Travelers finally are returning to urban cities for vacations, events and business travel, which RLJ Lodging Trust President and CEO Leslie Hale credited as the main factor behind the real estate investment trust’s strong second quarter.
Urban hotels represent two-thirds of the company’s earnings before interest, taxes, depreciation and amortization and saw the strongest growth in the quarter, “achieving a new high of 95% of 2019 revenue per available room in June,” Hale said on the company’s earnings call with analysts.
June average daily rate across the portfolio surpassed 2019 levels, and Hale said that accelerating urban demand in particular “is an indication of a runway that exists to drive rate” even further.
And while business-transient demand has been the traditional industry laggard in the U.S. so far this year, Hale said RLJ’s portfolio has seen “rapid improvement” of the segment, not only in pace of return, but in performance metrics.
“Business-transient revenues during the second quarter increased significantly by over 50% from the first quarter, which accelerated each month, with June achieving 71% of 2019, a new high watermark,” she said.
Weekday occupancy, the traditional indicator of business-transient demand, achieved 88% of 2019 levels in the second quarter, up 40% over the first quarter of the year.
And while events from small- and medium-sized companies form the bulk of RLJ’s business-transient and group demand, Hale said the company has seen “a return of traditional industries, such as financial services, consulting and technology companies” to the road.
Still-consistent leisure demand, growing group-business demand and the “new sources of demand emerging from the hybrid work environment” further bolstered RLJ’s urban portfolio, which is concentrated in Washington, D.C.; Chicago; Atlanta; Miami; Boston; and Houston. RLJ’s current portfolio has 97 hotels with more than 21,200 rooms in 24 states and the District of Columbia.
The company’s resorts achieved 110% of 2019 RevPAR in the second quarter, said Sean Mahoney, CFO and executive vice president. Group business revenue for the full portfolio grew to 90% of 2019 levels, and business-transient revenues reached 64% of 2019 levels, or an 1,800 basis-point improvement over the first quarter.
Total portfolio EBITDA of $118.6 million in the quarter was 91% of 2019 levels.
Hale said she doesn’t see this acceleration slowing down anytime soon, either.
“We expect leisure to remain healthy, especially since urban markets are fully open,” she said. “Our July business-transient revenues improved further from June and we expect corporate travel to continue to strengthen.”
Third-quarter group booking pace is tracking at 90% of 2019 levels, she said, and recent upticks in international inbound travel should provide more upside for the company’s urban hotels.
Transactions
RLJ’s most notable transaction happened outside of the second quarter; earlier this week the company announced its purchase of the 124-room 21c Museum Hotel in Nashville for $59 million, or $476,000 per key.
This is RLJ’s first hotel in Tennessee, and Hale called Nashville a top growth market where “demand has been growing at two times supply for the last 10 years,” driven not only by leisure but also by corporate expansion and regional group demand.
“This hotel is predicted to generate RevPAR that is two times our portfolio average and a stabilized [net operating income[ yield of 8% to 8.5%,” she said.
Year to date, the company has sold two hotel assets, including the SpringHill Suites by Marriott Denver North/Westminster, which took place in the quarter, for a combined price of approximately $49.9 million.
And while Hale said RLJ continues to look at opportunistic sales, she expects the REIT to be net neutral this year when it comes to buying and selling.
Operations
The company closed the quarter with $1.1 billion of liquidity, including $511.5 million in unrestricted cash, and Hale credited RLJ’s “strong balance sheet” to its ability to recycle capital into share repurchases. The company repurchased 4.2 million common shares for $50 million.
“Tight operational controls” and a full-time employee base still much smaller than 2019 levels led the company “to achieve 91% of 2019 hotel EBITDA, and EBITDA margins, which were only 60 basis points below 2019,” Hale said.
Occupancy across the portfolio in the second quarter was 74.7%, or 90% of 2019 levels. Average daily rate in the quarter of $195.64 was 105% of 2019 levels; and RevPAR was $146.05 — 92% of 2019 levels and up 36% from the first quarter, according to the company's earnings release.
At press time, RLJ’s stock price was trading at $12.38, down 11.13% year to date. The New York Stock Exchange Composite was down 11.3% for the same period.