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

Austin Wurschmidt - KeyBanc Capital Markets Wes Golladay - RBC Capital Markets Anthony Powell - Barclays Chris Woronka - Deutsche Bank.

Welcome to the RLJ Lodging Trust First Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Hilda Delgado, Treasurer and Senior Vice President of Finance. Please go ahead..

Thank you, Operator. Welcome to RLJ Lodging Trust first quarter 2018 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 our Chief Financial Officer, will discuss the company's operational and financial results; Tom Bardenett, our Executive Vice President of Asset Management will be available for Q&A.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company’s actual results to differ materially from what has been communicated. Factors that may impact the results of the company can be found in the company’s 10-K and other reports filed with SEC.

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

Thanks Hilda. 2018 is off to a good start for the industry and for RLJ. We were pleased with our performance this quarter and the significant progress we've made on each of our key strategic initiatives.

The positive momentum in the economy, high consumer confidence and recent tax reforms are strengthening corporate confidence, leading to increased business spending, rising business investment appears to be correlating with improving lodging demand.

Despite the shift of Easter into the quarter, the acceleration in demand drove industry RevPAR to increase by 3.5% slightly ahead of last year. One point worthy to note, is that transient RevPAR was up 3.9% for the industry with mid-week transient increasing over 3% despite difficult comps for the Easter shift in the inauguration.

This positive metric, provided indications of improvement in corporate transient demand.

But our portfolio, operating metrics for the quarter exceeded our expectations with RevPAR decreasing only 0.7% despite multiple headwinds, adjusting for the impact from the Super Bowl in Houston, the inauguration events in Washington D.C., and renovation displacement, our RevPAR would have been 170 basis points higher in the quarter.

Among our major markets Chicago, South Florida and New York showed strong growth and our portfolio in the aggregate experienced broad-based improvement in corporate demand during the quarter. We're encouraged by the positive signs that we've seen in recent months and are cautiously optimistic that these trends may continue.

As I mentioned earlier, we made significant progress on our key strategic initiatives this quarter. We successfully completed the sale of two legacy FelCor assets in the quarter for $119.2 million. And as the merger closed, we sold three properties for almost $300 million at a weighted average EBITDA multiple of 15.2 times.

These assets included The Fairmont Copley Plaza in Boston, the Embassy Suites Marlborough, and the Philadelphia Sheraton Society Hill. Our most recent transaction the Philadelphia Sheraton was sold for $95.5 million, which represented a 14.7 times EBITDA multiple and a 5.6% cap rate on 2017 actuals.

We successfully realized additional value in this asset by leveraging our relationships to unencumbered the asset from management and provide the buyer with an up-branding opportunity within the Marriott family.

Our ability to secure an attractive valuation beyond simply capitalizing the trailing cash flows is a great example of our thoughtful approach to driving incremental value to the non-core assets as we bring them to market. We continue to be encouraged by the transaction landscape.

Ample liquidity and a lack of quality product available in the market are driving strong interest in several of our assets. As a result, our disposition pipeline remains very active. We are on pace to sell the remaining non-core assets by Q1 2019.

And we anticipate a combination of these non-core assets plus other opportunistic sales will generate an incremental $200 million to $400 million of proceeds in 2018. Our primary use of the funds at this time continues to be the reduction of debt.

As we move forward with our marketing process, we’ll remain disciplined and methodical in our approach to maximizing those proceeds. Overall, we are encouraged by the positive economic backdrop and its potential to accelerate corporate demand.

Yet we are also excited that all the progress we have made on our strategic initiatives will unlock long-term value regardless of how the industry backdrop unfolds. First, as I described, we're continuing to optimize our portfolio through the disposition of both non-core, and opportunistic sales.

We remain on solid footing to execute the additional $200 million to $400 million in asset sales this year. Second, we've already paid down $300 million of our $500 million debt reduction goal and brought our leverage in-line with our overall target level. Given our disposition pipeline, we're on track to pay down the remaining amount by year-end.

Third, we’ve already realized the significant portion of the corporate synergies from our recent merger, and remain on schedule to realize the vast majority of the $22 million in annual G&A synergies by the end of Q3, 2018.

We also remain on target to generate operational synergies that we expect will offset 25 basis points to 50 basis points of the margin pressure by the end of next year.

And finally, we are opportunistically reinvesting in our assets to capitalize on market conditions with the renovation program now underway to position us for long-term growth with strong momentum behind each of our strategic initiatives I’ve made a personal decision that now is the time to pass the torch.

After nearly two decades with RLJ, I will be retiring in August of 2018. It has been a great honor and privilege to have had the opportunity to be part of this incredible and dynamic organization from day one. RJ has matured from a small, private investment vehicle to a public company with over $6 billion in assets.

I am extremely pleased that Leslie will be taking the reins as the next CEO. Leslie intimately knows the business and our strategy and brings the experience and leadership skills to successfully guide RLJ into the future.

I feel very good about the key business initiatives that we have in place and are more confident than ever about the key business initiative that we have in place and I am more confident than ever that they will create shareholder value as we continue to execute.

I will remain at RLJ through much of August continuing to focus on our business objectives while ensuring a seamless transition of leadership. And with that, I'll turn the call over to Leslie for a more detailed review of our operational and financial highlights.

Leslie?.

Thanks Ross. Before I highlight our operational performance, I want to take a moment to acknowledge Ross for his tremendous contribution to RLJ over the past 20 years and his leadership as CEO for the past two years.

Ross was one of the original architects of our company's investment strategy and he's been integral in establishing the foundation of this organization since the very beginning.

On a personal note, Ross and I have worked together for over a decade and I know that I also speak for everyone at our company, when I say that we greatly appreciate his dedicated service and wish him well in his retirement and future endeavors.

I also want to say that I'm humbled and excited by the opportunity to lead this amazing organization with such a talented group of individuals. Our entire management team remains committed to the vision we have outlined. And we remain focused on the execution of our key initiatives to drive shareholder value.

Now, in terms of our operations, our results for the first quarter exceeded our expectations with our RevPAR declining by only 0.7% which was better than what we had anticipated. As with the industry, we saw positive indications relative to business transient trends in the first quarter.

This is evident by our weekday performing stronger than weekend which is further illustrated by revenue contribution increasing year-over-year from Monday and Tuesday which are high business travel volume days.

This positive backdrop allowed us to hold occupancy despite headwinds from renovation related displacement and tough comps such as inauguration in D.C. and the Super Bowl in Houston. While several markets performed better than expected, markets such as Chicago, South Florida and New York delivered outstanding performance.

Our hotels in Chicago achieved strong RevPAR growth of 11% during the first quarter. Significantly outperforming the market by 520 basis points, stronger corporate transient and group demand at our hotels was amplified by increase in the citywide room nights that helps drive compression in the broader market.

While we expect Chicago to have a weaker second quarter as a result of fewer citywide, we expect to have a more favorable second half in light of easier year-over-year comps for our hotel.

In South Florida, we had strong leisure demand driven by a combination of factors such as cold weather throughout much of the country, displaced Caribbean demand and a positive impact from the holiday shift led our hotels to achieve robust RevPAR growth of 7.9%.

Given the positive demand trends we are seeing in the market, South Florida could be one of our stronger markets this year despite tough fourth quarter comps.

Our New York Hotels achieved 6.1% RevPAR growth during the first quarter, primarily driven by leisure travel that was bolstered by the holiday shift, coupled with improvements in corporate production. Additionally, the increase in transient compression at our hotels was amplified further by a solid group base.

We were very pleased to see a 7.4% increase in demand this quarter for the overall New York market. Despite the strength of our New York results in the first quarter, new supply will continue to be a challenge for the full year. Our Southern California Hotels reported flat RevPAR growth.

Strong growth and continued strength in corporate demand at a number of our hotels was offset by a weaker citywide calendar in San Diego and cold and wet weather that temperate leisure demand. Looking ahead, we expect improving performance for the remainder of the year for this market. RevPAR in our Denver market declined by 0.9%.

Although corporate demand continues to be strong, our results were impacted by the softness in our Denver South submarket. Excluding these hotels, RevPAR would have increased by 370 basis points to 2.8% while we expect our Denver hotels to have modest RevPAR growth this year.

Long-term, we expect Denver to remain an attractive market given the increasing growth and new demand drivers. Our Northern California market performed in line with our expectations for the quarter. We continue to take advantage of the timing of the Moscone expansion to renovate several hotels in this important cluster.

Adjusting for renovation displacement, our Northern California RevPAR performance would have improved by approximate 320 basis points. And while these renovations will continue throughout the year, they will position our Northern California market for strong performance during our record citywide calendar next year and beyond.

Moving to D.C., as expected the inauguration and the Woman's March in January last year created difficult comps for the overall market in our hotels. However, our hotel significantly outperformed the market by 680 basis points with a RevPAR decline of only 4.2%.

Several of our extended stay hotels benefited from long-term stays and transient business during the quarter allowing us to partially offset last year’s tough comp. With these headwinds now behind us, we expect our results to improve to the rest of the year for D.C. In Houston, similar to D.C., we also faced market headwinds.

Last year, two-thirds of our portfolio outperformed the market from outside exposure to the Super Bowl creating a difficult comp for us. And while we anticipate the strong citywide calendar in the second quarter to benefit our hotels. We continue to expect Houston to be one of our softer markets for the full year.

Austin and Louisville were also among our softer markets. In Austin, a lower turnout for South by Southwest and the lack of state government activity contributed to our soft performance. In Louisville, our performance continues to be impacted by the renovation at both the convention center and our Marriott Hotel.

Outside of our top markets, several of our non-top 10 markets show strong RevPAR growth including Philadelphia and Orlando, which achieved double digit growth 16.8% and 11.7%, respectively, underscoring the benefits of our diversified portfolio.

Now, with respect to margins our portfolio generated a solid EBITDA margin of 29.3% during the first quarter, which was down 177 basis points over the prior year. This quarter as expected, we had expense pressure from real estate taxes and insurance, which affected our margins by approximately 80 basis points.

Adjusting for this, our margins would have been down only 98 basis points and our operating expenses would have been up only 1% versus actuals of 1.9%. Our stronger than expected top line performance led the better than expected corporate financial results for the quarter.

We reported adjusted EBITDA of approximately $116 million and adjusted FFO of approximately $82 million or $0.47 on a per share basis for the quarter. We recommend reviewing exhibits in last night's press release for a full reconciliation of adjusted FFO and adjusted EBITDA. Moving onto our balance sheet.

We ended the quarter with $2.6 billion of debt outstanding, $400 million in unrestricted cash and a net debt to EBITDA ratio of 4 times. Given our current leverage and maturity profile, our balance sheet remains in a strong and flexible position.

In March, we redeemed $524 million of legacy FelCor bonds, which had a coupon of 5.6% or 115 basis points more than our weighted average interest rate at the end of the year. We paid down the bonds with proceeds from asset sales and our line of credit. At quarter end, we had $300 million outstanding on our credit facility.

However, in April, we pay down an incremental $50 million. We will use the proceeds from subsequent asset sale to pay down the remaining balance of $250 million on our line of credit, enabling us to achieve one of our initiatives, which is paying down a total of $500 million of debt this year.

Additionally, as I mentioned in our last call, we continue to be proactive regarding other aspects of our balance sheet. In January, we successfully amended three unsecured term loans for a total of $775 million. These transactions improved our maturity profile and collectively reduce the spread across our pricing grid by 30 basis points.

We now have no significant debt maturities until 2021. Approximately 90% of our debt is fixed and our weighted average maturity stands at 4.4 years. Additionally, we have 135 assets representing over 80% of our hotel EBITDA unencumbered by debt, affording us a very flexible balance sheet.

With regard to our capital program, our 2018 renovation plan $130 million to $140 million across 17 hotels remains on track. We estimate that our RevPAR disruption in the first quarter was approximately 100 basis points, which was consistent with our expectation and we continue to expect approximately 100 basis points of disruption for the full year.

In summary, we’re pleased with the great progress we’ve made towards our key initiatives and our performance this quarter relative to our expectations. In light of this quarter results, we are increasing the low end of our RevPAR guidance for the full-year by 50 basis points.

We have not yet adjusted our outlook for improved business travel other than the first quarter is better than expected performance. We’re also adjusting our EBITDA guidance for the net effect of our first quarter’s performance and the sale of the Sheraton Philly. No additional dispositions are reflected in our guidance.

Our updated 2018 guidance metrics are as follows, RevPAR growth of negative 0.5%, the positive 1%. Our hotel EBITDA’s new range is between $562 million to $593 million for the full year. And our adjusted EBITDA’s new range is between $524 million to $555 million for the full year. Thank you. And this concludes our remarks.

We will now open the line for Q&A.

Operator?.

[Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question..

As it relates the asset sales on the $200 million to $400 million of additional disposition do you expect, does that include all five of the remaining non-core FelCor assets that you've identified and are there any other assets that are included in that amounts?.

Austin, it’s Ross. No, it doesn't include necessarily all five. We recognized it - we’re talking about two different things here.

We've said that we do expect to sell those remaining non-core FelCor assets by the end of the first quarter of 2019, but in this $200 million to $400 million between now and the end of the year that's a mix of non-core and some legacy RLJ assets as well..

And then just given some of the strength in the resort markets in particular and some signs of optimism in New York, do you feel like now still the right time to be selling the Vinoy and the Knick in particular?.

Speaking to the Vinoy first, we simply don't do resorts, it's a great asset and it's ramping tremendously this year. And so it's with a heavy heart in some ways that that we're going to say goodbye to it, because it is going to contribute to our growth this year, but it's simply not what we do.

And we certainly want to remove any confusion about strategy creep or any of those things that came up when we initially announced the merger from consideration.

And the good news is that the appetite out there for resorts is tremendous and we feel very good about the opportunity to market the asset, which we intend to do in the next few weeks it will hit the market.

And based on the inbound interest we've already received and the broker opinions of value that we received, we're optimistic about hitting a good number on that.

As for the Knick as we've said we think that, well it's a special asset in a bull's eye location and it requires a little bit of a special process, a little bit more of a bespoke process, where experienced sellers of real estate in New York and we think creating a little bit of exclusivity around, it is the right way to go.

Unfortunately, New York did show some green shoots in the first quarter. It remains to be seen whether that can happen again in the second. Frankly, the first quarter was helped by the Easter shift and other stealth tailwinds that people forget about is stellar. Winter storms stellar last year dropped about four feet of snow on the city in March.

And so you know we just want to make sure before we start moving our expectations in New York that it's sustainable in the second quarter. But as it relates as the Knick, I would say our consideration with the Knick is more that it's actually ramping positively. It's heading in the right direction, it's not a fire sale.

So, the goal with the Knick is to take advantage of what an exclusive asset is and optimize the proceeds on that one..

Appreciate the thoughts there, Ross.

And then just can you provide an update as it relates to the timing and process of backfilling, not currently vacant, but to be vacant you know CFO and COO roles?.

Austin, you know we're working through our search process in a thoughtful manner with our advisors and we look forward to make an announcement you know long before the transition here, but we're working through it and we look forward to communicating for the broader market..

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

Can you maybe talk about you know the capital allocation throughout the year? How much you have to spend to outlay current – from this point on for renovations? And the thought process, if you have a very large cash balance and a very large line balance, so why not just pay down more of the line now?.

So Wes, our program is a $130 million to $140 million. We started about $30 million in the first quarter, largely concentrated in Northern California, where most of our disruption was at.

And I would say so that puts us probably at $100 million on the back for the remaining quarters and our progress that we're making on the dispositions gives us comfort in terms of our timing to pay it off in conjunction with where we thought we would be from a balance debt perspective.

And so we're comfortable with the cash balances that we're carrying today..

And then, with the integration or management change of some of your hotels, is there anything going on there or is it just business as usual?.

This is Tom. Wes, thanks for the question. In regards to the integration, we're right in line. We have identified around 25 basis points to 50 basis points by the end of 2019. And the exciting thing is we see contracts coming up for renewal both in IT and energy, in addition to ancillary revenues that we're attacking on the parking front and SNB.

So we think that we're in line with what we expect and the integration as far as people and processes is exactly where we wanted to be..

As it relates to the White Lodging transition to Interstate, it's gone very smoothly and we feel good about the job, that Interstate did stepping in and we think they're fresh eyes and fresh legs, in a situation like that is always a good thing. And we're finding it to have been a seamless process.

Fortunately Interstate already managed close to a dozen properties for us before the transition. And it's been painless..

And then, last one I guess maybe on markets that your outlook is surprising you most to the upside and the downside maybe in particular your outlook for Denver, I thought it might have been based on commentary from last quarter maybe a little bit better than expected or better outlook than you may be messaging right now.

Has anything changed there and anything to the upside?.

So our performance this quarter in Denver was affected by our Denver South cluster. There was a couple of assets there were under renovation in that cluster that came back online and that cluster underperformed it was down 10%. And as I said in my prepared remarks, if you remove that we'd be up 2.8%. So we feel there very good about Denver.

But in that particular case, we had a specific situation in that market. Denver obviously is absorbing new supply. And so as it absorbs that continues to create demand we feel good about the market long-term, but this year we are seeing some impact from the supply..

Thanks a lot and Ross congratulations on 20 years at RLJ..

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

Good morning, everyone. It's just a question on the cadence and renovation disruption. A lot of your peers are talking about very strong Northern California RevPAR growth in 2Q and 3Q. But it seems like you may have some renovation disruption in those markets.

Could you let us how much displacement you may have in the second or third quarters?.

So we generally try to concentrate as much as we can of our renovations in first and fourth quarter.

Having said that we've said that we're going to have 100 basis points of disruption throughout the year, we had 100 in the first quarter, will be slightly down from that in the second quarter and third quarter and then fourth quarter will have the most disruption for us for the year..

And one of your peers in New York announced a transaction or deal where they're restructuring their over the workforce within their in New York properties, is that something available to you either in New York or any of your properties nationwide?.

I'll tell you what you know anytime you're operating in a union environment, it's important for the operator and the owner and the union to all be in and sync and you know you know to create win-win opportunities.

And in New York City we’re aligned with the best, we’re aligned with a great operator there in highgate, and great relationships with the unions and we've explored these kinds of opportunities Anthony, and in the normal course of business over the past couple of years, and we’ll continue to do so going forward don't have a major initiative to report out right now but it's a continuous process for us..

And both the DoubleTree Met and the Knick, both are unionized or?.

They are same operator, same union..

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

I wanted to ask I know you're not ready to kind of raise your expectations for the remaining quarters of the year yet on RevPAR, but as we think about the asset sales that you're considering.

Have you raised your underwriting, your expectations on those I guess the question being have you really raised your pricing expectations on those assets since last quarter?.

I would say, not formally, but we are frankly optimistic about the valuation on the Vinoy because of the appetite for resorts out there. And so we're feeling good about that one. The good news is even though we haven't moved the needle upward very much, we haven't had to move it downward.

Rising interest rates has raised - in private conversations some investors have asked us, if rising rates are affecting valuations and I can report out that to date that's just not the case. A combination of a lot of equity out there and a lot of debt for yielding assets is keeping it a competitive market out there.

And to some degree spreads have compressed on the debt a little bit as a bit of a shock absorber for the rising underlying rates. And so, so far cap rates have held steady and we feel good about transacting in this environment..

And I also wanted to ask on your Hilton Marriott managed properties or franchise properties I should say are you seeing any positive impacts from some of the recent changes they've made to cancellation policies, is that one of the factors you think might be helping pricing or do you expect it to help more as the year goes on?.

Chris, this is Tom. We think it's a pretty positive step in the right direction. Obviously the goal is to try to have as much business trends in an optimal mix and reduce the amount of discounts and with the midweek volume that we've seen increase, that's been a positive step for us. In regards to the cancellation question, two things are happening.

We met with Hilton and they provided that they're down about in Q4 about 140 bps in the amount of cancellations that are happening which is a positive sign. In addition to that, cancellation revenue is up because of the amount of cancellations that are occurring still.

In addition to that, the opportunity with the strategic yielding on the OTA mix is also a revenue management practice that both Marriott and Hilton are managing for us, and that allows us during peak night to be able to maximize our business transient mix versus the OTAs.

So we think that going into the summer months when we have higher occupancies that is still to be seen that those can be positive things for us to expect in our results.

And that short-term window that everybody's been talking about that last minute window is creating the opportunity to resell rooms because of these cancellations in the last 72 and 48 hours. So we’re pretty positive about what the brands are doing. And as you know, our portfolio is predominantly Marriott and Hilton products..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Ross Bierkan for closing remarks..

Thank you, everybody. I know it's been a long earnings season and we appreciate you having - being with us today. We look forward to seeing you at NAREIT, but we're always available to you if you want to call in with any questions or follow-ups. We'll see you soon..

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