RLJ Lodging Trust [RLJ] Conference call transcript for 2022 q4
2023-02-28 14:18:06
Fiscal: 2022 q4
Operator: Welcome to the RLJ Lodging Trust Fourth Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the call over to Nikhil Bhalla, RLJ's Senior Vice President, Finance and Treasurer. Please go ahead.
Nikhil Bhalla: Thank you, operator. Good morning and welcome to RLJ Lodging Trust 2022 fourth quarter and full year earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter; Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results; Tom Bardenett, our Chief Operating Officer, will be available for Q&A. 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-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. Finally, please refer to the schedule of supplemental information, which was posted to our website last night, which includes pro forma operating results for our current hotel portfolio for 2019, 2021 and 2022. I will now turn the call over to Leslie.
Leslie Hale: Thanks, Nikhil. Good morning everyone, and thank you for joining us today. We were pleased that lodging fundamentals strengthened throughout last year with significant improvement across all segments of demand, demonstrating the resiliency of the industry. Against this positive backdrop, we successfully executed on our key priorities, including capturing strong operating performance driven by the accelerating recovery in urban markets, successfully launching all three of our transformative conversions, including the Zachari Dunes at Mandalay Beach and the iconic Mills House in Charleston, both of which joined the Hilton Curio collection, and the Pierside in Santa Monica, which was rebranded as an independent hotel acquiring a high quality hotel in Nashville, an attractive growth market. Further strengthening our balance sheet by addressing our 2023 maturities and exiting all COVID restrictions and returning capital to our shareholders through an increased dividend and disciplined share repurchases. The successful execution has positioned us to realize incremental EBITDA from our embedded growth catalyst in 2023 and beyond, and underscores our ability to leverage the optionality our strong balance sheet provides. Turning to our operating performance. In the fourth quarter, we saw sustained pricing power across our portfolio, outsized growth in urban markets, and continued recovery of business travel in addition to strong group booking activity. During the quarter, our hotels achieved 94% of 2019 RevPAR levels driven by ADR that achieved 105%. Our performance was led by urban markets, which benefited from improving corporate demand trends, increased citywide attendance and the continuation of leisure demand, as well as the early recovery of international travel. Our urban hotels outperformed our overall portfolio achieving 97% of 2019 RevPAR driven by ADR, which achieved 107% reflecting a sequential improvement. This outperformance was broad based with our hotels in markets such as Southern California, Atlanta, Boston, and Austin exceeding 2019 RevPAR further validating our strong position relative to improving trends in urban markets. In terms of segmentation, the momentum and corporate travel that we saw throughout last year carried into the fourth quarter, which achieved 70% of 2019 BT revenues, the highest since the pandemic. This represented an increase of 300 basis points from the prior quarter and an improvement of over 1.5x from the first quarter. SME travel continued to be the main driver of corporate demand. While our larger core accounts from industries such as entertainment, energy, consumer goods, services and aerospace saw increased demand throughout the quarter. We also saw strong production from small groups, which continued to contribute at elevated levels to our overall group mix. These positive trends stroke pricing power as group ADR achieved 105% of 2019 for the quarter. Although booking windows were short, momentum in group demand remained strong as demonstrated by our total in the year for the year bookings last year, which were over 30% higher than a typical year. As it relates to leisure, although trends returned to normal seasonality, demand remained healthy, an indication that consumers continue to overweight experiences in their spending decision. Weekend ADR for our entire portfolio achieved 116% of 2019 during the quarter, improving 200 basis points from the third quarter. These positive trends led our overall weekend RevPAR to achieve 107% of 2019 levels during the quarter. Urban leisure trends were especially robust as demonstrated by our weekend urban RevPAR achieving 111% of 2019 led by ADR that achieved 118% during the fourth quarter. Relative to the bottom line, excluding our three conversions, which are ramping, our portfolio achieved hotel EBITDA of over 91% of 2019 levels and margins that were only 128 basis points lower. This performance speaks to the efficiencies we have obtained in a high operating cost environment. Now turning to capital allocation, our internal and external growth catalyst have created multiple channels to drive EBITDA growth throughout this cycle. With respect to internal projects, we are pleased with the relaunch of our three conversions and are seeing significant momentum. Specifically, the Mills House in the historic district of Charleston is off to a great start after completing a comprehensive reimagination of the entire hotel, including repositioning all food and beverage outlets and the transformation of the hotel's rooftop, pool and bar. The hotel's repositioning and affiliation with Hilton's Curio collection is driving significant ADR premiums and early results are exceeding our expectations. The Zachari Dunes is taking full advantage of its transformative resort-wide renovation and its attractive beachfront location on the California coast. Additionally, we are benefiting from the enhanced operating model, which is driving meaningful out of room spin and savings of approximately $1 million from annual cost related to the elimination of comp services. We recently launched a Pierside Hotel in Santa Monica, which converted from a Wyndham following a transformative renovation of guest rooms and public spaces and the addition of a new open air F&B outlet. The hotel has a prime location at the entrance of the famous Santa Monica Pier with sweeping views of the iconic Pacific Wheel. The repositioning will allow us to attract higher rated experiential travelers to this irreplaceable location. The relaunch of these three conversions not only validates our ability to unlock the significant value embedded in our portfolio, but also enhances the overall quality of our platform. We expect these properties to significantly exceed 2019 levels of EBITDA this year as they continue to ramp and we remain confident in their ability to meaningfully exceed our initial underwriting, which supports our conviction and our ongoing value creation initiatives. Looking forward, we have tremendous optionality with one of the strongest balance sheets among publicly traded peers, which is allowing us to continue to pursue multiple channels of growth, such as additional brand repositionings. In 2023, we will build upon the successful execution of our recent conversions and are excited to announce two additional conversions, including the Wyndham Houston Medical Center, which is being repositioned as a DoubleTree by Hilton Brand. This property is ideally located across from one of the largest medical complexes in the world. Given the initial ADR list, this property has already achieved following its soft launch, we are confident that an opportunity exists to capture significant incremental ADR lift and market share after completing a comprehensive renovation this year. Also in 2023, our Indigo in New Orleans will join the Marriott Tribute Portfolio. The hotel benefits from its prime location within the New Orleans Famous Garden District, and is expected to generate incremental ADR as a tribute. The hotel's renovation is scheduled to begin later this year. With regard to external growth, we are continuing to build a pipeline of off market acquisition opportunities. Given the current backdrop where transactions are being constrained by limited lending capacity and all cash buyers are preferred, our strong balance sheet is a significant advantage. That said we remain highly disciplined given the current uncertain environment. Now looking ahead to 2023, while we acknowledge the overall macroeconomic uncertainty with the continued acceleration of business travel group booking momentum, and growing urban leisure demand, we believe that urban markets will outperform the industry on a relative basis. This will benefit our portfolio, which generates over two thirds of EBITDA from these markets. With respect to our 2023 outlook, in general, we expect ADR to remain healthy in all segments, while demand growth across each segment will differ. We expect leisure demand to remain above 2019 levels with seasonality continuing to normalize. However, we expect urban leisure to see stronger performance due to continuation of leisure demand from hybrid flexibility. Business transient recovery should continue to improve during 2023 with demand from larger corporate accounts increasing, which we are already seeing. Group remains strong as citywide attendance increases and more to citywides are held in key markets such as San Francisco, Boston, and San Diego. Additionally, we expect small group to continue to see elevated contribution levels. We remain encouraged by the healthy booking activity since the beginning of the fourth quarter, where we booked over $55 million in group revenues with approximately 70% related to 2023. This strong booking activity allowed us to enter 2023 with our group booking pace at 76% of 2019. And finally, inbound international travel should improve throughout the year, which will further benefit urban markets. Overall, we expect the strongest growth during the first half of the year due to easier comps. We have already seen this in January, which achieved year-over-year RevPAR growth of 43.5%, benefiting from improving corporate business travel, strong attendance and citywides, such as J.P. Morgan's Healthcare Conference in San Francisco and continued pricing power. February is projected to see an increase of over 20% from last year. Given these trends, we believe our RevPAR in hotel EBITDA should increase over 2022 throughout the year and achieve performance ahead of the industry. Our confidence in our growth profile is supported by our favorable footprint and our unique growth catalyst. As we look at the overall cycle, our outsize EBITDA growth will come from our concentration in urban markets, which have additional run room for growth. Our high quality portfolio benefiting from many livestock properties that have seven-day-a-week demand locations ramping of our four high quality acquisitions, which are pacing ahead of our underwriting, completion of our margin expansion initiatives, and incremental growth from embedded catalysts, including the ramp of our three recently completed conversions and our two newly announced projects and our pipeline of future opportunities. Additionally, our overall positioning will be enhanced by our strong balance sheet, which provides significant optionality to drive growth, while also driving shareholder returns. Furthermore, our balance sheet provides valuable liquidity to mitigate risk during the current macroeconomic uncertainty. I am incredibly proud of the hard work our team has done over the past several years in not only successfully navigating one of the most challenging periods in the history of the lodging industry, but also positioning RLJ to take advantage of multiple channels of growth to maximize shareholder value. I will now turn the call over to Sean. Sean?
Sean Mahoney: Thanks, Leslie. To start, our comparable numbers include our 96 hotels owned throughout the fourth quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ’s ownership period. We were pleased with our fourth quarter results, which were in line with our expectations. Fourth quarter portfolio occupancy was 66.9%, which was 89% of 2019 levels. An average daily rate was $190, achieving 105% of 2019. Specifically, as previously mentioned, fourth quarter ADR in our urban markets was the highest with respect to 2019 as urban markets continued to benefit from pricing power. Fourth quarter ADR exceeded 2019 levels by approximately 20% or more in a number of key urban markets, including San Diego, Manhattan, Tampa, Pittsburgh, and New Orleans. Our fourth quarter RevPAR was 94% of 2019 levels, which was in line with the third quarter. Monthly RevPAR achieved 95%, 91%, and 96% of 2019 levels during October, November, and December, respectively. November results were impacted by difficult comps to 2019 due to an additional travel week in 2019 as a result of the later timing of Thanksgiving compared to 2022. December re-accelerated, which was primarily driven by our urban markets such as New York, Washington, D.C., Tampa, and New Orleans. Our fourth quarter operating trends led our portfolio to achieve hotel EBITDA of $87.6 million, representing 87% of 2019 levels and hotel EBITDA margins of 29%, which was only 229 basis points below the comparable quarter of 2019. For the full year 2022, our RevPAR was $129.61, representing 89% of 2019 levels. And hotel EBITDA was $370 million, representing approximately 83% of 2019 levels, which underscores the incremental EBITDA potential in our Urban-centric portfolio. This year has started off well with January RevPAR, increasing by approximately 44% from 2022 with occupancy of nearly 60% and ADR of approximately $188. Turning to the bottom line, our fourth quarter adjusted EBITDA was $79 million, and adjusted FFO per share was $0.33. While demand remained strong during the fourth quarter, our operating cost continued to normalize underscoring the benefits of our portfolio construct and tangible results of the initiatives to redefine the operating cost model, our total fourth quarter and full year hotel operating costs were below 2019 by approximately 3% and 8% respectively. We are proud of our ability to maintain operating cost below 2019. As a frame of reference, the aggregate core CPI growth rate since 2019 equates to approximately 14%, which is meaningfully above our fourth quarter operating costs, which remained approximately 3% below 2019. There are many factors that influence these positive results with the most significant contributors being the recent successful restructurings of many of our third party operating agreements and success in reducing property taxes, both of which we expect to continue benefiting our operating costs. Fourth quarter wages and benefits, our largest operating cost at approximately 40% of total costs, remain approximately 5% below 2019 levels. Our portfolio remains better positioned for the current labor environment due to the need for fewer FTEs given our lean operating model, smaller footprints, limited F&B operations and longer length of stay. During the fourth quarter, our hotels continued operating with approximately 20% fewer FTEs than pre-COVID. Overall, while the labor market remains tight, we are encouraged that the hiring environment is showing signs of improvement, and we believe that the inflationary pressures on hourly wages are stabilizing. We remain active in managing our balance sheet to create additional flexibility and further lower our cost to capital during 2022. These accomplishments include: entering into a new $200 million term loan to address a 100% of our 2023 debt maturities and proactively address a $100 million of our 2024 debt maturities. Exiting all restrictions under our corporate credit facilities, which lowered our consolidated weighted average interest rate that resulted in annual interest savings, close to $9 million. Exercising extension options on $425 million in maturing debt and maintaining an undrawn corporate revolver. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. Our current weighted average maturity is approximately four years, and our weighted average interest rate is 3.6%. We are benefiting from 85% of our debt that is either fixed or hedged under valuable swap agreements, which protects us in the current interest rate environment. We continue to maintain significant flexibility on our balance sheet with 81 of our 96 hotels unencumbered by debt. Turning to liquidity, we ended the year with approximately $481 million of unrestricted cash, $600 million of availability on our corporate revolver and $2.2 billion of debt. Turning to capital allocation, we were active under our $250 million share or purchase program last year, where we repurchased approximately 4.9 million shares for $57.6 million at an average price of $11.75 per share, including $7.6 million in shares were purchased during the fourth quarter at an average price of $10.66 per share. So far in 2023, we’ve repurchase $0.5 million of stock and an average price of $10.49 per share. Additionally, given the embedded growth in our portfolio, our lean operating model and the strength of our balance sheet, our board recently authorized the increase of our quarterly dividend by 60% to $0.08 per share starting with the first quarter, representing the second dividend increase since last summer. We continue to view dividends as an important component of the total return we seek to provide investors, and the recent increase validates our ongoing commitment to enhancing shareholder returns. We will continue making prudent capital allocation decisions to position our portfolio to drive results during the entire lodging cycle while monitoring the financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt, and increase our overall balance sheet flexibility. Based on our current view, we are providing first quarter guidance that anticipates a continuation of the current operating and macroeconomic environment. For the first quarter, we expect comparable RevPAR between $133 and $137. Comparable hotel EBITDA between $85 million and $91 million, corporate adjusted EBITDA between $76 million and $82 million. An adjusted FFO per diluted share between $0.29 and $0.33. Our outlook assumes no additional acquisitions, dispositions, refinancings, or share purchases. Please refer to the supplemental information, which includes comparable 2019 and 2022 quarterly and annual operating results for our 96 hotel portfolio. Finally, we estimate RLJ capital expenditures will be in the range of $100 million to $120 million during 2023. Thank you. And this concludes our prepared remarks. We’ll now open the line for Q&A. Operator?
Q - Austin Wurschmidt: Great, thanks and good morning everybody. I realize you guys didn’t provide full year 2023 guidance, and don’t have a crystal ball on how economic growth’s going to shape up for this year, but can you just share based on the citywide calendar, and some of the various demand generators you see that, that you know of today through the balance of the year, how we should maybe think about generally speaking the cadence of RevPAR growth through the year?
Operator: Thank you. Our next question comes from the line of Michael Bellisario with Baird. Please proceed with your question.
Operator: Thank you. Our next question comes from line Floris van Dijkum with Compass Point. Please proceed with your question.
Operator: Thank you. [Operator Instructions] Our next question comes from line of Gregory Miller with Truist Securities. Please proceed with your question.
Operator: Thank you. [Operator Instructions] Our next question comes from the line of Chris Darling with Green Street. Please proceed with your question.
Operator: Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.
Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. And I’ll turn the floor back to Ms. Hale for any final comments.
Leslie Hale: I would like to thank everybody for joining us today and we look forward to delivering, positive results for the year. And we look forward to seeing many of you all, at the City Conference – next week.
Operator: Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.
