RLJ Lodging Trust

Ladies and gentlemen, thank you for standing by. The RLJ Lodging Trust Call will begin in just two minutes. Please continue to hold. Our program will begin in two minutes. © transcript Emily Beynon

Welcome to the RLJ Lodging Trust fourth quarter 2022 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, 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 Fourth Quarter and Full Year 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, We'll discuss the company's financial results. Tom Bartnett, our Chief Operating Officer, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-K and other reports filed with the SEC. the company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release. Finally, please refer to the schedule of supplemental information which was posted to our website last night, which includes pro forma operating results for our current hotel portfolio for 2019, 2021, and 2022. I will now turn the call over to Leslie.

Thanks Nikhil. Good morning everyone and thank you for joining us today. We were pleased that Lodging Fundamentals strengthened throughout last year with significant improvement across all segments of demand, demonstrating the resiliency of the industry. Against this positive backdrop, we successfully executed on our key priorities, including capturing strong operating performance driven by the accelerating recovery in urban markets, successfully launching all three of our transformative conversions, including the Sicari Dunes at Mandalay Beach and the iconic Mills House in Charleston, both of which joined the Hilton Curio Collection, and the Pearside in Santa Monica, which was rebranded as an independent hotel, acquiring a high-quality hotel in Nashville, an attractive growth market, further strengthening our balance sheet by addressing our 2023 maturities and exiting all COVID restrictions. and returning capital to our shareholders through an increased dividend and disciplined share repurchases. The successful execution has positioned us to realize incremental EBITDA from our embedded growth catalyst in 2023 and beyond, and underscores our ability to leverage the optionality our strong balance sheet provides. Turning to our operating performance, in the fourth quarter, we saw sustained pricing power across our portfolio, outsized growth in urban markets, and continued recovery of business travel in addition to strong group booking activity. During the quarter, our hotels achieved 94% of 2019 rep part levels driven by ADR that achieved 105%. Our performance was led by our urban markets, which benefited from improving corporate demand trends, increased citywide attendance, and a continuation of leisure demand, as well as the early recovery of international travel. Our urban hotels outperformed our overall portfolio, achieving 97% of 2019 RevPAR, driven by ADR, which achieved 107%, reflecting a sequential improvement. This outperformance was broad-based, with our hotels in markets such as Southern California, Atlanta, Boston, and Austin exceeding 2019 RevPAR, further validating our strong position relative to improving trends in urban markets. In terms of segmentation, The momentum in corporate travel that we saw throughout last year carried into the fourth quarter, which achieved 70% of 2019 BT revenues, the highest since the pandemic. This represented an increase of 300 basis points from the prior quarter and an improvement of over one and a half times from the first quarter. SME travel continued to be the main driver of corporate demand, while our larger core accounts from industries such as entertainment, energy, consumer goods, services, and aerospace saw increased demand throughout the quarter. We also saw strong production from small groups, which continued to contribute at elevated levels to our overall group mix. These positive trends drove pricing power, as Group ADR achieved 105% of 2019 for the quarter. Although booking windows were short, momentum in group demand remained strong, as demonstrated by our total in-the-year, for-the-year bookings last year which were over 30% higher than a typical year. As it relates to leisure, although trends returned to normal seasonality, demand remained healthy, an indication that consumers continued to overweight experiences in their spending decisions. Weakened ADR for our entire portfolio achieved 116% of 2019 during the quarter, improving 200 basis points from the third quarter. These positive trends led our overall weekend rev par to achieve 107% of 2019 levels during the quarter. Urban leisure trends were especially robust, as demonstrated by our weekend urban rev par achieving 111% of 2019, led by ADR that achieved 118% during the fourth quarter. Relative to the bottom line, excluding our three conversions, which are ramping, our portfolio achieved hotel EBITDA of over 91% of 2019 levels and margins that were only 128 basis points lower. This performance speaks to the efficiencies we have obtained in a high operating cost environment. Now turning to capital allocation, our internal and external growth catalysts have created multiple channels to drive EBITDA growth throughout this cycle. With respect to internal projects, We are pleased with the relaunch of our three conversions and are seeing significant momentum. Specifically, the Mills House in the historic district of Charleston is off to a great start after completing a comprehensive reimagination of the entire hotel, including repositioning all food and beverage outlets and the transformation of the hotel's rooftop, pool, and bar. The hotel's repositioning and affiliation with Hilton's Curio Collections is driving significant ADR premiums and early results are exceeding our expectations. The Sicari Dunes is taking full advantage of its transformative resort-wide renovation and its attractive beachfront location on the California coast. Additionally, we are benefiting from the enhanced operating model, which is driving meaningful out-of-room spend and savings of approximately $1 million from annual costs related to the elimination of comp services. We recently launched the Pearside Hotel in Santa Monica, which converted from a Wyndham following a transformative renovation of guest rooms and public spaces and the addition of a new open-air F&B outlet. The hotel has a prime location at the entrance of the famous Santa Monica Pier with sweeping views of the iconic Pacific Wheel. The repositioning will allow us to attract higher-rated experiential travelers to this irreplaceable location. The relaunch of these three conversions not only validates our ability to unlock the significant value embedded in our portfolio, but also enhances the overall quality of our platform. We expect these properties to significantly exceed 2019 levels of EBITDA. This year, as they continue to ramp and we remain confident in their ability to meaningfully exceed our initial underwriting, which supports our conviction and our ongoing value creation initiatives. Looking forward, We have tremendous optionality with one of the strongest balance sheets among publicly traded peers, which is allowing us to continue to pursue multiple channels of growth, such as additional brand repositionings. In 2023, we will build upon the successful execution of our recent conversions and are excited to announce two additional conversions, including the Wyndham Houston Medical Center, which is being repositioned as a Doubletree by Hilton brand. This property is ideally located across from one of the largest medical complexes in the world. Given the initial ADR lift this property has already achieved following its soft launch, we are confident that an opportunity exists to capture significant incremental ADR lift and market share after completing a comprehensive renovation this year. Also in 2023, our Indigo in New Orleans will join the Marriott Tribute Portfolio. The hotel benefits from its prime location within the New Orleans famous Garden District and is expected to generate incremental ADR as a tribute. The hotel's renovation is scheduled to begin later this year. With regard to external growth, we are continuing to build a pipeline of off-market acquisition opportunities. Given the current backdrop where transactions are being constrained by limited lending capacity and all cash buyers are preferred, our strong balance sheet is a significant advantage. That said, we remain highly disciplined given the current uncertain environment. Now, looking ahead to 2023, while we acknowledge the overall macroeconomic uncertainty, with the continued acceleration of business travel, group booking momentum, and growing urban leisure demand, we believe that urban markets will outperform the industry on a relative basis. This will benefit our portfolio, which generates over two-thirds of EBITDA from these markets. With respect to our 2023 outlook, in general, we expect ADR to remain healthy in all segments while demand growth across each segment will differ. We expect leisure demand to remain above 2019 levels with seasonality continuing to normalize. However, we expect urban leisure to see stronger performance due to continuation of leisure demand from hybrid flexibility. Business transient recovery should continue to improve during 2023 with demand from larger corporate accounts increasing, which we are already seeing. Group will remain strong as citywide attendance increases, and more citywide are held in key markets, such as San Francisco, Boston, and San Diego. Additionally, we expect small group to continue to see elevated contribution levels. We remain encouraged by the healthy booking activity since the beginning of the fourth quarter, where we booked over $55 million in group revenues. with approximately 70% related to 2023. This strong booking activity allowed us to enter 2023 with our group booking pace at 76% of 2019. And finally, inbound international travel should improve throughout the year, which will further benefit urban markets. Overall, we expect the strongest growth during the first half of the year due to easier comps. We have already seen this in January, which achieved year-over-year red part growth of 43.5%, benefiting from improving corporate business travel, strong attendance in city-wide, such as JP Morgan's healthcare conference in San Francisco, and continued pricing power. February is projected to see an increase of over 20% from last year. Given these trends, we believe our rep part at Hotel EBITDA should increase over 2022 throughout the year and achieve performance ahead of the industry. Our confidence in our growth profile is supported by our favorable footprint and our unique growth catalyst. As we look at the overall cycle, our outsized EBITDA growth will come from our concentration in urban markets, which have additional run room for growth, our high-quality portfolio benefiting from many livestock properties that have seven-day-a-week demand locations, ramping of our four high-quality acquisitions, which are pacing ahead of our underwriting, completion of our margin expansion initiatives, and incremental growth from embedded catalysts, including the ramp of our three recently completed conversions in our two newly announced projects and our pipeline of future opportunities. Additionally, our overall positioning will be enhanced by our strong balance sheet, which provides significant optionality to drive growth while also driving shareholder returns. Furthermore, our balance sheet provides valuable liquidity to mitigate risk during the current macroeconomic uncertainty. I am incredibly proud of the hard work our team has done over the past several years in not only successfully navigating one of the most challenging periods in the history of the lodging industry, but also positioning RLJ to take advantage of multiple channels of growth to maximize shareholder value. I will now turn the call over to Sean. Sean.

Thanks, Leslie. To start, our comparable numbers include our 96 hotels owned throughout the fourth quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. We were pleased with our fourth quarter results, which were in line with our expectations. Fourth quarter portfolio occupancy was 66.9%, which was 89% of 2019 levels, and average daily rate was $190, achieving 105% of 2019. Specifically, as previously mentioned, Fourth quarter ADR in our urban markets was the highest with respect to 2019 as urban markets continued to benefit from pricing power. Fourth quarter ADR exceeded 2019 levels by approximately 20% or more in a number of key urban markets, including San Diego, Manhattan, Tampa, Pittsburgh, and New Orleans. Our fourth quarter REVPAR was 94% of 2019 levels, which was in line with the third quarter. Monthly RevPAR achieved 95%, 91%, and 96% of 2019 levels during October, November, and December, respectively. November results were impacted by difficult comps to 2019 due to an additional travel week in 2019 as a result of the later timing of Thanksgiving compared to 2022. December reaccelerated, which was primarily driven by our urban markets, such as New York, Washington, D.C., Tampa, and New Orleans. Our fourth quarter operating trends led our portfolio to achieve hotel EBITDA of $87.6 million, representing 87% of 2019 levels. and Hotel EBITDA margins of 29%, which was only 229 basis points below the comparable quarter of 2019. For the full year 2022, our REF PAR was $129.61, representing 89% of 2019 levels, and Hotel EBITDA was $370 million, representing approximately 83% of 2019 levels. which underscores the incremental EBITDA potential in our urban-centric portfolio. This year has started off well, with January REPAR increasing by approximately 44% from 2022, with occupancy of nearly 60%, and ADR of approximately $188. Turning to the bottom line, our fourth quarter adjusted EBITDA was $79 million, and adjusted FFO per share was 33 cents. While demand remained strong during the fourth quarter, our operating costs continued to normalize. Underscoring the benefits of our portfolio construct and tangible results of the initiatives to redefine the operating cost model, our total fourth quarter and full year hotel operating costs were below 2019 by approximately 3% and 8% respectively. We are proud of our ability to maintain operating costs below 2019. As a frame of reference, the aggregate core CPI growth rate since 2019 equates to approximately 14%, which is meaningfully above our fourth quarter operating costs, which remained approximately 3% below 2019. There are many factors that influence these positive results, with the most significant contributors being the recent successful restructurings of many of our third-party operating agreements, and success in reducing property taxes, both of which we expect to continue benefiting our operating costs. Fourth quarter wages and benefits, our largest operating costs at approximately 40% of total costs, remain approximately 5% below 2019 levels. Our portfolio remains better positioned for the current labor environment due to the need for fewer FTEs given our lean operating model smaller footprints, limited F&B operations, and longer length of stay. During the fourth quarter, our hotels continued operating with approximately 20% fewer FTEs than pre-COVID. Overall, while the labor market remains tight, we are encouraged that the hiring environment is showing signs of improvement, and we believe that the inflationary pressures on hourly wages are stabilizing. We remain active in managing our balance sheet to create additional flexibility and further lower our cost of capital during 2022. These accomplishments include entering into a new $200 million term loan to address 100% of our 2023 debt maturities and proactively address $100 million of our 2024 debt maturities, exiting all restrictions under our corporate credit facilities, which lowered our consolidated weighted average interest rate that resulted in annual interest savings close to $9 million, exercising extension options on $425 million in maturing debt, and maintaining an undrawn corporate revolver. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. Our current weighted average maturity is approximately four years, and our weighted average interest rate is 3.6%. We are benefiting from 85% of our debt that is either fixed or hedged under valuable swap agreements, which protects us in the current interest rate environment. We continue to maintain significant flexibility on our balance sheet with 81 of our 96 hotels unencumbered by debt. Turning to liquidity, We ended the year with approximately $481 million of unrestricted cash, $600 million of availability on our corporate revolver, and $2.2 billion of debt. Turning to capital allocation, we were active under our $250 million share repurchase program last year, where we repurchased approximately 4.9 million shares for $57.6 million at an average price of $11.75 per share. including $7.6 million in shares repurchased during the fourth quarter at an average price of $10.66 per share. So far in 2023, we've repurchased $0.5 million of stock at an average price of $10.49 per share. Additionally, given the embedded growth in our portfolio, our lean operating model, and the strength of our balance sheet, our board recently authorized the increase of our quarterly dividend by 60% to $0.08 per share starting with the first quarter, representing the second dividend increase since last summer. We continue to view dividends as an important component of the total return we seek to provide investors, and the recent increase validates our ongoing commitment to enhancing shareholder returns. We will continue making prudent capital allocation decisions to position our portfolio to drive results during the entire lodging cycle, while monitoring 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. Based on our current view, we are providing first quarter guidance that anticipates a continuation of the current operating and macroeconomic environment. For the first quarter, we expect comparable rep far between $133 and $137, comparable hotel EBITDA between $85 million and $91 million, corporate adjusted EBITDA between $76 million and $82 million, and adjusted FFO per diluted share between 29 cents and 33 cents. Our outlook assumes no additional acquisitions dispositions, refinancings, or share of purchases. Please refer to the supplemental information, which includes comparable 2019 and 2022 quarterly and annual operating results for our 96 hotel portfolio. Finally, we estimate RLJ capital expenditures will be in the range of $100 million to $120 million during 2023. Thank you, and this concludes our prepared remarks. We will now open the line for Q&A. Operator?

Thank you. 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.

Great, thanks and good morning everybody. I realize you guys didn't provide, you know, full year 2023 guidance and don't, you know, have a crystal ball on how, you know, economic growth is going to shape up for this year, but can you just share based on the citywide calendar and, you know, some of the various demand generators you see that you know of today through the balance of the year, how we should maybe think about, generally speaking, the cadence of REVPAR growth through the year?

Sure. Good morning, Austin. Let me frame for you kind of our general expectations. We expect our performance to correlate to the performance of urban markets in 2023. And as you know, urban markets are expected to outperform the industry by 300 to 400 basis points in 2023. We expect year-over-year growth each quarter, 23 versus 22. And clearly Q1 is going to have the most significant growth, which is well-known. And we expect the other quarters to moderate but to remain positive year-over-year. In general, we expect to build upon the trajectory we had in 2022, you know, with some growth quarter-over-quarter.

Got it. And then second, with the upside you guys continue to highlight across the portfolio from occupancy, the ability to drive ADR presumably as occupancy improves, maybe most notably within that urban portion of the portfolio. But when you marry that with, Sean, I think you said stabilizing wages – and other costs. I mean, how do we think about the operating leverage you have today and the margin upside potential without, you know, asking you to put a timeline around that?

Sure. Thanks, Austin. I think, you know, I'll start with just, you know, talking about quickly the advantages of our model. We have the smaller footprints. We're room-centric, you know, longer-length-to-stay hotels. And with that comes less labor relative to, say, full-service hotels. We're at about 40% of our total operating costs labor represents versus roughly 50% for the full-service hotels. When you then drill a little deeper into ROJ-specific catalysts, we've got the initiatives that we talked about, the prepared remarks with respect to the operating agreements and property taxes, In addition, we have the benefit of the COVID era synergies, particularly around sales and marketing and how we've successfully complexed hotels, all of which will help us on a relative basis. And so what does that mean in total is that we expect if the baseline for full service hotels to get flat rev par is roughly 8% rev par, which is sort of the market, Our conventional wisdom there is we expect plus or minus 200 basis points lower than that for our portfolio to have breakeven margins. And so hopefully that helps you think about the relative positioning.

Yeah, that's very helpful. Thanks for the time.

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

Good morning, everyone. Good morning, Mike. Leslie, you talked about a bunch of the levers that you could pull this year, and I know you can sort of do all of them given the strength of the balance sheet, but maybe what would be at the top of the list today in terms of incremental spending as we sit here today?

So, Mike, obviously you saw us be very active last year. We demonstrated our ability and willingness to leverage the optionality in our balance sheet. And as you mentioned, clearly our balance sheet liquidity gives us the optionality to have you know, to execute multiple levers at the same time. You know, if we look at the fact last year we were active on buybacks. We did it on a leverage neutral basis with disposition proceeds. We were active from a standpoint of internal investments and you saw us deliver our conversions and we're poised to deliver two more. We also were active, you know, in the right window from an acquisition perspective and entered the growth market of Nashville. and we raise our dividends. But it's obviously pretty clear, based on how the volatility in the market is, is that buybacks remain the most attractive, but we're going to continue to do that on a leverage-neutral basis. We're also going to continue to monitor the backdrop in which we find ourselves in to find the right window. All of these levers have benefits. The key thing is to remain disciplined and focused on finding the right window to exercise those options, Michael.

Got it. Understood. And then on those two new conversions that you just announced, could you share, if you could, the total cost of each project and how you're thinking about incremental IRRs or returns from those investments?

Sure, Mike. This is Sean. We haven't talked specifically about what the aggregate costs are for those conversions. When I think about The incremental to sort of a normal run rate renovation, it's somewhere in the incremental cost of sort of $2 million to $4 million of incremental capital for each one of those conversions, in addition to sort of a normal cycle renovation. From a return perspective, I think the returns we're expecting are similar to what are similar attributes to what we have on the first conversion, which is we expect to have rate-driven gains as a result of the change of the brand affiliation. Now, we expect the unlevered IRRs to likely be lower than the first set of conversions, but still be well into the low double digits. It's a function of the New Orleans market and the Houston market relative to Charleston and Santa Monica, and they're just higher rate of markets. But we We still expect those to be significant rate ADR gains and significant returns. It's just a function of sort of where they are. But attractive and likely be layered in over the next, you know, call it one to two years is when we, you know, post-conversion is we expect them to ramp up. Similar to the first set, you'd expect the benefits to be earlier in that one to two-year ramp-up period because of the benefits of the brand reaffiliation. Okay.

And, Mike, just as a frame of reference, the first conversions that we did, we expect returns that are well north of 40%. And that was when we were underwriting pre-COVID. We now expect to materially exceed that. And so while we expect it to be lower, I mean, keep in mind that's the relevant benchmark to think about.

Got it. And then just last one for me on the acquisition pipeline that you referenced. It sounded a little more optimistic maybe than you have recently. Are you seeing more deals now? or has pricing come in on the deals that you were previously looking at where any particular deal might pencil better today than it did, say, 90 or 120 days ago?

Yeah, Mike, I think the optimism you heard in my voice is just recognizing that in an environment where transactions are constrained and the debt market, while it's loosening, is still relatively tight. all cash buyers are going to have an advantage. And so I'm excited about our balance sheet and what it will provide. But from an overall transaction perspective, deals remain still relatively low. What I would say is that what's happening is that assets are not being taken out to the market on a broad basis. What's happening is that sellers and brokers are calling buyers who they believe can actually execute on a transaction, and we're receiving some of those inbound calls because of our balance sheet strength and capability of actually closing. And so I'm encouraged by that. I'm also encouraged by the fact that given the backdrop of the debt market and where interest rates sit today, also how expensive caps are, and this looming CapEx that some sellers will have, I'm encouraged that there will be more willing sellers as we move throughout the year. So I'm just encouraged by the trajectory, not necessarily what I'm seeing immediately today.

Understood. Thanks for that, Colleen.

Thank you. Our next question comes from the line of Flores Van Dyken with Compass Point. Please proceed with your question.

Thanks, guys. I wanted to follow up on the question basically about the capital allocation. You've got a lot of financial flexibility with the cash and the line, obviously. I guess what people are trying to get a sense of is What portion of your liquidity could people assume to be spent on share buybacks versus some of the newer acquisitions versus some of the other potential rebranding of high-profile assets like the San Diego Renaissance as well as some of the more maintenance repositioning like the Hilton Cabana?

Thanks, Lars. This is Sean. I think when you think about the liquidity that we have, we appreciate the comments. We are happy with our liquidity position at $1.1 billion and a little under $500 million of that is cash. I think how we will specifically allocate that is based on what the relative return is on the opportunity. As Leslie mentioned, share purchases are attractive today. and you would expect us to follow a similar tactic we did in the last year or so, is that we will be opportunistic on deploying proceeds into shares. The acquisition market, we also showed that we were active when the market was appropriate. We think that the liquidity provides us with a first mover advantage when the market reopens to get access to the most attractive deals as a preferred buyer, and so I think that is certainly an option. And then Thirdly, you know, we continue to have a pipeline of internal opportunities, you know, the two conversions we talked about this morning as well as, you know, incremental ROI initiatives. And so, you know, the answer is, you know, we have liquidity to do all of them. We don't specifically take that cash and allocate it between the two. We look at it more on a long-term basis because our portfolio is generating free cash flow, so liquidity is increasing over time. But I think you would expect us to pull the right lever at the right time as opposed to be more regimented about specific dollars.

Maybe as a follow-up, obviously your current stock still is below the price where you bought back stock in 22. So would it be fair to assume that when you could – your view on the company obviously presumably hasn't changed, that we could see certainly a level equal to or greater than the buybacks that you did during the past year?

I'm not going to put a number on it, but you would expect us, we continue to view share purchases as attractive. Our house view continues to be that we're going to do it on an opportunistic basis and a leveraged neutral basis. And so the volume and cadence of share purchases is going to be based on, obviously, how we see the year playing out from a macroeconomic perspective, as well as where the opportunities present relative to where our stock is priced.

Sean, maybe one more if I can. So you guys have a lot of exposure to San Francisco, if you include Silicon Valley and Oakland as well. Maybe if you can give some comments on what you're seeing in that market and what kind of growth potential lies ahead for you there.

Yeah, I think I'll start and I'll let Tom, you know, add some color as well. You know, what I would say for us is that, you know, When we look at San Francisco, you know, we're encouraged by what we're seeing this year so far. We're seeing that the year-over-year growth relative to 22 is going to be meaningful. We acknowledge, though, that San Francisco CBD in particular, as a percent of 19, is going to lag. But we are, you know, encouraged that 23 city-wise or 2X on 2022 growth. that when you look at the back half of the year on city-wide for San Francisco, they're actually above 2019 levels for the third quarter and fourth quarter. We're starting to see international demand obviously be at very early, but we're seeing positive signs associated with that. So the momentum that we're seeing in San Francisco is encouraging. We ended the fourth quarter, the full year, at 2x where we started at as a percentage of 2019 levels. And we think the momentum is continuing to build in San Francisco, but we acknowledge that it's going to be a slower build overall. But we do see that the markets that are outside of CBD are moving at a faster pace than CBD San Francisco.

And I would add just a couple things, and that is, you know, through the RFP season, we were focused on trying to get average rate lift. Over the last few years, it was just rolling over rates. And we felt good about the negotiations specifically for that market with many of the demand generators, Microsoft, Accenture, Amazon, Salesforce, Google, Cisco, all are receiving average rate increases, which are going to give us a nice backdrop in regards to continued movement and recovery compared to 2019, in addition to growth over 2022. Thanks, guys.

Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of Gregory Miller with Truist Securities. Please proceed with your question.

Thanks. Good morning, all. First question, one trend that has arisen in recent months is soft business travel for a full week after a major holiday, such as Thanksgiving. I'm curious if you think such trends are likely to continue in 2023.

Good morning, Greg. I would say always the holiday is a unique time frame where people are thinking about other things outside of business travel. But what I would say is when you match up the calendar and you look at 23 versus 2022, we think that there's going to be some growth in some of those weeks, depending upon how the holiday falls. Examples of that would be the date of Halloween or what we've seen already in January, February, where We had Martin Luther King. We had President's Day. It was an elongated weekend. So, again, that was on the weekend itself. And then immediately on Tuesday, Wednesday, we ramped back up on both those weeks when it came to BT. So I think it's more around the holidays as in Thanksgiving and Christmas is where it's a little bit more unique on BT. And I don't think it's a norm that you're going to be able to look at in 23 versus 22 based on what you might have seen in Q4.

And then one thing to add, Greg, the way we're looking at it, we are seeing that same trend for the specific weeks. The way we're thinking about it is you really have to look at the weeks surrounding the holiday, too, and look at those two weeks in aggregate. And we think net-net because of the incremental leisure, it's a positive. When you look at the aggregate of the two weeks relative to 19 because of the incremental leisure travel through there, as well as the rate that we've seen pick up during those otherwise slow times in past years.

And I would just bolt onto that, Greg, and just say that our portfolio, given the way it's built, and the fact that we are in seven-day-a-week demand markets where you live, work, and play, that we're going to benefit from that shift no matter what happens. And so what you're not seeing on that day after the holiday, you're seeing on Thursday nights, and we're capturing that as well. And so I would say that our portfolio, more than others, is built to capture whatever movement in the new normal looks like.

Okay, I appreciate all that. As my follow-up, At the OLS conference last month, when some of you and your colleagues were on the stage, you and your team spoke very positively of soft brands as a growing presence. Your portfolio today is still primarily comprised of hard brands. If I were to look at your portfolio five to ten years from now, roughly what percentage of your portfolio would you ideally like to see as soft brands, even if that does mean some disposition activity?

Yeah, look, Greg, I would, you know, say that I don't have a number. And, you know, I think it's important to think about the characteristics of an asset as opposed to actually the physical label of a soft brand versus a hard brand. And I go back to when I point to, you know, the asset that we bought in Atlanta. It's a 20-story, you know, rooftop bar house. Sky Lobby Hampton Inn, right? And it functions just like, you know, a lifestyle, you know, asset because of its construct, because of the finishes and who it attracts and where it sits. And so it's less about hard versus soft and more about the dynamics of the asset. So if you think about what we've acquired, you think about the conversions that we've done, you know, all of those would mean that it's going to be a higher percentage, you know, overall, but I don't have a specific number for you.

Okay. Very fair. Thank you very much.

Thank you. Once again, it's Star 1 to join the question queue. Our next question comes from the line of Chris Darling with Green Street. Please proceed with your question.

Thank you. Good morning, everyone. I just want to follow up on some comments you made earlier around staffing. And I'm curious, are you more or less or your operators more or less running at the right headcount today relative to the level of demand you're experiencing? Or do you think there's more work to be done in terms of hiring?

Yeah, I would generally say that, and we've said this before, you know, that we generally expect to settle out at about 85% of 2019 levels from an FTE perspective. We ended 2022 at 75 on a full-year basis, but we ended the fourth quarter at 79, so we're nearing that. We do think that the labor market has improved from a hiring perspective. It's still not there yet, but we think that we are nearing kind of where we think we stabilize at. I would also say, again, that goes back to why we expect to have a more favorable margin profile. And, again, kind of leaning back into Sean's earlier comments around our expense management and how we're able to be under 2019 levels.

Yeah, and then, Chris, the driver of that incremental, you know, 500 basis points roughly is going to be as demand returns. The portfolio is sitting at, you know, for the year at 89% of 19 levels of occupancy, and so that's the natural progression. As we, you know, sell more rooms, you would expect that to normalize.

Got it. It's very helpful. And then, you know, just to follow up there, one of your peers has discussed the use of contract labor, maybe more elevated than it's typically been in the past. Just curious what your experience has been and how that might factor into the margin discussion as well.

Yeah, I would say that everybody across the industry is experiencing that, given the tight labor market. I don't think there's anybody who doesn't have higher contract labor today, but, you know, as the labor market improves, hopefully that will subside and come down. But you really have to look at it from a standpoint of not only the wage, but also compare that to the fact you have, when you hire somebody, you're not only paying wages, but you're paying benefits, et cetera, et cetera. So on a relative basis, it's someone in line, you know, in aggregate.

And the last thing that I would add to that is it really comes down to productivity. And when we look at how we size up, you know, when we look at hours per occupied room and the workforce that we're reusing, we want to make sure that our productivity is in line and that we feel very good about in comparison to, you know, just 2019 versus where we're at today, we're still below on an hours per occupied room. And then lastly, I would say that because we're receiving more applicants and retention is better, we're really having our managers invest in tools and resources with the staff that we do have to make sure that productivity and morale is at an all-time high. Appreciate it. Thank you.

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 urban leisure, which we've talked about a lot on this call, Where is that versus 19 in terms of either room rate, room demand, and just curious how much more natural recovery is left in urban leisure?

Yeah, so I'll kick it off, Anthony. Good morning. Urban leisure in the fourth quarter was 111% of REVPAR compared to 2019. And the primary driver of that was we were at 118% on the ADR side. So real movement above and beyond our portfolio numbers that we shared around Q4. And you think about weekends. Weekends have been real positive compared to 2022 with RevPAR over 106% and ADR 113%. What's interesting about urban leisure, though, the dynamics that Leslie was talking about who's coming to the hotels in regards to where they're staying. Many times we're seeing Thursday night as a check-in day, And there's a lot of activity around urban leisure with concerts and venues, as well as all the things that they might have in their backyard as far as demand generators around corporate, universities, and even medical. So the locations, as well as the desire of the consumer going to those locations, is really what's driving that. And that's benefiting us because urban is going to be the significant growth, 23 versus 2022.

So it sounds like you believe that there's still more year-over-year growth in urban leisure, whereas maybe in resort leisure there could be some more moderation. Is that a fair comment?

That is a fair comment. We think that urban leisure is still evolving as the new normal shakes out, Anthony. And I think what Tom is trying to say is that where our assets are situated is And the nature of our assets, it's easy to flip from that BT experience into the weekend leisure. And we think that that's still evolving and there's more room there. And we're seeing those trends that Tom talked about carrying into January and, you know, in the first quarter. So we're actually, you know, net positive on the incremental, you know, side. I think overall for us, we think that, you know, our portfolio is going to see Red Park growth that's driven not by just occupancy but also rate this year. We think there's room on the BT side as it ramps. We think that group will continue to be strong, and we think Urban Leisure is going to continue to have, on a relative basis, growth there as well.

Thanks. Maybe one more. Does the experience with the conversions doing more, I guess, up-scale brands, a soft brand, do you think you'll do more, I guess, up-scale hotels, whether they're soft branded, boutique, hard-branded over time versus kind of the more urban, upscale, rooms-focused product that you've been known for historically?

Yeah. What I would tell you is that our team does an incredible amount of work to determine what is the right brand for an asset and to think about, you know, what's going to perform well. So, for example, when we think about the two announcements that we just had, we made here. One, you know, is moving to a double tree, and that was the right brand for that asset, for where it sits, what the demand drivers are. And so, you know, we can't sit here today and say we're moving in an X direction or not. We're looking at the market, we're looking at the physical asset, and we're determining what's going to perform best there and will achieve the greatest returns. And that's the way to think about it. There's a tremendous amount of underwriting that goes into this. We have a very experienced asset management team and a fantastic design and construction team that's executed on these conversions. And so I don't want to give this impression that we just picked a north, true north. We are analyzing and studying and determining and working with the relevant bands to make sure that we've got the right asset, the right brand for the right asset.

All right. Thank you.

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.

I would like to thank everybody for joining us today, and we look forward to delivering positive results for the year, and we look forward to seeing many of you all at the city conference next week.

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