RLJ Lodging Trust 2026 Q2 Earnings Call

Good afternoon. Welcome to RLJ Lodging Trust 2026 second quarter earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Nikhil Bhalla, our Chief Financial Officer, will discuss the company's financial results. Tom Bardenett, our Chief Operating Officer, will also be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release.

Finally, please refer to the schedule of supplemental information, which includes pro forma operating results for our current hotel portfolio. I'll now turn the call over to Leslie.

Thanks, John Paul. Good afternoon, everyone. Thank you for joining us today. We are pleased to report strong second quarter results, which exceeded our expectations. Our operating performance reflects broad-based growth across our entire portfolio, as well as the successful ramp of our renovations and conversions. We continue to benefit from the momentum in lodging fundamentals, which are being led by the acceleration of business travel and robust demand around urban leisure experiences, both of which align with our portfolio's overall positioning. Against this positive backdrop, during the quarter, our RevPAR growth outperformed the industry by 110 basis points, with all of our markets delivering results ahead of our expectations. Our out-of-room spend once again exceeded our RevPAR growth. We delivered high single-digit EBITDAG growth with positive margin improvement. We completed the transformative conversion of our new Autograph Collection asset, further bolstering our lifestyle orientation.

The broad-based nature of the growth across markets and demand segments year-to-date is demonstrating that the strength we are seeing is durable and not reliant on any individual market or event. These industry tailwinds continue to disproportionately favor urban markets, which are benefiting from diverse demand drivers and an extended period of muted supply growth. Our urban-centric portfolio is well-positioned to capture these tailwinds, which combined with the upside we are seeing from our capital investments, gives us conviction in our ability to continue delivering strong relative performance. With respect to our operating performance, during the quarter, we achieved RevPAR growth of 6.8%, driven by ADR growth of 4.9%. We also saw a healthy 130 basis point increase in occupancy, which was better than we had expected, reflecting the acceleration in demand we are seeing in the short-term booking window.

Each month of the quarter achieved positive RevPAR growth, with June being the strongest month, up 12%. We were encouraged to see these positive trends carry into July, with preliminary RevPAR growth approaching 11%. With regard to the World Cup, the performance of our host markets came in line with our expectations as we successfully executed on our revenue management strategy of intentionally building a base of high certainty demand from teams, media, and sponsors, while preserving sufficient inventory to capture the transient pickup that materialized closer to the matches. This strategy performed as anticipated by amplifying rate growth. More importantly, beyond the World Cup, we were very encouraged by the broad-based momentum and fundamentals we saw across the entire portfolio, with our non-World Cup markets achieving RevPAR growth of 6.2% and several of these markets delivering double-digit RevPAR growth during the second quarter.

Among these, Austin was a notable outperformer, with RevPAR increasing 17% year-over-year, benefiting from strong in-house group. Other notable markets included Chicago, which saw RevPAR increase by 15%, driven by a strong citywide calendar, and Tampa, which grew RevPAR by 11%, benefiting from a healthy event calendar. We also had a number of other markets, such as Orlando, Charleston, and D.C., that produced high single-digit RevPAR growth, all supported by broad-based improvements in segmentation. We remain encouraged by the recovery underway in Northern California, with RevPAR growing 9% during the second quarter. While the market benefited from hosting World Cup matches, its performance continues to be primarily driven by the ongoing expansion of the AI industry, which is fueling corporate investment and business travel against the backdrop of a more constructive local environment, giving us confidence in a positive multi-year trajectory of this market's recovery.

As it relates to segmentation, business transient revenues continued to accelerate, increasing by a robust 10%. This increase was led by demand growth of 6%, with the rate increasing by 4%, reflecting ongoing pricing power as our highest-rated customer continues to increase their travel. The acceleration in BT is supported by elevated levels of business investment and earnings growth broadly across many industries, including tech, finance, healthcare, and defense. Encouragingly, we continue to observe strong demand among both large corporates as well as small and medium-sized businesses. As expected, the leisure segment performed well in the second quarter, with revenues increasing by 7% as pricing improved meaningfully with a 6% increase in rate, while demand remained healthy with a 1% increase in room nights.

Our hotels and live, work, play locations continue to benefit broadly from strong urban leisure trends, reflecting the ongoing shift in consumer preferences toward urban entertainment, which was aided by the World Cup during the second quarter. With respect to group, our revenues grew 6% during the quarter, balanced evenly between demand and ADR. While the booking window remains short, near-term demand is continuing to materialize. As demonstrated by our end-of-quarter, for-the-quarter group pace improving by 300 basis points during the second quarter. We were also pleased to see a meaningful pickup in our booking pace for the third quarter, which is now pacing at 110% of last year. We are encouraged by the growing share of corporate demand within our group mix, which is contributing to our high ADR and non-room revenues.

The strength we are seeing across each of our demand segments continues to have positive implications for our out-of-room spend, which grew by 7% during the second quarter. These results once again underscore the success of our ROI initiatives as well as our renovations and conversions aimed at growing food and beverage profitably, reconcepting underutilized space, and growing other ancillary revenues. This strong top-line performance translated into EBITDA growth of 7%. During the quarter, our occupancy growth exceeded our expectations, and as a result, expense growth was higher than anticipated, although we still were able to achieve margin improvement. With regard to capital allocation, the successful execution of our investments in our portfolio is unlocking value and is clearly evident in our performance. During the second quarter, our four high-impact renovations completed last year achieved 22% revenue growth and 50% EBITDA growth.

Our seven previously completed conversions achieved revenue growth of 8% and EBITDA growth of 12%. These results continue to reinforce our conviction around the investments we are making in our assets and contributed to our outperformance. During the quarter, we completed the conversion of the former Renaissance Pittsburgh, relaunching the hotel as The Atterbury under Marriott's Autograph Collection. The name Atterbury pays tribute to the original architect who designed the iconic building that opened in 1906. Our comprehensive renovation reimagined all public spaces and guest rooms and activated revenue-generating spaces to leverage the character of this historic asset. This included the addition of The Drafting Room, which is the hotel's signature restaurant and bar, the addition of The Fulton Room, a new premium function space, and the activation of the hotel's historic rotunda, which now hosts a light show showcasing Pittsburgh's rich history.

We are also excited to announce that we will be adding Margaritaville to our family of brand affiliations by converting our Fairfield Inn & Suites Key West to a Compass by Margaritaville. The Margaritaville lifestyle orientation, strong recognition among leisure travelers, and its origin in Key West make it a natural fit. As one of the highest ADR markets in the country, the reimagination of this asset will allow us to capture higher rated leisure demand while creating opportunities to drive ancillary revenue growth. Our repositioning will reimagine the property into an island resort with new themed inspired concepts, including 5 o'Clock Somewhere, a new poolside cabana bar that will tie in the aesthetics and spirit of Key West with live music and immersive F&B. We plan to initiate the conversion later this year and relaunch in 2027.

Finally, we made progress towards initiating the physical renovation at our Wyndham Boston, which will join Hilton's Tapestry Collection. With each of these conversions, we continue to increase our exposure to the lifestyle segment and evolving consumer trends. These repositionings are also consistent with our broader strategy of creating opportunities to drive high-margin out-of-room spend with thoughtful execution that allows us to attract customers beyond our hotel guests. In addition to advancing our internal growth pipeline, we remain an active portfolio manager and opportunistically sold a hotel at a highly accretive basis during the quarter. Overall, our strong balance sheet and liquidity continues to position us to drive growth this year and beyond. Turning to our outlook. There is considerable geopolitical uncertainty and limited visibility, we are raising our outlook for the full year to reflect our strong second quarter performance and the ongoing positive trends.

As we enter the second half of the year, we remain optimistic that a resilient economy and consumer preferences that favor urban leisure experiences will continue to drive healthy demand against a backdrop of muted supply growth. As such, our outlook for the remainder of the year assumes the continuation of tailwinds that have supported our performance thus far, including sustained momentum in the recovery of business travel, leisure demand remaining healthy, especially in urban markets, positive group revenue pace, continued strength of in-the-quarter, for-the-quarter bookings, and additional tailwinds from the continued ramp of our conversions. As we move into the second half of 2026, we expect the incremental contribution from demand growth to continue, as evidenced by July seeing 300 basis points of occupancy growth, resulting in slightly higher expense growth moving forward than we had anticipated in our prior outlook.

Overall, our first half outperformance is a direct reflection of our positioning in urban markets, which are benefiting from the momentum in BT and a recurring calendar of sports, concerts, festival, conventions, and other events that draw travelers into urban markets year-over-year. These factors, along with embedded growth from our capital investments and the resiliency of the broader economy, give us confidence in our ability to deliver strong relative performance through the remainder of the year. That said, we remain mindful that visibility is limited given the short booking window and the evolving macro backdrop, and we will continue to monitor for any shifts in demand as the year progresses. As we look to 2027, the setup is favorable, with sustained strength expected from the underlying demand trends, particularly as it relates to BT.