The December sale of the Fairmont Copley Plaza, as well as additional deals earlier this year, put RLJ Lodging Trust well on its path of accomplishing its key goals post-FelCor merger, executives said.
BETHESDA, Maryland—RLJ Lodging Trust executives established several strategic focus areas last year once the company’s merger with FelCor Lodging Trust was completed, and those goals are well underway, RLJ executives said on Wednesday’s fourth-quarter and full-year earnings conference call with analysts.
Selling hotels—mostly from a group of seven noncore assets the company identified last year—is one strategy the company has begun to execute, said RLJ President and CEO Ross Bierkan.
In mid-December, the company sold the 383-room Fairmont Copley Plaza in Boston for $170 million, or approximately $444,000 per key.
In a deal that closed after Q4 2017, the company sold the Embassy Suites Boston Marlborough for $23.7 million in what Bierkan called an “opportunistic sale,” because this hotel was not part of the company’s set of noncore assets. He said the company’s recent hotel sales illustrate its commitment to its disposition goal.
“We completed two sales and have an additional hotel under contract, which will bring us in line with our original goal,” Bierkan said. “Sales are at attractive multiples.”
He said the hotel under contract is one of the seven previously identified noncore assets, and that analysts should expect the company to achieve its goal of “selling an additional $200 million to $400 million of hotels in 2018 that are a combination of targeted, noncore assets and opportunistic sales.”
Bierkan said that even though RLJ will continue to look at sales opportunities that fall outside of its targeted properties, the company remains on track to sell those noncore assets by the end of the first quarter of 2019—but RLJ will do it by finding the best financial terms in the deals.
“It’s our intention (to meet that goal) but it’s not a fire sale,” he said.
In particular, he mentioned New York City’s Knickerbocker Hotel.
“It’s a special asset,” Bierkan said. “We recognized it as a candidate for sale because of the arbitrage (terms) and we think it requires a thoughtful approach. Last year we pulled it from the market; we thought there was a little too much noise surrounding it. … The Knick is such a singular asset—it’s certainly an asset we would like to sell at the right price, but the location, the real estate is too good for us to sell at a discount.”
Renovations and reinvestment are a big part of RLJ’s strategy moving forward, Bierkan said, in large part to capitalize on particular U.S. markets poised to see increased demand in the next few years.
“We will reinvest in our portfolio,” Bierkan said. “Renovations will be front-of-house and guest-facing in assets in markets poised to see recovery, including San Francisco, Los Angeles and Tampa. While these investments will cause disruption in 2018, they’ll enhance the competitive position of the hotels and drive customer preference and pricing.”
Leslie Hale, RLJ’s COO and CFO, said those renovations will be concentrated in six markets, including the three named by Bierkan.
“We will re-concept the properties and affect their comp positioning,” she said.
Bierkan said what the company calls “re-imaging” of properties will take about 60% of the company’s overall capital expenditures projects in 2018, and involve properties including those under Embassy Suites and Marriott International brand flags.
“At this point we’re not looking at adding keys, but more re-imaging,” he said. “80% of the capital we’re putting out this year is in markets that CBRE has earmarked to be top 10 markets for growth in 2019, 2020 or both. So we thoughtfully selected those assets, those markets at this time.”
RLJ’s pro forma revenue per available room increased 4% in Q4, bolstered by storm-related activity in Houston and South Florida, Bierkan said. Still, the company’s overall portfolio did well, exceeding its previous RevPAR growth guidance by 200 basis points.
Hale said executives were “pleased to see stronger corporate demand (in Q4)” and are encouraged by improvements in transient corporate demand, since that’s where most of RLJ’s portfolio sits. Still, she added that the company’s portfolio of Embassy Suites-branded hotels “are adding incremental exposure to the leisure segment.”
Hale and Bierkan said that due to factors like increased supply, tougher comps and headwinds from 2017’s weather events, “Houston, Austin and Louisville will have the strongest challenges” in 2018.
They identified Washington, D.C., and Chicago as strong performers in 2018.
Q4 and full-year performance
RLJ closed out 2017 with 157 hotels in its portfolio.
In the quarter, RevPAR increased 4% to $129.89, average daily rate increased 1% to $171.36 and occupancy grew 2.9% to 75.8%. Net income was $7.4 million, which includes $7.5 million of transaction costs and $31.8 million of non-cash income tax expense.
For the full year, net income was $75.7 million, which includes $44.4 million of transaction costs and $39.7 million of non-cash income tax expense. RevPAR decreased 0.5% to $135.82, ADR decreased 0.4% to $173.57 and occupancy was flat at 78.3%.
The company’s 2018 RevPAR outlook projects between a 1% decline and 1% growth for the year, which Hale said “reflects headwinds from hurricanes and renovation displacement.”
“We are pleased with everything we accomplished in 2017,” she said. “The momentum we are building in 2018 will be positive for long-term growth. We remain focused on our priorities and driving operational excellence.”
RLJ Lodging Trust shares were trading at $19.81 on Wednesday afternoon, down 9.8% year to date. The Baird/STR Hotel Stock Index was down 1% for the same time period.