RLJ Lodging Trust

Good afternoon and welcome to RLJ Lodging Trust's 2024 Third 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 Barnett, 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 discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release. I will now turn the call over to Leslie.

Thanks, Nikhil. Good afternoon, everyone, and thank you for joining us today. We were pleased with our third quarter results, which came in ahead of our expectations, despite the impact of the storms late in the quarter. Our third quarter REF PAR growth once again exceeded the industry, demonstrating the resiliency of our urban-centric portfolio, which is allowing us to outperform. Additionally, our effective expense management enabled us to drive EBITDA growth that exceeded our year-over-year REVPAR growth. Along with achieving solid operating results, we made meaningful progress on our key initiatives during the quarter, including executing on several objectives, which will position us well going into 2025, including successfully refinancing all of our near-term debt maturities and executing attractive interest rate hedges, completing two conversions, accretively recycling proceeds from non-core asset sales into share repurchases, and increasing our quarterly dividend by 50%. Achievement of these objectives demonstrate our commitment to unlocking value in our portfolio while recycling capital to enhance total shareholder returns. With respect to our third quarter operating performance, our 2% rep part growth rate was two times the industry's and our growth continues to be balanced between both rate and occupancy. Additionally, our hotels gained 100 basis points of market share, which represents the sixth consecutive quarter of outperformance, underscoring the strong positioning of our urban-centric portfolio. This quarter, our urban hotels continue to drive our outperformance and achieve 2.5% REFAR growth. Our urban markets are benefiting from positive trends in all demand segments, with markets such as Boston, Chicago, and Southern California achieving mid- to high-single-digit repart growth. Our deliberate efforts to reposition our urban footprint allowed our urban lifestyle hotels to achieve 3.2% repart growth during the quarter. Our urban lifestyle hotels represent approximately 40% of our portfolio and are well-positioned to capture seven-day-a-week demand. Our portfolio is seeing the lift from the ongoing improvement in business transient demand, which was once again our best-performing segment this quarter, achieving nearly 9% revenue growth over the prior year, driven by both ADR and occupancy gains. We were especially encouraged to see continuing pricing power, which drove 5.3% ADR growth and acceleration of 105 basis points from the second quarter. While SMEs remain the dominant driver of corporate demand, we are seeing positive momentum from large corporations who are increasingly returning to the office. The recent trends and the continuation of company mandates provides us with the confidence that steady growth and business transient revenues will continue. Our group segment also continued to see strong performance during the third quarter, achieving 3.4% revenue growth. led by a 1.4% increase in demand and a 1.9% increase in ADR. Group revenues benefited from both the increase in corporate meetings as well as strong citywide volume in many of our key markets, such as Boston, Chicago, San Diego, and New Orleans. As a sign of healthy group demand, our 2024 group revenues pace remains ahead of 2023 by mid-single digits, inclusive of our pace for the fourth quarter. despite the impact from recent storms, the holiday calendar shift, and the election. In aggregate, the continued strength in both business transient and group production drove a 3.1% increase in our third quarter weekday revenues. With respect to leisure, we were encouraged to see stable demand trends. Our leisure revenues grew by 2% during the third quarter, primarily driven by a 4% increase in demand which was offset by a 2% decline in ADR, highlighting continued consumer pricing sensitivity. In addition to achieving solid rooms revenue growth, our out-of-room spin in areas such as parking and F&B allowed us to grow our non-room revenue by 7.3%, which drove total revenue growth of 3%. This top-line growth combined with our focused approach to managing costs which has led to the moderation of operating expense growth, has allowed us to achieve flat margins and a year-over-year EBITDA increase of 2.6% in the third quarter. Now, turning to capital allocation. In the third quarter, we continued to demonstrate our disciplined approach to balance sheet management and the ability to assertively allocate capital across several fronts. We further strengthened our balance sheet and added incremental flexibility by entering into a new $500 million term loan, which addressed our 2024 and 2025 maturities. We opportunistically entered into new hedges, allowing us to maintain one of the lowest weighted average cost of debts at 4.5%. We sold a non-core hotel in Denver and recycled proceeds from recent dispositions towards the repurchase of 2.2 million shares for $20.7 million. And we completed the physical conversion of the Wyndham in Houston to a Doubletree and the Indigo in New Orleans to the Hotel Tornel, a Marriott tribute hotel. These hotels are ramping well and achieved strong rep part growth of 17% year-over-year in the third quarter. Additionally, we remain on track to complete the conversion of the Banker's Alley in Nashville to Hilton's Tapestry Collection and are pacing to complete the conversion of the Windham in Pittsburgh to a courtyard earlier than expected. Looking ahead, we are continuing to maintain our cadence of completing two conversions a year, with the transition of the Renaissance Pittsburgh to Marriott's Autograph Collection in 2025. We also made progress towards selecting a new brand for the Wyndham Boston, which we expect to convert in 2026. Our ability to execute on multiple fronts simultaneously validates our strong balance sheet and free cash flow profile, which not only drove our growth initiatives this quarter, but also allowed us to return significant capital shareholders in the form of dividends and share repurchases. Looking ahead, In the fourth quarter, there are some unique factors that will impact the final industry results, including the disruption of Hurricane Milton in October and the degree of the slowdown around the elections in November, which we estimate will constrain our fourth quarter rep part by approximately 100 basis points. However, despite these unique headwinds, our strong third quarter performance and the resiliency that our urban-centric portfolio is demonstrating will gives us confidence in our outlook. As we look towards 2025, while we expect a comparable industry background to 2024, our portfolio is well positioned and we should benefit from our portfolio's concentration in urban markets, which are expected to continue to outperform the industry. The ongoing ramp from our seven conversions, the continued improvement in business transient demand, and our favorable footprint in markets with strong city-wide, such as New Orleans, which will host the Super Bowl, Washington, D.C., which should benefit from the presidential inauguration, and favorable city-wise in Denver and San Francisco, which is supported by our strong 2025 group pace, currently ahead of 24 by mid-single digits. We believe that all of these positive attributes should continue to allow us to be a top performer. Longer term, we believe that the industry is positioned for multiple years of demand-driven growth, given the continuation of the secular trends of consumers prioritizing travel, which should be enhanced by moderating inflation and lower borrowing costs. Improving business travel demand from the combination of the continued recovery and the return of office trends. group demand remaining healthy due to the increasing citywide events and attendance, as well as corporate and social groups, and the recovery of international demand, which remains a meaningful growth opportunity. These factors, together with historically low new supply projected over the next several years, should provide multiple years of rev par, tailwinds, and be especially beneficial for urban hotels, which represent over two-thirds of our portfolio. I will now turn the call over to Sean.

Sean. Thanks, Leslie. To start, our comparable numbers include our 95 hotels owned at the end of the third quarter and exclude the Fairfield Inn Denver, which was sold during the quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during ROJ's ownership period. As Leslie said, we are pleased to report solid third quarter operating results. which demonstrated the strength and resiliency of our high-quality urban-centric portfolio. Our third quarter REVPAR growth of 2% was driven by a 1.4% increase in occupancy and a 0.6% increase in ADR. Third quarter occupancy was 75.1%, average daily rate was $193.39, and REVPAR was $145.23. As was noted, our business transient and midweek outperformed. Third quarter business transient red par grew 8.7% above 2023, including ADR growth of 5% and occupancy growth of 3%. Red par growth remained healthy in our urban markets, such as Louisville at 12%, Chicago CBD at 15%, New Orleans at 21 percent, Los Angeles at 10 percent, San Diego at 11 percent, Miami at 20 percent, and Portland at 33 percent. Monthly Red Park growth during the third quarter was 3.8 percent in July, 3.4 percent in August, and down 1.2 percent in September, which was constrained by the timing of Labor Day and impact of hurricane activity. Monthly total revenue growth was 5.2 percent in July, 4.6 percent in August, and contracted 0.7 percent in September. Looking ahead, our REVPAR growth rose during October, which is the most significant month of the quarter. Given the holiday and the weather-related headwinds, October REVPAR is forecasted to only increase approximately 1.5 percent above prior year. predominantly driven by ADR growth. Turning to the current operating cost environment, as we expected, operating cost growth rates moderated meaningfully during the third quarter. On a per occupied room basis, total hotel operating cost growth was only 1.7%, moderating over 300 basis points from the second quarter and underscoring the benefits of our portfolio construct and our initiatives to manage our operating cost growth. Drilling down further into hotel operating expenses, as expected, recent outsized growth in fixed costs such as insurance and property taxes reversed during the third quarter, with our fixed costs decreasing by 9.4 percent during the third quarter, which benefited from the expected moderation of fixed expense growth and the success of property tax appeals. We expect fourth quarter fixed cost growth to benefit from the lapping of difficult comps during the first half of the year and the successful renewal of our property insurance program this month. During the third quarter, our portfolio achieved hotel EBITDA of $100.7 million, representing 2.6% growth above 2023, and hotel EBITDA margins of 29.2%. We were pleased with our operating margin performance, which was essentially flat to 2023, at only 11 basis points behind the third quarter of 2023. Turning to the bottom line, our third quarter adjusted EBITDA was $91.9 million and adjusted FFO for diluted share was 40 cents. We continue actively managing our balance sheet to create additional flexibility and further lower our cost of capital. So far during 2024, we have addressed all of our 2024 and 2025 debt maturities. As previously announced, during the third quarter, we entered into a new $500 million term loan to refinance a 2025 maturing $400 million term loan and repay $100 million of the outstanding balance on our line of credit. The new $500 million term loan has an initial term of three years. and includes two one-year extension options to 2029. The new term loan also retained the pre-COVID pricing from the $400 million term loan. The execution of this financing is a testament to our strong lender relationships and favorable credit profiles. We ended the third quarter with a well-positioned balance sheet with $500 million available under our corporate revolver, a current weighted average maturity of approximately 3.7 years, 87 of our 95 hotels unencumbered by debt, an attractive weighted average interest rate of 4.56%, and 74% of debt either fixed or hedged. As it relates to our liquidity, we ended the third quarter with approximately $885 million of liquidity and $2.2 billion of debt. With respect to capital allocation, consistent with what we have demonstrated in the past, we intend to invest in projects to unlock the embedded value within our portfolio, while also remaining committed to returning capital to shareholders through both share repurchases and dividends. During 2024, we have been active under our $250 million share repurchase program. Year-to-date, we successfully recycled 100% of non-core disposition proceeds towards the repurchase of approximately 2.2 million shares for $20.7 million at an average price of $9.28 per share. During the third quarter, we repurchased approximately 1.6 million shares for $14.7 million at an average price of $9.21 per share. Additionally, our Board recently increased our quarterly dividend to 15 cents per share, which is well covered and supported by our free cash flow. 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 balance sheet flexibility. Turning to our outlook, we are reaffirming our prior guidance, which anticipates the continuation of the current operating and macroeconomic environment. For 2024, we continue to expect comparable rep part growth to range between 1% and 2.5%. Comparable hotel EBITDA between $382.5 million and $402.5 million. Corporate adjusted EBITDA between $346.5 million and $366.5 million. and adjusted FFO per diluted share to be between $1.45 and $1.58, which incorporates shares repurchased to date but no additional repurchases. Our outlook assumes no additional acquisitions, dispositions, or refinancings. We still estimate 2024 RLJ capital expenditures will be in the range of $100 million to $220 million and now expect net interest expense will be in the range of $92 million to $94 million, which reflects a slight decrease in base rates on our variable rate debt compared to our assumptions last quarter. Thank you, and this concludes our prepared remarks. We will now open the line for Q&A. Operator?