RLJ Lodging Trust (RLJ) 2015 Q4 法說會逐字稿

Greetings and welcome to the RLJ Lodging Trust fourth quarter 2015 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, Nikki Sacks with ICR. Thank you, Ms. Sacks, you may now begin.

Thank you, operator. Welcome to RLJ's fourth quarter and full year earnings call. On today's call, Tom Baltimore, the Company's President and Chief Executive Officer, will discuss key operational highlights for the quarter and for the year. 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 may 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-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 the call over to Tom.

Thank you, Nikki. Good morning, everyone, and welcome to our 2015 fourth quarter and full year earnings call. I am pleased to say 2015 completes our fifth year as a public company. During this time, we increased our RevPAR by 58%, expanded our EBITDA margins by over 400 basis points, and more than doubled our adjusted EBITDA.

Additionally, we upgraded our portfolio with 30 accretive acquisitions for $1.3 billion and sold 43 non-core hotels for approximately $400 million to create a high quality, diversified portfolio. As of year end, RLJ owned 126 hotels across the US with 70% of EBITDA generated from assets in urban or dense suburban markets.

With the majority of our hotels in the upscale focused service category, we are extremely well positioned to continue to deliver solid results through varying economic conditions. We were once again able to deliver another year of solid growth and remain committed to our guiding principles of achieving operational excellence, being prudent capital allocators, and proactively managing our balance sheet.

In 2015, this is clearly evidenced through the following. First, from an operational standpoint, our portfolio grew RevPAR by 3.9% marking the sixth consecutive year of RevPAR growth. We also achieved consolidated hotel EBITDA of approximately $405 million, which is an increase of 6.1% over last year. Second, we enhanced the quality of our portfolio through the sale of 23 non-core hotels. The RevPAR of the hotels sold was approximately 42% below our portfolio average, and the margins were 450 basis points lower than our portfolio average. Third, we recycled proceeds from asset sales into the acquisition of three hotels in key markets, for approximately $176 million that further diversified and improved the growth profile of our portfolio.

Fourth, we returned approximately $400 million of capital to our shareholders in the form of dividends and by buying back 8 million shares last year. To date, we have returned over $750 million of capital representing nearly 70% of all capital raised since our IPO. And finally, we bolstered our balance sheet by refinancing $165 million of debt at attractive terms.

As we look to 2016, we are starting on a strong foundation with increased concentration in higher growth markets such as California, Austin, and South Florida, which are projected to represent approximately a third of our EBITDA. In 2016, Northern California is forecasted to not only be our largest market, but also our top performing market. And the overall California market, including our hotels in Southern California, is expected to represent approximately 16% of our EBITDA in 2016.

In the near term, we remain cautiously optimistic that the US economy will continue to expand despite uneven global economic growth. Our review is supported by continued positive job growth, improved household balance sheets, and robust consumer confidence, which we believe should be able to offset headwinds such as the decline in oil prices.

A moderate improvement of the US economy continues to provide a favorable backdrop for the lodging industry, which completed its sixth consecutive year of RevPAR growth in 2015. We believe that 2016 will be another year of positive RevPAR growth as key industry trends, such as below average supply growth, historically high occupancy levels, and growing corporate demand continue to move in the right direction.

Our view is that the combination of favorable sector fundamentals and a generally healthy economy will extend the lodging cycle. In 2015, our portfolio delivered solid RevPAR growth of 3.9% for the year and 2.5% in the fourth quarter. Excluding New York and Houston, where a stronger US dollar, increased supply, and lower oil prices continue to be headwinds, our highly diversified portfolio achieved 6.2% RevPAR growth for the year and 4.8% in the fourth quarter, which is in line with the industry average for the respective periods.

Our diversification strategy is highlighted by the impressive performance in our non-top six markets, which accounted for 59 hotels and 54% of EBITDA for the year. Our non-top six hotels achieved RevPAR growth of 8% in 2015 and 7.6% during the fourth quarter. Our performance was led by several markets that achieved double-digit growth, such as Dallas, Northern California, Portland, Tampa, and Atlanta, which achieved RevPAR growth of 14.5%, 13.7%, 13.5%, 12%, and 10.3% respectively.

Northern California generated an impressive RevPAR growth of 13.7% for the year and 15.3% during the fourth quarter. Growth in technology and innovation is driving the Bay Area economy, and we expect our hotels to continue to benefit from these trends in 2016. The year is off to a great start with our hotels in the region seeing a significant RevPAR lift in February from the Super Bowl.

We anticipate that our largely renovated Hyatt portfolio and the recently opened Courtyard San Francisco Union Square will have a very strong year. Among our top six markets, Austin once again was our top performing market with RevPAR increasing 5.1% for the year and 2.4% during the fourth quarter.

The fourth quarter faced some challenges due to weather that disrupted travel and attendance at some citywide events. During the year, we also renovated four hotels, which are now complete and position us for strong performance in 2016. The Denver market was our second best performing market among our top six, with RevPAR increasing by 3.8% for the year and 2.8% during the fourth quarter. Both leisure and corporate demand were strong during the year and the fourth quarter, which offset the soft citywide calendar as some large conferences from the prior year did not repeat.

In 2015, we renovated several hotels in the Denver market and we expect to benefit from these renovations in 2016.

Moving on to Chicago, our hotels increased RevPAR by 2.9% for the year, despite fourth quarter RevPAR being down 3.5%. Fewer citywide room nights created less compression, especially at our Midway hotels. We expect our Chicago hotels to continue to feel the impact from fewer citywide room nights this year.

Now, looking at our DC market, RevPAR across our hotels increased by 1.2% for the year and 0.6% during the fourth quarter. In anticipation of what we are expecting will be a strong year for the market, we renovated four of our hotels and acquired the Hyatt Place Washington, DC hotel on K Street. City wide demand in 2016 is tracking ahead of last year by 20% with 400,000 rooms booked and 2017 is tracking even stronger with nearly 500,000 room nights already on the books. We expect our hotels to be well positioned to benefit, as the nation's capital gets ready for the presidential inauguration and strong citywide activity.

With respect to New York, RevPAR decreased by 2.5% for the full year and 1.8% during the fourth quarter. We were very pleased by our hotels' outperformance relative to the market and our increased market share. Our asset management team continues to work tirelessly to maximize revenues and control cost. While the demand/supply imbalance is likely to persist in the near term, we remain confident that New York City will be able to absorb new supply in the long run.

Finally, our Houston hotels started out strong in 2015. However, the combination of market pressure from declining oil prices and significant renovations at four of our nine hotels impacted overall performance during the year. As such, RevPAR at our Houston hotels decreased 8.3% for the full year and 13.1% during the fourth quarter.

In 2016, Houston is expected to benefit from compression created by the upcoming Final Four championships in April. We expect the ramp up of our recently renovated hotels to be a tailwind for our performance.

In addition to growing our top and bottom line, we kept our focus on further enhancing overall portfolio quality. Our portfolio metrics have vastly improved as a result of our continued capital recycling efforts in 2015. RevPAR across our top 60 hotels in aggregate, which represent more than 70% of our EBITDA, is now at par with many of our peers that own full service hotels, and our margins are among the highest.

The growth our portfolio achieved in 2015 is supported by our efforts to diversify our portfolio through accretive acquisitions and dispositions. We were very active on the capital recycling front and sold several non-core hotels. Since we initiated our disposition program two years ago, we have sold a total of 43 non-core hotels for approximately $400 million. These transactions have significantly enhanced our portfolio metrics, as the average RevPAR for the assets sold was $72, which represents a 45% discount to our 2015 year end reported RevPAR.

Additionally, these sales have saved us significant future capital expenditures that were required to upgrade these hotels. We continue to actively explore the sale of additional non-core hotels in our portfolio and will provide updates if and when these sales close. We've recycled the sale proceeds into three high quality assets for approximately $176 million. These acquisitions further diversified our portfolio and expanded our footprint in high growth markets such as Seattle, Silicon Valley, and in Washington, DC, where we see strong long-term growth trends.

We expect that the contribution to RevPAR and margins from these assets will further improve our key metrics. In 2015, we also opened our two conversion hotels. The SpringHill Suites Houston Downtown opened in August and the Courtyard San Francisco Union Square opened in September. Our cost basis in these two hotels is significantly below replacement cost and we are very pleased to say that both hotels are off to a great start.

We remained focused on returning capital to our shareholders in 2015 by increasing our annual dividend by nearly 27% and returned approximately $400 million to our shareholders in the form of dividends and share repurchases. In 2016, our portfolio is expected to generate significant free cash flow. We also plan to continue to sell non-core assets and will use our strong liquidity position to strengthen our balance sheet and repurchase shares given that we currently trade at a significant discount to net asset value. We have approximately $175 million remaining on the share repurchase program authorized by our Board.

Looking ahead, we believe that as long as there is moderate economic growth, the lodging cycle will continue to have room to run. The recent market volatility has amplified concerns about the pace of industry RevPAR growth. Given that sector sentiment in lodging remains generally very low, there is a likelihood that industry performance may surprise to the upside.

For RLJ, we expect some unique tailwinds in 2016. The 18 assets acquired over the last two years have further diversified our portfolio and positioned us towards higher growth markets such as Northern and Southern California, which together are expected to represent approximately 16% of our EBITDA in 2016. In addition to California, other markets that have become key markets for us are strong markets such as South Florida, Portland, Atlanta, Tampa, New Orleans, which account for 19 hotels and 18% of our EBITDA.

We also renovated several hotels in 2015 and opened our two major conversion projects. We expect the ramp up in these assets to be meaningful drivers of our growth in 2016. In light of these positive tailwinds, but recognizing that significant economic uncertainty persists, we expect 2016 pro forma RevPAR growth of 3% to 5%, pro forma hotel EBITDA margins between 36.5% and 37.5%, and consolidated hotel EBITDA between $425 million and $450 million.

I will now turn the call over to Leslie to provide some additional information on our financial performance for the quarter and for the year.

Thanks, Tom. Over the last five years, we have shown a consistent and disciplined approach to managing both our operations and the allocation of our capital with a focus on creating shareholder value.

Looking at our results for 2015, we are pleased to report that our hotel EBITDA increased by $23.3 million to $405 million. This represents an increase of 6.1% over the prior year. During the fourth quarter, our hotel EBITDA increased by $3.8 million to $95.9 million. For the year, we achieved hotel EBITDA margins of 36.4%, which represents a 9 basis point increase year-over-year.

For the quarter, we achieved margins of 35.5%, which is down 27 basis points from the prior year. Throughout the year, higher property taxes coupled with the challenging performance in Houston and New York weighed down our margins. Excluding these two markets, our margins would have expanded by 87 basis points for the year and 52 basis points for the quarter.

Now, with respect to our corporate performance, our adjusted EBITDA increased by $13.2 million to $380 million for the year, which represents an increase of 3.6% over the prior year. During the quarter, we achieved $89.8 million of adjusted EBITDA. Adjusted FFO for the year increased $14 million to $324.7 million, representing a 4.5% increase and equates to $2.50 on a per share basis. For the quarter, our adjusted FFO was $74.8 million or $0.60 on a per share basis.

Our adjusted EBITDA and adjusted FFO reflect add backs to normalize our results. In the fourth quarter, we had three non-cash adjustments, the most significant of which was a $40 million adjustment related to the release of our valuation allowance. The other adjustments included an impairment charge of $1 million and a $4.6 million gain related to the sale of an asset during the quarter. A complete reconciliation of adjustments is included in our press release from last night.

In addition to generating solid operating performance, we were proactive on the balance sheet front as well. Given the strength of the capital markets early in the year, we executed a multi-step strategy to refinance our 2015 debt maturities totaling $165 million. Our ability to effectively manage and execute this transaction significantly improved our interest rates on this tranche of debt by 210 basis points.

We were also able to defer the maturity of this tranche of debt to 2022, further staggering our debt and strengthening our balance sheet. Our conservative balance sheet has tremendous flexibility. Not only have we staggered our debt and reduced our weighted average interest rate, we have also continued to maintain a significant number of unencumbered assets. As of year end, we had 112 unencumbered assets, which represented approximately 82% of our hotel EBITDA.

We ended the year with $1.6 billion of debt and a net debt to EBITDA ratio of 3.8 times, which is an improvement of nearly six turns from when we went public. As a result, our balance sheet is one of the strongest among publicly traded lodging REITs today.

In 2016, we plan to continue to proactively manage our balance sheet. We expect to refinance our 2017 and 2018 debt maturities totaling $474 million and we plan to recast our $300 million credit facility. For each of these transactions, we intend to extend the duration, enhance the covenants, and improve the interest rate. As we complete these transactions, we will remain committed to maintaining a low levered, conservative capital structure.

Now, I'd like to turn to our liquidity position. We ended the year with an unrestricted cash balance of $134 million and our $300 million credit facility remained undrawn, providing us with ample dry powder to execute on a variety of capital deployments. During the year, the significant free cash flow generated by our portfolio and our capital recycling efforts enhanced our liquidity position. This enabled us to return a substantial amount of capital to our shareholders.

In 2015, we repurchased 8 million shares for a total of $225 million, including repurchasing 1.1 million shares in the fourth quarter for $25 million. We also increased our dividend by 27% on an annualized basis during the year. Since our IPO, we have distributed approximately $530 million in dividends and on average, we have increased our dividend by over 20% per year. In 2016, we intend to continue to explore the sale of additional non-core assets.

As we sell more assets, we intend to further strengthen our balance sheet and repurchase additional shares. Additionally, during the year, we completed our $85 million capital expenditure program, which included renovating 25 hotels. Given the unexpected port closures on the West Coast earlier in the year and the incremental disruption in key markets, we experienced more of an impact to our RevPAR than originally anticipated at the beginning of the year.

As a result, displacement from renovations impacted our full year RevPAR by 87 basis points. Excluding this disruption, our portfolio would have grown RevPAR by 4.8%. While these renovations created a headwind for us in 2015, we expect them to provide a tailwind for our portfolio in 2016.

As we start 2016, we plan to renovate nine hotels for approximately $30 million to $35 million and anticipate RevPAR displacement of between 25 and 30 basis points, which again is already factored into our annual guidance. As we have in the past, we expect the majority of the renovations for the year to occur during the first and fourth quarters to minimize disruption.

Before I expand on the 2016 guidance that Tom mentioned earlier, I want to note that our outlook includes all the acquisitions and dispositions announced to date and does not account for any future changes to our portfolio. Additionally, our RevPAR and margin guidance has been adjusted for non-comparable hotels. In 2016, our Courtyard Waikiki will continue to be non-comparable since it was also a non-comparable hotel in 2015 due to its extensive renovation.

Now, I would like to highlight the following points regarding our guidance for 2016. First, we expect pro forma RevPAR growth of 3% to 5%. Second, we estimate hotel EBITDA margins of 36.5% to 37.5%. Third, we estimate that our hotel EBITDA will be between $425 million to $450 million. Fourth, we expect our corporate G&A to be within $27.5 million to $28.5 million. Next, as we discussed our last call, we expect the run rate for our interest expense to be approximately $15 million per quarter. And finally, any non-cash impact to our taxes related to the release of the valuation allowance will be added back for purposes of adjusted FFO.

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

Thank you. At this time, we'll be conducting a question and answer session. (Operator Instructions)

Our first question is from the line of Ian Weissman with Credit Suisse. Please proceed with your question.

You know, we've heard from several of your peers this quarter who I guess would describe still a pretty strong bid for core assets in global gateway cities. I think you can essentially say that they've seen little in the way of backup in cap rates despite dislocation in the credit markets and the global economy.

I mean you guys are active sellers. Can you just talk a little bit about buyer demand and pricing for secondary markets, and call it lower RevPAR assets today?

I think it's still strong, Ian. If anything, maybe it's backed up 50 basis points. Clearly, the debt market has widened out a little bit, but I still think that there are a number of groups looking for yield, whether it's high net worth, whether it's private equity, whether it's large sovereign.

So we're in active discussions and we're certainly cautiously optimistic that we're going to be able to move some of our noncore assets. I think we've demonstrated that over the last few years. Again, we moved 23 assets for about $250 million last year. We've moved $400 million over the last couple of years. And so we're cautiously optimistic. We think it's still active.

The debt markets are choppy but we don't think at the size of deals that we're looking at, whether they're individual asset sales or small portfolios or slightly larger, we think and expect it's going to be relatively active.

Okay. And just quickly on the guidance. Leslie, if I heard you right, you said of the results this quarter, you experienced about 87 basis points of displacement, which I thought would have been a little bit higher just given what you guys did in Houston, down 13%. As I think about the 3% to 5% RevPAR guidance for 2016, without maybe pinpointing exactly can you just sort of, you know, sort of give us some indication what your expectations are for Houston and for New York within that 3% to 5%?

Yes, I think, Ian, a couple things to keep in mind. You know, we've transformed the portfolio so we've bought 18 assets in the last two years, 15 of those in 2014 for about $630 million. Obviously, we bought three assets last year for about $176 million largely in the West Coast in highly desirable markets. So now, obviously, we get a pretty significant tailwind from Northern California. As we said, we expect Northern California to be about 11%. When you combine that with Southern California, obviously, we think an incremental 5%. So that moves into being our largest market, followed largely by Austin being strong, South Florida being strong.

I do think it's important to sort of walk through the kind of top 10 because the way we're going to be reporting in the future is focusing not on kind of the historical top six but more the top ten. So, you know, after South Florida followed by probably Denver. New York City will fall down to probably our fifth market. Chicago, six; DC, seventh; Louisville, eighth; Houston, ninth; and Southern Cal, again closing out the top ten. It's an incredibly diverse portfolio. I think that's why -- I think our portfolio held up. Even though New York and Houston were a big drag last year, they were a drag of about 230 basis points.

So you add those two back last year, you know, we would have been for the quarter and for the year -- I think for the quarter about 4.8% and for the year about 6.2%, generally in line when you then add back the renovations we had, 87 basis points. The four previous years, you know, we were north of 7% in RevPAR growth.

So again, that also I think provides a backdrop that while things certainly softened slightly and we did see a slight deceleration, we don't think that there is a high probability for a recession. So I wanted to give you and other listeners certainly that backdrop because I think it is important as we move forward and why we're cautiously optimistic.

Last year, on Houston was a pretty significant miss. No one could have expected what happened. So in our case, we thought it was going to be positive. We ended up 8% down. You've got to keep in mind that 500 basis points of that related to really four major renovations involving four assets and about $16 million in capital, in addition to the fact that we also were adding a tenth asset there.

So as we look forward, you know, we think that we get the benefit of a slight tailwind given how we underperformed last year in Houston. We still think that Houston is going to be slightly down, to answer your question. Is that 2%, 3%? Certainly, in that range looks and feels about right. New York is always the toughest. We thought New York would be flat to up last year. Obviously, it ended up and as it related to us at about 2.5%. We still gained share. We're pleased with that and our operators are working closely with our asset management team to continue finding ways to take cost out of the business. But given the increased supply, given also what we're seeing with the -- these cancellation software that it's allowing, you know, many customers to rebook is certainly affecting pricing.

So as we look to New York, we also think New York is going to be slightly down, slightly negative. All of that is, again, factored into our guidance but we think so many of our other markets are going to be so much stronger. Again, Northern California we fully expect to be north of 20% just for first quarter this year, as an example, given the benefit that we got from Super Bowl and given the diversity of assets we have. We only have one asset downtown in the CBD. We're spread throughout Silicon Valley. That is very strong and we think going to really outperform for the year and probably we end the year north of double-digit RevPAR growth there.

So a little bit long winded but I thought it was important to kind of put it all in context for you. And hopefully, that's helpful to you and other listeners.

No, that's great color, Tom. Thank you very much. That's it for me.

Thank you. Our next question is from the line of Ryan Meliker with Canaccord Genuity. Please go ahead with your question.

Hey, good morning guys. Thanks for all the color to Ian's questions. It was really helpful to understand the tailwinds from renovations as well as what your underlying expectations are for Houston and New York, as we know those are continuing challenged markets.

The other question that I had for you guys was as you talked a little bit about the dislocation in the credit markets, you know, it seems like there's not the bid for portfolios of select service hotels that there was a year or two ago. You guys obviously have one of the best balance sheets in the industry. What's your appetite for kind of stepping in and filling the void on portfolio acquisitions that seems like private equity and maybe even some of the non-traded REITs have now vacated as we go through 2016?

It's a great question, Ryan. I would say that, you know, we're always opportunistic but I think as a general rule, based on where we sit today, you can expect that we'll be a net seller. We continue to be really focused on selling non-core assets. Again, as I said to Ian, I think the climate is perhaps a little tougher but we're cautiously optimistic and based on discussions we're having, we think that there are active buyers out there and the debt markets will certainly be sufficient.

You'll see us be again a net seller. You'll see us use those proceeds and we'll match fund consistent with what we said on the last call. We'll match fund those proceeds to continue to lower debt, continue to strengthen our balance sheet. Leslie and her team have just done a phenomenal job, and as Leslie articulated, we're -- you'll see us push out maturities. You'll see us get additional flexibility. We're confident that we will end this year with not only one of the best balance sheets, if not the best balance sheet, probably second to our friends at Host. But we think that will be a huge weapon for us as we ultimately get to the end of the cycle. We don't think we're there today.

Again, we'll also use excess proceeds to buy back our stock. We were active last year buying back. We bought back 8 million shares at an average price of about $28 and $24 the last quarter. And if we thought it was a good buy at that point, we clearly think it's a good buy today. We're trading at a huge significant discount to net asset value (inaudible) north of 40% range. So we think that's the highest and best use of our capital. And I think, you know, we've prided ourselves on being really prudent capital allocators. And I think you'll continue to see that kind of effort from us.

All right, and then I apologize if I missed this in the prepared remarks, but as you guys look to sell non-core assets, any particular markets that you guys are focused on trying to either reduce your exposure or outright exit?

As we said in the prepared remarks, our top 60 assets really with RevPARs comparable to almost most of our full service peers. You know, I wouldn't say that they're off limits but you know, we see that many of those are going to be core holdings. So, you know, if you look at the other -- the barbell, the other side of that with our portfolio, we do have a number of assets that are RevPARs in the $100 to $105 range that we don't think are long-term holds. You'll continue to look for us to -- and they're spread throughout the country. We're in 21 markets today so that gives us an opportunity to craft single assets in small portfolios. We'd prefer to do small portfolios in the size that you've seen us do in the past -- thirteen hotels; we did one last year, 20 hotels. That's sort of what will be the focus for us as we move forward.

And we're setting a target internally of $300 million to $400 million initially. And we can certainly increase that if the buyer universe is attractive and pretty robust. We will also explore lightening our load in New York. One of the comments that again I made earlier, I want to stress, is that both New York and Houston historically were probably in the 19% range. They will be, we believe, at about 12% of EBITDA. So again, they're less and less of an impact to us on the overall portfolio, in part because they had -- they underperformed. But I think equally important and perhaps even more important is the fact that we've grown the portfolio and we've repositioned with so many of the wonderful acquisitions over the last two years.

The Hyatt Portfolio and our relationship with them has been very strong and that portfolio generated near a (ten-cap) for us last year that we bought in 2014. We now renovated half that portfolio. So we are very bullish and seven of those ten assets were on the West Coast. So there is a lot of optimism. I think the market perhaps has not understood and that's something that we -- that Leslie and I plan to do a much better job communicating that. So people see despite the softness in a couple markets, our diversification is a real strength and we look forward to showing that benefit here in the months and years to come.

All right. Thanks, Tom. I appreciate the answers to my questions. Have a great day.

Thank you. Our next question is from the line of Wes Golladay with RBC. Please go ahead with your question.

Hey, good morning, everyone.

Good morning, Wes.

You had mentioned your stock is at a 40% discount and the core assets are fairly, I mean, you still get -- you could still get a good bid for those assets. Why not sell core assets and buy back the stock here?

It's an excellent question. Well, all options are on the table. Wes, I think you know us. We've had discussions before. We think the industry should consolidate, right, and we want to be part of that discussion as a buyer/seller. And I think, as -- we think in the intermediate long-term selling non-core positions us and helps us in the long-term goal again of looking and exploring M&A.

Having said that, if there are core assets and I'll take, I mean, a New York asset or two, if the pricing is right and it's attractive and it creates value for shareholders and given where we're trading as a discount as I said in the $300 to $400 million that we targeted so far, you can expect that we will seek to sell an asset or two in New York. So I think that answers your question and certainly that will be a part of the game plan that we'll explore.

Okay. So you mentioned you would actively hire someone to try and sell it rather than wait for a reverse enquiry, if I heard that correct?

Yes, we'll do both. I mean we'll look to sell assets off-market. We have a broker that we're currently working with. And given Ross Bierkan's background and all of those, we are -- and given our history, we certainly have unique relationships. So selling using brokers or not; we'll continue to explore ways to create value for shareholders.

Okay. And then, Leslie, real quick. What kind of margin expansion do you expect for this year? I think you just gave the absolute margin, but what's embedded in that?

That would assume at the high end 100 basis points and the midpoint 50.

Okay. And then for the tax release, will that allow you to keep your taxable income low and keep a low payout ratio this year and -- or not to raise the dividend, I guess, buy back more stock this year?

It's actually opposite, Wes. The fact that we are generating positive net income at the TRS would suggest that you're having more distributable taxable income, which you'd have to increase the dividend in theory. So it's actually the opposite implication.

Okay, sorry about that. And then, yes, that's it from me. Thank you.

Our next question is from the line of Bill Crow with Raymond James. Please go ahead with your question.

Good morning.

Good morning, Bill.

Hey, Tom, it sounds like if anything your concentration in Northern California is going to increase through the years via asset sales whether non-core or New York? I would like to get your take on -- and I know it's tough to pin down even 2016, but 2017 in the first half of the year looks in San Francisco in particular to be challenging, loss of a lot of citywides because of the Convention Center work. How are you thinking about that as you try and model out the next few years?

It's clearly something that we've got to monitor carefully. Like everybody, we are all trying to get our arms around what's the scope of the work, what impact is it going to have on some of the big groups. But I would say, Bill, given the fact that we're spread out through Los Altos, through Santa Clara, through Fremont and just where we are positioned through that and given the distance, and the fact that we've really only got one asset, the 167-room San Francisco Courtyard Union Square. We think we are pretty well insulated at this point. Obviously, if we had all of that exposure in the CBD, we'd certainly be a little more uncomfortable than we are today. We will monitor it, but we think and I think we'll see that while some of our other peers that are really bullseye locations in San Francisco that have sort of underperformed, I think you'll see our first quarter print, what we expect to see in Northern California will be a significant above what others are doing.

Well, that's terrific. My second question, Tom, is -- and it may be too early to tell, but I wonder what you're seeing from inbound international travel demand for the upcoming summer months. So maybe relative to what you saw a year ago?

Yes, I don't have the data on that right now. But I would say what we saw in New York last year, I think is a decent proxy. You know, international demand was down, revenue about $2.1 billion. It was about 17.5% of total revenue versus about 19.1% of total revenues in 2014, so down about a 150 basis points year-over-year and it had about 300 basis points of RevPAR impact to us in New York. Again, one operator we've got four hotels there in Manhattan.

So we have seen over the last few years the international generally was in that 18% to 20% range. So certainly, with the strong dollar, we have seen a pullback and also think the strong dollar has created opportunities for more of the U.S. consumers to be traveling abroad, so I think that's the other side of the equation as well.

So still think as you look at the Department of Commerce and what they put out, I think the compound annual growth rate of international travel between 2000 and 2012, I think was growing at about 2.3%, and I think they revised it down slightly for the next five years, but it was still north of 3% I think at around 3.1%.

So we're still cautiously optimistic. No doubt, here in the near term it's going to have an impact. We're not seeing a real falloff for the summer, just don't have enough of that data right now given the short booking patterns we have on the transient side.

Okay, great. Maybe I'll ask the same question next quarter when we get a little closer to the summer months. Thanks, guys. I appreciate the time.

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital. Please go ahead with your question.

Hi, good morning, guys.

Good morning.

Thanks for taking the question. I guess, Tom, just given your general cautious optimism on the industry, your comment about potentially the industry surprising to the upside struck me. And then you mentioned also just having limited visibility in the business. So, I guess, what gives you the confidence that -- or what are you seeing that, you know, that you think could -- that this year, RevPAR could surprise to the upside?

Well, I think clearly we're seeing supply still below the long -- certainly below the long-term average. Consumer is still healthy. Housing is still good. Corporate profits, well, a bit choppy. Balance sheets, I think have been repaired certainly from a consumer standpoint. And as we look out and see some of the trends group, I think is firming and certainly getting better. And I think a lot of the brands have supported that. We see in our own portfolio -- yes, look in transient, it's up about 4.7% here over the next 90 days. Even in group for us, which is not a big part of our business, we see that being up about 13%.

So we're cautiously optimistic, Austin. Also, the greatest is really -- if you step back and kind of look at our performance last year, and again, we all know the drag that we had for New York and Houston, about 230 basis points. But when you take that out and it's sort of unique situations, right? One strong dollar and certainly supply in New York, the other given the oil crisis and what we saw in the big falloff.

But we really had broad support. Out of our non-top six markets, again, 59 assets accounting for 54% of our EBITDA, up 7.6% for the quarter and up 8% for the year. So we're seeing a broadening and a strengthening. No doubt it's choppy. No doubt that GDP growth a little soft in fourth quarter. I think most of the pundits still see US growing at 2%, 2.5%. So that's moderate. But this has largely been a moderate recovery. It has not been a traditionally strong recovery.

And that can provide for continued growth in our business. So we -- for some who believe that the cycle is over and that we're looking at a recession in negative RevPAR, we just don't see any data on the horizon. We do see choppy markets and listen, we do -- I do want to communicate to the listeners, first quarter will be our softest quarter. We'll -- as Leslie pointed out we do have a few renovations this year. Those largely will occur in first quarter and fourth quarter. We do have some tougher comps in first quarter.

So we would expect that we would probably be in the 2% to 4% RevPAR despite all of that in the first quarter. But as we look out in favorable comps and demand patterns and again Northern California we just expect as kind of the north double-digit and we just had a very strong showing coming out of the Super Bowl there. And given our distribution of product there and the transformation of the portfolio, we're cautiously optimistic.

Thanks for the high-level comments there and the detail there on the first quarter. When you look across the supply picture in your non-top six markets versus the top six markets, how do they stack up?

I would say in the non-top six markets there's probably less supply exposure. And on a generally speaking -- and clearly I think we all know the New York picture, don't need to talk about that. Austin is interesting. Everybody talks about the end of Austin for years and we were up 11% in 2013, we were up 9.4% in 2014, and we were up another 5% last year. And we think we will be up mid-single-digits again this year. But when you have a city like that that's a tech hub and a university town, and a state capital and just prolific growth occurring. The supply, even for the high supplies occurring there, it's being absorbed. So I would think generally that the -- our current non-top six that the supply is probably slightly below what we're seeing in some of the other urban markets, yes, generally speaking.

Thanks for that. And then just lastly for me just on the transaction side. Is it fair to assume that -- you didn't buy back as much stock in the fourth quarter as you had previously. So is it fair to assume that your stock repurchases will kind of depend upon the pace of your asset sales in 2016?

Absolutely. We sent that signal in the last call that we would match fund, and we would use proceeds from dispositions again to continue to strengthen our balance sheet and continue to buy back stock. Those are priorities one and two for us this year. And we were clearly not happy with where we've been trading, but we were -- we know it's a marathon, not a sprint. We'll continue to work hard and prove out our thesis and we know if we do that, over time we'll get rewarded by investors.

Okay. Thanks for the time today.

Our next question comes from the line of Shaun Kelley with Bank of America Merrill Lynch. Please go ahead with your questions.

Hey, good morning, guys. Thank you for taking my question.

Good morning, Shaun.

Tom, I just wanted to go back to sort of the Houston underwriting and this is probably more of a clarification than an actual question. But I think you said in response to one of the first questions that you were expecting Houston to be down 2 to down 3. So A, did I catch that correctly? And then B, is that inclusive of your -- is that you market expectation or is that inclusive of the renovation or disruption tailwind that you'd expect to see at your specific hotels?

Well, that 2% to 3% negative related to our portfolio. We've got 10 assets there that was clearly related to RLJ's portfolio. That, keep in mind we were down pretty significant last year as you know, 8.3%. Again, we had at least 500 basis points of that related to significant renovations and a drop off in oil and gas business in Houston.

So we think Houston is going to be down. I would also stress that we expect that Houston is going to be about 5% of our EBITDA. We saw our hotel EBITDA of $425 million to $450 million. So it certainly is relevant, but we think again as we reposition and we talk about our top 10 markets, Houston really drops down to about our 9th top market in the scheme of things. So Houston is not going to crater our year and crater our business.

So we think long term, Houston is a wonderful market and I would remind listeners that between 2011 and 2014 we were generating a compound annual growth rate of about 10.8% and we were growing cash flow at 16.2%. So it was bodacious results for us and it's soft now and who knows how long this oil, certainly shortfall is going to remain.

But we're well positioned there long-term. We love having assets downtown in the Galleria and Woodlands and we like the portfolio and again, don't want more than 5% exposure, but we've always talked about having a really diversified portfolio and I think this is going to prove that thesis out over time here in the next few years.

That's great, thank you for that. And then the other question again is probably also just a clarification, but when we think about top markets for this coming year, I think in the prepared remarks you talked a little bit about South Florida. So I mean of the same -- of the bright spots that you see right now, is that the number one? Is it still continuation in places like Austin and Denver, just where do you think is going to be the best?

As I, Shaun, look at what I'd call the positives for 2016 for RLJ I would begin with Northern California, which we've talked about. We think it's our top market and our top-performing market. We estimate it will be approximately 11% of our EBITDA. We expect it will be north of 10% RevPAR growth. We've got eight assets there again part is coming from the Hyatt portfolio acquisition in 2014 and the other bolt-ons that we did last year coupled with the San Francisco, Courtyard Union Square, bullseye location that just opened, and it's ramping up very nicely.

We get the tailwinds from a number of renovations, the Waikiki, a significant renovation, our Courtyard there largely out of service last year; our DoubleTree Grand Key West in South Florida, one of the two assets that we have in a very strong Key West market; our Embassy suites Irvine, again coming off of a major renovation; our Portland Courtyard also coming off of a major renovation. The Hyatt portfolio, again, we renovated probably half of that portfolio last year.

And then our recent acquisitions. We get the tailwind coming from the Hyatt Place DC. DC we think is going to have a strong 2016 and an outstanding 2017. The asset that we bought last year in Seattle, of course the Los Altos Residence Inn that we also bought in the Silicon Valley area. So we think that really provides the greatest tailwind.

So Northern California certainly strong, Austin has continued to be a resilient market, South Florida feel very good about, Southern Cal we feel very good about. And then again, as we look at some those old what we call nontraditional, non-top six markets where we continue to get the benefit -- Atlanta should have an outstanding year, New Orleans should have a good year, Dallas should have a good year and so that diversification helps us and positions us and candidly can soften the blow for perhaps some of the other markets that may slip a little bit.

Again we, as I communicated earlier, would expect that first quarter would be our softest quarter; it traditionally is. We do have tougher comps, and again we would expect that we would be RevPAR probably in the 2% to 4% range for first quarter, but we are very optimistic as we look out for the second, third and fourth quarter for the balance of the year.

Thanks and sorry to make you repeat yourself, but I appreciate it.

Our next question is from the line of Lukas Hartwich, Green Street Advisors. Please go ahead with your questions.

Thank you. Hey guys, I just have one quick one.

Good morning Lukas.

Hey. So I'm just curious -- the asset sales that you are planning on doing, what's the priority in terms of the uses of proceeds there? Is it buying back stock, is it lowering leverage, just if you could talk about the priorities of disposition proceeds?

Yes, we don't see them being mutually exclusive, Lukas. So the reality is we'll continue to look at the balance sheet, as Leslie articulated in her prepared remarks and we are working on, again, extending maturities, giving us more flexibility with covenants. We want -- we have a superb balance sheet. We want a fortress balance sheet. And particularly, as we get later in the cycle and you'll see that again being an equal priority for us, as well as buying back stock. If we were an active buyer buying out at higher prices, you can fully expect that we have as much energy and enthusiasm today to buy back at what are unbelievably depressed prices and trading at a 40% or more discount to NAV.

So we'll manage both. I think the first priority is to seek to sell non-core assets and we'll seek to do that and whether it's single asset, small portfolios, or slightly larger portfolios and also again look to, like many of our peers look to lighten our load in New York, all those issues are on the table.

Great. That's it from me. Thank you.

Our next question comes from the line of David Loeb with Robert W. Baird. Please go ahead with your question.

Good morning, David.

Good morning, Tom. I want to hit on a couple of themes you guys have talked a lot about. So I apologize if it's a little bit repetitious. Leslie, one specific thing. I know you'll have which are the non-comp hotels in the supplement later today. But if you could just run through that now that would just help us in our understanding of the guidance.

Sure. This year we're going to have four non-comparable hotels. As I mentioned in my prepared remarks, Waikiki will continue to be non-comparable. Obviously, San Francisco just came online last year, so that won't be comparable, nor will the SpringHill Suites. Houston, because that came on last year, as well as the DC Hyatt, which opened last year, those are the four non-comparable hotels.

Just those. Great, okay. And, Tom, this is kind of more of a thought question on the dispositions and use of proceeds. I very much appreciate you have a highly accretive use of proceeds in buying your stock at a big discount to NAV. But do you think that there's some potential buyers of those assets out there that believe they have the upper hand on pricing, given this use of proceeds that you were highly motivated to use?

Yes, it's a great question, David. I mean, there's always a little bit of game theory. And look, we -- there's no need for a fire sale. There's no need for us to panic. We've got liquidity. We've got a wonderful balance sheet. Again, we want to continue to strengthen it and get it to a fortress position. But we will always be careful and thoughtful about ways to create shareholder value, but it's a very fair question.

I think that there will be in this environment and keep in mind, as you know and, as part of our history, we were on the private equity side. We did have three funds, as you know, prior to -- and were private before that for us. So we understand a little bit of that. But at the same time, there are buyers out there that have got a finite period of time to put out capital. This is their window. And as I tell many of the private equity guys, if you're going to transact when you've largely got a lot of the REITs on the sidelines, this is your window to act, and if you don't take advantage of it, I think you'll regret that. And so it's a little bit of game theory on both sides of the aisle.

Great. Thank you very much.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please go ahead with your questions.

Good morning.

Hi, good morning, everyone. Good morning, Tom. Obviously, your RevPAR growth in your non-top six markets historically was very strong and it actually accelerated from the -- in the fourth quarter from the third. What customer segments kind of drove that acceleration and also were you gaining share in those markets, or was it just kind of the markets themselves that drove the growth from the third quarter?

I think, again, Anthony, it benefits from having a really diversified portfolio. Clearly, leisure, given the strength of the consumer, has been strong. But we also saw a growth individually in business transient as well. So I would think it's diverse, it's broad-based. And, again, when you've got a portfolio of 125 assets now and we're in 21 markets, almost all of the major cities and/or very dense suburban markets, that diversification really gives you somewhat of a base and a moat.

We've always believed that being in four or five markets is not the way to play a volatile asset class like lodging. And where we think, again, you take out New York and Houston, we talked earlier about that. We're at 6.2%. You add back our displacement given the fact we had 25 renovations, significant renovations last year. We're really not that far off from where we've been the four previous years, north of 7%.

So again, no doubt we saw a slight deceleration, no doubt it's choppy out there, and no doubt forecasting is a little more difficult. And so we're not naive about this. We've been through many cycles. But we think the diversification really gives us a strength as we move forward.

Got it. And I think you mentioned before that M&A would be something that you'd look at and that selling non-core assets helps position you for that. Are you seeing still today little REIT-to-REIT M&A in the space? What do you think changes that this year or in future years?

M&A is -- we have this discussion every quarter. Everyone knows my views on it. I think the industry should consolidate. We want to be part of that discussion, either as a buyer or a seller. But I think in this environment, given where multiples are, given where people are trading vis-a-vis their own NAV, it's tough I think to imagine that a deal can get done.

Even for some of the take-private, you would need the debt markets to be cooperative to be able to do a large transaction in that scenario. And probably the biggest hurdle, which has historically been, is really the social issues. You've got a lot of entrenched CEOs and management teams that enjoy their -- enjoy the perch, and don't want to give it up. So I think that's certainly been one of the big issues as we've talked in the past.

Okay. And there's one more for me. I think recently CBRE identified Austin as a top Airbnb market in the country. Have you seen any impact of -- to that market from Airbnb and what's your view on Airbnb in general? I think you were latest to kind of burst onto the scene.

Yes, I missed your -- part of when you say Airbnb, you're talking specifically about Airbnb or a specific market?

Austin. I think CBRE kind of identified Austin as one of the top 10 Airbnb markets. And I wondered if you saw any impact in Austin or see any impact in Austin from Airbnb?

No, we really haven't. Again, as I said earlier, Austin has been -- it's been one of those markets where everybody has been predicting the end of Austin for a long time. I think we were up 11% in 2013, we were up 9.4% in 2014, were up 5% last year. And we fully expect we'll be in that range again this year. Again, given their -- the following, the consumer base, the number of millennials there, some of the special events, I mean, it makes sense that Airbnb might have a nice total there.

Listen, Airbnb is a real threat. They are here. In many respects they are operating illegal hotels. All we want is a level playing field. We want them to be able to pay taxes to the same extent that we are, want them to be required to adhere to the same ADA laws and the same fire/life safety laws that we RLJ and many of our peers are also required to follow. So, we think over time as municipalities are getting smarter about it and understand and understand the implications of zoning and taxes that that will level out over time.

We don't agree, as I think one or two of your peers have suggested, that Airbnb has created about 200 basis points of supply impact. We really disagree with that thesis, and don't believe that the logic supports that. No doubt in special events and certain situations -- we did see out in San Francisco that we had to -- it affected booking patterns. But at the end of the day, we had a fabulous performance for our hotels in the San Francisco area. A lot of the credit goes to our management company partners and our asset management team that work carefully to revenue manage appropriately.

All right. Thanks a lot. It's been a very good call. I appreciate it.

Thank you. At this time I will turn the floor back to Mr. Baltimore for closing remarks.

Thanks. We appreciate everyone taking time and look forward to our upcoming call in late April or early May. Safe travels.

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