Strong business travel and group demand helped drive performance across RLJ Lodging Trust's urban hotels during the second quarter.
Speaking during the hotel real estate investment trust's second-quarter earnings call, RLJ Lodging President and CEO Leslie Hale said it was encouraging to see the hotel industry’s revenue per available room growth sequentially improve during the second quarter despite a choppy backdrop. Urban markets were among those leading the way, enabling the REIT to achieve solid operating performance.
RLJ Lodging’s portfolio had 2.6% year-over-year RevPAR growth, driven by gains in both occupancy and average daily rate, she said. May was the strongest month in the quarter, achieving 6.9% RevPAR growth. June also saw positive RevPAR despite the impact from the Juneteenth holiday and several weather-related events.
Its hotels grew their market share by 170 basis points, underscoring the relative strong performance of the portfolio, she said.
“Our urban portfolio continues to benefit from all segments of demand, with growth in business and group demand, driving robust RevPAR growth in our markets, such as Boston, Denver, Los Angeles, San Diego, Miami and New York,” she said, adding that renovations in Atlanta and Austin held back performance.
Business travel was again the top-performing segment, generating outsize revenue growth of 13% from an 8% increase in occupancy and 4% increase in ADR as business travelers are traveling more frequently, Hale said. Corporate demand benefited from the ongoing expansion travel from large corporations as well as resilient demand from small and medium enterprises, growing midweek RevPAR by 4%.
Group demand had another solid quarter, achieving revenue growth of 5%, led primarily by ADR growing 4.7%, she said. The company benefited from favorable citywide events in many of its markets, including the 150th Kentucky Derby and the PGA Championship in Louisville, as well as its strong in-house group base.
“The attractiveness of our meeting space to small groups allowed our second-quarter bookings to exceed last year by 19%, with 27% of our revenue activity booked in the quarter, for the quarter,” she said.
Overall, group booking trends remain healthy, as evidenced by current 2024 booking pace of 107%, a 100-basis-point increase since the start of the quarter, she said.
In light of the continuing normalization of leisure rates across the industry and increased consumer price sensitivity, Hale said her team was pleased with the results from the quarter. Leisure room nights grew by 2.7%, with healthy demand in Southern California, New York City and drive-to markets, such as Charleston and Orlando.
“Although we are facing ADR headwinds, we believe that our portfolio is ideally positioned to attract demand in this environment, which also allows us remain constructive on leisure demand overall,” she said.
Outlook Adjusted
Though the current economic backdrop shows signs of moderation, RLJ Lodging Trust is optimistic that RevPAR growth will continue through the balance of the year, driven largely by demand in urban markets that will outperform the industry, Hale said.
“Our current view is rooted in the continued improvement in business travel and strong group demand as well as muted new supply, particularly in our footprint,” she said. “That said, we expect price sensitivity for the leisure segment to persist dampening our growth expectations relative to the beginning of the year.”
As a result, RLJ Lodging Trust adjusted its full-year guidance. It now expects full-year comparable RevPAR growth of 1% to 2.5%, down from 2.5% to 5.5% last quarter, according to its earnings release. It also projects comparable hotel earnings before interest, taxes, depreciation and amortization of $382.5 million to $402.5 million, down from its prior range of $395 million to $425 million.
The REIT expects its urban assets to benefit from the continuing improvement in business travel and stable urban leisure demand, Hale said. The second half of the year should benefit from strong citywide events in several markets, such as Boston and Chicago, with strong booking pace that is tracking double digits ahead of 2023 as well as its continued ramp-up from conversions.
The company is already seeing these dynamics play out in its July performance, she said.
“Longer term, we remain optimistic about the trajectory of lodging fundamentals, which over time should benefit from growth in all segments of demand given the ongoing consumer preferences towards experiential travel, especially against the backdrop of an elongated period of limited new supply,” she said.
Portfolio Management
During the quarter, RLJ Lodging acquired the 110-key boutique lifestyle property Hotel Teatro in Denver for $35.5 million in an off-market transaction, Hale said. The hotel is located in Denver’s central business district near the Denver Performing Arts Complex and the Colorado Convention Center.
“This acquisition firmly aligns with our strategy of acquiring high-margin, rooms-oriented hotels located in heart-of-demand locations within seven-day-a-week demand submarkets,” she said.
RLJ Lodging Trust expects the hotel will achieve a stabilized yield over 10% and should benefit from several return-on-investment opportunities not included in the underwriting, she said.
The REIT also advanced its internal growth initiatives, which will allow it to unlock meaningful growth that is embedded in the portfolio, including its conversions in Charleston, Mandalay Beach and Santa Monica, which collectively achieved 10% RevPAR growth during the quarter and more than 16% during the first half of the year, she said.
The company’s conversions of properties in Houston, Nashville and New Orleans remain on track to deliver this year, she said. The Hotel Tonnelle New Orleans, a Tribute Portfolio Hotel, recently completed its renovation and is ramping up well, achieving nearly 26% RevPAR growth during the quarter, while the REIT's two properties in Philadelphia are scheduled to deliver by next year.
RLJ Lodging Trust sold a non-core, 78-key Residence Inn hotel in Indiana for $8.1 million during the quarter.
By the Numbers
For the second quarter, RLJ Lodging Trust reported total revenue of $369.3 million, a 3% year-over-year increase, according to the company’s earnings release. It also reported net income of $37.3 million.
The REIT reported comparable hotel earnings before interest, taxes, depreciation and amortization of $118.6 million. Its adjusted EBITDA amounted to $109 million.
At the end of the quarter, RLJ Lodging Trust had approximately $771.1 million in total liquidity, which includes $371.1 million in unrestricted cash and $400 million available through its revolving credit facility. It has $2.2 billion of outstanding debt.
In April, it drew $200 million from its $600 million revolving credit facility and used the proceeds to repay $200 million of maturing mortgage debt. That same month, it exercised its one-year extension options to extend the maturities of $181 million in mortgage loans to April 2025.