Though the COVID-19 delta variant upset some of the recovery late in the summer, the U.S. hotel industry’s fundamentals overall maintained a promising recovery pace, RLJ Lodging Trust President and CEO Leslie Hale said during the company’s third quarter earnings call.
Leisure demand drove the industry’s revenue per available room, but improvements in business travel and group trends contributed as well, evidenced by quarter-over-quarter performance growth in urban and the top 25 markets, she said.
The company’s open hotels achieved 63.8% occupancy during the quarter, a 10-basis-point increase over the second quarter and 79% of 2019 levels, she said. The strongest occupancy during the pandemic was achieved in July, while normal seasonality and the delta variant played into August’s and September’s lower levels.
Hotels maintained rates during the quarter, achieving an average daily rate of $160, almost 90% of 2019 levels, she said. The portfolio demonstrated its pricing power, with 25% of its hotels exceeding 2019’s ADR, a sign consumers can absorb increased pricing when demand normalizes.
The continuation of strong leisure demand drove weekend occupancy to 76.8%, a 280-basis-point increase over the second quarter, Hale said. Weekend ADR grew by nearly 12%. Elevated leisure demand allowed RLJ’s resort hotels to achieve RevPAR that was 114% of 2019 levels with ADR exceeding 2019 levels by 20%. Hotels in several drive-to markets exceeded 2019 RevPAR as well, with Charleston and South Florida reporting RevPAR 130% and 117% over 2019 levels, respectively.
The sequential improvement in business transient and group is encouraging, Hale said. Weekday occupancy grew to 58.5%, a 320-basis-point increase over the second quarter. Urban hotels benefited from this trend, achieving 76% of 2019 occupancy levels, an improvement of 400 basis points compared to the second quarter.
“Overall, we were pleased to see our business transient revenues improve by 44% since the last quarter, led by markets such as Atlanta, [Los Angeles] and Boston,” she said.
Group revenue grew 54% from the second quarter, representing the strongest growth of all of RLJ's segments, Hale said. Room nights increased by 34% as the company’s hotels booked more small social groups, such as weddings and sports teams.
Business transient and group revenues recovered to 43% and 46% of 2019 levels — and nearly doubled second quarter revenue levels, she said.
“Looking ahead, we are encouraged by the moderating COVID cases and the generally positive economic backdrop supported by a strong consumer and rising corporate profits, but also acknowledge concerns around inflation,” she said. “That said, for the fourth quarter, we expect leisure to follow normal seasonality patterns but remain healthy, given the continuing flexibility in hybrid work environment.”
The U.S. reopening its borders to international travel will provide incremental tailwinds for urban markets, she said. Business transient will continue to gradually improve through the remainder of this year as offices reopen. Small social group bookings will also improve, as evidenced by group pace in the fourth quarter growing by 28% since the company’s last earnings call.
“These trends combined with the rate discipline our industry has maintained and the operational efficiencies achieved during the pandemic give us cause to be optimistic about the potential margin improvements that our industry can achieve as the recovery advances,” Hale said.
Portfolio Management
RLJ has been active in recycling capital and advancing its internal growth catalysts, Hale said. Since late 2020, the company has sold several of its non-core assets and is currently under contract to sell the DoubleTree by Hilton Metropolitan in New York City.
During the quarter, the company sold the 94-room Fairfield Inn & Suites Chicago Southeast Hammond, the 85-room Courtyard Chicago Southeast Hammond and the 78-room Residence Inn Chicago Southeast Hammond for an aggregate price of $21.8 million.
The company has sold eight of its non-core assets at a highly accretive multiple of more than 22 times 2019 earnings before interest, taxes, depreciation and amortization, Hale said. It’s on track to recycle more than $200 million of proceeds generated from these sales into three high quality acquisitions in markets that are positioned to outperform throughout the cycle.
RLJ acquired the 186-room Hampton Inn and Suites Atlanta Midtown in August for $58 million. The hotel is already outperforming the company’s underwriting, she said.
In October, it closed on the deal for the AC Hotel by Marriott Boston Downtown for $89 million. The AC Hotel was an off-market deal, acquired at a discount to pre-pandemic values and replacement costs.
The company is under contract to acquire a recently constructed Fairfield Inn & Suites in the heart of the upscale Cherry Creek submarket of Denver.
“Each of these acquisitions is consistent with our strategy of acquiring premium-branded, rooms-oriented hotels located within the heart of demand in high-growth markets,” she said. “Each of these hotels will generate RevPAR and margins, which are accretive to our current portfolio and are expected to enhance our growth profile.”
Three of the company’s hotels undergoing conversions remain on track for 2022, Hale said. The renovation and conversion of its Embassy Suites Mandalay Beach into Hilton’s Curio Collection is in full swing. The company has completed the model room design for conversion projects in Santa Monica and Charleston and will begin renovations shortly.
By the Numbers
During the third quarter, RLJ’s full portfolio achieved 61.5% occupancy, and the 95 open hotels reached 63.8% occupancy, according to the company’s earnings release. The DoubleTree by Hilton Metropolitan New York remains closed, and the Hotel Indigo in New Orleans is closed temporarily after being damaged by Hurricane Ida.
Pro forma average daily rate was $159.57 compared to $120.09 in the third quarter of 2020. Pro forma RevPAR reached $98.16, up from $34.51 from the same period last year.
The company reported total revenue of $233.8 million during the quarter, up from $83.9 million in 2020. It also reported a net loss of $151.8 million, an improvement from the net loss $173.9 million in the third quarter of 2020. It’s pro forma hotel earnings before interest, taxes, depreciation and amortization was $67.4 million with adjusted EBITDA of $60.1 million.
RLJ has $624.6 million in unrestricted cash and more than $1 billion in liquidity.
As of press time, RLJ’s stock was trading at $15.54 a share, up 9.8% year to date. The New York Stock Exchange Composite Index was up 18.6% for the same time period.