RLJ Lodging Trust (RLJ) Q1 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the RLJ Lodging Trust First Quarter 2016 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Hilda Delgado, Vice President and Treasurer. Please go ahead.

Thank you, operator. Welcome to RLJ’s 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 and Leslie Hale, Chief Financial Officer will discuss the company’s financial results. On today’s call, we are also joined by Ross Bierkan, the company’s Chief Investment Officer and Interim CEO Designee. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may 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-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 maybe 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 2016 first quarter earnings call. We are pleased to complete another quarter of positive operating results that further adds to our longstanding track record of performance. In addition to growing our RevPAR, we increased our return of capital to shareholders by repurchasing shares and we further strengthened our balance sheet by successfully refinancing over $1 billion of debt. These achievements continue to demonstrate our unwavering commitment to our three guiding principles of achieving operational excellence, prudently allocating capital and proactively managing our balance sheet. During the first quarter, our portfolio achieved RevPAR growth of 2.1%, led by exceptional double-digit growth in our Northern and Southern California markets, which offsets softer results in other markets such as Chicago and Houston. Our RevPAR, excluding Chicago and Houston, increased by 3.9% and outperformed the comparable Smith travel industry RevPAR growth by 90 basis points. The shift in the Easter holiday this year combined with the impact from adverse weather conditions in some regions led to uneven performance in many of our markets. Despite these events, we are very pleased that our hotels continue to gain market share by increasing RevPAR index during the quarter. We anticipate RevPAR growth to improve throughout the year as we get past the holiday shift in the first quarter. Our transient pace has improved and we expect that we will benefit from the ramp up of the two major conversions that we completed last year and also benefit from our properties in higher growth markets such as California. Our positive view for the year is further supported by the expectations for moderate U.S. economic growth to continue. Job creation has been robust since the beginning of the year, consumer confidence remains high and oil prices are showing signs of stabilization. While a stronger dollar and weak global economic growth are headwinds to corporate profits, we remain hopeful that positive employment trends and the improving health of the consumer will continue to drive economic expansion in the U.S. We therefore believe that moderate GDP growth should continue to support increases on lodging demand. At the same time, high occupancy should remain and enable the industry to absorb supply growth this year and expand rates. Our first quarter results exemplify the benefits of owning a highly diversified portfolio. By following a disciplined capital allocation strategy, we have expanded our presence in several strong markets and entered new ones. As a result, our top 10 markets generated approximately 75% of our EBITDA. Given our increased presence in certain markets such as Northern California, Southern California and South Florida, we have expanded our disclosure to report on more markets and to provide greater visibility into our portfolio. Among our top 10 markets, our California markets led the portfolio. Strong corporate and leisure demand and the ramp up from several recently renovated hotels drove excellent performance. Our largest market this year, Northern California, achieved an impressive RevPAR growth of 28.7% driven by the strength of our recently renovated Hyatt portfolio and the exceptional market fundamentals. Our hotels benefitted from Super Bowl 50, with many of our properties achieving RevPAR growth in excess of 200% during the peak days of the event. As previously stated on our last call, we continue to expect Northern California to be our top market this year in terms of RevPAR growth and EBITDA. Also benefiting from the broad-based economic growth and favorable industry fundamentals in California, our Southern California hotels achieved strong RevPAR growth of 11.9%. Both corporate and leisure demand were strong and we expect solid performance to continue throughout the year. In total, our California hotels represent approximately 16% of our EBITDA. Combined with our increased presence in key markets such as Portland and Seattle, we expect our hotels on the West Coast to be meaningful drivers of our performance this year. Among our major East Coast markets, our New York portfolio improved on what we have experienced in recent quarters and outperformed the market’s RevPAR growth by 50 basis points, although our RevPAR growth was flat. Our top 10 corporate accounts generated increased demand during the weekdays allowing our hotels to gain market share. During the first quarter, lodging demand exceeded supply in New York. We remain confident that New York will be able to absorb the new supply over the long-term and ultimately grow pricing power. To our south, an unusually warm winter in the Northeast constrained demand at our South Florida hotels. While our South Florida hotels typically benefit from increased leisure demand during the Easter holiday, the warm weather in the Northeast combined with a stronger U.S. dollar led to weaker than expected results. Additionally, we faced difficult comps as our South Florida hotels achieved 14.5% RevPAR growth last year. As a result, our South Florida market experienced RevPAR decline of 1.1% during the first quarter. We are optimistic that improving consumer confidence will drive leisure demand during the summer travel season. Moving to DC, the overall market was impacted by the holiday shift and by fewer congressional days. Our hotels in the DC market were also impacted by slower transient pickup following winter storm Jonas and the residual effect of one renovation in the first quarter which caused RevPAR in our DC market to decline by 3.5%. Going forward, our DC hotels are positioned for solid growth for the balance of this year and we expect to benefit from strong citywide bookings and ramp up from completed renovations at four hotels. As the Presidential Inauguration draws closer, we expect corporate and leisure demand to strengthen. Combined with the 20% increase in citywide room nights already on the books for next year, we expect our DC hotels to have a strong year in 2017. Now, with respect to Texas, which is home to two of our top 10 markets, our core market of Austin achieved a 2.6% RevPAR increase despite reduced attendance at the PGA tour in March due to rain as well as fewer citywides. We expect significant improvement through the remainder of the year as Austin’s vibrant and diverse economy continues to generate significant demand for lodging. The Houston market overall continues to be challenging as the weak oil and gas sector is impacting corporate demand. Our hotels in Houston beat the market, but nonetheless experienced a RevPAR decline of 7.4% as the holiday shift and a soft citywide calendar compounded the impact from the oil and gas slowdown. Additionally, our hotels faced tough comparisons to last year when our RevPAR was up 5.4% in the first quarter. We expect our second quarter to benefit from the NCAA Final Four Championships in April, although Houston will continue to be one our weaker markets this year. Moving on to the Chicago market. Several factors impacted our performance this year. As expected, the overall market experienced very low to compression as a result of a 50% reduction in citywide room nights compared to last year. Impacting compression further was the holiday shift, which had a notable effect on our hotels in the suburbs. Additionally, our hotels had some non-repeat business during the first quarter of 2015. The combination of these factors led to a RevPAR decline of 12.5%. We expect our results in the second half of the year to improve as citywide room nights booked are tracking higher. Among our other top 10 markets, Louisville and Denver overcame the tough holiday shift to achieve RevPAR growth of 4.2% and 3% respectively. Finally, during the quarter hotels in 9 of our overall markets delivered RevPAR growth ahead of the industry. Specifically, several markets outside of our top 10 achieved solid growth ahead of the industry including Atlanta, Tampa, San Antonio and Indianapolis, which reported RevPAR growth of 9.2%, 7.8%, 6.7% and 6.1% respectively. Our company’s overall performance during the first quarter is a reflection of our highly disciplined and strategic approach to capital allocation. Since our IPO, we have repositioned the portfolio by acquiring 30 hotels for $1.3 billion and selling 43 non-core hotels for $400 million. We have increased our presence in markets with strong fundamentals such as Northern and Southern California and entered new high growth markets such as Portland and Seattle. Concurrently, by selling non-core hotels, including one in the first quarter we have materially improved our operating metrics and growth outlook. Furthermore, by effectively recycling capital we have been able to acquire attractive assets, increase capital return to shareholders through share repurchases and maintain a fortress balance sheet. In the first quarter, we once again demonstrated our commitment to returning capital. We matched funded proceeds from asset sales and free cash flow generated by our portfolio with the repurchase of 510,000 shares for approximately $11.3 million. Since we announced our buyback program last year, we have repurchased approximately 8.6 million shares in aggregate for nearly $237 million, including share repurchases and dividends. We have now returned approximately $810 million to our shareholders since our IPO representing approximately 75% of all capital raised as a public company. Given our positive results during the first quarter, our outlook for stronger growth in the second half of the year and our shares continuing to trade at a significant discount to NAV, we continue to view share repurchases as a prudent capital allocation strategy. We have $163.5 million of remaining capacity under the current share repurchase plan authorized by our board. As we generate proceeds from the sale of additional non-core assets, we will continue to strengthen our balance sheet and repurchase shares. Our balance sheet remains one of the strongest in the industry. Over the last four months, we took several steps to proactively strengthen our balance sheet and improve flexibility by refinancing over $1 billion of debt. These refinancings have placed us in an even stronger position to execute our growth plan. Leslie will provide additional color on these transactions. Additionally, we continue to market several non-core assets for sale and will look to recycle capital if and when these transactions close. I will now turn the call over to Leslie to provide some additional information on our financial performance for the quarter and outlook for the year.

Thanks, Tom. Our solid performance during the first quarter once again underscores the benefit of our diversification strategy. Our portfolio was able to achieve positive RevPAR and EBITDA growth despite the headwinds created by the holiday shift, adverse weather conditions in some markets and a couple of market-specific challenges. We are pleased that this quarter our hotel EBITDA increased $6.3 million to $92.4 million representing an increase of 7.3% over the prior year. For the quarter, our portfolio achieved hotel EBITDA margins of 33.6%, an increase of 35 basis points over the prior year. Our ability to drive margin growth in light of the moderate RevPAR growth is a testament to our efficient operating model. Performance in Chicago and Houston impacted our margins. Excluding these two markets, our margins would have increased by a robust 82 basis points. Our portfolio’s increased exposure to stronger performing markets combined with our ability to maintain cost discipline generated robust corporate results. Our adjusted EBITDA this quarter increased $4.9 million to $86 million, representing an increase of 6.1% over last year. This increase translated into adjusted FFO growth of 5.2% over the prior year to $70.8 million or $0.57 on a per share basis. Our adjusted EBITDA and adjusted FFO reflect add-backs to normalize our results. During the first quarter, the most notable add-back related to a non-cash deferred tax expense of $1.1 million, which we alluded to on our last call. As Tom mentioned earlier, we were very active in the capital markets and took advantage of the low interest rate environment to refinance over a $1 billion of debt with a primary focus on further staggering our debt maturities. In each of these transactions, we were able to expand the duration, enhance the covenant and improve the interest rate. First, we refinanced our 2017 debt maturity which consisted of a $74 million secured loan from PNC. We took advantage of the improved performance of these underlying assets and upsized this tranche of debt to $85 million. We also extended the maturity of this loan by 6 years and improved the overall pricing. Second, we refinanced three Wells Fargo loans that were secured by four properties, for a total of $148 million. These loans were amended and restated to extend maturities to 2022 and to also improve overall pricing. Finally, we amended and restated our 2013 5-year term loan and our unsecured credit facility. For both facilities, we improved financial covenants, extended final maturities to 2021 and reduced interest rates across the pricing grid by an average of 21 and 26 basis points respectively. We also successfully increased the dry powder on a credit facility by $100 million. In doing so, we increased our available capacity to $400 million for future needs. The successful execution of these transactions once again demonstrates our commitment to proactive balance sheet management. With a total of $1.6 million of debt, our weighted average interest rate, pro forma for these transactions is very attractive at 3.3% and will result in an improved interest expense run-rate. With a net debt to EBITDA ratio of 3.8 times at quarter end and 111 unencumbered assets that represents approximately 83% of our EBITDA, we have one of the most conservative and flexible balance sheets among our peers. Our next tranche of debt will come due in 2019. However, we plan to start to address these maturities later this year and capitalize on the current lending environment. We remain committed to maintaining our fortress balance sheet with a well-laddered debt maturity profile. In terms of our liquidity position, we ended the quarter with $126 million of unrestricted cash and maintain ample capacity to fund capital deployment needs and our dividends this year. During the first quarter, we repurchased 510,000 shares for approximately $11.3 million at an average price of $22.11. Going forward, we will seek to pay down debt and match funds share repurchases with excess proceeds generated from the sale of non-core assets. Given the investments made in our portfolio over the past few years, we have moderate capital needs this year. In aggregate, we plan to renovate 9 hotels for $30 million to $35 million. There are a number of projects currently in progress. However, we expect the majority of renovations to take place in the fourth quarter in order to minimize disruption. We continue to anticipate RevPAR displacement of 25 to 30 basis points over the year, which is included in our guidance. Looking ahead, we expect that moderate economic growth, along with positive trend relative to our portfolio will allow us to maintain our full year guidance. Our implied RevPAR growth in subsequent quarters is a result of a number of encouraging factors, including improving citywides, more favorable year-over-year comparables in the second half of the year and transient pace trending positively. Additionally, we will benefit from tailwinds associated with the renovation of 25 hotels, the ramp up of our two recent conversions and the acquisition of three outstanding hotels completed last year. Based on these trends, we are maintaining our guidance. Now, before I turn the call back to Tom for his final remarks as CEO of RLJ Lodging Trust, I would like to extend my sincerest gratitude for the leadership he has provided our company and I wish him the very best in his new endeavors. He will be greatly missed by our entire team.

Thank you, Leslie. This is a very bittersweet time for me. And I want to take a moment to thank my fellow RLJ team members, our shareholders, and our other business partners from many years of support and encouragement. Building RLJ Lodging Trust and our predecessor entities over the last 16 plus years has been a team effort and I am extremely proud of what we have accomplished together. I am delighted that we have created a sustainable platform with a diversified, high-quality portfolio, a fortress balance sheet and consistently generated superior risk adjusted returns. The board and I have full confidence in the talented group of men and women on our senior team who have been together for more than a decade. Their exceptional abilities and experience will continue to drive RLJ’s strategy forward and deliver considerable value to our shareholders. The Board recently formed a committee to conduct a comprehensive CEO search to include both internal and external candidates. While the board understands the need for expediency in naming a permanent CEO, they will be thoughtful and will take the necessary time to find the appropriate individual for this role. The company will provide an update on this process at the appropriate time. During this time, I am pleased that the board named Ross Bierkan as Interim CEO. Ross has been a superb executive and a trusted partner to me for 16 years. He has worked closely with me and the rest of the executive team to develop and execute RLJ strategy and is well-qualified to move into this new role. It is now my pleasure to turn the call over to Ross for closing remarks.

Thanks, Tom. I have had the privilege to be a part of RLJ’s growth and evolution from day one. And over the last 16 years, I am proud of everything that we have collectively accomplished. We are firmly committed to executing our strategic plan and this leadership transition does not change that focus in anyway. Our highly experienced team remains committed to delivering superior shareholder value by continuing to adhere to our three guiding principles of achieving operational excellence, prudently allocating capital and proactively managing our balance sheet. We have a very high-quality, diversified hotel portfolio that is well-positioned to deliver robust performance in all parts of the lodging cycle. And our balance sheet is one of the best in the business. As Leslie said, Tom will certainly be missed, but we all feel confident about where RLJ is and where we are going. On behalf of our team and the board, I would like to thank Tom for his outstanding leadership and wish him the very best in his new opportunity. Thank you. And this concludes our remarks. We will now open the lines for Q&A. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Yes, good morning everyone and congratulations, Tom.

And Wes, just one second, I understand that we had some technical difficulties on the webcast, so I just wanted to apologize, really beyond our control. So, we will make sure that the webcast is appropriately put the tape is put up, so listeners can re-listen to it and again, we apologize. Our service provider is working on making sure it’s corrected. So, with that….

Yes, just a heads up, I didn’t hear the little beep sounds when I hit star 1 so maybe that’s an issue as well? Looking at the dispositions, because it looks like you have done about $22 million over the past year. I think with the stock trading where it is today, you would probably like to have a higher number than that. Is there anything that’s holding it up, whether it be the brands, the manager, is it just a bid/ask spread, what’s your take on what’s holding up the disposition?

Wes, one thing I would like to point out, we actually sold now 43 assets for $400 million since the IPO. And you know last year, I think we have sold, we did the portfolio deal last February for 20 assets for about $230 million. So, I think we were you know 22 to 25 assets last year plus or minus. The team is working diligently on selling non-core assets and I will let Ross provide some additional commentary on that.

Thanks, Tom. Yes, Wes, we have had a portfolio of 14 on the market for two or three quarters and there is no doubt that the bid/ask widened a little bit partly because of the debt markets, partly because the – frankly the buying community shrunk a little bit when the public REITs ironically left the space. But I am pleased to report that we have had good activity on it over the last few weeks and we have got a buyer circling and we are cautiously optimistic that we will be able to report some activity to you next quarter.

Okay, that sounds good. And then looking at the way the first quarter shaped up, obviously there was a little bit of, you came in at the low end of your guidance. Was this purely a function of just the holiday shift being more impactful before? I think everyone kind of missed March as being a more difficult month. Is that all there was to it or was there any market that weakened in particular?

That’s a fair question. Wes, I would say clearly Easter had more of an impact I think for our portfolio and ended up being about 170 basis points across the entire portfolio. Clearly, March was a little softer. I think we ended up about 1.1%, so clearly ended up on the low end of the guidance. You know, we still feel very good about the guidance for the balance of the year. Again, we have got favorable comps. We have got renovation tailwinds from last year. We have got a number of things that would certainly benefit us as we move forward.

Okay, I will hop back in the queue. Thanks.

Thanks.

Mr. Weissman, please proceed with your question.

Thank you very much. First of all, I want to say congratulations and best of luck to both Tom and Ross on the opportunity that lies ahead. Again, congratulations. Tom, you talked a little bit about in your opening comments about the continued challenges in Houston with the expectation that the market, I think you said is going to underperform your portfolio. You know, historically there has been a very strong correlation between oil prices and RevPAR performance in that market. You know, just given the recent move in oil prices, can you just possibly quantify where you think RevPAR will shake out in the city this year? I mean, will it stay negative?

Yes, I think for the broader market, oil I think this morning was up to about $45 plus or minus, so you know clearly coming back but nowhere near, Ian, where we were at $100 a barrel. No doubt that there is a high correlation between RevPAR and oil. I would say for the market, I would expect it to probably be negative based on where it ended last year and where the demand trends are. I would say for us, I really believe that we are going to surprise to the upside and keep in mind for the first quarter last year we were up 5.4%, so we had a tough comp, followed then by, we were down pretty significantly 11%, followed by 13% in fourth quarter and then I think we ended the year down about 8.3%. Also we underperformed in part because we chose to renovate half of our assets last year. So, we expect that to really be a tailwind. I don’t want to be too Pollyanna-ish about, but I do think that we will significantly outperform the market and I know some were projecting the market to be down 7% to 9%. We don’t see that in RLJ’s future, coupled with the fact that we still got the SpringHill Suites, the conversion opportunity that has opened and is continuing to ramp up. No, not a comp hotel, but clearly it’s going to contribute on the EBITDA side. So, Houston is a strong long-term market. Remember, it’s only 5% of EBITDA for the RLJ portfolio and we again have a very well diversified and that’s 5% across the portfolio that we are comfortable at that level and don’t think at all that’s it’s going to be a drag for us for the full year.

Right. And just as a follow-up. Thank you for that. Just on the asset sales, I mean we saw Hirscher close its New York City portfolio sale, we saw Starwood announce that they are selling the St. Regis, I think in both New York and San Francisco to the Qatari, so there is clearly a demand at both ends of the spectrum in terms of asset on the scale side, can you just update us on what the sale market looks like today in New York City for the stuff that you are interested in selling?

Yes. Ian, it’s Ross. The market is clearly skewed towards luxury. There is certainly a trophy premium. For the types of assets we have I would say it’s stable. There are three or four assets on the market right now that are being listed and there is no price discovery on them. They have languished a little bit. I am talking about weeks, not months. And so we don’t have great comps for our kind of product type right now. We don’t have ours listed, but we are receiving some inbound calls and it’s a mix of high net worth and Asian and so we are evaluating those. But we haven’t chosen to actually list the property right now. And we are bullish long-term on the market. It’s still one of the great markets in the hotel industry. But we have recognized that there might be some arbitrage in the near-term that we should at least take a look at.

Okay, thank you very much. Congrats again.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning and I would like to echo to the congratulations, both Tom and Ross. Tom, I look forward to working with you over at the Hilton REIT. You talk about the more impactful Easter shift, can you give us an update, I don’t think I heard it on April and whether those trends have reversed, because we have been kind of looking for that in the national data and just haven’t seen it?

Bill, haven’t closed out, obviously April yet, clearly April was stronger, certainly than we had seen in March and certainly in January. Probably will be in, I would say the low to mid-3s, so certainly better and encouraging. I think it’s important to note that transient in second quarter for us in our portfolio was trending up about 6%. When you compare that to January, which was trending in the early part of it up about 1%, so we are cautiously optimistic, there are a number of tailwinds that benefit us in the second half of the year and certainly Ross and Leslie are prepared to dig into those if there are additional questions on it. But we are comfortable with our guidance and comfortable with certainly maintaining what we put out at the beginning of the year.

And Tom, can you—is there any way to quantify how much impact Southern California received from the gas leak, was your—did your portfolio benefit to the same extent that some others did?

It did Bill, we were up as you know, I think in Northern California of about 28.7%. We were up 11.9% in Southern Cal. I believe one of the properties closest and would have benefited got an incremental. They were up about 30%, so it clearly had a positive impact, but unlike some of our peers where I think it was a greater, it was certainly a nice lift, but it was not a material impact to our portfolio. Again, we have got 14 assets now in California, so spread out and so diverse and in many great submarkets. So we feel really great about the repositioning work that we have done on our portfolio. And again, as I have said before, Northern California being our top market and then California in total about 16% of our EBITDA now, so that provides a great foundation for us as we move forward.

Great. Thank you. That’s it.

Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning everyone and congrats to Tom and Ross on the new opportunities.

Thank you.

Thanks. Thanks to everybody that’s offered that. We appreciate.

I missed the prepared remarks. I am sorry if you addressed this already, but South Florida was a market that seemed to have been a bit weaker in the first quarter, what’s the outlook for the rest of the year, especially progress international inbound travel and the impact of supply growth there?

I think it’s fair Anthony, we clearly saw a little bit of pull back on the international side. I think for us it was about $100,000 and certainly coming out of Canada and Brazil in particular of about 36 basis points. Probably the biggest disappointment for us was our Hilton Cabana. We had a leadership change at the property level. That property had a good year, last year had a tough first quarter. And part of that is with additional supply in the market and a lot of the beach hotels dropping rate and us being a little more North Miami Beach, that property was down double-digits. So you take that out, that hotel and I believe we were up about 2%. So still probably better than the market even with us being down 1.1%. I think the market was down 2.5%. We clearly outperformed and would have performed even more, have we not had a little bit of a mishap there at the Hilton Cabana. We are confident that we have got the issue addressed and our asset management team is partnering with our management company there and we expect much better results and improvement as we move forward.

And Anthony, on the softer less data driven side, there is no doubt that it was an unseasonably warm season in the Northeast and a little bit of a rainy season in Florida. And that was a deterrent, but it’s hard to quantify. And also a particularly dysfunctional period in Brazil right now and we are hoping that a year from now that that will be a clearer picture there and we might see a resumption of some of that inbound from them.

Thanks. And I believe almost all of your brand companies are now offering discounts to customers who book direct through their online channels, what’s your view on the impact of this, for your portfolio, is it positive or a negative over the next several years?

We enthusiastically support it and we congratulate all the efforts being made by our business partners at Marriott, at Hilton and Hyatt in particular. And anything that can reduce the cost of acquisition and allow us to have a more direct relationship with our customers and lower the, what we call the cost of revenue or the cost of acquisition is going to be a huge benefit. We are seeing with Hilton’s Stop Clicking Around, incrementally our portfolio, it’s been a real positive. So we are encouraged and enthusiastically endorsed and continue to encourage those companies and particularly their leaders to continue those efforts.

Right. Anthony, some of the recent negotiations that Marriott and Hilton especially have engaged in with Expedia and Priceline.com and some of the other gorillas in the space have been pretty successful. They have been able to claw back a few hundred bps of commission. More importantly perhaps, they have gotten back last room availability which frankly, in retrospect never should have been given away. So now the operators can basically yield out the OTAs when they are feeling good about their occupancy prospects. When the pace looks strong, they can cut those channels. And then finally they did gain permission, which again it’s hard to believe they ever gave up, but they have regained permission to post the lowest rates on their own website to encourage their clients to book direct on the brand site. These are all big wins and we are just beginning to see the repercussions.

Yes, just a quick follow-up. So, have you seen actual impact to the financials in your Hilton portfolio either in terms of your OTA room nights booked or you know lower commissions or anything like that in the first quarter?

Yes. In New York City in particular, that’s where we have been beta-testing it primarily and we have seen positive impact. We have seen a savings in commissions. We have seen a reduction in OTA bookings and a displacement of them with direct bookings through the channel, through the brand channels. So, so far, preliminarily, it looks like it’s beginning to work.

Alright. Thanks a lot for that detail. I appreciate it.

[Operator Instructions] Our next question comes from the line of Ryan Meliker with Canaccord Genuity. Please proceed with your question.

Hey, good morning, guys. I will reiterate all the sentiments. Congratulations to both Tom and Ross. Hope things go great going forward. The question I had was you guys have given some, I mean I guess data points surrounding improved transient demand trends heading into the second quarter. I think that’s great. I think, Tom, you had mentioned you are up 6%. Is that all demand? Is that all rate? Is that a combination of both and are there certain markets where you are seeing outperformance or underperformance?

I want to make sure I understand the question, Ryan. Are you asking what the ratio is between…

Yes, of that 6% that you are up heading into the second quarter right now and I know it’s, you don’t have a lot of visibility very far out, but are you driving a rate or is the majority of that occupancy?

If you break that 6% down, 6.1%, it’s 3.4% in rooms sold and 2.6% in ADR, so it’s a pretty even split. Now, keep in mind transient pace is a little bit of a flowing moving target, because people cancel and book and so it’s not quite as static as a group pace, but it’s an indicator. So, for example, at this time last quarter looking at the first quarter, the transient pace was up 1% and now it’s up a little over 6%. So, we like the indication and it’s promising.

Is any of that, is a large portion of that 6% driven by the Easter calendar shift or not at all?

We don’t think so. I mean, there were a couple of markets that got whacked pretty good by Easter you know Austin stood out, while other markets were impacted less. And then the first couple weeks of April weren’t quite, you didn’t see a springboard there to the degree that you might have expected possibly because of Passover, but it’s actually been a more level process. I don’t think you can attribute, I don’t think you can give Easter too much credit or blame for the trends at this point?

No, that’s helpful. And then one of the things that we heard from Marriott and Host was that group booking paces are picking up in the second and third quarters and they are particularly strong over the summer months and that’s going to translate into stronger transient pricing power. I know you guys don’t have a lot of group business, but you benefit from compression and pricing during compression. Are you expecting the majority of your RevPAR growth going forward to be more rate-driven than occupancy?

Potentially, yes. And we do have a percentage of our portfolio that is compact, full service hotels with reasonable amount of meeting space. We like streamlined full service hotels and their group booking pace is up about a 1.5 point, but we do look at our peers who have better data over wider portfolios and it is encouraging. And also, 8 out of the 10 U.S. markets that we track for citywides are also up quite a bit going forward. In fact, those, out of those 8, they were down 25% in citywide bookings in the first quarter and they are all up somewhere between 5% and 15% in each of the next three quarters. So, the citywide trends in addition to the full service hotel bookings trends are actually pretty encouraging.

That’s really good color. Thanks a lot. That’s all for me.

Thanks, Ryan.

Our next question comes from the line of Shaun Kelley with Bank of America. Please proceed with your question.

Hi, good morning, everyone. And just I will just throw my congratulations in as well. A lot of my questions have been answered, but just to follow-up on I think a question that was asked earlier about some of the direct booking detail, because I thought that was interesting. We have heard from in some cases that perhaps there could be a bit of a negative revenue fallout for a short period of time through some of these direct bookings, just as you know particularly the OTA’s change the search orders. Has that been an impact that you have seen? It clearly sounds like it’s been offset elsewhere profitability or through other channels, but have you seen any disruption in just the immediate rollout here for some of the test markets that you have talked about?

Yes, so far Shaun that’s been negligible. And there is no doubt there is a little bit of gamesmanship going on there as the OTAs face this for the first time. But as it’s adopted by the other brands, it’s certainly the Starwood-Marriott merger is probably something they are not glad to see. We believe the brands will gain the upper hand here. So, that’s one factor. And the other is, well, I will just leave it at that, because it’s unfolding before us, but so far the effect has been negligible.

And Shaun, I would agree with everything Ross said and add, I think anything that allows the brands and therefore the owners to get again closer to our customers, again, through continuing to grow their loyalty programs and I believe both Hilton and Marriott are probably somewhere in the 55 million members today and growing. And I know that picking up as a part of its programs, I think that’s only going to strengthen that connection which in the long run again will allow us to benefit from lower booking costs through those channels therefore ultimately providing a better price value to customers and benefiting owners. So, we have strongly endorsed it. There is much work to be done and there will be some bumps along the way. But at this point, we are encouraged based on the preliminary data that we have seen so far.

Thanks very much.

There are no further questions at this time. I would like to turn the call back over to Mr. Thomas Baltimore for any closing remarks.

Thanks again to everybody taking time. And again, I want to apologize for the technical difficulties I think occurred during the webcast. Those that dialed in I think were able to hear. Those on the webcast please know that the full tape and Q&A will be replayed. Don’t hesitate to call me. I have got a few days remaining here, but RLJ is going to be in great shape as they move forward under Ross Bierkan’s leadership and the incredible team of men and women, many of whom have been with me for well north of a decade. So, best wishes as we move forward and we will be talking.

This concludes today’s teleconference. Thank you for your participation and you may disconnect your lines at this time.