RLJ Lodging Trust (RLJ) 2013 Q2 法說會逐字稿

Greetings and welcome to the RLJ Lodging Trust second quarter 2013 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, Director of Finance for RLJ Lodging Trust. Thank you, Ms. Delgado. You may now begin.

Thank you, operator. And good morning and welcome to the second quarter earnings call for RLJ Lodging Trust. On today's call, Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. Leslie Hale, Treasurer and Chief Financial Officer, will discuss the Company's financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that 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 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 Tom.

Thank you, Hilda. Good morning, everyone, and welcome to our second quarter 2013 earnings call. I am pleased to announce that we had another outstanding quarter of industry-leading performance. We achieved RevPAR growth of 8.7% and margin expansion of 124 basis points, which was driven by the continued outperformance of our well-diversified portfolio. Furthermore, our results show that our portfolio is reaping the benefits from our focus on asset management, accretive acquisitions and well-timed repositioning projects. In addition to the strong operational results, we expanded our portfolio by adding two hotels in strong markets with solid lodging fundamentals. The first asset expanded our presence in the San Francisco Bay Area, and the second asset allowed us to enter into the desirable Hawaiian market.

While moderate in nature, momentum in the overall economy certainly remains positive. Corporate profits continue to show a positive trend, and we are seeing companies gain more confidence in hiring. As such, unemployment is moving in a positive direction, as is consumer confidence, which reached a five-year high in June. Furthermore, we expect GDP will show modest, but positive growth, despite a pullback in government spending. And while we have seen an uptick in interest rates, they remain at attractive levels, and debt is available for best in class sponsors.

We're already seeing increases in business and individual travel, driving healthy demand for the sector. With continued momentum in the housing market and improvements in consumer spending, we believe that it will enable us to achieve stronger pricing power. We expect that the favorable demand and supply imbalance will remain in the near future, and keep supply growth of new rooms below the long term average at least through 2015. For the quarter, Smith Travel reported US RevPAR growth of 5%, more specifically for the upscale and upper mid scale segments, which are most representative of our portfolio. Smith Travel reported 5.4% increase and a 4.2% increase, respectively.

Using Marriott's limited service hotels as an additional benchmark, RevPAR grew 4.7%. Once again, our industry-leading RevPAR growth exceeded all of these benchmarks. For the quarter, RevPAR increased 8.7%, our EBITDA margin improved 124 basis points and our portfolio gained additional market share over the prior year to end the quarter with 113.1% RevPAR index. Before we report on our top markets, we'd like to note that after acquiring additional assets in Houston, our eight hotels in that market have become one of our top contributors of hotel EBITDA. Since Houston now surpasses our Louisville market, starting this quarter, we are removing Louisville from our top six markets and replacing it with Houston.

We are pleased to report that our Houston hotels exhibited stellar performance in the quarter and recorded the highest RevPAR growth among our top six markets. Our Houston hotels reported RevPAR growth of 14.8%, with most of that growth coming from rate. During the quarter, our hotels benefited from strong compression, from several large citywide conventions. We saw strong attendance in energy sector conventions, such as Offshore Technology Conference, and also strong attention--attendance from the annual NRA convention, which drew the largest crowd on record. Going forward, we expect to benefit from Houston's strong energy market and growing employment in the area.

Once again, outperforming this quarter were hotels in Austin. RevPAR growth for this group of hotels was 14.3%, and was primarily driven by rate. Austin continues to experience compression from a variety of demand generators, including convention activities, leisure travel and various Circuit of The Americas races. Going forward, we expect investments in the market from various technology companies and a thriving tourism industry to drive additional growth.

Our New York hotels' strong RevPAR performance of 11.7% can largely be attributed to our capital investments at our Doubletree Met hotel and our Courtyard Upper East Side, which is benefiting from our best in class asset management initiatives. Furthermore, the city as a whole has experienced strong corporate demand, as well as increased international travel. While Hurricane Sandy demand has largely subsided, demand in New York remains strong, and we believe this market will benefit from the ongoing improvement in the overall economy.

In Chicago, we are very pleased to report that RevPAR grew 9.5%. Our assets performed very well this quarter, as a result of strong downtown compression from several citywide conventions and weather-related business. Strong demand provided our operators with the confidence needed to push rates. As we move forward to the second half of the year, we expect to see continued healthy growth in the market, but anticipate that the completion of the local refinery projects in the suburbs will moderate demand.

In Washington DC, we saw a 4.2% increase in RevPAR. Our DC hotels have consistently outperformed the overall market. Strong transient business helped our hotel stay resilience, in light of spending cuts in Washington. While we have yet to see the full impact of sequestration, we are closely monitoring the possible near-term volatility. We expect that third quarter will be a challenging quarter. However, we believe that long term, DC has very attractive market fundamentals, and transient business will continue to mitigate government cutbacks.

And finally in Denver. We reported RevPAR growth of 2.4%. Outside of Washington DC, our Denver hotels had the second-highest exposure to government business in the portfolio. Demand at our hotels remains soft, as a result of several of our hotels' exposure to government-related demands. But we are cautiously optimistic. We believe that we will benefit from the expansion of several health service firms and demand from regional sporting events in the second half of the year. Several other markets in our portfolio that posted strong performance include Michigan, Los Angeles and Indianapolis, which saw a RevPAR growth of 20%, 12.3% and 12.2%, respectively.

Finally, our top 40 hotels accounted for 63% of our hotel EBITDA this quarter. During the second quarter, this set of hotels delivered RevPAR growth of 9.6%, and margin expansion of 208 basis points. With regard to acquisitions, we remain focused on top margin markets that exhibit strong demand generators in gateway and urban locations. Recently, we closed on two transactions, the Courtyard in Waikiki Beach and the Vantaggio Suites in San Francisco. We acquired the long-term leasehold interest of the 399-room Courtyard in Waikiki Beach, on the island of Oahu in Hawaii, for a purchase price of $75.3 million or approximately $189,000 per key. This purchase price represents a forward cap rate of 7.8%, based on the hotel's projected 2014 income.

The Oahu market reported RevPAR growth of 16.1% year-to-date and was the highest growth market in the top 25 US lodging markets in 2012. The Waikiki sub-market benefits from strong demand from leisure and hospitality sectors, as well as from all four branches of the US military. The hotel further increases our portfolio's RevPAR, and it will be among the Company's top ten EBITDA contributors. In the second quarter, we also purchased the 150-room Vantaggio Suites in San Francisco for a purchase price of $29.5 million or approximately $197,000 per key, in an off-market transaction.

The purchase price per key represents a significant discount to replacement cost, given the high barriers to entry in San Francisco. The hotel will be closed for an extensive $13 million multi-phased brand conversion when it reopens at the end of 2014, and it will reopen as a Courtyard by Marriott hotel. We expect that our total investment will represent a forward cap rate of 7.8%, based on the hotel's 2015 income. The San Francisco market is a major tourist destination, convention center and corporate hub for a variety of sectors, and was one of the strongest markets in the top 25 US lodging markets in 2012.

To date, we have closed on approximately $185 million of acquisitions in 2013. We remain active in the acquisition market, and our current pipeline consists of approximately $125 million of hotels under contract with a letter of intent, including our previously announced Miami hotel. As we acquire future properties, we will balance a mix of stabilized assets, such as our Waikiki acquisition, and value-added opportunities, such as our San Francisco conversion. In regards to our disposition efforts, we are currently marketing 10 to 12 non-core hotels, as part of our active portfolio management. We see dispositions as an additional opportunity for us to recycle capital and to more urban focus higher growth markets. We're engaging the disposition of these assets with the same discipline as we are with our acquisitions and seeking to maximize value of each. We will provide further updates if and when any transaction closes.

As we look to the second half of 2013, we approach a period of economic expansion with a largely renovated and well-diversified asset portfolio, located in desirable markets for both business and leisure travelers. Our disciplined strategy has delivered consistent industry-leading performance. Our team of experienced professionals work tirelessly to look for opportunities to drive value and growth. We will continue to be smart capital allocators, as we seek both organic and external growth. Given our strong performance during the quarter and our recent acquisitions, we are raising the bottom end of our RevPAR guidance by 50 basis points to 6.5%, and maintaining our upper end of the range of 8%. We are also raising our hotel EBITDA guidance by $8 million on each end to $328 million to $348 million. I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter.

Thanks, Tom. Before I report on our second quarter financial results, as on previous calls, I would like to remind listeners that pro forma results include prior ownership periods. The performance metrics that Tom shared earlier refer to 146 hotels as if we'd owned them for the entire comparable period. These figures exclude the two conversions currently underway in our Garden District hotel in New Orleans, which was closed for most of 2012. Overall, our results this quarter demonstrate the quality of our portfolio, as well as the benefits we are capturing from a high-growth market. Our strong performance is further evidenced to the increase profitability of our consolidated hotel EBITDA, which increased $11.1 million or 12.6% over 2012.

For the quarter, our adjusted EBITDA increased $15.8 million to $92.1 million, representing a 20.8% increase over 2012. Adjusted FFO increased $19 million to $74.8 million for the quarter, or $0.61 on a per share basis. Our adjusted FFO increased significantly by 34% over the prior year and reflects a 17% savings in interest expense. Our proactive refinancing activities have yielded meaningful results.

During the quarter, we completed the transfer of the SpringHill Suites Southfield back to its lender, a process that we initiated over 18 months ago. The hotel's results have been moved to discontinued operations. As part of this transaction, we recorded a $2.4 million non-cash gain on the extinguishment of this debt. Our adjusted EBITDA and adjusted FFO excludes this gain. For further adjustment, we recommend reviewing the exhibits in last night's press release for full reconciliation of both metrics.

Moving on to our balance sheet and capital market activity. We strive to maintain a strong conservative balance sheet, and continue to seek ways to enhance our financial position and lower our cost of capital. We estimate that since going public, we have saved approximately $30 million in interest expense through various refinancing activities. The debt market has remained very attractive since we executed our last financing in November. And both bank demand and interest spread are at compelling levels, despite recent increases in interest rates.

Given the favorable pricing environment, we have the opportunity to extinguish several additional tranches of higher price debt, which are open to prepayment as of this month. We are actively looking at a combination of debt options, including returning to the unsecured market and possibly financing a handful of properties with first mortgage debt. We estimate that the refinancing of this debt tranche will allow us to reduce our interest expense by an incremental $8 million on an annualized basis. We also expect that through this upcoming transaction, we will be able to further stagger our debt maturities, significantly increase our unencumbered asset pool, and increase our unsecured debt exposure, relative to our overall capital status.

In aggregate, our debt profile currently consist of $1.4 billion of outstanding debt, resulting in a net debt to adjusted EBITDA of 3.6 times at quarter end. With an undrawn credit facility and $263 million of unrestricted cash available, we have ample liquidity for our dividend and capital expenditures. Our solid cash position, coupled with our portfolio's strong performance, provides us with the ability to offer shareholders meaningful returns, via both growth and cash dividends. For the quarter, we distributed a $0.205 dividend. This equates to $0.82 on an annualized basis, for a 17% increase to last year's annual distribution of $0.70.

We continue to focus on enhancing the quality of our portfolio and strengthening the long-term value of each hotel. Before our extensive two-year capital plan is complete, our 2013 plan calls for approximately $40 million to $45 million in additional value-added capital investments across 25 hotels. Most of these renovations will take place in the fourth quarter, in order to take advantage of seasonality within our portfolio. Therefore, we expect minimum disruption, if any, this year. As a reminder, these figures do not include projected capital requirements for our Houston and San Francisco conversions. While the design and planning for these two hotels are well underway, no actual hard costs will be incurred until 2014.

Now with respect to our outlook, we would like to reiterate several key assumptions for our 2013 guidance. First, our updated hotel EBITDA guidance of $328 million to $348 million reflects all of our acquisitions to date and includes approximately $5.9 million of prior ownership results. That will be reflected in our operating statistics, but will not be included in our adjusted EBITDA or adjusted FFO. Second, our new pro forma RevPAR growth of 6.5% to 8%, and our EBITDA margins of 34% to 35%, are adjusted for non-comparable hotels. As I mentioned earlier, our non-comparable hotels include our two conversions underway and our New Orleans hotel that was closed for most of last year.

And lastly, while we believe that our portfolio is well positioned to deliver solid year over year results for the remaining quarters, our RevPAR results are expected to step down each quarter, given favorable comparables from last year. Thank you, and this concludes our remarks. We will now open the lines for Q&A. Op--

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Jeff Donnelly, with Wells Fargo.

I actually had a question concerning the acquisitions in the quarter, the property in Honolulu, as well as one in San Francisco. The cap rates that you put out there are obviously based on forward projections.

Are you able to walk through for us in a little more detail about the underlying assumptions that got you there? Where you're thinking, in terms of either occupancy and ADR, or RevPAR penetration? I'm trying to underwrite the conservativeness or aggressiveness of the cap rate assumption.

Well, I don't have the underwriting with me, Jeff, but I would tell you, just given our history and I think you're quite familiar with it, we're quite conservative. We typically do a demand and supply analysis in every submarket. We will build a few years of modest ramp up in RevPAR, followed by stabilization.

Given the size and depth of our portfolio, we have a ton of information, given the fact that we've got 150 hotels approximately in 22 states. Kate Henriksen and our team--Kate's been with me north of ten years, and we're very capable team. We do all of our underwriting internally, so it's a ground up, and I think if you look at how our acquisitions have performed. Really, we've done about 34 acquisitions really, over the last three years.

I'm quite pleased with our performance. So we're typically, in terms of investment criteria, looking for returns in the 10% to 12% on leveraged, significant discount to replacement cost, and really looking for third-year cash-on-cash of 9%, which in many cases, a lot of the recent acquisitions we've been exceeding. So we're pretty comfortable with the underwriting.

What we like with Hawaii, obviously it's been a top lodging market, huge barriers to entry. Very difficult to break into. As we look at the RevPAR, I think the RevPAR in the second quarter, this asset was about $140. So that's north of 30% of the average portfolio that we have.

So we're--it's accomplishing our objectives. We're continuing to expand our presence on the West Coast. We're improving the overall portfolio RevPAR, and we're getting an asset that we think is going to be a long-term hold for the portfolio. So we're very comfortable with it. And for us, the 7.8% we reported on the forward cap rate in the first year is something that we are quite comfortable with.

And maybe just another question, concerning the guidance you guys gave for 2013. You took the low end of your pro forma RevPAR growth up 50 basis points to 6.5%. Most of the other lodging companies, brands and REITs have dialed down the top end of their range.

I'm curious, why raise the low ends at this point? Are you that confident in seeing the low end be a little bit better? Why not stay conservative? Just curious what sort of shape you're thinking there.

Well, it's a fair question, Jeff. I actually thought you were going to go the other way, and why--didn't ask us why we didn't raise the top end.

You can answer that too, if you want.

No, it's good. It's a very conservative team here. Obviously, we're up year-to-date, I think 9.8%.

We do have some tough comps in the second half of the year, but the reality is we've got a very well-diversified portfolio. It's largely renovated. We are continuing to see the tailwind from our seven conversions--our six conversions. I think we're up about 10.4% in the second quarter.

You look at our four most recent that really haven't gotten stabilization. I think they were up north of 16.5%.

And we're really seeing a broadening across our portfolio. As we--as I noted in my prepared remarks, if you look at Indianapolis and Michigan, Los Angeles, so even beyond our top six markets, our portfolio continues to perform very well. And I think part of it goes back to the strategy. I'm a passionate believer that, candidly, we have a superior strategy. Investing in upscale focused service or contact full-service hotels, with the right brands, that are well-located, that are transient-based.

I think we're going to--we've outperformed, and candidly, I expect that we're going to continue to outperform, certainly on an annualized basis. So we're comfortable with it. It requires approximately us to perform, I think at about just south of 5% for the second half of the year to meet the implied midpoint of our revised guidance. And we're comfortable with that at this point.

Clearly, there's some headwinds out there in a couple of markets and I assume, the government. But government's really a small part of our business, so we're not really losing a lot of sleep over that.

One last question. Leslie, you had touched on your remarks about the relatively small disruption to--from the renovations in the fourth quarter. Do you guys have an estimate though of that, nonetheless? Is a really just small dollars, or is there some number you can put to it?

Jeff, I'll answer that. There's really--look, we're--our team, as I think listeners have seen, we renovated 93 hotels over the last two years, with very little disruption. We plan with an excruciating detail to find the right windows, both in terms of ordering, FF&E, planning displacement, planning where the soft windows are for us, typically first and fourth quarter. And also given the size of these assets, there are none that are particularly large or difficult. It's garden variety, given the fact that we've got so many management companies, particularly White Lodging has worked with us for a long time.

Mistakes happen, sometimes delays happen, things happen beyond your control, but this team really focuses with great detail on trying to mitigate and minimize risk like that. So if there's any displacement, it's really manageable and baked into our forecast, but it's very minor.

Thanks, guys. I appreciate it.

Jordan Sadler, with KeyBanc Capital Markets.

It's Austin Wurschmidt here, with Jordan. Just wanted to go back to guidance.

While you guys did raise the low-end, the guidance does imply deceleration through the second half of the year, as Leslie mentioned. I know the comps are more difficult, and you've got some renovations planned in 4Q. But do you think the deceleration will remain a trend, or could we see it re-accelerate in 2014?

I would fully expect, Austin, that you'd continue to see further additional growth in our portfolio. I think last year, we were up about 7.4%, the year before, I think 7.7%, and we have been on the top tier of performance in the industry.

Obviously, year-to-date, we're at 9.8%. We did have some favorable comps in the first half of the year. We do have some tougher comps in the second half of the year.

I would remind listeners that Austin was up 30% in the fourth quarter of 2012, largely given Formula One there, and it was a first time event there, and 265,000 visitors, about $2 million in incremental revenue. We still are seeing incredible growth out of Austin, but obviously, coming on the heels of a 30% growth in fourth quarter, obviously, we've built in some--a more conservative forecast there.

Obviously, New York City, although we've had again great performance and have outperformed our peers there, we did benefit a lot in fourth quarter of last year from some of the post Sandy benefits. So clearly, we've got some tougher comps there.

We did have strong citywides in Chicago in the fourth quarter of last year as well, so those are slightly tougher comps. We also have the RNC convention in the third quarter of last year, which will make Tampa a little tougher.

But rest assured, we are cautiously optimistic. Our portfolio's performing very well, as I shared with Jeff, and we're very confident in the guidance that we provided. And while it implies that second half will be at around 5%, plus or minus, we're comfortable with that at this point.

Tom, it's Jordan, here with Austin. I wanted to get your thoughts on underwriting, given the moves in the capital markets and you guys are a buyer. Any thoughts on changes in underwriting for you guys? Are you adjusting exit caps up or going in caps? And then separately, if you could speak to the recent additions to the IPO pipeline, and any thoughts on those.

Yes, Jordan. No real comments on the additions to the IPO market. I'll let others more qualified to speak to that. And no secret, I think there should be some consolidation in the space, and I think I've said that enough, and I think people know my view and we certainly want to be part of that dialog.

As it relates to underwriting, we're approaching deals with the same rigorous approach that we have in the past. Again, it's got to be an asset compliant with our investment thesis. It's got to be something, in either an embedded story that we think either through a value add or if it's capital starved, or there's an opportunity to replace management. There's a conversion play. It can be, in some cases, traditional.

We feed words, replace cash flow, but we really haven't changed our underwriting standards at this time. We typically have always assumed that with cap rates, there would be an expansion. That's pretty embedded, but we never assume that there's going to be a reduction in cap rates, and then, banking on that, in terms of the value creation.

So we've always been conservative. And as I shared earlier, again still looking for un-levered returns in the 10% to 12% range. Comfortable with that.

There are some markets where I think, certainly gateway markets, where there's more competition right now. And in fact, some might assume that this should be an increase in cap rates. If anything, I think cap rates have really remained the same for most situations.

I do think in those hotly contested auctions, in fact some cases of cap rates are probably compressed a little bit, in part because you've got new entrants to private equity. Buyers are certainly out there, and the debt markets are improving. Even though interest rates are rising slightly, the availability of debt capital is still there.

Do you think that the private equity there is a buyer to the same degree they were, despite the moves that we've seen?

It's going to be a case-by-case and a market-by-market situation. But generally, I think we see them being as aggressive and certainly having the appetite. And we see ourselves principally as a net buyer, although we are looking to sell some of our non-core assets. And I don't think there's been a dramatic move at this point, either way. But it's clearly something where we're going to continue to monitor carefully.

We have a very rigorous investment process, and again, all of that underwriting is done internally. We have a team of very talented professionals, most of whom have been with me a long time. So we are not deviating at all from our underwriting approach.

Thank you.

David Loeb, with Robert W. Baird.

I want to follow up on some comments that you made, Tom, and that Leslie made about the refinancing. And really just understand about how the progress is going towards doing things that allow you to sell some of the older White Lodging assets. It sounds like step one in that process was doing some juggling of management contracts. Sublative Lodging took over some other hotels, and you've done a number of those.

Step two seems to be the debt restructuring to remove some assets from debt pools that restricted their ability to sell. So where are you on those? Are those among the hotels that you're currently marketing for sale?

That is correct, David. We've got--I think I've mentioned in previous calls, we've got 20 assets that would classify right now as non-core, about 5% of our EBITDA and about 10% of our outstanding rooms. We did do some horse trading with our partners at White Lodging, and we have unencumbered a number of hotels. I want to say approximately ten, plus or minus. But we've got 10 to 12 hotels that we're currently marketing right now, and we think most of those, if not all of those, will sell unencumbered.

There are buyers for encumbered assets for sure, but clearly, pricing can be impacted. There is a difference in pricing versus selling an unencumbered versus encumbered.

You are correct. This is the first step. We're cautiously optimistic. Obviously, as we make progress, and we enter into agreements, and most importantly, close, we will announce that to the market.

As it relates to the larger financing, let me just say that--and I'll let Leslie give some specifics on where we are in that process. But we do have north of $500 million in available debt that has a prepayment option and that we're working on. And we think in addition to making progress on our journey to get to investment grade, and having a larger portfolio of unencumbered assets, we will also give us flexibility to begin to accelerate some of our capital recycling efforts.

So hopefully, you've seen again, we're doing what we've said we're going to do, in terms of keeping--continuing to position the Company for--to be not only un-levered, but to be a Company that we think can certainly be investment grade. And by having a large portfolio of unencumbered assets and giving us the flexibility also to recycle capital is--are steps on that path.

David, this is Leslie. Just to close the loop on the end of that. We are in the market right now, looking at both the secured market and the unsecured market, and the transactions are going relatively well. From a timing perspective, we would be looking at the end of the third quarter, beginning of the fourth quarter, from an execution perspective.

And again, to your point, it would unlock a number of assets pretty dramatically. There's about 51 assets that are unencumbered by the debt that we are looking to refinance, and we would be looking to unlock a net 47 assets from this transaction.

So David, we'd end up at the end of the day, and Leslie can correct me, but I think we end up with about 100 -- 105 to 110 assets that will be unencumbered out of our pool of 150 assets, including those conversions that we have in the pipeline. So pretty dramatic, and I think we get to EBITDA of approximately 68% to 70% of our EBITDA.

It sounds like you're working in tandem, such that asset sales that might be in process now would be able to close shortly after that refinancing in the late third or fourth quarter?

I think that's a reasonable assumption. As you know, there's no assurance that anything will close, but we're certainly cautiously optimistic. And I think you know us to be a group that plans well, and we follow the plan, and we're working hard against that right now.

Yes, I do. And longer term, the 37% of EBITDA that comes from something north of 100 hotels, I guess closer to 110 hotels. Are all of those ultimately candidates for exit? Or subject to being able to work with White Lodging and others to make them more readily salable?

Yes, I don't know that I would say that north of 100 hotels. We will continue to, as part of our process, we have a very active portfolio management group. We are constantly looking at those submarkets, whether or not it's a long-term hold and how much capital is going to be required, how much potential supply. And so, we'll look at it on a case-by-case or batches of hotels.

I wouldn't see us looking to sell 100 of them at this time. As I've said, look, we're here to create value for shareholders. And to the extent someone wanted all of the portfolio, we'd certainly engage in that dialogue. And I think what we're trying to show through separating the 40 is just the strength of those 40 hotels, and the fact that they are as strong as any portfolio in this industry. Not only were they up, I think, 9.6% and they account for 63% of our EBITDA, but I think 13 of those assets that we've added really in the last few years.

So many of them are still ramping up. So there's a lot of embedded organic growth in that portfolio as well -- in that sub portfolio.

Yes, okay. That makes sense. I guess just trying to understand strategically. You do seem to be going more to those larger hotels. And number 40 is just under $2 million of EBITDA, which I'm sure means number 150 is, well, smaller than that. I guess trying to understand the--

Yes, certainly. David, you are correct. There are a number of assets that are small, less than $1 million in EBITDA. Clearly those are assets that over time, we will be looking to recycle capital.

I just don't know that it's 100 hotels, but it clearly would be a batch of those hotels that we'll continue to look to recycle and improve the quality of the portfolio. There's no doubt. No doubt we want to be in urban, dense suburban markets, higher RevPAR, strong brands, well located. And it's a core strategy, and we're certainly not going to deviate from that.

Okay, great. That helps. Thanks.

Wes Golladay, with RBC Capital Markets.

Can you comment on how you see supply impacting Chicago, Austin, Denver, and how you see each of these markets absorbing the new supply?

Honestly, Austin's probably the one that gets as much publicity as any. And I just want to continue to make the case that--Austin just has such a wonderful storyline. It's a state capital, it's a university town, it's becoming a tech hub, and it's becoming such a magnet for tourism as well.

We were up 14.3% in second quarter. I think we were up 10% in the first quarter. We were up 30% in the fourth quarter. Despite the fact that we've got tough comps in the fourth quarter being up 30%, we're cautiously optimistic that we're still going to have a very strong half of the year, even against that kind of base.

Part of that is that you've got a legislative year. So that's historically accounting for about 180 basis points of RevPAR.

You had private sector growth. Remember, most of the job growth that's been created in this country in the last several years, as we all know, is really been coming out of Texas. Largely driven by Austin and Houston. I think Austin's probably up about 10% in job growth over the last five years.

You've got the new Circuit of The Americas track. There were -- there was one event last year. Now, where there's a six additional events that were added this year, and now we understand there's going to be a seventh. And when you factor in Formula One, where they've signed a ten-year contract, you've got eight of these sort of one-time events. And many of them, we expect are going to be re-occuring.

If you look at just second quarter alone, in April, we were up 23% in RevPAR, and MotoGP had 130,000 visitors. So V8 Supercars had nearly 69,000 visitors. Grand Am, I think, had about 27,000 visitors, plus or minus. And you've got Apple investing $300 million, Samsung, I believe, $4 billion, plus or minus, to renovate plants, and you've got GM with an opening innovation center.

So no doubt, the secret of Austin is out. No doubt that there's supply coming. We're watching it. It's going to be pretty dramatic. Supply's going to clearly with White Lodging's 1,000-room JW Marriott that's coming, and others that are coming in the market.

I would say I think what we're--what we think will happen in Austin is a little bit like what's happened in Indianapolis, where having that 1,000-room property well located, with sufficient meeting space, actually makes the destination a stronger candidate for some of the regional conventions. So clearly, we'll have to get absorbed, and we know that.

But I think the concerns about Austin falling off the cliff, I think, are greatly exaggerated. It is such a dynamic market and growing, and that doesn't include all of the other tourism events from Austin City Limits to South-by-southwest and the frequent entertainment events that occur there. So we're very optimistic about Austin long term, and as you can see, we continue to post very impressive numbers coming out of that market.

As it relates to Chicago, clearly another 1,000 rooms have been added, plus or minus. We were up 9.5%. Our presence there, we've done very well. Our Courtyard in downtown, I think was up about 10%, we were up 11% in our midway cluster. And again, since there's--it's so diverse, and some of the other projects that have been occurring in the suburbs.

And Chicago continues to be a very solid market for us. It is a market that candidly, that I think you've got to watch them. I'm more concerned, candidly, about the rising property taxes there than I am about the incremental supply getting absorbed. I think that property tax issues are probably a little more daunting there, just from an operating standpoint. We continue to perform well there, and remain cautiously optimistic about Chicago long term.

In Denver, I think Denver was probably the one market--all of our other top six markets, we dramatically outperformed the market and our peers. And Denver, I think candidly, there was a slight reduction there in government business. And we also had some timing issues. There's some sporting events that were in second quarter, last year that are going to be in third quarter, this year.

So we're still cautiously optimistic on Denver. Denver, I think is--downtown Denver, given the availability of land, I think has more supply to risk than I think some of the other cities of that size. Again, the fact that our hotels are so spread out in other submarkets there, and Denver has historically been a good performer for us.

Okay. Thanks for the detailed explanation. Looking at your balance sheet, you guys have a large cash balance. Will you use some of the cash to pay down some of the debt you can retire?

Right now, as Tom mentioned, we've got a healthy acquisitions pipeline. So that is largely being geared toward those acquisitions right now.

And as you know, Wes, our net debt to EBITDA is sub four, and look, long term, we want to be getting that to the low threes. But we're still net buyers, and we're still active. And we've got $125 million in the pipeline today and the team is actively looking.

And we tend to find more than our fair share of deals off-market and try to steer clear of the auctions, as much as we can. So I think you'll continue to hear and see more deal activity from us in the fourth quarter -- in the third and fourth quarter.

Okay, last one. Sticking with that acquisition pipeline, it looks like you might have one or two more assets, excluding the Hilton Cabana. Are any of these a conversion opportunity?

Neither. At this point, they are not.

Okay.

There are few assets--one could be, Wes, but let me clarify that. One could be. But they are generally one West Coast, one East Coast, and weighted more towards stabilized assets is the way I would answer.

Okay. Thank you for taking the questions.

Lukas Hartwich, with Green Street Advisors.

All right. You guys obviously put up some really impressive numbers. I'm just curious. Do you have any idea of how much that was impacted by the renovation, the tailwind of that?

Well, if you take out the Doubletree Met, obviously it's our largest hotel and clearly has benefited, but even if you take that out of second quarter, we're still up 8%. And I think part of it is, again, is that you've got renovations, you've got conversions. If we strip out--if you strip out Doubletree Met, as I said, 8%. If you strip out our six conversions, we were still up 8.6%.

The reality is it's a well-diversified portfolio, and it's broad-based. No matter how you slice the data, you're still, I think, going to conclude that they're pretty impressive numbers.

And I think a lot of that credit goes to the fact that yes, they've been renovated, yes, there's some conversions, but I also think it's really blocking and tackling. It's our--the men and women in our asset management group that are working in partnership with our management companies everyday, every week, every month, every quarter to really drive incremental value. And we get it. It really is about performance, and it's about doing that on a daily basis, and really everything else is background noise.

So that's more than anything else is where we spend our time as a team, and I think these numbers are reflected. I also think that one of the things we talked about in the industry is that--and I think this secular shift of moving more towards selective service. Again, I think the evidence continues to support that there's a shift in customer preference.

These hotels are--you're getting the right price value. They're efficient to operate. They're guest friendly. And I think there's momentum there, and I expect that's only going to continue.

That's helpful. And then the Courtyard you acquired in Waikiki. That's got about 400 rooms, which seems like a lot for a limited service hotel. I was just curious if there's anything special about that asset.

Well, it doesn't have a lot of meeting space. Again, it really fits in our criteria of finding largely hotels that have largely rooms operations.

If you look at our Doubletree Met again, 764 rooms. North of 85% of the revenue, I believe, comes in rooms department. That's our core competency. That's our focus.

We tend to stay out from those hotels that have a lot of meeting space or have a lot of F&B. And so, it's got--obviously, it's got a lot of keys, but there's clearly a lot of demand. And as you know, Waikiki's been one of the strongest lodging markets over the last few years.

So we're excited about it. We think it improves the overall quality. And again, once our asset management team and our design and construction team can get in and renovate it, and work with our operators, we're confident that there's going to be significant growth there for us.

And then, just one last one. Of the dispositions you're planning, do you have any color on pricing or EBITDA multiples, or anything that you can provide on that front?

Lukas, I don't have anything at this point. I'd rather wait until after they're closed.

As you can expect, these are non-core assets. There are--some cases are going to require capital. Clearly, we would expect that these assets are going to trade at cap rates and multiples that are certainly higher than where we trade today.

But I think the objective is to be moving out of these secondary tertiary markets into higher growth markets. So as soon as we're--as we complete transactions, we will post a scorecard and the information for you, and certainly, the investment community.

Mr. Baltimore, there are no further questions at this time. I'd like to join the floor back over to you for any closing comments you may have.

Thank you. Appreciate everybody taking the time today. Please rest assured that the team here at RLJ is continuing to work hard to create value for shareholders, and we look far to updating you at the end of our third quarter, in late October, early November. Have a great summer, everyone.

Ladies and gentlemen, that does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.