This is the conference operator. Welcome to the RLJ Lodging Trust Second Quarter 2019 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 Treasurer and Vice President of Finance. Please go ahead.

Thank you, operator. Good morning and welcome to RLJ Lodging Trust's 2019 second quarter earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer will discuss key highlights for the quarter and provide an update on the recent strategic initiatives; 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. Finally, in order to assist investors with bridging to our prior guidance, we included tables in last night's press release to adjust our second quarter and 2019 outlook for the sale of 41 hotels. I will now turn the call over to Leslie.

Thanks Nikhil. Good morning everyone and thank you for joining us. We had a very successful and active second quarter where we achieved not only solid operating results, but also made meaningful progress on our key objectives. For the quarter, we delivered operating results in line with our expectations with RevPAR growth of 0.7%. In terms of our other priorities, we remain focused on selling noncore assets, maintaining a strong balance sheet, and deploying investment capital accretively. Since our last call, we achieved several milestones. We completed the sale of Kingston Plantation for $156 million at an accretive EBITDA multiple. We entered into an agreement to sell two portfolios of non-core legacy RLJ assets totaling 39 hotels for approximately $490 million. We positioned ourselves to unlock significant value by entering into an agreement to terminate our NOI guarantee with Wyndham. And we also accretively repurchased over 2.5 million shares with disposition proceeds. In aggregate, these transformational transactions significantly improved our portfolio quality, enhanced our growth profile, unlocked meaningful embedded value, and position us for incremental growth and NAV appreciation over time. In terms of dispositions during the quarter, we sold the two Kingston hotels in Myrtle Beach at an accretive multiple of 12.9 times. Our team was able to successfully unlock incremental value by taking time to simplify the structure of the asset and to package the development opportunities for potential buyers. In the end these steps enabled us to run a competitive process and achieve attractive pricing for this asset. We also opportunistically entered into two contracts to sell two portfolios with a total of 39 assets for approximately $490 million, which represents an accretive EBITDA multiple of 10.6 times. The first portfolio of 21 hotels closed in late June and the second portfolio of 18 hotels is currently…

Thanks Leslie. Before discussing our second quarter results, please note the following. First, our second quarter and year-to-date operating results include our 127 owned hotels as of June 30th, which excludes Kingston Plantation and the portfolio of 21 hotels that we recently sold. Second, our full year outlook includes our 109 owned hotels after the sale of the 18-hotel portfolio. And finally, corporate adjusted EBITDA and FFO only include the operating results for RLJ's ownership period. With these housekeeping items out of the way, we are pleased to report that second quarter RevPAR grew 0.7%, which was driven by a 0.3% increase in demand and 0.4% increase in rate. May was our strongest month of the quarter with 1.8% RevPAR growth. RevPAR was essentially flat in April and June at plus 0.4% and negative 0.1%, respectively. It is notable that our portfolio outperformed upscale hotels and gained 110 basis points of market share during the quarter. Excluding the 18 hotels under contract, our second quarter RevPAR growth was 1.1%, representing a 40 basis point improvement. Total revenue grew 1.1% during the quarter, which exceeded our RevPAR growth due to a 10% increase in other departmental revenues, which was driven by the continued success of recent parking and other revenue initiatives. From a segmentation standpoint, our second quarter benefited from a 2.2% increase in group revenues, which was primarily driven by our hotels in Northern California and Louisville where group revenues increased 20% and 27%, respectively. That said, the group segment only represented approximately 18.5% of our second quarter room revenues. The strong group results were partially offset by a slight decline in transient revenues, which was impacted by a decline in government demand. However, we successfully backfilled the majority of the lost transient demand with incremental contract business. Turning to…

Thanks, Sean. As we sit today, RLJ is ideally positioned with a portfolio rooms-oriented, high margin, premium branded hotels in growth-oriented markets. We have achieved this positioning by outlining a thoughtful strategy and meticulously executing on our objectives including selling non-core assets and stressing our balance sheet. With the recent transactions not only have we enhanced our portfolio quality, but we have also created meaningful investment capacity to pursue highly accretive capital allocation opportunities. As we move forward, we have multiple levers to create value such as ROI projects, conversion opportunities and share buybacks. We are truly pleased with our progress and today, we are uniquely positioned to drive significant NAV appreciation long-term. We will now open the line for Q&A. Operator?

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

Good morning, everyone. Can you talk about the flexibility you have on the capital allocation plan with the stock currently yielding around 8%? Is that one of the top priorities right now on the buyback?

Hey, Wes, thank you. Wes, obviously, with $1 billion of capacity, we have a lot of optionality. What that allows us to do is not allow these things to be mutually exclusive. So we can do buybacks and also continue to invest in our portfolio. But clearly buybacks given where we are trading today are the obvious choice from a prioritization perspective. And at these levels we do intend to continue to be active.

Okay. And then when we look at the $150 million to $200 million of ROI spend, how much of that is tilted towards the legacy FelCor portfolio?

Hey, Wes, it's Sean. It's actually a mix between legacy FelCor as well as legacy RLJ portfolio. I think when you look at the repositionings that $150 million to $200 million does exclude any capital that we think we're going to have to invest into the Wyndham portfolio as part of the conversions. But it does include the conversion of Mandalay Beach which is a big chunk of that conversion. But I wouldn't say that it's really slanted towards any one of the two portfolios.

Okay. And can you clarify the 20 hotels that could potentially convert or have the franchise agreements, changing over the next few years does that include the eight Wyndhams?

It does, Wes.

Okay. Thank you.

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

Good morning everyone. Could you provide just a little bit more background on the dispositions the process there? I know you were targeting $100 million to $200 million, but maybe how both of the deals came about and then just how you thought about pricing per-key pricing valuation of those portfolios versus what's remaining today for RLJ? That'd be helpful.

So at the beginning of the year we outlined our key priorities and outlined our strategy. And one of our priorities this year was to sell $100 million to $200 million of non-core assets. At that time we obviously had thought about which pool of assets would potentially be assets that we'd be looking to sell and we started the process from a marketing perspective. And the deals really came about Mike because we through that process identified some buyers who really -- their investment needs really matched the types of assets we were selling. Again these are slow-growth low-RevPAR assets that had capital needs and so finding the right buyer was important. And that really allowed us to upsize it. And from a pricing perspective we think the pricing reflects the profile of these assets the market dynamics and the capital needs. And any time that we sell an asset we're looking to maximize that relevant asset and I think that's what we did here.

And then just back to the Wyndham deal, can you provide any initial thoughts on maybe how much CapEx you might have to spend either with or without potential for key money? And then what sort of disruption should we think about in 2020 as you guys renovate and reposition those hotels in terms of RevPAR and maybe margin impact?

Mike those are great questions, but it's too early for us to be able to provide that level of detail. Please know that this is a high priority for us and that we're working really hard. We're working with the brands to understand what's available, what options would we choose and underwrite that. And we look forward to being able to provide a wholesome update on our next call as we get more clarity around which branding and the timing and we'll be able to provide some color on that?

And Mike just to bolt on to Leslie's comment; I think the one thing that I would focus you to think about on the $35 million termination payment. That is simply an acceleration of the guarantees that we would have gotten otherwise under the NOI guarantee. And so although the optics for EBITDA are a reduction of the 2021 and 2022 EBITDA we are getting paid that upfront and we'll have that capital with which to create value. And so I think that's an important way to think about it.

Got it, that’s helpful. And it's fair to assume that of these eight hotels, you're going to keep all of them? Are any plans to potentially sell 1 or 2?

Mike, I would never say never, but one of the jewels of the merger transaction was this pool of assets. We understood how valuable the real estate is and so the growth profile of these assets based upon what we think we can do from a topline perspective is a key cornerstone of our growth profile going forward. Additionally, we believe there's tremendous NAV appreciation in these assets. We think the cap rate that we'll be able to get post-renovation and post-conversion would be substantially different than what we can get today. I would tell you that lots of people understand the value of these assets because the inbound calls that we've gotten on this are tremendous. There hasn't been an executive on our team that hasn’t received several calls because they understand how these assets and where these assets are located is prime real estate. And so, we think it's a key component for us going forward. But I would never say never about possibly selling an asset.

That’s all for me. Thank you.

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

Hi good morning. The asset sale seemed to indicate a strong buyer interest in this luxurious assets, is there any appetite on your part to sell additional assets or are you pretty much done there?

Anthony these transactions represent the heavy lifting that we wanted to do to reshape our portfolio and the vast majority of our EBITDA is concentrated in assets that is aligned with our long-term vision. That said, when you have a 100-asset portfolio, we are going to be an active portfolio manager. And I would say that on a go-forward basis that we'll be more opportunistic with our sales is the way I would sort of think about it.

Got it. Thanks. And Sean, you mentioned the dividend. As the asset sales has happened coverage has come down a bit. How do you view dividend coverage? Are you comfortable with where you are in terms of coverage? And is the dividend kind of right-sized at the current level?

Sure, Anthony. I'll start with stating the fact that the divided -- maintaining the dividend is a very important part of our overall story at RLJ. And so when we think about the dividends and the loss of EBITDA from the sales, you have to look at the other side of that equation, which is the investment capacity, which we've raised as a result of these sales. And our ability to redeploy that in a way that helps take the dividend coverage back down to where it was before. There are both short-term and medium- to long-term tools that we have. The short-term tool that we're going to have is through incremental share repurchases, which will have an immediate 8% yield on that capital from a dividend perspective. The medium- to longer-term tools that we're going to deploy are the ROI initiatives, the conversions the brand repositionings et cetera to replace EBITDA as well. And with $1 billion of investment capacity that's a tremendous amount of embedded EBITDA that's going to sit within our portfolio as we redeploy.

Got it. Thank you.

Thank you. Our next question comes from the line of Dory Kastone [ph] with Wells Fargo. Please proceed with your question.

Good morning everyone.

Good morning.

Can you talk to the operations of the Knick since you acquired FelCor? And what are you seeing in the higher-end New York City transaction market?

On the operations side Dory, we're very pleased with the performance so far. As you know the Knick had a great first quarter and even year-to-date we're at 6.3% RevPAR. So we've been very pleased with the performance. In fact, even international demand was up at the Knickerbocker as we continued to ramp up the hotel and it's up literally 23% overall and 9% of our overall portfolio in New York. And when we look at the hotel, we're very pleased with the continuation of growth. We have high expectations in the back end of the year as well. So we're pleased with what the Knick has been doing. On an overall market basis, I'll kick that back over to Leslie in regards to New York in general on the transaction side.

Yes. I would say that on the transaction side, obviously for assets that have stories in New York and that are iconic there's interest in it, obviously you have to have the right buyer associated with that, high net worth individuals family offices and people who are looking past yield and are focused on long-term real estate value in New York.

Okay. Thank you.

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

Hi, good morning everyone. Just curious how quickly we should think about you redeploying some of this available dry powder and if you could ballpark maybe your ROI and redevelopment spend targets for 2020?

Sure, Austin. I think on the short-term, you'd expect us certainly on the share repurchases to continue to be active for the balance of the year. We have $206 million remaining on our share authorization program. You should expect us to be methodical and systematic about how we redeploy that capital within share repurchases. For 2020 and beyond I think what you should expect on the ROI initiatives, what we've said is there's $150 million to $200 million of optionality there that we expect to invest over the next two to three years. I think on the Wyndham portfolio as well with potential conversions, we expect those conversions to happen over phases over the next three years. And so I think what you'd expect is that we're going to redeploy that over time. We don't have a set target for 2020 or even 2019. I think what you should expect us to do is be opportunistic redeploying that capital based on what the market offers us, but you should also expect us to be aggressive to the extent that the market presents those sorts of options to us. But we're going to be focused on deploying that capital on the most accretive option possible.

Appreciate that. And then what percent of the portfolio would you say remaining has similar characteristics to the assets you've recently sold in the two legacy asset portfolios? And just thoughts around continuing to sell those?

Look I would say Austin as I said before, the vast majority of our EBITDA is concentrated in the asset set that fit our long-term aspirations for our portfolio. So there's a handful of assets left, but it's not meaningful.

Got it. And just last one for me. Going back to the dividend I guess longer-term how do we think about a target payout ratio and how you think about setting that over time?

So the payout ratio is one of the variables with which we set the dividends. The other is you want to make sure that we have a competitive dividend to our peers on a yield basis. We also as a REIT have to pay out essentially 90%, but really 100% of our taxable income and so all those factors come in. I think we believe that our dividend is an important part of the RLJ story, as I articulated before, and so I think we think maintaining the dividend and protecting the dividend is core to our offering to the shareholders and a way for us to return capital to the shareholders.

Thank you.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

Just a question on south Florida and Ft. Lauderdale elevated sales there and in West Palm Beach. I think that with the Miami Convention Center reopening that helped drive incremental demand on a sustained basis, are the dispositions a function of just that needing to be in the heart of demand? Or are you trying to avoid supply? I guess what's the rationale there? Because I thought south Florida was the strong market and market you guys liked.

Yeah. I mean, look I would say that, you're spot-on in terms of the key driver. Our goal is to own assets that are premium branded, rooms-oriented high-margin, hotels located in the heart of demand. And these assets have moved away from that definition and so we look to sell those assets. And you saw that moving away from that thesis and the function of how the growth profile has been slow and the RevPAR isn't where we want it to be in terms of approaching a full-service type asset with the flex service margins. And Tom can talk about the market profile.

Yeah. So a little bit of color around Miami, we're excited about 2020 as you know. The Super Bowl is coming there. And the convention center's ramping up. It'll be over roughly 200,000 rooms which is a good starting point as the convention center opens up and has opportunity to get volume. The other thing about south Florida as Leslie spoke about heart of demand Key West has been a great market for us now. This is the first time all rooms are back open in Key West and we're getting some great RevPAR results down there at 6.9 in the second quarter. And then the other hotels that we remain to have are our Embassy Suites in Miami Lauderdale as well as Deerfield Beach which came with the FelCor transaction. And those hotels have great locations in heart of demand on the beach in Deerfield right on 17th Street near the marina, and then Miami near the airport. So we're feeling positive about the hotels that we have and continue to reinvest in those opportunities.

Okay. Thanks. And then just going back to a question I think Austin was getting at maybe a different way the assets you sold obviously in these two portfolios had a lot of associated CapEx the buyer would need to pay. Just wondering was your remaining I think 109 assets, how many of those have that elevated CapEx requirement? Just thinking about appropriate cap rates for the valuation or the NAV?

Obviously we chose not to allocate capital towards those assets because we didn't think that was the right capital allocation for us. But the assets that we hold today we've chosen to invest in those assets and put the capital towards it. So I would say again, with the vast majority of our EBITDA concentrated in assets that we own those are the assets that we have been investing in. There is a handful of assets that still fit the slow-growth low-RevPAR profile, but the vast majority of what we have today is concentrated in what we want to own and is in line with our vision.

Okay. And last one, just going back to the Wyndham just in your initial thoughts would you care to share of the potential type of strategy there would it be independent soft brands? And then would you expect just given the nature of the repositioning would you expect those to be shut down for periods of time?

I would say that, we're looking at all brand options including independent for these assets. We're going to run the analysis and determine what's the best option for the relevant asset? And in terms of the conversions we would expect to operate them while we convert.

One of the things I would add on too is our partnership with Wyndham is very important to us and the field and regional teams have been doing a great job in maximizing performance at this point in time. And this strictly is opportunities for index opportunities and mix changes. But I wanted to make sure I put that on record. Thanks guys.

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

Hey, good morning. Thank you. Just a couple of follow-up questions from me. Can you just remind us where you're comfortable on the leverage side of things and how you guys are thinking about leverage in relation to your outlook for the industry and some of the uses of capital as well?

Sure, Tyler. I mean, our long-term goal for net debt to EBITDA is approximately four times. With these dispositions we have – we are about a turn below that. We think maintaining some incremental balance sheet capacity at this stage of the cycle particularly in light of some recent headwinds it feels like a prudent thing to do for our shareholders. And we also think that there'll be good opportunities with which to deploy that capital share repurchases being the most front and center today. But we're very comfortable at our leverage levels today. When we think about leverage, we think about leverage over an entire cycle and we peg our leverage at any one point in time to what the leverage would be and what we would view as a relatively draconian downturn scenario. In other words we stress-test our leverage at all times and wanting to make sure that if in fact that a draconian downturn happened that our balance sheet would be well-positioned to not only survive, but thrive during a downturn, and create value for our shareholders most likely through returning capital through share repurchases. So, we're very comfortable where we are today and expect to continue to be opportunistic.

Okay, great. That's helpful. And then how about on the preferred that's outstanding? Do you guys have any potential thoughts or maybe creative ways to take that out?

Sure. That's the preferreds are not callable under the contract. I think that is an instrument that is relatively expensive relative to our debt and something that we're going to continue to monitor, but when we look at opportunities to deploy capital on the balance sheet that is certainly one of them. There are some -- I would be remiss not to note that we have senior debt that we have a call option for mid next year that based on where that coupon is, it's 6% versus where we could borrow today will create incremental FFO for our shareholders of over $10 million a year. And so that's another tool that we can use that sort of -- that there's already a vehicle built into that instrument. But the preferreds are definitely one that we would also think about Tyler.

Okay. And then last question from me. Any update on supply outlook how that's changed with the 109 hotels that you have now versus last quarter when you still had 127?

Yeah, Tyler. There's a couple ways to kind of look at supply. You can look at it just on an absolute basis. And what I would say if we just look at kind of growth within our markets, it has improved with the dispositions. But the other way to look at supply is, look at where our assets are located relative to that supply. And I would say that from that perspective, our positioning has moved and improved dramatically. Let's take Austin for example. Prior to dispositions about 40% of our EBITDA was coming out of the CBD. Today 70% of our EBITDA is coming out of the CBD. The RevPAR in that market what we reported was 1.4%. If you take out the assets that we have pending, the RevPAR growth would have been 3.5%. Louisville's another example of that where we sold the outlying assets and we reported RevPAR growth of 19 -- sorry, 12%. Excluding those assets, it would have been up 19%, because we moved 100% of our EBITDA into the CBD. And so again it's not just looking at absolute percentages, but also looking at where our assets are located to that supply, but more importantly, where is it located relative to demand. And again, our thesis is making sure that the assets we hold are located in the heart of demand.

Okay. Great. That's all for me. Thank you.

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

Hi. Good morning everybody. I think most of my questions have been asked and answered, but just one quick one for Sean or Leslie. Sean I think in the prepared remarks, you mentioned something about the forward guidance or the dispositions enhanced your growth profile and allowed you to maintain your forward guidance. If I heard that correctly, can you just give any sense of, sort of, how much of a tailwind some of the dispositions or some of these lower-growth markets sort of would have been to the portfolio? And that’s it for me.

Yes. Shaun, what I would say is that, overall, we're really pleased with our ability to hold our guidance in an otherwise choppy environment for lodging. And the dispositions really was a primary driver in our ability to hold that guidance. If we had not achieved the dispositions, we probably would have moved the midpoint by 50 basis points plus or minus, not dissimilar from our peers. At the same token, I also want to say, that our guidance does reflect the softness -- here, it is implying flat. So our ability to hold is definitely driven by the dispositions which we believe further illustrates the strategic benefit of what we did. But at the same token, we believe, our guidance is achievable and it reflects the softness that we're seeing on the business transient side.

And to build on to a couple -- to provide a of data points to Leslie's comments, so on the first half of the year, the removal of these 39 assets added roughly 100 basis points to our RevPAR growth for the first half of the year. So our 109-hotel portfolio generated 1.8% RevPAR growth for the first half of the year. And so, when you look historically, that's pretty compelling. When you look in 2018 it was about 50 basis points growth enhancement from the removal of those assets. And so, I think, that's another data point. Forward-looking, on the deck that we published last night, which we'd encourage everybody to spend time with, we put a marker out there, which we think our long-term growth will be enhanced by 50 basis points from the removal of these assets on a go-forward basis. And so, I think, they're data points that just help reaffirm some of the comments that Leslie made.

Thanks for that. That's a lot of color and very helpful. Just to be like 100% clear then, because of the way you guys do it and you go back and restate on the pro forma basis, this is purely from these hotels generating lower RevPAR growth. There's nothing in the forward forecast that would be just due to mix shift from lower absolute dollar RevPAR and keeping higher dollar RevPAR. Am I understanding that correctly?

That's correct. From a forward-looking basis standpoint, on these hotels, we took out all the sold hotels for our full year guidance. But to echo Leslie's comment, we are sober on the trends that we see for the back half of the year, particularly business transient. And so, the assumptions that are underlying our back half of the year guidance, which is flat RevPAR, includes a softer business transient environment, but doesn't really change our thesis for what markets within our portfolio we believe are going to outperform, which Northern California and Louisville are big drivers of that, as well as the other segments. I mean, group continues to perform well for us as well as the industry. And our contract business has been a strong performer for us as well. And we expect that to continue particularly as we think about mix shifting away if business transient trends continue.

I get it. Thank you, both.

Thank you. Ladies and gentlemen we have come to the end of our time allowed for questions. I'll turn the floor back to Ms. Hale for any final comments.

Thank you, Operator. As you all can tell, we've been extremely busy this quarter, successfully executing on our key priorities and we wanted to give you a comprehensive update today. I want to take a moment to thank the entire RLJ team for their relentless effort and unwavering commitment. Our success would not have been possible without the many contributions from them. We are very pleased with all that we've accomplished and we appreciate the ongoing support of our investors. Enjoy the rest of your summer everyone and we look forward to reporting on the continued progress in the third quarter.

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