RLJ Lodging Trust (NYSE:RLJ) Q3 2023 Earnings Call Transcript

RLJ Lodging Trust (NYSE:RLJ) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Welcome to the RLJ Lodging Trust Third Quarter 2023 Earnings Call. [Operator Instructions] I would now like to turn the call over to Nikhil Bhalla, RLJ’s Senior Vice President, Finance and Treasurer. Please go ahead.

Nikhil Bhalla : Thank you, operator. Good afternoon, and welcome to RLJ Lodging Trust’s 2023 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 Bardenett, 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-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 was posted to our website last night, which includes our pro forma operating results for our current hotel portfolio. I will now turn the call over to Leslie.

Leslie Hale : Thanks, Nikhil. Good afternoon, everyone, and thank you for joining us today. Our third quarter results reflect the benefits of our urban-centric portfolio, which is ideally positioned to capture the emerging trends as evidenced by our RevPAR growth exceeding the industry for the third straight quarter. Our above-industry results were led by our urban markets, which are disproportionately benefiting from positive trends across all segments of demand. We were particularly pleased to see these trends accelerate throughout the quarter, culminating with September achieving new highs. Overall, we remain constructive on the help of lodging fundamentals, which continue to unfold with favorable trends for our portfolio.

With respect to our operating performance, despite the impact of several weather-related events, our third quarter RevPAR grew 3.4% year-over-year, which was 2x the industry and achieved 98% of 2019, representing a 200 basis point improvement from the prior quarter. Our RevPAR growth was balanced between occupancy and ADR, demonstrating additional run room in demand and continued pricing power across our portfolio. With sequential improvement during the quarter, our September RevPAR grew 5.8%, which allowed our portfolio RevPAR to exceed 2019 levels for the first time. These encouraging trends carried into October. Our urban markets grew 4.2% over last year, benefiting from the consistent improvement in business demand. These markets also benefited from ongoing robust group demand and healthy urban leisure trends with a return of large-scale events and improving inbound international demand.

These positive trends enabled our urban markets, such as Boston, D.C., and New York to achieve low double-digit RevPAR growth over last year. Our top line also continues to benefit from the expansion of non-room revenues as a result of our revenue enhancement initiatives, such as space reconfigurations, F&B re-concepting, and other initiatives. In the third quarter, non-room revenues grew by 12.7% and led our total revenues to grow by 4.9%. This momentum accelerated in September with total revenues increasing by 6.9% over last year. In terms of segmentation, our business transient segment continues to have a positive trajectory. This enabled us to achieve the highest level of revenues post the pandemic at 75% of 2019 levels, a 400 basis point increase over the second quarter.

On a year-over-year basis, business transient revenues increased by 11%. Notably, room nights improved by over 400 basis points to achieve 90% of 2019, demonstrating continued improvement in BT demand, which was led by SMEs and positive momentum in our national corporate accounts from industries such as industrial, telecom, and technology. Improving business demand trends were also evident in our weekday revenues, which grew by 4% year-over-year. Similar to our overall portfolio, our business transient trends accelerated throughout the quarter, with September achieving 21% revenue growth above 2022. Going forward, we expect the strengthening of these trends to be further bolstered by the progress relative to national return to office mandates.

With regards to group, our strong booking dynamics continued in the third quarter as group revenue grew by 4% over last year. Our group base has broadened to include more corporate and self-contained groups. This robust group demand led our third quarter group revenues to achieve 104% of 2019 levels, driven by ADR, which exceeded 2019 by 15% during the quarter. We remain bullish on our portfolio’s ability to capture group demand as evidenced by the strength in our, in the quarter for the quarter bookings, which represented nearly 20% of group revenues. As it relates to leisure, while resorts continue to normalize during the quarter for the industry, our leisure segment outperformed due to the ongoing strength in urban leisure, which benefited from strong attendance at various concerts as well as sporting events.

This allowed our urban weekend RevPAR to increase by 4% over last year during the third quarter. Turning to the bottom line. Flow through from our strong revenue growth allowed us to achieve EBITDA margins of 29.3%, which is only 206 basis points below last year. With expense growth continuing to normalize, our lean operating model should allow our margins to benefit more on a relative basis. In addition to reporting strong quarterly results, we also made progress on a number of capital allocation objectives, including the continuing ramp-up of our 2022 conversions, which are exceeding 2019 levels and our underwriting on all metrics. These conversions achieved aggregate RevPAR that was over 16% above 2019 in the third quarter. With a multiyear ramp ahead, we expect these conversions to continue to contribute to our future growth.

Additionally, we made progress on our recently announced 2023 conversions. These properties are already seeing a positive response to their new brand affiliation, and we expect renovations over the next several months to unlock significant growth. We also continue to allocate capital in a disciplined manner. This quarter, we enhanced total shareholder returns through a 25% increase in our quarterly dividend and repurchased nearly $15 million of common shares, bringing our total shares repurchased to date to $70 million. The progress we have made on multiple capital allocation opportunities simultaneously continues to underscore the optionality of our strong balance sheet. Looking ahead, while recognizing that the overall macroenvironment remains uncertain, we believe that the current environment remains constructive for lodging fundamentals.

We are encouraged that the strong industry trends that we saw in September carried into October. Against this backdrop, we expect our performance to sequentially improve in the fourth quarter. Given our urban footprint, which should continue to see above industry growth driven by improving business transient, healthy leisure demand as we approach the holiday season as well as emerging international demand, the continuing ramp-up of our 2022 conversions and other initiatives. Our strong group pace, which is being led by small and medium-sized group and is already significantly ahead of last year by 23% and strong citywide in key markets such as Atlanta, Boston, Washington, D.C., and Northern California. These robust group trends are also carrying into 2024, where our group pace is 22% above last year, including being meaningfully ahead in key markets such as Southern California by 82%, Tampa by 37%, and Northern California by 21%.

Looking beyond this year, we believe that the positive backdrop for industry fundamentals will continue, giving the shift of consumer preferences towards experiences, steady improvement in business demand, recovering international travel, and citywide events returning to pre-pandemic levels. We expect these trends to continue to disproportionately benefit urban markets, allowing them to outpace the industry, especially with a muted new supply outlook over the next several years. As this new normal unfolds, RLJ is well positioned to capture all segments of demand. In recent years, we have intentionally repositioned our portfolio into prime locations within urban markets that benefit from 7-day a week demand. As such, our portfolio is built to capture these emerging trends in addition to the tailwinds from our acquisitions and conversions.

We believe that all of these unique factors should enable us to continue to exceed industry growth. Finally, I want to mention that we will be showcasing one of our recent conversions, the Pierside in Santa Monica in November, and we look forward to hosting many of you for our property tour before NAREIT begins. We believe that experiencing the transformation will help investors to truly understand the value we are creating. I will now turn the call over to Sean. Sean?

Sean Mahoney : Thanks, Leslie. To start, our comparable numbers include our 96 hotels owned throughout the third quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ’s ownership period. We are pleased to report strong third quarter operating results, which were consistent with our expectations. Our third quarter RevPAR growth of 3.4% was primarily the result of a 1.5% increase in ADR and a 1.9% increase in occupancy. Third quarter portfolio occupancy was 74.1%, which was 92% of 2019 levels. Average daily rate was $191, achieving 106% of 2019 and RevPAR was $142, which was 98% of 2019. Our third quarter results were primarily driven by our urban markets, where RevPAR achieved 99% of 2019 levels.

Most of our urban markets meaningfully exceeded 2019 such as New York at 113%, Louisville at 105%, San Diego at 112%, Washington, D.C. at 111%, Tampa at 139%, and Pittsburgh at 120%. Monthly RevPAR growth throughout the third quarter exceeded 2022 for each month. RevPAR growth above 2022 was 0.7% in July, 4% in August, and 5.8% in September and achieved 96%, 94%, and 103% of 2019 levels during July, August, and September, respectively. Similar to RevPAR, our monthly total revenue growth above 2022 accelerated throughout the third quarter and was 2.9% in July, 5.1% in August and 6.9% in September and achieved 99%, 96%, and 106% of 2019 levels during July, August, and September, respectively. The positive momentum from September continued into October, the most significant month of the fourth quarter, where forecasted RevPAR is approximately $160, representing a 6% increase from 2022 and 101% of 2019.

October RevPAR was driven by occupancy of 77% and ADR of approximately $208, representing 94% and 107% of 2019 levels and 104% and 102% of October 2022. While demand remained strong during the third quarter, hotel operating costs continued to normalize. Underscoring the benefits of our portfolio construct and realization of our initiatives to redefine the operating cost model, total third quarter hotel operating costs were only 5% above 2019 levels, which is meaningfully below the aggregate core CPI growth rate since 2019. There are many factors that influence these positive results with the most significant contributors being the successful restructuring of many of our third-party operating agreements, our lean operating model with fewer FTEs and reductions in property taxes, all of which are expected to continue benefiting our operating costs.

Third quarter wages and benefits, our most significant operating cost at approximately 40% of total costs remained generally in line with 2019 levels as a result of our hotel’s ability to continue operating with 17% fewer FTEs than pre-COVID, demonstrating the flexibility of our labor model in this environment. 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. Our third quarter operating trends led our portfolio to achieve hotel EBITDA of $98.1 million and hotel EBITDA margins of 29.3%. Our margins were 206 basis points lower than the comparable quarter of 2022. We were generally pleased with our operating margin performance in light of both difficult comps to the third quarter of 2022, where margins benefited from pandemic levels of hotel operating costs and the inflationary pressure on hotel operating costs, which is improving.

Turning to the bottom line. Our third quarter adjusted EBITDA was $88.8 million and adjusted FFO per share was $0.40, both of which were within our guidance ranges. We remained active in managing our balance sheet to create additional flexibility and further lower our cost of capital. This year, we have extended $425 million of debt to 2024, recast our $600 million corporate revolver and entered into a new $225 million term loan. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. We have also taken advantage of continuing interest rate volatility to proactively manage our interest rate risk by entering into $450 million of new interest rate swaps. Today, our balance sheet is well positioned with an undrawn corporate revolver.

Our current weighted average maturity is approximately 3.2 years. 81 of our 96 hotels are unencumbered by debt. Our weighted average interest rate is an attractive 3.97% and 93% of debt is either fixed or hedged. Turning to liquidity. We ended the quarter with approximately $495 million of unrestricted cash, $600 million of availability on our corporate revolver and $2.2 billion of debt. With respect to capital allocation, as Leslie said, we remain committed to returning capital to shareholders through a combination of both share repurchases and dividends. During the third quarter, we were active under our $250 million share repurchase program and repurchased approximately 1.5 million shares for $14.4 million at an average price of $9.81 per share.

In total, during 2023, we have repurchased approximately 6.9 million shares for $70 million at an average price of $10.12 per share, including $2.7 million repurchased so far during the fourth quarter. Additionally, last quarter, our Board authorized the third increase of our quarterly dividend since last summer to $0.10 per share for the third quarter. Our dividend remains 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 our overall balance sheet flexibility.

Turning to our outlook. Based on our current view, we are providing fourth quarter guidance that anticipates a continuation of the current operating and macroeconomic environment. For the fourth quarter, we expect comparable RevPAR between $129.50 and $134.50, comparable hotel EBITDA between $82 million and $92 million, corporate adjusted EBITDA between $73 million and $83 million, and adjusted FFO per diluted share between $0.30 and $0.36. Our outlook assumes no additional acquisitions, dispositions, refinancings, or share repurchases. Please refer to the supplemental information, which includes comparable 2019 and 2022 quarterly and annual operating results for our 96 hotel portfolio. Finally, we continue to 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?

See also 12 Best Self Storage and Apartment Stocks To Buy Now and 10 Best Performing Technology ETFs in 2023.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Michael Bellisario with Baird.

Michael Bellisario : Leslie, big picture. Maybe can you give us your thoughts on kind of the industry outlook for ’24, how you think the various customer segments might perform? And then really, the follow-up here is probably my more important question, just how you think the RLJ portfolio will perform on a relative basis, just overlaying the customer segments there, that would be helpful.

Leslie Hale : Sure. Mike, obviously, we’re sober about the uncertainty that still sort of lays in the overall macro environment. But having said all of that, fundamentals remain stable. And there’s nothing that we’re seeing today that suggests that the trends that we’re seeing won’t carry into 2024. We expect business transient to continue to gradually improve based on not only current trends, but also what’s going on from an office, return to office trends as well. From a group perspective, group booking trends continue to be very strong. Our pace is at 122% versus last year already. And then we expect urban markets to continue to benefit from all segments of the demand, including urban leisure and the emerging international trends that are doing well in both New York and South Florida.

So when we overlay our portfolio, we continue to expect to track with urban markets. We expect urban to continue to outperform as it benefits from all those different segments in demand. When we think about markets that we’re most positive on for next year, Southern California, Tampa, Boston, San Diego and Atlanta come to mind. But in general, we think the setup for next year bodes well for our portfolio as the new normal continues to unfold.

Operator: Our next question comes from the line of Dori Kesten with Wells Fargo.

Dori Kesten : I know you’re regularly receiving inbound interest for your hotels. Is there a trend in location or perhaps brand that you’ve seen of late in that?

Leslie Hale : In terms of inbound inquiry, Dori, is that what you’re saying? Is that what you’re asking?

Dori Kesten : Yes.

Leslie Hale : No. I mean I would say that in general, it’s sort of broad strokes, Dori. I think that most of the inbound calls candidly are for bottom feeders who are looking for distress. And because of our balance sheet and the strength of liquidity we have, we don’t have to sell against this negative backdrop, but we can obviously be opportunistic and it can be thoughtful about things from a disposition perspective. We obviously have 97 assets in — we’ll continue to be an active portfolio manager and evaluate where trends are heading on a market-by-market basis and adjust accordingly. But inbound calls are generally around bottom feeding across spectrum for different reasons.

Dori Kesten : Do you — I mean, I recognize it’s difficult, but do you imagine being a net fire as a result next year just given your balance sheet?

Leslie Hale : Look, I think it’s unclear whether it’s a net buyer or a seller. I mean that’s going to unfold based on dynamics. But what I would say to you is that there has been a constructive shift in the mindset of sellers today where sellers are starting to accept the fact that interest rates are going to be higher for longer and the viability of hanging on to assets may not be viable for some. And so therefore, that will create attractive buying opportunities for all cash buyers like ourselves.

Operator: Our next question comes from the line of Bill Crow with Raymond James.

William Crow : Sean, I appreciate the color on the operating expenses. And I’m curious of these attributes that you highlighted, set you up in 2024 to be able to achieve breakeven EBITDA margins and maybe a lower level of revenue growth than your full-service peers.