RLJ Lodging Trust

Welcome to the RLJ Lodging Trust First Quarter 2023 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 Alla, RLJ's Senior Vice President, Finance and Treasurer. Please go ahead.

Thank you, operator. Good morning and welcome to RLG and Lodging Trust 2023 first quarter earnings call. On today's call, Leslie Hale, our president and chief executive officer, will discuss key highlights for the quarter. Sean Mahoney, our executive vice president and chief financial officer, will discuss the company's financial results. Tom Bodnett, 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 10Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discussed certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our precedent. Finally, please refer to the schedule of supplemental information which was posted to our website last night, which includes the former operating results for our current hotel portfolio. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us today. We are encouraged that the positive momentum in lodging fundamentals continued throughout the first quarter as rev par for the industry sequentially improved each month on both an absolute basis and relative to 2019. As we expected, first quarter rev par in urban markets outpaced the industry relative to last year and achieved a significant milestone of reaching 2019 levels for the first time post the pandemic. Against this constructive backdrop, we achieved strong first quarter operating results that exceeded our expectations, made tangible progress on our 2023 conversion, continued the ramp of our 2022 conversion, extended maturities for $425 million of debt, opportunistically repurchased $40 million of stock, and increased our quarterly dividend by 60%. Our strong performance during the first quarter underscores the overall benefits of our urban-centric portfolio and also demonstrates the optionality that our balance sheet provides to accretively deploy capital to enhance shareholder return. Turning to our operating performance, during the first quarter, the ongoing recovery in our urban markets led our REF PAR to increase by 27% over last year and achieve 95% of 2019, representing an improvement of 100 basis points from the fourth quarter. Notably, our REF PAR growth not only benefited from increased demand, yielding a 12% year-over-year increase in occupancy, but also achieved incremental ADR lift, as continued pricing power led our ADR to grow more than 13% above last year. Demand increased throughout the first quarter, which led our operating results to accelerate each month, with March REF PAR reaching 99% of 2019. We are encouraged to see this momentum continue into April. Our urban hotels, which represent two-thirds of our EBITDA, generated the highest REBPAR growth within our portfolio during the first quarter. These results outperformed our expectations, with REBPAR increasing by nearly 37% over last year and achieving 96% of 2019 for the quarter, with March achieving 101%. Demand growth was broad-based across all of our urban markets, including Southern California, despite the impact of severe weather during the quarter. Our urban portfolio benefited from continued improvement in business travel, strong group demand, healthy leisure, and rising international travel. This increased demand drove a 17% year over year increase in ADR during the first quarter for our urban portfolio, which continues to have significant room for growth. Strong performance in our urban hotel underscores our conviction that our portfolio is set up to outperform on a relative basis given the outsized growth expectations for urban markets. With respect to segmentation, we remain encouraged by the continued recovery of business transient demand. We are seeing corporate demand broadened to include industries such as aerospace, automotive, finance, insurance, healthcare, and consulting. This is reflected in our first quarter business transient room nights. which improved by 10 points from the fourth quarter to 85% relative to 2019. We saw sequential improvement throughout the quarter with our special corporate revenues, which achieved 75% of 2019 levels in March, the highest level post-pandemic. Positive momentum in business transit can also be seen in our weekday REFAR, which achieved 93% of 2019 during March. Our group segment continues to exceed our expectations. During the first quarter, our group revenues achieved nearly 100% of 2019 levels. Group revenues were driven by ADR growth and strong demand from social groups and improving corporate groups allowed us to achieve an 11% increase in ADR over 2019, the highest premium to date. Current year group bookings were robust during the first quarter as we booked approximately $48 million in group revenues for 2023 representing more than half of the total in-the-year group revenues booked during all of last year. This enabled us to drive higher group rates across our portfolio, including at our regional powerhouses, such as Louisville and Tampa. Given the appeal of our property type, the small groups, our hotels are able to book more self-contained groups rather than rely largely on citywide. This has allowed our in-the-year, for-the-year group revenue pace to increase to 95% of 2019 levels currently. representing a 13% improvement from the beginning of the year. Despite the normalization of demand patterns, leisure demand remained elevated across our portfolio, which further strengthened our leisure ADR to 125% of 2019, representing a new high watermark. The strength in leisure demand in our portfolio was bolstered by the continued recovery of urban leisure, which is benefiting from hybrid work flexibility. Our urban lifestyle properties which are located in seven-day-a-week demand submarkets with multiple demand generators, are especially well-positioned to benefit from this growth. Additionally, with our recently renovated resort assets, including our Sakari Dunes on Mandalay Beach, our resort properties achieved 120% of 2019 ADR, which improved sequentially from the fourth quarter. We believe that our leisure ADR will be more sustainable on a relative basis going forward, given our concentration urban lifestyle hotels which are well-positioned to capture urban leisure demand from experiential travelers looking to combine work and play. The positive momentum we achieved during the first quarter led our hotel EBITDA to increase by 44% over last year and achieve 87% of 2019 levels. As we expected, our lean operating model allowed us to achieve efficiency to mitigate some of the inflationary pressures on hotel operating costs. which led our hotel EBITDA margins to increase by more than 280 basis points from the prior year. Our strong operating performance and the overall margin profile of our portfolio enabled us to generate significant free cash flow during a seasonally slower quarter. Moving on to capital allocation, we continue to make progress on our internal growth opportunities. Our 2022 conversions are on pace to meaningfully outperform our overall underwriting. This year, we expect the EBITDA generated by these three conversions to accelerate throughout the year and exceed their 2019 EBITDA by over 25%. We are also making progress on our two new conversions. The comprehensive renovation and repositioning of our Houston Medical Center Hotel is expected to begin during the second quarter, which will position the hotel to capture incremental rate through its affiliation with Hilton as a double treat. And we are pleased to announce that our Garden District Hotel in New Orleans recently joined Marriott's tribute portfolio as Hotel Tonel. We expect the hotel to immediately benefit from joining the powerful Marriott Bonvoy system, with additional ADR lifts to come after we complete the repositioning and renovation scheduled for later this year. These conversions underscore the significant embedded value in our portfolio and our ability to unlock incremental EBITDA, We expect these conversions to be highly accretive and further enhance our portfolio quality. Additionally, we have one of the strongest balance sheets among our publicly traded peers, which allows us to pursue multiple channels of growth. We have demonstrated the optionality that our balance sheet provides by pulling multiple levers, such as deploying capital towards our new conversions and opportunistically repurchasing shares. So far this year, we have redeployed free cash flow to repurchase $40 million of our shares on a leverage-neutral basis at an attractive average price of $10.22 per share. Given our strong balance sheet and free cash flow profile, we will continue to evaluate incremental share repurchases on a disciplined and leverage-neutral basis. This past quarter, we also utilized multiple tools to return capital for our shareholders, which included raising our quarterly dividend by 60%. Looking ahead, While we recognize that the current macro environment is uncertain, there are a number of indicators that allow us to remain constructive for the remainder of the year. We believe that urban markets should continue to outperform the industry during the second quarter, which will benefit our portfolio, as reflected in our second quarter outlook. For the full year, we continue to expect year-over-year repart growth to be the strongest during the first half due to easier comps. And we also expect to achieve year-over-year growth each quarter for 2023 given that leisure performance should remain healthy against positive leisure demand dynamics. The recovery of business transient should continue throughout the year with corporate demand broadening as we experienced in the first quarter. Group demand should continue to strengthen, especially small social and corporate groups. As previously mentioned, Our group segment will benefit from the improving in-the-year, for-the-year booking trend. Our confidence is bolstered by our second quarter group pace, which is nearly at 2019 levels. Also, as international travel includes, it should drive incremental demand throughout the year, especially in gateway urban markets. And finally, the ramp of our three recently completed conversions will further bolster our performance. We believe that these positive trends should further amplify the performance of our urban markets, allowing us to achieve red part ahead of the industry. We are already seeing these trends taking shape during the second quarter. Longer term, we believe that the outlook for lodging fundamentals remains very positive, given the secular changes in the nature of travel demand, which will drive strong growth. This dynamic will be especially beneficial for our portfolios. which is uniquely positioned to drive outside EBITDA growth. Given our concentration in urban markets, which have significant run room for growth, given a multi-year favorable demand supply imbalance, our high quality diversified portfolio that benefits from seven day a week demand, the upside from our conversions and recent acquisitions, and the execution of incremental internal growth opportunities, including the completion of our next two conversions and our pipeline of future opportunities supported by our strong balance sheet. Overall, we are encouraged with our relative strong positioning. I will now turn the call over to Sean.