to see national corporate be a bigger part of the mix, which is a plus. When we've had city-wide, we've had attendance improving. In fact, even Dreamforce is now going to expect about 30,000 attendees And a three-day event, and we know that's always a big event. And more importantly than anything else, that creates compression. When we look at the 2023 calendar, we're much more robust in regards to what's going to happen from a citywide standpoint. So we've got a positive future when we think about where we're going. And even in the last three weeks, when I look at urban leisure, San Francisco, you know, we're in the mid-80s in occupancy, which is only about 5% to 10% below 19 levels. And ADR is at around the 90%. of 19 levels. So we're seeing continued movement, you know, as we're looking at CBD. And then even Silicon Valley, which is growing faster, it's primarily because of project corporate business. You know, companies like Facebook and the different IT companies and tech companies are starting to travel again. And our extended state assets are picking up that project business. Lastly, when I think about San Francisco, it's international, Mike. And what we've been watching is the deployments in northern Cal. And when we look at today, year to date, this is only through May, we're at about 49% year to date of international deplanements on passenger volume. But most recently in May, it was a 62%. So you're starting to see some growth. And we know that, you know, at the end of the day, there's about 35% when I look back at 19 levels of total deployment international. So if we can start to see that uptick go back into the fall, we think that there's positive demand with all the things we just mentioned.

Right. And the other thing I would just remind you, Mike, is we only have two assets that are in the CBD. The balance of our assets are outside of, and the assets that are not in the CBD are growing at, you know, recovering at a faster rate, kind of five, six points ahead of CBD. Helpful.

Thank you all.

Our next question comes from the line of Dori Keston with Wells Fargo. You may proceed with your question.

Thanks. Good morning. Your last few acquisitions have been a bit more boutique, upscale to high end in urban markets. Should we expect incremental recycling out of the remaining very few lower and less city center hotels you have?

What I would say, Dori, is that we're going to continue to be active portfolio managers and that our dispositions on a forward basis, as we said before, will be more opportunistic. And, you know, when you have 95, 96 assets, you're always going to have a lower end of your portfolio by default. And then we'll continue to sort of prune that appropriately. But we're not programmatically selling anything as we sit here today. We expect to be net neutral on sort of the buy-sell side, you know, this year.

Okay. And has anything changed in your underwriting of late, just given, you know, credit markets, the pace of recovery and operations to date in your urban markets, and just general uncertainty in the economy?

Yeah, so we always underwrite, Dory, to sort of long-term weighted average cost of capital. And so when we think about the short-term swings, that doesn't influence our long-term underwriting. And so we obviously assess as part of our hurdle rates whether this is something that would be more permanent that would require an adjustment, but You know, we were not giving ourselves the benefit of the low interest rate environment historically as we thought about our hurdle rates, and so this is just, you know, we're returning back to what long-term averages are going to be.

Okay.

Thank you.

Our next question comes from the line of Neil Malkin with Capital One. You may proceed with your question.

Thanks, everyone. Good morning. I think I, Leslie, I'm not sure if I hear what you said about the, it sounds like you said acquisitions disposition is kind of neutral this year. And if I misheard you, I apologize. But the question I had about that is, you know, do you expect to see additional opportunities present itself on the acquisition side toward the end of this year and the next year as you kind of think about a more difficult financing landscape? And a lot of brands are going to probably start reimposing pips on a lot of owners who might be cash flow strapped. And especially given your very advantageous cash position, do you feel like we're kind of entering a time when you guys can go on offense? And are you seeing more opportunities kind of hit your underwriting team's desk? Thanks.

So I would say two things, Neil. One, we are constructive on acquisitions because we do think that the current debt capital markets environment is creating advantages for all cash buyers against the backdrop where fundamentals are remaining healthy and positive. So whether or not the volume of transactions picks up because of the things that you described in terms of refinancing capabilities or brand initiatives, we do think opportunities will come out of that. But it's a matter of how much volume comes out of that to be determined. I think what we've seen thus far is that deals that were awarded prior to interest rates really moving, some of those transactions have not gotten done. and they've come back in different forms, and we've remained disciplined around those assets. So we've seen something around that. But let me eat this helicopter up a little bit on capital allocation just in general. We were very active this quarter on a number of fronts, and you saw us demonstrate the ability to leverage the optionality that our balance sheet provides. We showed that we could find windows to take advantage of the different tools that we have to drive value creation. We creatively recycle capital into stock buybacks. We found an attractive asset in a unique growth market. We've advanced our value creation internally, and then we raise our dividend. All the tools that we have available have benefits. So we're going to be thoughtful and balanced and find the right windows to deploy those tools We acknowledge that buybacks continue to be attractive at these current levels, but we want to do that on a leverage-neutral basis like we did in the second quarter. And as I said before, we're still constructive on acquisitions, just given the advantages that we think that we'll have being a cash buyer against this backdrop. But at the end of the day, all roads lead back to having a very strong balance sheet that gives us optionality. We have very little debt that's maturing in 2023, and so our asset sales can be redeployed for growth and not having to bring down leverage on our balance sheet. We do think that when we think about the transaction market, that there is a spectrum relative to what's happening. It's asset by asset, market by market. On one end of the spectrum, you have high-quality assets and growth markets that you can finance them better, although better is all relative in this market. On the other end of the spectrum, you have markets that are lagging or capital-intensive assets. We've seen assets that are on the high-quality growth spectrum continue to move forward if they were already in the market, and assets that are on the other end, those were paused. But You know, we expect a lot of capital that's on the sideline that needs to find homes. And so we'll look at sort of a post-Labor-Day environment to sort of see how the transaction market unfolds. You know, we recognize that rising interest rate environment is going to have some level of impact on values. You know, whether it's 1% to 5%, 3% to 7%, you know, who knows. But what I do know is that, you know, urban select service and resorts are going to be on the lower end of any price degradation because of the green shoots of the recovery that we're seeing and obviously the consumer trends that are happening there. So we think there's opportunity for us because of our balance sheet. And, you know, we're going to continue to be thoughtful on acquisitions.

Appreciate the fulsome answer. Thank you. Other one, maybe just kind of going back to the BT or I think overall remaining recovery side. It seems like this quarter, you know, there's a sort of inflection of thought in terms of, you know, group recovering ahead of BT. And, you know, obviously you guys are much more, you know, transient, business transient focused portfolio. You know, I think Austin asked you about how BT was accelerating. And, you know, I don't know if you have numbers, you know, maybe not want to share, but, you know, do you feel like, there is a chance that we don't actually get back to 100% in terms of BT demand, you know, in the near term? In other words, you know, but potentially, you know, permanently impaired slightly or somewhat? Or do you have confidence that the BT, however it comes, will get back to 2019 levels over the next, you know, one to two quarters.

Yeah, I mean, I'd say, Neil, yes, we have confidence that we're going to get back to 2019 levels and actually push beyond that. I think when we look at the data, we look at the pace of how BT is ramping, we think about the broad nature of it. You know, BT is expanding beyond SMEs and our traditional, as I said in my prepared remarks, traditional companies are starting to travel. I think the other thing that you have to keep in mind is that a lot of companies up until more recently still had restrictions on their internal travel authority, and that's all been lifted. So people are not having to seek approval to be able to travel these days. And so when we look at our transient pace, recognizing and acknowledging that our booking window remains short, it still is positive, and we feel very good about that. And we're seeing a lot of strong production on our group side, When we look at the third quarter, we're at 95% of 2019 levels from a PACE perspective and are in the quarter for the year. Average has been strong at about 30%. So when you take what we expect to book in the quarter relative to what we already have in the books, we feel pretty bullish on the group side. And while group is continuing to benefit from citywide attendance improving, the reality of it is that small, mini-sized group right now is still driving group, and that's right within our wheelhouse. But the key thing to keep in mind is that the person who's traveling for group is also my BT customer. And so that is overlap there, and that gives us confidence that BT is going to get back. We think there's pent-up demand relative to that. I think we acknowledge that there is a key inflection point will be post-Labor Day. We generally expect that the back half of the year will continue to remain strong. We acknowledge that seasonality is will materialize on an absolute basis, but when we think about it as a percent of 2019 levels, we expect to see a sequential improvement. So, overall, we're very, you know, confident that BT will get back to 2019 levels, and when we look at all the data, you know, we're encouraged by that. I'll let Tom add, you know, some other nuggets.

Yeah, so the only thing I would add to that, Leslie, would be when I look at the current environment, you know the booking window is short, as we've always said, Neil, but When I think about August compared to July, I see that the booking window is actually increasing where we have a better starting point in August versus then when we started in July for BT. When I look at September, it's the same story. So you see sequential improvement when you look at our portfolio and what's on the books going into that month, 60 days out. And then when I think about October, what we've been monitoring is, you know, compared to 19, Neil, we can look at travel click data and already in the 90 days prior to October, it's outpacing 2019 BT. So it gives us the leading indicators that BT is coming back. So the national corporates, consumer goods and services, life sciences and tech, even government services is starting to travel at a little bit higher clip. And so that's encouraging as we go into the fall as well.

And then lastly, you asked for a couple of data points around group. So as Leslie mentioned, our group, was at 90% of 19 levels in the second quarter. We expect it to be at 95% of 19 levels in the third quarter. We have 98% of our third quarter books already definite on the books. And so if we book the same amount, we will significantly exceed that, be in the quarter for the quarter. And so from a standpoint of our confidence around our ability to hit our group forecast, in light of our booking trends, it's significant. In a normal pre-COVID year, we would book a little over $70 million in the year for the year. So far this year, we've already booked $68 million through the first half of the year. And so our short-term trends continue to be strong on group, which is leading the recovery there. So to summarize, BT, we have the confidence and the group trends are significantly quicker to recover than we would have expected even six months ago.

Yeah, appreciate all the commentary. Thank you.

Our next question comes from the line of Bill Crow with Raymond James. You may proceed with your question.

Yeah, thanks. Good morning. Leslie, You noted that you've seen some acquisition opportunities reemerge after maybe being tied up by another party, and I think you said Nashville was one of those. I'm wondering how the pricing changed from when you first looked at it until you got that second opportunity.

Yeah. Nashville was a broken deal, Bill, but it was before the trends that I sort of recently mentioned. Having said that, you should trust and believe that we did our due diligence and used our due diligence opportunity to make sure that the pricing was right. I'll leave it at that on that deal. I would say the other deals, we're maintaining our discipline, and we topped out long before the other buyers did, and so when we say it's come back, it means that it's back in the market, but we're going to continue to be disciplined around whether or not we'll jump back in.

Okay. If I could just push one more question at that Nashville acquisition, because it's a market I like and sounds like a great asset, but what do you think the valuation difference is between buying something within a core brand, which does not have the loyalty program that, say, a Marriott, Hilton, or Hyatt might have? And that seems to be a market in which, given the leisure, long weekend sort of environment there, really thrives on these loyalty guests and utilization of points. Is there a material or should there be a material difference in the pricing for those sort of assets?

Yeah, it's a great question, Bill. I think the way we thought about it in light of the location of the asset and as well as it's a rooms only 124 keys, you know, we wouldn't frankly expect to see a significant difference. in valuation because we underwrote the ability for that hotel and that location to be able to sort of capture incremental share. And so I wouldn't see a huge difference. I think the way that we underwrote it and thought about the upside was as much the location and the market, as Leslie mentioned, but also our ability for our asset management team to come in and really put in place some of our best in class practices around particularly around revenue management and driving share within the market, but also cost structure as well as some of the ancillary revenues there. So we think that our special sauce on the asset management side is going to also allow us to create value on the deal.

Finally for me, and sorry if I missed this, but can you tell us of your existing portfolio, how many more assets might fit into a non-core bucket?

Yeah, I would say it's less than 5% of our EBITDA bill. And we feel pretty good about the fact that we did a tremendous amount of heavy lifting in 2019. And we have done some more non-course last year and a little bit earlier this year. So we have whittled it down. But again, as I mentioned before, we have 96 assets. you're always, by definition, going to have a bottom end of your portfolio. But for us, to answer your question, it's about less than 5%.

Great. That's it for me. Thank you.

Our next question comes from the line of Chris Ronco with Deutsche Bank. You may proceed with your question.

Hey, good morning, everyone. Leslie, I think you noted earlier you're seeing some improvements on the labor front. Could you maybe give us a little bit more detail as to what is that on hours worked or is it on hourly wages or something else? Because we got a pretty interesting employment report this morning that's suggesting things are still pretty tight out there. So any color on that would be great.

Yeah, I mean, you know, obviously, keep in mind, given the nature of our portfolio and the small footprint of it, that, you know, we're at a relative advantage on this. But I'll let Tom give some comments about what he's seen boots on the ground.

Yeah, so, Chris, what I would say, you know, from a high-level standpoint, before I get into the numbers, is hiring has absolutely improved. We have less open positions than we did in first quarter and quarter two. And turnover is down, so we track retention. and retaining employees. I think wages basically have, you know, been now in line to hire and compete and retain. And we saw that as a positive movement towards those three, you know, items that I mentioned earlier. In regards to productivity, I think minutes per occupied room are in line in regards to what we thought it would be. When I look at hours per occupied room, we're down about 30 cents compared to 19 levels. And then wage rates, which are higher than 19 three years later as we expected, you know, are contributing to the overall, you know, impact on that. But as Sean mentioned earlier in his prepared remarks, we're at 77% of FTEs at 90% occupancy levels. So we have a lot of scrutiny around the synergies that we're having, you know, at each property, whether it's proximity or various locations and different departments, as well as the productivity that we're thinking about, whether it's F&B, housekeeping, and all the items that we talked about earlier around shared services with the brand. So all in all, we think it's an improving environment, still a very tight labor market, and we do have to use contract labor more than we'd like, but we're productivity-wise, as we monitor that, we think that's going to help us at the end of the day and to make sure that our margins are protected.

Yeah, thanks. Thanks, Tom. Maybe just to follow up on that is I think we heard that in July, Marriott changed some of the service level requirements, and you guys have some exposure to kind of the full service Marriott side. Is there any noticeable change from what they implemented?

Yeah, you're right about the implementation, and we do have about 40% of our portfolio is Marriott products, but also you have to look within the details, Chris, full service versus select service and what they're asking us to do. And we do think it's a consistent methodology that they're trying to adhere to when the consumer comes in so they know what they expect. And so, for instance, at our select service properties, they're asking us to do light stays and ask the customer again if they want to have cleaning or not. And what's most interesting, I think, in our world, our consumer is kind of trainable, if you will, and the take rate is more about 25% when I think about it. More weekends than weekday because the customer many times will put a D&D sign on their door. So it hasn't impacted productivity to this point. And then on full service, they're asking you to do it every day in regards to that type of clean. We have less full service hotels within the Marriott brand than we do on the select service side where we have a lot of courtyards and residence ends, as you know.

Great. Great. Thanks. Just as a last one, you guys have three conversions that are wrapping up, which means you're presumably going to start the next, the next few, is there any change in, in, you know, scope of plans or budgets or anything like that based on increasing costs and, you know, maybe potential disruption at the assets in a, in a, in a very strong demand and pricing environment?

Yeah. I mean, look, we're excited about the fact that we were entering the final stages of their three conversions and that we are going to relaunch in the fall and And as we said before, we expect to do two conversions per year. We're on pace for that, and we look forward to giving more color to that on the next call. In terms of scope, what I would say is that, in general, we're holding scope. We recognize that, obviously, the cost of inputs have gone up, but the returns that we were generating on these conversions can more than absorb the incremental costs related from supply chain, etc., And so, no, we haven't had to change the scope of what we are doing on those projects. And what I would say is that, you know, the three conversions that we will be launching in the fall have a significant leisure bent, and so the backdrop in which they're launching is very strong. We do believe that the leisure customer has structurally changed from a pricing perspective, and so we expect these assets to do better than what we actually underwrote. And clearly, if you're renovating and therefore have disruption and rates are higher than what you originally planned for, by definition, your disruption is a little bit higher. But again, that's all temporary and we would get the benefit on the backside of that when the asset comes out of renovation.

Yeah. And Chris, the one thing I would just add, the reason why we sequenced the conversions the way we did over several years is to mitigate the risk of having excess disruption in any one year. And so we were sort of very thoughtful in how we wanted to roll out a couple per year to allow us to have ramping assets at the same time, you know, that we were, you know, having other assets under the knife converting. And so I think, you know, that strategic thinking early on is allowing us to mitigate the risk that you articulated as well.

Okay. Great. Thanks.

Our next question comes from the line of Tyler Battery with Oppenheimer and Co. You may proceed with your question.

Good morning. Thanks for taking my question. Just one for me here on the capital allocation topic. Nice to see the dividends increase. I understand that's a board decision, but what's your updated view on the right payout level and your perspective on what you might need to see to grow the dividend in the future? Sure.

Thanks, Tyler. I think, you know, appreciate the commentary around the increase of the dividend. I think, you know, just to frame, you know, the increase for us, right, we wanted to set it at a level that we thought was sustainable, you know, through all phases of an economic cycle, and also showed our confidence and our ability of the portfolio to generate free cash flow. But to your point, would allow for room for future increases as the recovery unfolds, recognizing that it's a board decision to You know, our views around the future dividends is going to be about, you know, where's the outlook for lodging fundamentals? What's the forecast of taxable income, which influences our dividend payout? And then finally, what are market expectations for dividend payout? So all of those things will influence our dividend payout. I think the thought around what percentage of FFO and things like that is usually a byproduct of all three of those variables, as opposed to the driving factor of the decision. in setting long-term dividend practice.

The only thing I would add to that is that you think about the nature of our portfolio, the high margin profile. I think the path forward as the macro trends and lodging trends unfold, the path forward for our dividend raise is pretty clear.

Okay, great. I'll leave it there. Thank you for the detail. Appreciate it.

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

Thanks. Good morning. Just a couple quick ones on the 21st. Do you anticipate that this hotel has hotel margins at stabilization above, similar, or below your portfolio average?

Greg, we underwrote that the margins were going to be generally in line with our portfolio margins for the asset just because of the nature of the service levels offered for a boutique lifestyle hotel are going to be a little higher than, say, a select service hotel, but that will be offset by the fact that the rate that we can capture in that market is going to be higher. So net-net, we would expect margins to be in line.

Okay. And then follow up on the same Nashville Hotel. Do you anticipate that this one will require or warrant considerably more time from your asset managers than the other three post-pandemic acquisitions?

No. You know, keep in mind, you know, as I said before, our general view is that this lifestyle asset sort of fits within sort of the curio tapestry kind of framework. The two hotels that we're converting for our conversions or we're converting those to Curio to remind that Santa Monica is an independent hotel, so no. I think it fits within the framework, but we do think, again, that there is operational upside that our experienced asset management team can bring to bear to this hotel, but not incremental time beyond any other assets that we have.

And, Greg, during our due diligence process – we really identified a lot of that through just good dialogue, conversation, understanding where the upside is. And so looking at the asset, there's 6,300 dedicated square footage of meeting space. There's about 1,600 square feet of specialty suite and outdoor terrace overlooking the city. There's a lot of high ceilings and premium rooms that we typically, when you think about best practices of what we do as a an asset management division. That's where we dig in and we dive into that, and then we just hold people accountable to where we think their group mix is, transient mix, and all the details that would go along. With 124 keys, you can get your arms around it pretty quick in this type of market, specifically because there's high demand. And so now it's picking and choosing what business you want and deciding where you want to be positioning-wise compared to the other independent lifestyle brands.

Okay, thank you all.

Our next question comes from the line of Anthony Powell with Barclays. You may proceed with your question.

Hi, good morning. It's one for me. So all four of your deals you've done since the pandemic have been urban, which is different from the other public leagues. Is that intentional, and would you consider adding more resorts like you have in Key West or California or Hawaii, or are you really focused more on urban at this point?

Yeah. So I think it's about the seven-day-a-week demand market component and really being able to look at demand throughout the week, Anthony, is the way I would think about it. I'll remind you that our split was 80% transient, 20% group on segmentation side. Of the transient, we were 55% BT and 45% leisure. You know, over time that will probably move to 50-50 just based on the way that consumer trends are evolving and how leisure is manifesting itself. But, you know, we're getting our fair share of leisure exposure in these markets. Nashville is a perfect example of that. It's got very strong weekend trends, as does Cherry Creek, et cetera. And so we are looking at making sure that we've got multiple demand drivers. And, again, as I mentioned, that seven-day-a-week demand on that. And, again, If you think about what we're doing from a conversion perspective on Mills House as well as Santa Monica and Mandalay, obviously those are leisure assets that we're converting and upbranding as well. So I think that when you look at the overall portfolio, we are adding leisure, but we're very focused on making sure we have seven-day-a-week demand as our core ten of our investment thesis.

Anthony, I would say the last thing I would add to that is, These are all thriving markets. They're growing markets. If you think about where we've purchased assets in midtown Atlanta, there's a significant amount of growth for corporate as well as entertainment there. Boston, it's life sciences in the Seaport area and downtown. And then Moxie Cherry Creek is just an irreplaceable location in a very high-end market. We're the new kid on the block, if you will, compared to all the lifestyle hotels that are existing there. So we have aspirational opportunities with average rate because it's a growing market with continued high-end retail that is going there. So that's another component that we really focus on is thriving and growing markets as well. Thank you.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Ms. Leslie Hale for closing remarks.

Thank you, everybody, for joining us. We hope that the remainder of your summer is excellent, that everybody is traveling. We look forward to seeing you guys on the other side of Labor Day. Have a great weekend, everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.