Q3 2024 RLJ Lodging Trust Earnings Call

In This Article:

Participants

Nikhil Bhalla; Senior Vice President, Finance & Treasurer; RLJ Lodging Trust

Leslie Hale; President, Chief Executive Officer; RLJ Lodging Trust LP

Sean Mahoney; Chief Financial Officer, Executive Vice President; RLJ Lodging Trust

Thomas Bardenett; Chief Operating Officer, Executive Vice President; RLJ Lodging Trust

Austin Wurschmidt; Analyst; KeyBanc Capital Markets Inc

Michael Bellisario; Analyst; Robert W. Baird & Co., Inc

Jonathan Jenkins; Analyst; Oppenheimer & Co. Inc

Dori Kesten; Analyst; Wells Fargo

Chris Woronka; Analyst; Deutsche Bank

Gregory Miller; Analyst; Truist Securities

Floris van Dijkum; Analyst; Compass Point

Presentation

Operator

Welcome to the RLJ Lodging Trust third quarter 2024 earnings call. (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 afternoon and welcome to RLJ Lodging Trust 2024 third quarter 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-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.
I will now turn the call over to Leslie.

Leslie Hale

Thanks, Nikhil. Good afternoon, everyone, and thank you for joining us today. We were pleased with our third quarter results, which came in ahead of our expectations, despite the impact of the storms late in the quarter. Our third quarter RevPAR growth once again exceeded the industry, demonstrating the resiliency of our urban-centric portfolio, which is allowing us to outperform. Additionally, our effective expense management enabled us to drive RevPAR growth that exceeded our year-over-year RevPAR growth.
Along with achieving solid operating results, we made meaningful progress on our key initiatives during the quarter, including executing on several objectives, which will position us well going into 2025, including successfully refinancing all of our near-term debt maturities and executing attractive interest rate hedges, completing two conversions, accretively recycling proceeds from non-core asset sales into share repurchases, and increasing our quarterly dividend by 50%. Achievement of these objectives demonstrate our commitment to unlocking value in our portfolio while recycling capital to enhance total shareholder returns.
With respect to our third quarter operating performance, our 2% RevPAR growth rate was 2 times the industry, and our growth continues to be balanced between both rate and occupancy. Additionally, our hotels gained 100 basis points of market share, which represents the sixth consecutive quarter of outperformance, underscoring the strong positioning of our urban-centric portfolio.
This quarter, our urban hotels continue to drive our outperformance and achieve 2.5% RevPAR growth. Our urban markets are benefiting from positive trends in all demand segments, with markets such as Boston, Chicago, and Southern California achieving mid to high-single-digit RevPAR growth.
Our deliberate efforts to reposition our urban footprint allowed our urban lifestyle hotels to achieve 3.2% RevPAR growth during the quarter. Our urban lifestyle hotels represent approximately 40% of our portfolio and are well-positioned to capture seven day-a-week demand.
Our portfolio is seeing the lift from the ongoing improvement in business transient demand, which was once again our best-performing segment this quarter, achieving nearly 9% revenue growth over the prior year, driven by both ADR and occupancy gains. We were especially encouraged to see continuing pricing power, which drove 5.3% ADR growth, an acceleration of 105 basis points from the second quarter.
While SMEs remain the dominant driver of corporate demand, we are seeing positive momentum from large corporations, who are increasingly returning to the office. The recent trends and the continuation of company mandates provides us with the confidence that steady growth in business transient revenues will continue.
Our group segment also continued to see strong performance during the third quarter, achieving 3.4% revenue growth, led by a 1.4% increase in demand and a 1.9% increase in ADR. Group revenues benefited from both the increase in corporate meetings as well as strong citywide volume in many of our key markets, such as Boston, Chicago, San Diego, and New Orleans.
As a sign of healthy group demand, our 2024 group revenues pace remains ahead of 2023 by mid-single digits, inclusive of our pace for the fourth quarter, despite the impact from recent storms, the holiday calendar shift, and the election. In aggregate, the continued strength in both business transient and group production drove a 3.1% increase in our third quarter weekday revenues.
With respect to leisure, we were encouraged to see stable demand trends. Our leisure revenues grew by 2% during the third quarter, primarily driven by a 4% increase in demand, which was offset by a 2% decline in ADR, highlighting continued consumer pricing sensitivity.
In addition to achieving solid rooms revenue growth, our out-of-room spin in areas such as parking and F&B allowed us to grow our non-room revenue by 7.3%, which drove total revenue growth of 3%. This top-line growth combined with our focused approach to managing costs, which has led to the moderation of operating expense growth, has allowed us to achieve flat margins and a year-over-year EBITDA increase of 2.6% in the third quarter.
Now turning to capital allocation. In the third quarter, we continued to demonstrate our disciplined approach to balance sheet management and the ability to assertively allocate capital across several fronts. We further strengthened our balance sheet and added incremental flexibility by entering into a new $500 million term loan, which addressed our 2024 and 2025 maturities. We opportunistically entered into new hedges, allowing us to maintain one of the lowest weighted average cost of debts at 4.5%.
We sold a non-core hotel in Denver and recycled proceeds from recent dispositions towards the repurchase of 2.2 million shares for $20.7 million. And we completed the physical conversion of the Wyndham in Houston to a Doubletree and the Indigo in New Orleans to the Hotel Tonnelle, a Marriott Tribute Hotel. These hotels are ramping well and achieved strong RevPAR growth of 17% year-over-year in the third quarter.
Additionally, we remained on track to complete the conversion of the Bankers Alley in Nashville to Hilton's Tapestry Collection and are pacing to complete the conversion of the Wyndham in Pittsburgh to a Courtyard earlier than expected.
Looking ahead, we are continuing to maintain our cadence of completing two conversions a year with the transition of the Renaissance Pittsburgh to Marriott's Autograph Collection in 2025. We also made progress towards selecting a new brand for the Wyndham Boston, which we expect to convert in 2026. Our ability to execute on multiple fronts simultaneously validates our strong balance sheet and free cash flow profile, which not only drove our growth initiatives this quarter, but also allowed us to return significant capital shareholders in the form of dividends and share repurchases.
Looking ahead, in the fourth quarter, there are some unique factors that will impact the final industry results, including the disruption of Hurricane Milton in October and the degree of the slowdown around the elections in November, which we estimate will constrain our fourth quarter RevPAR by approximately 100 basis points. However, despite these unique headwinds, our strong third quarter performance and the resiliency that our urban-centric portfolio is demonstrating gives us confidence in our outlook.
As we look towards 2025, while we expect a comparable industry background to 2024, our portfolio is well-positioned and we should benefit from our portfolio's concentration in urban markets, which are expected to continue to outperform the industry, the ongoing ramp from our seven conversions, the continued improvement in business transient demand, and our favorable footprint in markets with strong citywide, such as New Orleans, which will host the Super Bowl, Washington, D.C., which should benefit from the presidential inauguration, and favorable citywide in Denver and San Francisco, which is supported by our strong 2025 route pace, currently ahead of '24 by mid-single digits.
We believe that all of these positive attributes should continue to allow us to be a top performer. Longer-term, we believe that the industry is positioned for multiple years of demand-driven growth, given the continuation of the secular trends of consumers prioritizing travel, which should be enhanced by moderating inflation and lower borrowing costs. Improving business travel demand from the combination of the continued recovery and the return of office trends.
Group demand remaining healthy due to the increasing citywide events and attendance, as well as corporate and social groups. And the recovery of international demand, which remains a meaningful growth opportunity. These factors, together with historically low new supply projected over the next several years, should provide multiple years of RevPAR, tailwinds, and be especially beneficial for urban hotels, which represent over two-third of our portfolio.
I will now turn the call over to Sean. Sean?

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