Welcome to the RLJ Lodging Trust Fourth Quarter and Year End 2018 Earnings Conference 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] I would now like to turn the conference over to Nikhil Bhalla, RLJ's Vice President of Finance. Please go ahead.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust 2018 fourth quarter and year end earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter and the year; Sean Mahoney, our Executive Vice President and Chief Financial Officer will discuss the Company's operational and financial results. 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-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 from last night. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone and thank you for joining us. By all measures, 2018 was a transformational year for RLJ, as we executed on the thoughtful plan, we have laid out to unlock value in our portfolio, strengthen our balance sheet and position our Company for long-term growth. We successfully achieved all of our key priorities for the year. In fact, we not only met or exceeded our expectations on each of these objectives, but we also completed them ahead of schedule. I'm pleased to report that we sold seven assets for over $530 million at a highly accretive combined multiple of 16.5 times, exceeding our goal of $200 million to $400 million of incremental proceeds and our targeted average multiple of 14 times. We redeployed the sales proceeds to accretively repay $635 million of debt and exceeded our target of $500 million. We ended the year with a net debt to EBITDA ratio of 3.7 times ahead of our target of 4 times. We realized $22 million in G&A synergies on the merger. We successfully completed our 2018 capital program on time and on budget. And finally, we took advantage of the dislocation in our stock price by redeploying the net proceeds from Fisherman's Wharf, which was sold for close to a 19 times multiple into RLJ shares at approximately 10 times. In addition to accomplishing these objectives, we rounded out our team this year. I am proud of the tremendous work our team has done to position the combined platform, to create value for our shareholders long-term. Operationally, 2018 was a transitional year for us in part due to the renovations we undertook in key markets position us for growth in 2019 and beyond. In the fourth quarter, our operating results performed in line with our expectation.…

Thanks, Leslie. We are pleased that our fourth quarter results were in line with our expectations. RevPAR in the quarter contracted by 3%, which was driven by a 3.2% decline in occupancy, partially offset by a 0.2% increase in ADR. For the year, RevPAR declined 0.8%. As a reminder, our fourth quarter results were impacted by several transitory items, including our Houston, South Florida and Austin markets face difficult prior year, Hurricane Harvey and Irma comps that impacted our RevPAR growth by approximately 180 basis points. We invested significant capital into our portfolio during the fourth quarter including renovations of the San Francisco Marriott, Tampa Embassy Suites, Louisville Marriott, Embassy Suites SFO and the Embassy Suites Downey. In total, renovation disruption impacted our fourth quarter RevPAR growth by approximately 115 basis points, which was consistent with our expectations. And the San Francisco Marriott was negatively impacted by the union strike during the fourth quarter. Additionally, our Austin, Denver, and Louisville markets continued to face headwinds from new supply. From a segmentation standpoint, our fourth quarter transient slightly underperformed group. The transient softness was partly driven by non-repeating prior year FEMA business in Houston, South Florida, and Austin. Our full-year margins of 32.8% exceeded the high end of our guidance range, due to the success of aggressive asset management strategies. Hotel EBITDA margins contracted 150 basis points, which was impacted by approximately 60 basis points from increased insurance and property taxes, which was in line with our expectations at the beginning of the year and includes, the Prop 13 impact on our California FelCor hotels. Additionally, our margins were impacted by approximately 55 basis points from renovation disruption. Excluding these transitory items, our full year margin contraction was held to only 34 basis points. Our fourth quarter margins contracted 221 basis…

Thanks, Sean. Now, before we turn the call over for Q&A, I want to take a moment to talk about our long-term aspiration for RLJ. By achieving our priorities in 2018, we made meaningful progress towards our long-term objective of owning a portfolio that will generate significant NAV appreciation over time. We believe that achieving this appreciation comes through owning premium branded, rooms-oriented hotels with high margins that are located in the heart of demand. These hotels have absolute RevPARs that approach that of full service hotels and have an attractive margin profile that is typical of select service hotels. We believe that these types of hotels will achieve stronger long-term growth, generate significant free cash flow and a resilient. The majority of our current portfolio is aligned with our portfolio vision and our expanded platform provides us with the optionality to further pursue this vision. We will continue to evaluate opportunities to curate and refine our portfolio over time, which may include repositioning of assets, ROI opportunities and selling assets that do not conform to our vision in order to further unlock the embedded value within our portfolio. Thank you. And this concludes our prepared remarks. We will now open up the line for Q&A.

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.

Hi, good morning, everyone. Just curious after accounting for the FelCor sales, and the $100 million to $200 million of opportunistic sales from legacy RL J assets, how much investment capacity does that give you guys versus your leverage target to be opportunistic with new investments? And then could you just rank the near-term capital allocation opportunities as we sit here today?

Hi, Ausitn, this is Sean. From an investment capacity standpoint, we believe that those transactions and assuming we're at the high end of that range, takes our net debt to EBITDA down to close to three times from where it is today at 3.7 times, which obviously provides us significant investment capacity. From a capital allocation standpoint, we're obviously going to evaluate all of our options from a capital allocation, from anything, from share repurchases, to ROI initiatives, to investing in the portfolio, et cetera. And so we believe from a capital allocation perspective, we're going to make the right decision that creates the most NAV value at that time based on how we view our alternatives. But we think that executing our strategy, continuing the dispositions will afford us that optionality.

Thanks. Appreciate the detail there, Sean. And then we have a good sense of timing on the sales of the remaining FelCor core assets based on the targets you've put out there. But can you give us a sense on the timing around the sale of the $100 million to $200 million? And how we should think about valuation? And are these going to be more one-offs or are you considering smaller portfolios?

So, Austin that target is for the year and we believe that the markets today supports single assets and small portfolios and so we would sort of see the execution in that in small chunks there. And I would say from a pricing perspective, obviously these assets that we're looking to sell from a legacy RLJ portfolio are very different profile than the assets we sold last year. Our goal here is to maximize the value of these relative assets. When we sell them and keep in mind that the strategic benefit of selling these assets that's going to improve our operating metrics as well as allow us to recycle the capital.

And then just last one from me. You've talked a lot about long-term ROI opportunities. You've identified within the FelCor portfolio. Within that $90 million to $110 million of capital expenditures on renovations this year, how much of that is just the typical renovation, soft goods renovation versus maybe something that's a little more transformational?

Yes, I would say that our split this year is not that is similar to last year, Austin. We have about 60% of our capital this year that is in, when we call the reimaging of the Embassy Suites which we view as an ROI projects and also some specific ROI projects as well.

Right. Thanks for taking the questions.

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

Good morning, everyone. Just following up on the CapEx comments that -- that range you gave is just for renovations, is that correct and how should we think about the incremental dollars for maintenance CapEx or total spend in 2019?

So, Mike, our maintenance CapEx is generally covered by our reserve, which is about 4% and that generally covers it, that's what we think about it.

So just to be clear, total CapEx spend in 2019 will be higher than your renovation range, right? That's not the total spend that you've provided?

That's right, Mike. The $90 million to $110 million is our renovation capital for 2019 and that's concentrated as well as we mentioned in assets such as our Hilton Garden Inn, Emeryville, our Embassy Suites in Milpitas, as well as Buckhead and a couple of our hotels. But we feel good about the prospects for those assets come out of renovation and so we're allocating our capital dollars to where we believe we are going to get the returns.

Got it. And then just back to the our ROI projects. Could you give us a sense of kind of how you're thinking about unlevered returns on those investments versus maybe potential acquisition opportunities? I know you have mentioned the acquisitions as a capital allocation priority but kind of what's the delta that you see today versus where things are trading versus where you can invest in your portfolio?

Mike, I think as we think about ROI opportunities, we tend to underwrite to a low double-digit unlevered IRR, based on the opportunities, obviously we assess that IRR will fluctuate depending on the risk of the project. But relative to where we're seeing assets price today, we think that internal returns are going to be higher than we could get based on buying hotel in the public markets today.

One example of that, Mike, is that we are looking at adding rooms in our Hilton Garden Inn in Emeryville, on the top floor used to be meeting space that was underutilized, we're adding 23 keys. I mean if you can imagine in a high occupancy market, adding those as keys is pretty accretive and immediately from a per key value, adds value, so those are the types of ROI projects that we are seeing in our portfolio.

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

Hi, good morning, everyone. Just a question on Austin, Denver and Houston. As you always talk about those market as a headwind for a while and for years, when do you think those markets will be less of a headwind? I know the supply pipeline and if you're still pretty high, so when will be maybe less of a drag you think?

Yes, I think that, what we still believe in Denver and Austin long-term, both of those markets are two of the top five fastest growing metro markets. And if you look at the demand pattern and demand is predicted to be up 7% in Denver this year and up 5.5% in Austin. The challenge is that does where there's demand there is supply, Anthony. And so the market needs to absorb that. I think what we also like to do is, we look at combing our portfolio. We have to look at where we are relative to that demand. And so, I think it's also a function of some of the sub-markets specifically relative to the overall market. We believe in Austin and Denver long term. Denver is going through a rocky migration and seeing tremendous influx in business, and Austin is expanding its tech community. So that's why the demand is there, and that's why supply is there. So we believe that ultimately it will be able to absorb that. But we also have to look at our positioning relative to that demand.

Got it. Thanks. So I do ask my second question. I guess you imply that you're going to be closer to demand generators in your markets. Does that imply more urban or more in-town or suburban, or is that a market-by-market exercise, talk about maybe areas that you may want to lighten your exposure within some of these markets?

Yes, and I would say that you spot on, it would imply that we want to be urban centric, we want to be in the top 25 markets. And I would say that, there is no market that we want to exit. But there are markets where we want to reposition ourselves. And I think Austin and Denver would be examples of that.

Got it. And I know you're not focused on acquisitions right now. But are there markets where you're not in, that you would like to be in long-term?

You know, we would like to expand our footprint in Boston and San Diego, for example.

Okay. All right. Great. Thank you.

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

Hi. Good morning everyone. When you look at the portfolio, how many conversion opportunities do you see, and can you start any this year?

Wes, you got cut off at the end. What was the last part of your question?

For the conversion opportunities in the portfolio, could you start any this year and how many do you see in the entire portfolio?

We are in early stages of outlining the conversions. We have the green light for the brand on a few of them. We have right now identified at least three, in terms of what we know we're going to do, two of those are criteria, there's another five to seven assets that we're working on the conversion strategy, Wes.

Okay. And then when we look at the dispositions of the non-core RLJ legacy assets, will this year be the high watermark for the disposition program there, then maybe going forward does have fine tuning of the portfolio?

Wes, I think it's a great question. Last year we were focused on selling non-core FelCor assets. The sale of the legacy RLJ assets is consistent with our portfolio evolution. As I mentioned in my prepared remarks, the vast majority of our portfolio is aligned with a long-term vision. And the sale of the $100 million to $200 million of assets is just consistent with execution of that, and our ability to recycle out of assets that don't fit. When we think about our portfolio long term, we're going to continue to curate, refine our portfolio and look at assets that don't fit, but also look at assets kind of skating to where the puck is going, in a sense of identifying what asset may not fit us two years down the road. So we can get ahead of that as well. So I think that's what you do from a portfolio management perspective, it's kind of comio portfolio on an ongoing basis.

Okay. And then last one from me. When we look at your non-top 10 markets this year, do you think those will outperform the top 10 markets?

I think that they're going to perform well toward the high-end of our range, Wes. I think they can perform well.

Fantastic. That's all from me. Thank you.

[Operator Instructions] Our next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed with your question.

Yes, good morning. I'm just curious in Louisville. Can you talk about the inflection that you see there? Is that a situation where you think that the market is flipping positive or do you see yourself taking share in a market that ultimately remains a little soft, is this the benefit you have from renovation comps?

Yes, it's a good question. We spend a lot of time in Louisville and the hotel looks great, after the renovation. In fact what Leslie had hinted too in her remarks was, we're at a great position from a Group standpoint with our pace, almost 89% on the books. It's a significant increase over last year, but it should be, because of the renovation. And from a normalized standpoint, we're up about 7% to 10% and ADRs double digits compared to what it used to be previously. So we think we're in a great spot. Couple of things happening in Louisville is with our location next to the Convention Center, and with them expanding by about 50,000 square feet, they really changed the dynamics of how we can sell our hotel because of its Convention Center relationship next door. For instance, the Exhibit Hall is the immediate thing that when you cross over from our hotel and that allows us to sell both of our ballrooms and do two groups versus maybe one in the past compared to what we had. So we're in a great position from the citywide standpoint. In addition to that, when we renovate our meeting space, there is a significant amount of galas that take place on the catering side. So we are going to be increasing the amount of business that we're doing, because of the way our meeting space looks and the lobby. Some of the things that are important to Louisville is what type of bourbon do you like to drink. So we actually expanded our lobby bar, we actually have a opportunity to have a speak easy to have memberships. So we think we're positioned perfectly in regards to the local marketplace with what people are looking for when they go to Louisville.

And then, Jeff, just to add-on to Tom's remarks, I mean we think about our 2019 expectations for Louisville, where we incorporated low double-digit RevPAR growth for that total market within our portfolio. We expect our CBD asset to outperform our suburban assets. But when it all rolls up, it's in low double-digit. So we feel pretty bullish for that market as a catalyst for us in 2019.

And maybe just a follow-up on dispositions, you guys gave a lot of disclosure there that was helpful. I just want to clarify, assuming no unforeseen outcomes, do you think you'll be able to complete and close all the dispositions you referenced in the RLJ and FelCor portfolios in 2019? Or is there something about how you're maybe laddering, bringing them to market that do you think closings could actually extend into early next year?

As it relates to the FelCor assets, we absolutely expect it to close out this year. To your question, on the RLJ assets, I would expect to close a number of assets within the range that we gave.

Okay. And may be on the FelCor assets, those three are you able to share with us maybe just collectively with those three contributed to EBITDA in 2018, just to help folks with modeling?

Yes, it's about $25 million.

Okay, great. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Leslie Hale for closing remarks.

Thank you for your time today everyone. We're excited about the opportunities in front of us and we look forward to continuing to report on our progress throughout the year, as we execute on our key priorities. Thank you and have a good weekend.

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