RLJ Lodging Trust

Welcome to the RLJ Lodging Trust second quarter 2025 earnings call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to John Paul Austin, RLJ's Director of Investor Relations. Please go ahead.

Thank you, Operator. Good morning and welcome to RLJ Lodging Trust's 2025 Second Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Nikhil Bala, our Senior Vice President of Finance and Treasurer, will discuss the company's financial results. Tom Bardinet, our Chief Operating Officer, will also 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-Q 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 includes pro forma operating results for our current hotel portfolio. I'll now turn the call over to Leslie.

Good morning, everyone, and thank you for joining us today. We achieved second quarter results that were ahead of our expectations, demonstrating the resiliency and benefits of our diversified portfolio. the continued ramping of our conversions, and our disciplined expense management as we focus on delivering bottom line results. In addition to our operational focus, during the quarter, we executed on several key initiatives, which included making progress on the repositioning of several key assets, further strengthening our balance sheet by addressing all near-term maturities, and opportunistically recycling capital into accretive share repurchases. Against an evolving landscape, we remain focused on driving earnings growth and executing on our capital allocation initiatives to drive long-term shareholder value. With respect to our operating results, our REVPAR decline of 2.1% in the second quarter was consistent with our expectations we had outlined on our last call. Our REVPAR was constrained largely by a reduction in room nights, driven by the ongoing transformational renovations at high-occupancy properties in South Florida, Waikiki, and New York, as well as the planned closure of the Austin Convention Center, which will significantly expand the center and further strengthen the Austin market in the coming years. Excluding these factors, RevPAR growth for our portfolio was slightly positive, outperforming the industry, and we also gained 140 basis points of market share, highlighting the strength of our portfolio. Our urban hotels continue to be the key driver of our portfolio, with RevPAR outperforming our portfolio by 140 basis points. Notably, our hotels in San Francisco, CBD, achieved 20% rep art growth, benefiting from a strong citywide calendar and improving return to office trends. We are encouraged by the ongoing recovery in Northern California, which continues to gain momentum, supported by an improving citywide calendar and a positive local business climate. We believe that the scale and trajectory of AI investment should drive sustained economic expansion in the region and support further improvement in lodging fundamentals over the next several years. We are also encouraged by the continuing positive results in our seven completed conversions, which collectively achieved 10% REVPAR growth during the second quarter, validating our ability to drive operational upside through our conversion pipeline. Relative to segmentation, we saw strong growth in leisure revenues, which were up 5%, aided by the shift of Easter into April and an elongated spring break. Additionally, leisure revenues benefited from several events, such as the U.S. Open in Pittsburgh, Formula One in Miami, the World Cup soccer games in several of our markets, and strong attendance at concerts in several markets, such as Chicago and Houston. These events especially benefited our urban leisure segments, which outperformed, achieving 7% revenue growth. These results also reinforced our conviction around urban leisure as another leg that will continue to drive outperformance in our urban markets. As it relates to business travel, underlying trends remain healthy as large corporate accounts are driving momentum in BT, especially in sectors such as consulting, tech, and defense, with return-to-office trends continuing to create incremental demand. Excluding government-related business, which remains challenged, revenues were up 3%. Our second quarter group revenues were impacted by holiday shifts, the closure of the Austin Convention Center, and the reduced demand from government-related groups. Softer group demand led to a broader lack of compression during the second quarter overall. Despite softer group demand, our non-room revenues grew by a solid 1.5%. Once again, underscoring the success of our ROI initiatives aimed at growing food and beverage and other ancillary revenues. This growth, paired with our tight cost containment initiatives, allowed our portfolio to deliver bottom line results which exceeded our expectations. Our operators were able to preserve EBITDA through the early implementation of aggressive cost mitigation efforts during the quarter, which included optimizing productivity across all hotel departments, managing F&B direct costs, and adjusting hours of operations. These and many other initiatives allowed our portfolio to achieve flat operating expense growth compared to last year, which limited our margin compression to just 90 basis points. Turning to capital allocation, which continues to be an important source of value creation for RLJ. Our four most recent conversions in Nashville, New Orleans, Houston Medical Center, and University of Pittsburgh achieved a combined REVPAR growth of 26% during the second quarter. Underscoring the significant growth embedded in our conversions, we continue to expect our conversions to generate robust double-digit returns, which should enhance our operating performance. We are on track to deliver our conversion of the Renaissance Pittsburgh to an autograph by Marriott by year end. Additionally, we are making meaningful progress on our Boston conversion and look forward to sharing an update on the brand selection during the third quarter. In the second quarter, we advanced our transformational renovations at four high occupancy properties in South Florida, Hawaii, and New York. We expect these assets to start ramping in the fourth quarter as they are delivered. Additionally, we took advantage of the dislocation in our share price to execute $6 million of share repurchases, recycling the remaining proceeds from our last disposition. And finally, we further strengthened our balance sheet by addressing our near-term maturities and paying down the remaining balance on our revolver. Our ability to successfully execute on multiple capital allocation opportunities simultaneously continues to highlight the optionality of our strong balance sheet. With respect to fundamentals for the back half of the year, our outlook is mixed as a broader macro environment remains uncertain, which is contributing to shorter booking windows and limited visibility. These dynamics will weigh heavily on the third quarter, while favorable calendar shifts, easier comps, and improved group travel will help support better lodging fundamental trends during the fourth quarter. Relative to the third quarter, we are facing tough citywide comps in markets such as Chicago, which hosted the DNC last year, as well as Boston, San Diego, and New Orleans, which is compounded by the softer-than-expected overall group demand. Additionally, Tampa and Houston will face difficult year-over-year comparisons against last year's hurricanes, which drove outside FEMA business. We expect leisure demand to remain stable, although with continued rate sensitivity, while government-related and international travel are expected to remain soft for the duration of the year. And we will also be impacted by the continuing renovations in South Florida and Hawaii and the closure of the Austin Convention Center. Against this backdrop, our preliminary July REVPAR is tracking down by mid-single digits year over year. Relative to the fourth quarter, we anticipate tailwinds from a more favorable holiday calendar, the lapping of the presidential election, strong city-wise in a number of our markets, including Northern California, and the ramp from our renovations, including Waikiki, as they are delivered. Looking at 2026 and beyond, We see an improving setup for the industry, which should benefit from a positive economic backdrop driven by less regulation, extension of lower tax rates, tariff clarity, and the expectation of lower borrowing costs to allow for business leaders to make decisions around capital planning and investment. This will occur against an extended period of constrained new supply. With this improving backdrop, our portfolio is especially well positioned for 2026 given our favorable geographic exposure and our urban footprint, which should allow us to see outside benefit in an improving demand environment. In particular, we should benefit from an improved citywide calendar and a number of our markets. A favorable footprint positioned to capture demand from a strong calendar of special events such as the 250th anniversary celebration of the United States in Boston, D.C., and Philadelphia, NBA and NLB All-Star Games in Los Angeles and Philadelphia, the NFL Draft in Pittsburgh, the Super Bowl in San Francisco, as well as the World Cup matches across several of our markets. The ramp from our eight completed conversions, including the autograph in Pittsburgh, which should drive incremental growth in our portfolio. and the ramp from our high-occupancy renovations in South Florida, Hawaii, and New York that will be completed in 2025. Additionally, we remain constructive on Austin's long-term outlook as the city continues to benefit from economic expansion, including a thriving tech sector. While the Convention Center renovation will continue to weigh on near-term results, The facility will double its current size and is expected to reinforce Austin's position as a regional economic engine and generate meaningful future demand, particularly across our footprint. Moreover, our portfolio's lean operating model and our relentless focus on cost containment will enable us to drive much of this expected improvement to our bottom line and generate significant free cash flow. We remain confident that our portfolio construct, operational discipline, and embedded growth drivers will allow us to look through any near-term volatility and continue to create long-term value for our shareholders. With that, I will now turn the call over to Nikhil. Nikhil.

Thanks, Leslie. To start, our comparable numbers include our 94 hotels owned at the end of the second quarter. Our reported corporate adjusted EBITDA and AFFO include operating results from all sold and acquired hotels during RLJ's ownership period. We were pleased with our second quarter results, which came in ahead of our expectations. Our second quarter occupancy was 75.5%, average daily rate was $205, and REF PAR was $155, which translates to a 2.1% REF PAR contraction versus prior year, including a 1.6% decline in occupancy and a half percentage point drop in ADR. As Leslie noted, transformational renovations at several key assets, as well as the closure of the convention center in Austin, impacted second quarter results. Excluding these, our portfolio ref power increased by 0.2%. Ref power at our urban hotels outperformed our portfolio, led by 13% and 10.3% growth at our urban hotels in South Florida and Northern California, respectively, as well as positive REFPA growth in several urban markets, such as Atlanta, New York, and Houston. We were especially pleased with our non-room revenues achieving 1.5% growth, demonstrating the momentum behind our ROI initiatives, despite slightly lower occupancy this quarter. With respect to the cadence of REFPA during the quarter, April was effectively flat, influenced by the Easter calendar shift and an elongated spring break. May and June came in approximately 3% below last year, lining up with a closure of the Austin Convention Center and renovations at key properties, which are continuing into the third quarter. Turning to the current operating cost environment, we were pleased to achieve flat expense growth during the second quarter and improvement of nearly 300 basis points from the first quarter. Our ability to control costs in a soft offline growth environment speaks to the benefits of our portfolio construct and our lean operating model. Our operators proactively responded to the softening operating environment by initiating cost mitigation efforts early. which limited our margin contraction over the last year to just 90 basis points. Additionally, with respect to our fixed costs, we are now lapping the difficult comparisons to last year and benefiting from over 10% reduction in annual property insurance during last year's renewal. Turning to our bottom line results, during the second quarter, our portfolio achieved hotel EBITDA of $113 million and hotel EBITDA margins of 31.1%. Excluding the renovations in Austin, our hotel EBITDA margins were flat over last year. We achieved adjusted EBITDA of 104 million and adjusted FFO per diluted share of 48 cents during the second quarter. Our balance sheet remains strong. As previously announced, in the second quarter, we proactively addressed our 2025 and early 2026 debt maturities, including entering into a new $300 million term loan used to refinance a term loan maturing in early 2026 and fully repaying the outstanding balance on our line of credit. The new term loan matures in 2030, inclusive of extension options. Additionally, early in the second quarter, we exercised the extensions on two mortgage loans of $96 million and $85 million, respectively. Having addressed all of our 2025 debt maturities, we are now turning our attention to our 2026 maturities. Overall, we have a well-positioned balance sheet with $600 million available under our undrawn corporate revolver, a current weighted average maturity of nearly four years, 86 of our 94 hotels unencumbered by debt, an attractive weighted average interest rate of 4.5%, and almost 75% of our debt either fixed or hedged. We ended the second quarter with nearly $1 billion of total liquidity and $2.2 billion of debt. With respect to capital allocation, we are continuing to demonstrate the optionality our strong balance sheet provides by unlocking embedded value in our portfolio through transformative renovations and high-value conversions, while simultaneously remaining committed to returning capital to shareholders through dividends and share repurchases. During the second quarter, we repurchased 0.8 million shares for $6 million at an attractive basis of $7.14 per share. So far during this year, we have repurchased approximately 3.2 million shares for $28 million. Additionally, our quarterly dividend of $0.15 per share is well covered and supported by our free cash flow. Overall, we will maintain a disciplined approach to capital allocation, aiming to ensure stability while positioning our portfolio for growth throughout the lodging cycle. At the same time, we will actively monitor financing markets to identify opportunities to improve the laddering of our debt maturities, lowering our weighted average cost of debt, and enhance the flexibility of our balance sheet. Now turning to our outlook, given the low visibility environment we are operating in today and the third quarter softness we are seeing we view the bottom end of our guidance range as the most likely outcome. With respect to the third quarter, we expect that the industry will face headwinds from the holiday shift in September, soft leisure, and lower government and international demand, causing ref power to be down. In addition to these industry headwinds, our third quarter will also face incremental impact of approximately 200 basis points due to the revenue displacement from continued renovations in Waikiki and South Florida and the closure of the Austin Convention Center, which will lead to our third quarter being the softest quarter of this year. Our operators are continuing to aggressively execute asset management cost containment initiatives to mitigate the impact on the bottom line. The fourth quarter, on the other hand, will benefit from a number of tailwinds to REF PARP. These include a favorable holiday shift, significantly stronger citywide calendars in many of our markets, notably Northern California, an easier comparison to the presidential election last year, and the rampant assets under renovation that start to deliver. Finally, please refer to the supplemental information which will include comparable 2025 and 2024 quarterly and annual operating results for our 94 hotel portfolio. Thank you. And this concludes our prepared remarks. We will now open the line for Q&A. Operator.

Thank you. We will now 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 tone will indicate that your line is in the question queue. You may press star 2 if you would 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. One moment, please, while we poll for questions. Our first question comes from Austin Oerschmidt with KeyBank Capital Markets. Please proceed with your question.

Thanks. Good morning, everybody. I appreciate the details around the impact of the portfolio in July. Can you just talk a little bit about the booking pace tracking into August and September and how much you think also is attributable to some of the holiday shift and just some of the other factors you highlighted?

Sure. You know, Austin, if I sort of think about the third quarter in aggregate, you know, as we mentioned on the call, it's a layering effect that's happening in the third quarter and it's really being driven by a demand that's causing it to be our weakest quarter. As we talked about before, You know, there are some knowns to the quarter in terms of the holiday shift affecting September, the tough comps in Chicago, Boston, NOLA, and San Diego, and then the tough comps that are coming from the hurricanes that are in Houston and Tampa, which started in July. And as I mentioned before in my prepared remarks, you layer in the softness on the government and international and international leisure is obviously affecting July and August for the summer months. And what we're seeing from that layering effect is that the booking dynamics in the third quarter, you know, pace is down and in the quarter, for the quarter isn't picking up. We do think that this layering effect is causing the softness to behave different in the third quarter and isolated to the third quarter. And so when we look at sort of how the cadence of the quarter is shaping up, as I mentioned in my prepared remarks, July is coming in at mid-single digits. We think that August is going to be similar, and that September will be slightly better, you know, from the shape of the quarter.

That's helpful. I guess which segments or markets really, would you say, are underperforming more than you had expected when you revised your guidance last quarter?

I would say that, in general, it's the layering effect, Austin. So I think it's a compound effect of all the pieces as a result of group being softer and not picking up in the quarter for the quarter.

Got it. That's all for me. Thanks.

Our next question comes from Tyler Battery with Oppenheimer. Please proceed with your question.

Thank you. Good morning. I'm wondering if we can zero in what you're seeing in the leisure side of things, perhaps talk about some of the differences between urban leisure versus resort leisure, just trying to get a good sense of how that business is trending so far in the summer.

Yeah, I mean, as we mentioned for the second quarter, Urban leisure outperform was up seven and leisure was up five. It's really a function of our exposure to city-wide, I'm sorry, not city-wide, but special events that were really strong in the second quarter. We continue to see our exposure to those things in the summer do well, but the reality is that international leisure plays a bigger role during the summer and isn't as strong as it normally is. And so we saw some softness around that. We continue to see demand be strong, but leisure rate continues to be under pressure from the leisure side. But as we have special events in various markets, we continue to perform relatively well, and urban leisure continues to outperform overall.

And just to add a little bit more to that, Austin, or Tyler, excuse me, what we're also seeing is When we think about average rate, we're able to hold on average rate. And we've seen that even with the softness in quarter three and quarter four. As we look into the future, because of the solid base we have in regards to pricing integrity within the market segments. And that's a reflection of our bar pricing. Even on weekends, as Leslie talked about the demand softening, we're still holding rate. And that's helping us on the profitability side. And even when we think about our group as we go into Q4, we know that our rates are in a good spot in addition to our pace is 102%. So we're hanging in there even with the softness on the average rate side, which is helping us to flex when we know that we have potential demand issues, we're able to flex to the bottom line. And that's also helping us in Q4 as we look to the rising of where we're going after Q3, which is really an isolation of All the things Leslie mentioned. Okay, thank you for that.

And my follow-up, can you talk a little bit more about how you're thinking about share repurchases and whether you'd like to be a little more programmatic with that and just how you think about repurchases compared with your leverage and some of the other uses for your capital?

Sure. You know, Tyler, obviously with this backdrop that share repurchases continue to be attractive, and as you mentioned, some things that we sort of look at in terms of the volume of share purchase, that's really influenced by our view on fundamentals, on the macro, on leverage. And we have been programmatic, and we're going to continue to be programmatic. We were active this quarter. We used disposition proceeds. We continue to think that that is the best way to approach buybacks, to remain leverage neutral, is to use disposition proceeds. You know, in addition to deploying buybacks, we also, you know, continue to be active in terms of advancing our conversions, which we've generated strong returns. As we further and continue to strengthen our balance sheet, it does give us optionality to be able to deploy capital into buybacks as well as conversions and gives us the optionality to do that simultaneously. And you'll still continue to see us do that, you know, assuming, you know, valuations stay where they are.

Okay, that's all for me. Thank you.

Our next question comes from Gregory Miller with Truro Securities. Please proceed with your question.

Thanks. Good morning, everyone. I'd like to start off with Nashville. Maybe you missed this in the prepared remarks, but could you provide an update on Banker's Alley? We heard from another REIT asserting about Nashville supply growth impacting how hoteliers particularly the high end, are positioning on transient leisure room rates and discounting. I'm curious if you're seeing similar trends from your side of the coin within downtown Nashville, and if so, how impactful is that to your hotel?

So, hey, thanks for the question. You know, we're very pleased how our Nashville asset has come out the gates. We were up 14% in the second quarter. As you know, we just recently converted that asset. We only have 124 keys, so it's built right, and we're situated within walking densities of multiple demand drivers, and so we're very pleased how our asset is performing. I'll let Tom give some incremental color.

Yeah, Greg, I know you know a lot about the market, but What I would also add to Leslie's comments is because when we shifted over to the Hilton Res system and we're a tapestry, so it's a collection hotel, we really have a different vibe there. And I think the Hilton Honors members have really enjoyed having another product to go to because there wasn't a lot of Hilton supply there. As an example, 60% of our business is coming through Hilton Honors now. And what we've also seen, because we have some square footage there in an art gallery, It's a really different way to experience Nashville. As you know, it's a fun place to visit. In addition to that, as Leslie talked about our location on 2nd Avenue, there has been a significant beautification from Broadway to 2nd Avenue, and all that's going to bring the connection between Printers Alley, Broadway, and 2nd Avenue. And then on top of that, the future is really bright because you can see the Titan Stadium that's now outdoors being built next door that's going to be indoor. So all the concerts and leisure, urban leisure that we talk about, that's going to be a great venue for more of those concerts because they can go, you know, 12 months out of the year. And then we do believe that Oracle Campus, we can see it coming out of the ground. We all know that that's going to be the world headquarters on 65 acres. And with 8,500 jobs in the future, we think that this is going to be a bright market for us. So, yes, there is supply. Yes, there are some issues in regards to convention center business. But we play in a different league, if you will, with 124 keys. We're a small group and really benefit from that leisure customer as well as corporate, which is closer to our location.

Thanks to you both. For my second question, I'd like to ask about the transactions environment. This question comes up pretty often on earnings calls, but it looks like there may be a little bit of a pickup of activity and upscale, at least that's what I'm seeing. And I'm curious what you're seeing both for upscale and upper upscale right now. How's volume? How's pricing? And if you can comment, how does that relate to how you view your discount NAV at present?

Yeah, I mean, look, I would say that, in general, volume remains low on the transaction side. You know, we continue to see the types of deals that are getting done are smaller deals, owner-operated, operator deals. And deals are taking longer in general. I would so acknowledge, though, that sentiment around transactions over the last 45 to 60 days have seemingly improved as policy backdrop has inched forward. And so we could see more deals get done in the coming months. The debt markets continue to be the bright spot, but equity capital continues to be scarce. But this could be a better backdrop to be more active, you know, in the coming months. I would say that in general, bid ask is still deal by deal. You can't paint the transaction market with a brush. The deals that are getting done are generally when there's some kind of debt maturity or capital need or some kind of fatigue within the capital stack from our perspective. That's really sort of driving the deals that continue to get done. you know, over the next month or next quarter or two, we could see that improve. And in general, obviously, we continue to believe that we're trading meaningfully below the underlying value of our assets. It's complete dislocation there.

Thanks, Leslie. Appreciate it.

Our next question comes from Daniel Hogan with Baird. Please proceed with your question.

Hi, good morning. I just wanted to ask first, I know you mentioned a lot of the leisure trends and how they're looking into the back half of the year. Are you seeing more leisure discounting and different, you know, any difference in booking and channel mix and where discounts may be coming from that's impacting the back half?

Yeah, I mean, I would say... Sorry about that. I would say that in general, the way we are seeing leisure unfold is that demand remains stable, urban continues to outperform, and that rate sensitivity is showing up in the form of using discount booking channels. And we think that's going to persist through the remainder of the year. As we think about the other segments, You know, BT without government continues to grind forward. And we're seeing, you know, national accounts really drive that. And we think that's going to continue throughout the remainder of the year and that October is going to benefit a lot as a strong BT month. And that while, you know, while group is soft in the third quarter, as we outlined before, because of the booking trends that we're seeing with week calendar, tough comps, and the holiday shift, In the fourth quarter, we think that group is going to do well because of the setup. While the third quarter is soft for us, We see the fourth quarter shaping up as we expected because the setup hasn't changed. The holiday shift will benefit the fourth quarter, and we're lapping the election in the fourth quarter. We have better city-wise across NOLA, Boston, Denver, Orlando, Houston, Louisville, and the booking dynamic is better. We're seeing our pace actualize. We're seeing definites materialize. We're going to get the benefit of our renovations ramping, and our conversions are going to continue to ramp. So when we look at fourth quarter versus third quarter, in the third quarter you were hurt by the holidays. In the fourth quarter you're going to benefit from the holidays. In the third quarter you had tough comps across the markets we talked about, but we're lapping and we have easier comps in the fourth quarter. Additionally, when we think about the city-wide, city-wise we're weak in the third quarter, they're going to be strong in the fourth quarter. And the booking dynamic, in the third quarter we saw the inability, we're seeing the inability for the quarter pickup, whereas we're actually seeing the pace materialize for the fourth quarter. And lastly, specific to us, the renovations are impacting us in the third quarter, but we're getting the benefit of that in the fourth quarter. I would also say that our fourth quarter was built on what we think are modest assumptions. We're only built on assuming a pace of 102%, which is relatively modest when you think about that. And so, you know, we have, you know, we feel good about how the fourth quarter is shaping up, and the setup is very different than the third quarter. And so while we have articulated some of the segment softness in the third quarter, we think it's isolated to the third quarter. It is not a function of what we're seeing from a fundamentals perspective and isn't carrying into the fourth quarter.

Great. That's helpful. And then quickly shifting over to expenses. Honey, you mentioned the fixed expenses as well in 2Q, but then overall just the cost controls. Is there any change in the expense outlook for the second half of the year, or were your change in assumptions, especially 3Q and 4Q, mostly just top-line driven?

Yeah, I would say, first of all, I really want to give the team a recognition for the great job they did in terms of being very aggressive around the cost side. The team is really focused on a number of factors around optimizing scheduling, procurement, looking at hours of operation on F&B, energy initiatives, and continuing to cluster, which is unique to our portfolio. And then we were able to flex. because of the types of assets that we own. And I think that's the benefit of what we saw in the second quarter. And I would say that our assumption around the back half of the year is about 2% growth. And we feel good about being able to contain that to the extent that there's any incremental weakness on the top side.

And I would add just a couple things, Daniel. And that is, when you think about the level of intensity that we're putting around that, it's really critical to think about how the workforce is changing out there. We're continuing to see a decreasing of contract labor, both in rooms and F&B. We have dedicated time and effort to really making sure that we have labor management systems that are driving productivity. And because our management companies are now having employees working for the company, we're finding that retention is up, turnover is down. And then when you think about our footprint, it allows us to really take advantage of what Leslie talked about earlier, and that is having 50% suites with longer length of stay, 80% rooms revenue, which is less complicated F&B operations. You know, when we really dig in, it's the proximity of our locations and our footprint that is allowing us to grasp that sustainable synergies and savings going forward. And then we made a move in Q2 Based on our scale, with the amount of assets that we have, we made a procurement decision to really maximize savings by bundling what we buy and driving compliance by adhering to, you know, drop sizes that are going to provide us incentives. And we're already seeing the window of savings, like, for instance, Comp, F&B, POR is down a couple percent. And those are early stages of that move. We're really digging in on that side. And as Leslie said, if we have demand issues, we flex. And when we have revenue increases, we will flow. And that's how we're thinking about our operations.

Great. Very helpful. That's it for me. Thanks.

Our next question comes from Chris Oronka with Deutsche Bank. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking the question. Maybe we can start off with a follow-up of the last question. Is there any – as you guys start looking to 26, is there any change in kind of your expectation of what it takes to get flat margins from a REVPAR perspective maybe versus what you would have said coming into 2025? Yeah.

Yeah, Chris, I mean, I think when I look at the second quarter as sort of a proxy, what you saw in the second quarter was a two-to-one, you know, relationship where you're down two on the top and one on the bottom. And I really think that that's a signal that we're moving towards more of a normalized relationship between revenue and expenses, and that's kind of the way I would think about it.

Okay. Thanks, Leslie. Super helpful. And just as a follow-up, I guess if you maybe drill down a little bit across all your buckets of demand, and you covered a little bit of this already, but is there any discernible change in booking window or sourcing of booking in terms of where it's coming from, direct OTA, anything to kind of highlight there if we're getting back into a more normalized environment in the fourth quarter?

Yeah, yeah. I mean, the one thing I would say, and then I'm going to let Tom dig into your question around channels, is obviously the booking window remains short, which is obviously impacting visibility beyond the current trends that we see. So that continues to be our current lens today.

Yeah, and to give you some color around how people are booking, when I look at the numbers, Chris, I think it's encouraging that people are continuing to go to brand.com. And we're still growing that. For instance, quarter two was up 2.5%. It's our largest mix of business, which is great because you don't want to have to pay transaction fees on that. And so that's roughly almost 40% of our business that's going through the brand. In addition to that, when Leslie talked about BT, we obviously look at global distribution systems, we look at local negotiated rates, we look at the national corporate accounts. That's where we're seeing the growth. So even in the face of adversity within the government market, To get to positive 3% with BT means that our national corporate accounts are coming back. They're booking through GDS. We're really hunting on the ground, street corner by street corner, to drive local negotiated rates to bring that in. And then when you look at OTAs, they're up a little bit because obviously leisure being a little softer, you've got to take a little bit of that business. And that's a channel that you can control and turn the valve off and turn the valve on when you need it from a demand standpoint. But it's still a very small percentage of our total mix. That gives you a little bit of an idea how things are happening. And then more importantly, because we have a significant amount of hard brands, even our collection brands and our conversions that are lifestyle, the brand.com and the loyalty continues to rise. And that's roughly about 60% of our occupancy at our Marriotts, our Hiltons, and our Hyatts. And so we continue to really explore how we, you know, drive membership to try to make sure we continue to increase share.

Okay. Very helpful. Appreciate that. Thanks, Tom.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Zach Armstrong with Wells Fargo. Please proceed with your question.

Thank you, Morten. Thanks for taking the question. You've got one of the strongest cash positions among your peers, and with portfolio-leading rev par growth and attractive returns from your ROI CapEx programs, why not increase the pace of those across the portfolio? Is there something holding you back there operationally from not just the conversions and the up-brandings, but ROI-specific assets like the rooftop at the Mills house?

Yeah, we love the rooftop at Mills House, too. You know, what I would say in general is we've obviously talked about the conversions before being on two per year. We're on that cadence and hitting that cadence. We've also obviously foreshadowed that in our prepared remarks that we're going to be giving you the brand selection for Boston on the next quarter. And so we feel good about our pace related to that. So we'll do that. I think in terms of ROIs, we are continuously looking at ROIs throughout our portfolio and wrapping that into our normal, you know, renovations. As I mentioned before, you know, we have our program this year includes some high occupancy assets where we are repositioning those assets for transformation. Well, we're not rebranding those assets. We are elevating the rooms, reimagining the F&B, and the sense of arrival of those assets, and so it's pretty meaningful, and we expect to get the benefit of that starting in the fourth quarter next year. And so we are continuously looking at ROIs, but we're roping those into our normal renovation programs. I'll let Tom add some color as well.

So, Jack, I think a great statistic to be able to kind of give you a flavor of how the ROIs are making an impact, you know, we were up 1.5% on non-room revenue spent. I'll give you a couple examples of how we're doing it. So you think about the F&B and the reimagined space that Leslie just referred to in our transformational renovations. We really are leaning in on beverage-centric on food and beverage. And as an example of that, our food and beverage profit was up 180 basis points this quarter. In addition, because of our scale, we really dig into parking, whether it's valet or self. We have the ability to work with operators to make sure we get the proper splits on valet, and then we'll put capital against gates when we have just parking lots that are surface parking lots versus garages. And so still trying to make sure we're taking that best practice on third-party opportunities to maximize. And those are companies like Spot Hero that are looking for spots at some of our airport locations to really try to maximize even folks that aren't staying with us for park and fly. And then lastly, I think in our lobbies, as Leslie had mentioned, I think, you know, one-on-one for our renovations is we go in and we look at our markets. You know, you think about you're traveling through airports today and everything's in your quarters. You don't go into stores. Well, our markets are in our lobbies and we're expanding that. What's happening is our PORs are increasing. We're allowing people to grab something and go if they don't want to sit down and have a meal. And we're finding that that new consumer behavior, we're taking advantage of that in many of our hotels and our lobbies by putting ROI money there. So, no, we're leaning in to ROIs and really continue to see that as a consecutive quarter where we're increasing our non-room revenue spend.

Really helpful. Thank you.

Our next question comes from Ken Billingsley with CompassPoint.

Please proceed with your question. Ken, are you there? I am here. Can you hear me?

Can you hear me?

Now we can. Go ahead.

I apologize. I was on mute. So I actually wanted to follow up on the F&B commentary you just made. With occupancy down, but F&B up 2.7%, you said it's beverage-centric. But another question I have on that is, what is driving it more? Is it customer spending or the prices being charged? What's driving it the most?

Thanks for the question, Ken. I would say all of the above. When I think about what we're doing on hours of operations and where we're putting most of our time and energy is where their transactions can be had. Examples of that are when we think about our menus, many people are wanting to go to the bar just to grab a quick meal. They're not looking to sit down, and so we really are allowing them to feel like that's the place to have a meal. And what I would say about beverage-centric, we're adding seats to our bars. An example of that I'll give you at the Knickerbocker. When we looked at St. Cloud, it's been an incredibly successful rooftop bar, does better numbers than most rooftops in New York. Obviously, we've got a beautiful view of the ball. but we just added a sushi bar in space that was not being maximized. It was really overflow space, and now it's generating income. And that, as you know, is very profitable business, and we're just seeing the ramp-up of that as an example. So when we think about food and beverage, maximizing our space in our atriums. For instance, we have a fairly significant amount of embassy suites. We have now changed the way people are interacting with our lobby space. So you have your meeting space, and then you have your area where you can now congregate. And that's driving more people having lunches, meals, receptions, and giving us a chance to be able to not just do it in price, but doing it in volume.

And I would also point out to you in a couple examples that Tom gave that we're able to drive F&B revenues from non-hotel guests. And so if you think about what he just described with Nick, also what we did at Sakari Dunes, and other examples through our portfolio, that's another reason why F&B is up is because the concepting and reimagining of the spaces are drawing customers that are not just in the hotel.

That's good insight. And the other question I have is, I've seen it mixed with some peers. Is urban performing any different than other hotels when it comes to F&B? Some had shown some decline, specifically in urban, and maybe it was just some seasonality because of the calendar. But have you noticed any difference that there's more or less spending on the urban side?

Well, I think if you look at our statistics, I would say that we're very pleased that urban is performing very well. When you look at just high level, urban performed better than the portfolio when we look at the results this quarter. In addition to that, when we talked about urban leisure, we saw that that was up. I think a lot of that is because we're closer to the attractions, right? So when you think about why people go to urban locations, it's because they have an event they're going to. It might be a concert. It could be a ball game. You know, you think about the 26 footprint for us. We're really excited about that. When we look at, like, Pittsburgh as an example, when we're going to convert the Renaissance to an autograph down there, the NFL draft is going to come in to that location. And when it was in Detroit, you know, it brought 7,500 people, or excuse me, 75,000 people for that weekend. So what's happening is all these locations with these urban locations is where the activity is. People are living there, they're working there, they're playing there, and they want to spend their money there. So I would say that it's really positive for us. And in an F&B question, it's where people are spending money because that's where they're going to have fun.

Great. Thank you.

This really speaks to kind of the construct of our portfolio and the urban signature nature of it and the live, work, play environments that we try to have from all demand drivers.

Excellent. I appreciate it. Thank you.

We have reached the end of our question and answer session, and I would now like to turn the floor back over to Leslie Hale for closing comments.

Thank you all for joining us today. We hope that you enjoy the rest of your summer, and we look forward to seeing many of you in the fall. Thank you.

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