Greetings and welcome to the RLJ Lodging Trust First Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Hilda Delgado, Director of Finance for RLJ Lodging Trust. Thank you, Ms. Delgado. You may begin.

Thank you, operator. Welcome to RLJ Lodging Trust first quarter earnings call. On today's call, Tom Baltimore, the company's President and Chief Executive Officer, will discuss key operational highlights for the quarter. Leslie Hale, Treasurer and Chief Financial Officer, will discuss the company's financial results from last night. Forward-looking statements made on this call are subject to numerous risks and uncertainties that can 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 Tom.

Thank you, Hilda. Good morning and welcome to our first quarter 2013 earnings call. I'm pleased to report that we had another quarter of great performance. Our portfolio was once again one of the top performers in the industry with RevPAR growth at 10.6% and margin expansion of 150 basis points. This quarter's strong results were driven by our brand conversions, renovated assets and acquisitions acquired over the last 24 months. Not only did we achieve solid operational growth, but we also completed two other notable transactions during the quarter. Highlights of those include the acquisition of a small portfolio in one of the top performing markets in the country and our first follow-on offering. The patience and discipline we showed while executing these transactions highlight our commitment to grow long-term shareholder value. The positive trends that we are seeing in our portfolio, as well as the economy are encouraging. We are pleased to see that GDP growth has strengthened and that the S&P 500 and Dow Jones are reaching record highs. Furthermore, rising home prices and a slight reduction in unemployment to a four-year low have helped fuel improvements in consumer confidence. That said, we do not believe we have seen the full impact of spending cuts on the economy. Within the lodging sector, we continue to see rising corporate profits translate to a steady flow of corporate travel. Additionally, the positive imbalance of supply and demand reinforces our ability to continue to drive rate and expand our margins. Over the past eight quarters as a public company, our RevPAR growth has been largely driven by ADR increases for each quarter, a trend we expect will continue. For the quarter, Smith Travel reported U.S. RevPAR growth of 6.4%. More specifically, for the upscale and upper mid-scale segments, which are…

Thanks, Tom. Before I report on our first quarter financial results, like on previous calls, I would like to remind listeners that the pro forma results include prior ownership periods. The performance metrics that Tom shared earlier refer to 147 hotels as if we had owned them for the entire comparable periods and excludes the Houston apartment income. These results also exclude non-comparable hotels, such as our Garden District Hotel, which was closed for most of 2012. Adjusted EBITDA and adjusted FFO, which I will discuss shortly, only reflect results for our ownership periods. Now, looking at our results for the first quarter, our pro forma consolidated hotel EBITDA increased $9.9 million to $68.9 million, representing a 16.8% increase over 2012. This increase was primarily driven by the strong performance at our New York, Houston and Austin properties. For the quarter, our adjusted EBITDA increased $12.2 million to $61.3 million, representing a 24.8% increase over 2012. Adjusted FFO increased $15.5 million to $44.1 million or $0.41 on a per share basis. During the quarter, we realized significant interest expense savings, primarily from the first mortgage debt we refinanced in the fourth quarter of 2012. And as a reminder, during the quarter, we issued 15.9 million shares as part of our equity offering, which will impact our weighted share count going forward. Both adjusted EBITDA and adjusted FFO reflect add backs to normalize our operating expenses. We recommend reviewing the exhibits in last night's press release for a full reconciliation of both metrics. Moving on to our balance sheet and recent capital markets activity, we strive to maintain a strong conservative balance sheet and continue to seek ways to further enhance our financial position and lower our cost of capital. During the quarter, we successfully completed our first equity raise since…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Jeff Donnelly with Wells Fargo. Please state your question.

Good morning, folks.

Hi, Jeff. How are you?

Good, good. First question, I guess, maybe for you Tom and maybe I misheard you, but I think in your opening remarks you said that we have yet to see the full impact of a reduction in government spending. I guess, did I hear you correctly? And if so, how much further do you think we have to go to flush out that full impact?

I think the honest answer, Jeff, because I'm not sure anybody really knows, I think if you think about it historically there were talking about 85 billion in the first year. I think they further revised that to be sort of 44 billion. What we saw in DC and it was largely isolated in one hotel, our residence international harbor which is really on the same pad as the Gaylord property. We were down about 25% there. If you look historically, government business is about 6% across our entire portfolio but historically, it's been 22% to 23% of our DC portfolio. But we were down about 530 basis points approximately in DC, again largely at that hotel and accounted for about 551,000 of loss business in the first quarter. So we are continuing to monitor it carefully. We did see a little bit of softening in Denver as well. That's probably the second market where we've got a little bit of government exposure, obviously not as much as we do in DC. There we saw reduce business coming out of DOJ, Department of Interior, and some of the government contractors as well. I would say that we saw April across our entire portfolio cover pretty dramatically. Again, we had a great first quarter. April was up 13% across our entire portfolio, but DC was up about 15% of RevPAR. So the market came back. I think we're just being cautious. We think there's clearly some additional uncertainty out there. We continue to monitor it. Given the fact that our portfolio was so well diversified, I think where as insolated as anybody.

You might have just answered my question on this, but do you feel that select service hotels, particularly I guess in the DC market could in some cases be a net beneficiary of sequestration. I know, maybe it's on a relative basis. I guess my thinking is that, could essential government travel be forced to trade down if you go to the lower cost channels?

Jeff, I absolutely agree with that statement. I think one of the beauties of our strategy, and we use this phrase all the time is that it's sort of an all-weather strategy. We're going to be a full participant in the recovery. I think we've continued to demonstrate that. Our portfolio was up 10% in the fourth quarter, again 10.6% here in the first quarter. But if things soften and I think government spend is an example of that, where a natural trade down opportunity where people are going to still get that price value. And again, we've got a much leaner operating model. So I think we benefit on the upswing and to the extent things soften slightly, we are well positioned.

Jeff, it's Ross Bierkan. One more thing to is, it seems like the group business has been impacted more than the transient. Group bookings are an easy target for budget cuts and because of the nature of our portfolio, a little bit more transient orient than group, we're perhaps less impacted.

I think the facts of our portfolio support the statement that both I made as well as Ross.

If I could just switch gears, I'm just curious with interest rates low and stocks recovering and what have you. I guess I wanted maybe first your general thoughts. How do you think with the possibility of further consolidation into the sector in terms of the odds of seeing it in the next year, do you think they're increasing that we see more consolidation either public to public or are the public companies buying large portfolios that help privately to the extent that they're out there?

Well, I've been a vocal advocate for consolidation in this industry. And I think having 13 REITs plus or minus is too many. And I think it's far more use, a more efficient use of capital to the extent you could consolidate and perhaps have many fewer, whether that's half. I think there's some natural combinations that makes sense. No secret we clearly want to be part of that discussion. Probably our preference would be as a buyer but at the end of the day, we're not opposed to being a seller to the extent it creates shareholder value. In terms of the likelihood of it, this year I would say probably not likely, Jeff, I think based on where we are in this cycle. I do think that this year for us, you'll see us use more of a sharpshooter approach and that's a single asset, small portfolios. We are interested in some large portfolios and we're certainly interested in talking about M&A. But I think an M&A will happen. I just think it's going to be a little later in the cycle. And again, it's always about timing and price and, of course, you always have to be able to work out the social issues. But I for one believe strongly that this industry should consolidate.

Thanks guys.

Okay.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please state your question.

Hey, good morning guys. It's Austin Wurschmidt actually here with Jordan.

Hey, Austin and Jordan. How are you?

Good, thanks. Just want to talk a little bit about the decision. It looked like you increased the dispositions. I think last quarter you talked about 8 to 10. Now you're talking around 12. Could you just talk about what drove that decision? And then also, how many additional hotels in the portfolio would you consider to be sort of non-core candidates for disposition?

If you remember historically, Austin, we talked about we've got say 20 assets that really account for about 5% of EBITDA and about 10% of rooms. 11 of those historically have been crossed in the debt pool. We did come through the portfolio and really identified 12 assets that we have not listed with two brokers and we've commenced marketing, but those are assets that are really non-core; many of them are in secondary tertiary markets, not part of our long-term strategy. We think given that the attractiveness of the debt markets and the fact that there are many owner operators that might be interested in these assets that that now is the time to really accelerate that pace. We know quite candidly, we've gotten questions from many investors and we've stated before that it would be part of our strategy. And again, we want to demonstrate that we're going to do what we say we're going to do and we've initiated that process. In terms of long-term, we've provided more disclosure recently. I think you noted that our top 40 hotels truly account for north of 60% of our EBITDA. You will see us continue to prune and manage the portfolio and certainly look for opportunity to continue to create long-term shareholder value. No doubt those 40 assets, I think, are strong as any portfolio in the business. And again, those 40 are up north of I think 14.5% of RevPAR in the first quarter.

And what should we be thinking on in terms of cap rates on dispositions?

In markets like – these assets that are secondary, tertiary, clearly those are going to be wider of, I think, where we trade today. But the reality is, they are such a small part of our portfolio and I think we're confident that we can recycle that capital into higher growth markets that are going to be accretive. So I don't have an answer for you today, and we'll see how the market responds, but I certainly would expect them to be a little wider of where we trade today.

Okay. That's helpful. Thanks. And then just turning to the acquisition side, you had talked about increased competition from PE firms and other REITs. What are you seeing out there today in terms of the assets that you're looking at?

Well, let me talk about it globally and then Ross Bierkan, our Chief Investment Officer is here. He just got back from a road trip, so I think he'll have even more insightful commentary. The reality is that we have been very careful in the deals that we've done since we've gone public. I think we've bought now eight or nine assets. They've all been compliant, bull's eye real estate, attractive cap rates. I think those cap rates have ranged from 7.1 to 10.1 when you include the most recent Houston deals. So we've been very careful, very thoughtful about the deals that we've done. If you look – if you back up even further, I think sometimes people forget. We've actually acquired about 31 assets over the last three years of about 1.4 billion, so we were pretty active right before going public. So, we really like the pipeline that we've built over that period of time and the recent deals that we've certainly added to that. Clearly, we're seeing more competitors in the marketplace, the debt markets are certainly helping and aiding from that standpoint to the extent that a lot of the PE firms can lever up more to get their returns. I would say that given Ross Bierkan – and Ross and I have been together for 14 years. We have been as successful as anybody at finding off-market deals or limited good deals, and that's really I think where we separate ourselves for many of our peers. We try to stay as far away from what I call the heated auctions as we can. I'll let Ross gives some commentary.

Yeah, Jordan, the private equity guys, fortunately it seemed to be sort of bifurcated in what they're chasing. They are looking for core assets in major markets and then they're looking for more recently select service assets in secondary markets where they're chasing yield. And we're not particularly interested in either of those. So that's a good thing. Secondarily, the inventory of opportunities on the market to the brokerage community while ample, not necessarily a good fit for what we're looking for either. We're being very selective. So, we are having to use our own relationships built up over the years to create our own heat, and source opportunities off-market and out of the spotlight a little bit. So it's working in our favor.

Austin, the other thing I would add is, we've got – there are four assets right now that we have under contract that I made in my prepared remarks. Remember those are – that's the Miami deal that we'll close at the end of the year. Obviously, the San Francisco deal that we previously announced and we think we'll close at the end of second quarter plus or minus. Again, that's another conversion. Both assets one in North Miami Beach, the other in three blocks from Union Square in San Francisco, bull's eye real estate very compliant with our strategy. The other two assets are also really of that same class gateway, West Coast. We're very excited. And again, improving the quality of our portfolio, improving the RevPAR and also we believe pretty attractive yields as well. So, we feel very good about our pipeline. And as I also stated in my remarks, we're confident that we're going to deploy at least 300 million in capital this year, okay? Hopefully that answers your question.

Yeah. That's very helpful. Thanks for the color guys.

Okay.

Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please state your question.

Good morning, everyone.

Good morning, Wes. How are you?

Doing good. Looking at the dispositions, you mentioned some of them are tied up in a debt pool. You guys also have a large CMBS debt piece that's pre-payable this year. What would prevent you from prepaying this? And would you consider doing an unsecured note at that time?

That's a great question, Wes. Look, the assets that we're listing today, 12 assets, there are few of them that have debt, but they are not part of the debt pool that you mentioned. And for the listeners, obviously, we've got 43 assets that are tied up in the debt pool. Leslie will correct me if I'm wrong. I think it's about $487 million with a coupon rate of 6.59. We think it's a great opportunity to refinance. And in that, lockup burns off I believe at the end of July of this year. So Leslie and her team have begun discussions and are working on looking at our options. And Leslie, you might want to add some additional commentary.

Sure. First of all, I'll just remind everybody that we don't have any debt that's maturing this year. So this will be something that we would exercise in order to take advantage of whatever we talked today and [his focal low]. So, we – as Tom mentioned, we are exploring and looking at it and hopefully we'll have some more color on it on our next call. But we will evaluate all product types whether it's unsecured, first mortgage, et cetera. We're looking at all those product types.

Wes, I would also add that keep in mind, our portfolio, our long-term objective was less than five times net debt to EBITDA. I think this quarter, we ended up about 3.6 plus or minus. You'll see us working this year to – really that will probably end up in the low 4s. Ultimately, we aspire to get to investment grade. But keep in mind that we've got about 60 assets today that are unencumbered which again gives us great flexibility. If we look at unlocking those 43 as well, we can see some pretty attractive scenarios. And Leslie and her team did a fabulous job as we did two term loans last year and also a recast of our credit facility. So rest assured that we're out in front of this. We think, obviously, that we can lower our interest expense and we'll continue to evaluate in a very thoughtful manner.

Okay. Thanks for all the color that piece. Now looking at your margins, you guys are still guiding flat 200 bps and you seem to off to a very good start to the first quarter and then the good RevPAR numbers in April. Is this just being conservative or do you have any, I guess, increased cost that you see in the second half of the year?

Yeah. I wouldn't say conservative, Wes. Look, we're cautious and I think if you look historically – keep in mind we started at a much higher base. I think we ended last year at 33.9. There maybe one or two of our peers that are in that category. So we're fighting for the nickels and dimes and quarters here to move those margins. I think first quarter is a great example of that 150 bps. We're very comfortable with the guidance that we've given so far across from both RevPAR, EBITDA and margins. But rest assured we're working our tails off to do better than that.

Okay. And lastly, can you provide an update on how the Hotel Indigo in New Orleans is doing for you?

Indigo has just been a – it was a fabulous conversion. As you know, that's the seventh conversion that we completed. Six of them – while we get the data on Indigo, let me give you a little bit about the overall conversions. The six conversions were up 19.3% in RevPAR in 2012. They were up 22.6% in the first quarter. So we feel really good, really excited about that. The Indigo itself in the first quarter generated an ADR of about $226 and occupancy just over 50% in the first quarter. Keep in mind that it just converted and obviously we got the benefit of the Super Bowl. So we're really excited about that asset and I think like all the other conversions, we think conversions are a way that we really distinguish ourselves and we really have a core competency in doing that. But most importantly, we think it's a way that we can generate outsize returns for our shareholders.

Okay, thanks for taking the questions Tom and Leslie.

(Operator Instructions). Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please state your question.

Thank you. Hi, guys. For your Houston acquisition, what do you think you're all-in basis for the SpringHill Suites will be? And what sort of return are you expecting?

I think the all-in basis – the allocated price on the apartment building is about $18.8 million. We're estimating today at about 17 million of CapEx, so all-in would be at about 215,000. We think again the combined all three, because obviously it's a combined entity there, both the residents and the Courtyard and the SpringHill Suites will generate well north of unlevered 11%. So we're excited about it. It's off to a great start already. I think both assets were – the two that are up and running were up north of 14% in RevPAR in first quarter. And we like the market dynamics in Houston as well. So we think this is an example of really how we separate ourselves, an off-market deal, great going in yields, two existing assets and a great conversion, and we're very bullish on this portfolio and this transaction.

Great. And as you look to use the proceeds from the recent equity offering, what sort of cap rate or multiple do you think you'll be able to deploy that at?

Yeah, if you look, Lukas, the last – as I mentioned, let's say the nine deals that we've done, the cap rates of the public company have been really from 7.1 to 10.1. Every asset's a little different, every story. I would say clearly our investment criteria we're looking for unlevered deals in the 10% to 12% and pretty significant discounts to replacement cost. But I would fully expect that first year cap rates would be in the 8% range. We want to do deals that are accretive and that are adding value in short order to our portfolio.

Great. That's it for me. Thank you.

Okay.

It appears there are no further questions at this time. I would now like to turn the floor over to Thomas Baltimore for closing remarks.

We appreciate all of you taking time. Please note that the team here at RLJ that we're working hard and committed to creating long-term shareholder value. I look forward to seeing many of you in the next few weeks as we will see you at NYU and NAREIT and perhaps even individual meetings as well. So if you have any additional questions or concerns, we'll be available today. Please don't hesitate to call us.

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