RLJ Lodging Trust (RLJ) 2014 Q3 法說會逐字稿

Greetings and welcome to the RLJ Lodging Trust third-quarter earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your post, Ms. Hilda Delgado, Vice President of Finance. Thank you. You may begin.

Thank you, operator. Welcome to RLJ's third-quarter earnings call.

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 and may cause 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-K 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 to call over to Tom.

Thank you, Hilda. Good morning, everyone, and welcome to our 2014 third-quarter earnings call. I am very pleased to report that our portfolio delivered another quarter of impressive results.

This quarter our revPAR grew 9.6% and EBITDA margins expanded by more than 200 basis points to 36.8%. In addition to closing out another strong quarter, we acquired two hotels for over $125 million and also recently announced the completion of a $143 million secured financing that provides us with further room for growth.

As a result of our continued positive performance, we increased our quarterly dividend by 36% over the last quarter. Overall we are encouraged by the improving economic climate we saw this quarter, despite the extensive media coverage on geopolitical risk and Ebola.

We are seeing business expansion and consumer confidence maintain positive trends. Improvements in labor conditions continue to drive the unemployment rate down, which is currently at a six-year low. The positive trends and economic indicators are providing continued momentum for the lodging industry.

Over the last 12 months demand growth outpaced supply growth by approximately 310 basis points. US domestic demand continues to expand. And despite weak economic headlines in Europe, international travel continues to accelerate.

We expect international travel to continue to increase in the upcoming years and provide an additional catalyst for the sector. Supply growth remains certainly well below the historical levels and is expected to stay muted over the next two to three years, supporting the positive lodging fundamentals that we are experiencing.

For our portfolio during the third quarter, we generated revPAR growth of 9.6% and EBITDA margin expansion of 201 basis points. Our steady growth has been a result of our focus on operational excellence and the overall upgrading of our portfolio.

This quarter several of our top markets generated double-digit revPAR growth. I'll start with our hotels in Austin, which posted revPAR growth of 14.1%. Austin continues to benefit from a strong technology sector and a vibrant entertainment scene.

This quarter's strong convention calendar generated more than an 80% increase in convention room nights over last year. The increase in travel to Austin is further apparent through Austin's airport, which has recorded passenger gains in almost all of the last 56 months and hit the 1 million passenger milestone for the first time in July. Looking ahead, we expect this market will continue to outperform.

Our hotels in Denver had another quarter of strong revPAR growth of 11.1%. Our hotels saw a broad-based increase in corporate demand and a high influx of weekend activity. Passenger traffic at Denver international Airport also grew for the ninth consecutive month in August. While Denver has consistently been one of our top performers this year, we expect fourth-quarter growth will taper, given the influx of flood-related business we picked up last year.

Our DC hotels had a strong quarter, with 10.8% revPAR growth. DC had a very active convention calendar, with citywides generating over 100,000 more room nights than last year. We also saw strong growth in corporate demand, especially from the insurance and healthcare sectors.

Looking ahead, we expect the market will finish the year on a positive note, with a healthy citywide outlook and better comps due to government shutdown in 2013. We are also very pleased to see that Lonely Planet ranked DC as the top city in the world to visit next year. We expect that this will bode well for stronger tourism traffic in 2015.

Our hotels in Houston generated revPAR growth of 10.4%. Our portfolio this quarter benefited from strong leisure demand as well as business demand from the expansion of several technology companies and growth from the energy sector. In addition to growing revPAR, our properties continue to gain market share. Going forward, we expect this dynamic market will generate high single-digit growth and end the year as one of our top performers.

Our hotels in the Chicago market recovered from a weaker first half of the year, generating strong revPAR growth of 8.9%. Our hotels were able to capitalize on the city's strong convention calendar as well as a strong corporate demand from the insurance and financial services sector. Additionally, our Midway portfolio experienced a significant increase in business resulting from the air traffic control tower fire that temporarily closed the O'Hare and Midway airports. Looking ahead, we expect our hotels will continue to see positive growth.

As expected, our New York hotels had relatively modest revPAR growth of 1.3%. We are pleased to see a great turnout at several annual events, such as Fashion Week and the U.S. Open. Positive increases in travel to New York continue to absorb new supply. We expect next quarter's growth will pick up modestly.

In addition to strong performance from several of our top six markets, we also saw impressive gains in several of our other markets. Our hotels in New Orleans grew revPAR by 30% due to strong convention activity. Louisville saw a strong turnout from the PGA Championship and generated a revPAR growth of 18%.

Our recently acquired Hyatt portfolio is also performing very well, with revPAR growth of 13.4%. Our most recent five conversions are ramping up with another quarter of double-digit revPAR growth of 13.3%.

We are excited about the completion of one of our three major renovation projects that we had underway. The Residence Inn, located in Midtown Atlanta -- the all-in cost of $144,000 per key represents a significant discount to replacement cost. We expect this asset, along with our San Francisco and Houston assets, which are scheduled to open late in the first quarter of next year, will generate further growth for our portfolio in 2015 and beyond.

Regarding our transaction activity, we used proceeds from our May equity raise to acquire two previously announced assets in off-market transactions for just over $125 million. We acquired the newly converted Hyatt Atlanta Midtown for $49.5 million. We expect the hotel to benefit from Midtown's healthy business environment and from Hyatt's underrepresentation in the market.

We also acquired the DoubleTree Grand Key Resort for $77 million, which is a significant discount to both replacement cost and to recent transactions. We expect the hotel to continue to outperform, given Key West's strong tourism demand and its high barriers for new supply.

In total we have acquired 15 assets for $630 million since the beginning of the year, more than half of which are located on the West Coast. These assets are expected to be strong contributors to our future growth.

In fact, our revPAR growth for 2014 acquisitions grew 12% during the quarter, 240 basis points higher than the portfolio average. Our acquisition pipeline remains active. We are seeing a steady flow of quality assets come to market from sellers.

Competition for these assets, however, is also increasing, in particular from private equity firms and foreign investors. We will remain disciplined and continue to seek ways to leverage existing relationships to acquire compliant assets at attractive prices.

We remain committed to recycling capital from slower growth markets into higher ones. To date, we have sold 15 hotels for approximately $130 million. We have earmarked an additional 26 hotels for sale. These assets are at various stages of the marketing process, and therefore we will provide further updates if and when they close.

Our prudent investment strategy and aggressive asset management once again generated strong growth for our portfolio. We believe we are midcycle, with plenty of runway remaining for the lodging sector.

I am pleased with the results we have achieved to date, and I am optimistic that our portfolio is well positioned to generate future growth. As a result of these improvements, we are raising our guidance the third time this year.

We are increasing our revPAR growth to 6% to 8%, increasing our hotel EBITDA guidance to $390 million to $410 million, and increasing our EBITDA margins to 35.1% to 36.1%. I will now pass the call over to Leslie, who will provide some additional information on our financial performance for the quarter.

Thanks, Tom. Our results this quarter illustrate that our disciplined investment strategy and our focus on operational excellence continues to drive solid growth for our portfolio. This quarter our strong performance generated an increase of $15.1 million to $109.4 million in hotel EBITDA, representing a 16% increase over the prior year. Our EBITDA margins expanded 201 basis points to 36.8% as we worked with our management companies to drive strong positive flowthrough.

With regard to our corporate results for the quarter, our adjusted EBITDA increased $20.9 million to $101.6 million, resulting in a 25.8% increase over the same period last year. Adjusted FFO increased $22.3 million to $87.4 million, representing a 34.2% increase.

For the quarter adjusted FFO equates to $0.66 on a per-share basis. Adjusted FFO this quarter increased as a result of strong operating performance and interest expense savings captured from our balance sheet management efforts.

Adjustments worth noting this quarter include a $9.2 million impairment charge for certain assets that we are currently marketing for sale. These assets in particular are among the lowest-revPAR assets in our portfolio, are located in the secondary markets, and have some of the larger capital requirements in our portfolio.

In addition to taking a hands-on approach to our overall portfolio, we are also committed to managing our balance sheet. Maintaining a conservative capital structure that provides us with flexibility and a solid foundation for future growth is a fundamental principle for us.

We have been exploring various options to address our near-term debt maturities. As a result we were able to refinance a $143 million tranche of debt shortly after quarter-end. A favorable lending environment coupled with our strong banking relationships allowed us to successfully execute this transaction. In doing so we further staggered our maturities, unencumbered an additional asset in our portfolio, and increased our balance sheet flexibility.

We originated four first mortgage loans totaling $143 million and used the proceeds to retire five existing loans. The new mortgages are interest-only for the first five years and bear a floating rate of LIBOR plus 225 basis points. These are synthetic seven-year loans with a base term of three years and four one-year extension options. Including the extension, this tranche of debt will now mature in 2021.

Since closing this transaction, we hedged one-third of the outstanding principal with an interest rate swap. We anticipate hedging the remaining amount in the near term. Once complete, we expect our all-in interest rates for the new loan to be equivalent to the interest rate on the recently extinguished debt.

We will continue to monitor the capital markets for additional opportunities to further strengthen our balance sheet. As of quarter-end, we had an outstanding debt balance of $1.6 billion and a net debt to EBITDA ratio of 3.5 times. We ended the quarter with an unrestricted cash balance of $274 million. Our cash on hand along with our undrawn line of credit provide us with ample liquidity to fund future acquisitions.

The strong growth in our portfolio and operating income not only bolster our balance sheet but also allowed us to significantly increase our dividend. In the third quarter we increased our dividend by 36% over the prior quarter to $0.30.

With this year's annual distribution we will have increased our dividend by 20% per annum on average over the last three years. As discussed before, it is our general policy to distribute 100% of our REIT taxable income, and all future dividends are subject to Board approval.

Other capital outlays for the year include our 2014 renovation plan, which is now in its final stage. Most of the renovations scheduled for this year are taking place in the fourth quarter and are currently underway. We expect 60 to 80 basis points of disruption for the fourth quarter and approximately 40 to 50 basis points for the full year. As always, our in-house team is working closely with our asset managers and the properties to minimize potential disruption.

One of our key renovations this year is the Residence Inn, located in Midtown Atlanta, which we are pleased to announce reopened shortly after the quarter ended. During the renovation we made significant improvements to the hotel, including adding 12 keys and upgrading all the rooms and common areas. We expect the newly renovated asset to benefit from its central location in the heart of Midtown Atlanta.

We are also excited by the pending opening of our Fairfield Inn Key West, which is scheduled to reopen in late November -- just in time to capitalize on the peak season for the Key West market. Next year we will complete the conversion of the Courtyard San Francisco and the SpringHill Suites in downtown Houston, which will further strengthen the growth profile of our portfolio.

Our team is working diligently to bring these projects to completion. During the quarter we capitalized $517,000 of interest primarily associated with these assets. We expect to continue to capitalize interest for these two assets until they come online early next year.

Now, in light of our strong performance and our recent transactions, we have raised our guidance across the board. Our new guidance does not reflect any potential future acquisitions or dispositions.

We would like to highlight the following: first, we have increased our pro forma revPAR guidance to 6% to 8%. Second, we have increased our EBITDA margins to 35.1% to 36.1%. And third, we raised our hotel EBITDA guidance to $390 million to $410 million. Our guidance removes income from hotels sold and includes approximately $12 million of the prior owners' hotel EBITDA, which will not accrue to us and therefore will not be included in our FFO.

Thank you, this concludes our remarks. We will now open line for Q&A. Operator?

(Operator Instructions) Jordan Sadler, KeyBanc Capital Markets.

It's Austin Wurschmidt here with Jordan. I wanted to touch a little bit on New York. And just across your guys' five hotels, it's been a bit of an underperformer from a market perspective. Are you seeing any discrepancy in terms of -- or disparity in terms of the performance of those hotels? And are there any particular submarkets that are being impacted by supply?

It's a fair question, Austin. A couple of things I would note about New York: our portfolio ran 97% in occupancy. I think the market was still running 84% to 85%. So certainly the supply is getting absorbed.

We do have some tough comps -- if you look last year at FEMA and Sandy business, I think we had incremental 300,000 in the third quarter, about 83 basis points of revPAR impact. Also 20% of the rooms in what we refer to as Midtown East, where the DoubleTree Met is, were under renovation last year. So those are certainly easier comps.

Obviously, the adjacent Lexington property, which -- owned by one of our peers obviously had a pretty major renovation last year, as well. So they are benefiting, obviously, from that easier comp. But we like our portfolio. It is well positioned. We think we are going to do very well over the long term.

A little choppy right now -- that's probably the one soft market when you compare that across our entire portfolio. You know, New York only accounts for, really, about 14% of our EBITDA. But we think this is a temporary issue and certainly not a permanent issue.

Given our high occupancy, we are working in partnership with our internal asset managers and our external management company, Highgate, to look for ways to continue to shift the mix of business and continue to push rate. And we are optimistic about the future.

So would you expect that supply starts to moderate next year -- that you could see an acceleration in performance? Or does the sort of low single-digit in 2015 feel right?

I would think the amount of supply -- I think approximately 5.8%, I think, in third quarter -- I think that's probably going to continue through fourth, and something comparable to that in 2015. I have a hard time seeing New York not being anything more than a low to mid-single-digit in the near term, certainly underperforming what we are seeing in other markets -- the West Coast, Houston, Austin, etc.

Long-term we love what's happening in New York. And if you look at international arrivals as an example, I think from 2000 to 2012 international arrivals were growing at about 2.3%. I think the Department of Commerce just came out recently and has now increased that expectation up to 4% between 2014 and 2018, increasing from about $74 million to about $88 million. Clearly, we would all expect that New York would get more than a fair share of that. And that will benefit everyone in that market. And we certainly think we will get more than our fair share.

Thanks. That's helpful. And then just switching over to the balance sheet, Leslie, it looks like you've got some debt maturing sort of early to mid next year which appear to be at above-market rates. Just curious as to your thoughts on that, and any potential for an early refinancing there?

Yes. I mean, it's debt that we are obviously -- is on our radar screen. It's CMBS debt, so the window to be able to prepay is actually relatively short. But we are working towards putting a plan in place to refinance that at more attractive rates.

And then just one last one for me. In last quarter's release you guys mentioned about a potential special dividend in the fourth quarter. Any update there?

A couple of things we would note, Austin. If you look since we have been public, I think we've paid out about $2.68 in dividends for about $320 million, as Leslie noted in her prepared remarks. We've grown our dividend 20% a year. We increased it 36% this year.

It is our policy to distribute 100% of our taxable income. Obviously, some of our tax profile -- we will evaluate that at the end of the year and determine whether or not a special dividend is warranted. If it is, we clearly will distribute. We see dividends as an important part of being a REIT and an important part of return of capital. And I think we've demonstrated that time and time again.

Great. Thanks for the time, guys.

Ryan Meliker, MLV & Co.

Just one quick one from me. Just give -- I apologize if I missed this early on; I jumped on a little bit late. But you guys have a pretty wide range for guidance for the full year now, which implies an extremely wide range for 4Q.

Can you just give us an idea if you are more comfortable accurate low end, midpoint, or high end of that range? I think a $20 million spread on EBITDA relative to consensus in 4Q, which is somewhere in the $90 million range, is a pretty big range to be looking at. I was just hoping you might give us a little bit more color on how you are thinking about things for 4Q?

I certainly appreciate that, Ryan. To your comment last night, we didn't mean to set up an environment that we'd drive a truck through. I would encourage you and the listeners -- we would really drive you toward the midpoint of all of the guidance, both in revPAR in that 6% to 8% range; the same, obviously, for margins; and the same for EBITDA.

We are having a great year, feel very good about the fourth quarter. Obviously, we are going to have a number of renovations, particularly the Hyatt portfolio that we recently acquired. Six of those 10 assets for about $25 million in capital will be renovated from the fourth quarter through part of the early first quarter. But again, we are very comfortable with the midpoint of guidance. And we certainly would direct you and the listeners there.

All right. That's really all I had. Thanks for the color, and nice quarter.

Anthony Powell, Barclays.

Just a question on transactions -- you mentioned that you have around 26 assets that are marked as for sale. Are you a net buyer or a net seller at this point of the cycle? And do you kind of want to grow your portfolio size or just kind of keep it where it is right now?

I would say at this point in the cycle, Anthony, we're both. I think as you have seen, this year is a great example of that.

You know, we've sold 15 assets. Obviously, these are non-core assets. And for about $130 million revPAR, those assets were 30% to 35% below the portfolio average. At the same time, we have acquired 15 assets for $630 million, and Ross Bierkan and our deal team have done an exceptional job, particularly with the Hyatt portfolio.

And if you look at the assets that we've bought, most of which have been on the West Coast, we continue to improve the quality of our portfolio. So you can see us continuing to look for opportunities -- again, the 26 assets that we are currently marketing, they are at various stages. And you can look for us to recycle that capital into higher growth markets.

Clearly, the transaction environment is more difficult. There's a lot of capital; the debt markets are also pretty accommodating. But I think we've generated time and time again our ability to find deals off-market or limited-bid. And we are very confident that we will continue to find really accretive opportunities as we move forward.

I guess a follow-up on that. Have you seen more, I guess, private equity or sovereign wealth funds active in the single asset market in your flow of service? That will be, I think, a relatively new phenomenon, right?

I would say the answer is no. Generally, you are seeing the private equity, because of the debt market, is more interested in small to large portfolios, which makes sense given the amount of capital they have.

It's not inconceivable that you will occasionally see some of the private equity firms interested in a value-add, or a conversion, or a de-turn. Those tend to be, perhaps, a little larger and probably more urban in nature.

But clearly, there's a lot of capital, both from private equity and foreign investors. Without question we are passionate about our strategy. It is, on one side, really nice to see the validation. So many of the investors understand now the real benefits of an all-weather strategy by owning limited service hotels, particularly in urban environments.

Great. Thank you.

Thank you. It appears there are no further questions at this time. I would like to turn the floor back over to Mr. Baltimore for any additional concluding comments.

We appreciate everybody taking time this morning. We suspect many of you are headed to NAREIT, and we look forward to seeing you there and continuing our discussion. So safe travel, and we will talk soon.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.