Hilda Delgado - Treasurer and Corporate Vice President of Finance Ross Bierkan - President and CEO Leslie Hale - COO and CFO Thomas Bardenett - EVP of Asset Management.

Wes Golladay - RBC Patrick Scholes - SunTrust Austin Wurschmidt - KeyBanc Michael Bellisario - Robert W. Baird Sean Kelly - Bank of America/Merrill Lynch Chris Woronka - Deutsche Bank Floris van Dijkum - Boenning & Scattergood.

Welcome to the RLJ Lodging Trust Fourth Quarter 2017 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Hilda Delgado, Treasurer and Corporate Vice President of Finance. Please go ahead..

Thank you, Operator. Welcome to RLJ Lodging Trust fourth quarter and year-end earnings call. On today's call, Ross Bierkan, our President and Chief Executive Officer, will discuss key highlights for the quarter and the year.

Leslie Hale, our Chief Operating Officer and Chief Financial Officer, will discuss the Company's operational and financial results; Tom Bardenett, our Executive Vice President of Asset Management 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 has been communicated. Factors that may impact the results of the Company can be found in the Company's 10-K and other reports filed with the SEC.

The Company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night. I will now turn the call over to Ross..

Thanks Hilda. 2017 was a transformative year for RLJ. Through our merger with FelCor, we added high quality hotels that not only strengthened our diversification strategy across brand, market and business mix, but also bolstered our differentiated investment thesis.

Since our inception, we have remained committed to owning high quality premium branded hotels with a rooms oriented focus. This asset type is a more efficient operating model that provides robust margins and sustainable free cash flow regardless of where we are in the lodging cycle.

With that strategy as our foundation, I am pleased to note that the portfolio delivered a very strong fourth quarter. Our RevPAR growth of 4% exceeded the high end of our guidance range by 200 basis points, boosted by outperformance in Houston, in South Florida where RevPAR grew 20.7% and 15.2% respectively.

While we were pleased to see such strong performance from these two markets, during the quarter, we saw broad based positive performance across the number of our markets, highlighting the benefits of our diversified portfolio.

In addition to driving strong operating results in the quarter, we also made meaningful progress on each of our key strategic initiatives that we expect will position us for long-term outperformance.

These initiatives include achieving corporate synergies from our recent merger, optimizing our portfolio by disposing of non-core assets, reducing leverage by proactively managing our balance sheet, and opportunistically and accretively reinvesting in our assets.

With regards to synergies, we've made tremendous progress integrating the two companies and remain on track to realizing the full benefit of the $22 million in annualized corporate savings that we underwrote. We expect to get a normalized G&A run rate by the end of the third quarter of this year.

While the success of the merger did not depend on specific operational synergies, we were confident that we would identify opportunities to implement best practices throughout the platform. We have identified topline opportunities and expense savings that we expect will offset 25 to 50 basis points of margin pressure over the next two years.

While some of these initiatives can have a more immediate impact, others will require a longer lead time, as existing contracts and service agreements burn off.

On the disposition front, we've already completed two sales and have an additional asset under contract, which will bring us in line with our initial goal of selling at least $300 million in assets. More importantly, the sales are at attractive multiples with an aggregate EBITDA on multiple north of 15 times.

These sales include the Fairmont Copley Boston for $170 million and the opportunistic sale of the Embassy Suites Marlborough for $23.7 million, which closed post quarter end. The property under contract is one of the non-core assets we have previously identified, and we look forward to providing more details when it closes.

With the completion of our initial goal, we are moving forward with a second round of dispositions. We are encouraged by the transaction landscape, heightened by our appetite and a lack of quality product available in the market are driving strong interest in several of our assets.

As a result, we anticipate disposing of an additional $200 million to $400 million of hotels during 2018 that are a combination of targeted non-core assets and opportunistic sales. And as we continue to move forward with our marketing process, we remain disciplined and methodical in our approach in order to maximize proceeds.

With such solid success on the disposition front, we’re in a strong position to further enhance our balance sheet. We will redeploy sales proceeds to accretively pay down at least $500 million in debt and maintain our target leverage of four times or below. Leslie will go into further details on the progress we have made to-date and the next steps.

And finally, we will accretively reinvest in our portfolio. We are proactively capitalizing on temporary market softness including ongoing convention center renovations to strategically reinvest in a number of hotels across our portfolio.

These renovations will predominantly be front of the house, guest facing projects and will be concentrated assets that are located in markets poised to see recovery in strong growth in 2019 and beyond, including San Francisco, Los Angeles and Tampa.

While these investments will cause short-term disruption in 2018, they will enhance the competitive position of our hotels and drive customer preference and pricing. We are excited about the progress we've made across our four key priorities and the value creation opportunities, we're continuing to unlock from the FelCor merger.

Now, as we look forward into 2018, we are encouraged by the overall macro outlook. We're optimistic that positive GDP and continued job growth will further boost consumer and business confidence. This backdrop should lead to another year of increased lodging demand, which should offset new supply growth on a national basis.

And as a result, we expect industry fundamentals to remain positive in 2018. And in addition, while we see potential demand upside from tax reform and infrastructure spending, the degree and timing of any such benefits are difficult to predict.

So, while we anticipate a positive backdrop for the industry in 2018, new supply growth in urban markets is higher than the national average, tempering expectations for urban focused portfolios.

Our guidance reflects headwinds from new supply, weak citywide in select markets, renovations, as well as tough comps from the Super Bowl, inauguration and post-hurricane business.

From a market perspective, we expect Houston, Austin and Louisville to have the strongest challenges, offsetting positive growth in markets that continue to show healthy corporate demand patterns such as Southern Cal, Denver and Chicago.

Looking beyond 2018, we are encouraged by indications that each of the aforementioned challenges will moderate in 2019. And we look forward to the ramp up of citywide as the convention centers in San Francisco, Louisville and Miami become fully operational.

We finished 2017 with a strong fourth quarter and made great progress within our four key priorities. In 2018, we will leverage current market conditions to position RLJ for long-term growth.

We will remain focused on optimizing our operational performance as well as our four key strategies, realizing the full $22 million in corporate synergies, having another $200 million to $400 million of assets on top of the $300 million outlined earlier, paying down at least $500 million in debt and opportunistically and accretively reinvesting in our assets.

And with that, I'll turn the call over to Leslie for a more detailed review of our operational and financial highlights.

Leslie?.

Thanks Ross. Before I highlight our operational performance, I would like to once again thank the entire RLJ team for the extensive work surrounding the merger. Given the magnitude of this transaction, the team's commitment and dedication was essential to our ability to execute a smooth integration. Now with regard to our operations.

For the quarter, a robust RevPAR growth of 4% was in large part driven by hurricane related demand and the Jewish holiday shift. Additionally, we continue to see a positive benefit from the FelCor portfolio, which performed well, with RevPAR growth of 4.2%.

Of our top 10 markets, Houston and South Florida were our best performing markets in the quarter, clearly benefiting from post hurricane demand. While we are still seeing some of this demand carry over into the first quarter, it has subsided considerably.

Given our robust performance in the fourth quarter, we expect to face difficult comps later this year in both of these markets. For Houston, headwinds will be amplified by the tough Super Bowl comp in the first quarter and by new supply.

In Southern California and Denver, not only did we continue to see healthy corporate demand this quarter, but we also benefited from robust group business. Given the broad mix of industries in each market and the strong regional growth, we expect to see these positive demand trends continue in 2018.

In Washington D.C., we outperformed the market in the fourth quarter, despite tough comps from the prior year’s robust double-digit RevPAR growth. We saw a significant increase in government business and overall transient demand.

Looking ahead, although we have difficult comps in the first quarter, due to the presidential inauguration and the women's march, we expect D.C. to be one of our best performing markets again in 2018. In Chicago, RevPAR declined by over 5% in the quarter, driven by a soft convincing calendar and operational disruption at the Courtyard Mag Mile Hotel.

As I mentioned on our last earnings call, our Mag Mile Hotel had a sprinkler malfunction that resulted in moves being out of order, which impacted performance for the quarter. Adjusting for this disruption, RevPAR performance would have improved by approximate 300 basis points.

With all the rooms back on line and a better citywide calendar for 2018, we expect Chicago to be one of our best performing markets this year. In Northern California, our RevPAR growth during the quarter remained muted in light of the renovations at three of our hotels.

We are taking advantage of the Moscone Center being under renovation through the remainder of this year to reinvest in additional hotels in the market. While we expect disruption to constrain our RevPAR growth in 2018, our investments will position us to cash for significant market share in 2019 when the city is projected to see record citywide.

In Louisville, our RevPAR growth outperformed the market in the fourth quarter as a result of compression from two large group events. However, since both of these will not repeat in 2018, and the city's convention center remains under renovation, we expect Louisville to be one of our softest markets this year.

On a positive note, in Austin and York, demand continues to be robust exceeding the industry on average for several years now. However, both markets continue to absorb elevated supply, which is limiting overall pricing power.

With new supply continues to impact both markets and 2018, we expect RevPAR New York and Austin to be down relative to last year. Additionally, eight of our non-top 10 markets outperform the industry in the fourth quarter, including Orlando, Tampa and Philadelphia, once again, validating the benefit of our diversified portfolio.

We expect to see the benefit of diversification continue in 2018 with strength in markets such as Orlando, Dallas and Atlanta. In the fourth quarter, we were pleased to see stronger corporate demand relative to the softness that persisted throughout most of 2017. We were encouraged by the improvement in business transient demand.

However, it’s still too early to determine if it will continue to accelerate. While our overall mix remains heavily weighted towards corporate transient, and the addition of several Embassy Suites into our portfolio is providing incremental exposure to the leisure segment.

Given the strong RevPAR trends that leisure has seen over the last several quarters, we are encouraged by the list, this increase exposure is likely to bring. Now with regard to our margins, we continue to generate strong margins as a result of our rooms orientated product.

In the fourth quarter, we generated an EBITDA margin of 32% despite expense pressures from a variety of sources. Our margins were down 97 basis points during the quarter.

This expenses including real estate taxes and insurance along with operational disruption related to our Chicago Mag Mile hotel impacted our margins were approximately 100 basis points. Adjusting for these factors, our margin growth would have been slightly positive.

Given the backdrop of a challenging operating environment, we were pleased that our EBITDA margin for the full year was 33.1%. I would like to thank our asset management team and hotel operating partners for their continuous work to aggressively manage cost.

Turning to our corporate results, our strong operating performance drove robust corporate level growth. For the fourth quarter, we reported adjusted EBITDA of a $136 million and adjusted FFO of $99 million or $0.57 on a per share basis, which exceeded our expectations.

Adjustments during the quarter worth noting included merger/transition related cost of $7.5 million. We also adjusted FFO for a non-cash tax expense of $32 million, primarily related to the change in tax rates from a recently passed tax reform bill.

We recommend reviewing exhibits in last night's press release for full reconciliation of adjusted FFO and adjusted EBITDA. Moving onto our balance sheet, we ended the year with $2.8 billion of debt outstanding, $586 million in unrestricted cash, a $600 million undrawn credit facility and a net debt to EBITDA ratio of 3.9 times.

Given our current leverage and maturity profile, our balance sheet remains in a strong and flexible position. Our leverage ratio of 3.9 times is expected to fluctuate slightly from quarter-to-quarter due to the timing of various asset sale and capital expenditure outlays.

However, we remain committed to the overall leverage ratio target of 4 times or better. To maintain this ratio, we intend to pay down $500 million in debt this year. We are targeting the repayment of the legacy portfolio bonds which carry a 5.6% coupon.

Given our confidence in our disposition pipeline, we've provided the bond trustees with a formal, irrevocable notification of our intent to redeem the bonds and we are on track to do so in mid-March. To fund the redemption, we will utilize recent disposition proceeds and our line of credit.

As we complete further dispositions, we will pay down the line of credit. In addition to paying down debt and improving our leverage ratio, we continue to be proactive regarding other aspects of our balance sheet. In January, we successfully amended three unsecured term loans with an added amount of $775 million.

These transactions improved our maturity profile and collectively reduced our spread across our pricing grid. We have no significant debt maturities until 2021 and our weighted average maturity will stand at 4.7 years, following a redemption of the FelCor bonds.

Upon the redemption of the bonds, we will have unencumbered 9 assets, increasing our unencumbered assets to 136 representing more than 80% of our hotel EBITDA. Now, with respect to our capital expenditure program, we plan to invest $130 million to $140 million across 17 hotels.

We believe now is the opportune time to invest in these assets in light of the current market softness and the expected recovery in these markets. These ROI and renovation projects will primarily be guest facing and will effectively re-concept the properties and enhance the competitive positioning.

Approximately 80% of our capital dollars will be concentrated in six markets including San Francisco, Los Angeles and Tampa, which are expected to be among the top performing markets in 2019 and 2020. We are projecting approximately 100 basis points of RevPAR disruption for the year due to these investments.

Our operating cash flow and liquidity position continues to support our capital outlays including paying our dividend. In the fourth quarter, we paid a quarterly dividend of $0.33 and for the full year we paid a $1.32.

While future dividends are subject to board approval, we believe that dividends remain a very important component of the total return we seek to provide our shareholders. Now, with respect to our outlook, no additional dispositions have been adjusted for beyond those that have already closed.

And while we’re optimistic about the economic outlook, the potential upside from tax reforms, the infrastructure bills or any re-acceleration in the oil and gas industry is not reflected in our guidance.

For 2018, we expect RevPAR growth to be negative 1% to positive 1%, which reflects 50 basis points of headwinds from last year’s hurricanes and approximately 100 basis points of renovation disruption. Hotel EBITDA will be between $565 million to $600 million for the year.

Hotel EBITDA margins will be between 31.25% to 32.5%, which reflects 60 basis points to 70 basis points of headwinds from property taxes and insurance on top of renovation disruption.

And I would just like to mention that in light of tough comps in the first quarter, we expect RevPAR growth in the first quarter to be 200 basis points to 250 basis points below our full year guidance.

In summary, we are pleased with everything that we were able to accomplish in 2017 and the momentum we are building in 2018 that will position us for long-term growth. As we move through 2018, we will remain focused on our priorities and driving operational excellence. Thank you. And this concludes our prepared remarks.

We will now open our lines for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Wes Golladay with RBC. Please proceed with your questions..

Looking at the dispositions, the incremental $200 million to $400 million, what type of multiple are you looking for those assets? And then I think Ross you mentioned the first $300 was a 14 times multiple or 15 times multiple and/or did that include the other $100 million plus that you have under contract?.

Yes, the 15 multiple included the asset under contract. So it's all three assets, Fairmont, Marlborough and the asset under contract. And going forward to $200 million to $400 million is a little harder to call.

What we've stated with some confidence is that the aggregate of the FelCor non-core assets is going to be about 14 times, but the $200 million to $400 million moving forward through the rest of the year is going to be a bit of a blend. FelCor assets and legacy RLJ assets and frankly the legacy RLJ assets will trade at lower multiples.

But they'll be part of curating the portfolio and improving the quality of the portfolio. And so it's a little harder to call exactly what the multiple is going to be going forward..

And then looking at the use of proceeds for that, I mean it looks like you identified the bond you're going to pay off shortly. Do you have enough cash on the balance sheet for that and looking at your EBITDA guide for the year, adjusting for dividend and CapEx and interest expense, it looks like you're self-funding on the current ROI project.

So wondering what the incremental cash flow will be used for? Can you pay off incremental debt, are you going to look to buy stuff, could you buy stock, can you buy individual assets or kind of or do we build the cash balance here on the balance sheet?.

Right, the number one priority is going to be paying down the debt. And frankly as we call the bonds, it's an all or nothing proposition. And we will use a combination of sale proceeds and cash and the credit facility and then the subsequent sale proceeds will be used to replenish the credit facility.

Beyond that, we'll take a look at where we stand, then we get into the asset allocation exercise of looking at where we're trading, what our cost of capital is and what the highest and best use of the ensuing capital is. And it will be a combination of all of the above.

We'll take a look at our share value and whether that's in the best interest of shareholders, but we also are conscious that we're selling off EBITDA, and we'll be looking to external growth when our cost of capital - when our cost of capital suggests that that's what we should be doing..

And then looking at the ROI projects for this year, I mean, how should we look at the maybe next year where we have incremental projects that we're going to do next year or is it going to be a material RevPAR lift and CapEx come down, just kind of looking at maybe at the two year outlay and then as part of these projects are you going to have any brand changes or additional keys added?.

Right, I would say first of all, we're still working on the 2019 budget. So that's up in the air. What I can say that of the CapEx projects we're looking at this year, about 60% of them involve reimaging of properties.

Some of our Embassy Suites or completely imaging projects, the Marriott, Louisville, the Marriott Union Square is undergoing quite a serious renovation.

And our goal for those, the ROI for those I would say we target low double digits and that's validated by information we're getting back from the brands and what they're seeing to, Hilton has noted lift of [lead stock] from the Embassy Suites that have been completed and we’ve seen that in our portfolio as well.

At this point, we're not looking necessarily at adding keys to any of the asset, but it’s really more in the form of the reimaging, and 80% of the capital that we’re putting out this year is in markets, and I think Leslie alluded to this in her prepared comments, in markets where PKF/CBRE have earmarked to be top 10 markets for growth in either 2019 or 2020 or both.

So, we thoughtfully selected these assets and these markets at this time to do this scope of work..

Our next question comes from the line of Patrick Scholes with SunTrust. Please proceed with your question..

Two questions here.

The Knickerbocker, what are your long-term plans, hold it, keep it, sell it? I know that was one FelCor has been trying to sell for a while?.

Dear Patrick, the Knick is a special asset and we identified it early on as a candidate for sale, because we recognized the arbitrage between the private market value and the public valuation. That being said, we think that it requires a thoughtful approach.

Last year, we pulled it from the market, we thought there was a little bit too much noise surrounding it. We are experienced sellers of real estate, and including real estate in New York City, and as recently as 15 months ago sold a couple of assets at a premium by going through a more thoughtful process.

The Knick is such a singular asset we think it deserves that, and it is certainly an asset that we would like to sell at the right price. But it's too distinctive, the real estate is too good for us to sell it out at discount..

And then, my second question and I apologize if I misheard, you had noted in the remarks that there’s a 25 basis points to 50 basis point in decreased margin pressure, where is that decreased margin pressure coming from?.

So what we’ve identified - this is Tom Bardenett. Thanks for the question. It was a great time to join RLJ during the budget season and what we were trying to identify is how to unlock value of this merger, so best practices both with RLJ and FelCor were identified through that process with our operators.

To give you an idea of where we’re going to be focused on reducing cost in addition to raising revenues, we’ve identified third-party vendor contracts and rebidding those, based on our scale and our leverage. Some of those would be in the IT area under video, voice and Internet.

And then, under energy procurement, we think there’s an opportunity to reduce usage, cost and put some money against ROI projects that will give us a longer term benefit. So those are some of the areas on the cost side. On the revenue side, we’re pretty encouraged based on - I’ll give an example.

In New Orleans, there were two assets that FelCor was managing and there were two assets that RLJ was managing. And in ancillary revenues, parking is a pure profit in many cases opportunities. So what we did is, we looked at who were the operators and we identified that.

And as opportunities expire within those contracts, we’re going to be able to use our leverage to get a better deal on both revenue and cost. That’s an example of the revenue upside. And then to Ross' point on the Embassy Suites front, this reimaging is really going to give us a really bolster on the revenue side as well.

We’re encouraged, when we reimage, as you know Embassy Suites known for the opportunity to have free breakfasts, as well as the social hour. Some of these reimages are giving us a beverage-centric bar experience and that’s going to drive revenues as well by reimaging and giving us a better guest experience for that.

So that's how we've identified during the budget process to get some short-term as well as some longer-term margin pressure relief..

Our next question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question..

First one, just want to start off with the clarification here.

Did you say that the asset that's under contract was one of the original seven that you outlined of the non-core FelCor assets?.

Yes, we did. It’s one of the targeted assets..

And then just want to clarify on the targeted multiple of 14 times, is that specific to those 7 non-core FelCor assets that you identified? And I guess the goalpost is moving a little bit on the assets that you intend and are potentially marketing.

So, curious how we should think about the multiple on those assets outside of the original seven?.

Yes. The 14x is for the original assets. But I want to say about the goalposts. Our disposition strategy has not changed. We're very focused on the targeted assets as well as curated selection of RLJ legacy assets between now and the end of the year. The others like Marlborough for example were opportunistic.

Marlborough was a situation where we were approached and one operator in particular was extremely interested, had a couple of private equity sources, we had a renovation underway that was predetermined by FelCor before the merger closed. It was a sizable CapEx delivery.

We saw that and we were also conscious to the fact that we frankly had a superior asset in our Embassy Suites and Welfare nearby.

We put a number out there based on the interest we were receiving, they hit it and we are able now to move on, take the asset that was - take the capital that was allocated towards that project and put it towards higher ROI projects and frankly it was opportunistic.

So we haven't changed strategy, but we're always going to be open this year or any year to opportunities as the market presents them..

So we should still expect that the seven that you initially identified, no change in the targeted timeframe of those sales, I think you outlined 12 to 18 months around November timeframe - last November as when you expected those to be sold?.

That's right. I mean listen I do want to say that we have some flexibility here only in that - we very much have targeted $200 million to $400 million in asset sales by the end of this year. And we have a pool of assets that would constitute more than that.

So that gives us a little bit of optionality which is good because that way we're able to optimize pricing.

At the same time, we do recognize that what we said and what we want to do is, sell those legacy assets by the end of or the 18 months would be the end of the first quarter of 2019 and that is still our intention, but it's not a fire sale where want to make sure that we combine, I will say the goal and a sense of urgency and purpose with optimizing pricing..

And then as far as the NEC, as you think about you know New York has been a little bit challenging, maybe things have bottomed a bit and as you remain patient, how should we think about the ramp in that asset. It looks like there was some additional upward movement in that asset in the fourth quarter.

Just curious how we should think about the ramp as you kind of remain patient on selling that one in particular?.

Austin, I’ll start and then turn it over to Tom. The very good news about the Knick is that despite the challenging conditions in New York with new supply and expenses, it is ramping.

Now obviously you never quite fulfill the potential that FelCor initially envisioned for, but on our watch, it is still trending in the right direction, you could say it's fighting the tape in New York, and that gives us comfort that as we exercise patience that we're not seeing easy to leak away, it is heading in the right direction as it finds its marketing position in the New York market.

But Tom, you've been spending time and what you’re seeing there..

Yes. I've been up in New York quite a bit, Ross. Thanks. The encouraging thing is in the fourth quarter we did see RevPAR lift. We know that we have opportunities to increase our RevPAR index and really establish our self in the marketplace. In addition to that, we had a nice January come out of the gate at 5.8.

So we're very pleased with where we're going with this asset and we definitely feel there's more ramp time. We have a good strong partner with leading hotels and we're really putting every single lever into maximizing revenue in addition to profit, as this hotel continues to ramp..

Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question..

I just want to go back to the CapEx outlook, the $130 million to $140 million range.

How does that budget compared to maybe your initial expectations at the time of the merger and then kind of what's changed, maybe what's fallen into 2019? What did you decide to table if anything?.

I would say that this budget is largely in line. I think that what we've been able to do is work with the brands and also look at our cost structure relative to executing it and bring it down somewhat, but it's generally in line.

If you look historically at what we've spent on capital the last seven years, we spent about 6% of relative to revenues, 6.5% relative to revenues, and our 2018 plan is very much in line with that threshold and consistent.

And I would also say that you know two-thirds of this capital is being spent on the RLJ portfolio which would have been consistent with our you know with our plan regardless of the merger..

And then maybe to follow-up on Wes’ question just about the 2019 run rate, how should we think about that relative to spend in 2018?.

I would say, you know obviously as Ross mentioned it's too early to determine that exactly, but I would expect this to somewhere be similar to our historical average..

And then just on the Interstate White Lodging contracts sale, have you seen any transition related disruption early on and then maybe specifically for Tom any upside opportunities with Interstate now overseeing these hotels?.

Yes, I'm pretty familiar with this as you know Mike.

I had an opportunity to work with Interstate for fairly a long length of my career, and I think where we're excited about it is the synergistic opportunities no one on the proximity of these hotels were really going to try to encourage the opportunity to further share synergies on the operations side, sales side, and engineering side when we have hotels in similar locations.

And so that's number one. Number two, I think on the procurement side I also am very familiar with how that works, and we're encouraged that that’s an opportunity to reduce our costs on operating supplies and equipment in addition to some of the areas that we do on a regular basis when it comes to food cost.

So we’re very excited about the transition because we got a different lens, and certainly still have White Lodging as an operator for nine of our big assets on the full service side. So we think that the best practices from both entities can really produce for us in the future..

No disruption though, at least early on, is that fair?.

No, in fact really very orderly, seamless, very encouraged.

We had some great cooperation on the White side, and making sure this was seamless from data transfer to people and we’re very encouraged that those two operators who are really truly professional assisted us through this process and especially in the first quarter versus the highest occupancies in Q2 and Q3..

And keep in mind Mike, White Lodging continues to operate assets for us. So it was obviously very much in everybody’s interest to make sure this was seamless. So you know comps points are very, very important..

Our next question comes from the line of Sean Kelly with Bank of America/Merrill Lynch. Please proceed with your question..

Just to go back to sort of the guidance and outlook, just Ross I know you discussed it a little bit in the prepared remarks but you know could you just help us think through some of the high-level puts and takes on the disruption side.

Because I think as we kind of thought about it we thought you were rolling off a few renovations particularly I think in Louisville, but then obviously you know you’re taking advantage of maybe some of the citywide you know convention calendar.

So just, kind of, can you just walk us through some of the pluses and minuses there on what you’re seeing on renos in 2018 relative to 2017?.

I would say you know we see some positives for sure. I mean you know the intangible is the stronger economic backdrop both domestically and abroad and we're all hoping that tax reform is simulative for corporate travel going forward.

We saw that nice surge in the fourth quarter but you know one quarter does not a trend make, and so we're all watching for that. We certainly didn't want to set our guidance based on being over optimistic on that front, but it will unfold over the next couple of quarters.

We do have Convention Center re-openings in Miami in July and August in Louisville and December in San Francisco. I'll get to the, I guess the headwinds in a sec. We've got easy comps in a few markets that were impaired by Harvey or Irma, but didn't benefit from the recovery business like Charleston or New Orleans or Atlanta.

We're hoping the weaker U.S. dollar will help us in Florida and New York City. The Mag Mile comp where we had the sprinkler issue, if you spread out over the year and over the entire portfolio, that's about 10 bps of tailwind for us. And there is a stronger citywide pace in a few select major markets for Chicago, Houston and San Francisco.

Now, I guess countering that you know half of our top 10 markets have a softening citywide pace, in Austin, D.C., South Florida, Southern Cal and New York. And many of our top, non-top 10 markets like Boston and Atlanta, and Philly and Tampa are a little softer this year. Everybody knows about the tough Super Bowl comp.

Well, I’ll tell you for us it was because we had 11 assets in Houston and one in Minneapolis, and then the inauguration comp in D.C. New supply is going to be around 3.8% for us and higher in a couple of markets like Austin and New York.

The storm comps late in the year are definitely daunting, if you spread the - you know the disruption from the storms versus the lift, it's a net gain of about $8.2 million of business, you spread out over the portfolio over the year, it’s about 54 bps.

And then there is the renovation displacement, which you specifically asked about and that 100 bps is about - net about 50 bps above or what happened last year.

And you know and I will say that given this backdrop, given the softening or given the headwinds, we did make a strategic decision to invest in the portfolio in specific assets and specific markets at this time. You know and I’ll address Louisville, in particular, because you asked about that.

Our renovation there will be wrapping up later in the year, in time for the convention center reopening, but what's happened in Louisville is that the bookings have not materialized in 2018, the meeting for any community seems to be in a wait and see mode until the project gets a little bit closer to completion, and so it looks like it's going to be more of a 2019 event.

And in addition to that, we do have a tough comp in the fourth quarter in Louisville, because there were a couple of large groups in the market, in the fourth quarter, which gave us great results in Q4 2017, but sets the bar high, there are groups that won't repeat this year, that allegedly they're on an every other year pattern, we might see them in 2019, they haven't rebooked yet, but we're definitely not going to see them in 2018.

So Louisville is actually going to be one of our softer markets for one more year. But the growth potential for Louisville in 2019 and 2020 is quite good. It definitely shows up in the CBRE data as one of the top growth markets going forward bouncing off of its trough..

And then to switch gears for a little bit, and just kind of given the blended mix of margins in the FelCor portfolio relative to margins in the kind of existing or legacy RLJ portfolio, it’s a little hard to kind of track what’s going on the margin front.

So, I’m kind of curious just overall and what kind of expense headwind are you guys facing on an apples to apples basis, as you’re moving through 2018, and then like just kind of directionally what are you guys kind of fighting out there as it relates to your hotels?.

Sean you know we’re looking at expenses for 2018 growing kind of in that 2.5 plus or minus percent range. In terms of headwinds on the expense side, we are facing headwinds from Texas. We think that's going to be about a 75 basis point impact for us in 2018.

And just to give you flavor on that, we obviously as a result of the merger are having Prop 13 pickup in Texas, in California and that’s going to be about half of that impact.

Additionally, we had the unfortunate timing of renewing our insurance in the October timeframe last year right in the storm of when all the carriers were trying to figure out what the damage was. And so, given all that concern, we saw a significant impact almost 50% increase in our premium.

So, insurance is going to be a headwind for us as well in 2018. And in labor, labor continues to be a concern in a tight labor market and in markets where you have meaningful new supply. And when you have wages growing at 3.5% to 4%, labor continues to be an issue. Our team is working very hard to control expenses. They did a great job.

Our expenses only grew 1.3% in 2017, so you know estimates and team did an awesome job there. But the reality of it is, is that we are going to have pressures. Having said all that, we posted strong margins in the fourth quarter and we're going to post strong margins in 2018 as well, given our business model..

Our next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed with your question..

I wanted to ask you dive in a little bit on CapEx and you know if we kind of just look at the ROI portion of it and totally you know kind of ignore what's typically maintenance is, how do you guys measure the return on that in terms of, is there ultimately expected to be a RevPAR premium you know down the road.

And is it something that we can - is it easy for us to kind of monitor or is it more difficult?.

I would say, again, as we've looked at it about 60% of the CapEx budget is our ROI-oriented, in that we're completely reimaging some of these hotels know for example I guess the Embassy Suites are the best examples.

We're going in and we're literally tenting the atriums, because we're destroying the old Koi ponds and fake rocks and palm trees and completely modernizing the looks.

Not only does that freshen the appearance, but it literally captures space, because your evening off choppy multi-leveled floors, you're actually capturing free function space outside of the meeting rooms, it’s very productive.

In addition to that, as Tom mentioned, we re-concept the food and beverage, make it more beverage oriented, increased the in-house capture, provided premium alternative to the comp beverages offered in the afternoon. And then of course, the guest rooms get completely modernized as well.

And what we've seen and the ones that we've done in Irvine and Downey and what FelCor had done pre-merger in Dallas and International Drive in Orlando is low-double digit returns there and in fact that's supported by data that we've gotten from Hilton on a much larger set of assets that have been reinvented.

There's not a singular single number that I can give you for RevPAR growth coming out of them, but frankly it's a blend of occupancy and RevPAR because it really does, it's all guest facing stuff, it affects guest satisfaction, it affects buying decisions and it affects pricing.

Outside of that 60%, naturally there's a portion of the renovation dollars that are necessary just as part of a lifecycle of assets to keep the assets competitive. But we're glad that over half of the CapEx in 2018 really is going in to reinventing these assets.

Tom?.

In addition to that, you know, the selection process is critical and we've all focused a lot on San Francisco and Louisville and Miami. But, you know, Tampa is an example is an Embassy Suites Downtown Convention Center and there's a $3 billion expansion going on in the Water Street area.

And you just saw a memorandum in regards to the raise will go to Ybor City, so we're putting our money where we know there'll be future growth in addition to the recon something that Ross had mentioned..

And just to revisit the Knickerbocker for a second, I know it's part of the leading hotels right now and I know the conventional wisdom was always sell it unencumbered of brand for optionality and price, but you know have you guys run any kind of updated analysis to see okay if this is the brand this is the RevPAR and maybe the multiple is different, but maybe the RevPAR more than offsets that or is there any updated thinking on that?.

If we knew we were keeping this asset for the next 5 to 10 years or into perpetuity as a core holding we would probably skew towards some form of affiliation but given our intentions at this point, we've focused our efforts on external outreach you know to the investor community and there's no question that the feedback that we're getting is that, they preferred the blank canvas they, they preferred the unencumbered opportunity to do with it as they see fit..

Our next question comes from the line of Floris van Dijkum with Boenning & Scattergood. Please proceed with your question..

I had a question, may we get your comments on your comp EBITDA growth as you look at RLJ and what has the impact been from the FelCor acquisition merger.

Has your core growth improved do you think as a result of that or is it - was it more of an opportunistic situation?.

Absolutely the FelCor portfolio is providing the benefits that we thought it would bring. We've seen it both from the topline.

We're obviously realizing the synergies that we identified and that some of our assumptions around it, we’re finding to be conservative, so we absolutely feel that the merger is bringing the benefits that we expected from an EBITDA contribution perspective..

So your core growth has gone up as a result of that?.

If you look at fourth quarter, which was our first quarter, you know as a consolidated portfolio. And if you break down sort of legacy RLJ and legacy FelCor, we actually got a lift on both the RevPAR growth front and margin preservation from the FelCor portfolio. So it's been additive..

Another follow-up question on your third-party management strategy, presumably you had a chance to look at all of the contracts and benchmark all of the managers.

Do you foresee any significant changes or have you learned anything from that process?.

Well, I would say at this current time, we have about 18 managers. We shared a couple of managers between RLJ and FelCor. FelCor primarily had brand management, where RLJ had mostly third-party management.

And as you know going through the budget process at the time to reflect on how they performed in 2017 and as we look at 2018 as they're putting their projections together, we will constantly look at putting the best manager in the right location, whether they're better at a regional assignment or national and we obviously had the transition that I referred to earlier with the interstate and wide transition.

So we feel like we're - we've got the right team approach, but there's always opportunities and when we go through contracts, we try to make sure that we have an out to be able to have that flexibility and optionality when we know performance is maybe not at its maximum..

And so do you think that there is going forward there's more savings to be had on that front? And maybe can you quantify that, is there any way you can quantify that?.

I would say at this time, it's a little early to be able to put a number on that because we're talking about a very large portfolio with 18 different operators. What we're doing though is we're maximizing our influence with those top managers.

So when we look at our portfolio of Embassy Suites, the benchmarking that we're doing on our Embassy Suites, we have obviously 29 residents in, we're looking at the opportunities to make sure that we're moving the bottom to the top, and maximizing performance by really getting into the details to secure best-in-class profit margins..

Mr. Bierkan, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments..

All right. Thank you. I just want to thank everybody for joining us. It's been a long earning season for you and we appreciate you hanging in there with us. We're excited about the progress that we've made and we look forward to updating you on future progress on our next call. We'll see you soon..

Ladies and gentlemen this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day..