RLJ Lodging Trust (RLJ) 2016 Q3 法說會逐字稿

Welcome to the RLJ Lodging Trust third-quarter 2016 earnings call. At this time, all participants are in a listen-only mode. A brief Question-and-Answer session will follow this formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Hilda Delgado, Treasurer and Vice President of Finance. Please go ahead.

Thank you, operator. Welcome to RLJ's third-quarter earnings call. On today's call, Ross Bierkan, the Company's President and Chief Executive Officer, will discuss key highlights for the quarter, and Leslie Hale, the Company's Chief Operating Officer and Chief Financial Officer, will discuss the company's financial and operational 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-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 Ross.

Thank you, Hilda. Good morning, everyone, and welcome to our 2016 third-quarter earnings call. The lodging industry is at an interesting point in time. After almost 7 years of strong performance, this year's RevPAR growth has been tempered by moderating corporate profits, increased global economic uncertainty, and an increase in supply.

This quarter, industry demand growth of 1.6% was evenly offset by supply growth. While supply is increasing, it still remains below the long-term historical average and well below 2009 peak levels of 3.2%. Even in the face of increasing supply, we believe the U.S. lodging industry can remain on track for another year of positive RevPAR growth, albeit modest, so long as economic growth and business spending don't further decelerate.

Now, while demand and supply dynamics are shifting, our seasoned team has years of experience successfully navigating through multiple hotel and economic cycles, and we are prepared to respond to the shift in fundamentals. Our portfolio's scale and broad market diversification provides a strong platform to weather any softness.

With respect to our performance during the quarter, we had several markets post solid RevPAR growth which helped offset declines in markets like Houston and New York. While our RevPAR this quarter was flat to prior year, excluding the results from Houston and New York, our portfolio achieved growth of 1.9%.

Our team of knowledge asset managers and our best-in-class operators continue to manage operational costs and grow market share in light of a challenging backdrop. We are very pleased that this quarter, we once again increased our market share. Our RevPAR index this quarter increased meaningfully by 170 basis points with eight of our top ten markets gaining share year-over-year.

As I mentioned, we had a number of markets perform very well this quarter. For instance, our hotels in Washington, D.C., South Florida, and Tampa, generated RevPAR growth well ahead of the industry helping offset softness in weaker markets like Houston, New York, and Austin.

Our Washington, D.C. hotels generated excellent RevPAR growth of 12.3%, significantly outperforming the market by 680 basis points. Our well-located hotels benefited from strong summer leisure travel and an increase in group production. We also benefited from significant ramp-up of our Hyatt Place hotel, which entered our comparable set this quarter, and our Residence Inn in National Harbor that was renovated last year.

Our D.C. hotels are expected to continue to post positive performance in the fourth quarter. As we look further out to 2017, we expect to benefit from a robust city-wide calendar, inauguration and a change in administration.

Our South Florida market generated outstanding RevPAR growth of 7.9%.

During the quarter, we benefited from tailwinds at three of our properties that we renovated in 2015. Additionally, we were very pleased that our hotels were able to gain market share amidst the closure of the Miami Beach Convention Center and an increase in supply. Our operators are actively engaged in ensuring that proper revenue management strategies are being executed to address these various market factors.

Hotels in our Southern California market achieved RevPAR growth of 4.4% despite tough comps as our hotels achieved 11.3% RevPAR growth last year. Southern California continues to benefit from healthy tourism demand as well as robust corporate demand. We expect these positive trends to continue to help drive RevPAR growth through the remainder of the year.

In the Denver market, our hotels achieved RevPAR growth of 3.2% during the quarter. The Denver market saw healthy demand as a result of an increase in city-wide production. With city-wide room nights tracking higher year-over-year in the fourth quarter as well, we expect our hotels in this market to continue to report positive growth.

Our Northern California hotels reported growth at 2.2%. Our Bay Area hotels continue to benefit from the region's strong fundamentals. We expect our newly converted Courtyard Union Square Hotel, which enters our comparable set in the fourth quarter, to be a positive contributor to our future growth and help offset the impact from the renovations underway at the Moscone Center.

Our Chicago hotels generated RevPAR growth of 1.0% showing notable improvements in the first half of this year. The increase in city-wide activity helped offset tough year-over-year comparables from non-repeat project business distinct to our non-CBD hotels. We expect that city-wide activity in the fourth quarter will drive compression and continue to offset the loss of this non-repeat business.

Our hotels in New York reported a decline of 4.8%. In addition to the impact from new supply, our hotels also faced tough year-over-year comparables as we outperformed the market last year. Last year, our hotels benefited from a strong UNGA Conference combined with a Papal visit which generated significant compression in the city.

We expect the shift of the Jewish holidays this year from September to October to impact our fourth quarter results. However, as we look further out, we expect the largest asset in our portfolio, the DoubleTree Met to benefit from the Waldorf's closure in early 2017 given its approximate location and Hilton brand affiliation.

In Louisville, our hotels are coming off a very strong first half of the year. As expected, this quarter our RevPAR was affected by the lack of compression in the city due to the recent closure of the Convention Center. Additionally, the loss of non-repeat project business impacted demand at our hotels resulting in a 5.4% RevPAR decline. While we expect the city and our hotels will benefit tremendously from the expansion once the renovation is complete, in the interim, we expect Louisville to have a soft fourth quarter.

Now in Austin, over the last 5 years, we've generated significant growth from this dynamic city. Given the robust growth the city has experienced, hotel development has increased naturally as well. In addition, during the third quarter, city-wide room nights were down significantly and the lack of compression, coupled with an increase in room supply, led our RevPAR to decline by 6.2%. We expect that Austin will remain a vibrant city that will continue to capture a multitude of demand generators, however, in the near-term, we do expect a soft fourth quarter.

And finally, in Houston, our team continues to push forward despite the headwinds of which we are all aware. While our RevPAR decline of 16.5% was generally in line with the market, we were very pleased that we successfully increased our market share and our comp sets by 850 basis points due to tailwinds from four hotels that we renovated last year. We expect our newly-converted SpringHill Suites in downtown, which enters our comparable set in the fourth quarter, to be a positive contributor to both the fourth quarter and next year.

Now turning to our recycling efforts and capital allocation, over the last 5 years, we built a solid track record of being prudent capital allocators. As we look to sell non-core assets, we intend to remain extremely disciplined. While the transaction market has slowed, it's still active. Given current fundamentals, buyers remain cautious and transactions are generally taking longer to close.

For our assets, we're seeing interest from a diverse buyer pool including institutional funds, overseas investors, as well as smaller, regional players. As we noted last quarter, we've observed a shift in the appetites of buyers away from the large, highly levered portfolios towards single assets in pairs that are strategic to them in some way. In fact, a portfolio of select-service assets that RLJ previously mentioned is no longer in play, and we're aligning our disposition candidates in accordance with the shift in the market.

We will continue to recycle capital from asset sales and seek opportunistic avenues to drive shareholder value, such as buying back shares. Given our solid balance sheet, we're under no particular pressure to sell. We will provide further updates, if and when, transactions materialize.

Before I turn the call over to Leslie, I'd like to briefly address our outlook. While we're adjusting our near-term guidance, we remain confident in our long-term view. We have a diversified portfolio that spans across the U.S. with the right brand and service-level mix. We're generating one of the strongest margins among publicly-traded lodging rates and our balance sheet remains solid, and we continue to generate significant cash flow.

Furthermore, our highly experienced and dedicated team is doing an outstanding job managing through a challenging environment. Five months into my role as CEO, and after 16 years as a C-Suite Executive here at RLJ, I'm more confident than ever in our strategy.

I'll now turn the call over to Leslie, who will provide additional information on our financial and operational performance. Leslie?

Thanks, Ross. During the third quarter, we benefited from a number of tailwinds in our portfolio; however, not to the degree we anticipated which resulted in operating performance that was lighter than what we had expected.

While the change in our occupancy was in line with the industry, our gain on rate was more modest relative to the industry. The industry benefited more than we did from a strong group performance this quarter as we are primarily transient-driven.

In terms of the transient segment, our revenues were slightly up, driven by increase in room nights for the quarter. In regards to our margin, in the third quarter, we generated a solid EBITDA margin of 35.5%, which continues to be one of the strongest among public lodging REITS. Our asset managers are working tirelessly with our operators to manage expenses while keeping our guest satisfaction high.

We were very pleased to see solid margin growth across a number of our markets which is Washington, D.C., South Florida, and Denver, again demonstrating the benefit of a broad-based portfolio. This performance partially offset the headwinds with Houston and New York where rate pressures tampered flow-through. While our hotels are already efficient, there are still opportunities to offset margin pressures.

Our asset managers are focused on controlling expenses and have a number of expense initiatives underway, including clustering staffing and consolidating services where possible. Some of the initiatives that we are implementing, such as adjustments to staffing, can have a more immediate impact while others, such as upgrading equipment to yield energy efficiencies and the re-negotiation of energy contracts, require a longer lead time.

In addition to actively managing direct operational costs, we have also been aggressively managing our property taxes. This quarter, real estate taxes impacted our margins meaningfully as a result of a combination of timing differences and continued increases across a number of jurisdictions. We have been very aggressive and proactive in appealing increases, and to date, we have successful tax appeals at a number of our properties. We expect to see the full impact of these savings next year.

Accordingly, during the third quarter, our portfolio generated hotel EBITDA of $105.1 million, our adjusted EBITDA increased to $100.2 million, and our adjusted FFO increased to $85.4 million. Our adjusted FFO this quarter translates to $0.69 on per share basis and represents a modest increase over last year.

Turning to our balance sheet, we continue to maintain one of the most conservative and nimble balance sheets among public lodging REITS. With a total of $1.6 billion of debt outstanding, we ended the quarter with a net debt-to-EBITDA ratio of 3.6 times and 111 unencumbered assets that account for 86% for our hotel EBITDA.

Following a very busy first half of the year on the capital markets front where we refinanced over $1 billion of debt, we had limited activity in third quarter. Over the last 5 years, we have demonstrated our commitment to proactively managing our balance sheet, and have already initiated discussions with our bank group regarding our 2019 debt maturities. Maintaining low-leveraged, well-laddered maturities and ample liquidity continues to be fundamental principles for us.

We ended the quarter with $178.6 million of unrestricted cash and our $400 million credit facility remains undrawn. Despite the moderation in industry-wide RevPAR growth, our high-margin portfolio is expected to continue to generate significant free cash flow. We have ample capacity to support our capital allocation strategy.

First, our capital expenditure program is on track with the remaining projects well underway. Second, we continue to distribute a robust dividend with north of a 6% dividend yield. Our dividend remains a very important component of the total shareholder return that we seek to provide our investors and is well covered by the strong cash flow generated by our hotels.

And finally, with regards to share repurchases, our philosophy has not changed. We remain committed to redeploying capital in ways that drive shareholder value. During the quarter, we did not repurchase any shares; however, we still have $162 million of capacity remaining under the program. Combined with dividends paid-to-date, we have returned approximately $900 million to our shareholders representing over 80% of all the capital we have raised as a public company.

Now I would like to comment on our outlook. While our prior guidance had accounted for a muted second half of the year, we had identified some tailwinds across our portfolio that we expected to drive additional growth in the portfolio. However, the incremental weakness in Austin and Houston ultimately overshadowed the benefit of the tailwinds in the quarter.

In light of our third quarter performance, the current backdrop, and our October trends, we would like outline the following adjustments to our 2016 full-year guidance. First, we have lowered our RevPAR guidance to flat, to 1%, from 1.5% to 2.5%. Second, we have adjusted our hotel EBITDA guidance to a range of $407 million to $413 million from $415 million to $425 million. And finally, we've adjusted our margin guidance to 35.5% to 36% from 36.5% to 37%.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions) Wes Golladay; RBC.

Good morning, everyone. Going back to Houston, I was expecting a little more out of the portfolio. I think you had a 600 basis point of, I guess, of a headwind last year on the renovations at the four hotels. Did it come in line with your expectations, or did you just not get the renovation lift that you thought?

I'm sorry, Wes, which market was that?

Houston, sorry. Yes, you had four assets under renovation, and I believe it was about a 600 basis point headwind last year. Were you expecting a more of a lift, and what, I guess, are the submarkets out there? Was there broad-based weakness, or did you see outside the weakness in the Energy Corridor, the Galleria, what did you see out there?

Wes, we did expect, obviously, more of a lift. In our downtown properties, just for example, they were up 15%, but our Galleria properties didn't benefit from the tailwind that we thought that they were going to get. So, we didn't get the benefit from that tailwind from those two properties, but downtown did produce, and then the rest of the market was just generally soft given the increment of supply.

Okay. When you're hearing on some of the other conference calls, especially multifamily, they were talking about the Houston market, cap rates are actually falling, now people aren't paying attention so much to the NOI. They're trading on a per-door basis in multifamily. I'd try and look at RLJ's portfolio out there; I'm pretty sure their market is described being a, probably being a high single-digit cash flow multiple to those hotels which probably translates into a very low value-per-key. I'm just trying to get a sense of how much of the $410 million middle-of-the-road run rate for EBITDA is coming from Houston. Is it around 4%, 5%?

Actually, the Houston market for us is about 5% of our EBITDA, and I agree with the take of what's going on in multifamily. We have a lot more confidence in that market and in our asset pool there than the, I guess, the multiple that's being ascribed under our public structure to those assets.

At the same time, we have had some inquiries from outside investors. That's sort of a validator of the value. And frankly, the mood right now in Houston is a little bit predatory, and so we are not looking to liquidate assets in Houston. It's been such a good market for us historically. For four years, we had a CAGR of 11% ADR growth and 17% EBITDA growth leading all the way up until just 2014, and the market itself is healthy.

Unemployment is at 6% or below, housing prices have held up. As you mentioned, in multifamily, multiples are contracting. There's a lot of belief out there in the fourth largest city in the country, that it's a diverse enough economy that it will come through this. Schlumberger attracted some attention to themselves a couple of weeks ago on their earnings call when they called a bit of a bottom in the oil and gas complex, and we're no experts in that.

We were glad to see it, but we do know there was a lag on the way down. They'll be a lag on the way back up, but if demand has troughed, that's a good thing. But we're still going to have to get through a little bit of new supply overhang here in Houston, so the fourth quarter will continue to be soft. But we still think those tailwinds will be in place for us, at least at the downtown assets.

And in the fourth quarter -- we've got a SpringHill Suites that comes online in the fourth quarter that's in the same footprint as our Residence Inn and Courtyard in the Humble Oil Tower in downtown, and it should provide a little bit of extra RevPAR growth for us within the Houston market for us statistically as it ramps up.

Yes, I wasn't, by any means, suggesting to sell Houston. What I was -- I was trying to take a look at the Company, maybe not so much on the cash for multiple for certain of your markets like, probably, New York and Houston would probably be two markets that I see that might screen better, or it will probably be mis-valued if you did a EBITDA-to-EBITDA multiple versus the sum of the parts on those, and it could set the -- you'd have a lot of disruption throughout the portfolio. It seems like the -- I'm just, maybe read into why would you not be buying stock back aggressively at these levels when you could be having a mismark into the value of the stock, the equity value?

Wes, we've stated that we want to match funds. We obviously had the portfolio that Ross alluded to, that we're tracking. We were generally optimistic and had that traded, you might have seen it at the assets. But the reality of it is, is that we want to stake bid it to match funding buybacks with this position, from a recycling perspective. As we receive cash, we'll evaluate the situation at the time. We'll look at the volatility in our stock. We'll look at the general business environment as it continues to be and the health of our balance sheet, and make those decisions. But we're going to stay disciplined to match funding.

Okay. Thanks a lot.

Ryan Meliker; Canaccord Genuity.

Hey, good morning, guys. I just wanted to ask, and I know you're not here to give guidance for 2017, and it's not what I'm looking for, but I think it might be helpful for us to think about how you're thinking about your individual markets, and how we should think about 2017 growth going forward. Obviously, RevPAR growth is relatively muted this year. It seems like supply is picking up next year, not to mention some challenges with the gas leak comp in the first quarter, the Super Bowl impact in San Francisco, the Moscone Center renovation which may have an impact on some of your Northern California assets.

How are you guys thinking about your markets as we head into 2017? And assuming economic growth doesn't accelerate, which obviously is a big assumption, hopefully it will. Do you think RevPAR growth is going to be flat through this year, better or worse, based on what you're seeing out across your markets?

Hi, Ryan. First of all, it's too early to tell, and you probably expected me to say that. Things are really volatile out there, and when we try to look things like our transient pace and our group pace, they don't seem to hold up in the quarter for the quarter.

But based on -- and in vision, at least on our business mix, our booking windows are shorter than some of our peers, which we're accustomed to, but it does cut down on visibility in 2017 a little bit. So we'll be huddling with our operators over the next few weeks and the preliminary budgets will start pouring in, but you gave me some examples to chew on.

And just really, really quickly, the Porter Ranch gas leak -- we've got six assets in Southern Cal, and the only that benefited from that was our Hilton Garden Inn in Hollywood Heights, and that was just in the first half of the year. We don't think that will be a material comp to overcome.

The Super Bowl in Northern California will be a little difficult for those assets. We still expect to be net-positive in Northern California because the Moscone Center thing won't hit us as much as it may some of our peers because our only asset in the CBD is our new Courtyard which just becomes comp here in the fourth quarter.

So it's still ramping, and we're expecting double-digit RevPAR growth out of it in Q4, and that tailwind should continue into next year. And the balance of our Northern California assets is pretty geographically diverse; Silicone Valley, San Jose. There is some supply risk in San Jose, but the corporate growth is amazing too. And the other thing about the Super Bowl is we're trading Super Bowl locations. We've got 10 assets in Houston, and the Super Bowl is going to be in Houston in February.

I guess the main point is that we've got such a large geographical diverse portfolio that, in any given year, there's going to be markets that pick up the ones that are going through a little bit of a cyclical downturn. We don't think in terms of national averages. We think about a cluster of a number of different markets, and that's the beauty of the diversity is they support each other in up cycles and in softening cycles like this.

That's helpful. That makes sense. And just out of curiosity, since you touched on the fact that Houston is going host the Super Bowl in February, any thoughts on whether you think the Super Bowl will have more or less of an impact on Houston than we typically see? It's kind of a weird economy. I wouldn't -- Houston's type of market where I would expect it to have a bigger impact than a market like San Francisco, but at the same time, given all the softness in Houston, I wonder whether there's really going to be that much pricing power. Any thoughts?

At the risk of talking my own book up, I think it will have a bigger impact in Houston because it's going to be more concentrated. It was really spread out in San Francisco between Santa Clara and San Fran. They moved a lot of the activities to the CBD, and of course, the game was in Santa Clara. So people weren't quite sure where to stay. And admittedly, there was probably a little bit of an Airbnb factor in there too.

Houston is going to be much more concentrated. I think the CBD and the Galleria area are really going to prosper. So we're looking forward to it.

All right. Thanks. That's helpful. Just one last question; I'm just going to throw this out there. Obviously, it's not your view, but assuming that RevPAR growth stays relatively constant at this flattish level that you guys are seeing this year for next year. Where would you -- are there more costs to cut? Do you think you can maintain margins, or do you think margins would erode again by another 50 to 100 basis points, kind of like what you're seeing this year?

Yes, that's a great question. I guess I'd like to point out that we're starting from a beautiful starting point of having margins above 36%, and it's a reflection of both the nature of the assets that we've chosen to make the center-point of our strategy and our excellent asset management, attentive asset management. It's pretty dialed in right now, but that isn't to say that aren't opportunities here.

Now, we want to be careful about impacting guest services because this isn't an apocalyptic situation. This isn't 2009 where people are fighting, owners are fighting for solvency and you do what you have to do. This is a lull, and to impact guest service to too great a degree might send you down a rabbit hole of losing market share and all that, but there are things that can be done. There are cluster efficiencies. There are staffing models used. There are vendor re-negotiations.

And, Leslie, I guess we've had some successes in some other areas. Did you touch on those?

Yes, right. Just to give you a frame of reference, our asset management team has done a great job of controlling our operating costs this year. I mean, our costs are only up about -- they're averaging about 1.6% for the year, to give you a frame of reference. But as Ross mentioned, the team has been really active in terms of staffing, whether it's clustering or having managers work some shifts reducing contract labor, controlling overtime; we're really focused on that.

Some of the other areas, as I mentioned on my remarks on the energy side, we've seen an improvement on energy this year, an aggregate of about 6%, and we expect to see some more next year as the energy projects kick in. Our insurance premiums went down about 10% to 12% last year. We're looking at another 10% top 14% next year.

We continue to cluster services as Ross mentioned in terms of re-negotiating contracts. We're seeing some benefits there in terms of bringing, for example, carpet cleaning in-house as opposed to outsourcing it. Our operators are running a tight ship and continue to look for ways to control the expenses. We're pretty optimistic in our ability to continue to flex.

Got you. So from all that commentary, it sounds like cost controls will continue to be a positive, or arguably, a tailwind relative to what you might normally expect in this slow growth environment. Is that a fair assessment?

I'll tell you what. We don't want to -- we always like to exceed expectations. And I can tell you that year-to-date in a very flat environment, we restricted expense growth to about 1.6% excluding property taxes, which is sort of a moving target because we're always in the process of appealing those and there's timing factors, and the benefits of those kicking in. So 1.6% is pretty good.

Can we get it lower than that? Perhaps; that's certainly the goal. From a starting point of north of 36% margins, we think, at the end of the day, we're going to continue to produce EBITDA margins that are best-in-class for the space at really top tier, and we are generating a ton of cash here and will continue to do so.

Great. That's great color, and that's all for me. Thanks for the time, guys.

Jeffrey Donnelly; Wells Fargo.

Good morning. If I can maybe continue that question on controlling costs. How do you both think about the ability to sustain margin control costs, however you want to refer it, and the potential for your select-service assets versus your compact full-service assets as we roll into 2017? Do you think one of those segments, more than the other, is going to prove more resilient? I'm just curious what your thoughts are.

From a resilience standpoint, from a top-line standpoint, and maybe I should approach it from there, we're gaining share. In a flat environment, we gained 170 basis points of share in the third quarter, and that's helpful. This is an asset class that -- first of all, the brands that we're aligned with, it's difficult for them to distinguish themselves when every hotel is full in a market, but when the tide recedes a little bit, consumer preference begins to emerge and our brands, Marriott, Hilton, Hyatt, gain share.

Secondly, this asset class tends to gain share in a soft environment as well because it becomes a little bit of a value proposition for travelers, both corporate travelers who are looking for their expense account to look right and leisure travelers who are voting with their wallet as to where to stay.

Ironically, it's not always the case that we're charging lower rates than our full-service comps because, frankly, with smaller inventories -- room inventories per hotel, we don't have to layer in as much base business, take as much OTA business, and so, call it the rate integrity at the hotel is stronger, and we end up running RevPARs that are similar to or greater than our full-service cousins.

Now, as far as actually cutting costs, in addition to the measures that Leslie mentioned, it's possible that our compact full-service hotels might have a few more services that would give us optionality to look at including more sizeable food and beverage departments, but for the most part, the full-service hotels that we've acquired are already pretty lean as well because we admire that operating model. But we still expect, Jeff, to be able to cut costs within our portfolio.

That's fair. That's the question that I ultimately had. Was -- the select-service already runs pretty lean to start, but so don't many compact full-service hotels. But they do have more -- arguably more costs to cut in the latter group, so I wasn't sure how you saw that.

Leslie, I don't know if you'd have this handy, but you gave us, obviously, the same sort of EBITDA margins for the quarter, do you have that figure excluding the Houston assets? I'm just curious if Houston was more of a drag on your portfolio this quarter; just wondering what it might look like away from that one market.

Excluding -- margins-wise, Jeff?

Yes.

Excluding Houston and New York, we would have improved by 100 basis points.

Okay. Sorry, I missed that. And maybe just one last question; and it's just, we kind of keep hearing that it's increasingly difficult to get assets sold because of a wide bid-ask price between buyers and sellers, and it's just a more restrictive funding environment. In your view, has there been -- I guess, two parts -- has there been a discernible change in pricing in even as recently as the last three to six months? And as you think forward into 2017, do you think initial yields on deals in the market are going to remain stable despite maybe some weakness in EBITDA, or do you think we're going to continue to see yields maybe move a little higher as EBITDA softens? I'm just kind of curious how you think about where asset prices go on transactions as we look forward.

I do think pricing is softened, but it's largely as a result of declining performance. I'm not sure that the yields, that the cap rates, or the multiples have changed that much. There's an interesting sort of inverse thing that takes place where as the NOIs drop, the price per pounds begins to get suppressed, and if a buyer knows that they can buy an asset at, say $150 a key instead of $200 a key, they might be inclined to reach a little bit on the multiple and take a little bit of horizon risk because they know they're getting in at a good basis. So the price per pound may end up being a little bit of a floor underpricing here, but that's going to be particularly true in the stronger urban markets.

Okay. That's helpful. Thanks, guys.

Bill Crow; Raymond James.

Good morning, guys. Ross, with the imminent closure of the Waldorf, it seems like maybe there won't be a better time for you guys to think about selling the DoubleTree Met over the next couple of years, and what might be around the corner. Do you have any thoughts on selling that asset?

Thanks, Bill. It's interesting. New York, obviously, has supply issues. Fortunately, New York doesn't have demand issues, it has supply issues. It's still a strong demand market. And it's only 8% of the EBITDA in our portfolio. Our portfolio is large enough to absorb this part of the cycle with New York, and we've been working with our operator there.

Highgate has been doing a great job with us to eliminate nonessential services and tighten up the ship. We've gained market share. So, we're feeling good about New York and certainly love the market long-term.

That being said, shame on us if we're not opportunistic if somebody came along at the right price, offered us an attractive exit, as it relates to the DoubleTree Met. We are excited about the closing of the Waldorf frankly. It's been a drag on the Hilton system for some time. It's 1,300 to 1,400 rooms. It's 1% of the supply in New York City, and it's virtually across the street from us and in the same brand family.

In addition, just last night, we received information from one of the established brokers in New York that there is a pending zoning change intended to incentivize development in Midtown that could pass in 2017 that could add as much as 300,000 square feet of FAR to our hotel. We're not developers, but somebody else might be, and/or that FAR could be sold to a nearby development.

So there is some upside there. I'm sorry, go ahead, Bill.

No, go ahead. I'm sorry. I didn't mean to interrupt.

Okay. So while we're optimistic about the asset, it would be opportunistic, it's not for sale at this time.

Okay. Do you have a hard date on the closure of the Waldorf? What happens to all the big conventions that have been booked there for the next few years?

All of our intel is that it closes in February. I'm sorry, what was the second part of your question, Bill?

Things like NAREIT have already been booked for future periods while that will be closed. What happens to all of those events?

They all go to the DoubleTree Metropolitan.

There you go. That's the right answer.

We're certainly going to be chasing them. And being within the Hilton family will help, but maybe to my regret in this case, we have a 763-room hotel there with only 7,000 feet of meeting space. Normally, we brag about that because it's such an efficient machine, but it may not position us to pick up a lot of the groups that are going to be displaced from the Waldorf.

Right. I guess - I don't want to beat a dead horse, but it could've been net negative in that the large groups are going to have to a different city, and that you'll lose some of the overflow that would've been there.

No, I don't believe that's the case. I believe those groups will be retained, if not in Midtown, certainly in New York City. So no, and I think the Hilton is going -- Hilton manages the Waldorf; they're going to endeavor to retain all of those at Hilton-branded hotels which will help us.

Okay. Finally, from me, actually following up on Jeff Donnelly's question on pricing, and I may have missed this if you gave it earlier, but the portfolio that you had on the market that you took off the market, where was pricing coming in relative to your expectations? What was the percentage gap between bid and ask?

Right. Well, initially, there was no gap, and we were enjoying a healthy due-diligence period. But the softening fundamentals spooked the buyer a little bit, and they didn't buy into what I was saying to Jeff, that at some point, the underlying value of the asset forms a floor under the pricing. We're just trying to apply a multiple to a dwindling NOI with that particular portfolio. We maintained our discipline.

We've always been really prudent allocators of capital, and we're under no pressure to sell. We don't have a balance sheet that needs fixing in any way, and we like the assets. They're good assets, $100 RevPARs; they generate a lot of cash. And when it did gap out to probably a 7% to 10% gap between bid and ask, we pulled it.

Now we're sort of rethinking our strategy, taking into account that the appetite seems to have moved away from large, highly levered portfolios to singles and pairs, and so we're rethinking those candidates and others according to that shift in market appetite.

Great. Thanks, Ross and Leslie.

Lukas Hartwich; Green Street Advisors.

Good morning. Hey, in terms of revenue management, I'm just curious how you guys are thinking about weighing holding rate versus pushing for occupancy?

Yes, as I said, we have been gaining share in this environment, 170 BIPS in the third quarter. Occupancy was actually 210 BIPS, and we were down about 40 BIPS in share and rate, and October showed a similar pattern. But it's not exactly a heads-in-beds strategy, Lukas, it's more of seeking an optical mix, I guess.

We started to group up. What group space we do have, we started to group up starting in Quarter one. Our midweek base, ordinarily we would keep a pretty low midweek base and wait for the corporate transient to fill it in the last two to four weeks, but we've grown our midweek base with the group, with more leisure even, midweek.

We've been taking more advanced purchase discounts to lock in the business. We've been booking more extended stay, not only at our extended-stay hotels, but at our other hotels, which comes at a slightly lower rate, but it helps with the shoulder nights, and the margins on the business are pretty good. So what we're ending up with is some occupancy gains at the slight expensive rate, but definitely RevPAR share gains, but it's not just because we're opening the flood gates at discounting, it's really just seeking that optimal mix.

That's really helpful. Secondly, on the asset sales, can you comment a little bit more on the timing and maybe the magnitude of what guys are looking to do there?

We're still working through the 2017 plan now. We actually have an asset, a single asset that is under contract, and we'll probably announce something in the fourth quarter, and our activity in 2017 will look more like that. But I don't have a definite target for you at this time.

That's it for me. Thank you.

Shawn Kelley; Bank of America.

Hey, good morning, guys. Most of my questions have been widely discussed, so just one last one would be, could you talk a little more about Austin? It's not a market that other guys have much material exposure to, so what's the supply headwind in that market, and what's the outlook for 2017? I appreciate you guys already gave some of 4Q.

Thanks, Shawn. Love Austin, love it, but supply is here. We've had a 5-year run there going through 2015 of 10% CAGR in RevPAR growth. Demand has never been a problem there. It's a dynamic city. It continues to attract people, and events, and corporations. In fact, demand is up another 4.3% this year, year-to-date, but supply is up 6.5%. And you throw in fewer city-wide in the third quarter, and a couple of our hotels particular to our portfolio had tough FEMA comps from some flooding that brought in some FEMA agents last year. So that's why we were down the 6%, 6.2% in the third quarter.

Looking forward, I guess in Q4, we'll have a -- if you're looking for tailwinds, we have an easier comp. We were up only 2.4% in Q4 in 2015 versus 6%, I guess, in Q3. We'll have a couple of renovation ramps, but the new supply needs to be absorbed. It's going to continue to be a challenge, so we're probably going be down single digits in Q4, and we think 2017 will look a lot like that.

We have -- we love our position in Austin, and we have the utmost confidence in the market, but it's just going to be soft a little bit while we absorb all of this new supply. Our hotels in Austin, despite all of this, did gain share in Q3 despite the headwinds that I mentioned, so our operator is doing a good job. But we just have to get through Q4 and a little bit of softness in 2017 while the market absorbs that supply.

Great. Thank you very much. Just one other area of the country that you guys have a little bit more exposure to, sort of a Southeast corridor in Florida, specifically. What's going on in some of those key markets both as it relates to supply and the topic du jour which is ZIKA?

We had a great quarter there and expect it to continue to outperform there; tailwinds from some renovations, our Hilton Cabana assets still ramping up. But I guess the headwinds there are new supply, and a slowed international travel there. It's only about 8.5% of our portfolio, but the international is a big factor down there, and the Brazilian travel, for us at least, has been cut in half, and the Canadians are down about 20%.

Then, there's the ZIKA thing. We haven't had any cancellations for ZIKA, nor have we received a lot of inbound about it. So, our evidence is only anecdotal; it seems like it might be affecting booking pace a little bit around the area, but to the credit of both the press and consumers, there seems to be an acceptance that it's isolated to some geographical pockets, and it's not even approaching a wide-spread panic. It's just a source of concern, but again, we don't have concrete evidence of any cancellations.

Looking forward, I think our biggest headwind is probably going to be new supply. It looks like in 2017, it might be around 5% in Miami and around 3% in West Palm Beach, but we like our asset base there. We're going to continue to enjoy the tailwinds from our renovations in the first half of the year.

So we think we're going to see low single-digit growth there, but the market does have to get through this lull in international, and it does, hopefully, have to get some relief, in general, from the whole ZIKA bug.

Great. Thanks a lot for that.

Anthony Powell; Barclays.

Hi. Good morning, everyone. Sorry if I missed this, but what is the supply outlook like in Northern California? We've heard from some peers that they're seeing more supply growth there next year.

Yes, Anthony. There is a little bit of a surge there, particularly in San Jose. San Jose could be north of 4%, but the demand growth there is fantastic as well.

Throughout the rest of Silicon Valley, there's a few other hotels opening, but what my friends in the development community are telling me is that beyond those, they're just not sure about any future, immediate future, because the cost of the dirt has become so prohibitive. The cost of the labor has as well. In fact, the mere availability of the labor is almost non-existent. Construction debt is GAAP'd out on them, and so replacement cost is getting up over $400,000 a key for select-service assets. A number of deals that have been approved aren't putting shovels in the ground.

In the San Fran CBD itself, everybody talks about Moscone, but the fact is the supply growth is still de minimis there. It's a terribly difficult place to get stuff done. So when Moscone Center reopens, the compression will be fantastic in the second half of 2018.

So yes, I would say if you're looking for supply concerns, you'll probably look to San Jose among all the different areas, but again, the demand growth there has been sensational too, and we're very optimistic about our assets there.

Got it. Do you think the current environment makes REIT M&A more or less likely over the next, say12 to 18 months?

That's a good question. On the one hand, fatigue could lead to more conversations, right?

Yes, that's what I was thinking.

Yes, fatigue could be a factor here, and could motivate some Boards and senior teams to at least meet and talk. The headwind, I think, is that we've had multiple compression where we've all come together. There isn't as much arb between the various parties as there might have been a year to two ago.

So it's harder for one to pay a premium for the other so than it becomes a merger of equals, and you have the social issues. I guess there's a reason that there's -- I saw somebody quote it saying the book about REIT mergers is the shortest book in the world. It's hard. It's hard to pull off.

I think there'll be more conversation, and we will be in the middle of them. RLJ has always been vocal about being commercial and about the need for the space to aggregate and scale up, and we'll be in the mix. I'm not sure it's going to get any easier than it has been historically.

All right, great. Thank you for that.

Thank you. This concludes today's Question-and Answer session. I would like to turn the floor back over to management for closing comments.

Thank you, everyone. We appreciate your participation today and your ongoing support. We'll see a number of you at NAREIT later this month, and we'll catch up with the rest of you on our year-end call. Thanks again.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.