This is the conference operator. Welcome to the RLJ Lodging Trust First Quarter 2019 Earnings Conference 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.

[Operator Instructions] I would now like to turn the conference over to Nikhil Bhalla, RLJ's Treasurer and Vice President of Finance. Please go ahead..

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust 2019 first quarter earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter; Sean Mahoney, our Executive Vice President and Chief Financial Officer will discuss the company's 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 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 from last night.

I will now turn the call over to Leslie..

achieving our operating performance metrics; including realizing 25 to 50 basis points of operating synergies; selling our non-core hotels including the remaining legacy FelCor assets and $100 million to $200 million of legacy RLJ assets; maintaining a low-levered and flexible balance sheet. And finally, deploying investment capital accretively.

On our last call, we outlined the long-term aspiration for our portfolio, which was to own premium-branded rooms-oriented hotels with high margins that are located in the heart of demand. We remain well positioned to realize our priorities for the year and reach our long-term vision.

I will now turn the call over to Sean for a more detailed review of our operational and financial highlights.

Sean?.

Thanks, Leslie. We're pleased with our operating performance in the first quarter driven by strong performances from our hotels in Northern California, Louisville and Atlanta where results during the Super Bowl materially exceeded expectations.

Additionally, our asset management team successfully managed operating expenses to limit growth and realized positive flow-through in a high-cost environment. For the first quarter, our RevPAR increase of 1.3% was driven by a 2% increase in ADR partially offset by a 0.7% decrease in occupancy.

RevPAR increased 0.3% in January, 3.9% in February, and 0.1% in March. As Leslie mentioned, our first quarter RevPAR growth was negatively impacted by 25 basis points from the government shutdown and 60 basis points from current year renovation disruption.

Additionally, our total revenue growth exceeding our RevPAR growth was driven by a 6.1% increase in food and beverage revenues and a 9.4% increase in other revenues. In terms of our segmentation, similar to the trends in the industry our group segment was our strongest segment.

First quarter group revenues grew in the high-single-digits, which was expected due to our favorable geographic footprint in markets with stronger citywide activity.

Our first quarter group outperformance was primarily due to the significant group demand in markets such as Northern California, Louisville and Atlanta and the post-renovation ramp-up from several 2018 renovations.

In the transient segment, while we experienced robust growth in the special corporate, total transient was down due to a decline in government, largely related to the government shutdown. As it relates to our bottom line, we achieved solid hotel EBITDA margin of 30.2% for the quarter.

Our asset management team aggressively managed costs, which led to our operating expenses increasing by only 2.6%, which limited our margin decline to only 46 basis points.

On the cost front, although the tight labor market continues to be an industry headwind, we were pleased with the success of our asset management cost containment initiatives that limited the increase in departmental expenses, including rooms and food and beverage and support costs, including utilities and IT.

During the first quarter, we generated hotel EBITDA of $120.5 million, corporate adjusted EBITDA of $111.5 million, and adjusted FFO per share of $0.48. Each of these metrics exceeded our first quarter expectations. Turning to capital allocation, we continued to take advantage of the volatility in the capital markets to repurchase shares.

Year-to-date, we have repurchased over 600,000 shares at an average price of $17.53 a share. Since last year, we have deployed $32.6 million for share repurchases and currently have $249.6 million of remaining capacity under our current share repurchase plan recently authorized by the Board.

As we generate proceeds from incremental asset sales, we will continue to view share repurchases as a key capital allocation tool to return capital to our shareholders. Additionally, our solid balance sheet positions us well to pursue multiple capital allocation priorities simultaneously.

We ended the quarter with $2.2 billion of debt over $240 million in unrestricted cash and net debt to EBITDA of 3.8 times, which is below our target of 4 times. As of the end of the quarter, over 94% of our debt is fixed or hedged.

Our balance sheet remains highly flexible and adjusted for the recent re-financings, 131 of our 150 hotels, which represents approximately 83% of EBITDA remain unencumbered.

Subsequent to the end of the first quarter, we opportunistically refinanced $296 million of first mortgage loans by entering into a new $200 million 5-year floating rate mortgage loan and a new $96 million 7-year floating rate mortgage loan.

Additionally, we opportunistically amended an existing $85 million mortgage loan to match the pricing of the new $96 million mortgage loan. These refinancings will reduce our annual borrowing costs by $2.5 million, which was included in the outlook we provided last quarter.

Additionally, the new debt successfully extended our average debt maturity and increased our financial flexibility. Finally, we have no significant maturities until 2021.

Looking ahead, we will continue to explore additional transactions to lower our interest expense, further ladder out our maturities, and add additional flexibility to our balance sheet. Turning to capital expenditures, our 2019 capital program remains on track and on budget.

Our RevPAR disruption in the first quarter was approximately 60 basis points, which was in line with our expectations. We continue to expect renovation disruption to impact 2019 RevPAR growth by 40 to 50 basis points.

Now in terms of our outlook, as we looked at the factors that may impact our performance for the remainder of the year, the overall economy continues to expand, which should drive positive industry RevPAR growth this year. That said, we believe macroeconomic and geopolitical risks remain. Turning to our portfolio.

We expect that some of the tailwinds that we experienced during the first quarter will continue through the remainder of the year.

As a reminder, we expect our 2019 operating performance to benefit from a strong citywide calendar in Northern California and the ramp-up of several hotels that we renovated last year in this market; robust group pace at the Marriott Louisville; strong citywides in Tampa; and lower renovation disruption compared to last year.

Our updated full year outlook reflects these and incorporates our first quarter results, but assumes no incremental acquisitions, dispositions, refinancings or share repurchases.

For 2019, we now expect RevPAR growth to range between flat and up 2%, which still incorporates 40 to 50 basis points of renovation disruption; hotel EBITDA margins in the range of 31.8% to 32.6%, an increase of 20 basis points to the low end of our prior range; consolidated hotel EBITDA to range between $527 million to $552 million, an increase of $5 million to the low end of our prior range; adjusted EBITDA to range between $492 million and $517 million, an increase of $5 million to the low end of our prior range; and adjusted FFO per share to be between $2.18 and $2.30 a share, an increase of $0.03 to the low end of our prior range.

To assist in modeling our seasonality, we expect second quarter hotel EBITDA and adjusted EBITDA to range between 28.75% and 29.75% of the full year, calculated at the midpoint of their respective full year guidance range. Consistent with the overall industry our preliminary April RevPAR growth was behind expectations at 0.1%.

We expect the second quarter to be the lowest RevPAR growth quarter of 2019. Please refer to the schedule of supplemental information that was posted on our website last evening, which includes the pro forma operating results for our portfolio over the past four quarters. I will now turn the call back over to the operator for Q&A.

Operator?.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Austin Wurschmidt with KeyBanc Capital. Please proceed with your question..

Great, thank you and good morning, everyone. Just curious Leslie, Sean, if you could characterize what the interest level has been around the $100 million to $200 million of legacy RLJ assets.

And then are you actively marketing anything today on that front?.

Austin, good morning. I would say that we're, obviously, early in that process but -- and that objective of $100 million to $200 million is for the full year. And as we've discussed before we would expect to see that transact in both portfolios and single assets and we have had healthy conversations around those assets.

And what I would say is that ultimately, the volume and timing related to those transactions will be predicated on market conditions as well as buyer interest. But based on the early read there's been healthy interest..

I appreciate that. And then it sounds like there's not a ton new to report as it relates to the Knick, but just curious if you'd care to offer up an updated time horizon on the potential sale of that hotel..

Austin, I appreciate the question. But let me answer it let me answer it this way. We are absolutely pushing on transacting on all of the remaining FelCor assets, but more importantly we're focused on maximizing the value. And I'll remind you that we have transacted on $700 million of deals recently at a healthy multiple of 17 times.

And each time that we've executed on a deal we've been very thoughtful, we've been very deliberate on both how we position the asset the path that we've taken to execute on that asset and selecting the buyer. And all of those steps have led to us having the very attractive multiples that we yielded.

At the same time, we have deleveraged our balance sheet like we said we would. And we sit well below -- healthily below our target of 4 times. And so given the strength of our balance sheet and how well the assets have performed we're in a position to be equally as deliberate to process the sale of the remaining assets that we have here.

And what we're very focused on is making sure that we create the most value for our shareholders. Transactions have processes and we are very pleased at how each of these transactions have moved towards its respective process.

And so what I would say to you is that we believe that we're going to transact on these assets and we look forward to updating you at the appropriate time..

Okay. I appreciate the thoughts there. And then just the last one for me. You mentioned April kind of coming in at the lower end of the full year range and 2Q being the softest quarter for the year.

Do you still expect the second quarter to come within that full year guidance range? Or is it possible that we see that kind of fall below the low end of the range?.

No. We expect it to come within the range. But I would say from a cadence perspective Austin is that the second quarter will be the softest quarter. We expect third and fourth quarter to be relatively similar with the third quarter being slightly better than fourth quarter because of easier comps..

Great. Thanks for the time..

Our next question comes from Anthony Powell with Barclays. Please proceed with your question..

Hello. Good morning. I had a question on the rebranding initiative. I don't believe you have any other soft brands in the portfolio.

Correct me if I'm wrong, but how many more Curios could you do? And how does Curio I think as it gets higher up your upscale brands is a general fit into your kind of long-term vision for your brand mix?.

So Anthony, you are correct in terms of some of the soft brands. I think that there are a few opportunities within our portfolio to look at that Curio brand and other soft brands that we would be interested in.

And part of that is going to be predicated on what brands are available within the respective market and then the physical condition or physical structure of the asset and the willingness of the brand to be able to do that.

But we are having active discussions around assets that we think could fit that profile and so when we think about both our brand relationships, we think about the franchise agreements that we have that are possibly rolling in the near-term there are opportunities to add more soft brands to our portfolio.

I'll let Tom talk about the Curio specifically..

Yes, Anthony what's interesting about the soft brands is they all have something in common now and that is they're all wired and they're connected to a powerful reservation system within the Marriott and Hilton family, specifically with Curio now there's 89 million members with Hilton.

And so as we think about those renovations and those opportunities to create value, the Embassy Suites is a perfect opportunity there because we've got great real estate where we're on the beach in Southern California, which is rare up there and we know that that brand will do very well for us based on it's on the way to Santa Barbara.

It's a great opportunity to have a member of Hilton participate as well as the group side where we think there is upside of that particular one. The soft brands are really about experiences versus possessions. And it's interesting as we think about Autograph AC as well as Moxy they're all making statements in regards to what they're trying to attract.

But the thing in common that's most important to us is they're connected to the pipe. And those members within Marriott and Hilton are going to be attractive at those brands as well..

And Anthony what I would add on is that while we always are looking at opportunities to convert we remain committed to the Embassy Suites brand. We think that it is a brand that fits well within our profile.

When we do look for conversions as an opportunity to take advantage of the unique situation of the assets like particularly on Mandalay it's an asset that sits on the beach and there's an opportunity to remix that asset because of that. It's not because we don't believe in the Embassy Suites brand..

Got it. Okay. And I'm guessing long-term you're comfortable owning the Curios and I guess even maybe other upper upscale or just maybe rightly luxury brands in your portfolio long-term, if their room is focused and they are high-margin.

Is that fair?.

Yes, I mean, again, our focus is owning rooms-oriented, high-margin assets located in the heart of demand. And to the extent the asset fits that criteria we would absolutely consider owning it..

Got it.

And how does it impact your CapEx profile over the next couple of years in terms of percent of revenue?.

Anthony, I think when you look at our CapEx over the last couple of years, particularly last year, we made significant investments within our portfolio, which included a handful of significant repositionings, particularly last year with Union Square and Louisville.

So this is just a continuation of that into the future year where -- what you should expect from us is not to lump a significant quantity of these repositionings or conversions into one year.

And so I think last year would represent a fairly heavy CapEx spend for a portfolio of our size and we wouldn't want to go materially above that, but it will ebb and flow based on the years..

Okay. Thank you..

Our next question comes from Wes Golladay with RBC Capital Markets. Please proceed with your question..

A quick one a follow-up to that last question.

The CapEx will be obviously comparable, but what about the renovation disruption next year as these projects go under the knife?.

Yes, Wes, it's too early to talk about that for 2020. Renovation disruption within the portfolio was always going to be based on what particular market the renovation takes place in. Obviously, higher occupancy markets that don't have true seasonality, disruption is higher in those markets.

And so we will of course as we think about repositioning and rebranding assets try to schedule the renovations in the least disruptive period possible. So it's just going to be a function of the individual market as well as the length of time it takes to convert..

Okay. And then looking at this quarter's results, the food and beverage the other revenue as you called out in your prepared remarks definitely very strong.

Will that continue throughout the year?.

Yes, our view is that F&B is going to be correlated to how our group sequences out for the year. First quarter, we had particular strength in San Francisco as well as Louisville and Atlanta with respect to the groups. And so our F&B moved accordingly.

For the full-year, our assumptions are that F&B should outpace our total RevPAR growth throughout the portfolio and that's really buoyed by two of those three markets in Louisville and San Francisco. Atlanta was more of a Super Bowl-centric story, but we do expect both outperformance in F&B in both San Francisco as well as Louisville..

And the other revenue?.

Other revenue is a function of a couple of things. One was the parking initiatives, which we have rolled out portfolio-wide and we're aggressively working on that. We expect those trends to continue for the year.

The other driver for us in other revenue for the quarter was our resort and facility fees and we are working on a handful of those initiatives throughout the portfolio. We don't assume that a lot of that is going to continue for the year, but we're working hard to try to get that uplift.

But I would think that the trends for the year should expect that to moderate..

Okay. And last one. You mentioned in the prepared remarks that you always look for ways to further enhance the balance sheet.

Is there anything you can do this year?.

We're evaluating a handful of transactions. I think with respect to this year, there's probably not a lot done. We don't have a debt maturity until -- the next debt maturity is 2021. We are looking at a handful of transactions. But it's not -- it's more of a reshuffling the deck chairs with respect to the debt as opposed to something significant.

And so I think the heavy-lifting from an interest rate savings has already been done for the year..

Okay. Thank you..

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

Good morning everyone..

Good morning..

Going back to the non-core sales that you're working on, can you help us think about how you're thinking about pricing of these assets, one-off versus portfolio pricing versus the implied trading multiple of the stock and kind of your appetite to buyback more shares eventually when hopefully more cash comes in the door upon sale completion?.

Sure. So my -- I think it's too early for us to sort of book in the range on these transactions, because of how early we are in the process. And what I would say is clearly the characteristics of this assets are vastly different than the assets that we recently have sold.

These are assets where either market conditions, the growth profile and the capital needs of the asset will dictate the pricing. And ultimately the pricing will be appropriate for these assets.

What I would say is, is that with the strength of our balance sheet and the proceeds that we will see from any disposition, we're in a position to look at all capital allocation, including buying back our stock and we'll continue to evaluate that as we receive the proceeds.

We're going to be disciplined in terms of match-funding as well as leverage-neutral and we'll look at the market conditions at that point in time and in terms of whether or not it's appropriate to buyback stock..

Got it.

And then maybe sort of in that same vein, kind of high level, are you noticing any structural changes in performance between your suburban assets and your urban asset maybe not just what you saw in the first quarter, but over the last six months, nine months, 12 months and maybe how that's impacting where you plan to allocate incremental capital?.

Yeah. I would say the citywides really relate to how CBD performs. Michael, this is Tom. And for instance, San Francisco when we were out there during NAREIT with you, we talked about compression. And an example of that CBD San Francisco ran in the 24%.

We have hotels in Emeryville as well as South San Francisco near the airport and they performed in the high teens. So, we felt good about how that performed. When you think about other markets where San Diego was positive with citywides, Atlanta obviously had the Super Bowl, those citywide performances were all positive.

When we think about suburban performance, the compression that comes from those citywides sometimes moves out from those citywide locations and that's where you start to get some performance.

I would say on an overall basis our suburban assets did well, but not comparatively to the CBD assets that we had based on the footprint that we have within our portfolio..

And then Mike, just to bolt-on to some of Tom's comments. Supply has been a big driver within some of these markets where we have suburban assets and that has driven some of the underperformance in our suburban assets, particularly in markets like in Denver and some of our suburban Austin assets.

As we articulated on the last call, our long-term vision for our portfolio is to be concentrated more in heart-of-demand markets and may naturally line up to more CBD-type markets than maybe some of our suburban markets.

And so, as we think through how we are reshaping the portfolio, I think a natural fallout of that is going to be some of these suburban assets in markets that have had outsized demand -- sorry -- new supply which has impacted some of these submarkets' ability to compress relative to what it -- these submarkets would have compressed in the past cycle..

Got it. That’s helpful. Thank you..

Our next question comes from Tyler Batory with Janney Capital. Please proceed with your question..

Hi. Good morning. Thanks for taking my questions. I want to circle back to the EBITDA margin in the first quarter. I think you guys cited some cost containment measures.

Can you discuss that a little bit further? And then when you look at 2019, are you still on pace to have 25 to 50 basis points of operational synergies by year-end?.

Yeah. Happy to answer that. So the first quarter, obviously, when we're able to flow, it helps when your RevPARs are in line. And obviously in the RevPAR area if you can drive average rate that also assists in that with that 2% growth of the 1.3% RevPAR. Sean already alluded to the revenues in the food and beverage and other which helps flow.

But on the cost side, we also had a lot of measures successfully managing wages and benefits growth. They were at the low end of our expectations, particularly on the benefits side. Utilities, we talked about our procurement efforts and that's part of the 25 to 50 basis points.

We've been focused on making sure that as contracts come up that we have the opportunity to buy lower on gas as well as electric. And then on the F&B profitability side, because the mix was primarily banquets, the flow was positive. We had actually at 295 basis point improvement on profit margin.

In regards to the 25 basis points to 50 basis points, we are on path to be -- to hit our objectives. And a lot of the heavy-lifting was done in 2018. We already talked specifically about the energy committee, and the focus around procurement.

But in addition to that, holding webinars, with our management companies and making sure we're focused on energy conservation, green choice programs at the desk, to make sure that we're offering points versus housekeeping. In addition to that, we had a lot of IT contracts.

And what we found within the acquisition, as those contracts came up, we were able to do voice, high-speed and phone and get significant reductions in regards to making sure that we consolidated our vendors. So we feel good about our 25 basis points to 50 basis points and that was part of our scorecard for first quarter.

And we think we'll continue to have results in regards to 2019 going forward..

Okay. Great, that's helpful. And then, just a follow-up on some of the market discussion, can you talk a little bit more about what you're seeing in Austin. I think you mentioned that, that 1.8% RevPAR growth outperformed your expectations.

But how are you thinking about things for 2019? And then also if you could talk about supplies in that market both this year and beyond, that would be helpful as well..

Sure. I mean Austin, as we said at the beginning of the year was going to be one of our headwinds. Austin did perform better than our expectations in the first quarter. And that was largely driven by the fact that it was a legislative year. Citywides, we're still down in Austin as well as we had some hurricane comps that we were overcoming as well.

But the legislative year, was able to outpace that. We actually think that, the balance of the year Austin would fall for us, because legislation rolls off in April. And so, Austin will be a headwind for the balance. Supply in Austin is up about 5.5% in -- it was up 5.5% in 2018, it's up 4.6% this year.

And I think it's a similar level tapering down slightly in 2020….

Okay, that’s helpful..

…And then the one thing kind of I will add on Austin is that, we are going to be under renovation at one of our CBD assets the Residence Inn this year. And so that is going to impact the performance of the market, which was baked into our guidance. But it is worth noting that that's one of our largest Austin assets..

Okay. I appreciate. I leave it there. Thank you..

Our next question comes from Bill Crow with Raymond James. Please proceed with your question..

Hey good morning. Thanks. A couple of questions for you, Leslie, are you guys married to the Louisville Marriott? And I ask that because, obviously, it's had a big lift with the reopening of the Convention Center that will cause some comp issues next year.

I'm just curious your intent there?.

And Bill we're never married to any single asset. Every asset is for sale at the right price. But obviously, we do believe in the market which is why we were willing to put the capital into the asset. And it's ramping up as expected in 2019.

And with the way that the asset and the Convention Center, is pacing for 2020 we feel very good about next year as well. And so, where we sit today, I think it's an act that we would continue to hold. But again every asset is for sale at some price..

Okay. And we've seen some weakness in select service brands, as we look at the Hilton results, and the Hyatt results, and Marriott results et cetera.

I'm just curious, whether you think some of the newer brands the Moxys the Mottos of the world, are taking share away from the older select service brands?.

Well, I still think it's a little early for that, because there's just not enough distribution on the softer brands at this point in time.

I think the other thing that is interesting and there's a little bit of noise with the Marriott Starwood integration, because you have products that now are benefiting from the same pipe, so you have to kind of work through that a little bit. In addition to that, you think about what's going on with redemptions and the thresholds.

There's a variety of things that Marriott is trying to figure out through the -- opportunistic to have more of a tiered threshold for that select service model.

And so as I think about what's going on with the soft brands versus the other Courtyards and Residence Inns, you still have a very high-performing RevPAR index from all those select service supplies. Those are typically your highest performers.

So, if there is going to be an impact, it's probably going to be there because of the swimming lane that some of these softer brands are very close to the other brands within the select service model.

But I think it's still going to play out, because there's so much loyalty to those brands in regards to in the extended stay models of what you have to compete with and the deliverables. But we are interested in some of the soft brands and certainly want to be where heart of demand is, as Leslie stated.

So we're interested in potentially pursuing that in the future..

And Bill, one thing I'll add with respect to your question is that we're trying to take initiatives to make our own luck with respect to some of these assets.

And so, when we think about the scope of our renovations and how we're positioning these assets within the market, we know that the guest trends are such that it wants to be more a unique type experience.

And so when we're positioning assets within these markets, our renovations are geared to trying to differentiate the product within the market, which will help we think relative performance on share..

Well, I appreciate that.

And that actually leads me to my last question, which is do you have kind of an average age of your portfolio using the last time it's been fully renovated as kind of a new birthdate?.

We put a lot of capital onto the assets recently Bill, so I don't have that number. We can get back to you on it on what the effective age would be relative to the amount of capital we put in recently in the assets we've renovated..

Okay. All right. I’ll leave it there. Thank you..

Thank you. At this time, I would like to turn the call back over to Leslie Hale for closing comments..

Well, thank you all for joining us today on the call. We're very pleased with our start to the year in terms of our operating performance and the progress we have made on our key initiatives. And we look forward to providing an update in the near term. Thank you..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day..