Hilda Delgado - VP, Finance and Treasurer Ross Bierkan - President and CEO Leslie Hale - EVP, COO, and CFO.

Wes Golladay - RBC Capital Markets Austin Wurschmidt - KeyBanc Capital Markets Bill Crow - Raymond James Ryan Meliker - Canaccord Genuity Michael Bellisario - Robert W. Baird.

Welcome to the RLJ Lodging Trust First Quarter 2017 Earnings Call. At 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] As a reminder this call is being recorded.

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's first quarter earnings call. On today's call, Ross Bierkan, our President and Chief Executive Officer will discuss key highlights for the quarter. Leslie Hale, our Chief Operating Officer and Chief Financial Officer will discuss the company's operational and financial results.

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-Q and other reports filed with the SEC.

The company undertakes no obligation to update forward-looking statement. 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..

Thank you, Hilda. Good morning, everyone and welcome to our 2017 first quarter earnings call. On today's call, we will not discuss or take any questions relating to our announcement to merge with FelCor. We appreciate your patience as we move through this process. We will provide additional update when possible.

Now with respect to the first quarter we were generally encouraged to see continued economic growth in the U.S. while initial GDP numbers turned out modest, the forecast for the rest of the year indicates improving growth.

We remain cautiously optimistic though while unemployment, business investment, high consumer confidence, rising wages and healthy consumer balance sheets will continue to support economic expansion and positive margin demand trends.

We were encouraged to see industry-wide lodging demand this quarter improve by 50 basis points relative to last quarter and outpace supply by 90 basis points.

We believe that industry RevPAR remains well positioned for an eighth consecutive year of growth and we expect that ADR growth will remain positive although growth and new supply is likely to lead to a slight decline in occupancy this year around the country.

While new supply remains a concern, we are encouraged to hear from those on the development front that construction lending is getting tighter. Additionally, escalating construction cost are making it tougher to pencil out new projects.

High-quality development with strong sponsorship continue to get funded with the headwinds that marginal products are facing could temper the growth of supply beyond 2019.

As for asset management and operations, with respect to our performance this quarter, our RevPAR decline of 0.6% was slightly better than our internal expectations as a result of stronger performance in markets such as Washington DC, Southern California and Houston.

Excluding our two softest markets, Louisville and Northern California, where we had our toughest year-over-year comps our RevPAR would've been a positive 1.6%. The headwinds we faced this quarter were fully anticipated and are reflected in our guide. Relative to the overall industry performance, our portfolio was affected by a few factors.

First in Northern California, we had renovation disruption combined with difficult first quarter comps, given our stronger outperformance during last year's Super Bowl.

Second, the short-term closure of the convention center in Louisville continue to impact that market and finally, group business outperforms transient during the quarter, which did not favor our highly transient mix on a relative basis. That said, we were very pleased to once again benefit from the diversity and quality of our portfolio.

This was especially evident in our non-top markets, which achieved robust RevPAR growth of 4.6% markets such as Salt Lake City, Atlanta, Pittsburgh and Tampa achieved outstanding RevPAR growth of 24.5%, 12.5%, 11.6% and 9.3% respectively. Now moving on to our top 10 markets, our top performer Washington DC achieved exceptional RevPAR growth of 14.3%.

The Presidential Inauguration followed by the Woman's March created significant compression throughout the city and helped our hotels achieve RevPAR growth of over 170% during these events.

Our hotels also took market share this quarter with our index increasing by 250 basis points as we benefited from the continuing wrap up of our Hyatt Place Washington DC and coming off the renovation of our Homewood Suites. We were very pleased with this quarter's performance and expect DC to be our top performing markets this year.

In our Southern California market, our hotels continue to benefit from strong corporate business production, from industries such as technology, in arts and entertainment. Additionally, we're seeing added benefit from the ramp up of our recently renovated hotels.

These positive factors led our RevPAR to increase an impressive 7.4%, making Southern California our second best performing top 10 markets. Looking ahead, we expect the positive trends in this market to continue. In Houston, we benefited significantly from Super Bowl achieving RevPAR growth of nearly 25% in the month of February.

The continuing ramp of our newly converted hotel in Downtown also made a positive contribution. Overall, we were very pleased with RevPAR growth of 2.4% for the quarter as well as an increase in market share of approximately 70 basis point.

As we look further out, we do expect to see headwinds in Houston as the market continues to absorb new supply and given that the NCAA final four took place in April of 2016. In Denver, our hotels generated 0.5% RevPAR growth for the quarter.

Citywide activity and corporate demand were strong and the ramp up of two hotels that were under renovation this time last year were positive contributors to RevPAR growth. Looking ahead, we expect strong corporate demand in Denver to continue to drive positive RevPAR growth this year.

In South Florida, our RevPAR was down 1.6% while our broad diversification in the regional allowed us to outperform the market by 330 basis points during the quarter. We continue to capitalize on the upside outside of Miami such as our properties in the West Palm Beach area, which has benefited from the President's frequent visit.

Having such diversity in this greater MSA is helping to offset Miami-specific headwinds like ongoing renovations at the convention center and new supply in Miami Beach. We expect this diversification to continue to benefit our portfolio as the year progresses.

In Austin, a burgeoning technology sector and the Metro's growing appeal as a destination for major entertainment event, continues to drive robust lodging demand growth. During the first quarter, demand in the Austin market increased 5.9%, of course the rising interest in this market has also attracted new hotel supply.

In this quarter, the increase in new supply along with the loss of some corporate project business that we hosted last year led to our 2.1% RevPAR decline. Given Austin's dynamic market and growing appeal, we expect that the market will ultimately absorb the new supply. However, in the near-term, we expect RevPAR to be soft throughout the year.

In Chicago, we had some nonrepeat corporate extended stay business in 2016 plus disruption from two renovations this quarter that led to a 7.4% decline in RevPAR.

The renovations at our two hotels are now complete, which should drive improvement through the remainder of the year and additionally citywide room nights are up year-over-year during the second quarter. In New York where we now three hotels following the recent sale of two properties, our RevPAR declined by 7.9%.

Our results this quarter were affected by renovation destruction at one of our hotels and the reentry of two large competitive hotels that were under renovation during the comparable period last year. While the city continues to see impressive demand, we expect RevPAR will continue to be soft as new supply continues to get absorbed in New York.

Finally, this quarter Northern California and Louisville were two of our softest markets with RevPAR declining by 8.9% and 19.8% respectively. Now in Northern California, our hotels experienced tough cost since we vastly outperformed the market last year in the first quarter with RevPAR growth of 28.7% in large part due to the Super Bowl.

In addition to tough comp this quarter, we also had two hotels under renovation. As a result, our Northern California hotels saw a RevPAR decline of 8.9%. The disruption from the renovation of two hotels was approximately 560 basis points.

While some incremental disruption will also extend into the second quarter, we will course lap the Super Bowl tough comp and we expect to see improvement in Northern California in the second half of the year. And finally, in Louisville, the market continues to be impacted by the short-term closure of the city's convention center.

In light of this, we are capitalizing on the timing to do a comprehensive renovation at our Marriott Louisville, which is connected to the convention center. The reopening of the new state-of-the-art center in the second half of 2018 will drive a robust group activity and our hotel will be well-positioned to capitalize on it.

Although our topline performance was slightly down, we were pleased to generate portfolio EBITDA margins of 32.9%. Our ability to continue to generate leading margin in a soft environment and maintain strong free cash flow, allows us to continue to provide a meaningful return to our shareholders.

RLJ's has been in the lodging real estate business for over 15 years, six of those as a public company. Our team of seasoned professionals have navigated to many different market conditions.

We've demonstrated that a geographically diverse portfolio of premium select service and lean compact full-service hotel with best-in-class brand can generate superior margins in any environment. Combined with a low-leverage balance sheet it has proven to be sustainable all-weather strategy for generating high returns while mitigating risks.

As we move forward throughout the year, several of our markets such as Washington DC and Southern California are expected to continue to perform well and help partially offset weaker fundamentals in markets that are experiencing headwind.

We remain generally encouraged by the positive indicators in the economy and the benefits they could have on corporate and leisure demand. With our broad diversification, we are well-positioned to capitalize on any upside in lodging fundamentals.

I would like to turn it over to Leslie for a more detailed review of our operational and financial highlights.

Leslie?.

Thanks Ross. Our overall performance this quarter was slightly better than expected with first quarter generating a slight decline in RevPAR of 0.6%. During the quarter, January was our strongest month with RevPAR growth at 3.1%. February and March were much softer with declines of 3.1% and 1.3% respectively.

We were pleased to see the diversity of our portfolio offset short-term softness in select market such as Northern California and Louisville. As we deconstruct the drivers of our performance and look at our segmentations, in general, we saw softens in leisure demand and flat corporate demand.

Although, our business mix is primarily transient in nature, we were pleased at our strategy to group up continue to produce positive result. The moment we saw in our small group business last quarter carry over to this quarter as well. We continue to see not only a meaningful increase in small social groups, but also in corporate groups as well.

This increase in group production overall helped partially offset softer leisure production. In light of top line pressure, which was driven in large part of the softness in our Northern California, and Louisville markets, our EBITDA margin for the quarter decreased by 142 basis points.

Yet overall, we are very pleased that our EBITDA margin of 32.9% continues to rank as one of the highest amongst our peers despite a slight RevPAR contraction. We attribute our ability to continue to generate strong margins, the strength of our business operating model, aggressive asset management and strong partnership with our operator.

Our asset managers continue to work tirelessly with our operations to manage expenses while keeping guest satisfaction high. As a result, our hotel operating cost this quarter increased by less than 1%.

Now, with regards to our corporate performance, our adjusted EBITDA decreased by $7 million to $79 million for the quarter and adjusted FFO decreased $6.3 million to $64.4 million or $0.52 on a per share basis.

While reviewing our performance, please keep in mind that last year’s results included approximately $2 million of EBITDA from hotels sold in the fourth quarter and that 2016 was a leap year. Therefore, the first quarter had one less day than the prior year, which has an impact on a year-over-year comparison.

Turning to the balance sheet, while we had minimum activity on the capital markets point this quarter, we continue to maintain a strong balance sheet with low leverage, significant coverage and a well ladder maturity profile. At the end of the first quarter, the total debt outstanding was $1.6 billion and our net debt to EBITDA ratio was 3.1 times.

We ended the first quarter with a robust liquidity position of more than $850 million including $460 million in cash and $400 million of availability on our undrawn credit facility. We have plenty of liquidity to our cover our capital performance priorities including paying our dividends and implementing our capital expenditure programs.

We continue to believe that our dividend is an important component of our total return we seek to provide our shareholders. Now, with regards to our capital expenditures, our renovations are on schedule and we continue to expect capital outlays for the year of $40 million to $45 million.

Half of our project disruption for the year occurred during the first quarter, impacting our RevPAR growth by approximately 85 basis points. While we will have additional renovation activities throughout the remainder of the year, we expect less displacement in the subsequent quarter compared to the first quarter.

Therefore, for the full year, we continue to project total disruption of 30 to 40 basis points. Now, with respect to our guidance for the year, given that our first quarter results were largely in line with expectations, we are reaffirming outlook for the full year of RevPAR growth of negative 1% to positive 1%.

Total EBITDA margins of 34.5% to 35.5% and hotel EBITDA in the range of $380 million to $400 million. We would like to note that we expect second quarter to be our weakest quarter this year in line of softness city wide in select markets, coupled with the holiday shifts.

We expect RevPAR growth to improve during the second half of the year as we move pass though comp, such as the timing of the convention center closing in Louisville. Thank you and this concludes our prepared remarks. We will now open the lines for Q&A.

As a reminder, we are unable to discuss the recently announced merger and we ask that you refrain from asking any related questions, operator?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Wes Golladay with RBC Capital Markets. Please proceed..

Hey, good morning everyone.

Just want to build on that last comment about the timing of the -- or the RevPAR progression throughout the year, what are you seeing in the back half as far as easy comps outside of the Louisville Convention Center shutting down?.

Yes Wes, good morning. I will start it out and then turn it over to Leslie for a little more detail but, we saw this progression coming from a mile away. We knew that the first half was going to be a little softer for us. The second half does get easier, part of it is comps.

We were flat in the second half of last year, but there is also some individual market and assets issues that give us a little bit more comfort in the second half Leslie?.

Yes, Wes, we obviously think that obviously the first half is going to be soft and the second half is going to be -- is offset that and keep us in line with our guidance. There is no particular market that we're depending on given our diversification. Just walking through our non-top 10 markets were up 4.6% this quarter.

We expect them to continue to perform relatively well in the back half of this year, Washington DC will continue to be solid for us as well to benefit from the Hyatt place. DC still ramping up.

Also, we have renovations in the Residence Inn Bethesda last year in the fourth quarter and also, we're seeing some benefits from our group up strategy and some key assets in our DC market. Denver is expected to perform well for us in the second half as well.

So, we continue to see solid business transit there in some of our markets like Longmont and Louisville. Southern California continues to be strong market for us and we expect to see business trends there continue to perform well there as well as the ramp-up of the Embassy Suites in Irvine. Louisville, we already talked about, lapping the comp there.

The Convention Center closed in August, but also there is a big citywide coming in Louisville back to Louisville that wasn’t there in 2016.

Northern California as Ross mentioned, is not going to have the disruption that we had in the first half, but also, we expect to benefit from the two-large city wide that are going to be in the fourth quarter in Northern California.

Florida is going to be relatively flat for us on the back half and then we expect see softness in Houston, Austin and New York..

It should be pointed out, I know Leslie mentioned a couple of citywide end markets where the convention centers are closed, but the one in Louisville does have an alternative site to meet at but it's not the convention center. So, we're not adjacent to it, but it is an alternative venue in Louisville.

And the other two citywide in San Fran are Oracle and Sales Force and they also have found alternative that they will be headquartered outside of Moscone..

Okay.

Now, we looking at your second largest asset, the Doubletree Met, are you seeing any lift there post-closing of the Waldorf Astoria?.

Yes, too early. The Waldorf closed in March, and frankly leading up to the closure, they were discounting their brains out because they hadn’t done anything to the product in the last year and they were just putting heads in bed.

So, they were a bit of a drag on the market in the first quarter and so, I would say no, so far, we have not seen and we're looking forward to seeing what impact might be going forward..

Okay. Thanks for taking the questions..

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed..

Hi, good morning. Thanks for taking the questions.

Was just interested in hearing your thoughts about capital allocation plans moving forward and how you're thinking about potentially selling any additional legacy RLJ hotels? And then how would you think about in terms of use of proceeds given the pull back in the stock here more recently?.

Austin, good question. We as a standalone are always looking at our portfolio for opportunities to recycle capital, as we did in December of last year when we took advantage of the arbitrage between the private valuation on a couple of New York assets and the public valuation and that reduced our exposure in New York to about 3.3% of our EBITDA.

We also look naturally at assets that either are in need of CapEx coming up and we can shift that. Naturally, that goes into the pricing when you sell an asset, but if we can shift that to de-capitalize in the DR and the exit instead of going through the work ourselves, we take a look at that.

We certainly look at the lower 10% of the portfolio from a RevPAR standpoint as a way of producing addition by subtraction by selling off the lower RevPAR assets and we continue to look at those.

And then finally there is I guess market exposure and where we think that it might be wise to rationalize our exposure to certain markets, we’re always looking at opportunities to do that as well and that’s ongoing. In light of some larger things that we’re working on, that we can’t talk about today, I would say that that doesn’t change.

That doesn’t change our thinking about the RLJ assets and we’ll keep you posted along those lines, but as for I guess reallocation of capital, Leslie you want to….

Yeah, Austin, the thing I would say there is that obviously there are a number of ways to allocate capital to create shareholder value at this time, buying back our shares is not a priority relative to the other opportunities that stand before us to create long term shareholder value..

Great so it seems like it’s fair to say that there is not necessarily anything being actively marketed today in the legacy RLJ portfolio?.

That is correct, nothing is listed. We received inbounds in fact just you didn’t ask, but just as an anecdote, we probably get more calls on our Houston assets than anything else. Private equity is circling and looking and start taking a position in Houston for the rebound, we’re encouraged by that and we’re not inclined to sell Houston at this point.

But we are looking at anything else in the portfolio that makes sense. We’re going to be opportunistic and we do receive inbound inquiries, but nothing is listed at this time..

Great. Thanks for the comments there and then just one for me, you’ve talked about your positioning a little bit outside San Francisco being less impacted by Moscone as potentially those more within the CBD.

I was curious if that’s still your expectation or with some of these conferences now relocating, do you still think that you guys could be an outperformer in Northern California versus the industry?.

We think so, yeah, we think so Austin, it was a soft quarter for us in Q1 because of the difficult comp. We outperformed -- during the Q1 of last year, we outperformed our comp sets by almost 15% and so, being in 8.5% out didn’t come as a surprise to us, but we don’t think it was a reflection of being outside of the CBD. We’re in Palo Alto.

We’re in San Jose. We’re in strong submarkets around the Bay Area. The two that we saw might be affected by citywide compression or our two assets in Emeryville right across the Bay Bridge from the city and that has turned out to be the case.

So, they might ironically benefit from a couple of these citywide that come in as well as our Courtyard Union Square. That asset finished flat to just slightly up in Q1 and actually gained over 250 points of market share during the first quarter relative to last year. So, we feel good about our positioning in the area.

And we do think that the diversity is going to continue to serve us well. We’ve got call it maybe a third of the portfolio. I’d say, we have direct exposure to San Francisco and the citywide compression and then two-thirds of it is good diversification for us..

Great. Thanks for the time today..

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

Hey. Good morning, Ross and Leslie. Really quick question on the progression of RevPAR trends during that first quarter, where you said it started out strong in January and got progressively weaker. Was that really just the Super Bowl in D.C. that lifted January? I'm a little surprised given the Easter shift that March was a little stronger..

Yeah. It was definitely -- it was definitely the inauguration in Woman's March in D.C. and Super Bowl in Houston. We did very well. But, I would say that the Easter shift helped in March, but also the progression -- it was a combination of corporate transient fading a little bit and also, I think the Easter shift helped most in leisure locations.

We did see a progression in Florida. We saw a progression in Oahu. We saw progression in New York City, but in the corporate market, it didn’t help us much. It seemed to have group business more than transient.

I must say that while our portfolio is skewed towards transient business and we do believe that that is the best way in the long run to play the hotel business, group business did seem to emerge this quarter as a stronger gainer.

We saw that our transient business or that in general transient business was up according to Smith Travel about 1.2% while group is up about 6.6%. And it seems like the Easter shift helped a little bit more with groups.

So, it’s fitting in their bookings in the month of March a little bit more than it generated incremental corporate transient business..

Okay.

And then how did April, then if you think about that relative to March, was it weaker or was it same, stronger?.

Yeah. Again, I think April was good, April was good for the leisure locations. Florida had a good. New York had a good April. But in general, around the country, most of our corporate hotels it was I would say weaker. April was a weaker month. It will be the weakest month of the quarter in fact, fortunately May and June get progressively better..

Yeah. Thank you. That’s it for me.

[Operator Instruction] Our next question come from Ryan Meliker with Canaccord. Please proceed..

Hey, good morning guys. I think a lot of the color you gave on RevPAR progression and everything was pretty helpful. So, I don't need to dig into that stuff. But I did want to ask a little bit about strategy and I’m not going to ask about FelCor as you guys requested.

But, just tell me a little about how you guys define your target submarket? I know when you guys did put on the FelCor presentation, you highlighted the slide that talked about urban being a focus and then with the FelCor deal most of those assets don’t fall into FTRs definition of urban.

So, I guess is urban changing for you guys as you guys move forward, are things outside of urban becoming more core? Or is it, that you just have a different definition of urban, help us understand that. Thanks..

Sure. Yeah. Regardless of FelCor as you suggest, we’ve always believed that the way to play the business is with the premium select service and the compact or lien full service hotels within the same brand families, within the dominant brand families, Marriott, Hilton, Hyatt and it’s been a very successful strategy for us.

And as for locations, we’ve always said urban or dense commercial locations, what we don’t want is we don’t want to own roadside. We don’t want to own hotels that are overly dependent on one source of demand.

We apply, the -- the metaphor we used to use back in the day when we were first explaining the strategy was this stool, three legs of this stool. Now if the stool has four of five legs, that's great, but we at least want multiple sources of demand for the assets.

So, if a hotel is not in the urban core, but it’s able to draw from strong say a biotech office park and leisure and/or it may also be approximate to an airport, but it’s not necessarily an airport hotel, then we’re comfortable that in the ebb and flow of business throughout the year from a seasonality standpoint and/or if weakness develops in one of the segments that the others can pick it up.

And so that continues to be our strategy going forward..

That’s helpful and then as we think about capital recycling and acquisitions, obviously you’ve got a big acquisition on your plate right now.

Should we expect you guys to continue to be active in terms of buying and selling over the next few months as you guys work on the merger with FelCor or do we think that that's probably more of a 2018 story?.

We’re going to continue to look, we are sitting on more cash than we normally do. Now obviously, we’ve got good use of that cash, but we continue to look, now I will say that as we’ve been underwriting, we have found things to be a little pricy out there. It’s a seller's market right now.

There are a lot of buyers out there, a lot of different types of buyers and there are REITs, some of our peers are out there. In fact, I’d say more than half of the REITs are looking and there is the non-traded REITs.

The innermost spirits are steering within private equity because debt rates are down especially CMBS is readily available and then there is the International buyers.

So, we’ve had trouble canceling individual deals, which makes a deal of scale perhaps a little bit more attractive and we’ve continued to look within our own portfolio for disposition activities or opportunities I should say. I don’t have anything to announce.

We don’t have anything under contract, but we haven’t necessarily simply put the brakes on all other activity. We continue to look..

All right. That’s helpful. That’s it for me. Thanks. Appreciate it Ross..

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

Good morning.

Just one quick follow-up question for me, you precluded from share repurchases given the merger agreements or precluded into the shareholder voters, that’s just on the backburner for you?.

Yeah, it’s not a backburner Mike. It’s not something we would do..

Got it.

And you said in relation to the other opportunities that are out there right now, that in relation to the pending FelCor merger then or are there other things out there that you continue to look at as a follow up to Ryan’s question?.

Yeah, we evaluate all the opportunities Michael the term where we think would be the best allocation of capital and where we think would create the greater value and so right now, on a relative basis to what we’re looking out there buying back shares is not the best use of capital..

Got it thanks..

I would now like to turn the floor over to Ross Bierkan for closing comments..

Thank you, everybody. We recognize today is a very busy day on the call front. So, we appreciate you joining us. We look forward to talking to you a lot more about things that we have going in the near future, but for today, we’re pleased to be able to share with you the results of our first quarter and we look forward to catching up with you soon.

Take care..

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