Welcome to the RLJ Lodging Trust Second Quarter 2017 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Hilda Delgado, Treasurer and Corporate Vice President of Finance. Please go ahead.

Thank you, Operator. Welcome to RLJ Lodging Trust's second quarter earnings call. On today's call, Ross Bierkan, our President and Chief Executive Officer will discuss key highlights for the quarter. Leslie Hale, our Chief Operating Officer and Chief Financial Officer will discuss the company's operational and financial results. 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-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statement. 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 Ross.

Thank you, Hilda. Good morning, everyone. And welcome to our 2017 second quarter earnings call. Before start, I'd like to remind listeners that at this time we cannot discuss or take any questions relating to the FelCor merger in our recently filed proxy. We appreciate your patience as we move forward through this process. I would first like to start by noting that we’re pleased to see continued demand growth in the lodging industry. For the quarter, industry demand outpaced supply and ADR growth remain healthy, driving yet another quarter of positive growth in the U.S. with RevPAR up 2.7%. Now, the industry's growth this quarter was primarily driven by the leisure segment, the robust 7.1% RevPAR growth in the resort market was a good illustration of this segments strong demand. Flat RevPAR growth in urban markets, which are generally more business and group oriented, highlighted the quarter is more tempered business and group travel, given our portfolio’s greater concentration in urban markets, we did not see the same degree of leisure benefited the industry and were disproportionately affected by the new business travel. This combined with a few portfolio transitory headwinds contributed to our softer relative performance to the industry of a 3.4% RevPAR decline. Despite the revenue pressure, our EBITDA margins held strong at 37.7%. Our efficient operating model coupled with our team's ability to manage our bottomline continued to produce one of the strongest margins in our space and generate significant free cash flow. As we move past some of our toughest comps, we expect the second half of the year to be better than the first half on a relative basis. At the same time, absent any meaningful acceleration in the economy, we expect that performance gain in the second half to remain muted. From a…

Thanks, Ross. On our last call we noted that second quarter would have a few headwinds, including the shift of the Easter holiday, the continuation of convention center closures and a tough year-over-year comps that will result in this quarter being a weakest of the year. During the quarter, our RevPAR declined a 3.4% was largely driven by April. April was our weakest month, with the decline in RevPAR of 6.5%. May and June fared better, the declines of only 1.9% and 1.8%, respectively. April decline was impacted by the Easter shift, which constrained business and group travel in the month. These dynamics led the less compression across a number of our markets that are more business and group centric. Additionally, April’s RevPAR was impacted by almost 200 basis points in aggregate to the renovation disruption in our Northern California market, the Final Four not returning to Houston and a non-recurrence of flood-related business in Austin. As we look at the quarter overall on the transient side, some of our leisure-oriented markets, such as South Florida fared better in large part to the holiday shift and overall healthy leisure demand. However, given our portfolio mix, which has greater business transient concentration, the healthy increase in leisure demand that benefited the industry did not translate into our portfolio. While we did see business demand increase across some of our market such as Southern California and Denver, business demand in general was muted. Overall, group demand for the industry was down meaningfully relative to transient. For our portfolio, this weak group demand was further amplified as a result of approximately 20% of our EBITDA being affected by markets with convention centers under renovation. Over the last few quarters we have benefited from our grouping up strategy, specifically with small social events. Therefore,…

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

Hey. Good morning, everyone. Can we go back to the Northern California performance, looks like you had been down about 330 basis points excluding renovation disruption? Can you give us overall landscape of how that’s progressing your San Jose hotels, your hotels in the city and in the hotels just outside of the city that might benefit from compression of the convention center?

Right. Hey, Wes, good morning. Yeah. First of all, that was an interesting region for us because it was a tough comp from last year. We were up about 9%. So that was a headwind that we saw coming. You mentioned the renovations. We actually think we benefit from a geographical diversity in Northern California. I would say of our assets there that the three that are most impacted by Moscone are and of course the CBD of course and our two in Emeryville, the Hilton Garden Inn and the Hyatt House. But of course there's a compression effect throughout most of the valley. And so, while we outperformed the market to that that diversity, we do expect to participate in the recovery on the backend, we like our position there, we like our exposure. It's about 10.5% of our EBITDA and even though we are having to weather this well here, we really like the fact that we have got a presence there and we are going to participate in that recovery in the second half of next year. In fact, even this year we expect Q3 to be relatively a lot better than Q2. We’re going to get through those renovations. That disruption is a little bit of a lap of the Moscone closure but in Q4 clearly we get a full quarter of lap in the Moscone closure, plus, ironically, are going to be a couple citywide in San Francisco despite the fact that Moscone is down. Oracle and Salesforce will be meeting at different venues and they are going to create quite a bit of compression. So we expect Q4 to be pretty positive in part of our story in Q4 that gives us some optimism about that quarter.

Okay. And looking at Texas, can you give us your thoughts on Houston maybe next year, looks like we are going to start to lap, but now start the third year declines for that market, DC supply abating or and demand picking up for 18th Avenue. You kind of alluded to in Austin that you saw -- thought supply pressure might start to pull back particularly for your track. Can you give additional details on that?

Yes. Yes. We have got to weather the first quarter, because we have got the Super Bowl comp. But this year actually in Q2 for the first time since 2013 our percentage room nights from oil and gas rose, I mean, it was a pretty big -- it was a pretty big percentage increase, it was 50% room nights revenues 34%, but it's off a small base. So I don't want to get too giddy about it. But it's a good indicator and last week the biggest U.S. energy companies reported strong earnings, Exxon doubled their net income and Chevron came out huge with about a $1.5 billion for Q2 and oil and gas rates rough 44%. So decent indicators about what's going on there. We are actually expecting a good fourth quarter, because October is a strong citywide in the market, so we are going to get some relief in the drag that that Houston has been on our portfolio. Third quarter still going to be soft, ‘18 as I mentioned, you got the Super Bowl comp in the first quarter then after that from a supply standpoint, it's dropping some about 6% to about 4% and that’s NSA wide and in our particular tracks it also peaks in ‘17 and begins to subside in ’18. And so if we have that nice confluence, right, subsiding new supply and just incremental gains in the oil and gas complex along with the other diverse elements in Houston, we think that -- we are calling the bottom yet. But and I'm not -- I can’t say I am optimistic about ’18, but I am feeling better about it. And I mentioned this on the call last week too-- last quarter. We probably get more inbound calls on our Houston assets than any other city, from private equity and owner operators, and while that coffee doesn't get you much, it is another decent indicator of investor interest in the market. We are actually pretty high in the market. And we enjoyed the four consecutive years of double-digit CAGR before downturn and it lasted longer than we expected, but we’re optimistic about the recovery there, we think it’s going to be pretty dramatic when if possible…

Okay. And in Austin REIT you mentioned that your tracks will get better, can you just elaborate on that?

Yeah. Yeah. A similar story, fortunately not nearly the drama of Houston. Because Austin, God bless, it’s a great city, people want to be there, demands up another 4.3% year-to-date on top of a 5.2%, I think, last year, but supply finally caught up and it 6.3% this year, at least in Q2, and then we had some additional headwinds from some things that were specific to our portfolio. But we’re expecting Q3 to be again relatively better Q4, a little bit better again. But we do see in our tracks that ‘17 is a peek and it begins to subside. Unfortunately in Austin, that’s the situation where outside of our tracks, the new supply continues in ‘18 and so we don't know how much that’s going to affect us sort of from the ripple effect and it’s still going to be a big number. And with the MSA numbers in ‘17 are 7.5% for the MSA of 6.0% for us for the year, I am sorry, for the MSA its 7.5% in ‘17 and 6.0% in ’18. In our tracks though, I mentioned the 6.8% drops to 2.1% in ’18, don’t hesitate to celebrate that too much, because again you don't know about the ripple effect of the new supply outside of our tracks, but it's a promising indicator, we like to see that it peaks for us at least in ’17.

Okay. Thanks a lot. I’ll hop back in the queue.

Our next question comes from the line of Tyler Batory from Janney Capital Markets. Please proceed with your question.

Great. Good morning. Thanks for taking my question. Firstly, a quick question on the RevPAR in the second quarter, do you have a number maybe excluding some of the markets that were disrupted by the convention center closures. I am just trying to get about your sense of what RevPAR might have been in the quarter just excluding some of those transitory issues?

Yeah. If you subtract the three markets that I alluded to you in 20%, you would have improved by about 70 basis points.

Okay. Great. And then question on the guidance, you noted a little more cautious on the third quarter here just given July, I wonder if you can give a little more detail about what is going on in July, what you are seeing there?

Yeah, In July, the first week was tough. It was down 9%, 10%. It was largely leisure based. It was a similar effect to what we saw with the Easter shift in April and it was just difficult for the month to recover after that. Things stabilize after that. But it set us back sort of mid-single digits for the month.

Okay. Great. And then maybe big picture question, I look at some of the brands that you have, Embassy Suites, I think, sticks out just as far as growth in the first half of the year, I assume that maybe it’s little bit market driven. But can you maybe just remind us picture, what you think about that brands kind of your opinion of that long-term?

Yeah. Yeah. We think Embassy Suites is a category killer has been and continues to be. Hilton is very keen on the brands. You want to make sure before you invest too heavily in a brand that, it isn’t your father's automobile, right. Hilton is very keen on Embassy Suites and it’s got 60 of them in the development pipeline around the world and most of those in North America, in fact more than any other full-service brand. And I'd wager that that's probably more than any other full-service brand in any of the brand families. So it's alive and well. And the transformations that are taking place at the Embassy Suites that are being renovated are material, that the atrium renovations in addition to the guest rooms are really moving the needle on RevPAR at those hotels around the country. And so not unlike Marriott were doing some modernization moves with the brand. Hilton isn’t going to be left behind with Embassy Suites and so they're keeping it very current. It is a hybrid between a full-service brand and a select service brand, because while it is full-service to the degree that it has food service and a bar, guests kind of help themselves to the comp breakfast, you got the comp, amenities in the afternoon largely focused on the drinks. And then but the margins that you run at Embassy Suites resemble select service hotels, because of the service delivery and when you combine the high RevPAR's with those kind of margins the flow-through is terrific. So we are big fans of the brand. They're not the cheapest hotel to develop from scratch, but Hilton has worked hard to modify the model to make it more efficient to develop, but the existing Embassy Suites we think are treasures and any time that we can acquire one at a decent basis. We are enthusiastic about it.

Okay. Great. That’s very helpful. Thank you.

Our next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Please proceed with your question.

Hi. Good morning. Thanks for taking the question. One respect to the no comments on the proxy, but I was just curious there's clearly a view out there that there's a fair value target I guess in the stock and I am just wondering has there been any change in either you or the board's view on either the trajectory of interest rates or a less optimistic view of hotel EBITDA trends going forward?

Appreciate the question, Austin. All I can say is, we're excited about the opportunity and we have a very serious and deliberate board that take the fiduciary very seriously. We still believe that this is a good time for any organization to enter into a strategic opportunity. We are long-term investors. We don't look at one quarter or two quarters. We look at the long view, whether we are buying a single asset or portfolio or conversely looking at a disposition or buying back stock, any asset allocation decision we take a very long view toward shareholder value creation. But I think that's all I can say at this point. Our council has been very specific that with a live proxy in effect here that we have to proceed prudently here with what we say.

So it's fair to say that some of the pressure that you have seen here near-term, you do expect to be transitory and that you are more optimistic as you look out over the next 12 months to 18 months in terms of fundamental trends?

Yes. Yeah. We -- our economic crystal ball is that we are not looking at a cliff here. We are not looking at recession. The Wall Street Journal told the economists in July and they came up with a -- they pegged the odd at 15% of recession, which is down from 22% a year ago. This recovery has been long, but it has been slow and this 2% CAGR has resulted in nothing being particularly overheated and we believe within our portfolio that the headwinds that we’re facing this year, a number of them are going to be reverse next year and the easiest ones to point to are the convention centers reopening in three of our markets. So we are optimistic about ‘18 and even more in ’19. And so I would -- we are not in a bunker here as it relates to asset allocation.

Great. Thanks for the comments there Ross. And just, Leslie, quickly on the hotel EBITDA margins, you guys are really tracking ahead through the first half of the year and went ahead and took down your margin expectation for the full year, despite the fact that it sounds like you think that the second half is going to trend more favorably on the RevPAR side. So just curious what it is that’s putting that further downward pressure in the back half of the year?

You are correct, Austin, in sense of that. Second quarter performed better than we would have expected, given the fall in RevPAR and that’s off of a base of 39.2% from 2016, which is one of the highest margin in second quarter ever. And our team did a really good job of managing expenses in the second quarter given our revenue management strategy, given some initiatives that we had put in place last year and also from the standpoint of managing labor which I know a lot of people had questions around. While you look at the second half it looks like it, well, it looks like second half of the year based on the our guidance would imply that year-over-year performance relative to first half is slightly better, if you look at it from that perspective, so as opposed to pressuring and bringing it down. So first half of the year in aggregate it’s looking like at the midpoint we were down 150 basis points, 142 basis points I should say. If you were get the midpoint in the second half, I would suggest that we are down 130 basis point year-over-year. So I look at it slightly differently than you articulated it, primarily in second half we’re having less revenue pressure the topline. We are going to continue the revenue strategy that we had in the second quarter, as well as we should see another quarter of full benefits of some the initiative that we had started last year.

Okay. That’s very helpful. I’ll hop back in the queue. Thank you.

Our next question comes from the line of Michael Bellisario from Robert W. Baird. Please proceed with your question.

Good morning everyone. Just first question quickly, did you guys provide a RevPAR index, could you provide a RevPAR index change for the entire portfolio during the quarter?

RevPAR index for the quarter was 111 and that is down about 190 basis points.

Thanks. And then just more on the kind of capital allocation fronts, but what specific to legacy RLJ portfolio, I mean, how are you thinking about maybe selling more of your non-core hotels and then what would you do with that cash if you did proceed with more asset sales?

Right. Michael, the first part is, we sold three assets in December, including two in New York and we’re evaluating opportunities in our portfolio as we speak and nothing is listed. But you can expect us to be more active over the next year. The second part of your question, well we do that capital is going to depend on what unfolds over the next couple of months here and it is in any situation we always look at the spectrum, right. Should we be retiring debt which in legacy RLJ right now is very low cost debt. Should we be backing up the proverbial truck and buying back stock, which is an attractive option at these levels, depending on what happens over the next couple of months. Or should we be putting it into growth assets that help reap -- replace the FFO from the dispositions. In any given environment we evaluate all those options and make the choice based on what's in the best interest of shareholders.

Got it. But it doesn't sound like that you are more aggressively pursuing a disposition strategy with the legacy assets, correct? And…

I would -- yeah, not at this very moment. That's right.

Understood. Thank you.

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

Hey. Good morning, guys. Nice job on the margin this quarter. It was better than we were expecting. Quick question I had, it kind of piggy back of Michael was just asking with capital allocation. Do you guys run, I guess, hold versus sell analyses on your portfolio relatively frequently?

I would say the answer to that is yes. But it's a dynamic thing. We don't think of in terms of a snapshot. We look at the entire portfolio and we take into account so many factors, Ryan, because it's not just what an asset is worth at a given time. We also look at our waiting in a specific market and what that would suggest. We look at CapEx requirements that are coming up over the next three year to five years. Obviously, there's a correlation between RevPAR and multiple on the street most years, maybe not recently, there has been a little disconnect with the surge of select service interests and so we take that into account. So it becomes a little bit of a stew of quantitative and subjective business judgment that blurs the lines little bit with just the classic holds up.

No. I understand and that makes a lot of sense, and the reason why I brought it up was because I kind of think if you are not going to sell something it's probably because you're willing to buy it at whatever price you can get to sell it, more like a buy/sell type analysis than hold. But -- and with that background I guess the question I would have is, the stock has traded down since you guys announced the FelCor deal. Obviously, you’re bullish on the FelCor deal. You think there is a lot of value creation the market doesn't see it yet. But obviously if you're right that will play out over time. But the stock has pullback and you’ve created some type of almost artificially deflated stock price in the near-term which tends to be an interesting option to buy back stock. I know you can’t comment on it, but your proxy indicated that you had a level of interest at close to 15% premium where the stocks trading today. So my question do you is with the $200 million in buyback authorization and the amount of cash you have on the balance sheet, why didn’t you pull the trigger and buyback stock in the quarter?

So, Ryan, what I would say, first of all, just to remind you, we return a $1 billion of capital to our shareholders in the form of dividends and buyback. And right now we are actually precluded from buying back our stock. Once we get pass that prohibition of buying back our stocks, we will absolutely continue to evaluate buying back our stock as a capital allocation alternative.

Okay. But I mean, I think, a lot of that stock has been repurchased at levels well above where your stock trades today, so it seems like given all the factors that we know today, it would be more compelling today?

The -- we do not disagree that we are inexpensive right now. But given the constraints that we’re facing, we’re exercising restraint and we are looking forward to having that option open up.

And -- fair enough. And I assume I know you guys have talked a little about this in the past, but to the extent you can share some color, you -- after the FelCor transaction is completed, assuming it’s completed, you guys will be able to -- you guys are planning to delever to an extent. Are you trying to retain cash for the purpose or are you looking at more the operating cash flows from the portfolio driving that deleveraging?

Would love to get into that discussion, but council advises that that's something we can’t talk about on this call.

Fair enough. Okay. Thanks.

Our next question comes from the line of Floris van Dijkum from Boenning & Scattergood. Please proceed with your question.

Great. Thanks for taking my question. I had a question on your comp EBITDA trends. Maybe if you could share that and also what would comp EBITDA has been, if you exclude your three convention markets?

So, Floris, that is, our EBITDA that we gave year-over-year is comp, so maybe if you can explain what you think you are looking at, I can answer but, but the numbers we provided our comp.

Yeah. No, no. What I was trying to get at, Leslie, is more, what would it have been if you excludes the comp -- if you excluded [Technical Difficulty] (42:56) -- what would comp EBITDA have been?

Floris, I don't have that number in front of me, but I'm happy to follow up with you and provide that information.

Okay. Great. Thanks, Leslie. The other question I had is, regarding the Embassy Suites, do you expect any costs associated potentially with upgrades to your properties or are your properties up to the new standard for Hilton?

Yeah. It’s great question, Floris. We owned six Embassy Suites and we renovated four of them. And we have found that we are good at it. The industry spend somewhere between $35,000 and $55,000 a key to do a complete comprehensive Embassy Suites renovation and we've been falling in around that $35,000 to $40,000 key level and as -- in locations like Irvine and Downey and West Palm Beach have really produce some beautiful results. So we think we've got the neck for it and look forward to exercising that full set on future hotels.

Great. Thanks, Ross.

That is all the time we have for questions. I’d like to turn the call back over to management for closing comments.

Thank you, Operator. This is a dynamic quarter for RLJ and we appreciate your interest. We look forward to speaking with many of you throughout the next quarter. Hope you have a restful weekend. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.