The strength of hotel average daily rate and demand in urban markets is inching RLJ Lodging Trust’s performance closer to 2019 levels.
During the company’s first quarter 2022 earnings call, RLJ President and CEO Leslie Hale credited the company’s success to the resurgence of demand in urban markets such as Southern California; Atlanta; Boston; Washington, D.C.; and New York. The average daily rate at RLJ’s urban hotels achieved 95% of 2019 levels in the first quarter of this year, with several either eclipsing or nearing pre-pandemic levels.
Hale said that the first quarter results “exceeded our expectations” and credited a spike in business transient and group demand as the catalyst.
Urban Markets
A pandemic-era high weekday revenue per available room in March shows the positive effect of business transient and group demand on urban performance, Hale said.
Employees returning to the office and in-person events led to an increase in business transient and group demand in urban markets throughout the quarter that boosted the company’s RevPAR levels, allowing RLJ to raise its average daily rates, Hale said.
“Our ability to achieve new highs in ADR ahead of a full recovery of our urban markets is an indication of the run room that exists to drive rates. We continue to believe that the next leg of a recovery will be driven by the strengthening of urban demand. The pace of the recent improvement in urban markets underscores our confidence this recovery is underway,” she said.
Although the company’s first quarter business transient revenues were only 46% of 2019 levels, Sean Mahoney, RLJ executive vice president and chief financial officer, said the increase in business transient demand is “encouraging” and shows the growth possibilities as the number rises toward pre-pandemic levels.
Urban leisure demand also increased due to venues opening back up to full capacity with cities lifting COVID-19 restrictions. Hale said this boost correlates with March weekend numbers hitting pandemic-era highs, with RevPAR and ADR surpassing 2019 levels by 5% and 10%, respectively.
“If you think about the urban markets last year, many of the leisure attractions were actually not open. Broadway was not open, museums were not open; they're now open,” she said. “We expect not only to see the benefit of what we're seeing from a [business transient] and group perspective, but we also expect to benefit from urban leisure as well.”
Transaction Market
After committing to be a net acquirer in the company’s fourth quarter and full-year earnings call in February, Hale said the company is taking a more disciplined approach since stock prices haven’t responded as fundamentals have improved over the first quarter. With the increase of buyers on the market, sellers have the leverage to hold their price and not lower the value of properties.
Now RLJ’s focus has shifted to stock buybacks.
“Obviously, buybacks have become more attractive. Now the good thing is for our perspective, given our balance sheet and liquidity, we have the optionality to pursue multiple channels of value creation and optionality relative to capital allocation. It's very clear that where we're trading doesn't reflect the underlying value of our assets,” she said.
According to RLJ’s first quarter earnings release, the company has approximately $1.1 billion of total liquidity, with $479 million in unrestricted cash and $600 million available under the company’s revolving credit facility.
Mahoney said the company has enough liquidity to delve into multiple choices in capital allocation, including acquisitions, stock buybacks and dividends.
Although RLJ is more interested in share repurchases, he said the company still has an active pipeline and will be monitoring each option closely.
“What lever we actually pull and how much volume we pull is gonna be a function of what the relative returns available on those are at the time that we make those decisions," he said. "We don't make them in isolation. And nor do we make them now for the balance of the year. Things change rapidly throughout the year, and you would expect us to be able to pull the right lever at the right time."
RLJ sold two hotels in the Denver market this year, including the Marriott Denver Airport at Gateway Park and the SpringHill Suites Denver North Westminster, with the latter being sold after the first quarter ended. The two properties combined brought in about $50 million.
First Quarter Performance
According to RLJ’s first quarter earnings release, the company’s portfolio achieved RevPAR of $107.39 in the first quarter, along with ADR of $175.57 and occupancy of 61.2%.
The company’s first quarter RevPAR was 74% of 2019 levels and went up 5% from the previous quarter. Its March RevPAR reached 84% of the levels reached in 2019, the closest RLJ has been to pre-pandemic levels. RLJ’s first quarter ADR increased 7% from its 2021 fourth quarter levels.
RLJ's first quarter adjusted earnings before interest, taxes, depreciation and amortization was $54.6 million.
As of press time, RLJ’s stock price was trading at $13.10 per share, down 6% year to date. The New York Stock Exchange Composite Index was down 8.8% for the same period.