Welcome to the RLJ Lodging Trust First Quarter 2023 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the call over to Nikhil Bhalla, RLJ’s Senior Vice President, Finance and Treasurer. Please, go ahead.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust 2023 first 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 financial results; Tom Bardenett, our Chief Operating Officer, 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-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 may be helpful to review the reconciliations to GAAP located in our press release. Finally, please refer to the schedule of supplemental information, which was posted to our website last night, which includes pro forma operating results for our current hotel portfolio. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone, and thank you for joining us today. We are encouraged that the positive momentum in lodging fundamentals continued throughout the first quarter, as RevPAR for the industry sequentially improved each month on both an absolute basis and relative to 2019. As we expected, first quarter RevPAR in urban markets outpaced the industry relative to last year and achieved a significant milestone of reaching 2019 level for the first time post the pandemic. Against this constructive backdrop, we achieved strong first quarter operating results that exceeded our expectations, made tangible progress on our 2023 conversion, continued the ramp of our 2022 conversion, extended maturities for $425 million of debt, opportunistically repurchased $40 million of stock and increased our quarterly dividend by 60%. Our strong performance during the first quarter underscores the overall benefits of our urban-centric portfolio and also demonstrates the optionality that our balance sheet provides to accretively deploy capital to enhance shareholder return. Turning to our operating performance. During the first quarter, the ongoing recovery in our urban markets led our RevPAR to increase by 27% over last year and achieved 95% of 2019, representing an improvement of 100 basis points from the fourth quarter. Notably, our RevPAR growth, not only benefited from increased demand, yielding a 12% year-over-year increase in occupancy, but also achieved incremental ADR lift, as continued pricing power led our ADR to grow more than 13% above last year. Demand increased throughout the first quarter, which led our operating results to accelerate each month, with March RevPAR reaching 99% of 2019. We are encouraged to see this momentum continue into April. Our urban hotels, which represent two-thirds of our EBITDA, generated the highest RevPAR growth within our portfolio during the first quarter. These results outperformed our expectations with RevPAR increasing…

Thanks Leslie. To start, our comparable numbers include our 96 hotels owned throughout the first quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. We were pleased with our first quarter results. which exceeded our expectations. First quarter portfolio occupancy was 68.5%, which was 90% of 2019 levels. Average daily rate was $199, achieving 105% of 2019 and RevPAR was $136,000, which was 95% of 2019. The first quarter ADR exceeded 2019 levels by 10% or more in a number of key urban markets, including San Diego, New York, Miami, Tampa, Washington, D.C., Pittsburgh, and New Orleans. Monthly RevPAR accelerated throughout the quarter and achieved 91%, 93%, and 99% of 2019 levels during January, February, and March, respectively. March recovered to 99% of 2019, which was the highest month of the pandemic and was driven by a combination of occupancy at 93% of 2019 levels and ADR of 106% of 2019. Our outstanding March results were primarily driven by RevPAR exceeding 2019 in most of our urban markets such as New York at 105%, Los Angeles at 110%; San Diego at 108% and Chicago at 111%, Washington, D.C. at 106%, Tampa at 132%, Indianapolis at 133%, and Louisville at 122%. Our first quarter operating trends led our portfolio to achieve hotel EBITDA of $90.9 million, representing 87% of 2019 levels. Hotel EBITDA margin of 28.9% increased 283 basis points above the comparable quarter of 2022. Monthly results accelerated throughout the quarter, with March hotel EBITDA at 94% of 2019 levels. The positive momentum from March continued into April where forecasted RevPAR is approximately $156, representing a 7% increase from 2022. April RevPAR was driven by occupancy of 75% and ADR of approximately $207, representing 91% and 108% of…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Great. Thanks and good morning, everybody. I appreciate your guys' comments around the BT broadening across sectors, but curious if you're seeing any slowdown in velocity of the recovery in BT and then specific to your urban portfolio, how did it perform in the context of your April results?

So, first of all, good morning, Austin. And I would say that as it relates to BT, we're not seeing a slowdown. We're seeing a grind forward, if you will. We talked about in our prepared remarks that our room nights are up 10 points quarter-over-quarter. We saw sequential improvement during the quarter where we ended the quarter at 85% of 2019 room nights, March actually ended at 92% room nights. What I would also say is that we saw sequential improvement in revenues and ended with market 75% of total revenues for 2019. If I drill down even further on midweek numbers, we ended the quarter with RevPAR 89%, which is a 100 basis point quarter-over-quarter improvement, but margin did at 93%. And so as I think about that moving into April, we're seeing that momentum carry forward. And in fact, the quarter is off to a good start. April, we expect overall to be in line with March, but we saw ADR overall, pick up 200 basis points relative to 2019 month-over-month relative to March. Additionally, you didn't ask about group, but group pace is at 2019 levels for the second quarter. And then what I would say about BT, in the second quarter is that typically May and June are the stronger BT months in the second quarter. And so we would expect to build on the momentum we saw in the second half of April relative to BT, and so we're seeing it growing forward. We're not seeing it soften off.

And then, I'm curious with the latest trends in sort of pace update across your Northern California submarkets are for various demand segments. Do you continue to see a recovery in any specific submarkets that are outperforming?

Yes. Good morning, Austin. It's Tom. So in Northern California, as you know, our footprint, we have a couple in CBD, a couple out in Emeryville over at the airport SFO and Burlingame and then out in Silicon Valley. And so, what we're finding is we are seeing significant project business and new hires that are coming into our Silicon Valley hotels, accounts like Tesla, Apple, accounts that Leslie referred to in her BT, are also still hiring some folks that are on the intern side, and we're seeing that type of business come in. We just booked some short-term group business with Micron for instance. And so it's encouraging what's happened out in Silicon Valley and starting to see that as a ramp more in Q2 and Q3 than Q1. And then in Northern California, CBD, obviously, JPMorgan really kind of led the charge out of the gate in January. It was one of the best events where we were going to see great attendance there. And then in the back half of Northern California, it's better comps for Q3 and Q4, where we know that the citywides are double the amount of 2022, even though they're still chasing 2019, we feel like there's going to be compression, because of the amount of attendance that's expected in, let's say, 16 out of the 33 citywides. There's going to be pretty significant attendance in the back half of this year, which should be encouraging, because that type of compression helps Emeryville and South San Francisco when citywides come into San Francisco.

No, that's helpful. Thanks, Tom. Thanks, Leslie.

Our next question comes from the line of Tyler Batory with Oppenheimer. Please proceed with your question.

Hey. Good morning. Thank you. Questions on the guidance. I'm just interested when you look at the range you provided for RevPAR in Q2, are you thinking that's more occupancy driven, maybe more rate driven, maybe more 50-50 means certainly that the rate growth in Q1 was very strong. It sounds like April was strong as well. So just interested what you're expecting for the balance of Q2?

Sure. Tyler, as you mentioned, sort of our split between rates and not was about 50-50 for the first quarter. I would say that, in general, for the second quarter, we're looking at about two-thirds rate versus off, but in April, it was largely rate. And we just still believe that there's still ability to push overall pricing power.

Okay. Okay. Perfect. And in terms of the capital allocation, nice to see the repurchase. I mean, how do you view that option versus some of the other opportunities that might be out there. You bought back stock on a leverage-neutral basis. I mean, is that perhaps a governor as you think about applying more capital towards buybacks in the future? And the average price was kind of about where the stock is right now. So should we expect you to continue to be active in the market at current levels?

So I was sort of helicopter overall and just say that you obviously saw that we were very active across a number of fronts. Tyler, and that we've consistently demonstrated a thoughtful and disciplined approach to leveraging the optionality that our balance sheet provides given the liquidity we have, we can pull more than one trigger. And so we've done that for the last several quarters here. And as you mentioned, we were active on the buyback side. We did utilize free cash flow in order to buy the shares at a leverage neutral basis, which is something that's important to us -- but if you look at our margin profile and our free cash flow generation, that's something that we're going to be able to continue to leverage as we go forward. We continue to obviously invest in our portfolio. We launched the two new conversions, which are already performing ahead of our expectations even without the capital that we're going to put in later this year, we increased our dividend as well. And we continue to cultivate a pipeline of potential acquisitions, but recognizing that buybacks today remain the most attractive and accretive deployment of capital today. We'll continue to monitor that. Our general approach is to have a view on where we think fundamentals and they have a view a macro perspective as well because where you think that's headed also impacts your perspective on sort of volume and complexity around buybacks. And so I think we've been thoughtful. We're going to continue to be thoughtful, but we do acknowledge that buybacks remain attractive.

Okay. Great. I appreciate that detail. That's all for me. Thank you.

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

Thank you. Good morning, everyone.

Good morning.

First question, For you mentioned an improvement in head count, lower FTEs. I mean how much of a driver of 1Q's outperformance on the EBITDA line? Was that how sustainable do you think that better run rate is for the remainder of the year? And does that change your earnings outlook at all or at least your internal earnings outlook for the remainder of 2023.

Yes, Mike, this is Sean. I think on the FTEs, what we saw for the benefit of sort of our footprint, is despite occupancy going up quarter-on-quarter, we were able to flex the in light of sort of where the demand was and sort of -- and take advantage of that this quarter. I think our long-term approach to where we think FTEs are going to land, has not changed. We think that's in the low to mid-80% of 2019 levels. And we think that the ramp back to that is going to be influenced by occupancy rebuilding. And so as occupancy rebuilds, we would expect FTEs to normalize, but we think that the opportunity there is still at the 80% to 85% of 2019 levels. So our view has not changed on that for the year. And then from a margin perspective on sort of how labor is 40% of our total operating costs and so labor is a big driver of our margins. What we said at the beginning of the year, our full year expectations were for margins to grow year-over-year, which they did in the first quarter by over 280 basis points. And our expectations are for that to continue for the full year.

And Mike, I would just sort of look in on to Sean's comments that our guidance reflects ramp back to what we think is a normalized FTE level.

Got it. So it sort of sounds like the improvement in 1Q is maybe either a little bit more temporary or the improvement that you might see is a little bit more of a 2023 impact because the long run, whether that's 24% or 25% is unchanged. Is that a fair takeaway there?

Yeah, I would say that we have -- we are very aggressive on the asset management side. And so we spend a lot of time making sure that our management companies do not let costs get ahead of the top-line. Coming into the year, clearly everybody had a perspective around possible macro headwinds. And so we are pretty cautious on the FTE side. So I think what you're seeing is that we didn't fill some of those spots. And so it's a temporary transitory pickup on the first quarter on FTEs. And what I would say, though, is it does demonstrate our model and ability to flex on the FTE side. It goes back to the lean operating model from a standpoint of our ability to cluster, our ability to have efficiencies because of the size of our box and the average length of stay. And so what I think it should do, Mike is give you confidence that we can flex when we need to, given the type of model that we have.

Got it. That's helpful. And then just one more for Sean. Where is net leverage stand today? And sort of what's the comfort level or the comfortable range that you want to operate at for the remainder of the year based on your outlook?

Sure. Today, we're in the high-4s on a trailing four-quarter basis on leverage. We would expect that to go down this year, roughly half a ton as our EBITDA continues to grow over 2022. And for the overall cycle we continue to believe that below four times net debt to EBITDA is the appropriate level. As a reminder, we entered COVID with leverage in the low-2s. I think we were 3.2% or 3.3%, and we would expect to get back below four times -- sometime in the either first or second quarter next year, depending on the trajectory based on our internal models.

Thank you. That's all for me

Our next question comes from the line of Chris Darling with Green Street. Please proceed with your question.

Thanks. Good morning. Leslie, you discussed the desire to maintain some level of leverage neutrality in terms of share repurchases. So I wonder how you're thinking about selective dispositions in that context. I understand it's not a great environment to maximize value, but in theory, that provides incremental capital to take advantage of that option. Any thoughts on any of those competing ideas?

Well, thanks for the question. I would say, in general, given the backdrop that we face today in the debt capital markets that is not an optimal market to be selling assets into. And given the fact that we do have significant liquidity on our balance sheet, we can project forward in terms of what we think our free cash flow will be and offset that with utilizing cash today and then putting it back at when we have free cash flow generated. So I would think about it from a timing issue as opposed to needing to sell assets in order to stay leverage neutral.

All right. Fair enough. That's helpful. And maybe one more, it might be for Tom. But -- if I look at your recent presentation, you lay out the pipeline of future conversion opportunities along with, I think, about 5 to 7 of what you're calling special situations. Just hoping you could speak to those special situations, the types of ROI projects that you're envisioning over time there?

Sure. This is Leslie, let me jump in on this question. I think that what those unique opportunities are is where you have an asset and the size of -- the lot size allows you to look at not only hospitality asset, but maybe also doing a multiuse site. So these are situations where you can look at developing multifamily alongside a hotel. So it's not necessarily something that we would execute on our own, but it's an opportunity where we think there's incremental value for RLJ embedded in an asset given where it's located.

Got it. And I appreciate the time. Thank you.

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

Hi, good morning. Just one for me on the balance sheet. I know you extended the mortgage loans and the term loan into next year. But as you think about refinancing those, most of your peers seem to be paying off mortgages. Is that something that you would consider, or what do you think you get on the mortgage loan currently, what rate?

Yeah. Thanks, Anthony. Mortgage debt today, we have mortgage debt on 15 of our 96 hotels. It represents less than 10% of our total asset value. We're very comfortable just from a standpoint of having diverse debt sources, having anywhere from up to maybe 15% of our total debt as secured. And so we think that that's appropriate. I think for the loans that we have secured today, they are loans that are anywhere on -- and I'm going to use 2023 numbers here, a mid-teens debt yield and north of two times coverage on each one of those loans. And so they're relatively low LTV loans. And so -- which is why they're priced attractively. And so we think that's a strategy when we think about our secured -- that as we refinance, we would probably continue to maintain not pushing individual leverage on those individual loans, but trying to make sure it's an attractive from a pricing perspective. The market today continues to be like all lending choppy unsecured debt. As we talk to secured lenders, we're obviously in a very good position because of our balance sheet and because of our relationships, and so we would expect to be able to put secured debt on in an efficient way, but it would be more expensive than the expiring debt. The market is moving all over the place. And so I'm not -- I don't have a view today on what the all-in rate would be other than it would be at spreads higher than maturing, but we would be able to compensate for that from lower LTVs.

Thank you.

Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your questions.

Hey, good morning. Just a follow-up question. I think, Leslie, you mentioned something about BT, and I'm somewhat encouraged by -- BT was 85% of 2019 levels, I think you said April is actually even higher. Where will BT get to -- or can it get to 100% of 2019 levels this year in your view? And what does it take? Obviously, we've got some economic uncertainty still weighing over us, et cetera. But maybe you can give a little comment and how does that view your perspective on the company and on the market as well? A – Leslie Hale: So look, I would generally say that BT is grinding for. We don't necessarily see it getting back to 2019 levels by the end of this year. We do think it's a possibility that's a 2024 story. Now obviously, we all know the million-dollar question is that BT get back to 100% or not. But what I would say is that we have confidence that the puts and takes between all the segments -- and given the elevated rate growth that we're seeing across the portfolio across the segments is going to allow us to achieve our 2019 revenues across the portfolio. And so what I would say to you is that we all, as an industry, are evolving to be able to capture the new breakdown of segmentation, and we think that our portfolio is built for that. When you think about our Urban-centric portfolio, our urban lifestyle assets, which are sitting in the heart of seven-day a week demand, the nature and types of assets that we have, whether the mix between BT and leisure evolves, we can capture that. And so I think that we're net-net positive on how BT is evolving. But as the new normal continues to shake out, our portfolio is uniquely positioned to be able to capture the evolving mix is what I would say. A – Sean Mahoney: Yes. And then just to bolt on to that, kind of with respect to our guidance relative to first quarter as well as fourth quarter. So our RevPAR was improved relative to 90 to 100 basis points fourth quarter to first quarter. And our guidance implies at midpoint, we're at 99% of 2019 levels of RevPAR, so another 400 basis points of recovery quarter-over-quarter. And so I think that is as much an indication of how we believe that the recovery is going to continue to unfold. And because of our Urban-centric portfolio and BT being a driver of that in this moment in time, we think that is overall giving us the confidence to give the guidance that we gave.

Thanks. That’s it for me

Our next question comes from the line of Gregory Miller with Truist. Please proceed with your question.

HI. Thanks. Good morning, all. I'd like to also talk about -- a question about business transient. Could you provide an update on negotiated corporate ADR trends now that we are past the winter months, whereas negotiated ADR today compared to the mid-single-digit growth that had been previously articulated. Thanks. A – Tom Bardenett: Good morning, Greg. It's Tom. And yes, we're actually pleased with how it shook out -- when we went into the negotiation process, which starts in the August, September time frame, and it was pretty lengthy going into fourth quarter as well as first quarter. We had a pretty significant ask on the table, knowing that we had a walkaway price at the same time. And where we ended up globally was somewhere between 5% on the minimum and high single digits on the top end. And there's obviously accounts that when you think about volume and to Leslie's point about the grind forward, we're seeing significant volume year-over-year, which was an easy comp, if you think about 2022, Q1 versus 2023. But more importantly, we're seeing movement from what Sean was just talking about from Q4 to Q1. And where our mix is increasing and the type of accounts that are increasing are the large corporations. As you all know, SMEs have been kind of holding up, if you will. And now we're starting to see growth from the tech companies, even though they went through a correction in regards to the hiring process. We're actually seeing volume start to gain traction from aerospace and automotive, consulting, where we see Deloitte and Accenture and P&C and Ernst & Young coming back and staying at our hotels. And a leading indicator of that is when you look at source of business, you can see that global distribution systems, which was in the low high single digits percentage-wise now is at double digits, right? So you're looking at the demand is coming through the Amex travels and the organizations that typically book those type of BT events. So -- we're encouraged how it ended up, and we're seeing the growth in rate and then the volume is starting to also track back to 2019, but certainly over 2022?

Great. Thanks so much for that. The other question that I had for you, I believe that there is an out and progress on the front desk -- and I found that's interesting

You're breaking up -- and you're breaking up, so we didn't hear part of your question, I'm sorry.

Is it over?

Try again.

Okay. Sorry about that. Okay. I believe that there is an HLA survey and progress on the front desk, and I found that it's pretty interesting, not to front run the survey, but I'm curious how franchise staffing and labor costs are pending for the portfolio today? Is the position harder to fill the hourly roles?

Yes. And I would say, when we think about our desk and what's happening there versus housekeeping and food and beverage, we've been able to maintain levels because you have to obviously have a certain amount of folks on the shifts as occupancy starts to increase. It typically has not been the hardest area to find jobs compared to, let's say, housekeeping and food and beverage because of what happened. When you think about the restaurant industry and the move where group took a little while to come back but the desk has always been something that we've been maintaining. And to Leslie's earlier point, we always can cover shifts if we need to, when it comes down to having managers do that as well even if we had a little bit of slow track back. But we typically, haven't seen that be the topic where we've been able to have retention. In fact, what we've done, which I think is interesting, Greg, you have an up-selling program. And with that, the whole goal is to try to drive average rate and put people in views, configurations. And so it's actually been attractive for the desk folks to be able to be hired and have that opportunity to have a little incentive in place which they get a piece of the pie if they were able to upsell. And we found that program to be highly attractive to be able to get more people on the desk to be able to work at our assets.

Terrific. Thanks so much for all the information.

And we have reached the end of the question-and-answer session. And I'll now turn the call back over to Leslie Hale for closing remarks.

Thank you all for joining us today. I would just like to reiterate that the positive momentum that we've seen in our portfolio, our urban concentration position us for continued growth. And that we talked about a number of catalysts that are unique to RLJ and that provides us confidence that we can continue to outperform. Look, I look forward to seeing many of you at NAREIT. I hope all of you have great summer plans, and I wish you all well for the summer. Thank you, everybody.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.