Nikhil Bhalla - Vice President, Finance Leslie Hale - President and CEO Sean Mahoney - CFO Tom Bardenett - EVP, Asset Management.

Austin Wurschmidt - KeyBanc Capital Markets Michael Bellisario - Robert W. Baird & Company. Chris Woronka - Deutsche Bank.

Thank you for standing by. This is conference operator. Welcome to the RLJ Lodging Trust Third Quarter 2018 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions.

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

Thank you, Operator. Welcome to RLJ Lodging Trust’s third quarter 2018 earnings call. On today’s call, Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President, Chief Financial Officer and Treasurer will discuss the company’s operational and financial results.

Tom Bardenett, our Executive Vice President of Asset Management will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company’s actual results to differ materially from what had been communicated.

Factors that may impact the results of the company can be found in the company’s 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release from last night.

I will now turn the call over to Leslie..

Thanks, Nikhil. Good morning, everyone, and welcome to our third quarter earnings call. We had a very active and successful third quarter on a number of fronts as we not only solidified our team, but we also exceeded all of our key objectives for the year ahead of the timeline we had expected.

Specifically, we sold four assets for approximately $340 million during the third quarter and another asset for $75 million in October.

In aggregate, we have sold five assets for approximately $415 million since the end of the first quarter, exceeding our original goal of generating an incremental $200 million to $400 million of proceeds from asset sales by year end. We executed these recent dispositions at a highly accretive multiple of 17.5 times in aggregate.

Over the last 12 months, we have sold eight assets at a combined multiple of 16.5 times, well ahead of the 14 times we had initially targeted. The high multiples we have achieved on these asset sales has enabled us to de-lever accretively.

In total, we have reduced our debt by $550 million as of the end of the third quarter, once again exceeding our 2018 goal of $500 million. Our current debt-to-EBITDA ratio stands at a very healthy 3.5 times. Additionally, we have realized $22 million in annualized G&A savings as of the end of the third quarter.

And we are working diligently to capture the operational synergies that we have previously outlined. And finally, we expect to complete our capital plan for the year on time and on budget, which will further position our portfolio for long-term growth.

We are energized by the tremendous progress we have made in executing a thoughtful plan we had laid out to unlock value in our portfolio, strengthen our balance sheet and position our company for long-term growth. We achieved these milestones against the backdrop of a strong economy.

We are encouraged that the economy expanded at a healthy pace this quarter. Although concerns around trade wars have elevated volatility, we are cautiously optimistic that this economic expansion will persist and continue to drive lodging demand. Overall, the third quarter was noisy for the lodging sector.

The industry and our portfolio faced multiple headwinds including July 4 falling mid-week, the Jewish holidays falling on heavy corporate travel days and difficult comps from post-hurricane recovery efforts last year which were further complicated by Hurricane Florence.

For our portfolio, while we had anticipated number of these headwinds, the combination of Hurricane Florence and incremental softness in some markets resulted in our RevPAR declining by 0.8% in the third quarter, which was below our expectations at the beginning of the quarter.

Specifically, Hurricane Florence impacted our third quarter RevPAR by over 40 basis points. The storm directly hit our Myrtle Beach and Charleston markets, which account for 5% of our EBITDA. Additionally, we faced incremental softness in Louisville, Austin and Denver.

Excluding these three markets and the impact of Hurricane Florence, our RevPAR would have increased by 0.8%. Now relative to our largest markets, Chicago was our best performing market this quarter. Our hotels achieved robust RevPAR growth of 6.7% and increased market share by 350 basis points.

We benefited from a strong citywide calendar and the ramp up of one hotel that was under renovation last year. With a robust citywide calendar in the fourth quarter, we expect to see continued strength in Chicago. In Northern California, our largest market, we achieved solid RevPAR growth of 4.6% despite ongoing renovations.

Our hotels benefited from the compression created by several large citywide events during the quarter. However, our fourth quarter results will be constrained by softer citywide calendar, continuing renovations and the impact from the ongoing labor strike.

Looking ahead, our innovative portfolio is well positioned to benefit from the record breaking citywide calendar next year. In New York, our hotels generated flat RevPAR growth. Our RevPAR was constrained by the Jewish holidays and travel disruptions from Hurricane Florence.

Despite these headwinds, our hotels increased market share by 230 basis points. Our hotels benefited from robust leisure trends, strong group production from the [ph] UNGA and an increase in the number of compression nights in the city. The fourth quarter in New York is off to a strong start with our RevPAR increasing by mid-single digits in October.

Now, in Washington DC, our hotels gained 150 basis points of market share despite our RevPAR declining by 1.6%. Our results were impacted by soft citywides and unexpected cancellations from Hurricane Florence. Although citywides are up slightly, we expect a soft fourth quarter as Congress will be in session for fewer days.

In Southern California, our RevPAR declined by 2.2% as citywide calendars were soft in both San Diego and Los Angeles and we also comped against a 12% RevPAR growth at our hotels in San Diego last year.

With citywides continuing to be soft in Los Angeles and with renovations at two hotels, we expect RevPAR in our Southern California market to be weak in the fourth quarter. Two markets that faced especially difficult comps in the third quarter were South Florida and Houston, which benefited from hurricane recovery efforts last year.

Despite this, our South Florida cluster achieved RevPAR growth of 1.3% and grew market share by a robust 370 basis points. In Houston, our hotels outperformed the overall market by 600 basis points in RevPAR, benefiting from strong citywides. However, given the extremely difficult prior year hurricane comps, our RevPAR declined by 7.2% in Houston.

With our comps continuing to be tough for the remainder of the year, we expect soft results from both of these markets in the fourth quarter. Despite very strong demand growth of 5% in Denver, our hotels were impacted by a combination of tougher comps in one of our submarkets and new supply, which resulted in our RevPAR declining by 4.1%.

In the fourth quarter the combination of weak citywides and new supply were main headwinds for our RevPAR growth in Denver.

In Austin, although our hotels in the CBD benefited from strong compression from citywides, we experienced headwinds from one hotel under major renovation, tough comps from non-repeat [ph] FEMA business and incremental pressure from new supply, which resulted in our RevPAR declining by 8.1%.

In the fourth quarter, some of these headwinds will continue and we expect this market to underperform a broader portfolio through year end. Now in Louisville.

The ongoing renovation at our largest asset, The Marriott Louisville Downtown and non-repeat project business at other hotels in the market resulted in our RevPAR declining by 17.1% during the quarter.

With ongoing renovations during the fourth quarter and comping against an 11% RevPAR growth last year, we expect weakness to persist in the fourth quarter. For 2019 however, we are encouraged by the renovation related tailwinds and the strong group pace at the Marriott Downtown.

Finally, a number of our other markets delivered solid results, such as Pittsburgh, Atlanta and Orlando, which achieved RevPAR growth of 7.6%, 6.3% and 3.2% respectively. Now moving on to asset sales. The momentum we saw in the third quarter has continued into the fourth quarter with the recent sale of Fisherman’s Wharf.

In addition to transitioning the main building to the ground lessor at the expiration of the lease, we sold the related Annex building for over $75 million, $10,000 per key, of which our pro rata share was $30.4 million.

This sale is another example of our team’s ability to unlock embedded value from dispositions as the sales proceeds we realized are nearly two times our underwritten value. As we look at the current transaction landscape, we remain encouraged by the availability of investment capital and the scarcity of high quality assets on the market.

This positive backdrop gives us the confidence that we will be able to sell our remaining non-core assets by the end of the first quarter of next year.

Thus far, the proceeds we have generated from asset sales this year have allowed us to make significant progress with respect to strengthening our balance sheet and achieving our deleveraging objectives. Going forward, as it relates to the deployment of proceeds from asset sale, we intend to remain highly disciplined.

We will take into consideration many variables in evaluating capital allocation opportunities, including current market conditions, our macro outlook, relative returns of specific investment opportunities and other relevant factors.

We will consider all options available to us to maximize shareholder value, which may include share repurchases, reinvestment opportunities within our portfolio, acquisitions and incremental debt reduction.

In summary, we made tremendous progress on our key initiatives for the year including dispositions, balance sheet optimization and realizing synergies. We have great momentum as we have not only met or exceeded all of our key objectives for 2018, but we also have achieved them ahead of a timeline we had expected.

Operationally, 2018 is a transitional year for us as we have strategically invested significant capital in markets that are poised for recovery which has created short-term disruption, but has positioned us for long-term growth. As we look to next year, we like our geographical footprint with our exposure to Northern California.

Additionally, we are encouraged by lower overall renovation headwinds next year and the removal of several headwinds that we faced this year, including Super Bowl and hurricane-related comps. Finally, while we have limited group exposure, our group-oriented hotels are primarily located in markets with more favorable citywide calendars in 2019.

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

Sean?.

Thanks, Leslie. We are pleased that our third quarter results came in ahead of our guidance which we’ve revised in October. As mentioned earlier, the third quarter was fairly noisy due to difficult comps in markets impacted by prior year hurricanes, holiday shifts and Hurricane Florence.

Additionally, we had disruption from planned renovations in our portfolio. Our third quarter RevPAR contraction of 0.8% was driven by a 1.6% decline in occupancy, partially offset by a 0.9% increase in ADR. RevPAR grew 0.4% in July, but contracted by 0.4% in August and 2.5% in September, which more than offset July’s growth.

For the year-to-date period ended September 30, RevPAR was essentially flat at 0.1% down. I’d like to provide some color on the impact of the transitory items on the quarter. First, we estimate that Hurricane Florence negatively impacted our third quarter and full year RevPAR growth by approximately 40 basis points and 10 basis points respectively.

Our hotels in Charleston and Myrtle Beach were subject to mandatory evacuations leading up to enduring the hurricane and access to Myrtle Beach was limited for several weeks following the storm.

We were expecting significant RevPar growth in September due to record group bookings in Myrtle Beach and prior year hurricanes hitting Charleston, which magnified the disruption. Second, our portfolio faced top comps tied to hurricane-induced demand in September, most significantly in Houston.

Third, the shifting of July 4 and the Jewish holidays impacted our performance. Despite the choppy a top-line environment, our cost control initiatives exceeded our expectations, while portfolio generated a solid EBITDA margin of 32.3% during the third quarter which contracted a 183 basis points from the prior year.

Total operating cost increased just 2.4%, a testament to our asset management team and the cost containment initiatives in place across our portfolio. While we are very pleased with our ability to control operating costs, property taxes increased 5.7% and the impact of California’s top 13 adjustments impacted margins by 36 basis points.

It is also important to note that we held our labor and benefits expenses increased to 3.3%. We were pleased with this result due to the well documented labor environment driven by low unemployment levels.

Rising inflation should continue to pressure labor costs, which we expect to increase in the 3% to 4% range moving forward, further pressuring margins. Turning to the bottom-line, hotel EBITDA for the third quarter was a $140 million, which exceeded the high end of our revised guidance range.

Our early October update assumed approximately $3 million of Hurricane Florence related revenue displacement and approximately $5 million of EBITDA impact. The primary driver of the EBITDA beat was a success of our cost controls at the Hurricane Florence impacted properties in Myrtle Beach and Charleston.

Finally, we reported adjusted EBITDA of approximately a $133 million, which exceeded the high end of our revised guidance and adjusted FFO of $0.58 per share. Moving on to our balance sheet. We ended the quarter with $2.3 billion of debt, over $400 million in unrestricted cash and net debt-to-EBITDA of 3.5 times, which is below our target of 4 times.

Subsequent to quarter end, we paid down the $85 million mortgage tied to the Knickerbocker Hotel with existing corporate cash. In total, we have now paid down $635 million in debt this year. The annual interest expense savings from the Knickerbocker pay-off is over $4 million.

Our balance sheet is well positioned with no significant debt maturities until 2021, approximately 88% of fixed rate debt with a weighted average interest rate of 4.1% and a weighted average maturity of 4.3 years.

Additionally, we have a 132 unencumbered assets, representing over 85% of our hotel EBITDA, affording us a very flexible balance sheet that will support long-term growth. Additionally, while future dividends are subject to board approval, our dividend remains well covered. Our capital program is set up to position the portfolio for sustained growth.

Our 2018 renovation plan for a $130 million to a $140 million of owned or funded CapEx remains on schedule and on budget. We estimate that RevPAR disruption in the third quarter was approximately 75 basis points, which was in line with our expectations. We continue to expect approximately a 100 basis points of disruptions for the full year.

As a reminder, most of this year’s CapEx spend is focused on markets poised for recovery in 2019 and beyond.

We are updating our full year outlook to incorporate our third quarter results, including the impact from Hurricane Florence, asset sales including $4 million of pro forma hotel EBITDA related to the removal of the Holiday Inn Fisherman’s Wharf, recent trends in Denver, Austin and Louisville, and finally, risks associated with the ongoing labor strike in San Francisco.

Additionally, we narrowed our ranges to reflect only one quarter remaining in the year. We now expect RevPAR growth of negative 1.25% to negative 0.5%, 113 basis points below the midpoint of prior guidance. Consolidated hotel EBITDA of $537 million to $547 million, which is $4.5 million below the midpoint of prior implied guidance.

And adjusted EBITDA of $518 million to $528 million, which is generally in line with the midpoint of prior implied guidance. We are encouraged that we were able to preserve adjusted EBITDA despite the reduction of RevPAR expectations due to the successful cost containment initiatives.

Although we are not revising prior margin guidance, we are currently trending towards the high end of our range. In conclusion, we feel very good about how our portfolio is positioned for 2019 and beyond. And we’ll continue to focus our portfolio strategy on driving long-term growth moving forward. Thank you. And this concludes our prepared remarks.

We will now open up the lines for Q&A..

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please proceed with your question..

Hi. Good morning, everyone. First, you’ve had some success selling assets, and Leslie you clearly talked about there is still more work to be done on the non-core asset sales.

But I’m curious how now capital allocation priorities may have changed now that you’ve exceeded your target for debt repayment as well as leverage and given the move in the stock price as of late?.

Hey, good morning, Austin. Just as a reminder, we did lay out a thoughtful plan to strengthen our balance sheet by paying down our debt by $500 million and we just achieved that this quarter. Maintaining our leverage gives us tremendous optionality relative to capital allocation opportunities.

As we look forward, Austin, we want to make sure that as we deploy capital we’re doing it in a way that creates durable and recurring benefits. And we want to make sure that we’re driving not only operating metrics, but we’re also driving NAV appreciation over time.

We’re going to thoughtful as we look forward about looking at all the options that are available to us including buying back stock, investing in our portfolio and also possibly paying down incremental debt. None of these options are mutually exclusive. When looking at sort of buying back debt, it’s a great tool to return capital to shareholders.

We have capacity under our program. We want to do it on a debt neutral basis. And you are right, given the pull back in the stock, it’s more attractive today.

Having said that, as we look at our portfolio today and given the recent acquisitions we’ve done, we have tremendous embedded value in our portfolio where we have ROI projects, we have conversion opportunities, we have pure real estate plays as well.

Additionally, when we look at our capital stack, we have some prefers and we have some bonds that are trading at high coupons which we could pay down accretively as well. So, we’ll look at all of those options Austin as we get more acquisition proceeds, I’m sorry, disposition proceeds.

Our disposition pipeline remained strong and we’re pacing towards selling the remaining assets by the end of the first quarter. But our balance sheet is strong and it gives us optionality relative to all of those options..

Thanks, Leslie. I appreciate the commentary there. And then second one just on Louisville. It’s been a market we spent a good bit of talking about heading into 2019, but you guys flagged some incremental softness this quarter.

And I wish -- I was hoping you could give some additional details as to what you’re seeing on the ground and if that’s any way change your outlook into 2019?.

Well, it has not changed our outlook into 2019, but I’ll tell you that third quarter was obviously impacted by the renovation of one Marriott Louisville, which is one of our largest assets.

We also saw -- we had some really good production from the Ford business last year and some of our non-CBD assets and we weren’t able to replace that business this year because of the incremental supply that we saw in the market, I mean that’s what happened in third quarter.

In the fourth quarter, Louisville is going to be comping against a very big 11% that we were up last year and we’re going to continue to have our renovation of the Marriott Louisville. And so -- and citywides are down as well.

So, overall, when we look at the combination of comping against up being 11% last year, soft citywides, continued renovation and the incremental supply in the market, we think all of those things are going to make Louisville soft for the fourth quarter.

Having said that, we still feel very good about Louisville in 2019 given the renovation tailwind, as well as we’re seeing strong in-house group picking up for us in Louisville, and Tom will give you some more color on it as well..

Yes. Austin, to bolt on to what Leslie said, with the convention center opening up in August, they added 50,000 square feet of additional space which is basically a 6% increase and really enhances the exhibit hall there.

What we’re looking at for them is about 112 events that are contracted through 2024 and 84 conventions are going to give us an estimated about $250 million economic impact. And what we’re seeing on the ground is new groups coming to Louisville that have not been there before.

We got a variety of different association groups from college admissions, college teacher education and a variety of guests associations as well with utility commissions and Southern Gas. So, we’re encouraged based on our group pace at the hotel as well as the citywide starting to ramp up.

We’re indicating that we’re going to be up about 18,000 rooms year-over-year which is pretty significant 2019 to 2018. Now mind you we were under renovation so we should expect those numbers to be significant, but we’re also pacing really nicely to the last two years.

We’re seeing that our ADRs are going to be up and we’re encouraged based on what’s going on in Downtown Louisville. So, with our 2019 footprint with Marriott Louisville should give us the positive move that we’re looking for based on our renovations that we’ve set up..

Thanks. That’s helpful. And then just last one.

Would you care to provide RevPAR growth for October?.

Yes. I mean obviously, Austin our guidance implies that the fourth quarter will be negative and I would say that October is looking at being down low-single digits which is consistent with the implied guidance..

Great. Thank you, guys..

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

Good morning, everyone.

First on the Fisherman’s Wharf sale, can you kind of explain the structure there and the difference between the gross and net proceeds and then what ultimately will hit your cash balance when we see the numbers come out at year end?.

Sure, Michael. This is Sean. So, the $75 million was the gross sales price for the Annex building which was 243 rooms. The other building on Columbus, the ground lease expired and we are -- and that got transferred back to the ground lessor. The $75 million it was the gross proceeds, the net was a little over $30 million.

The difference between those two was a portion of the proceeds was used to buy the ground lessor out under the Annex building. So, the 2018 multiple that we quoted and three tenant room is based on the allocated portion of the EBITDA related to the 243 rooms and adjusted for the ground lease..

Okay. That’s helpful. And then just back to the capital allocation conversation. What are you seeing on the pricing side for potential acquisitions and maybe put that on its head based on also what you’ve seen as you’ve been selling hotels too.

What are the signals that you are looking for specifically on the macro front to help you determine whether you should be buying hotels, buying your stock back deleveraging further? What are you keying up over the next three to six months as you complete your remaining asset sales and decide what to do next on the capital allocation front?.

Yes. Michael thanks for the question. I would say, just I want to remind you that we just did a major acquisition. We acquired 37 assets and we’ve obviously been talking about the assets that we have sold, but we’re most excited about the assets that we’re keeping.

And so, I would say rather than kind of focusing on buying incremental assets, which is obviously always an option for us really focus on harvesting the value that’s in our portfolio. As I mentioned before we have ROI projects that are embedded in the portfolio associated with the reimaging of the Embassy Suites.

We have conversion opportunities to up ran a few of the hotels. We also have some real estate place. So, I would say that’s really sort of the alternative for us as we focus where our focus is today.

Clearly, when you’re looking buying back stock like we’re looking at making sure that there is a meaningful discount, making sure that we understand what the next -- is there next leg to drop in the sector relative to where the stock is trading at. And so, there is a variety of factors that are associated with that.

But again, what I would say to you is that it’s not mutually exclusive. Given the strength of our balance sheet, given the strength of our pipeline, there is nothing that says we can’t do both..

Thank you. That’s all for me..

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

Hey, good morning, everyone.

Wanted to ask if maybe we can get your outlook on supply growth and your market for 2019 and if you maybe have a forecast for 2020?.

Yes. What I would say is that we are looking at about 3% supply growth for 2018. And given the sort of delays in starts and finishes is really a blur between 2018 and 2019 and beyond. What I would say is that we expect 2019 to be of a similar trajectory as 2018 in terms of overall, for overall portfolio.

Clearly there are some headwinds that are building up relative to supply relative to material cost and labor cost which is helpful in terms of bringing down new supply. But the reality of it is given the delays in starts and finishes being able to kind of look out on a market by market basis becomes challenging.

What I would say to you is that there are five markets that are going to be generally in line with the overall market; DC, Northern California, Southern California, Chicago and South Florida. Where we’re having the most supply impact is Louisville and Austin and where those markets are elevated this year and they’ll continue to be elevated next year.

They are on a downward trajectory..

Okay. That’s helpful. And then just kind of a follow up on that, agree that some of the materials cost pressures in labor are probably going to help constrain supply going out.

Does that also -- does that impact you when you think about the renovation and some of the repositioning you’re talking about is that a major impact or do you think you can mitigate through that?.

Yes. Clearly, the incremental cost around materials and labors is affecting us as well. What we’ve tried to do is lock-in our labor as early as possible as we know what our renovation program is. And clearly, given the sort of trade wars we’re also seeing incremental increase in materials around FF&A in particular.

And we are trying to manage around that as best as we can in light of the current circumstances..

And Chris, to add on to Leslie’s commentary, one of the key attributes of the FelCor acquisition was a lot of the embedded growth within that portfolio and that was critical to how we thought about the deal.

And so, when we look at allocating capital towards internal growth, we clearly factor in the incremental cost and the risks of tariffs and labor shortages et cetera. But we still feel there is compelling internal growth opportunities within that portfolio, as well as within our legacy portfolio as well.

So, we’re pretty bullish on our ability to create value..

Okay, very helpful. Thanks..

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

Thank you everybody for joining us on the call today. We hope to see many of you at NAREIT to the extent that you have availability on Friday, we are conducting property tours. Please reach out to us if you’re interested in joining us. Thank you everybody..

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