RLJ Lodging Trust (RLJ) 2011 Q2 法說會逐字稿

Greetings, and welcome to the RLJ Lodging Trust Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Hilda Delgado, Investor Relations. Thank you, Ms. Delgado, you may begin.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust Second Quarter Earnings Call. This morning, Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. And Leslie Hale, Treasurer and Chief Financial Officer, will discuss the Company's financial results. Ross Bierkan, Executive Vice President and Chief Investment Officer, will be available after our prepared remarks to answer questions.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that can cause 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 prospectus, 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 reconciliation to GAAP, located in our press release or 10-Q.

I will now turn the call over to Tom.

Thank you, Hilda. Good morning, and welcome to our first earnings call. I am thrilled and honored to be here this morning. Before we get into this quarter's highlights, I want to briefly share with you a little bit of our history. I am proud to say that over the last decade we have assembled a strong management team with core competencies that span from underwriting, asset management, design and construction, and acquisitions.

The second quarter marked an important milestone in RLJ's evolution, as we completed our IPO on May 16. We decided to take the Company public, not only because it was a natural progression for us, but because we are passionate about this business and we see greater opportunities.

We have a disciplined investment strategy that we launched nearly 12 years ago. That strategy is what we are executing today and it is a strategy that we will continue to execute going forward. In short, we aspire to be the aggregator in this space, targeting upscale, focused service and compact full service hotels in urban and dense suburban markets.

From an external growth perspective, this strategy is advantageous to us as we benefit from both a large universe of acquisition targets and a smaller universe of public competitors. From an organic growth perspective, the focused service and compact full service hotels that we own generate strong RevPAR and have a leaner operating structure.

Our RevPAR is comparable to traditional full service hotels, yet our operating model is more efficient. We derive the majority of our revenues from rooms as we utilize fewer food and beverage outlets and have less meeting space. As a result, our hotels require fewer employees and lower costs to operate and contribute to our ability to produce higher EBITDA margins. Our 140-hotel portfolio in 19 states and the District of Columbia has significant opportunity to outperform as we move through the next cycle.

We have high quality, institutional-grade assets in key urban and dense suburban markets. These markets have higher barriers to entry and multiple demand generators. Our urban markets alone represent approximately 54% of our EBITDA this quarter. Also, our portfolio primarily consists of premium brands such as Marriott, Hilton, Hyatt that generate RevPAR premiums over their competitors.

The opportunity to drive further value will come from a recovery of operating performance to historical levels. Our peak RevPAR for the 89 hotels that we have owned since 2006 was $85.00 in 2007, providing us further room to grow given where we are today. As we continue to execute our investment strategy and strengthen the mix of assets in our portfolio, we expect to capture additional rate growth and see a meaningful cash flow benefit.

So, through a combination of growth as an industry consolidator and the embedded growth in our 20,000 plus room hotel portfolio, RLJ is well positioned to outperform. Furthermore, we have confidence in pursuing our strategy as we are supported by our strong balance sheet. With more than $533 million raised from our IPO, we paid down existing debt, strengthened our balance sheet, and reduced our net debt to EBITDA to five times.

I have been through various cycles, and I strongly believe that a low levered company provides a meaningful advantage and is compatible with our long-term strategy to ultimately become investment grade.

If I step back and look at the overall economy, the second quarter remained volatile and political tensions continued on both the domestic and the international fronts. While each market has its own specific demand generators, GDP growth and general macroeconomic conditions are key drivers of the lodging industry.

We continue to see mixed messages coming from several economic indicators. Consumer confidence and spending recently declined; however, we continue to see strong corporate profits and a continued increase in business travel. Unemployment as of July remained high at 9.1%, but is still an improvement from the peak of 10.1% in October 2009.

Going into the second half, we will likely continue to face macro headwinds; however, positive lodging fundamentals remain and the new supply picture is constrained. With an annual average of less than 1% in new supply expected now through 2013, new supply is considerably below its historical average. While news reports of the economy experiencing a slower growth rate is a concern for investors, we remain optimistic that we are in a multi-year recovery in lodging demand.

During the second quarter, the US RevPAR increased an estimated 8.1% with rate up 3.5% and occupancy up 4.5%. If we use Marriott's RevPAR growth for the limited service segment as a benchmark, our portfolio outperformed their 7.2% growth. And if we look further into what Smith Travel reported for RevPAR growth in the upscale and upper midscale, which are most representative of our portfolio, RevPAR growth of 7.8% and 8.7%, respectively, shows strong momentum, but still trail our outsize quarterly performance.

Again, as I mentioned earlier, one of our key core competencies is asset management. During the second quarter, our team was able to outperform the industry, delivering strong RevPAR and hotel EBITDA margin growth. Our portfolio RevPAR penetration this quarter grew 2.2% to 113.7 and resulted in solid pro forma RevPAR growth.

For our 139 assets, pro forma RevPAR increased a strong 9.8% over 2010, driven through a 5.4% ADR increase and a 4.2% occupancy increase. Consolidated pro forma EBITDA margins for our 139 hotels was 36.1% in the second quarter, an increase of 222 basis points over last year. This impressive growth was a combination of our business model, which focuses on room revenue and operating on a lean platform and our asset management teams' dedication to controlling costs and implementing revenue-enhancing strategies.

Given our increased presence in strong urban markets, we anticipate that our annual 35% peak margins from 2007 will be surpassed in the coming quarters. We saw stellar performance in some of our urban markets this quarter. And year to date, we've only seen RevPAR decline in one of our 19 markets.

Let me share some of the highlights in our top markets. Leading the way this quarter was our New York market, where we own four assets and benefited from its contribution of approximately 19% of our hotel EBITDA this quarter. RevPAR growth in this market increased almost 22% over prior year, primarily driven through ADR, which increased almost 15%.

We saw a big push in transient business as corporate and mid-week transient demand appear to have returned to their 2008 levels. Also, a strong turnout for several city-wide events helped drive compression in the city.

Earlier this year, we also successfully converted our Fashion 26 Hotel, originally a Wyndham hotel, to the Hilton Fashion District. This conversion is already exceeding expectations and should generate a 10% cap rate and a nine times multiple during our first year of ownership.

In Austin, where we own 17 assets that make up 10% of our EBITDA, our RevPAR grew 11.6%. Austin continues to outperform, and with strong macro drivers in its favor, we expect that Austin is well positioned for considerable upside.

The demand drivers in Austin include a large presence in technology and higher education and its significance as a state capitol. Austin also has a relatively low unemployment rate and should continue to generate significant demand growth.

Chicago, where we own 21 assets comprising 12% of our EBITDA, we saw RevPAR grow 5.6% and was entirely driven by ADR. This summer, we haven't seen the level of transient and group corporate demand that we generally experience.

Although level of city-wide conventions was down in the second quarter and will be down again in the third, we managed to post a second quarter increase. Chicago will have some high profile conventions coming its way in 2012, and we should see significant RevPAR growth.

In Denver, where we own 15 assets and derive 10% of our EBITDA, our RevPAR grew 7.8% through a combination of ADR and occupancy growth. The Denver market continues to show steady growth, although the strength in the market is heavily driven by our North Denver hotels because of its stronger presence in tech, corporate group, and an increase in overall weekend business.

And last but not least, our Washington, DC/Baltimore market. Although we saw ADR increase almost 4%, less pickup in city-wide conventions, a lighter Congressional calendar, and a general slowdown in government demand, led to a 2% drop in occupancy.

We expect our hotels to post better results in the second half of the year, thanks to a successful conversion of our Red Roof Inn to a Fairfield Inn & Suites in downtown DC. We invested approximately $7 million in less than 90 days to transform this hotel in the heart of Chinatown. We fully expect this hotel to generate returns in excess of our underwriting.

Focusing on acquisitions, in 2010 and early 2011, we purchased 24 assets for approximately $1 billion. In the second quarter, these acquisitions made up 32% of our hotel EBITDA with the RevPAR increasing 12.9%. We expect that these assets will continue to show strong gains as our asset management team implements our investment strategy and completes repositioning each property as underwritten.

Looking forward, we anticipate completing approximately $400 million of acquisitions over the next 12 to 18 months. We have an active deal pipeline, much of which has come through our industry relationships in the form of off-market and/or limited bid transactions.

Our attention remains focused on buying hotels in the top 30 markets with a biased towards the coastal markets. We will continue to be selective and follow our disciplined investment strategy and pursue deals that are compliant with our strategy, are accretive, and drive shareholder value. We have a track record of completing attractive acquisitions. And with approximately $0.5 billion in dry powder, we expect to remain active in pursuing high-yielding investments.

Before I wrap up, I want to stress how excited we are about 2011 and continuing to build RLJ into a leader into the lodging industry. We expect our lodging fundamentals will continue to strengthen. And with a solid management team in place, a strong track record, and a stellar balance sheet, we are well positioned to outperform.

With our history of making accretive acquisitions and our desire to become our segment's aggregator, RLJ is a company that will work hard to earn your confidence and create meaningful value for shareholders in the coming years.

With all that said, I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter and our outlook for the remainder of the year.

Thanks, Tom, and good morning, everyone. Looking at the quarter, our adjusted EBITDA increased $26.4 million to $69.5 million, representing a 61.2% increase over 2010. Year-to-date, our adjusted EBITDA increased $45.7 million to $115.6 million, representing a 63.1% increase. The Marriott LaGuardia Hotel, which will be reflected in discontinued operations beginning in the third quarter, contributed $1 million and $1.2 million for the respective periods.

Adjusted FFO for the quarter was $45.4 million, compared to $19.6 million in 2010. On a per share basis, adjusted FFO for the quarter was $0.42 per share, if you calculate it using the total number of shares outstanding at quarter end. Year-to-date, adjusted FFO was $65.4 million, compared to $25.4 million in 2010. The Marriott LaGuardia Hotel contributed approximately $800,000, both for this quarter and the year-to-date period.

Both adjusted EBITDA and adjusted FFO reflect add-back to normalize our G&A expense, and a reconciliation to EBITDA and FFO is in last night's press release. Adjustments worth noting in the second quarter include $10.2 million of expenses associated with our recent IPO, and $581,000 associated with non-recurrent expenses from our predecessor.

We also have some additional add-backs for this quarter that specifically affect our interest expense. We added back to adjusted FFO $2.9 million to reflect non-recurring prepayment fees. And of the $2.5 million in deferred financing we incurred this quarter, we added back $1.4 million to account for accelerated deferred financing. Both of these interest expense adjustments were a direct result of debt retired during the quarter.

As I move over to our balance sheet, I want to reiterate our intent to keep a simple, clean, and low-levered capital structure. With the proceeds from our IPO, we paid off $473 million in debt and other related expenses for transactions. The debt that we paid down had mid-term maturities, and as a result, over 80% of our remaining debt now matures in 2015 and beyond. Our recent debt paydowns also increased the number of unencumbered assets we have to a total of 44, and these assets represent about a third of our EBITDA.

On the horizon, we have [$149] loan expiring this year. This loan has two extension options that permit us to extend the maturity date to September 2012; however, we intend to refinance this loan later this year through the placement of first mortgage debt of approximately four to five assets.

As we look forward, we will have the ability to place first mortgage debt on existing or new assets and increase our purchasing power. However, we are ultimately striving to achieve investment grade; therefore, we will govern ourselves toward having a low leverage ratio of five times or better. I'm pleased to say that our current net debt to EBITDA of five times is one of the lowest in our sector.

Our balance sheet currently has ample liquidity for various capital outlays. This quarter, we closed on a new credit facility. We received favorable terms on our lines, reinforcing the support we have from our banking relationships and providing us with the flexibility necessary to execute our growth strategy.

The credit facility bears interest at a rate of LIBOR plus 225 basis points and 325 basis points, depending on our total leverage. This is a three year, $300 million unsecured facility, and it features an accordion option to upsize the facility to $450 million. We anticipate using the facility primarily for acquisitions. We expect that the credit facility, which currently has no outstanding balance, coupled with our existing cash on hand, will provide us with $400 million to $500 million in purchasing power.

Our current cash from operations supports our strategy to distribute quarterly dividends. This quarter, we declared our first dividend. We expect that our dividend rate will continue to be $0.15 per share; however, the final declaration of a dividend will continue to remain at the discretion of our Board. Overall, we expect to maintain a payout ratio of approximately 50% to 55% of adjusted FFO.

Turning to capital expenditures. In 2011, we released renovation projects totaling $115 million spread across 51 properties. Our 2011 capital program is largely focused on upgrading and/or repositioning 24 hotels acquired in 2010 and 2011, which includes seven brand conversions. The balance of our renovations will include brand-related upgrades at other select hotels.

A total of $11 million was spent in the first quarter of 2011 on five hotels, two of which were conversion projects. And as Tom mentioned earlier in his remarks, the two that were converted were the Red Roof Inn in Washington, DC to a Fairfield Inn & Suites, and a Wyndham hotel in New York was converted to the Hilton New York Fashion District.

An incremental $32 million of upgrades for an additional five hotels were initiated during the second quarter. We anticipate that the remaining 41 hotels will begin their upgrades in the second half of the year, with most of this work to be expected to take place in the fourth quarter when demand is seasonally slower.

We estimate that approximately $2 million to $3 million of revenue will be displaced during the second half of the year, and will largely be concentrated in seven hotels. Relative to our total revenue, this displacement will represent less than 0.005% and equate to approximately 40 basis points in RevPAR for the year.

In general, we take a methodical approach to scheduling work in order to minimize disruption. Our in-house team of experts has a deep experience in conversions and major renovations needed to ensure that our 2011 capital program is a success. Our 2011 outlook presented in our press release already reflects this displacement, and we anticipate that our investment should derive a meaningful rate lift upon completion.

Before I get to our outlook, I want to provide a brief update on the Marriott LaGuardia Hotel. Over 18 months ago, our executive team decided that keeping the hotel was no longer in line with our interests. Earlier this year, we reached an agreement with Capmark Financial to place a fully negotiated deed in lieu contract into escrow, and that agreement required Capmark Financial to take possession of the hotel no later than September 15 of this year.

This past Friday on August 5, the deed in lieu contract was executed and the hotel was transferred to Capmark Financial. While actual results for the three and six month periods ending June 30, 2011 include the Marriott LaGuardia Hotel, the overall impact so far has been cash neutral since we cease to receive distributions from the property, stopped subsidizing its performance, as well as stopped making debt service payments. As a result of this transfer, we began reporting the hotel's financial results under discontinued operations in the third quarter.

Finally, as we look at the rest of the year, we are seeing positive momentum continue in most of our urban markets, like Austin and New York. While we can't control the economy, we anticipate that our various asset management initiatives and capital projects will help drive RevPAR growth of 7% to 9% for the year. We expect that ADR will continue to drive most of this growth and will flow through in the form of higher EBITDA margins year-over-year.

With a strong balance sheet and ample cash, we will have sufficient capital to fund new acquisitions through early next year. And even though we have an active pipeline, we don't currently anticipate closing on any new acquisitions prior to the fourth quarter. As a result, our outlook assumes no acquisitions or dispositions other than removing the Marriott LaGuardia. Please refer to the press release from last night for additional guidance.

Thank you, and this concludes our formal remarks. We will now open the lines for Q&A. Operator?

Thank you.

(Operator Instructions)

Our first question today comes from the line of Jeff Donnelly with Wells Fargo. Please proceed with your question.

Good morning, folks, and welcome to the fold. I guess I'd say I wish your first quarter being public was probably a little bit better than you were hoping.

My first question, Tom, is that like most hotel REITs, though, your shares are off a bit since its IPO. Could that make you think about maybe accelerating some asset sales that are in the non-core markets like Indiana -- that you would maybe use the proceeds to repurchase shares? I guess the rationale being that maybe there's an arbitrage -- another way to arbitrage the gap in valuation between the property markets and securities markets.

Jeff, good morning, and we're certainly thrilled to be part of the fold now. We are pleased, obviously, with the second quarter performance. And regarding your question, I would say on the opportunity of repurchasing shares, it's certainly something that we're going to look at. It's not something that we've really discussed with our board at this time. It is something that we'll continue to evaluate.

You are aware, and I think some of the investors are aware, that we do have 20 assets that represent about 10% of our rooms and about 5% of our EBITDA that are in slower growth markets. Some of those assets are crossed, but we will be looking at opportunities to slowly dispose of those over time.

I don't think that's something that we would implement here in the next quarter or two, just given those debt crossing issues, but we are going to continue to evaluate that over the next year or so.

And I'm not sure how much of the cash that you finished the quarter with you're holding for some of the renovation work, but it strikes me that you certainly do have probably a good chunk of that available to you to repurchase shares. Not to dwell on the point, but do you think that's something you'd consider bringing to the Board at this point, or is it --?

It is something that we certainly plan to discuss with our Board. You don't want to overreact given what's happening in the macroeconomic climate right now. And we've seen people who have timed the market correctly; others haven't. So, we certainly want to be prudent. We do have an active deal pipeline and we do think that there are going to be some accretive deals out there.

Just one last question is -- most of your peers are predominantly full service owners, so you could argue there's a preponderance of advanced bookings from groups that aides their forward visibility, though, I would say overall in lodging it is tough. RLJ is obviously a bit different with more exposure in select service.

So, in an industry with limited visibility, is it fair to say that you guys maybe have a little less? And what keeps you confident about the pace of revenue growth in the coming [months]?

I would say a couple of things, Jeff. We have an all-weather strategy. If you look, we've been talking about this for some time. The real benefit of our strategy is that in good times we can tuck our portfolio under the full service hotels and will generate RevPARs that are close to or exceeding full service hotels, but we'll have a much leaner operating structure and higher margins.

And then, if things do soften, and ultimately they will soften because we're in a cyclical business, what we'll find is that we're not going to fall as far. And if you look at our portfolio and how we've performed so far, our compact full service hotels were up 14.5%, obviously, in the second quarter and our focused service hotels were up 8.5%.

So, we think that our strategy is really the best way to play lodging. If things continue to move sequentially in a positive forecast as we certainly hope and predict, we're going to be well positioned. And if things do soften, we're going to be better positioned because we're not going to fall as far.

The best example I can give to you is in 2009. It was an incredibly difficult period for all of us. We fell about 19% in revenue, like many of our peers, but we only fell about 29% in net operating income.

So, we're passionate about the strategy. We believe it's the right way to play. And again, if you can have operations that are essentially rooms-focused without all of the ancillary services, without all the meeting space, without all the F&B, you can generate higher margins; ultimately, you're going to have a higher return on your invested capital.

That's been our strategy since we launched nearly 12 years ago, and that's really going to continue to be our strategy moving forward.

Great, that's helpful. Thank you.

Thank you. Ladies and gentlemen, our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Good morning, guys. You talked a little bit about --

Michael, how are you?

Can't complain.

Good.

It's an up market today, so --. You talked a little bit about acquisition -- the acquisition pipeline. Can you give us a sense of what you're looking specifically for? Is it more market-focused or opportunistic-focused?

Also, if you look at the acquisitions you did in 2010 and early 2011, there's definitely a bias towards value-add as opposed to -- or is it just basically just a bias towards value-add-type properties, conversion-type properties? Should we expect that to kind of be the focus still going forward as well?

Yes. I think, Mike, a couple of things. If you look at our acquisitions we did last year -- and again, last year and the first part of this year, although most of those were sort of incubated in 2010, we had 24 assets for about $1 billion. 15 closed in 2010, nine of those in the first quarter of 2011, seven of those were conversions.

We think one of the real benefits of our portfolio and our scale is that we can take on some of those value-added projects. We can look at deeper terms and some really opportunistic conversions that can generate outsized returns.

I would cite for you in our current portfolio we've already completed two of those conversions. Obviously, the Fairfield Inn in DC that we are thrilled with and, obviously, the Fashion District in Manhattan that is already showing, again, outsized performance. We're very pleased with both.

We do have five others, three of which were released in the second quarter. We've got two more that will be released in the second half of the year. But those five hotels are providing only about $2.5 million to $3 million in EBITDA right now in 2011. We fully expect that they're going to generate two-and-a-half to three times that in the first year after renovation, next year in 2012. So, we think the size of our operation gives us an embedded advantage over many of our peers.

In terms of markets, we've stated that really it's top 30 markets. We do have a bias for coastal markets. There are some natural pockets where we're not represented, clearly, up in Boston and the Northeast. Out West, we think there's some opportunities. But again, we're always going to be focused on our bottoms-up underwriting and finding deals that are compliant with our strategy, that generate our return thresholds, and that ultimately are going to be accretive.

Also, given the fact that we haven't acquired a lot of assets in the second quarter, and [unlike] many of our peers, we think also think that we have a slight advantage now because we're sitting on tremendous liquidity. We've got an undrawn credit facility.

We have a natural competitive advantage because most of our peers, our REIT peers, aren't focused on this combination of focused service and compact full service, so that gives us an opportunity as we look for opportunities this year and next year.

That's helpful. Second of all, [you then] talk about a couple of convention hotels in the Austin market. Can you talk about your long-term thoughts on that market, whether (inaudible) you may have to trim a little bit of exposure?

Austin has surprisingly -- it's been a great market for us, and I'm surprised at how well it's performed this year. But when you look at the makeup of that market, obviously it's pro-business, it's a state capitol, it's a university town.

And if you look at the limited job growth that we've seen in this country, I believe 38% to 40% of that has really come out of Texas and I think a good portion of that has really come out of the Austin market. It also has a great presence in technology. So when you look at our diversity of product and across it, almost all of our hotels in that submarket did incredibly well.

We are watching the talk of two convention center hotels. Obviously, these are being represented and led by two seasoned groups and two well capitalized groups, particularly White Lodging, who we know very well. Keep in mind that that supply probably won't happen. If it does happen, [until] probably 2014, so we think there's going to be a lot of running room for us the next few years in that market.

So, we're very bullish on Austin. It's been a great performer for us. We are naturally going to be looking at any sort of recycling programs; we're not going to be shy about that. And if we find that a market that we think we're over-represented or that there were slower growth submarkets within that market, we'll look to lighten the load. We won't hesitate to do that.

Okay. Then finally, Leslie, not to leave you out, I think you talked about some financings for the second half of the year, to take out the term loan there. Can you just give us a sense in terms of pricing LTVs on those?

Sure. We're still in the process right now of just sort of getting our term sheets, and so we don't have anything locked down, but I think in general we're going to continue to maintain low leverage. What we could get in the market relative to what we're asking for is substantially low. And I think that pricing in the first mortgage on-balance sheet market is still available, unlike the CMBS market, which we're not very attractive to right now, obviously.

So, I would say that we're seeing sort of spreads in the LIBOR plus 400, 450 range on the floating rate side, and LTVs are sort of anywhere from 60% to 65%.

That's encouraging. Thanks.

Thank you. Ladies and gentlemen, our next question comes from the line of Sule Sauvigne with Barclays Capital. Please proceed with your question.

Good morning, everyone. First --.

Good morning.

Hi. I did want to offer my congratulations on all you've accomplished so far this year.

Thank you. Thank you. The team has been working hard.

Yes. Based on your strong RevPAR performance in the second quarter and the reiteration of your prior RevPAR guidance, it seems like you do expect a slight deceleration in the second half? And I'm just wondering, is that consistent with what you were expecting when you initially provided your RevPAR guidance earlier in the year, or are you being conservative in light of the mixed economic data that you alluded to?

Clearly, being conservative and we do have some tougher comps in the second half of the year. If you look at our first half, obviously we had a strong performance with RevPAR being up 8.6%. And if you look at our guidance, I believe in order for us to hit the low end we've got to be about 5.4%, in the midpoint about 7.4%.

We're still encouraged. Again, 80% to 85% of our business is really on the transient side. We've got very little group business. Corporate profits are up. We're still seeing strong business travel. And, of course, there's little or no supply growth. So, we're encouraged.

I would also say that there's no evidence of a slowdown at this time across our portfolio, and we do have a diversified portfolio. Obviously, 20,000 plus rooms in 19 states and the District of Columbia. We are, like everyone, we're watching the macro headwinds and the global concerns and we'll adjust to the extent conditions change. But at this point, we really are seeing no evidence of a slowdown.

Okay. Thank you. And along those lines, Leslie, you mentioned that your outlook assumes no further acquisitions this year. And I'm also wondering, has the recent macro headlines and uncertainty given you guys a reason to be less aggressive on acquisitions in the near-term, maybe to preserve liquidity, or is it just a matter of timing of closings?

I think that for the first part, Sule, we think that -- we do intend, or do anticipate that we will have some acquisitions, actually, in the fourth quarter.

Okay.

But those are sort of a timing as it relates to the initial part of the question. And can you repeat the latter half of your question?

I was just saying given the economic uncertainty and the headlines, while you're not seeing it in portfolio now, would that make you maybe be less aggressive on acquisitions in order to preserve liquidity, given that you are conservative?

Yes, it's a fair question. We're going to be disciplined. We're going to continue to look for attractive opportunities. We currently have an active pipeline, although we don't have anything under contract at this time.

I would say that we don't want to bury our head in the sand. If we look at our history, some of the best deals we did were post-911 in that 2001, 2002, 2003, all the way through 2005, where we were pretty active acquirers when there was a lot of uncertainty, particularly in '01 and '02. We were able to sell those hotels many years later for four and five and six times cash equity multiples. And in 2010, again, we were quite opportunistic.

So, we're going to continue with our strategy to be careful, to be prudent. We don't feel the need to reach for any deal. If we can find assets that are compliant, that fit holes in terms of locations where we're like to be, and it's [bull's-eye] real estate, we clearly would continue to proceed with it.

But we're also going to be mindful of the fact that having liquidity and having a low-levered balance sheet is a fundamental tenet and is something that I think you know and I've communicated consistently we'll not deviate from. That is a passionate tenet for us. We know what happens if you're over-levered, and we don't want to get to that point again.

Okay. Wonderful. Thank you.

Okay.

Thank you. Our next question comes from the line of Dennis Forst with KeyBanc Capital Markets. Please proceed with your question.

Thank you very much. Good morning, all.

Good morning, Dennis. How are you?

Good, thank you. Tom, I wanted to try and understand the lack of acquisitions the last couple of quarters. Was that something that was a conscious decision? Take care of the IPO. You made a lot of acquisitions in the first quarter and take some breathing room, or did nothing good come up? What were you thinking, and what is the thinking going forward?

Keep in mind that, as I mentioned, we did 24 deals when you look at the balance of 2010, and nine of those spilled --.

Right.

-- into the first quarter of 2011. So, we were very active. We also had a quiet period as we were working through the IPO, so we were precluded and obviously didn't complete the IPO until May 16.

We've never shut down the deal shop. Ross Bierkan, our EVP and Chief Investment Officer, and again, he's been with me for 12 years, we are constantly looking for opportunities. We're not going to deviate, again, from our disciplined approach. We do have an active pipeline right now.

Markets did get a little frothy. We saw that, certainly, in New York and other gateway cities. We're going to continue to seek to find deals in the second half of the year that make sense. But again, we're not going to reach, given where we are and given some of the uncertainty at this time.

Okay, good. And then, you made a compelling case for Austin. And at the beginning of your presentation you said, I think, Austin's RevPAR was up 11.6% in the quarter? But I missed, if you said it -- what percentage of EBITDA Austin accounted for.

Bear with me one second. I think Austin is either 10% or 12%. I'll have that for you -- it's 10%, Dennis.

That's about the same as Denver.

Yes, about the same as Denver.

Okay. And that was in the second quarter --

That was in the second quarter. That is correct.

Got you. Okay. And then I have one question for Leslie. Leslie, you broke out the interest expense in the quarter, and you were going rather fast for me.

Sorry about that.

Can you give those numbers again? The total was $28.1 million, but I think you said $2.9 million was something?

Sure. We added back $2.9 million of pre-payment fees that were associated with the debt we paid down.

Okay.

And we also added back $1.4 million of accelerated deferred financing associated with that paydown.

Okay, yes.

And that's outlined in our press release.

Yes, in this press release it brings out that $4.3 million, so that [foots now]. Okay, terrific. So then, going forward, if I can do the math in my head, you've got around $24 million of interest expense if nothing else changes, on a quarterly basis?

I think you have to remember that our transaction was done in mid-quarter, and so that interest expense number has a half a quarter of interest related to the assets that we paid off.

Okay. Right.

Right? And then we also put on our credit facility after the IPO halfway, so you need to annualize that as well.

Okay. And there was no cap interest in the quarter?

No.

Okay. And there likely will not be any going forward?

No.

Perfect. Thank you, very much.

Thank you. Our next question comes from the line of Andrew Didora with Bank of America. Please proceed with your question.

Good morning, Tom. Good morning, Leslie.

Good morning, Andrew. How are you?

I'm pretty good, thank you. A lot of my questions have been answered already, but Tom, just one for you. Just curious on how the pace of your transient business has been post the quarter in July and the early days of August. Have you seen any significant deviation from your budget? And what has kind of been the feedback you've been getting from some of your hotel GMs of late?

I'm reluctant to sort of give forward-looking statements, but as we sort of look at the business right now -- and I had all of our asset managers assembled yesterday, we are not seeing, again, any slowdown in the business. We remain optimistic and remain comfortable with the guidance that we've given.

I did point out earlier, obviously, that given the fact that we had such a strong first half of 8.6%, we really don't -- we could have a slightly softer second half to meet the guidance we've provided. We would probably lean towards that, just given all of the uncertainty from a macro standpoint, but that's really us just being more conservative. We don't have any evidence that suggests any sort of slowdown at this time.

Okay, great. That's all I had. Thanks.

Okay.

Thank you. Our next question comes from the line of Eli Hackel with Goldman Sachs. Please proceed with your question.

Eli, how are you?

Good. How are you? Thank you.

Good.

Just two questions. First, just in New York, was -- the RevPAR growth, obviously, very strong. Was that concentrated at one of the four hotels or was that kind of -- did you see really strong growth spread across the city in your portfolio?

And my second, just on the acquisition environment. You talked about buying maybe something in Boston or something in a major city, maybe on the West Coast. How does --- just kind of going back to the recent equity valuations, how does that kind of jibe with the fact that you're looking for accretive deals, given just where public equity -- public REIT asset valuations are now? Thanks.

Yes. Good questions, Eli. The first question, our three New York City -- those three hotels in Manhattan, we have a fourth that's in Garden District. All four were very strong performers. I would tell you, out of our New York City assets, out of about 122,000 available rooms in our New York City hotels in the second quarter, only 2,500 rooms were left vacant and we increased rate by 15%.

We have three superb assets in Manhattan. First, the Doubletree that we bought last year, obviously, in the midtown submarket. We had the Hilton Garden Inn on 35th Street near Herald Square, obviously, we bought that in 2009. And then we have the Wyndham Hotel that we bought in 2010 as well that we converted to a Hilton.

So, all three are strong and we've benefited from really a combination of great product, great submarkets, and our asset management team, in conjunction with our manager -- and I want to give a recognition to Highgate, our manager there, who I think has really continued to demonstrate themselves as the top manager in New York City.

So, we're very pleased with those assets. They're bull's-eye real estate, well constructed, the right brands, the right manager; and as a result, we're getting outsized performance.

And on the second, it's not lost on us what's happening in the equity markets. Clearly, the cost of equity is rising, so we're cognizant of that. And I'll let Ross Bierkan, our Chief Investment Officer, jump in here as well and talk a little bit about what we're seeing in the marketplace.

Yes. Thanks, Tom. Eli, we're continuing to look pretty actively, although we're conscious of what's going on. We've never underwritten the macro; we always underwrite submarkets individually, bottom-up, as Tom said earlier. And we've always felt that in a tough environment there are great submarkets and in a great environment there are dangerous submarkets, and so we always drill down to the micro.

There's no denying, though, that the currency value of all the public entities have taken a hit here, and we're taking that into account as we underwrite. Nobody has a crystal ball about growth rates going forward, but we're being conservative.

And as for the returns that we're seeking, again, we're aware of what's happened to our currency value, we're aware of our cost of capital. And while we were seeking historically in our short history unlevered IRRs of 10% to 12%, we're going to shore up the bottom of that range, take it up to perhaps 10.5% or 11% to 12% to take into account the volatility that's out there.

That's very helpful. Thanks, guys.

Thanks.

Thank you.

(Operator Instructions)

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

Good morning, Tom, Leslie, Ross. Most of my questions have been answered. Just one thing I wanted to clear up was your comments on the $400 million of acquisitions kind of over the 12 to 18-month timeframe. Do you have the capacity to do that all on-balance sheet, or was some of that with some supported equity down the road?

We have the capacity to do all of that on-balance sheet today. It is not our plan, nor will we do a dilutive equity offering in this environment. We have all of the internal capacity right now to do deals really, $400 million to $500 million. Again, that assumes that we've taken down all equity. We could put a modest amount of debt on as well.

But again, we're going to be careful and prudent, given the macroeconomic climate. We're not going to bury our head in the sand to not look at deals. Again, we think there are going to be some attractive opportunities, but we're going to be very selective.

All right. That was helpful. Thank you. That's all I had.

Thank you. Ladies and gentlemen, we have no further questions at this time, and I'd like to turn the floor back to management for any closing remarks.

I'd just like to thank all of the participants. We're excited about this transition. You've got a team at RLJ who are passionate about our strategy. We're going to continue to work hard. We know magnetic north, and that is creating shareholder value, and we look forward to our next call at the end of the third quarter. Thanks.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.