RLJ Lodging Trust Q1 FY2021 Earnings Call

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2021 first quarter earnings call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company's financial results. Tom Bardenett, our Executive Vice President of Asset Management, will 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 from last night. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning, everyone and thank you for joining us. We hope that everyone continues to remain safe. And we also hope that you have a vaccination plan in place. It is a meaningful step towards all of us getting back to normal again. The current backdrop today is starkly different than where it was a year ago at this time. Although we have a ways to go, we are encouraged by the acceleration and lodging demand that we saw throughout the first quarter, which has continued into the second quarter. Lodging fundamentals have benefited from a significant increase in vaccination rates and the easing of restrictions that have allowed many markets to reopen, as well as the passing of additional economic stimulus. These positive developments allow the industry to benefit from significant pent-up demand during the first quarter and drove our results to exceed our expectations. During the first quarter, we continued to execute on several fronts, and our portfolio's relative performance unfolded as we thought it would. Our relative performance confirmed our expectations that our portfolio would be an early beneficiary as a recovery starts to take hold. Our continued market share gains illustrate this and highlight the appeal of our brands, product type, and footprint. Additionally, we continue to operate with a minimal cost structure. Our lean operating model enabled our entire portfolio to generate positive hotel EBITDA during the first quarter for the first time since the pandemic unfolded, while our open hotels generated positive hotel EBITDA for the third consecutive quarter. We also materially improved our average monthly cash burn for the quarter relative to our estimates, and we continue to maintain significant liquidity which is providing the capacity to advance our growth initiatives. And finally, we made meaningful progress on each of our three conversions, including finalizing the design and scope of our renovations for the Wyndham Santa Monica, the Mills House in Charleston, and the Embassy Suites Mandalay Beach. With respect to our operating performance, our open hotels achieved an occupancy of 46.4% during the first quarter and gained over 500 basis points in market share. Occupancy improved sequentially each month, achieving 56.1% in March, which represents the highest monthly occupancy level since the start of the pandemic. We were pleased that the occupancy for open hotels exceeded the overall industry during February and March, demonstrating the benefit of our portfolio construct and geographic footprint. These improving trends enabled our entire portfolio to generate positive hotel EBITDA each month of the quarter. We are pleased to see this positive momentum continuing into April, which is expected to be even better than March. From a segmentation standpoint, our leisure markets continue to outperform, with drive-to markets such as South Florida, Charleston, and Orlando benefiting from significant pent-up leisure demand throughout the first quarter, including robust travel trends driven by an extended spring break in March. Additionally, there were several markets that benefited from unique catalysts during the quarter, such as the Super Bowl in Tampa, the Bi-Annual Legislative Year in Austin, and inauguration-related demand in Washington D.C. With all of our markets benefiting from some incremental leisure demand, our portfolio achieved weekend occupancy of 56.5%, the highest of any quarter since the beginning of the pandemic. In light of the work-from-anywhere flexibility for many, our brands and product type are allowing us to benefit from elongated weekends that now include Thursdays. This past quarter, we also saw another uptick in both business transient and group demand. Our hotels are capturing increased demand from smaller groups, such as sports teams, educational or training groups, and weddings, allowing our group revenues, which represent 10% of our first quarter room revenues, to nearly double from the fourth quarter, albeit from very low levels. We are encouraged by the continued improvement in corporate demand, which increased 27% from the fourth quarter and was a contributing factor to the sequential improvement in our weekday demand trends from last quarter. Corporate demand is still largely concentrated in local and regional counts from such industries as insurance, healthcare, and government. In conjunction with the improving pace of demand, ADR at our open hotels also improved each month, and we are encouraged to see the relationship between demand and pricing hold. For example, the nearly 19-point increase in occupancy at our open hotels from January through March was accompanied by nearly 12% growth in ADR, resulting in RevPAR growing by 69% during this period. Our strong relative performance during the first quarter once again demonstrated the benefit of our portfolio construct, which should continue to allow us to outperform as our recovery unfolds. For example, our resort properties achieved 70% occupancy. Our all three hotels achieved 50.1% occupancy and also gained 11 points of share. Finally, our drive-to market achieved over 50% occupancy. Our portfolio's ability to gain market share while continuing to operate under aggressive cost containment initiatives enabled us to achieve positive adjusted EBITDA for the first time during this pandemic. Our improving performance enabled us to continue to reduce our average monthly cash burn, which was 30% below the low end of our first quarter guidance. We expect our average monthly cash burn for the year to continue to improve. Now looking ahead, the strong start to the year has increased our confidence in the strength of the recovery of demand. Leisure will remain a dominant demand driver, and we expect the pace of vaccinations, additional loosening of restrictions, and recent stimulus to drive continued significant pent-up travel demand. Additionally, the continuing work-from-anywhere flexibility should allow leisure demand to remain elevated during the summer. With respect to business transient and group demand, we are encouraged by the sequential improvement and trends we are seeing, but our expectations relative to the ramp of these segments have not significantly changed since our last call. We continue to expect employees to begin returning to offices during the summer, with a pace increasing in the fall as schools return to in-person learning, which should lead to a step change in business travel in the latter part of the year. We also expect small group demand, which accounts for the majority of our group business, to continue to ramp up as vaccination rates increase and size restrictions on gatherings loosen during the second half of the year, which should drive incremental demand from sporting and other special events. Although the group booking window remains short, both our leads and conversions are continuing to strengthen, especially for the summer. A more positive outlook for demand growth is also supported by the recent trends we are already seeing, such as airline passenger volume rising to the highest level since the start of the pandemic, as well as the pace of employees already returning to offices in some markets, and the number of venues and attractions with high attendance that are already open. The overall momentum from the first quarter bodes well for the underlying strength of the lodging recovery and could result in outperformance relative to our expectations for the balance of 2021. As these improving trends unfold, we could not be more pleased with our overall positioning, which will continue to allow us to outperform. As we have demonstrated through our exposure to drive-to leisure markets, and the overall attractiveness of our hotels is allowing us to gain market share. Our transient in urban hotels are positioned to benefit as business travel improves. Our hotels continue to be favored by small groups that have begun traveling. Our less operationally complex hotels with smaller footprints are currently generating positive cash flow, and our more efficient operating costs model should allow us to return to pre-pandemic EBITDA sooner. Additionally, the continued strength of our balance sheet is allowing us to remain well-positioned to outperform long-term, given that our strong liquidity of over $1 billion and low burn rate is enabling us to emerge with a healthy balance sheet and pursue our growth strategies sooner. As our dispositions demonstrate, we continue to be active portfolio managers and are pursuing opportunistic sales that will create incremental capacity for growth without meaningfully shrinking our EBITDA base. Additionally, we are seeing the benefits of our portfolio's improved growth profile in our relative performance and expect to thrive as business transient and group segments improve. Finally, we are moving closer to unlocking the embedded value from our conversions that are expected to amplify our EBITDA growth throughout the cycle. In addition to unlocking our growth catalyst, we are continuing to actively underwrite acquisition targets and remain well-positioned to deploy growth capital during what we believe will be a multiyear window for acquisitions. We remain confident that our seasoned team will be able to source attractive acquisitions for RLJ this year as our pipeline of opportunities has grown since our last call. That said, we will remain extremely disciplined as we underwrite opportunities. Overall, we are encouraged by the improving backdrop we are seeing and are incrementally more positive about the potential for further improvement in lodging demand for the rest of the year. Moreover, we are pleased to see that our portfolio's recovery and our outperformance is unfolding as we expected. Long-term, we are energized by our strong positioning which will enable us to unlock our better growth opportunities and create significant shareholder value throughout the cycle. Finally, and more importantly, we remain deeply grateful to our frontline associates, who are instrumental in helping us navigate the recovery as it unfolds. I will now turn the call over to Sean.

Thanks, Leslie. We were pleased with the first quarter results, which have continued to improve so far during the second quarter. Our pro forma hotel operating results include the 101 hotels that we owned as of March 31, despite having four suspended hotels throughout the first quarter. Pro forma numbers exclude the courtyard Sugarland, which was sold during the quarter. Our reported corporate adjusted EBITDA and FFO include operating results from any sold hotels during RLJ's ownership period. Our first quarter portfolio occupancy of 43% represented an 880 basis point improvement from the fourth quarter. Our portfolio's monthly occupancy accelerated throughout the quarter at 34.2% in January, 42.5% in February, and 52.2% in March, which was stronger than we expected and provides further evidence that our portfolio is well-positioned to capture demand in the current environment. The strengthening demand provided our hotel operators with the ability to yield rates, resulting in the average daily rate growing by 11.6% from $111.49 in January to $124.43 in March. In markets with the highest demand, such as Key West, Charleston, Fort Lauderdale, and Miami, our hotels also achieved higher pricing throughout the quarter, providing us with confidence that historical pricing dynamics will continue as demand returns post-COVID. Additionally, despite several of our urban assets in New York City and San Francisco remaining suspended throughout the quarter, our portfolio generated positive hotel EBITDA each month. We are encouraged that both of these markets are beginning to show signs of recovery, which is allowing us to have a more constructive view on reopening our suspended hotels. The improving trends during the first quarter led our entire portfolio to achieve hotel EBITDA of $11.5 million, which also represented the first quarter of positive hotel EBITDA since the start of the pandemic. Our ability to generate positive hotel EBITDA is an affirmation of our high expectations for our portfolio's performance during a sustained recovery. With respect to our 97 open hotels, these properties achieved an occupancy of 46.4%, an average daily rate of $119, and $18.5 million of hotel EBITDA, representing the third consecutive quarter of positive hotel EBITDA. Similar to the overall portfolio, our monthly occupancy accelerated during the quarter at 37.1%, 46%, and 56.1% in January, February, and March respectively. Finally, as we expected, our open hotel portfolio outperformed as demand returned, gaining over 500 basis points of market share during the first quarter. We are encouraged that second-quarter demand trends have started off stronger than our expectations. During April, our portfolio is expected to generate occupancy of approximately 55% and ADR of approximately $132, which both represent improvements over March. Turning to the bottom line, our first quarter adjusted EBITDA was $3.6 million and adjusted FFO per share was negative $0.18. We were pleased that our portfolio was able to generate positive corporate adjusted EBITDA for the first time since the start of the pandemic, which affirmed our assertion that RLJ would be one of the earliest to return to profitability due to our lean operating model and portfolio construct. As Leslie mentioned, while demand accelerated throughout the first quarter, we remain vigilant in monitoring operator compliance with the aggressive cost containment initiative instituted during the pandemic. Underscoring our relentless focus on controlling costs, our first-quarter total operating costs declined approximately 49.5% versus last year. Our team also remained vigilant on controlling variable costs during the quarter, resulting in a 51% reduction in wages and benefits from the first quarter of 2020. The benefits of these stringent cost control measures are also evident in our quarter-over-quarter performance. While our first-quarter revenues increased 31.7% from the fourth quarter, our operating costs only increased approximately 10.1%, which allowed our portfolio to increase the bottom line by approximately $18.7 million. Turning to liquidity, against the backdrop of improving fundamentals, we paid down $200 million of the outstanding balance on our line of credit in March with cash on hand. Even after this repayment, we ended the quarter with approximately $648 million of unrestricted cash, $400 million of availability on our corporate revolver, $2.4 billion of debt, and no debt maturities until 2022. We continue to maintain significant flexibility on our balance sheet. As of the end of the quarter, approximately 95% of our debt is fixed or hedged, and 82 of our 101 hotels are unencumbered. We were encouraged that the first quarter's monthly cash burn was significantly lower than expected, driven by the portfolio's accelerating demand growth throughout the quarter. Our first quarter average monthly cash burn was approximately $14 million, which was 30% better than the low end of our estimated range. Looking forward, we expect the second quarter average monthly cash burn to be in the range of $16 million to $20 million, which includes approximately $14 million in semiannual interest payments on our senior notes during June. Based on our liquidity and low cash burn rate, we remain among the best-positioned lodging REITs to take advantage of ROI investment and external growth opportunities. As a reminder, our cash burn estimates exclude RLJ-funded capital expenditures, which we continue to estimate will be between $75 million to $85 million for the full year of 2021. Looking ahead, our portfolio's lean operating model and portfolio construct should allow our hotels to continue performing substantially better than portfolios comprised of traditional full-service hotels. Even as fundamentals are improving, our efforts continue to be focused on maintaining adequate liquidity while making prudent capital allocation decisions to position our portfolio to drive outperformance during the recovery and beyond. To that end, we are continuing to prioritize high-value projects, including completing the room additions in Emeryville and Buckhead and finalizing the planning for the conversions in Santa Monica, Charleston, and Mandalay Beach. We will also continue to prioritize less capital-intensive ROI initiatives such as parking and contract renegotiations. As we look ahead, RLJ remains well-positioned with a flexible balance sheet, ample liquidity, lean operating model, and a transit-oriented portfolio with many embedded catalysts. Thank you, and this concludes our prepared remarks. We will now open the lines for Q&A.

Thank you. We will now open the floor for questions. Our first question is from Michael Bellisario with Baird. Please go ahead with your question.

Good morning, everyone.

Good morning, Mike.

Let me just start with the big picture question for you. Your comments in the prepared remarks make it sound like you're looking more closely at acquisitions today. But maybe could you help us understand your desire and maybe any sense of urgency you're feeling to put some money to work today toward acquisitions given the improvement in the fundamental outlook?

Well, first of all, let me just say obviously we are pleased to be able to focus on growth as opposed to preserving capital. We have ample liquidity to do both internal and external growth. So we're well-positioned for that. What I would say, Mike, is that we do believe that the acquisition environment is going to be a multiyear window. But we do appreciate that early cycle acquisitions tend to create more value. Having said all of that, we will be very disciplined with how we underwrite and make sure that the types of assets that we're looking at are in our strike zone, which we still have conviction in our investment model, and we want to make sure that the deals we're doing are accretive on a number of fronts, whether it is accretive volume, a complement to our portfolio or offering metrics, the quality of our assets, and, of course, the returns. So we're going to remain disciplined, although we do appreciate that early cycle acquisitions can tend to create more value.

And then as a follow-up there, how would you or maybe for Sean if he wants to jump in here, how would you rank your different sources of capital today in terms of cost or relative attractiveness?

Sure, thanks, Mike. The internal growth catalysts are extremely compelling, and we think are probably the most valuable capital allocation source we have to use today. Acquisition because of their early cycle nature and the ability to create value have gained a tremendous amount of steam as fundamentals improved. And so we view that as a silver medalist, if you will, in the hierarchy. But the beauty of our capital structure is we have the ability to do both. And you would expect us as we deploy our capital to be able to do both on that front.

Got it. Thank you.

Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Great, thanks. Good morning, everybody. So you guys previously said you were running a heads and beds type strategy earlier this year. You referenced you saw a 27% increase in corporate demand. So just curious, one, what does corporate demand represent today as a percent of overall room nights and how does that stack up versus pre-pandemic levels? And then secondly, I'm just curious we’ve talked about the sort of local business traveler being the primary driver that but how much upside is there still from more of the local regional type corporate customers?

So Austin, the first part of your question, business transient is contributing about 11% to 12% of our contribution, and that's about 20% of 2019 levels. We continue to believe that for the balance of the year, business transient will ramp gradually and that in the near term it's going to be your insurance, government, and healthcare players. We think that business travel is really going to be continued and increase is really going to be contingent upon offices reopening, which we don't really anticipate seeing in a meaningful way until after Labor Day. And we could see a step change in demand following that, but in general that's what we sort of view as the cadence. We think that obviously, rate and occupancy have continued to hold their relationship. And as we've been able to drive occupancy, we've been able to drive rates, and we think the same thing will happen as business transient ramps appropriately. But it's still at a pretty anemic level being only 20% of 2019 levels.

And then so do you think there's still upside simply from the local and regional corporate customer? Or does it really need to broaden out for you to see a more meaningful shift in the mix?

Yes. I would say, Austin, this is Tom. Good morning. The local and regional is where it's starting, and we definitely feel like that's a good beginning. But to have the type of demand come back to the levels that we're used to, it's going to have to be more national as well as visitation that's going to go state to state versus internally. So what we think is, as Leslie's previously stated, when offices start to open, we think that not only will they go to their own office, but people will be allowed to visit their office. And that's where you'll start to really see the uptick. The encouraging thing is weekday demand is picking up. Some of that is leisure, and some of that is business transient. So as we look at the type of travelers that are coming in today, pharmaceutical, medical, insurance, and government that's related to corporate, we think it's going to have the uptick more in the Q3 and Q4 timeframe when offices truly are opening and people are visiting more on a national level versus local and regional.

Got it. Appreciate the additional details, Tom. And then expenses this quarter you had some pretty significant variable cost savings. You mentioned the cash burn coming well below what you had anticipated. How sustainable are those savings and how do we think about the ramp through the year a little bit?

I think that Austin we obviously believe that there are efficiencies that we have gained through this pandemic that we think will carry over. Clearly, we're going to have to put some of the cost back in as occupancy continues to improve. But we've been very thoughtful about making sure that the cost we put back in is occupancy-appropriate. So whether it's an SMB incremental offering that we have or even on the labor side, all of it has been occupancy-appropriate. We still have a ways to go from a recovery perspective. So we're being very thoughtful and disciplined around that.

Understood, thank you.

Thank you. Our next question comes from the line of Tyler Batory with Janney Capital Markets. Please proceed with your question.

Thank you. Good morning. First question I have is to go back to the cost side of things. I'm interested in what you're seeing on the labor front and I'm also curious if you could discuss focus service versus compact full service on the labor side of things and perhaps quantify labor requirements as those property pilots and perhaps how they differ?

Yes, I mean, sure, Tyler. Everybody obviously knows that there is a staffing issue within the industry. It's not just a lodging industry, it's a service industry overall. And clearly, that's being influenced by the extended benefits that associates are receiving, lack of childcare because some students are not in school, or just the inability or flux in occupancy, which doesn't give us the ability to offer a 40-hour work week. We think that those are temporary and transitory. And as occupancy continues to improve, and we get past September related to the benefits that some of these labor pressures will subside. We think our team has done a great job in terms of dealing with the shortage of staffing and being able to meet the needs of the customer. The consumer, despite the lack of staffing in some areas, we think it's sort of a general industry issue and not specific. I think Tom can comment more on a flex service versus full service, but in general, we're not seeing a difference in labor shortage across either asset type.

Yes. Tyler, I would add that we've been tracking FTE since the pandemic. When we think about quarter four, and I'll get into full service versus flex service, but if we look at overall portfolio first we were running around 38% of FTE compared to pre-pandemic, when we were at around 34% occupancy. And just as we increased in quarter one to about 41% of pre-pandemic at 43% occupancy. So you can see a little bit of a stair step. But the controls around FTE have been pretty significant both in select service and full service. Where we see the most need obviously, is housekeeping as we're ramping up in occupancy. And as Leslie stated earlier on the food and beverage front, we're gradually opening up outlets as occupancy increases and consumer preferences are out there when you're running 80% or 90% in some of our resorts. So we are putting FTEs back in that area. The one area, I'd also say that we've been very cognizant around making sure that we maintain our assets is we have been very careful not to save on the rooms and maintenance side where we've only had around 22% compared to on the labor front, because we want to make sure our assets are in good shape, getting ready for the demand that's going to be coming this summer. And we've been very thoughtful around that. And the last point that I would say on full service and select service is we really haven't noticed a difference because we've always run our compact full services with that select service mindset. We haven't seen a major differential because most of our compact full services are 300 keys with maybe 5,000 to 10,000 square feet of meeting space, so we run it more similar to what we would say a select service margin would be able to acquire.

Okay, that's very helpful. And as a follow-up, can you talk more about weekday versus weekend performance in the portfolio? Has that gap started to narrow when you look at results in April or March compared with earlier in the first quarter or even the fourth quarter?

Yes. I would say that there's still a meaningful gap there, because this is obviously leisure-driven demand. We think leisure is going to continue to drive demand in the second quarter and third quarter. So our weekend occupancy in the first quarter was 56%, and our weekday was I think 42%. And so you can see the meaningful gap there. We continue to see that into April as well and would expect that to generally hold.

And one thing I would add to Tyler is in April, the bounce that we're seeing on weekends is for instance we had 36 hotels that had occupancy higher than 2019 levels. And so when we're able to push rate, we're really dialing into those opportunities where we see the demand is there where the relationship between rate and occupancy is giving us that opportunity to try to drive some ADR index at the same time. So we do also see a differential not only in occupancy but ADR on weekends versus weekday.

Yes, and the one thing to add on there is we are seeing an uptick in weekday occupancy. We saw a strong performance in April and an increase in weekday occupancy as well as weekend. But I think the perspective on how the portfolio's performance from an occupancy perspective is that both weekend and weekday are improving which is encouraging to us as demand continues to accelerate.

Thanks. That's all for me. Appreciate the detail.

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Hi, good morning. Just in terms of acquisitions, what are you seeing, I guess, on the market in terms of potential you seeing single asset portfolios? And who's kind of the typical potential seller for your type of product?

Yes, I would say that there is still a limited supply of high-quality assets we want to acquire. However, we have noticed an increase in discussions around this. We are focused on off-market or limited bid transactions. The assets we are considering typically generate positive cash flow, which reduces pressure on sellers. The opportunities have shifted from simply looking for discounts to accessing unique opportunities. We are engaging with a range of sellers, including owner-operators, high net worth individuals, and private equity firms, as well as institutional owners who may find that certain assets, despite their quality, do not align with their future strategies. Overall, we are encouraged by the growth in the number of conversations we are having.

Thanks, and how close are your brand partners to announcing these new brand standards for your various brands? I guess there is some concern that as more people start to travel that they're going to expect a certain level of amenities that may not be available or may not be coming back at all. So just curious, your conversations with Hilton, Marriott, and Hyatt, are they close to really just announcing new standards so that customers can know what they're expecting?

Yes. Anthony, good morning. We've had a very collaborative relationship with all three brands that you mentioned, Marriott, Hilton, and Hyatt. What's been interesting, as they've started to see the ramp, they've started to really think about what does the new future look like because we're getting closer to that, which is encouraging. If you come out of first quarter and starting to see occupancies in the 50% and 60% in April. We are starting to see the consumer have different requests as they come in as you have more demand. What we're noticing is they are definitely keyed in on trying to do a reset. For instance, how they can actually take a look at hours of operations, efficiency of operations, and most importantly, the actual food and beverage deliverable as an example. When you think about the breakfasts in our world, where we either have a complimentary breakfast or a buffet or even evening receptions, there are modifications that are coming through. So it's not going to go back to pre-pandemic levels. But we're very encouraged that they're taking a look at what was waste, what was their area of opportunity to try to minimize the selection so that you actually are focused on what people actually like. So we’re thinking that there's going to be a change, that's going to be after Memorial Day, but occupancy levels will drive that. And we’ll see that there will be below pre-pandemic levels. The last thing that I would say is on the housekeeping front, everybody is staying firm in regards to the current situation, where it's more of an opt-in. And that's encouraging, as well as we're going into cleaning after checkout versus on a stayover. And as we look at the take rate that's continuing to climb a little bit, but that's one of the biggest areas of opportunity because we are a rooms-oriented portfolio.

And I would just sort of just want to emphasize what Tom was saying about occupancy. I think the brands are being very thoughtful to ensure that whatever brand standards they put back in place are occupancy appropriate, and that's key, because we're partnering with owners around this topic.

Thank you.

Thank you. Our next question comes from the line of Dany Asad with Bank of America. Please proceed with your question.

Hey, good morning team. We touched on this a little bit through different questions this morning. But just trying to put it all together if we think about the floor and wall operating model of your specific hotels relative to last cycle, how do we think about RLJ's margin potential this cycle when we know you've done a lot on the cost side on one hand, but at the same time, we keep hearing about labor constraints, inflation, and just costs as an emerging risk here?

Thanks, Dany. I think there are clear benefits to sort of what we call the all-weather strategy of the RLJ portfolio in the sense that from an operating cost standpoint, our lean operating model allows us to perform well in low occupancy environments, but also our locations within our portfolio provide us with the urban exposure to be able to have ADR left and similar upside to some of the more full-service-centric portfolios within the market. And so where we think our portfolio sits today is a portfolio that has the downside protection of the stability of more stable occupancy and tighter and more robust margins while maintaining that upside potential at the higher rate through our urban locations. And so I think RLJ's positioning post over the last several years has been to be a portfolio that we believe should be able to perform throughout the cycle that's a combination of just organic growth within the portfolio but also the ability of our internal growth catalysts and the capital that we're deploying within the portfolio. And so we're excited about our positioning and think that our portfolio should be an outperformer throughout the cycle because of how we positioned the portfolio and what we have left to go.

And Sean, just a follow-up on that. So with everything you see in front of you right now, do you feel confident or comfortable that we could hit higher, like relative to last cycle's margin peaks? We can hit higher margins this cycle with everything that's been done?

Yes. I think you would expect RLJ's portfolio as the cycle evolves if the operating model is lower, we believe it will be, you would expect RLJ's portfolio to be within the mix of the margin expansion. We have not publicly provided what we think that margin expansion is, other than we are confident that costs will stay out of the business. We're confident that our portfolio margin expansion will be in line certainly within the other portfolios, but we have not publicly given a range for that out of our confidence around the ability that there will be margin expansion.

Understood. Got it. Thank you.

Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, everyone. Good morning. First question, Leslie, in your commentary today, and then written in the release last night, you talked about your increased confidence in the lodging recovery. Totally see that on the leisure side, but I guess, in terms of your market, maybe easy to look at, you have reasonably sized exposures to Chicago, California, NYC, these are very reliant on international travel, the larger corporate accounts, group activity, and these also have some of the most aggressive unions as well. So just kind of curious to if you can maybe parse that statement that you made, or maybe kind of just disaggregate that statement from the markets that I'm talking about. I am interested to get how you view that in comparison to some of your drive-to leisure-oriented markets and hotels?

Yes. I think the way to think about it is our portfolio diversification. I appreciate the puts and takes that you articulated. But we really think that our portfolio, because of our footprint and our exposure to the various segmentations of the leisure exposure that we have, as well as how we're positioned relative to business transient and small group, that we are positioned to outperform. And we've seen that in our performance thus far, and as recovery unfolds, we would expect that relationship and relative performance to continue despite the individual market puts and takes because we're looking at it on a portfolio basis. We've seen we still expect leisure to drive; it's going to be a leader-centric recovery, and so we like our exposure there. We think that business transient will rebound and we like how our portfolio is positioned, particularly in our urban select service component. And we think that small group will lead the way, and we're positioned for that, and that's across our portfolio. I appreciate the puts and takes from some of the markets, but I think in aggregate, our portfolio is going to be an outperformer as we've demonstrated this quarter.

Okay, thanks. And then, just in terms of Sean's comments about internal repositioning ROI projects being the best use of capital as you guys sit here today, I'm just wondering, given that and your commentary again being more bullish on the recovery, do you think or are you more willing to think about pulling maybe some of the Wyndham conversions forward? Just kind of getting them ready to take advantage of what should be probably record levels of domestic leisure travel over the next 12 to 18 months or so.

So let me start and I'll kick it over to Leslie with respect to the timing of the renovations. We've been very strategic about how we wanted to sequence out the Wyndham renovations. When we got this opportunity, which we accelerated from what should have been a year in 2022 opportunity to a year in 2019 opportunity, we thought that the best way to sequence was to do renovate and relaunch a couple of those per year based on where those markets were relative to the recovery. And so we've accelerated Santa Monica and Charleston because when we looked at the assets, we saw leisure-centric markets and we wanted to prioritize those; they were first. But we have a sequencing of a couple per year within that. We don't think that the timing of the pandemic or COVID will change our sequencing because we want to make sure that we have the expertise to do it. And we want to make sure that when we relaunch these things they relaunch in a way that's strategic.

Okay, so yes. So kind of no change from before.

Thank you. Our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

Hey, good morning, guys. Thank you for taking my question. I am just trying to ask, I guess touch upon previous questions, but maybe phrase it differently. And because I do think that while you talk about outperformance, obviously the investors compare you to your peers who also happen to have broken even on an EBITDA basis. And so I think it's a relative value for a lot of them. So how do you stand out? And how do you tell the story to help you make you stand out? I am just thinking about it and Leslie and Sean, maybe if you can, I know you guys haven't talked about this, but I think it would be helpful for the market to understand you had $450 million of adjusted EBITDA in 2019. What do you think your stabilized EBITDA will be once we get through this? I realize it could be three years or four years down the road. But if you can, and then qualify some of the cost savings, the permanent cost savings that have gone into removed from the system your ROI conversions or your ROI investments, your Wyndham conversions, and sort of your general index improvements relative to peers. What do you think your earnings power will look like once we get to the other side?

So there's a lot to pack in there. We'll start with a piece of it and if we miss or miss a piece of it, just follow up on it. But look, I would generally say that the thing that gives us confidence about our ability to outperform is the nature and types of assets that we own. We own assets that when the recovery unfolds and business transient and group starts to take hold and rates really start to drive, we have assets that are going to tuck right up under with the full-service on the rate side, but that have very attractive margin profiles like select service assets. These assets generate significant free cash flow and are more resilient, and the resiliency has been demonstrated through this pandemic. We think that's going to drive operating performance from that perspective. We think that our portfolio is positioned to perform throughout the cycle. We think early in the cycle we're demonstrating that on a relative basis to what we believe is our true peer group that we're going to outperform operationally, which we are. If you look at our occupancy and you look at not so much the fact that it's positively EBITDA with the level of EBITDA, and therefore the importance of the ability to get back to 2019 levels sooner. Additionally, we think that the conversion opportunities and ROI opportunities that we have will allow us to get above recovery growth, not just simple growth from the recovery taking hold, but growth from the incremental value that we are getting from our conversions. And then finally, the types of assets that we own today will also allow us to get back to, because of the free cash flow that we have, to get back to paying a dividend sooner as well relative to our full-service peers or who we think is sort of our true comps. So you have to look at it throughout the cycle. We think that we've benefited every element of the recovery: earlier recovery, the middle of recovery, and on the backend of the recovery as dividends become more prevalent, as we believe that our model, our asset type, and our footprint is going to serve us well throughout that component.

But Leslie, are we talking about 10% EBITDA improvement down the road or are we talking about 15% EBITDA improvement? What sort of, if you can quantify any of that, I think that would help investors and get them more comfortable about the potential for RLJ.

So you are breaking up pretty badly, and I apologize. So I am trying to do my best to interpret because I'm missing every other word. But what I would say to you is that we're pretty confident that our ability to generate EBITDA above our 2019 levels exists. We think that our conversions are going to play a key role in that. We think that the improved growth profile that we garnered when we sold about a third of our assets in 2019, all those things will allow us to achieve EBITDA that's above our 2019 EBITDA adjusted for itself. We think we have a much better portfolio today. We think that the investment that we're going to make in the Wyndham's will generate significant returns there. We remain excited about all of our conversions, but in particular, the two conversions that we mentioned earlier; Santa Monica and Charleston, are on target to start the renovations at the end of the year. We look forward to relaunching those assets in 2022 as a start of our conversion pipeline, which is going to coincide with the return of the higher-rated customer. We have greater conviction today as it relates to the returns on these assets because we have a leisure-centric recovery that's coming. And we expect the returns to be well north of 40% on each of these assets. This is an example of the nature and types of conversions that we have in our portfolio. We're very pleased to be able to deliver these conversions at least two years earlier than we would have been able to deliver relative to the structure that was on these assets. So we think that the embedded value in our conversions and ROI properties are going to allow us to push past 2019 in addition to just the normal recovery.

Thanks, Leslie. Maybe one follow-up in terms of the dividend you touched upon. Can investors expect a resumption of the dividends in the second half of this year?

I mean for us, that's obviously a board decision. I think, based on the current pace of recovery, I wouldn't expect lodging REITs to be returning to paying cash dividends outside of if there's taxable income for 2021. But clearly, that's a board decision.

Thanks, Sean. Appreciate it.

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Yes. Thanks. Good morning. Leslie, there have been discussions out there that the market, and I was wondering if you could give us an update on that asset as well as the.

Yes. So look, I think that we have 100 asset portfolio. And we're active portfolio managers. As we have demonstrated, we sold two assets at the end of 2020. We have two other assets that are pending, and we continue to be looking at our portfolio. We will evaluate opportunities as opposed to other assets if and when it becomes necessary to discuss, but at this time, we don't have anything to discuss on New York relative to asset sales.

Our next question comes from the line of Gregory Miller with Truist. Please proceed with your question.

Thanks. Good morning. Apologies if this question has already been asked, I lost connection for a minute. I'm curious to hear your latest thoughts on the financial distress of franchisees that lock your liquidity and how that distress may impact RLJ. For example, do you anticipate a greater number of vendor takeovers of privately owned hotels this year if that's sort of coming or perhaps mergers of private owners as well?

I think that there is going to be an elongated window of how the impact of the pandemic unfolds between the banks being accommodating for a period of time, between owners being able to access their reserves or using NOIs in their balance sheet. The impact of that will take several years to see, but what I would say is that the types of assets that we are most interested in, they're already free; they're already generating free cash flow. And so therefore, as I mentioned before, there's less pressure on those types of sellers. Having said that, we do think that there will be some assets that shake loose as a result of individual balance sheets and how the impact and the pandemic has impacted them. And let's be clear, there isn’t a single industry that was severely impacted where balance sheets aren't going to have to be reshaped in some form or fashion. Lodging is not agnostic to that. But it's going to take a while to see how it ultimately unfolds. Part of that's going to be predicated on the ramp of the recovery, but we will see some owners fail; assets will be considered a stress sale. That will be to be determined, but there will be some level of pressure as well from the pandemic, but we have to watch it unfold.

Okay, great. And then I would like to shift to the demand side for a minute. In recent quarters, you've spoken to a short booking window. I'm wondering if you could share your latest impressions on the length of the booking window today and perhaps the types of hotels or markets that are seeing more advanced bookings if it's leisure-specific, or you're seeing it on the corporate side, urban markets versus leisure-oriented markets. Any color?

I'll start now and let Tom give some more color. What I would say is that our booking window continues to be relatively short. We're most encouraged on the small group side where we've seen our leads improve, and we saw our conversions on short conversions increase as well. An example of that, as we mentioned earlier, small group represented about 10% of our revenues in the first quarter, a third of that was booked in the quarter for the quarter, just as an example of how to sort of think about the need of the booking window.

And Greg, on the transient side, the booking window is still strongest as you can imagine, same day and 1 to 3 days, because it's leisure, and they're making those last-minute decisions. And for instance, in the last four weeks, they've been actually almost above 2019 levels somewhere between 90% and 110% in 2019 levels. And obviously, there is more inventory because leisure is the main traveler. What is interesting, though, is 31 plus days is about 80% of 2019 levels. And that's encouraging because people are starting to put their toe in the water and thinking about booking longer out. So for instance, markets like New Orleans, Charleston, the leisure markets where people are saying I want to go, they are actually making reservations sooner than last minute in some of those markets because they're higher demand markets similar to like what we have in Key West where people know it's going to be busy down there. On the group side to Leslie's point earlier, what we're seeing is short-term bookings are happening. For instance, about 40% of our bookings into 2021 are actually happening in the quarter for the quarter when we look at what happened in the first quarter. And then when we look at the rest of the year, most of that business is going into 2021, not 2022. When I think about the type of groups that are coming, it is still within our power query peak night demand for group lead volume is roughly between 10 and 25 rooms or 25 and 50 rooms. And that's almost predominantly the major amount of groups that we're seeing on the booking pace. A little color around group to give you an example: in some of our markets, it is related to leisure, but we're also seeing some opportunities where we're encouraged based on what's happening in Q3 and Q4. For instance, on the leisure front, we have a maintenance team that's going to put a roller coaster together in Northern California. So it's the first time that we're going to see some demand coming from that. In the future, we're excited about Tampa, for instance, where we had the Super Bowl. They really got some good press, and we put about 4,000 room nights at our Embassy Suites Tampa with a group Association in Q3 and Q4. So that's encouraging. And then lastly, I would say we've all been talking about sports and weddings and training. That's the activity that we're seeing in a small group, which again kind of bodes well for our type of portfolio.

Terrific. That sounds very promising. Thanks very much.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Leslie Hale for any closing remarks.

Thank you all for joining us. This year has gotten off to a strong start, which is encouraging. We're optimistic that that momentum will carry into the back half of the year. We hope everybody remains safe and look forward to hopefully seeing you all in person at some point in the near future.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.