RLJ Lodging Trust
Q4 2019 Earnings Call Transcript

Published: 26 Feb 2020

[Operator:]

This is the conference operator. Welcome to the RLJ Lodging Trust Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Nikhil Bhalla, RLJ's Vice President and Treasurer, Corporate Strategy and Investor Relations. Please go ahead.

[Nikhil Bhalla:]

Thank you, Operator. Good morning, and welcome to RLJ Lodging Trust 2019 Fourth Quarter and Year-end Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter and the year; Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's operational and financial results and guidance; Tom Bardenett, our Executive Vice President of Asset Management, 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 from last night.I will now turn the call over to Leslie.

[Leslie Hale:]

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. By all measures, 2019 was another transformative year for RLJ as we execute on the thoughtful plan we had laid out to reshape our portfolio, enhance our operating metrics and improve our growth profile. We successfully achieved all of our key priorities for the year. In fact, we not only exceeded our expectations, but we've also completed them ahead of schedule. I am pleased to report that we sold 47 hotels for over $720 million, including 2 legacy focal hotels located in Myrtle Beach and 45 legacy RLJ hotels in 5 separate transactions. We further strengthened our fortress balance sheet by improving our debt maturity and covenant profile, while ending the year with a net debt-to-EBITDA ratio of 3.1x, and we accretively repurchased $78 million of stock.Operationally, in 2019, we demonstrated the strength and quality of our reshape portfolio by achieving 0.7% RevPAR growth, which was in line with the broader industry. Additionally, we ended the year with an absolute RevPAR of $145, which was 8% higher than the $134 that we reported in 2018, while maintaining our attractive margin profile. We are especially pleased with the progress of our operational initiatives, which is reflected in the relative strength of our margins this year. With the successful execution of our 2019 objectives, we have moved closer to achieving our long-term vision of owning a portfolio that not only drives strong operating results, but also drives NAV appreciation over time.Our efforts last year, which were largely focused on unveiling the underlying quality of our portfolio, the non-core asset sales had several strategic benefits. We enhanced our portfolio as evidenced by a higher absolute RevPAR and improved concentration in growth-oriented markets and an elevated growth profile. We created significant investment capacity. And finally, we identified unique tangible catalysts embedded in our portfolio that are expected to generate both near-term returns and multiyear growth, which will drive long-term value creation. Our portfolio transformation will enable us to perform in line with the industry in the near term. While the execution of our growth initiatives and embedded catalysts will drive long-term outperformance.Following the strong execution of our 2018 disposition program, we do not expect to sell any hotels this year. As we enter 2020, a strong balance sheet and a carefully prune portfolio, we are focused on redeploying capital to activate catalysts. This year, we are focused on 5 key areas

[Sean Mahoney:]

Thanks, Leslie. Before discussing our fourth quarter results, please note the following

[Operator:]

[Operator Instructions]. Our first question today is coming from Austin Wurschmidt of KeyBanc Capital Markets.

[Austin Wurschmidt:]

First, just a little bit of a clarification. Is the $3 million to $4 million of contribution from the ROI initiatives related to investments you did last year? And if so, second, I'd be curious how much contribution you expect this calendar year from the $50 million you're targeting to spend this year?

[Sean Mahoney:]

Sure, Austin. The $3 million to $4 million is what we expect to benefit in calendar year 2020 from our ROI initiatives. That's a combination of the lapping effect of initiatives that we put in place in 2019 as well as the partial year impact that we're going to get from the 2020 initiatives.

[Austin Wurschmidt:]

Got it. That makes sense. And is -- how much of that is already captured, I guess, in your RevPAR growth forecast? Or maybe asked a little bit of a different way is, what do you expect sort of a pro forma same-store revenue growth number to look like in 2020?

[Sean Mahoney:]

So Austin, a lot of those ROI initiatives that we put in place last year were things like renegotiating our parking agreements and operational-type initiatives that are not really RevPAR centric. And so I wouldn't -- you really can't parse out the RevPAR impact because it's de minimis on the ROI. A lot of that is, it was us capturing lower costs on those initiatives as well as our green initiatives as well, which are reflected in our utility cost.

[Austin Wurschmidt:]

Got it. That's helpful. And then recognizing you don't intend to use all the existing dry powder immediately, but what's a reasonable time frame that we should expect you to redeploy the capital?

[Leslie Hale:]

I think, Austin, I mean, we've talked about is, on the ROIs, we expect to deploy $100 million to $200 million, and $50 million per annum for the next couple of years. We've also -- are looking at a run rate on our normal CapEx at about $100 million this year that seems consistent with last year as well. And then we will have some incremental on the conversions that we would bake in and say that's a to-be-determined number. But I would see this over a 2- to 3-year period of time.

[Austin Wurschmidt:]

That's helpful. And then our acquisitions on the table today?

[Leslie Hale:]

Look, Austin, we never say never, but we recognize where the current cost of capital is at that the bar is a little bit higher for acquisitions. But our acquisition team continues to underwrite and never put our pencil down because you never know when an opportunity will present itself. But we recognize that buybacks are very attractive given the current volatility today. We recognize that buying back the bonds or redeeming the bonds has an immediate impact as well as the ROIs. And so we're clear about -- from a prioritization perspective, but we never say never about acquisitions.

[Operator:]

Our next question is coming from Chris Woronka of Deutsche Bank.

[Chris Woronka:]

I was hoping to -- and I know you all have done a lot of CapEx over the last several years, but could we get maybe a big picture overview. If we look at kind of the Embassy, Courtyard and Residence Inn portfolios, which are your 3 biggest with the current portfolio, where you kind of stand on overall capital needs for those given that I know those brands are all in various stages of new prototypes and such?

[Sean Mahoney:]

Sure. Thanks, Chris. I think I'll start with that on -- a lot of our disposition activity was centered around hotels that frankly, there was a lot of the deferred capital with those assets that we couldn't justify allocating capital to those markets, or those specific assets. And so a lot of that, what I'll call, brand reconditioning work that you referenced, we handled thus far with our disposition program. But when you look at the initiatives within our portfolio, Embassy Suites is a big chunk of our capital over this year, last year and likely over the next year or so as we invest into the reimagining of that brand, which we're super supportive of, and Hilton's done great work there. But the $90 million to $100 million of CapEx this year -- sorry $90 million to $110 million is what we would consider a normal run rate capital. And so all the work within each one of those brands is really just a subset of that $90 million to $110 million. And so that's what we spent roughly last year and that's a 2020 -- and that's a normal run rate for our portfolio.

[Chris Woronka:]

Okay. That's helpful. Just on the Wyndham portfolio, I think you said 2 repositionings by mid-2021, 2 by the end of 2021, leaving 4. I mean should we -- not that we model it separately, but I mean, where do you think the performance of kind of the four that are not going to be done? Where does that fall between now and when you actually come up with a plan for those? Is that something that's a potential drag? Or how do you underwrite that?

[Leslie Hale:]

I mean there's a couple of moving pieces to that. Keep in mind that we did receive the termination payment from Wyndham that we're amortizing over the next few years. And so that will function as a yield support for our portfolio as we make -- as we renovate the assets. Additionally, we are talking to brands about possibly converting some of the assets before they're actually renovated. And so it's hard for us to give you an exact perspective on that. But what we say is that we are looking for ways to offset that when the termination payment burns off and the actual conversion.

[Operator:]

Our next question is coming from Wes Golladay of RBC Capital Markets.

[Wesley Golladay:]

Just want to look at the ROI projects. Can you talk about your payback period on the energy investments? And how many keys you want to add to the hotel portfolio this year?

[Sean Mahoney:]

Sure, Wes. For the energy initiatives that obviously varies by project. But generally speaking, we underwrite to anywhere from 2.5 to 3.5-year payback period. So those things like water flow and energy consumption projects are quicker. Things like in-room thermostats are a little bit longer on that. With respect to the number of keys, we're adding 23 keys to the Emeryville hotel and then we're adding about 10 keys in Buckhead and 16 keys in San Jose. That's the projects that we've identified. Obviously, as you would expect us to continue to try to uncover incremental ROIs, adding keys is a critical subset of that. But that's what we've identified today.

[Wesley Golladay:]

Okay. And then looking at the balance sheet, you have a lot of cash, and you did call out refinancing potentially the former FelCor bonds at about 6%. Would this be a delay draw? And then just why not use cash on the balance sheet right now to pay that off?

[Sean Mahoney:]

Sure, it's a great question. Within our term loan facilities, we have a delayed draw option within the existing facility. And so I don't have a crystal ball what the world is going to look like, June 1. But certainly, one of the options that we have is to utilize the delayed draw feature on our existing facility. But it's something that is certainly on the table. But however we execute, that's ultimately what we're going to bake into our guidance when we announced that transaction. But in short, all of those options are on the table right now as we evaluate the right execution for that transaction.

[Operator:]

Our next question is coming from Gregory Miller of SunTrust Robinson Humphrey.

[Gregory Miller:]

As being on the call or where there are a number of New York City hotel owners that are defaulting on the mortgages to the point that a few are reportedly closing, given that environment, are there hotels competitive to your New York City hotels that are in trouble and/or have closed? And can these default trends actually work in your favor, perhaps for market share gains?

[Sean Mahoney:]

Sure, Greg. Listen, we've been reading the same reports on that, that you have. I think New York City as a market, our assets are well positioned, right? We're in Midtown and times Square, respectively, for the majority of our New York City concentrations. When you look at those submarkets, we're not seeing a lot of hotels exit the system, and so we're not seeing a lot of benefit. I think our view, as we said on the prepared remarks, is that 2020 will continue to be a challenging year within New York. When you look out on a longer horizon, supply does weighing starting next year and the following year. And so we are cautiously optimistic that if that continues and demand trend continues to be strong, which it has been in New York that there is a light at the end of the tunnel for New York, but 2020 is going to be a challenge.

[Gregory Miller:]

Okay. And just one other question on my end. As for the Wyndham hotels, I'm curious if there's any advantage today to perhaps holding out on signing new management or franchise contracts, given what could be a slowdown in U.S. development deals for some of the C corps. Similarly, have you seen prospective deal terms becoming more favorable, say, versus your expectations a few months ago?

[Leslie Hale:]

I don't think there's any need to hold out. This is bullseye real estate that all the brands are very attractive to. As I mentioned in my prepared remarks, we're in active negotiations. We're excited by the opportunities that are being presented to us. And we're making great progress. And so in those negotiations, we are starting to see the terms and they're very attractive relative to what we're seeing because of the real estate is driving it. Seven steps from Santa Monica Pier, in the heart of Charleston, doesn't matter what the development cycle is. It's bullseye real estate.

[Operator:]

Our next question is coming from Anthony Powell of Barclays.

[Anthony Powell:]

Yes. Focusing on New York, and sorry if I missed this in the prepared remarks, I wasn't on the call earlier. But yes, the Knick seemed to show year-over-year declines in EBITDA and how that hotel ramping versus your expectations? And what's the update on the time line for a potential sale there?

[Leslie Hale:]

Anthony, I'll take the second part first, and then Tom will comment on the Knick itself . Look, we were very successful on our disposition program. Last year, we built a tremendous amount of capacity that's allowing us to execute on our initiatives this year. And so with our strong execution, we are going to become patient with the Knick, as we've mentioned before. This is an iconic asset in an irreplaceable location, and we believe in New York long term and given our great execution on dispositions, we don't look at selling any more assets this year. And that includes the Knick.

[Thomas Bardenett:]

Anthony, I would say that we're very pleased with the performance. In fact, the Knick outperformance in the New York market in the first 6 months. The back 6 months -- the backend of the 6 months was a little softer, but we continue to ramp up by growing share by about 4.5% grew RevPAR last year. And we continue to see us having the right place when it comes to business transient in that marketplace in Times Square where we're growing that segment, which is critical for our average rate to continue to escalate.

[Anthony Powell:]

Got it. And and on the planned refi of the Felcor bonds later this year, your lever has come down a lot, which is good. Does it make sense for you to maybe even refi with a bit more debt than the $400 million, maybe a $500 million in the news and proceeds to buy back more shares given where your share is trading right now?

[Sean Mahoney:]

Yes. Anthony, great question. We're sitting on a tremendous amount of capacity today. And so the incremental proceeds, I think, aren't going to help or hurt us from buying back stock. I mean we are sitting in a very enviable position today of having enough capacity with which we can deploy on the initiatives that we're so pleased, as we sit here today. So I think our decision on how much to refinance is going to be a function of kind of what the arbitrage is between the 6% and where the market is as well as what our outlook is for capital needs over the next 2 to 3 years, as Les mentioned, on things like ROI initiatives, CapEx, share repurchase activity, Wyndham conversions, et cetera.

[Anthony Powell:]

Got it. And the $250 million buyback authorization, is that a signal that you want to do $250 million? Or just what's kind of the commentary on the magnitude and timing of the buybacks over the next year or so?

[Leslie Hale:]

Yes. I mean, Anthony, we've always said that order magnitude would be a function of where the price is trading at relative to volatility and current outlook. So you would expect us to be more active today, obviously, where things are at. What I said in my prepared remarks is that we expect our levels to be similar to next year -- I'm sorry, to last year, rather. And the size of the program is just a typical size of the program. Obviously, if market conditions continue to be this volatile, you'll see us be more active.

[Sean Mahoney:]

And just to bolt-on to that, Anthony. We had a share repurchase program that was $250 million that expires on the 29th of Feb, and we just renewed with essentially an identical share repurchase program. And so there is no signaling by that amount.

[Operator:]

Our next question is coming from Neil Malkin of Capital One Securities.

[Neil Malkin:]

Wondering if you could just maybe talk about the different economics or acquisition costs or net REVPAR, however you want to look at it, between, I guess, booking through brand.com or the hotel website versus our loyalty guests doing the same thing versus an OTA booking?

[Thomas Bardenett:]

Yes. Sure, Neil. This is Tom. So we're very well-heeled when it comes to the support that we get from the brands. If you think about what's going on right now, the big brands that we have, most of our product, we got about 34% of our portfolio with Hilton, 43% portfolio for our Marriotts, and they continue to grow brand loyalty programs. So a lot of the occupancy that's coming through the brand.com site is very attractive in regards to the cost related to compared to the OTA sites. Obviously, the percentage that you pay on the OTA sites are more like higher -- excuse me, single -- double digits. And there's a lot less fees and relationship when you look through the brand.com site. So we're spending a lot of our opportunity and with the brands focused on e-commerce and making sure people are going to the brand sites. In fact, the brand loyalty program, for what it's worth, there's a lot of sign-ups that happen at the desk, there's a try over and over again to make sure you're converting from the OTA side.So it's a much healthier, profitable location to drive business. And with the acquisition of new members, both for Marriott and Hilton, they're now over 100 million to 130 million members. So you have a significant amount of draw to those locations. When you think about the group side, obviously, the brands have been working with us and brought down from the group commission from 10% to 7%. In regards to group acquisition for many of the meeting planner sites, the HelmsBriscoe, the folks that book the larger citywide events, and so that cost is also coming down compared to the OTA.So when we look at where we spend our marketing dollars and what we're trying to attract, we obviously would like to have no commissions, first and foremost, but we do understand the importance of attach yourself to the pipe and the brand loyalty programs really give us that opportunity to do that.

[Neil Malkin:]

Yes. I guess another way of kind of understanding. Are you more -- are you happier or it's a net benefit to trade an OTA relative to a loyalty member who gets the lower ADR and whatever associated fee you pay into the brand system related to that?

[Sean Mahoney:]

Yes. Neil, this is Sean. Listen, we are supportive of all things being equal. We like having a guest come in through brand.com. The overall cost to secure that revenue is less than it would be for an OTA. The commissions is a part of it, but there are other factors that influence us as well. And I think when you look at what the trends have been, there's a report published on -- recently on the brands and how they continue to steal share, and they've increased during 2019, the amount of bookings that have shifted to brand.com. And so we are super supportive of that continuing because it benefits our both top and bottom line through lower commissions, but also, I think, more predictable business, et cetera. And so from a preference standpoint, we prefer brand.com book business.

[Neil Malkin:]

Okay. Great. And then, I guess, the other thing for me. Obviously, you're not a big group house, but just given the coronavirus uncertainty, in terms of like the West Coast, are you seeing incremental increase in companies or large events pushing or canceling? And then if so, are you going through with the cancellation fee, attrition fee or because of the circumstance, are you sort of forgiving that just to build a goodwill?

[Leslie Hale:]

Yes. We are seeing some cancellations. Well, keep in mind, we only have sort of 60- to 90-day window of visibility here. We have seen some cancellations on the West Coast. And they are oftentimes when we're having discussions with those individuals about rebooking and utilizing the cancellation provisions as a way to sort of segue into that conversation. As Sean mentioned, it's not in our guidance in terms of the impact because we are talking about them in terms of rebooking. I think the real bigger issue is not necessarily what we're seeing in our properties, but it's really seeing what's happening in the broader market, and the lack of compression that's going to occur as a result of people not showing up to larger events, for example.

[Operator:]

Our next question is coming from Michael Bellisario of Baird.

[Michael Bellisario:]

Just a couple of questions back on the Wyndham portfolio. I guess, first, specifically on the two 2020 projects. Are you guys assuming any top or bottom line disruption in your guidance for this year?

[Leslie Hale:]

No. A lot of the work that we're doing with the Wyndham portfolio is going to be a soft-cost driven, Mike, and so that's not going to have any disruption impact this year. A lot of the hard cost is going to be spent next year.

[Michael Bellisario:]

Got it. And then for these two first projects, fair to assume, at least on a gross basis, net of any brand, key money that these two hotels are going to be the highest cost of the rebranding projects that you guys do go forward with?

[Leslie Hale:]

No. I wouldn't make that assumption. And what I would say to you is, is that until we -- it's too early to sort of make that assumption because

[Michael Bellisario:]

Got it. And then just lastly, more high level. Can you remind us of your underwriting on these deals? And how you're thinking about the top and bottom line lift over time? And how long you think it takes to get to those stabilized numbers that you're projecting?

[Sean Mahoney:]

Sure, Mike. With respect to the entire portfolio, we think there's 20 points of share gains relative to these hotels upon getting rebranded from Wyndham. And so we expect that to happen over the next 3 years. And so the way we've underwritten it is that by the end of 2022, which would have been the end of the guarantee period, we would expect it to grow back to where we otherwise would have been with the guarantee. We also, as Leslie mentioned, have the $35 million termination payment, which will act as yield support against the renovation disruption as we renovate these hotels over the next 3 years. But our view is that, that 20 points of share translates roughly at the top line to $30-plus million of incremental revenue and anywhere from $10 million to $12 million of incremental profit, just purely based on like margins to our existing portfolio.

[Operator:]

Our next question is coming from Bill Crow of Raymond James.

[William Crow:]

With the lack of room revenues, industry-wide, everybody is looking at nonrooms revenue to drive or help support margins. Can you remind us how many of your hotels are charging fees, amenity fees or resort fees or whatever you want to call it? And then what your thought process is in 2020 as far as growth in that number, both number of hotels you might add to that program? And how much you might increase in the actual fee itself?

[Sean Mahoney:]

Sure. Bill, we have five hotels that are charging facility into our resort fees today. That's in Key west, Orlando and New York. We -- within our 2020 guidance, we assume that there is no incremental hotels that move into the charge resort fee year-over-year. We are expecting increases of the resort fee within the hotels that we do charge the fees. But we are not underwriting, at least, for 2020, the addition of any new fees within the portfolio.

[William Crow:]

Sean, is that just a competitive issue within those markets? Is that a brand prohibitive issue? Or why do you not have more -- why are you not charging more fees across your portfolio?

[Sean Mahoney:]

I think it's primarily a function of the kind of hotels that we own. We are not a resort-driven portfolio, as you know, which is where the greatest opportunity is to charge these fees. So that's probably the biggest impediment. We will continue to look inwards within our portfolio and try to identify opportunities to add the fees, but we -- when you look at the opportunity set within our portfolio, which is our portfolio type is not -- we've had a resort type portfolio, where these fees are more common.

[Operator:]

At this time, I'd like to turn the floor back over to Ms. Hale for closing comments.

[Leslie Hale:]

I'd like to thank you all for joining us today. As we've discussed, we are very pleased with the successful completion of our repositioning, which has set us up with a number of unique value-creation opportunities along with the capacity to pursue them, and we look forward to providing you guys an update as we make progress. Thank you, guys.

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time. Thank you, and have a wonderful day.