Greetings, and welcome to the RLJ Lodging Trust Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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, Ms. Hilda Delgado, Director of Finance for RLJ Lodging Trust. Thank you. Ms. Delgado, you may now begin.

Thank you, operator, and good morning and welcome to the second quarter earnings call for RLJ Lodging Trust. 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. 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, everyone and welcome to our second quarter 2013 earnings call. I am pleased to announce that we had another outstanding quarter of industry leading performance. We achieved RevPAR growth of 8.7% and margin expansion of 124 basis points, which was driven by the continued out-performance of our well diversified portfolio. Furthermore, our results show that our portfolio is reaping the benefits from our focus on asset management, accretive acquisitions and well-timed repositioning projects. In addition to these strong operational results, we expanded our portfolio by adding two hotels in strong markets with solid lodging fundamentals. The first asset expanded our presence in the San Francisco Bay area, and the second asset allowed us to enter into the desirable Hawaiian market. While moderate in nature, momentum in the overall economy certainly remains positive. Corporate profits continue to show a positive trend and we are seeing company has gained more confidence in hiring. As such, unemployment is moving in a positive direction as is consumer confidence which reached a five-year high in June. Furthermore, we expect GDP will show modest, but positive growth despite a pullback in government spending. And while we have seen an uptick in interest rates, they remain at attractive levels and debt is available for best-in-class sponsors. We are already seeing increases in business and individual travel driving healthy demand for this sector. With continued momentum in the housing market and improvements in consumer spending, we believe that it will enable us to achieve stronger pricing power. We expect that the favorable demand and supply imbalance will remain in the near future and keep supply growth of new rooms below the long-term average at least through 2015. For the quarter, Smith Travel reported U.S. RevPAR growth of 5% more specifically for the upscale…

Thanks, Tom. Before I report on our second quarter financial results, as on previous fiscal calls, I would like to remind listeners that pro forma results include prior ownership period. The performance metrics that Tom shared earlier refer to 146 hotels as if we’d owned them for the entire comparable period. These figures exclude the two conversions currently underway in our Garden District Hotel in New Orleans which was closed for most of 2012. Overall, our results this quarter demonstrate the quality of our portfolio, as well as the benefit we are capturing from our high growth markets. Our strong performance is further evidenced to the increased profitability of our consolidated hotel EBITDA, which increased $11.1 million, or 12.6% over 2012. For the quarter, our adjusted EBITDA increased $15.8 million to $92.1 million, representing a 20.8% increase over 2012. Adjusted FFO increased $19 million to $74.8 million for the quarter, or $0.61 on a per share basis. Our adjusted FFO increased significantly by 34% over the prior year and reflects a 17% saving in interest expense. Our proactive refinancing activities have yielded meaningful results. During the quarter, we completed the transfer of the SpringHill Suites Southfield back to its lender, a process that we initiated over 18 months ago. The hotel’s results have been moved to discontinued operations. As part of this transaction, we recorded a $2.4 million non-cash gain on the extinguishment of its debt. Our adjusted EBITDA and adjusted FFO exclude this gain. For further adjustment, we recommend reviewing the exhibits in last night’s press release for full reconciliation of both metrics. Moving on to our balance sheet and capital markets activity, we strive to maintain a strong conservative balance sheet and continue to seek ways to enhance our financial position and lower our cost of capital. We…

Thank you. 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 proceed with your question. Your line is live.

Good morning, folks.

Good morning, Jeff. Hey Jeff, how are you?

Doing very well. I had a question just concerning the acquisitions in the quarter, the property in Honolulu as well as one in San Francisco. The cap rates that you put out there are obviously based on forward projections. Are you able to maybe walk through for us in a little more detail about the underlying assumptions that got you there? I mean, where you are thinking in terms of either occupancy in ADR, or may be RevPAR penetration? I’m just, I guess, I’m trying to underwrite the conservativeness, or aggressiveness of the cap rate assumption?

Well, I don’t have the underwriting with me, Jeff, but I would tell you just given our history and I think you’re quite familiar with it, we are quite conservative. We typically do a demand and supply analysis in every sub market. We will build a few years of modest ramp-up in RevPAR, followed by sort of stabilization. Given the size and depth of our portfolio, we have a ton of information given the fact that we got 150 hotels approximately in 22 states. Kate Henriksen in our team, and you know, Kate’s been with me north of 10 years and we’re very capable team. We do all of our underwriting internally. So it’s a ground up. And I think if you look at how our acquisitions have performed, and really, we’ve done about 34 acquisitions really over the last three years. I’m quite pleased with our performance. So, we typically are, in terms of investment criteria, looking for returns in the 10% to 12% un-levered, you know, significant discount to replacement cost and really looking for a third year cash on cash of 9%, which in many cases a lot of our recent acquisitions we’ve been exceeding. So we’re pretty comfortable with the underwriting. What we like about Hawaii obviously, it’s been a top lodging market, huge barriers to entry, very difficult to break into. As we look at sort of a RevPAR, I think the RevPAR in second quarter this asset was about $140. So that’s north of 30% of the average portfolio that we have. So, it’s accomplishing our objectives. We’re continuing to expand our presence on the West Coast, we’re improving the overall portfolio RevPAR, and we’re getting an asset that we think is going to be a long-term hold for the portfolio. So we’re very comfortable with it. For us, the 7.8% I think we reported in the forward cap rate in the first year is something that we are quite comfortable with.

Maybe just another question concerning the guidance you guys gave for 2013. You took the low end of your pro forma RevPAR growth up 50 basis points to 6.5%. Most of the other lodging companies, brands and REITs have dialed down the top end of their range. I guess, I’m curious why raise the low end, at this point, I mean, it’s just that confident in seeing the low end be a little bit better, I guess, why not stay conservative? I was just curious about what sort of shape you’re thinking there.

Well, it’s a fair question, Jeff. I actually thought you’re going to go the other way and why didn’t ask us why we raise the top end.

You can answer that too, if you want.

No, you know, it’s a very conservative team here. Obviously, we’re up year-to-date I think 9.8%. We do have some tough comps in the second half of the year, but the reality is we’ve got a very well diversified portfolio. It’s largely renovated. We are continuing to see the tailwind from our six conversions. I think we’re up about 10.4% in second quarter. If you look at our four most recent that really haven’t gotten stabilization, I think they were up north of 16.5%. And we’re really seeing a broadening across our portfolio. As I noted in my prepared remarks, if you look at Indianapolis, I mean, Michigan, and Los Angeles, so even beyond kind of our top six markets, our portfolio continues to perform very well. And I think part of it goes back to the strategy. I am a passionate believer that candidly we have a superior strategy, investing in upscale-focused service or compact full service hotels with the right brands that are well located, that are transient based. I think we’ve outperformed and candidly, I expect that we’re going to continue to outperform certainly on an annualized basis. So we’re comfortable with it. It requires approximately us to perform I think at about just south of 5% for the second half of the year to meet the implied midpoint of our revised guidance. And we’re comfortable with that at this point. Clearly, there is some headwinds out there in a couple of markets and obviously in the government, but government is really a small part of our business. So, we are not really losing a lot of sleep over that.

Okay. Just one last question, Leslie, you had touched on it in your remarks about the relatively small disruption from the renovations in the fourth quarter. Do you guys have an estimate though, of that, nonetheless? I mean, is it really the sort of small dollars or is there some number you can put to it?

Jeff, I will answer that. I mean, look our team as I think listeners have seen we renovated 93 hotels over the last two years with very little disruption. We plan with an excruciating detail to find the right windows both in terms of ordering, FF&E, planning displacement, planning when the soft windows are for us typically first and fourth quarter; and also given the size of these assets, there are none that are particularly large or difficult. Its garden variety given the fact that we’ve got so many management companies, particularly White Lodging, has worked with us for a long time. Mistakes happen certainly delays things happen beyond your control, but this team really focuses with great detail on trying to mitigate and minimize risk like that. So, if there is any displacement, it’s really negligible and baked into our forecast but it’s very minor.

Thanks guys. Appreciate it.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question. Your line is live.

Hi, it’s Austin Wurschmidt here with Jordan. Just wanted to go back to...

Hello, Austin.

Hey guys. Just wanted to go back to guidance, while you guys did raise the low end, the guidance does imply deceleration through the second half of the year as Leslie mentioned. And I know the comps are more difficult and you’ve got some renovations planned in 4Q, but do you think that the deceleration will remain a trend, or could we see it reaccelerate in 2014?

I would fully expect Austin that you’d continue to see further additional growth in our portfolio. I think last year we were up 7.4%, the year before I think 7.7%. I think we’ve been on the, certainly on the top tier of performance in the industry. Obviously, year-to-date we are at 9.8%. We did have some favorable comps in the first half of the year. We do have some tougher comps in the second half of the year. I would remind listeners that Austin was up 30% in the fourth quarter of 2012, largely given Formula One there and it was a first time event there and 265,000 visitors, about $2 million in incremental revenue. We still are seeing incredible growth out of Austin, but obviously coming on the heels of a 30% growth in fourth quarter, obviously, we built in certainly, a more conservative forecast there. Obviously, New York City, although we’ve had again great performance and have outperformed our peers there, we did benefit a lot in fourth quarter of last year from some of the post Sandy benefit. So clearly, we’ve got some tougher comps there. We did have strong (indiscernible) in Chicago in the fourth quarter of last year as well. So those are slightly tougher comps. We also had the RNC convention in the third quarter of last year which will make Tampa a little tougher, but rest assured we are cautiously optimistic. Our portfolio is performing very well as I shared with Jeff. And we are very confident in the guidance that we have provided. And while it implies that second half will be at around 5% plus or minus we are comfortable with that at this point.

Hey, Tom, it’s Jordan here with Austin. I wanted to just get your thoughts on underwriting, given sort of the moves in the capital markets. You guys are a buyer, any thoughts on changes in underwriting for you guys? Are you adjusting exit caps up or going in caps? And then separately if maybe you could speak to recent additions to the IPO pipeline and any thoughts on those?

Jordan, no real comments on the additions to the IPO market, I’ll let others, more qualified to speak to that, and no secret, I think there should be some consolidation in the space. And I think I have said that enough and I think people know my view and we certainly want to be part of that dialog. As it relates to underwriting, I mean, we are approaching deals with the same rigorous approach that we have in the past. Again, it’s got to be an asset compliant with our investment thesis. It’s got to be something either an embedded story that we think either through a value add or its capital starts, or there is an opportunity to replace management. There is a conversion play. It can be in some cases sort of traditional REIT, where it’s in place cash flow but we really haven’t changed our underwriting standards at this time. We typically have always assumed that for cap rates there would be an expansion that’s pretty embedded. We never assume that there is going to be a reduction in cap rates, and are banking on that in terms of the value creation. So we’ve always been conservative. And as I shared earlier again still looking for un-levered returns in the 10% to 12% range comfortable with that. There are some markets, where I think certainly gateway markets where there’s more competition right now. And in fact, some might assume that there should be an increase in cap rates. If anything I think cap rates have really remained the same for most situations. I do think in those highly contested auctions. In fact in some cases, cap rates have probably compressed a little bit in part because you’ve got new entrants, the private equity. Buyers are certainly out there and the debt markets are improving. Even though interest rates are rising slightly, the availability of debt capital is still there.

Do you think that the private equity there is sort of a buyer to the same degree they were despite sort of the moves that we have seen?

It’s going to be a case-by-case and a market-by-market situation. But generally, I think we see them being as aggressive and certainly having the appetite, and we see ourselves principally as a net buyer although we are looking to sell some of our non-core assets. And I don’t think there’s been certainly a dramatic move at this point either way, but it’s clearly something we’re going to continue to monitor carefully. We have a very rigorous investment process. And again, all of that underwriting is done internally. We have a team of very talented professionals, most of whom have been with me a long time. So, we are not deviating at all from showing our underwriting approach.

Thank you.

Thank you. Our next question comes from the line of David Loeb with Robert W. Baird. Please proceed with your question. Your line is live.

Good morning.

Hey David. How are you? Good morning.

I am fine. Thank you. I want to follow-up on some comments that you made Tom and that Leslie made about the refinancing. And really, just to understand about how the progress is going towards doing things that allow you to sell some of the hold your White Lodging assets? It sounds like step one in that process was doing some juggling of management contracts such that White Lodging took over some other hotels and you’ve done a number of those. Step two seems to be the debt restructuring to remove some assets from debt pools that restricted their ability to sell. So where are you on those? Are those among the hotels that you’re currently marketing for sale?

That is correct, David. As I think I have mentioned on previous calls, we have got 20 assets that would classify right now sort of non-core or about 5% of our EBITDA and about 10% of our outstanding rooms. We did do some horse trading with our partners at White Lodging, and we have unencumbered a number of hotels, I want to say approximately 10 plus or minus. But we’ve got 10 to 12 hotels that we’re currently marketing right now. We think most of those, if not all of those will sell unencumbered. There are buyers for encumbered assets for sure, but clearly, pricing can be impacted. There is a difference in pricing versus selling an unencumbered versus encumbered. So, you are correct. This is the first step. We’re cautiously optimistic. Obviously, as we make progress and we enter into agreements and/or most importantly close, we will announce that to the market. As it relates to the larger financing, let me just say that and I will let Leslie give some specifics on where we are in that process, but we do have north of $500 million in available debt that has a prepayment option, and that we are working on. And we think in addition to making progress on our journey to get to investment grade and having a larger portfolio of unencumbered assets, it will also give us flexibility to begin to accelerate some of our capital recycling efforts. So, hopefully, you’ve seen again we’re doing what we said we were going to do in terms of continuing to position the company to be not only low levered, but to be a company that we think can certainly be investment grade, by having a large portfolio of unencumbered assets and giving us the flexibility also to recycle capital was our steps on that path.

Hey, David, this is Leslie. Just to kind of close loop on the end of that. We are in the market right now looking at both the secured market and the unsecured market and the transactions are going relatively well. From a timing perspective, we would be looking at the end of the third quarter, beginning of the fourth quarter from an execution perspective. And again, to your point, it would unlock a number of assets, pretty dramatically. There is about 51 assets that are encumbered by the debt that we are looking to refinance and we would be looking to unlock a net 47 assets from this transaction.

So, David, we would end up then at the end of the day and Leslie can correct me, but I think we end up with about 105 to 110 assets that will be unencumbered out of our pool of 150 assets including those conversions that we have in the pipeline. So, pretty dramatic and I think we get to EBITDA of approximately 68% to 70% of our EBITDA.

It sounds like you are kind of working in tandem such that asset sales that might be in process now would be able to close shortly after that refinancing in the late third or fourth quarter (indiscernible)?

I think that’s a reasonable assumption. As you know there is no assurance that anything will close, but we are certainly cautiously optimistic and I think you know us to be a group that plans well and we follow the plan, and that we’re working hard against that right now.

Yes, I do. And longer term the 37% of EBITDA that comes from something north of a 100 hotels, I guess closer to 110 hotels, are all of those ultimately candidates for exit or subject to being able to work with White Lodging and others to make them more readily salable?

Yes. I don’t know that I would say that north of a 100 hotels. We will continue to as part of our process we have a very active portfolio management group. We are constantly looking at both submarkets whether or not it’s a long-term hold and how much capital is going to be required how much potential supply. And so we will look at it in sort of a case-by-case or batches of hotels. I wouldn’t see us looking to sell a 100 of them at this time. As I said, look, we’re here to create value for shareholders and to the extent someone wanted all of the portfolio we would certainly engage in that dialogue. And I think what we’re trying to show through separating the 40 is just the strength of those 40 hotels, and the fact that they are as strong as any portfolio in this industry. Not only were they up, I think, 9.6% and they account for 63% of our EBITDA, but I think 13 of those been assets that we’ve added really the last few years. So, many of them are still ramping up. So, there is a lot of embedded organic growth in that portfolio as well in that sub portfolio.

Okay, that makes sense. I guess I’m just trying to understand strategically you do seem to be going more to those larger hotels. And number 40 is just under $2 million of EBITDA, which I am sure means number 150 is well smaller than that. I guess just trying to understand that?

Yes, they are certainly, David, you are correct. There are number of assets that are small, less than $1 million in EBITDA, clearly those are assets that over time we will be looking to recycle capital. I just don’t know that it’s 100 hotels, but it clearly would be a batch of those hotels that we’ll continue to look to recycle and improve the quality of the portfolio. There is no doubt, no doubt that we want to be in dense suburban markets, higher RevPAR, strong brands, well located, it’s a core strategy and we’re certainly not going to deviate from that.

Okay, great, that helps. Thanks.

Okay.

Thank you. Our next question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question. Your line is live.

Hey.

Good morning, Wes.

Good morning.

Good morning too as well.

Can you comment on how you see supply impacting Chicago, Austin, Denver, and how you see each of these markets absorbing the new supply?

Yes, I mean, obviously, Austin is probably the one that gets as much publicity as any. And I just want to continue to make the case that, Austin just has such a wonderful storyline. It’s a state capital, it’s a university town, it’s becoming a tech hub and it’s becoming such a magnet for tourism as well. We were up 14.3% in second quarter. I think we were up 10% in the first quarter. We were up 30% in the fourth quarter. Despite the fact that we’ve got tough comps in the fourth quarter being up 30%, we are cautiously optimistic that we are still going to have a very strong second half of the year even against that kind of base, part of that is you’ve got a legislative year, so that’s historically accounting for about 180 basis points of RevPAR. You had private sector growth. I mean, remember most of the job growth has been created in this country in the last several years as we all know, as we’ve already been coming out of Texas, largely driven by Austin and Houston. I think Austin is probably up about 10% in job growth over the last five years. You got the new Circuit of The Americas track, there were those one event last year and where there is six additional events that were added this year and now we understand, there is going to be a seventh. And then when you factor in Formula One where they’ve signed a 10-year contract, you got eight of these sort of one-time events and many of them we expect are going to be recurring. If you look at just second quarter alone, in April we were up 23% in RevPAR and MotoGP had a 130,000 visitors. So, V8 Supercars add nearly…

Okay, thanks for the detailed explanation. Looking at your balance sheet, you guys have a large cash balance, will you use some of the cash to pay down some of the debt you can retire?

Right now, as Tom mentioned, you know, we have got a healthy acquisitions pipeline. So that is largely being sort of geared towards those acquisitions right now.

And as you know Wes, our net debt to EBITDA is sub four and look long-term we want to be getting that to the low 3s. But you know we’re still net buyers and we are still active and we’ve got $125 million kind of in the pipeline today and the team is actively looking and we tend to find more than our fair share of deals off market and try to steer clear of the auctions as much as we can. So I think you will continue to hear and see more deal activity from us in the fourth quarter, in the third and fourth quarter.

Okay. Last one sticking with that acquisition pipeline, it looks like you might have one or two more assets excluding the Hilton Cabana, are any of these a conversion opportunity?

Neither, at this point, they are not.

Okay.

And there are a few assets, one could be Wes, but let me clarify that one could be, but there are generally one West Coast, one East Coast and weighted more towards stabilized assets the way I would answer.

Okay, thank you for taking the questions.

Okay.

Thank you. Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question. Your line is live.

Thank you. Hi guys.

Hi, Lukas. How are you?

Good. How are you?

Doing well, thanks.

Alright, you guys obviously put up some really impressive numbers. I am just curious do you have any idea of how much that was impacted by the renovation, the tailwind of that?

Well, if you take out the Doubletree Met, obviously it’s our largest hotel and clearly has benefited, but even if you take that out of second quarter, we were still up 8%. So, and I think part of it again is that you’ve got renovations, you’ve got conversions. If you strip out Doubletree Met, as I said 8%, if you strip out our six conversions, we were still up 8.6%. The reality is it’s a well-diversified portfolio, and it’s broad-based. So no matter how you slice the data, you still I think are going to conclude that they are pretty impressive numbers. And I think a lot of that credit goes to the fact that yes they’ve been renovated, and yes there is some conversions, but I also think it’s really blocking and tackling. It’s The men and women in our asset management group that are working in partnership with our management companies every day, every week, every month, every quarter to really drive incremental value and we get it. It really is about performance and it’s about doing that on a daily basis, and really everything else is sort of background noise. So that’s more than anything else is where we spend our time as a team. And I think these numbers are reflected. I also think that one of the things that we talk about in the industry is I think this secular shift of sort of moving more towards select service, again, I think the evidence continues to support that there is a shift in customer preference. These hotels you are getting the right price value. They are efficient to operate. They are guest friendly. And I think there is momentum there and I expect that that’s only going to continue.

That is helpful. And then the Courtyard, you acquired in Waikiki, that’s got about 400 rooms, which seems like a lot for a limited service hotel. Just curious, if there is anything special with that asset?

It doesn’t have a lot of meeting space. Again, it really fits in our criteria of finding larger hotels that have largely rooms operations. If you look at our Doubletree Met again, 764 rooms, north of 85% of the revenue I believe comes in the rooms department. That’s our core competency. That’s our focus. We tend to stay with most from those hotels that have a lot of meeting space or have a lot of F&B. So it’s obviously got a lot of keys, but there is clearly a lot of demand and as you know, Waikiki has been certainly one of the strongest lodging markets over the last few years. So we are excited about it. We think it improves the overall quality and again once our asset management team and our design and construction team can get in and renovate it and work with our operators, we are confident that there is going to be significant growth there for us.

Okay. And then just one last one, the dispositions you are planning, do you have any color on pricing or EBITDA multiples or anything that you can provide on that front?

Lukas, I don’t have anything at this point. I would rather wait until after they close. As you can expect, I mean these are non-core assets. These, in some cases are going to require capital. Clearly, we would expect that these assets are going to trade at cap rates and multiples that are certainly higher than where we trade today. But I think the objective is to be moving out of these secondary, tertiary markets into higher growth markets. So as soon as we complete transactions, we will post a scorecard and the information for you and certainly the investment community.

Thank you. Mr. Baltimore, there are no further questions at this time. I’d like to turn the floor back over to you for any closing comments you may have.

Thank you. Appreciate everybody taking time today. Please, rest assured that the team here at RLJ is continuing to work hard to create value for shareholders and we look forward to updating you at the end of our third quarter in late October, early November. Have a great summer everyone.

Ladies and gentlemen, that does conclude today’s conference. You may disconnect your lines at this time and we thank you all for your participation. Good day.