RLJ Lodging Trust (RLJ) 2017 Q1 法說會逐字稿

Welcome to the RLJ Lodging Trust's First Quarter 2017 Earnings Call. (Operator Instructions). As a reminder, this call is being recorded.

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

Thank you, operator. Welcome to RLJ Lodging Trust's First Quarter Earnings Call. On today's call, Ross Bierkan, our President and Chief Executive Officer, will discuss key highlights for the quarter. Leslie Hale, our Chief Operating Officer and Chief Financial Officer, will discuss the company's operational and financial results.

Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-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 2017 first quarter earnings call. On today's call, we will not discuss or take any questions relating to our announcement to merge with FelCor. We appreciate your patience as we move through this process. We will provide additional updates when possible.

Now with respect to the first quarter, we were generally encouraged to see continued economic growth in the U.S. While initial GDP numbers turned out modest, the forecast for the rest of the year indicates improving growth. We remain cautiously optimistic though. Low unemployment, business investment, high consumer confidence, rising wages and healthy consumer balance sheets will continue to support economic expansion and positive lodging demand trends. We were encouraged to see industry-wide lodging demand this quarter improve by 50 basis points relative to last quarter and outpace supply by 90 basis points. We believe that industry RevPAR remains well positioned for an eighth consecutive year of growth, and we expect that ADR growth will remain positive, although growth in new supply is likely to lead to a slight decline in occupancy this year around the country. While new supply remains a concern, we are encouraged to hear from those on the development front that construction lending is getting tighter. Additionally, escalating construction costs are making it tougher to pencil out new projects. High-quality developments with strong sponsorship continue to get funded, but the headwinds that marginal projects are facing could temper the growth of supply beyond 2019.

As for asset management and operations, with respect to our performance this quarter, our RevPAR decline of 0.6% was slightly better than our internal expectations as a result of stronger performance in markets such as Washington D.C., Southern California and Houston. Excluding our 2 softest markets, Louisville and Northern California, where we had our toughest year-over-year comps, our RevPAR would have been a positive 1.6%. The headwinds we faced this quarter were fully anticipated and are reflected in our guidance.

Relative to the overall industry performance, our portfolio is affected by a few factors. First, in Northern California, we had renovation disruption combined with difficult first quarter comps given our stronger outperformance during last year's Super Bowl. Second, the short-term closure of the conventional center in Louisville continued to impact that market. And finally, group business outperformed transient during the quarter, which did not favor our highly transient mix on a relative basis. That said, we were very pleased to once again benefit from the diversity and quality of our portfolio. This was especially evident in our non-top markets, which achieved robust RevPAR growth of 4.6%. Markets such as Salt Lake City, Atlanta, Pittsburgh and Tampa achieved outstanding RevPAR growth of 24.5%, 12.5%, 11.6%, and 9.3%, respectively.

Now moving on to our top 10 markets. Our top performer Washington D.C. achieved exceptional RevPAR growth of 14.3%. The presidential inauguration followed by the Women's March created significant compression throughout the city and helped our hotels achieve RevPAR growth of over 170% during these events. Our hotels also took market share this quarter with our index increasing by 250 basis points as we benefited from the continuing ramp-up of our Hyatt Place Washington, D.C. and coming off the renovation of our Homewood Suites. We were very pleased with this quarter's performance and expect D.C. to be our top-performing market this year.

In our Southern California market, our hotels continued to benefit from strong corporate business production from industries such as technology and the arts and entertainment. Additionally, we're seeing added benefits from the ramp-up of one of our recently renovated hotels. These positive factors led our RevPAR to increase an impressive 7.4%, making Southern California our second best performing top 10 market. Looking ahead, we expect the positive trends in this market to continue.

In Houston, we benefited significantly from Super Bowl, achieving RevPAR growth of nearly 25% in the month of February. The continuing ramp of our newly converted hotel in Downtown also made a positive contribution. Overall, we're very pleased with RevPAR growth of 2.4% for the quarter as well as an increase in market share of approximately 70 basis points. As we look further out, we do expect to see headwinds in Houston as the market continues to absorb new supply and given that the NCAA Final Four took place in April of 2016.

In Denver, our hotels generated 0.5% RevPAR growth for the quarter. Citywide activity and corporate demand were strong and the ramp-up of 2 hotels that were under renovation this time last year were positive contributors to RevPAR growth. Looking ahead, we expect strong corporate demand in Denver to continue to drive positive RevPAR growth this year.

In South Florida, our RevPAR was down 1.6%, but our broad diversification in the region allowed us to outperform the market by 330 basis points during the quarter. We continue to capitalize on the upside outside of Miami, such as our properties in the West Palm Beach area, which have benefited from the President's frequent visits. Having such diversity in this greater MSA is helping to offset Miami's specific headwinds like ongoing renovations at the convention center and new supply at Miami Beach. We expect this diversification to continue to benefit our portfolio as the year progresses.

In Austin, our burgeoning technology sector and the metro's growing appeal as a destination for major entertainment events continues to drive robust lodging demand growth. During the first quarter, demand in the Austin market increased 5.9%, of course, the rising interest in this market has also attracted new hotel supply. In this quarter, the increase in new supply along with the loss of some corporate project business that we hosted last year lead to our 2.1% RevPAR decline. Given Austin's dynamic market and growing appeal, we expect that the market will ultimately absorb the new supply. However, in the near term, we expect RevPAR to be soft throughout the year.

In Chicago, we had some nonrepeat corporate extended stay business in 2016 plus disruption from 2 renovations this quarter that led to a 7.4% decline in RevPAR. The renovations at our 2 hotels are now complete, which should drive improvement through the remainder of the year. And additionally, citywide room nights are up year-over-year during the second quarter.

In New York, where we now own 3 hotels following the recent sale of 2 properties, our RevPAR declined by 7.9%. Our results this quarter were affected by renovation disruption at one of our hotels and the reentry of 2 large competitive hotels that were under renovation during the comparable period last year. While the city continues to see impressive demand, we expect RevPAR will continue to be soft as new supply continues to get absorbed in New York.

Finally, this quarter Northern California and Louisville were 2 of our softest markets with RevPAR declining by 8.9% and 19.8%, respectively. Now in Northern California, our hotels experienced tough comps since we vastly outperformed the market last year in the first quarter with RevPAR growth of 28.7% and large part due to the Super Bowl. In addition to tough comps this quarter, we also had 2 hotels under renovation. As a result, our Northern California hotel saw a RevPAR decline of 8.9%. The disruption from the renovation of 2 hotels was approximately 560 basis points. While some incremental disruption will also extended into the second quarter, we will, of course, wrap the Super Bowl tough comp, and we expect to see improvements in Northern California in the second half of the year.

And finally, in Louisville, the market continues to be impacted by the short-term closure of the city's convention center. In light of this, we are capitalizing on the timing to do a comprehensive renovation at our Marriott Louisville, which is connected to the convention center. The reopening of the new state-of-the-art center in the second half of 2018 will drive a robust group activity, and our hotel will be well positioned to capitalize on it.

Although our top line performance was slightly down, we were pleased to generate portfolio of EBITDA margins of 32.9%. Our ability to continue to generate leading margins in a soft environment and maintain strong free cash flow allows us to continue to provide a meaningful return to our shareholders.

RLJ has been in the lodging real estate business for over 15 years, 6 of those as a public company. Our team of seasoned professionals have navigated through many different market conditions. We have demonstrated that a geographically diverse portfolio of premium select-service and lean compact full-service hotels with best-in-class brands can generate superior margins in any environment. Combined with a low leverage balance sheet, it is proven to be a sustainable all-weather strategy for generating high returns while mitigating risk.

As we move forward throughout the year, several of our markets, such as Washington D.C. and Southern California, are expected to continue to perform well and help partially offset weaker fundamentals in markets that are experiencing headwinds. We remain generally encouraged by the positive indicators in the economy and the benefits they could have on corporate and leisure demand. With our broad diversification, we're well positioned to capitalize on any upside in lodging fundamentals.

I'd like to turn it over to Leslie for a more detailed review of our operational and financial highlights. Leslie?

Thanks, Ross. Our overall performance this quarter was slightly better than expected with first quarter generating a slight decline in RevPAR of 0.6%. During the quarter, January was our strongest month with RevPAR growth of 3.1%. February and March were much softer with declines of 3.1% and 1.3%, respectively. We were pleased to see the diversity of our portfolio offset short-term softness in select markets, such as Northern California and Louisville. As we deconstruct the drivers of our performance and look at our segmentation, in general, we saw softness in leisure demand and flat corporate demand.

Although our business mix is primarily transient in nature, we were pleased that our strategy to group up continued to produce positive results. The momentum we saw in our small group business last quarter carried over to this quarter as well. We continue to see not only a meaningful increase in small social groups, but also in corporate groups as well. This increase in group production overall helped partially offset softer leisure production.

In light of top line pressure, which was driven in large part by the softness in our Northern California and Louisville markets, our EBITDA margin for the quarter decreased by 142 basis points. Yet, overall, we are very pleased that our EBITDA margin of 32.9% continues to rank as one of the highest among our peers despite a slight RevPAR contraction. We attribute our ability to continue to generate strong margins through the strength of our efficient operating model, aggressive asset management and strong partnership with our operators. Our asset managers continue to work tirelessly with our operators to manage expenses while keeping guest satisfaction high. As a result, our hotel operating cost this quarter increased by less than 1%.

Now with regard to our corporate performance, our adjusted EBITDA decreased by $7 million to $79 million for the quarter, and adjusted FFO decreased $6.3 million to $64.4 million or $0.52 on a per share basis.

When reviewing our performance, please keep in mind that last year's results included approximately $2 million of EBITDA from hotels sold in the fourth quarter and that 2016 was a leap year. Therefore, the first quarter had 1 less day than the prior year, which has an impact on the year-over-year comparison.

Turning to the balance sheet. While we had minimum activity on the capital markets front this quarter, we continued to maintain a strong balance sheet with low leverage, significant coverage and a well-laddered maturity profile. At the end of the first quarter, our total debt outstanding was $1.6 billion and our net debt-to-EBITDA ratio was 3.1x. We ended the first quarter with a robust liquidity position of more than $850 million including $450 million in cash and $400 million of availability on our undrawn credit facility. We have plenty of liquidity to cover our capital deployment priorities including paying our dividend and implementing our capital expenditure program. We continue to believe that our dividend is an important component of our total return we seek to provide our shareholders.

Now with regards to our capital expenditures. Our renovations are on schedule, and we continue to expect capital outlays for the year of $40 million to $45 million. Half of our projected disruption for the year occurred during the first quarter, impacting our RevPAR growth by approximately 85 basis points. While we will have additional renovation activity throughout the remainder of the year, we expect less displacement in the subsequent quarters compared to the first quarter. Therefore, for the full year, we continue to project total disruption of 30 to 40 basis points.

Now with respect to our guidance for the year. Given that our first quarter results were largely in line with our expectations, we are reaffirming our outlook for the full year of RevPAR growth of negative 1% to positive 1%. Total EBITDA margins of 34.5% to 35.5% and hotel EBITDA in the range of $380 million to $400 million.

We would like to note that we expect second quarter to be our weakest quarter this year in light of softer citywides in select markets coupled with the holiday shift. We expect RevPAR growth to improve during the second half of the year as we move past tough comps, such as the timing of the convention center closing in Louisville.

Thank you. And this concludes our prepared remarks. We will now open the lines for Q&A. As a reminder, we are unable to discuss the recently announced merger, and we ask that you refrain from asking any related questions. Operator?

(Operator Instructions) Our first question comes from Wes Golladay with RBC Capital Markets.

I just wanted to ask about that last comment about the timing of the -- or the RevPAR growth progression throughout the year. What do you see in the back half as far as easy comps outside of the Louisville Convention Center shutting down?

Yes, Wes, I'll start it out and then turn it over to Leslie for a little more detail. But -- we saw this progression coming from a mile away. We knew that the first half was going to be a little softer for us. The second half does get easier, part of it is comps. We were flat in the second half of last year, but there's also some individual market and asset issues that give us a little bit more comfort in the second half. Leslie?

Yes, Wes, we, obviously, think that, obviously, the first half is going to be soft and the second half is going to be -- is offset that and keep us in mind, with our guidance. There is no particular market that we're depending on given our diversification. Just walking through, our non-top 10 markets were up 4.6% this quarter. We expect them to continue to perform relatively well in the back half of this year. Washington D.C. will continue to be solid for us as well to benefit from the Hyatt Place D.C. still ramping up. Also we had renovations in the Residence Inn Bethesda last year in the fourth quarter. And also we're seeing some benefit from our group-up strategy in some key assets in the D.C. market. Denver is expected to perform well for us in the second half as well. We continue to see a solid business transient there in some of our markets like Longmont and Louisville. Southern California continues to be a strong market for us. We expect to see business transient continue to perform well there as well as the ramp-up of the Embassy Suites in Irvine. Louisville, we already talked about, ramping the comp there, the convention center closed in August. But also there is a big citywide coming in Louisville, back to Louisville that wasn't there in 2016. Northern California, as Ross mentioned, is not going to have the disruption that we had in the first half, but also we expect to benefit from the 2 large citywides that are going to be in the fourth quarter in Northern California. Florida is going to be relatively flat for us on the back half, and then we expect to see softness in Houston, Austin and New York.

It should be pointed out, I know Leslie mentioned a couple of citywides in markets where the convention centers are closed, but the one in Louisville does have an alternative site to meet at. And -- but it's not the convention center, so we are not adjacent to it, but it is an alternative venue in Louisville, and the other 2 citywides in San Fran are Oracle and Salesforce. And they also have found alternatives. They'll be headquartered outside of Moscone.

Okay. Now looking at your second-largest asset, the Doubletree Met, are you using any lift there post closing of the Waldorf Astoria?

Yes, too early. The Waldorf closed in March. And frankly, leading up to the closure, they were discounting their brains out because they hadn't done anything to the product in the last year and they were just putting heads in beds. So there were a bit of a drag on the market in the first quarter. And so I would say, no. So far, we have not seen it, and we're looking forward to seeing what the impact might be going forward.

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

I was just interested in hearing your thoughts about capital allocation plans moving forward and how you're thinking about potentially selling any additional legacy RLJ hotels. And then how would you think about in terms of use of proceeds given sort of the pullback in the stock here more recently?

Austin, good question. We, as a stand-alone, are always looking at our portfolio for opportunities to recycle capital. As we did in December of last year when we took advantage of the arbitration between the private valuation on a couple of New York assets and the public valuation, and that reduced our exposure in New York to about 3.3% of our EBITDA. We also look naturally at assets that either are in need of CapEx coming up and we can shift that. Naturally, that goes into the pricing when you sell an asset, but if we can shift that to be capitalized in the deal on the exit instead of going through the work ourselves, we take a look at that. We certainly look at the lower 10% of the portfolio from a RevPAR standpoint as a way of producing addition by subtraction by selling off the lower RevPAR assets, and we continue to look at those. And then finally there is, I guess, market exposure, and where we think that it might be wise to rationalize our exposure to certain markets, we're always looking at opportunities to do that as well. And that's ongoing. In light of some larger things that we're working on that we can't talk about today, I would say that, that doesn't change. That doesn't change our thinking about the RLJ assets. And we'll keep you posted along those lines. But as far as, I guess, reallocation of capital, Leslie, you want to...?

Yes, I mean, Austin, the thing I would say there is that, obviously, there are a number of ways to allocate capital to create shareholder value. At this time, buying back our shares is not a priority relative to the other opportunities that stand before us to create long-term shareholder value.

Great. So it seems like it's fair to say that there's not necessarily anything being actively marketed today in the legacy RLJ portfolio?

That is correct. Nothing is listed. We receive inbounds. In fact, just -- you didn't ask, but just as an anecdote, we probably get more calls on our Houston assets than anything else. Private equity is circling and looking to start taking a position in Houston for the rebound. We're encouraged by that. And we're not inclined to sell Houston at this point. But we are looking at -- anything else in the portfolio that makes sense, we're going to be opportunistic. And we do receive inbound inquiries, but nothing is listed at this time.

Great. And then just one more for me. You've talked about your positioning a little bit outside San Francisco being less impacted by Moscone as potentially those more within the CBD. I was curious if that's still your expectation? Or with some of these conferences now relocating, do you still think that you guys could be an outperformer in Northern California versus the industry?

I think so. Yes, yes, yes, we think so, Austin. We -- it was a soft quarter for us in Q1 because of the difficult comp. We outperformed -- during the Q1 of last year, we outperformed our comp sets by almost 15%. And so the -- being 8.5% down, it didn't come as a surprise to us, but we don't think it was a reflection of being outside of the CBD. I mean, we're in Palo Alto, we're in San Jose, we're in strong submarkets around the Bay Area. The 2 that we thought might be affected by citywide compression are our 2 assets in Emeryville, right across the Bay Bridge, from the city and that has turned out to be the case. So they might ironically benefit from a couple of these citywides that come in as well as our Courtyard Union Square. That asset finished flat to just slightly up in Q1 and actually gained over 250 points of market share during the first quarter relative to last year. So we feel good about our positioning in the area. And we do think that the diversity is going to continue to serve us well. We've gotten -- we got, call it, maybe, a third of the portfolio. I would say we would have direct exposure to San Francisco in the citywide compression and then 2/3 of it is good diversification for us.

Our next question comes from Bill Crow with Raymond James.

Real quick question on the progression of RevPAR trends during that first quarter, where you said it started out strong in January and got progressively weaker. Was that really just the Super Bowl in D.C. that lifted January? I'm a little surprised given the Easter shift that March was a little stronger.

Yes, it was definitely the inauguration and Women's March in D.C. and the Super Bowl in Houston. We did very well. But I would say that the Easter shift helped in March, but also the -- well, the progression -- I -- it was a combination of corporate transient fading a little bit. And also I think the Easter shift helped most in leisure locations. We did see a progression in Florida. We saw a progression in Oahu, we saw a progression in New York City. But in the corporate markets, it didn't help as much. It seemed to help group business more than transient. I must say that while our portfolio is skewed towards transient business, and we do believe that, that is the best way in the long run to play the hotel business, group business did seem to emerge this quarter as a stronger gainer. We saw that our transient business -- or that in general, transient business was up, according to Smith Travel, about 1.2%, while group is up about 6.6%. And it seems like the Easter shift helped a little bit more with groups. So fitting in their bookings in the month of March a little bit more than a generated incremental corporate transient business.

And then how did April, then if you think about that relative to March, was it weaker or was it same, stronger?

Yes, again, I think April was good. April was good for the leisure locations. Florida had a good April. New York had a good April. But in general, around the country, most of our corporate hotels -- it was, I would say, weaker. April was a weaker month. It'll be the weakest month of the quarter, in fact. Fortunately May and June get progressively better.

(Operator Instructions) Our next question comes from Ryan Meliker with Canaccord.

I think that a lot of the color you gave on RevPAR progression and everything was pretty helpful. So I don't need to dig into that stuff. But I did want to ask a little bit about strategy, and I'm not going to sell about FelCor, as you guys requested. But just tell me a little bit about how you guys define your target submarkets. I know when you guys did put on the FelCor presentation, you highlighted the slide that talked about urban being a focus and then with the FelCor deal most of the those assets don't fall into SGR's definition of urban. So I guess, is urban changing for you guys as you guys move forward? Is -- are things outside of urban becoming more core? Or is it that you just have a different definition of urban? Help us understand that.

Sure. Regardless of FelCor, as you suggest, we've always believed that the way to play the business is with the premium select-service and the compact or lean full-service hotels within the same brand families, within the dominant brand families, Marriott, Hilton and Hyatt. And it's been a very successful strategy for us. And as for locations, we've always said, urban or dense commercial locations. What we don't want is we don't want to own roadsides. We don't want to own hotels that are overly dependent on one source of demand. We like -- the metaphor we used to use back in the day when we were first explaining the strategy was a stool, 3 legs of a stool. Now if a stool has 4 and 5 legs, that's great, but we at least want multiple sources of demand for the assets. So if a hotel is not in the urban core, but it's able to draw strong, say, a biotech office park and leisure, all right, and/or it may also be proximate to an airport, but it's not necessarily an airport hotel, then we're comfortable that in the ebb and flow of business throughout the year from a seasonality standpoint and/or if weakness develops in one of those segments that the others can pick it up. And so that continues to be our strategy going forward.

That's helpful. And then as we think about capital recycling and acquisitions, obviously, you've got a big acquisition on your plate right now. Should we expect you guys to continue to be active in terms of buying and selling over the next few months as you guys work on the merger with FelCor? Or do we think that, that's probably more of a 2018 story?

We're going to continue to look. We are sitting on more cash than we normally do. Now, obviously, we've got good use of that cash. But we continue to look. Now I will say that as we've underwrite -- as we've been underwriting, we have found things to be a little pricey out there. It's a sellers' market right now. There are a lot of buyers out there of lot of different types of buyers and the REITs. Some of our peers are out there, in fact, I'd say, more than half of the REITs are looking and there is the nontraded REITs. The animal spirits are stirring within private equity because debt rates are down, especially CMBS is readily available. And then there is the international buyers. So we've had trouble penciling individual deals, which makes a deal to scale perhaps a little bit more attractive. But -- and we've continued to look within our own portfolio for disposition activities or opportunities, I should say. I don't have anything to announce. We don't have anything under contract. But we haven't necessarily simply put the brakes on all other activity. We continue to look.

Our next question comes from Michael Bellisario with Baird.

Just one quick follow-up question for me. Are you precluded from share repurchases given the merger agreement or -- and precluded until the shareholder vote or is it on the back burner for you?

Back burner.

Yes, it's on the back burner, Mike. It's not something we would do.

Got it. And you said in relation to the other opportunities that are out there right now that in relation to the pending FelCor merger then? Or are there other things out there that you continue to look at, kind of follow-up to Ryan's question?

Yes. We evaluate all the opportunities, Michael, to determine what we think would be the best allocation of capital and what we think would create the greatest value. And so right now, on a relative basis what we're looking out there, buying back shares is not the best use of capital.

I would now like to turn the floor over to Ross Bierkan for closing comments.

Thank you, everybody. We recognize today is a very busy day on the call front. So we appreciate you joining us. We look forward to talking to you a lot more about things that we have going on in the near future. But for today, we were pleased to be able to share with you the results of our first quarter, and we look forward to catching up with you soon. Take care.

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