Welcome to the RLJ Lodging Trust Fourth Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. 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's fourth quarter and year-end earnings call. On today's call, Ross Bierkan, the company's President and Chief Executive Officer will discuss key highlights for the quarter and the year; Leslie Hale, the company's Chief Operating Officer and Chief Financial Officer will discuss the company's financial and operational 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-K 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 2016 fourth quarter and full year earnings call. As we reflect on the various macroeconomic and lodging issues that persisted through 2016, we're pleased that we were able to generate positive RevPAR growth of 1.1% for the full year. Our ability to do so is a testament to the overall quality, broad diversification of our portfolio. Our strong foundation is centered on three guiding principles; first, to insist on operational excellence; second, to allocate capital prudently; and finally, to always be proactive managers of our balance sheet. In 2016, we continue to execute on these principles in a thoughtful and disciplined way. First, we successfully grew RevPAR and EBITDA despite multiple headwinds affecting both the industry and select markets. Second, we took advantage of the strong interest from international investors looking to acquire real estate in New York by opportunistically selling two hotels at a very attractive valuation. Separately, we sold two non-core assets as part of our continuing effort to recycle capital and optimize our portfolio quality. And finally, we refinanced over $1 billion of debt, leading to one of the strongest balance sheet among publicly-traded lodging REITs. These efforts led to our ability to continue to generate significant cash flow and to create value for shareholders. As such, we distributed over $178 million to our shareholders in the form of dividends and share repurchases. Y-to-date we've returned $930 million of capital to shareholders, over 85% of all capital raised since our IPO. Looking forward we are encouraged by the optimism surrounding possible improvement and economic growth, which would benefit corporate demand. We're hopeful that high consumer confidence, bolstered by strong job creation, increasing wages, and healthy housing market will continue to support consumer spending. Several of the new…

Thanks, Ross. We had expected a softer fourth quarter, particularly given the trend we saw in the third quarter and October softness which was heavily impacted by the holiday shift. However, the stronger-than-expected performance in November and December enabled us to generate flat RevPAR growth for the quarter and resulted in a full year RevPAR slightly exceeding the high-end of our revised guidance, while our business mix is primarily transient in nature. We were pleased to see our strategy to group up to produce positive results in the quarter, a meaningful increase in small social groups provide a base of the business which helped to offset softer transient trend. Overall, business transient have been weak throughout the year and while that continued to some degree into the fourth quarter we did see a slight increase corporate demand, primarily driven by Northern and Southern California, Denver and Washington DC. Given the pressures we faced all year, we were pleased that our EBITDA margin for the quarter increased by 10 basis points to 35.2% despite flat RevPAR. The tireless efforts of our asset management and hotel operating teams to control cost resulted in solid margin growth across a number of our markets. These results demonstrate the benefit of the efficient operating model of our hotel and our ability to manage cost effectively throughout the cycle. Additionally, as I mentioned on our last call, we’ve been aggressively managing our property taxes. In this quarter, we began to see the results from some of our successful appeal. We also yielded additional benefits from some of our other portfolio wide strategy that we have discussed previously. Including reduced energy costs from investment in energy initiatives and reduced insurance premiums. As a result, our expense decreased slightly fourth quarter despite relatively flat RevPAR growth. For the…

Thank you. At this time, we'll 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.

Hi. Good morning. Thanks for taking the question. I was curious if you could break down the RevPAR guidance between your top 10 markets versus the other pool?

Hey, good morning Austin. Thanks. That's a strong question. Hang on just a second.

Happy to follow-up if you'd like offline.

Anytime. I don't do that. Thank you.

Maybe in the meantime, I was wondering if you'd be willing to offer up any detail as to how January and February are trending up into this point.

January, very well. It came in strong. It was aided by a few different things, certainly Super Bowl in Houston where we have a high concentration of assets and inauguration in Washington D.C. But in general, around the country, January firmed up nicely. February, not so much. And it seems to be taking back much of the gains in January. Now, it should be said that those two months are disproportionately likely relative to the month of March and we're expecting March to really be the bellwether of how the quarter comes in and visibility there right now is relatively neutral to our guidance.

And then Austin to answer your question about our non-top 10 markets. They are generally going to perform in line with the industry.

Thanks for that Leslie. And then just lastly I was curious if you could give us a comp on the 34.5% to 35.5% operating margins and then just talk a little bit about some of the expense pressures that you expect in 2017?

And Austin when you say comp, you mean in short what was -- what's 2016?

Yes, correct.

Yes, so we rolled up on an actual basis 36.3%, but if you do it on a comp basis, it is about 36.1%. And then from an expense perspective, just to give you a frame of reference, our expense is in 2016 in aggregate it went up about 1.3%. We're looking at about 2%, 2.5% expense growth in 2017 and obviously, you we're going to be continuing to be aggressive and our operating [ph] is continue to look to control cost. We're going to continue to execute on the initiatives that we had outlined on our last call, staffing initiatives, energy and insurance, but the reality of it is in a flat RevPAR environment, it's going to be hard to grow -- hard to hold margins, that's this part of the cycle is really important from a size and scale and given where margins are starting out at 36%, we feel very good about our overall portfolio. Having said that we do recognize that wages are going to have some pressure. Clearly, in a tight labor market, you're going to have anything that's incremental to that will be something that's going to put pressure. Given the -- given what's going on from an immigration perspective, we obviously see that may have an impact on wages as well, but it's something that we're monitoring and think that we feel very comfortable with our guidance for 2017.

And then could you just offer up a little bit of detail on what you expect for real estate taxes this year?

For real estate taxes, we're looking at about a 7% to 8% increase. That is not assume any wins on appeal. We don't budget appeal wins.

Great. Thanks for the detail.

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

Hi, good morning everyone. Just wanted to update on your acquisition strategy or disposition strategy in 2017, you obviously had a lot of liquidity after the sales in New York. We've heard some of your peers yesterday talking about being more aggressive buying hotels. So, if you get summarize what you're thinking right now, that would be great.

Thanks Anthony. We're in the engine [ph] position of having options in front of us. The balance sheet is in great shape. We don't have a 10:31 clock ticking, but we are looking for acquisitions that can or could be accretive, especially considering the sub five cap that we rolled out of New York with. We feel like that EBITDA could be put to work in markets where there are still some running room or in locations that have a reasonable moat in a market or in an asset that has a catalyst, either external or internal to the asset where we can add value and grow that EBITDA. But it's going to be opportunistic. We -- there's not a hard and fast goal or a deadline, but similar to our peers, we are interested in finding opportunities that work for our portfolio and improve it. And conversely, it's not a binary decision while we're looking at acquisitions to also consider buying back shares. We'll be opportunistic on that front as well. We did not when -- during the winter in December after we sold the assets in New York there was little bit too much of volatility in the market and we chose to wait and so this gives us the luxury now as 2017 unfold to pick your spot.

Alright. Great, that’s it for me. Thank you.

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

Hey, good morning everyone. Just following up on the question of acquisitions, are you seeing any developers getting into trouble? I imagine some are missing their pro formas and any opportunity to take a value add or just a development lease-up unstabilized asset?

Right, I appreciate that. Historically, RLJ is definitely included our unstabilized opportunities, value add opportunities in our mix of our acquisitions in our pipeline. So far we haven’t seen that kind of distress, we’ve seen a different kind where developers have acquired piece of dirt, they’ve teed up an project, they’ve got an approval from the brands and then they've gone back to get their hard bids from their contractors and their full commitment letters from their lenders and the goalpost have been moved and the project -- shovel doesn’t go in the ground. Now, RLJ is not about to take on a situation like that, but we have friends in the development community who say that their phones are ringing with distress developers so predevelopment, but so far our projects that are being delivered there hasn't been much distress to speaker. We do think that in some markets where margins are being compressed and New York might be a good example that that there could be some distress and we’re certainly going to stay in touch with development community around the country because perhaps a year or two from now that could be a better opportunity than it is right now.

Okay. And thanks for that. And then looking at Louisville, how should that progress throughout the year we saw the negative 12% in the fourth quarter was that impacted all by the renovation activity and how do you see that the point out throughout the year and hopefully gives us easier comps in the second half?

Yes, we're budgeting to be down about mid-single-digits in Louisville. We are accelerating renovations there to because there's no better time to do it. We are excited about the market. It’s 688 key asset and it’s connected to the Convention Center. So, we’re looking forward to the reopening in the summer of 2018, but yes the easier comp will help us and to their credit the staff there, the operator there has done a good job of booking our regional business into the hotel and not relying on the Convention Center for all their compression. So there are going to minimize the pain during 2017 to be ready for 2018.

Okay. And then quick one for Leslie on the margins you have mentioned roughly around may be 110 basis points contraction on comparable basis, do you happen to have the impact of the tax abatement, will that would cost for headwind for this year?

So, our margins in 2016 were down 21 basis points, we would have been down 50, Wes, without the benefits of the tax wins this year, so you can do thank you math off of it.

Okay. Fantastic. Thank you.

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

Hey, good morning guys. Thanks for taking my questions. I might have a couple here. I think the first one I want to ask about was with regards to Southern California. Did you in any of your property’s have any favorable impact last year from the Porter Ranch gas leak or was that immaterial to your portfolio?

Ryan, hey it was immaterial. Out of our five assets in the region the only one that saw any benefit was our Hilton garden in Hollywood that was just a little bit during the first half of year, so were not too concerned about a comparable.

Great. That’s the part I want to make sure. And then if I look at your overall the major markets that you operate in, obviously you gave some good color on the call earlier and just to make sure I understand correctly D.C. is going to accelerate from 2016 to 2017, it sounds like Chicago might accelerate from 2016 to 2017 with the Group calendar from Chicago, are there any other markets that you think might be accelerating from 2016 to 2017 versus decelerating it seems like pretty much all the other major market that you highlight might be decelerating?

Right, certainly Southern California.

Do you think it will accelerate from the plus 8% you guys put up this year?

I am sorry, not from the plus 8. I would say then Denver is probably the best bet. We are looking at low-single digits there, but consistent with what we did last year despite the fact that there is far amount of new supply coming into that market, probably about 4.4% if you look at the RLJ tracks. But general corporate strength and frankly some easy comps in Q1 it was both very weak citywide last year quarter and we also have a couple of full service assets under renovation. We think we are going to accelerate slightly from last year.

So do you feel like Denver, Chicago and DC in the acceleration you are going to see in those markets are going to offset to deceleration you might see everywhere else to get high end of your guidance trends or do you feel like probably it's going to be some losses in terms of year-over-year growth coming from those decelerating markets?

Sure. I mean we were going to have other positive markets as well. So, I don’t want it to seem like they all got delayed, it's just whether or not they are going to accelerate by your definition over the private…

Right, no I understand that. I am not having any negative, I am just trying to figure out you guys have 1% growth this year, which is the high-end of your aims for 2017 and it just seems like the vast majority of your markets are more likely to decelerate and accelerate in 2017 which maybe prior year, your guidance complies one percentage point deceleration. I just want to make sure if there is anything I missing regarding those markets that might usually get to the high-end of the ranges?

No, no. Understood. No, I would say it is going to be equilibrium. I mean it’s the benefit of a large portfolio that you got markets picking up for the ones that are going through some new supply indigestion. But I think it's true, the entire industry too, I think if you look at everyone's guidance, everyone is expecting similar fate. The industry average for new supply is often quoted as call it, 2.0, 1.9, 2.0, but where most of the RIETs own assets new supply is going to be higher than that, right. In the RLJ tracks, for example, it will be 3.8% across the portfolio. Some markets will be higher, some will be lower and it's just going to be a year for the entire industry of absorbing new supply, which is why I think you're seeing so much cautious guidance. We're hopeful that through some of the things the administration is talking about, tax reform, deregulation that there will be an economic acceleration towards the backend that will boost things, but because of the lack of visibility of that, because of the -- time it's going to take to implement those things and because of the lag effect that occurs even after they are put in place, we're not banking on that for 2017 and what we are -- what we can bank on and what we -- what's staring us in the face is that these hotels are going to open and they need to be absorbed in these markets. As strong as the markets are, in almost every case, demand is not the problem. We just need to absorb the supply. Fortunately, in our portfolio, it's so diverse, we've got the markets that can pull the others up and compensate for them. And we have a lot of conviction that the range that we've outlined is achievable.

No, that's helpful. And good color. And then just one last one on margins, and Leslie, you gave some good insights in the margins in terms of operating expenses for 2017 versus 2016 earlier. But it looks like -- are you guys being somewhat conservative in terms of your operating expense growth given how low they were this year. Is it that you have some tailwinds this year that you don't expect to have next year 1.3% versus the 2% to 2.5% that you're guiding to? Or is there something else going there? Obviously, you only -- you hit the high end of your guidance range on RevPAR. In 2016, you hit the high end of your 2017 guidance range and RevPAR and margins, we're only down about 20 basis points on a pro forma basis and at the high end of your range for 2017, you're expecting margins to be down 60 or 70 bps. So, it seems like you're certainly expecting operating expense to get worse in 2017, was there a tailwind in 2016? Or was there areas just that you just think you can necessarily sustain that level of low cost?

Yes, I think it's really a function of the fact that we have flat RevPAR. And when you do that, it does really becomes hard the hold that and when you have your expenses growing at 2.5%, while we think that it's going to be still to meat on the bone relative to some of the initiatives we're working on, reality of it, it's not to be enough to offset the loss from topline. And that's just the reality that we're in right now. As I said before, our operators are going to continue to work very hard to control expenses and we're going to push very hard. The only thing that's not really sort of baked in that is really any appeal that we may win, but we can't budget that, we can't really sort of demand on that. The only other thing is that we obviously do -- we have perfect payroll budgeted as well, meaning that if somebody -- if we have an open position, we assume we're going to fill it, we assume it's filled for the whole year. Maybe it's not filled for -- its maybe filled for nine months versus 12 months and little bit of add in there, but that's not going to be enough to really affect the overall et cetera.

Okay. Makes sense. All right, that's it from me. Thanks for all the color. I appreciate it.

Thank you. [Operator Instructions] Our next question comes from the line of Lukas Hartwich with Green Street Advisors. Please proceed with your question.

Thanks. Good morning guys. In terms of Houston, how much more pain do you think there is in that market before where you kind of find the bottom?

Lukas Houston is that a conundrum, but we do believe that demand may have bottomed there. Unfortunately, Houston has a supply challenge too. In 2016, it was about 5.8% supply growth and in 2017, it's another 5.9%. So, including the new Marriott Marquis hotel that opened in December, the 1,000-room hotel down by the Convention Center. Now, Marriott has been a little bit close to the vest, but anecdotally -- reported that they booked quite a few groups that considerably exceed their room account, 2,500 needs, 1,500 needs and that. In January, the property ramped-up immediately and earned fair share and that half the groups their booking has never been to Houston before. So, the hotel seems be its job as a headquarter hotel for the Convention Center, but still contributes to the overall supply issue that the market needs to absorb. So, we're budgeting down mid-single-digits in Houston. And certainly the comps have gotten easier, but from what we're seeing in the oil patch, at least, rig counts are up and $60 oil seems to be a level at which they can make money and from what our operators are telling us, demand seems to be troughing, so now we need to absorb the new supply.

And the thing that I would add Lukas is if you look at the last eight quarters for us, the first four quarters in terms of the drop in performance was driven by occupancy which coincides with the comment on demand. And the last three quarters have really been focused on -- and really been driven by rate, which suggest the supply point that Ross is pointing out.

That's really helpful. And then Leslie just one quick follow-up, the 2019 term loans, when is the earliest you can start thinking about extending those?

We're thinking about it now Lukas. We're in the mix of doing that. We only waited -- we could have done it last year, we only waited for this year, so that we can get an extra year of maturity, but we're actively engaged in discussions around next steps with that debt.

Great. That's it from me. Thank you.

Thank you.

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

Hey, good morning guys. This is actually Dany Asad on for Shaun. Just taking a quick look at your 10 South Florida assets, they were flat RevPAR for the last year and Ross, what are you -- what is you think your budgeting for this year in terms of -- I know that there are some renovation going on, but in terms of like how do you're thinking about that market for this year?

Right Dany, we're budgeting slightly negative. And we expect to outperform the market due to our geographical diversity there. We've got, of course, the Hilton on South Beach, but we also have a couple in Miramar, a couple in Plantation, three assets in West Palm, and a pair in Key West. And we think that's going to help us relative to certainly the Miami comps. And there is new supply there. Demand subsided last year as a result of everything we know, the strong dollar and the South American economies and lingering fears and then in the second half of the year the closure of the Convention Center. But we still finished the year relatively strong and certainly outperforming the market. We were actually up 30 bps for the year in our South Florida portfolio last year. So, this year again slightly negative, but outperforming the area and hopeful that some of these concerns will subside surrounding the Zika and we're looking forward to 2018 when that Convention Center gets reopened.

That's it. Thank you from me. That's it.

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

Hey, good morning folks. Ross, continuing with the supply focus this morning, can you just tell us within your major markets, which markets might see less supply growth in 2018 relative to 2017?

Most of them. 2018 is a quite a bit of a relief. I mean across the country, not necessarily so, but across our portfolio, we're looking at -- it's probably about half of what 2017 is going to be. And it varies by market, so if -- call it, 3.8 in 2017, about 1.9 in 2018.

And based on what's in the ground right now or being discussed, is there a trend that you would think would carry-forward in the 2019? In other words, even more markets have hit their peak and are on the downside. Is that fair?

Yes. I would say across the country that is true. Not just in our portfolio that you can certainly bank on everything that's in the ground obviously. But the attrition rate for development starting right now and things that we deliver in 2019 has been relatively high, perhaps as high as 50%. So, it does appear -- it does appear that in most market 2019 will be quite a bit better than 2018.

Okay. That's helpful. Thank you. Appreciate it.

Thank you. Mr. Bierkan there are no further questions at this time. I'd like to turn the floor back to you for final remarks.

All right. I want to thank everyone for joining us this morning and we look forward to speaking to you again just a couple months down the road at the end of the first quarter as we provide more details on that quarter and perhaps a little bit more visibility on the rest of the year. We'll talk to you then.

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