The launch of RLJ’s city hotel portfolio signals a recovery in business travel

Travelers are finally returning to urban cities for vacations, events and business trips, which RLJ Lodging Trust President and CEO Leslie Hale cited as a major factor behind the real estate investment trust’s strong second quarter.

City hotels account for two-thirds of the company’s earnings before interest, taxes, depreciation and amortization and saw the strongest growth in the quarter, “hitting a new high of 95% of 2019 revenue per available room in June,” Hale said in the report the company’s earnings call with analysts.

The portfolio’s June average daily rate exceeded 2019 levels, and Hale said the acceleration in urban demand in particular “is indicative of a runway that exists to push the rate” further.

And while business transient demand has been the traditional laggard in the US industry so far this year, Hale said RLJ’s portfolio has seen “rapid improvement” in the segment, not only in rate of return but also in performance metrics.

“Business pass-through revenue in the second quarter increased significantly by more than 50% from the first quarter, which accelerated each month, with June reaching 71% from 2019, a new high watermark,” she said.

Weekday employment, the traditional indicator of transitory business demand, reached 88% of 2019 levels in the second quarter, up 40% from the first quarter of the year.

And while SMB events form the bulk of RLJ’s transient business and group demand, Hale said the company has seen a “return of traditional industries such as financial services, consulting and technology companies” on the road.

Still-steady leisure demand, growing group business demand and “new sources of demand emerging from the hybrid work environment” further bolstered RLJ’s urban portfolio, which is centered in Washington, DC; Chicago; Atlanta; Miami; Boston; and Houston. RLJ’s current portfolio includes 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 income for the entire portfolio rose to 90% of 2019 levels and pass-through business income reached 64% of 2019 levels, or an improvement of 1,800 basis points over the first quarter.

Total portfolio EBITDA of $118.6 million in the quarter was 91% of 2019 levels.

Hale said he doesn’t see that acceleration slowing down anytime soon.

“We expect leisure to remain healthy, especially with city markets fully open,” she said. “Our transit business revenue in July improved further compared to June and we expect corporate travel to continue to strengthen.”

The pace of group bookings in the third quarter is tracking at 90% of 2019 levels, she said, and recent gains in international inbound travel should provide more upside for the company’s city hotels.

RLJ’s most notable deal happened outside of the second quarter; earlier this week the company announced the purchase of 124-room 21c Museum Hotel in Nashville for $59 million, or $476,000 per turn.

It’s RLJ’s first hotel in Tennessee, and Hale called Nashville a top-growth market where “demand has grown at twice the rate of supply over the past 10 years,” driven not only by leisure but also by corporate expansion and demand for regional groups.

“This hotel is projected to generate a RevPAR that is twice our portfolio average and a stabilized[netoperatingincome[yieldof8%to85%”shesaid[нетеноперативендоход[доходностот8%до85%“казатя[netoperatingincome[yieldof8%to85%”shesaid

Year to date, the company has sold two hotel assets, including SpringHill Suites by Marriott Denver North/Westminster, which occurred during the quarter, for a total 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.

The company closed the quarter with $1.1 billion in liquidity, including $511.5 million in unrestricted cash, and Hale attributed RLJ’s “strong balance sheet” to its ability to recycle capital into share buybacks. The company repurchased 4.2 million shares of common stock for $50 million.

“Strong operational controls” and a full-time employee base still well below 2019 levels led the company to “achieve 91% of 2019 hotel EBITDA and EBITDA margins that were just 60 basis points below 2019,” Hale said.

Full portfolio occupancy in the second quarter was 74.7%, or 90% of 2019 levels. The quarter’s average daily rate 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 release of earnings.

At press time, RLJ shares were trading at $12.38, down 11.13% year to date. The New York Stock Exchange Composite fell 11.3% over the same period.

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