RLJ’s Q1 buoyed by NorCal, Louisville, Atlanta assets
RLJ’s Q1 buoyed by NorCal, Louisville, Atlanta assets
10 MAY 2019 7:40 AM

Despite headwinds, first-quarter performance was largely better than expected for RLJ Lodging Trust, driven by strong demand in markets with citywide events.

BETHESDA, Maryland—A softer first quarter for many of RLJ Lodging Trust’s top markets was more than made up for by the real estate investment trust’s assets in Northern California, Louisville and Atlanta, executives said.

RLJ reported revenue per available room across its portfolio grew 1.3% year-over-year in the first quarter, lifted by gains in its Northern California (+15.5% RevPAR) and Louisville (+13.5% RevPAR) markets. Atlanta, which typically is not a top-10 market for RLJ, recorded a 20.9% increase in RevPAR as a result of demand from Super Bowl LIII.

In Northern California, RLJ’s six San Francisco-area hotels reported RevPAR growth of approximately 21% as a result of “record citywide (events), combined with strong corporate and leisure demand,” according to President and CEO Leslie Hale.

Performance in Louisville was boosted in large part by the post-renovation ramp-up of the Marriott Louisville Downtown, which is located near the newly renovated Kentucky International Convention Center and “is attracting significant demand from meeting planners,” Hale said on a call with analysts to discuss the company’s quarterly earnings.

The company saw RevPAR declines in five of its top 10 markets, led by a 10.4% year-over-year drop in Denver, where occupancy was down 8.4% and average daily rate was down 2.1% year over year for RLJ properties, according to the company’s quarterly earnings news release.

Headwinds dragging down performance in Denver and other top-10 markets such as Austin, New York and Washington, D.C., included a federal government shutdown in Q1, as well as disruption due to renovations at the company’s hotels in some of those markets, executives said.

“While the overall economy expanded at a robust clip in the first quarter, components of the economy that closely correlate to our industry, such as business and consumer spending, decelerated,” Hale said.

“At the same time, the lodging industry was impacted by the government shutdown during the quarter,” which the company said had a 25-basis-point impact on overall performance.

Renovations contributed approximately 60 basis points of disruption overall, said Sean Mahoney , EVP, CFO and treasurer for the company.

Those renovations include two hotels in Southern California, where the company reported a 4.4% decline in RevPAR. Hale said the company decided to take advantage of lower compression in the market, due to a soft citywide events calendar, to conduct renovations, but “although the renovations will be ongoing, we expect lower disruption going forward, and we expect our performance to improve.”

Disposition of non-core assets
Executives said RLJ continues to be focused on selling off the remaining non-core assets that it acquired as part of FelCor Lodging Trust, with significant progress on pending transactions, though no sales were completed in the first quarter.

The sale of one of those assets, The Knickerbocker Hotel in New York City, is “taking more time than originally expected,” Hale admitted. “That being said, we are an experienced seller in New York and are encouraged by the market’s interest in this unique asset,” she said.

Caption: RLJ Lodging Trust continues to pursue disposition of assets it picked up in its 2017 acquisition of FelCor Lodging Trust, including The Knickerbocker Hotel in New York City’s Times Square. (Photo: The Knickerbocker)

Hale said the company has the advantage of being able to take some time to maximize the return on its asset disposition.

“We are absolutely pushing on transacting on all of the remaining FelCor assets, but more importantly we’re focused on maximizing the value,” she said.

“We have transacted on $700 million of deals recently at a healthy multiple of 17 times, and each time we’ve executed on a deal, we’ve been very thoughtful, very deliberate on both how we position the asset and the path we’ve taken to execute on that asset, and selecting the buyer. All of those steps have led to having the very attractive multiples that we have yielded.

“At the same time, we have re-leveraged our balance sheet, as we said we would. We sit healthily below our target of four times. Given the strength of our balance sheet and how well the assets have performed, we’re in a position to be equally as deliberate to process the sales of the remaining assets.”

The company’s asset-disposition strategy also includes the sale of legacy RLJ properties “that are not compliant with a long-term growth profile,” Hale said, with a full-year 2019 goal of selling $100 million to $200 million in legacy assets. “We would expect to see that transact in both portfolio and single assets,” she said.

Though that process is still in early stages, “to date, we have made progress on these potential sales, and investor appetite for these hotels is healthy,” she said. “That said, our disposition volume and timing will be influence by several factors, including investor demand as well as the financing market. … But based on the early read, there’s been healthy interest.”

These asset sales are expected to free up capital which will be invested in “value-add opportunities within the portfolio,” including brand repositioning and “re-concepting F&B and lobby areas across the portfolio, such as we have accomplished at some of our Embassy Suites,” Hale said.

Q1 performance
RLJ reported average daily rate grew 2% year-over-year in the first quarter (to $175.32), despite a 0.7% dip in occupancy (to 74.8%) over the same period.

“Similar to the trends in industry, our group segment was our strongest segment,” Mahoney said. “First-quarter group revenues grew in the high single digits, which was expected due to our favorable geographic footprint in markets with greater citywide activity.”

Somewhat related to that group strength, RLJ reported first-quarter F&B revenue growth of 6.1%, he said.

The company reported Q1 net income of $28.3 million, an 18.6% increase over the same quarter in 2018, and a 3.7% year-over-year decline in adjusted earnings before interest, taxes, depreciation and amortization to $111.5 million.

To reflect first-quarter performance, RLJ raised its full-year 2019 projection for adjusted EBITDA to $492 million to $517 million, reflecting a variance from its previous outlook of $2.5 million at the midpoint. RevPAR outlook stayed static at flat to 2% growth

As of press time, RLJ stock was trading at $18.43 a share, up 12.3% year to date. The Baird/STR Hotel Stock Index was up 16.6% for the same period.

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