Nikki Sacks - ICR, IR Tom Baltimore - President & CEO Leslie Hale - EVP, CFO & Treasurer.

Chris Fang - Credit Suisse Wes Golladay - RBC Capital Markets Ryan Meliker - Canaccord Genuity Lukas Hartwich - Green Street Advisors Anthony Powell - Barclay's Bill Crow - Raymond James Shaun Kelley - Bank of America.

Welcome to the RLJ Lodging Trust Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Nikkie Sacks with ICR, thank you. Ms. Sacks, you may now begin..

Thank you, Operator. Welcome to RLJ's third quarter earnings call. On today's call, Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. Leslie Hale, Treasurer and Chief Financial Officer, will discuss the Company's financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may cause the Company's actual results to differ materially from those that have been communicated. Factors that may impact 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, 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 Tom..

Thank you, Nikki. Good morning, everyone and welcome to our 2015 third quarter earnings call. I am pleased to report another quarter of positive RevPAR performance and the continued successful execution of a number capital allocation strategies.

This quarter we acquired three accretive hotels and returned significant capital to our shareholders by accelerating our share buyback program. We also opened two newly converted hotels in key markets and recycled capital by selling two noncore assets.

These events highlight our commitment to our three guiding principles which are operational excellence, prudent capital allocation and proactive balance sheet management. In the third quarter, our portfolio RevPAR increased 2.9% despite tough year-over-year comparisons.

In the comparable quarter last year, four of our top six markets generated double-digit RevPAR performance and our portfolio achieved a 9.6% RevPAR increase, outperforming the 9.2% increase for the industry. During this quarter, Labor Day fell one week late extending the summer travel season and two Jewish holidays fell in September.

These events led to a shift in travel patterns which resulted in a softer third quarter. Even in the face of these events, our portfolio continued to generate overall positive growth.

Excluding Houston, where very specific market factors and renovations muted growth, our RevPAR increased 3.9% clearly illustrating the benefits of a diversified high-quality portfolio. We're optimistic that the fourth quarter will result in another quarter of positive growth.

We expect the addition of our recently acquired hotels and completed conversions to further increase the future growth rate of our portfolio. This optimism is bolstered by the current trends in the U.S. economy which is expected to expand at a moderate pace. Key indicators, such as job creation, continue to show growth.

The unemployment rate is at a seven-year low and corporate profits remain at healthy levels. At the same time, interest rates are likely to remain low and extend the length of the lodging cycle. As such, the outlook for lodging continues to be positive. Year-to-date, lodging demand has outpaced supply by 200 basis points.

While some markets are seeing an increase in new hotel supply, continued increases in construction cost are likely to hamper supply growth. We therefore see demand outpacing supply for at least the next few years, moreover, hotel occupancy remains at a record level nationally and lodging demand growth should help drive further rate expansion.

As a result, we see a promising setup for the lodging cycle over the next few years and feel confident that our portfolio is well positioned to deliver strong returns.

Our portfolio's market diversification continues to be a key element to our solid performance as reflected by the 6.5% RevPAR growth among our [indiscernible] six markets which account for 59 assets and half of our EBITDA and exceeded the 5.9% growth for the industry during the quarter.

This quarter, Portland, Dallas and San Antonio outperformed and delivered impressive growth rates of 17.5%, 16.4% and 10.4%. Our continued expansion along the West Coast this quarter further amplifies our diversification strategy as we continue to increase our footprint in high-growth markets.

Lodging fundamentals in many of our West Coast markets continue to be strong and our recent acquisitions, including the freshly renovated Hyatt portfolio, drove double-digit performance during the quarter. Our Northern California hotels achieved a RevPAR increase of 13.7% and our Southern California hotels reported RevPAR increase of 11.3%.

And, finally, our first hotel in the Seattle market, the Homewood Suites Lynnwood that we acquired during the third quarter reported nearly 10% RevPAR increase. We expect Northern California to be our largest market and our strongest contributor to EBITDA in 2016.

Among our top six markets, our Austin portfolio once again delivered outstanding results. The growing technology base in the region is driving corporate demand and enabled our properties to realize a 6.6% increase in RevPAR.

Our performance is even more impressive given that our hotels achieved a 14.1% RevPAR increase in the third quarter of last year. We continue to expect positive RevPAR performance across our Austin hotels in the fourth quarter and into 2016. Our hotels in Denver achieved a solid 4.5% RevPAR increase on top of 11.1% RevPAR growth last year.

Leisure travel was especially strong over the weekends, although citywide activity this quarter was notably soft with 38% fewer room nights against last year. We expect our hotels in Denver to continue to see positive results in the fourth quarter.

We're pleased to see positive RevPAR performance at our New York City hotels during the third quarter with RevPAR increasing 2.5%. Our four hotels outperformed the market in September, as demand generated during the UNGA conference and the pope's visit in late September more than offset the shift in the two Jewish holidays.

While we expect new supply additions and a stronger dollar to be constraints in the fourth quarter, growth in domestic visitors and the outlook for increased international travel to New York over the next several years supports our long term view on the market.

Our Chicago portfolio faced headwinds from last year's strong citywide calendar and some one-time events. As a result, RevPAR across our Chicago hotels decreased 2.2% in the quarter. Last year our Chicago hotels benefited, in particular, from a large technology conference that generated in excess of 70,000 room nights. Hotels in our core market of D.C.

faced a soft citywide calendar in the quarter. RevPAR across our hotels declined 6.7% compared to nearly an 11% RevPAR increase last year. This quarter there were four fewer citywide events, 124,000 fewer room nights in the city. The lack of compression was particularly impactful in August when Congress wasn't in session.

Additionally, our Residence Inn National Harbor was under renovation. The fourth quarter, however, should see improved results. It is also worth noting that 2016 is shaping up to be a very good year for the D.C. market as citywide room nights are tracking higher by 20% year-over-year.

Finally, RevPAR hotels in Houston declined 13.6% this quarter with significant impact to RevPAR coming from renovations at four of our nine hotels in Houston. Last year our Houston portfolio reported RevPAR growth of 10.4% and outperformed the market by approximately 220 basis points. Third quarter of last year was a strong citywide calendar.

This quarter there were 20,000 fewer citywide room nights than last year resulting in a loss of compression in the overall market. We're optimistic that the results will improve as our renovated hotels and our newly converted SpringHill Suites ramp up. We remain committed to the Houston market and believe firmly in its long term fundamentals.

During the quarter, we were very active on the transaction front and acquired three outstanding hotels for approximately $176 million. As we discussed on our last call in July, we acquired the newly opened Hyatt Place in downtown D.C. and the Homewood Suites Lynnwood in the Seattle market for approximately $106 million.

These assets are accretive to our portfolio RevPAR and are located in markets with great long term fundamentals. In September we acquired the Residence Inn Los Altos located in the heart of Silicon Valley for $70 million which had been previously announced.

This recently renovated hotel is expected to generate RevPAR during our first year of ownership that is more than an 85% premium to our 2014 reported RevPAR.

In the first quarter of next year, we expect that this asset, along with some of our other Northern California hotels, will benefit from the compression created by Super Bowl 50, scheduled to be held at the Levi Stadium in Santa Clara.

Economic growth in Northern California continues to outperform the country and our eight hotels in this market are well positioned to benefit from this growth. With these acquisitions, we expect our Northern California market to be our largest EBITDA contributor next year and our top market.

We also opened two hotels in key markets after a transformational conversion. These conversions speak to our team's expertise in identifying and pursuing select value-add opportunities to create long term shareholder value. In late August, we opened the SpringHill Suites Houston Downtown Convention Center.

Our cost basis in this hotel of $195,000 per key represents a significant discount to replacement cost and we expect a forward cap rate of 8% in our first full year of operation. In late September we opened the Courtyard San Francisco Union Square.

This property sits just three blocks from the historic Union Square and our cost basis of $340,000 per key represents a significant discount to replacement cost in the highly sought-after San Francisco real estate market.

We expect a solid cap rate of 8.6% in our first full year of operation at this hotel which is several hundred basis points higher than the yields on comparable hotel transactions. This quarter we also continue to strategically sell noncore assets to further improve our overall portfolio quality.

Since July we have sold two noncore assets for an aggregate price of approximately $20 million. Overall RevPAR in 2014 for these two assets was 30% below our reported RevPAR. We have now sold 42 hotels for $393 million with an average RevPAR of approximately $72 or approximately a 40% discount to our 2014 year-end reported RevPAR.

We continue to evaluate our portfolio for other disposition opportunities and will provide further updates if and when asset sales materialize. We continue to believe that, at current levels, investing in our own stock is a prudent use of our capital.

Therefore, in the third quarter, we aggressively bought back our stock and returned capital to our shareholders. This quarter we repurchased an additional 5 million shares for a total amount of approximately $140 million for an average share price of approximately $28.

With these purchases, we have now fully utilized our approved $200 million buyback program. As the equity markets remain choppy, we do not believe the market is appropriately recognizing the quality of our assets or our growth outlook. Our Board authorized another $200 million share repurchase program.

We plan to aggressively implement this program over the next few quarters as we accelerate selling noncore assets and reduce our near-term acquisition activities. We believe that recycling capital and buying back stock is a prudent capital allocation strategy and creates significant shareholder value at low risk.

Looking ahead, we see a favorable backdrop for the lodging cycle and continue to believe that the industry is positioned for a few more years of broadbased growth.

Next year our portfolio is poised to benefit from our recent acquisitions, newly converted hotels and the ramp from several renovated hotels including the Hyatt portfolio, the Courtyard Waikiki and the Doubletree Grand Key West, among others.

We're adjusting our outlook to include our recent acquisitions and disposition activity, our operating results for the third quarter and increased renovation disruption in the fourth quarter.

We're tightening our full-year 2015 pro forma RevPAR growth to 4% to 5%; our hotel EBITDA margins to be between 36% to 36.5%; and hotel EBITDA guidance between $400 million to $410 million. I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter..

Thank you, Tom. We're pleased our diversified portfolio delivered another quarter of positive RevPAR in hotel EBITDA growth despite the headwinds that Tom mentioned earlier. Our portfolio generated $105.9 million of hotel EBITDA this quarter which is a $2.7 million increase over the prior year.

This quarter our portfolio generated solid hotel EBITDA margins of 37.1% which is a slight increase over the prior year despite continued pressure from double-digit property tax increases for our overall portfolio and the drag from the performance of our Houston assets. Excluding Houston, our margins would have increased by 47 basis points.

With regards to corporate results, our adjusted EBITDA for the quarter was $98.8 million and our adjusted FFO was $84.6 million or $0.66 on a per-share basis. This excludes an $800,000 gain on the sale of the Residence Inn South Bend during the quarter. Over the past several months, we have completed a number of capital market transactions.

First, we took advantage of the arbitrage between our cash position and the delayed draw feature on our 2014 seven-year term loan and realized meaningful interest expense savings in the second quarter.

Second, we completed the previously discussed draws that were available to us which include the full $150 million available on our 2014 term loan and an incremental $7 million available under our Marriott Louisville property level loan.

Third, we assumed $33.4 million of property level debt associated with the acquisition of the Residence Inn at Los Altos. And, finally, we retired a $9.9 million property level loan to end the quarter with a total of $1.6 billion of debt outstanding which is in line with our historical debt levels.

As a result of the incremental debt and several hedges which took effect in third quarter, our interest expense increased this quarter by $1.7 million relative to last quarter.

We expect our fourth quarter's interest expense to be approximately $15 million as we realize a full quarter of interest expense on our new debt and no longer capture the benefit from capitalized interest associated with our recently completed conversions.

In light of the incremental debt and hedges, we're very pleased with our weighted average interest rate which remains very attractive at approximately 3.4%. The composition of our low levered balance sheet continues to provide us with tremendous flexibility.

We ended the quarter with 113 unencumbered assets which represents more than 80% of our hotel EBITDA. For the quarter our net debt-to-EBITDA ratio was 3.8 times which was below our target of 4 times. This quarter our capital recycling program provided incremental liquidity.

As previously mentioned, we sold the Residence Inn in South Bend for $5.8 million and subsequent to quarter-end, we sold the Embassy Suites Columbus for $14.1 million.

We ended the quarter with an unrestricted cash balance of $140.5 million and our $300 million credit facility remained undrawn, giving us ample liquidity for future capital deployment initiatives.

We also had a very active quarter with regard to our capital allocation as we completed a number of acquisitions, repurchased shares and completed two hotel conversion projects. As Tom highlighted earlier, we acquired three assets in high-growth markets.

We funded these accretive acquisitions with cash on our balance sheet for a total of $142.5 million net of the assumed debt. Simultaneous to these transactions, we returned $140 million of capital to shareholders in the form of a stock repurchase as we bought back 5 million shares at an average price of $28.03.

Year-to-date, we have repurchased 7 million shares, representing over 5% of our shares outstanding at an average price of $28.59 for a total of approximately $200 million. Our strong free cash flow and balance sheet profile allows us to opportunistically employ various tools to create shareholder value.

We will continue to explore all opportunities including aggressively buying back our stock as conditions warrant and as our asset sales accelerate. Now, with respect to our capital expenditures, during the quarter we completed our two remaining conversion projects.

We're pleased that the Courtyard San Francisco near Union Square and the SpringHill Suites in downtown Houston are now open and ramping up. We also continue to make significant progress with the rest of our $85 million capital plan for 2015, of which approximately half has been deployed.

During the quarter, four of our Houston hotels and our Doubletree Grand Key West were undergoing substantial renovations and we experienced more disruption than originally planned. Overall, our RevPAR for the quarter was impacted by 100 basis points from renovation disruption across our portfolio.

Given the increased disruption from this quarter and in anticipation of increased disruption in the fourth quarter, our expectation for displacement for the full year is now estimated to be 80 to 100 basis points and is reflected in our updated guidance.

Given our third quarter performance in recent transactions, we have updated our RevPAR margin and hotel EBITDA guidance. Our updated guidance reflects the addition of the Residence Inn Los Altos as well as the disposition of the Embassy Suites Columbus. All other activity during the quarter was previously reflected in our prior guidance.

We would like to highlight the following -- first, we have tightened our RevPAR guidance from 4% to 5%; second, our new range for margin guidance is 36% to 36.5%; third, we have adjusted our hotel EBITDA guidance from $400 million to $410 million.

Our guidance includes approximately $4.8 million of prior owner's hotel EBITDA which will not accrue to us and therefore will not be included in our FFO. Additionally, I want to reiterate that we expect our new run rate for interest expense to be approximately $15 million. Thank you and this concludes our remarks. We will now open the lines for Q&A.

Operator..

[Operator Instructions]. Our first question comes from the line of Ian Weissman with Credit Suisse. Please proceed with your question..

This is Chris for Ian. So a couple of questions on uses of capital. So two of the three assets you acquired during the quarter were in July when share prices were above $30. They were off-market deals, good locations, attractive prices, it makes sense.

But just wondering if you could talk us through the Residence Inn Palo Alto that you acquired kind of late in the quarter when your share price was quite a bit lower.

Is that just a timing issue where you put it under contract when the shares were a little bit higher priced and you couldn't walk away? And then, secondly, given that you were -- given where shares are today, can we assume that you would have to -- that prices would have to go up pretty meaningfully before you consider more acquisitions?.

We put the Palo Alto asset under contract many months ago. It had a CMBS debt assumption of $33 million, so it took several months to work through that. We do love the asset, we love the sub-market and we're having great success out in Northern California. As we said during our prepared remarks, we expect that to be our top market next year.

In fact, we expect that asset probably will generate a RevPAR 85% plus or minus what our portfolio average was a year ago. So, love the asset, love the sub-market. Again, put under contract many months ago, completed the CMBS debt and then closed on it. So certainly don't have any regrets on that particular asset.

Your question in terms of what we're going to do, moving forward, I think we tried to make it clear in our prepared remarks. Obviously, our cost of capital is rising.

Clearly, at this point, you'll find us to likely be a net seller and looking to continue to sell noncore assets and, really, we think the highest and best use of our capital right now is buying back stock, particularly at these levels. We're at least 20%, 25% below any of the consensus and that is considerably below our internal forecast as well.

So at this point, as we demonstrated this past quarter, we bought back 5 million shares and now 7 million shares, in total. Now, we expect with the latest $200 million program that that would be implemented over the next few quarters because we do want to ramp up some of our noncore asset sales. So we do have cash.

We've got a very nimble balance sheet. We've got flexibility. You can expect that we'll be buying back our stock over the next few quarters..

That kind of segues into my next question. Obviously, you've been very aggressive on the share repurchases, like you said, but just wondering about the size of the program.

I mean, just curious, when you burn through the initial 200 million share repurchase authorization, why the Board wouldn't authorize a larger amount and kind of be done with it? Is that a leverage issue? And then given that you're under your target leverage and you have a $300 million credit facility that remains unused, would you consider using some of that to repurchase shares?.

I think our Board, very much like management, tends to be very deliberate. We thought $200 million initially made sense. Obviously, increasing that another $200 million, I don't think. And so we don't want to speak for the Board. I don't think that they would object to increasing that again to the extent that our shares remained undervalued.

In terms of our willingness to use the credit facility, we would. We would be very careful and disciplined with that. Again, we've set kind of a ceiling of 4 times net debt to EBITDA.

It doesn't mean that we wouldn't slightly increase that if a transaction emerged or if, again, if our stock were considerably undervalued that we might use it on an interim basis.

And, again, having liquid -- having the kind of cash we have plus the undrawn credit facility, we've worked hard to get our balance sheet in this position at this particular -- if this kind of situation emerged so that we could really take advantage of it.

So we're very optimistic about the future, feel very good about 2016 and I think you've seen us consistently do what we say we're going to do..

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

Looking at next year, we're trying to look at our forecast and we're wondering, what do you think the net impact of renovations will be next year relative to this year?.

This year, Wes, if you look at it, we've got 26 renovations for approximately $85 million. A lot of those relate to -- seven of those relate to the acquisitions that we made in 2014. If you recall, we bought about 15 assets for about $630 million, plus or minus.

Our renovations this year also weighted to the second half of the year, so we've got eight of those renovations in third quarter, another 11 of those in -- excuse me -- eight of those in the third quarter and 11 of those in the fourth quarter. So clearly weighted to the back half of the year.

We think that those renovations are going to provide a great tailwind for us as we head into 2016 and 2017. Again, the Hyatt portfolio will be almost completely renovated. Our Portland Courtyard, our Doubletree Grand in Key West, Waikiki Courtyard will be back at the end of the year, first week of January next year, the Embassy Suites Irvine.

So when you look at that, I'm not sure the market is giving us any credit and we've completely transformed the portfolio. So when you look at 2016, Northern California will be our top market. Austin, we're still bullish on. South Florida moves up in the ranking.

Denver moves up, New York City moves down considerably to probably 5th or 6th and Houston moves way down to probably 9th or 10th in terms of its overall contribution. So we have continued to work hard, recycle capital and reposition the portfolio.

In terms of our renovations next year, we're probably looking at $30 million to $35 million on a preliminary basis, so it will be far fewer renovations, far fewer assets. So from that standpoint, we expect it to be a cleaner year for us in 2016..

Okay and then looking at that $400 million to $410 million current outlook, does that include any positive impact or maybe even a negative impact from the recent conversions?.

Let me just try to articulate. Obviously, the men and women on the phone listening and, clearly, the analysts will note that there is probably approximately a $5 million reduction. I'd say that two-thirds of that is really related to, sort of, operational matters and that would include, obviously, New York and Houston being a little softer.

Clearly, the two conversions delivered later so don't really -- aren't making the kind of contribution we had hoped for and, plus, we've got a fair amount of pre-opening with both of those. So that's accounting for about two-thirds of it. A third of it is really increased disruption displacement in the fourth quarter.

That's expected and, obviously, the third quarter. As I mentioned earlier, having eight renovations in the third quarter and then again another 11 in the fourth quarter, we have a very seasoned, very skilled team but, clearly, there's just a lot of activity.

And there are some labor and materials challenges and just the volume of construction activity, we do expect that we're going to have incremental disruption hence the reason that we took a more conservative approach. We expect to finish the year, feel good.

October was choppy, but still a solid month at the top line and we feel very good about the balance of the fourth quarter for 2015..

Okay and just one quick question on Houston. I know it's been a tough market. Renovations weighed on you, probably being more transient also is a little bit more impactful relative to the market.

But do you think you left any on the table with a more aggressive revenue management practice out there? Can you change anything on that front? And, I guess would it be a little bit easier comp for you going into next year?.

No doubt we expect it to be a much easier comp and, obviously, the numbers are -- I know the headline numbers are certainly disappointing and I think it's really misleading if I could give all the listeners, perhaps, a little more color on Houston. Houston represents about 6% of our EBITDA, a very tough comp in the third quarter.

We were up 10.4% last year. I think it's also important to note that Houston has been a fabulous market for us the last four years. Our compounded annual growth rate on the RevPAR basis is about [Technical Difficulty] percent. Our compounded annual growth rate in EBITDA is 16.2%. So we have done extraordinarily well.

I realize and we realize here at RLJ, it's all about what have you done for me lately. But I do want to put in context that it's been a really strong market for us. We do believe, long term, that it's going to come back. I think it's important to also note that we had four major renovations in the third quarter.

We did try to forecast that in the last call. We did say that we'd have about 600 basis points of disruption and displacement. That's exactly in the range of where we came out, about $840,000 worth of displacement and about 589 basis points, plus or minus.

Oil and gas-related business, clearly, last year we saw we had accounting for about 14% to 15% of our business. It's probably down now to 10% or 11%. That was probably another $900,000 for the quarter and another 600 basis points. So that really accounts for it.

I would say that given where our properties are located, we were well positioned given how strong the oil and gas industry was. Again, we expect that it will come back and, as a result of that, we had very aggregate revenue management and, hence, the strong performance we got.

I was down there a couple of weeks ago with our asset management team and our management company and working hard and we're aggressively working to remix our business and it is a broad, diversified economy and we're cautiously optimistic that 2016 should be a much stronger year. And, obviously, we'll have very low and very favorable comps.

Please keep in mind that there will be some softening in fourth quarter as we finish out the renovations. Now, the four renovations are almost complete, but they will linger into fourth quarter..

Our next question comes from the line of Ryan Meliker with Canaccord Genuity. Please proceed with your question..

Just a couple of things I was hoping to get some color on. So with the new Residence Inn out in Northern California, Los Altos, the cap rate looked great. The price per key looked high.

I'm wondering if you can give us some color on where you think you bought that relative to replacement cost, what you think is driving the cash flows of that property so strong and how much supply risk there might be with the available brands, et cetera, in the sub-market that could really eat into some of that cash flow..

I would say a couple of things, Ryan. Look, we love the sub-market. As I said earlier, we were up 13.7% in third quarter. I think in October we were up 14% in that sub-market. We love the underlying RevPAR of this asset. Again, I think its $215 to $220. It's in the heart of Palo Alto. Obviously, you've got tremendous job growth.

The tech boom, if anything, I think remains strong even though we've seen a little bit of softening from some of our peers in San Francisco, we're not seeing that in broader Silicon Valley. So we thought well-located, no doubt a high price per key.

I think in terms of replacement cost, given how land values are really rising in that area, no doubt in our mind the replacement cost would be well north of $500,000 a key.

And the regulatory process that you've got to go through, the permitting process, having just completed our renovation in downtown San Francisco, again, historic building, converting it, a very complex $26 million renovation. It added many months to the complexity of working through the regulatory process with neighbors and the complexity of that.

That extends not only from downtown San Francisco but throughout the Bay Area. And so we're confident that we're well below replacement cost and that there is talk of supply. We suspect that that supply will get delivered much later and cost much more than people realize..

And then the second question, I'm sure you guys have thought through this, but I think it might be helpful for everybody on the call to kind of hear what your thoughts are with regards to buybacks versus equity issuance. I think it was a year and a half ago now you guys did your last follow-on offering and the stock price was $26.45 on that.

And you guys have been buying back shares at an average price about $2 above that.

How do you marry those two things? How are you guys thinking about buying back stock at prices higher than where you issued equity less than two years ago?.

I would say if you make decisions based on the best information you have at that time. But I think, in fairness, if you step back, kind of, look at our performance now in our fifth year as a public company, I think we've consistently done everything we said we were going to do. We've consistently outperformed.

Keep in mind that we've returned about $700 million of capital to shareholders and, again, we've only done -- we had original IPO over about $560 million and I think we've done two follow-on equity raises of about $530 million to $550 million, plus or minus. My point being we've returned 70% of that capital in a little bit more than four years.

So I think investors are pretty pleased with us. Obviously, look at our total shareholder returns well north of 75% even with the pullback. We've been a top-tier performer there. We're laser-focused and I'll say it again -- laser-focused -- on creating long term shareholder value.

We're not likely to be a buyer of assets given where the pricing is, given where the cost of capital and given where our stock is trading at this point. We do believe that we're very prudent capital allocators and that the highest and best use right now of our capital is selling noncore assets and buying back our stock.

We're a buyer of our stock, we're not a seller. So you will not see us sell our stock at these levels and, without question, when you're trading at 20%, 25%, 30% below NAV it makes no sense to issue stock at this point. We've spent a lot of time.

We try to be very, very thoughtful about the decisions we're making and, hopefully, you and the listeners have seen that track record over the last four to five years..

And I think we all have track record. It's just good to get some color on your thought process there. And then the last thing I had just as a follow-up to Wes's line of questioning. It sounds like 2016 you're going to see more tailwinds associated with renovations than headwinds.

Is that a fair assessment?.

We're going through the budgeting process now and I think the guidance, at least preliminary guidance, that Marriott and Hilton gave and looking at 4% to 6%, I think it seems reasonable. But I think the industry is going to have a much better 2016 than we've had in 2015 and I think that RLJ is going to have a very strong year.

When you step back and sort of look at the transformation and the way we repositioned the portfolio, you've got Northern California now with eight assets, you've got the Super Bowl, as we pointed out. We expect that that, again, is going to be our top market. The tailwind from some pretty significant renovations.

Our Waikiki Courtyard, our Doubletree Grand in Key West, the Embassy Suites in Irvine, the Courtyard that we bought, again, that was up 20%, by the way, in third quarter and we've got a $3 million renovation that's going to happen here in the fourth quarter.

We've got our Hyatt portfolio, those 10 assets which, by the way, has been a fabulous deal for us. That was up 14% in the third quarter. And so most of those assets have been renovated. And, of course, the three new acquisitions -- the Hyatt Place D.C., bull's eye real estate. I know one of your peers made the comment that D.C. is underperforming.

D.C., obviously, had a tough third quarter, but it's up -- the citywide pace is up 20% next year and 2017 is on track to possibly be a record year. Already $500,000 which is another 20% above 2016 which is already on the books.

So we feel very good about the outlook in our portfolio and, again, finally, the two conversions, both San Francisco and Houston. Houston, obviously, still a tough market. We recognize that but, again, we have a very diversified portfolio. Houston is only 6% of our overall base.

So one of the benefits of RLJ is having that diversified and being in 22 states like that, we think will help. You're going to have some markets that are going to be down from time to time, but we will more than compensate for that given the distribution that we have when we've worked so hard to reposition..

Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question..

I just have a quick follow-up on the buyback plan, the new authorization.

Do you plan on funding that with asset sales or are you comfortable leveraging up, kind of, in the near term and maybe paying down the line later on with asset sales as those come down the chute?.

Look, we have cash on the balance sheet today, Lukas and so we're well positioned to be able to use that cash. As I said, though, you would expect us to, again, not be a net seller in this environment. You would expect us to be a net seller not a net buyer in this environment.

And you would expect us to really deploy the $200 million really over the next few quarters and be driven largely by our noncore asset sales. Having said that, to the extent that our stock remains at these low and considerably undervalued levels, we clearly have the tools available.

Our undrawn credit facility in cash to lever up, in the short run, but that would really likely be a timing issue. We're committed to keeping our net debt to EBITDA under 4 times which is what we've, I think, demonstrated again over the last five years.

But it's not inconceivable that we could be a week or two over that until an asset sale was complete or we elected to take advantage of the fact of trading levels that just were so low that it's in our best judgment to buy back our stock. We were very aggressive last quarter.

I think we've said we would be and I think, as we typically do, we do what we say we're going to do..

And then in terms of the asset sales, can you give us a sense of the scope, rough numbers, what you're thinking you might sell over the next few quarters?.

We're still working through that. The reality is, I think as we said earlier in the year, we've now sold 42 assets for just under $400 million. My colleagues can correct me -- but I think we've sold 23 assets this year for about $250 million. There is probably another 10 to 15 assets that we've circled that we'll, sort of, begin that marketing process.

But there's nothing that is immediately under contract or immediately that we're prepared to disclose at this point. But I think we've demonstrated again that we have the ability to be both a net buyer and seller.

We will not be buying assets here at these levels in the near term and you would expect us again to be the net seller to build up those coffers to buy back stock and look for other strategic opportunities as they emerge..

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

Could you discuss supply growth in your top six markets? You're in a number of markets that have been highlighted as having much higher than national average supply growth next year and the year after. So if you could discuss Austin, Denver, Houston, New York, that would be great..

Look, if you look nationally, we're still below the long term average. We expect we're probably going to be about 1.2% this year, plus or minus and ramp it up to 1.7%. I don't think we eclipse the long term average until probably 2017. Some of those individual markets, you know -- take Austin.

I mean, I think people have been terribly concerned about Austin. I think this past quarter we were up 6.6% and keep in mind that we were up 14% in third quarter of last year. We're very bullish on Austin in 2016. People were concerned about the JW Marriott and 1,000-room hotel. In fact, what's happened is it's created a hub-and-spoke system.

It's improved the destination. You still have a dynamic city there, a great state capital, a university town, a tech hub, tremendous job growth. So that supply is getting absorbed and we're quite bullish on the outlook for Austin in 2016 and beyond.

Supply clearly has an impact but, again, we think our portfolio is well located and it's going to get absorbed and not really be a big issue at all. Houston is a different story. Obviously, you know, it's been a challenging environment given what's happened with the oil and gas industry.

Again, we chose to accelerate our renovations and get those done this year. That is distorting our performance there. We like Houston, long term. As I outlined earlier, we have done extraordinarily well there in 2011 and 2014. Not the case this year, a little softer.

Clearly, we're repositioning and seeking to change the revenue mix there and working hard on that front. You do have some special events coming into Houston that will help. The Final Four is going to be there in 2016, the Super Bowl is going to be there in 2017, so that's going to help.

And, again, another Convention Center hotel and then what's happening, the explosion downtown in Houston, long term, I think is going to really position that city to be more competitive in the convention circuit. So I feel good about that. I think we've all talked enough about New York to know that New York clearly supplies impact to the market.

You've got fewer super compression days and you don't have the pricing power, but we're still running occupancies, 97%, 98%. The issue is rate and the inability to really push rate and get the kind of flow through that I think we've all enjoyed over the long term. Regarding other markets, Denver again continues to be a strong performer.

Again, one of those cities that continues to grow and expand. And it's got many attributes that I think are quite appealing, particularly to the next generations -- the millennials and others. So we remain optimistic. I think the thing that benefits us so much is that we have this diversified portfolio and look at our noncore markets.

Those [indiscernible] being up 6.5% -- it's interesting to note that those same markets were up over 11% last year. So despite the tough comps, they continue to perform well. So we feel very good about having that diversified.

It doesn't make us any more dependent and we typically don't want to be any more 10%, 11%, 12%, 13%, 14% exposure to any market and we've seen -- you've seen what happened. Obviously, Houston is a great example.

It's a high flyer until it's not a high flyer and that same thing can happen to other markets as well, but we can absorb the soft patch in Houston in our diversified portfolio..

On international inbound travel -- outside of New York, do you get a lot of that type of travel into markets like South Florida or California, West Coast and how do you expect that part of the business to trend next year on either [indiscernible]?.

Yes, no doubt, if you look at the top five or six markets on the international side, clearly, New York is huge. D.C., South Florida, clearly, Los Angeles, San Francisco are big markets for that. I think if you looked from 2000 and 2012 I think the compound annual growth rate was about 2.3%.

I think the Department of Commerce came out a few months ago and expected that compound annual growth rate to change to about 3.6% and to go from about $74 million to about $92 million between 2014 and 2019, 2020. So, clearly, the strong dollar is impacted.

For us, in New York, I think we were down about $500,000 in revenue in third quarter and about 205 basis points in terms of international contribution. In other words, we were about 19.1% in third quarter of 2014 and about 17.1%, I believe, in 2015. Hopefully, that's helpful to you..

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

Let me ask you to put a finer point on a couple of those markets, because you gave us some great information.

Do you think, as you look into 2016 and I understand all the renovation disruption in Houston, but do you think your assets, your portfolio there, will be positive or negative from a RevPAR growth perspective? And the same question really extends into Chicago with a very tough convention calendar. And then New York which we're all trying to handicap.

Is that going to be positive or negative next year?.

I think, without questioning them, in Houston we think it's going to be positive, Bill.

One, if you look at the distribution from where downtown and the three-hotel complex, obviously, the street along that on Dallas right now is torn up, but when you look at what's happening and the amount of investment going into downtown Houston, we think we've got a bull's eye location and feel very good.

We've got four assets there in the Galleria, again, well located, feel very good about that. Two in Sugarland. Sugarland has obviously been impacted by oil and gas, although it has been coming back.

We have a bull's eye Hyatt right there in Woodlands that continues to -- out of all of the assets has been a really strong performer is that as Exxon relocates out there, so I feel very good about that. So, long term, we like Houston. Would I want Houston to be 10% or 15% of the portfolio? No. It's a more volatile market.

But, again, put in context, look how well we've done and the amount of shareholder value that we've created over the last four years. We made the decision to proceed with the renovations. We think that's going to position us as new supplies are coming onboard. So we're confident with that and feel good that Houston will be positive for us.

Look, we've been in Chicago a long time. We continue to, despite the operating challenges, the higher real estate taxes, et cetera, that can sometimes be a little frustrating, we continue to do well there. I expect that, without question, Chicago is going to be positive.

New York is the biggest wild card, right? We candidly thought New York would have been more positive this year. We did have a solid third quarter. I think fourth quarter will probably be flat, slightly negative and I think that's the one where you've got new supply coming in there.

We're working very aggressively with our management company, our partner there, to implement even more bold cost containment strategies. We implemented about $2.4 million so far this year and that's a market that I think we've all got to be carefully evaluating.

But, long term given the great city of New York, given the rising land prices, New York is going to come back, I just think we need to rethink about the operating model to get better flowthrough. The fact that you run the high occupancies, we just don't have the pricing power and I know you hear that from all of our peers, et cetera.

I did and Bill, I've got great respect for you and your assessment. I did want you to just keep in mind the tailwind that we create in 2016 by all of the good work the team has done to reposition the portfolio. Not sure the market fully understands that. Right now we're painted with the Houston and New York brush.

Keep in mind, Northern California becomes our top market next year, pretty dramatic. South Florida is very strong..

I appreciate that, definitely recognize the changes in the portfolio. For whatever reason, I think we always, every quarter we talk about consolidation and there's already been some, right? And you've always talked about being a part of it.

And I think Lee and maybe some other folks out there who have speculated there might be a role for your company in an asset-light strategy shift by Hilton. I've heard that you actually have talked to Hilton about that.

I don't know if that's true or not or what you could comment about, but how does buying back stocks, shrinking the equity base on what I hope is a short-term oversold position for lodging REITs.

How does that kind of jive with maybe long or intermediate term thoughts on industry consolidation and how you might play a role in that?.

Well, as you would expect, I would not comment on what my friends at Hilton may or may not do. No secret, we think the industry should consolidate. We want to be part of that discussion either as a buyer or as a seller. We would prefer to be a buyer. We have a very capable team.

I think our track record speaks for itself and we'd like to certainly have a bigger platform to the extent that it made sense. Regarding the buyback, we really pride ourselves on our three guiding principles -- operational excellence, making our numbers, doing what we say we're going to do. This is a good quarter not a great quarter, we know that.

But I think there's some reasons for it and, obviously, very tough comps given how strong our third quarter was last year. Balance sheet management, it's been a fundamental tenet from when we went public. We were net debt-to-EBITDA close to 10 times. We've taken that now under four times.

Leslie Hale and her team have just done a fabulous job there and I think the thing that really separates REITs, in my humble opinion, is really capital allocation.

I think we have consistently shown that we're a prudent capital allocator and when we look at the climate today, our stock is considerably undervalued in our view and I think the view of many of your peers when you look at where just consensus NAV is.

So when you look at the amount of dry powder we have and our ability to recycle capital, we think the highest and best use of that, whether that's short term or long term is really to shrink the equity base and buy back our stock. It's low risk and we're trading probably at an 8.6%, 8.9% cap, I think, on 2016.

And you know Ross Bierkan and he's been with me a long time and I don't think that our deal team can find a lot of deals right now at 8.6% to 8.9%. So we think investing in our own portfolio is a really prudent use of capital.

The other thing I would point out, Bill, is we generate, over the last four years we've averaged free cash flow at 22% of AFFO. I would respectfully submit that very few, if any, of our partners and our peers are even close to that. So we're generating a lot of free cash flow, so that gives us also flexibility.

Buy back our stock, pay down debt -- we've got all the tools in the toolkit and we'll be very thoughtful and deliberate as we look at opportunities in the future..

Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question..

I was just curious, I mean, you guys covered a lot of ground, so I'll try and keep this fairly short. Like, one of the other brands that you guys actually don't have exposure to, called out some increasing competition in, sort of, the upscale and upper mid-scale components of the chain scale.

And I was curious because you do have some brands that do have exposure there and, again, it wasn't called out by one of the brands that you have.

I'm curious if you have seen any notable change by the brands in your portfolio in terms of, you know, kind of, competitive initiatives, marketing, points programs, anything like that either to drive business to your hotels or just changes in the way that they're, sort of, doing business in the recent term.

If you're sensing the competition is heating up at all in some of those parts of the chain scale?.

I don't think so, Shaun. I would say, look, we're in frequent contact with what I would say are three primary brand partners, Marriott, Hilton and Hyatt -- all led by very talented men and have superb teams. I think they're all working on their own mobile strategies.

I think they're all working on ways to continue to improve and certainly try to drive as much business through the direct channels and not through the OTAs.

I think they're all looking at ways to continue to find brand enhancements and figure out ways to look at what the next generation of customers, particularly the generation X and, more importantly, the generation Y millennials.

So there's a lot of chatter and work happening around that and I think we're all looking at the food and beverage offerings and can we shift that with what Hilton and others have done with going to less room service and more grab-and-go.

I think all of that makes sense and really pushing more through digital and mobile check-in and that's sort of the wave of the future. We're partnering with our brand partners. We're trying to understand it. I think some of these things are going to be capital intensive, but it's clearly the direction of where the business is going.

We want to be a long term anchor player in this space and want to be on the forefront and working with our brand partners and implementing and making sure these things are done right. And, most importantly, they're going to be profitable and create shareholder value and long term customer preference..

Ladies and gentlemen, that concludes our time for questions. I would like to turn the floor back to Mr. Baltimore for any final concluding remarks..

Thanks. We appreciate everybody taking time today and we look forward to seeing many of you out at NAREIT in a couple of weeks..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..