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

Thank you, Operator. Good morning, and welcome to RLJ Lodging Trust's 2019 Third Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's operational and financial results and guidance. Tom Bardenett, our Executive Vice President of Asset Management, will be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-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 Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us. During the third quarter, we continued to build on the momentum from our portfolio transformation. We made meaningful progress by executing on a number of fronts and generated solid operating results amid slowing operating trends. This includes closing on the sale of the 18-asset noncore portfolio that we previously announced and selling 1 additional hotel in September; executing the final termination agreement for 8 Wyndham hotels; repurchasing $47 million of shares during the quarter; maintaining a low levered balance sheet with net debt at only 3.2x EBITDA; and despite choppy fundamentals, achieving RevPAR which was largely in line with our expectations. We are pleased with the progress we made in light of the moderating economic trends in the third quarter, which were hampered by the uncertainty associated with the trade wars and geopolitical events. Key indicators such as business investment softened further, which continued to constrain business transient demand. And although the U.S. consumer remained healthy, the growth in the consumer spending decelerated from prior quarters, which likely impacted leisure transient demand. These trends resulted in overall lodging demand softening during the third quarter, especially in the urban and top 25 markets. Against this backdrop, our third quarter RevPAR declined slightly by 0.3%. Our performance was also impacted by Hurricane Dorian as a slow-moving hurricane constrained demand for several days around the heavily traveled Labor Day weekend, diminishing the positive lift we expected from the Jewish holiday shift in September. Additionally, consistent with the broader trends in the industry, we experienced a softening in the corporate transient segment across most of our markets. Despite these headwinds, we are pleased that we outperformed the urban segment of the industry as well as the top 25 markets and also gained market…

Thanks, Leslie. Before discussing our third quarter results, please note the following. Our third quarter and year-to-date operating results include our 108 owned hotels as of September 30 and exclude the 18-hotel portfolio and the Residence Inn Columbia which were sold during the quarter. Our reported corporate adjusted EBITDA and FFO only include operating results from sold hotels during RLJ's ownership period. With these housekeeping items out of the way, our third quarter RevPAR contraction of 0.3% was driven by a 0.8% decrease in average daily rate, partially offset by a 0.5 percentage point increase in occupancy. Monthly RevPAR results were flat in July with RevPAR growth of 0.1%, followed by contraction of 0.5% and 0.4% in August and September, respectively. We were pleased that the portfolio outperformed the upscale, urban and top 25 markets and gained 50 basis points of market share from their competitive sets during the quarter. Our third quarter RevPAR growth was negatively impacted by approximately 40 basis points from Hurricane Dorian in September. Total revenue grew 0.6% during the quarter, which exceeded the change in RevPAR due to a 4.6% increase in food and beverage revenues and an 8.1% increase in other departmental revenues, which was driven by the continued success of parking and other revenue initiatives. From a segmentation standpoint, our third quarter benefited from a low single-digit increase in group revenues, which was driven by outperformance in Louisville and Tampa. These markets were partially offset by San Francisco, which was impacted by the shifting of a week-long citywide into the fourth quarter. That said, our group segment only represented approximately 17% of our third quarter room revenues. The positive group results were more than offset by a low single-digit decline in transient revenues. However, we continued our strategy to partially mitigate the soft…

[Operator Instructions]. Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital.

With the Wyndham transaction now finalized, I was wondering if you could give us a better sense around the mechanics behind how the loss of the NOI guarantee is going to flow through the P&L. Just curious if that $10 million goes away Jan 1 or if it's more of a gradual decrease as the conversions are underway.

Austin, thanks for the question. Since our last call, we were able to finalize it, as I discussed in my prepared remarks. And we've been able to structure the deal in a way such that it's going to allow us to recognize a similar contribution in 2020 that we received in 2019 for the termination payment. Said differently, Austin, we don't expect any drop in EBITDA as a result of the termination of the Wyndham guarantee in 2020. The mechanics are kind of technical. But said -- as long as Wyndham is involved, we'll be amortizing that payment over their involvement.

Got it. Appreciate the clarification there. And then how far along are you at this point with respect to identifying which Wyndham hotels you'd like to reposition first and what brands you think might make the most sense?

Yes. Austin, we are super excited about this opportunity and really think there's great value here, as we've discussed on many calls. We are in active discussions with the major brands that you would expect us to be with: Hilton, Hyatt, Marriott and IHG. We are in the process of reviewing proposals and narrowing down the brands. We've had great interest. We expect to be in a position to finalize the brand selections for several of the hotels by the end of this year, early next year, which would put us in a position to be able to commence renovations on 1 or 2 of the assets next year. Our ability to comment on the size of the renovation and the duration is really going to be predicated on a final brand selection, which we expect to have. And so we look forward to being able to provide more color on that on our next call.

Has the softer operating environment changed your thinking about the timing of the rebrandings or just any of the sort of high-impact ROI opportunities that you mentioned in the prepared remarks?

No. If you sort of think about the span of ROI projects that we have, we've identified a number of projects that we've sort of classified as $150 million to $200 million. And they span from, obviously, the conversions, as we talked about, but also the space reconfigurations, operating ROIs and energy ROIs. And so if you think about space reconfiguration, taking a pool, which is a nonrevenue-generating space, and converting it into a meeting space, there's no risk in that because it wasn't generating any revenue before. So anything incremental will create value. Thinking about it from an operation perspective and adding parking, limited risk associated with that because you weren't charging before and now you're charging for it. And also from an energy perspective, you're going to continue to have energy costs regardless of where we are in the cycle. So no, it hasn't changed our view on deploying capital from an ROI perspective.

Our next question comes from the line of Michael Bellisario with Baird.

Just kind of on that same topic of capital allocation, kind of can you give us an update about where acquisitions fit relative to the returns that you'd see on the ROI projects and the buybacks that you're doing today?

Yes. The capacity that we have and the strength of our balance sheet really provides us optionality, Mike, and so we don't really think that our ability to deploy capital is mutually exclusive. Having said that, as we look to be balanced and thoughtful, we are going to look at relative returns across the various options. And so from our perspective, while acquisitions aren't necessarily off the table, we do recognize that the bar is higher for an acquisition, and that's got to be accretive on a number of fronts, right? Accretive on the operating metrics from a RevPAR perspective, accretive on the growth profile, accretive on the geographical footprint benefits for our overall portfolio. And it has to have catalysts to create value within the asset in terms of why we're buying it. And then, of course, it needs to fit in the middle of the fairway in terms of what we like to invest in, which is rooms-oriented, high-margin and premium-branded hotels. And so it's not off the table, but we do recognize on a relative basis that the bar is higher. In terms of the other avenues for deploying capital, you've seen that we've been active on the buybacks. We're going to continue to be active on the buybacks. Obviously, market conditions will dictate the volume and also, obviously, the discount to our NAV as well. So we'll continue to be active on that. Additionally, we're going to continue to look at opportunities on the balance sheet side relative to the bonds that are coming due next year. And so what I would say is that the strength of our balance sheet and the amount of capacity we have gives us the opportunity to optimize our capital deployment across the spectrum of buybacks, investing in our ROIs as well as acquisitions to the extent that they materialize.

Got it. That's helpful. And then on the flip side, the disposition activity that you guys have completed, obviously, better underlying, more concentrated real estate today. But can you maybe help us understand how your mix of business has shifted because of the asset sales? How much more exposed are you to the corporate business traveler? How has the group mix shifted following the asset sales? Any intel there would be very helpful.

Sure. Mike, this is Tom Bardenett. So as far as the mix of business, our portfolio hasn't really shifted that much. When we look at the portfolio, we still have about the same amount of group percentage, where we attract about 17% to 20% of the group side. We have had to shift, though, if you will, based on what's happening on the business transient side to try to group up as well as put more contract business into our hotels. And even in the phase when we're looking at our full-service hotels, one of the biggest areas for capital allocation is some of these reimaging of our Embassy Suites, which is allowing us to try to change the mix based on what we're doing with our lobby evolutions by gaining more space and having that opportunity to get more group business, which we think will help us ultimately change the mix a little bit and get a higher-rated as well as catering per occupied room to be able to provide more profitability. So the dispositions certainly have helped us on overall RevPAR. But when we look at mix and segmentation, it hasn't really shifted that much when you look at what we still do and what we have to do to become profitable.

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

Could you provide an update on where the mix stands in the sales process? And what's your appetite for additional noncore asset sales given your strong capacity right now?

Thanks, Anthony. On additional asset sales, look, we've -- as we mentioned on our last call, we really completed the heavy lifting around reshaping our portfolio with the business we did over the summer. And the vast majority of our EBITDA that we own is aligned with our long-term vision. We're going to, on a forward basis, be more opportunistic in terms of asset sales, and you saw us do that on Columbia. It was an asset that, from a location perspective, was not core to us. And it was opportunistic because the management agreement was rolling and we had a chance to sell it unencumbered. So that's just an example being opportunistic on future asset sales. Look, as it relates to the Knick, we have executed well on all of our dispositions, and we've exceeded our targets as it relates to the FelCor and legacy RLJ assets. We have significant capacity and strong balance sheet, which gives us ability to remain disciplined, Anthony. And we have a high conviction in the value of this asset. And we're going to be patient. This is an asset that's iconic. It's in an irreplaceable location, and it's in a market that we believe in long term. And then it continues to perform well. It was up 1.3% in the third quarter. It's up 4% year-to-date. And so we're going to be patient, Anthony, as it relates to this asset. And we believe that we'll get the value ultimately.

Okay. And on to just the fundamentals, I mean, you mentioned international inbound a lot on the call. What's your international mix currently? And where do you think we are in kind of the headwinds for that segment? Can we be flat in that business next year? Or do we expect continued declines there?

So Anthony, to answer the first part of your question, international is about 2% of our overall portfolio, with the biggest markets being New York which is about 18% to 20%; and South Florida, which is about 10%. And we think it's going to continue to be a headwind. Obviously, the dollar continues to be strong. And obviously, the rhetoric coming out of our government these days is not helpful as well. And so we continue to see it as a headwind across some markets. We're also seeing some softness in Houston related to that as well in the medical center, which gets a lot of international inbound associated with that and also imagine L.A. and San Francisco as well.

And just on that last one, San Francisco, you mentioned that you expect it to be flat despite the sales force shifting into the quarter. What's driving that rather sharp reduction in expectations there?

Sure. Thanks, Anthony. I mean I think our view on Northern California throughout the year, particularly in the third and fourth quarter, it had a great start of the year in Northern California. But our expectations -- and the third quarter started muted because of the timing of sales force. And we underperformed relative to what we would have thought at the beginning of the quarter by, call it, 300 basis points in the third quarter, and we took a similar adjustment to our expectations for the fourth quarter. And so I think what's driving that is not the citywide activities as such, which was known. It's that incremental business transient traveler within Northern California that is impacting our portfolio. If you drill down a little deeper, the CBD assets within San Francisco are still performing well, and we expect them to perform well within the fourth quarter. But where we're seeing some softness is in some of our Silicon Valley assets, which are being impacted. There is some renovation disruption later in the fourth quarter, which is impacting our fourth quarter as well. But we can do that. But it's really -- it's the demand going out to those other Northern California markets.

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

I just want to look at the capital deployment for next year. Obviously, you highlighted the FelCor bonds as something you could potentially take out. Would the initial plan to be to refinance that? Or would you look just to pay off using cash until you find other uses for your cash pile?

Thanks, Wes. We're evaluating the alternatives right now. We have the ability under our balance sheet and the cash to deleverage if we want to. There's a great value creation from refinancing at current rates for corporate debt would be about 300 basis points inside of where that debt sits today, which realizes on an annualized basis, call it, $14 million of interest savings. But we're going to make that call next year based on where we read the tea leaves with respect to the financing markets. But we are confident that there's significant interest rate savings there. It's just a function of whether we go like-for-like on a refinancing or whether we deleverage a little bit as part of that. And we'll be -- we'll have more color on that early in 2020 when we're firmer on that decision.

Okay. And then can I get your outlook for supply next year? What markets stand out as getting better or maybe a little worse?

Yes. So Wes, what I would generally say, though, is that we generally expect overall 2020 to be similar to 2019. Lines are really blurring between years. And so beginning of the year projections are generally off so I would -- just keep that in mind. But we're seeing deceleration in several markets on supply side. Denver, Houston, Louisville stand out. And then our biggest supply headwind is in Austin, expected to be kind of up 7% to 8%. But what I would say to you about Austin is that Austin continues as a surprise to the upside. Demand is expected to be up 8% next year. Austin just continues to find ways to find demand in that market, and so we believe in that market long term. And then our position is also better within the Austin market because we have the greatest concentration in CBD post our sales. And so while the absolute number is higher, our position relative to that supply is much better. And so we feel good about Austin.

Okay. And then maybe sticking with the supply being pushed out a bit. Are you seeing any delays in what it takes to complete a renovation for your assets?

No. We're not seeing delays. I mean, obviously, I think we've been in sort of a higher labor cost, higher material cost for a while. And so that's baked into our plans with enough cushion and enough reserves to get the products done on time and on schedule relative to the way that we planned the renovation. We have a very experienced in-house team that has executed very well, both on normal renovations and also conversions. We have an extensive history about being able to do it. And I think the thing that makes us unique is that we have a full in-house team, design and execution.

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Ancillary fees have definitely been a great tailwind for you all and many of your peers. I guess I know it's hard to model a little bit, but is there a tail to that? Do you think the level of upside you've been getting from those can continue for the next couple of years?

So we've been very focused on ancillary revenues. And we've been very pleased with, so far, many of those are returning a great investment based on some capital we're putting against it. So from a modeling, I'll let Sean handle that, but let me tell you a little bit about the examples that we think are going to continue to be positive for us. Certainly, on the food and beverage, we've had growth. In quarter 3, we're up 4.6%. We continue to see the benefits of the lobby renovations that we talked about earlier, making a more beverage-centric deliverable for our Embassy Suites. When we think about our other revenues in the catering and banquet space, we've been spending money in Miami, Boston, Charleston, Louisville as well as Union Square on our ballroom renovations, which has really returned a better group mix for us in regards to how we're able to benefit on the food and beverage side. So we continue to see food and beverage as an opportunity. And then even with the Wyndham conversions, we will potentially have opportunities, depending upon what brand we pick to do some more space reconfigurations within that portfolio. On the parking initiatives, I know Leslie referred to it earlier. Again, we continue to be up to prior year, spending a little bit of capital to make sure that we have arms when people come in so there's no labor at the location where we're having parking. And even with Uber and Lyft, we still see Lyft, knowing that we're going to have an opportunity to be in urban markets where people need to drive in many locations. And then lastly, on the miscellaneous, whether it's attrition, cancellation fees, up-selling an opportunity to -- based on room configurations, we think that, that will still continue to drive more revenue from a miscellaneous standpoint, which is really bankable RevPAR at the end of the day.

And then, Chris, I'll bolt on to a couple of Tom's comments. One, specifically with the parking, parking is a subset of our ROI initiatives. And we are -- we have a lot of runway left within the portfolio to continue to drive parking revenues throughout the portfolio. And we think we have several years of initiatives that we're going to pull through there, and so we continue to be confident there. The other thing that I'll note for our portfolio maybe relative to some of our other peers is that we are less exposed to the risk of sort of resort facility fee, which is an industry risk just because the nature of our portfolio is just not a big part of our ancillary revenue than it would be maybe for some of our peers. And so when I -- when you think about sort of those other revenues and a lot of lift folks are getting, that's not the key part of our story like it would be for some others. And so that gives us more confidence in the sustainability of that other revenue growth.

Okay. Great. Appreciate all the color. And then understanding that the negotiations with brands are still ongoing, would you expect to get key money or at least some form of downside protection as you're going through those renovations next year or into 2021?

So keep in mind, we're in active discussions and reviewing proposals right now. But I would say to you, absolutely expect that key money would be a part of our negotiations. And then some form of other opportunities may be horse-traded, but we would expect to get some sort of support from the brands.

Okay. Great. And obviously, a lot of progress on the asset sale front the last couple of years. I guess, by definition, you always kind of have a bottom 10%. So what's your kind of appetite to continue pruning the portfolio as the cycle moves on and private market pricing remains really strong?

As I mentioned before, we're not actively marketing any assets, but we will be opportunistic in terms of selling assets. But the reality of it is with 100-plus assets, you have to be active portfolio management all the time. And so we'll be looking at our portfolio over the coming years and determining whether or not we need to prune something. But right now, we're not active. We're just going to be opportunistic if the opportunity presents itself to trade some incremental assets.

And just to add on to Leslie's comments, Chris, we're really happy with where our portfolio sits today. We've done the heavy lifting on the dispositions this year, and that was intended to get the portfolio where we want it to be long term. And so within Leslie's prepared remarks, the statement that the portfolio generally aligns with what we want long term in our vision shouldn't be lost in the group. That's important to us. And think we're through the heavy lifting.

Our next question comes from the line of Neil Malkin with Capital One Securities.

Tom, a question for you. Embassy Suites as your biggest brand. And obviously, the configuration of those is such that you can serve the hollow middle of the hotel, a lot of open space. Can you just maybe talk about your current and future plans, what they are for maximizing the space or revenues, reconfigurations, adding rooms, whatever it may be just given that, that is the -- such a big part of the portfolio and opportunity?

Yes. So thanks, Neil, for the question. We've met with Hilton and had numerous conversations about what we want to be. And if you think about the elevations that you talked about, what existed in the initial build was koi ponds, tremendous amount of landscape, water features, not useful space but pretty space to take a picture and have an opportunity for people to really enjoy that atrium but not utilize the space as much as what's happening today from a consumer standpoint. So what we've done is we have really changed the elevation to be able to be one elevation, where people can utilize the space throughout, and then created kind of public-private space to whether it's the comp breakfast or the actually -- opportunity for the evening reception and then bring our restaurant or beverage space out into the lobby so people want to spend time there and actually be more transactional. So we've had some concepts called Taste and Tap & Tavern on the food and beverage side and actually provided a much better environment to be able to purchase alcohol, spend time and create some camaraderie with the groups that we're attracting. In addition to that, when you change that elevation, you actually add meeting space. So for instance, if an Embassy has 300 keys with 7,500 square feet, you could -- you only, in the past, probably service and maintain that group by using your ballroom or your breakout space. Now with the open-area atrium, you're now serving lunches, receptions and using that space as additional meeting space so you can actually book two groups in your ballroom and then use the atrium for that additional space. So we think that's proof positive. And the other thing that we've done is, from room configurations, we do have part of ROI actually taking a few rooms back at -- by getting some additional keys, which is an immediate ROI, and locations that we think are going to be proof positive from an occupancy standpoint. And the ability to fill in a pool, which we had 2 in Buckhead, which is allowing us to create another 2,500 square feet in Buckhead midweek, that's a real positive for us to be able to drive that BT, special corporate and group that can produce a better catering productivity floors. So that's some of the things that we're doing in our Embassy Suites to be able to create a different value and attract the consumer that, quite honestly, midweek, will drive a higher average rate.

Yes. Neil, this is Sean. With respect to being able to -- listen, this is a focus item for Hilton. It's a big part of their system, and we're a large owner of Embassy Suites relative to the system. So we have spent a lot of time with Hilton in one end and are believers in the reconcepting of the public space that Tom mentioned that will allow us, we think it's an upside potential within our portfolio, to drive incremental group business, et cetera, within the brand. But Hilton has done a great job in how they've repositioned the brand for the next 20 years as we think about what Embassy Suites is going to be all about, and we are a critical part of that discussion within Hilton. So when you step back and think about where Embassy Suites fits in with our portfolio, it's a core holding for RLJ. And those -- as we continue to invest capital within those assets, we see a lot of upside over the next, call it, 1 to 5 years within our portfolio as we remix those hotels.

I appreciate that. And maybe, Leslie, for you. Can you just maybe give a breakdown of the leisure and the business transient guest or demand? Kind of since July, I know trends of demand has slowed. Any incremental color or anecdotes, things you're hearing that would lead you to believe that there's an inflection point coming, either negative or positive? That would be great.

So Neil, I just don't understand your question. Are you asking for sort of what are the data points that we're seeing that would suggest that there is softness in the leisure side? Is that what you're asking?

Well, I mean, yes, like leisure or the business, which obviously has been documented. But yes, either of those. And then I'm saying since you talked about weakness into the fourth quarter, and I'm just saying, have you seen anything incremental that will lead you to believe that, okay, we haven't quite bottomed out in terms of weakness, but we're actually getting worse or on the inverse, we've kind of maybe been through the sort of lull and maybe we'll come back a bit?

Yes. I would say, look, in general, the theme here is deceleration, right, on a number of fronts. Obviously, the economic backdrop is decelerating as we saw it from a GDP perspective. We saw business spend down 1.5 points in the quarter as well. And that is impacting business transient, which is a well-discussed topic. And then on the consumer side, while the consumer remains healthy, we did see consumer spending decelerate quarter-over-quarter. And we believe that, that is having an impact on the leisure side. When we look at the data points from a standpoint of weekend versus weekday, we saw some drops there on a trend basis on the occupancy side that would suggest that there's weakness in cracks there associated with the leisure traveler. And so when you look at demand being down year-to-date 50 basis points and you look -- and you drill down even further and look at where the urban markets and the top 25 markets where we -- most of us replay and the degradation in performance there, the trend is clearly there. We think that it's going to persist, and that's why, obviously, we and most of our peers have brought down our guidance to reflect that. Go ahead.

Okay. But you're -- is there anything incremental about like either from your -- like major business contracts or corporates or anything like that, that would lead you to indicate things are changing maybe like a weaker negotiated rates for next year or cancellations, anything like that?

Yes. Actually, just the opposite. On the special corporate area, for instance, when you negotiate with the IBMs, the AT&Ts and the folks that have a discount based on volume production, we actually were up in quarter 3. So that was a proof positive that it's continuing to have demand in regards to what we're expecting. I would think similar trends would happen into Q4 based on what we've seen early indications as well as what we're looking for 2020 with -- low single digits is what we're hearing from our management companies in regards to the negotiating for next year's results. And a lot of that is really dynamic pricing versus fixed pricing, trying to set you up based on how bar flows in regards to what you're quoting to be able to take advantage of high-demand days. The other thing on the leisure side, which I think is -- sometimes people forget, but when a hurricane happens -- and specifically in our portfolio, we had 9 hotels in South Florida and then 2 in Charleston that had a mandatory evacuation over Labor Day weekend. So a lot of Q3 leisure was related to that 11 days of a stalled hurricane that, unfortunately, people were waiting to see where to go and what to travel around. So we're still thinking leisure is positive. Our Embassy Suites portfolio really has that value proposition on leisure. So we think that's a short-term blip on the leisure side in regards to what occurred in Q3, just to give you a little bit more color.

Ladies and gentlemen, this concludes the Q&A session. I would now like to turn the conference back to Ms. Hale for any closing comments.

We want to thank you all for joining us today, and we are pleased to be able to report another quarter of progress. We look forward to seeing many of you guys next week at NAREIT and continuing our discussion around all the activity that we have within our portfolio. Thank you, guys.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.