RLJ Lodging Trust Q1 FY2022 Earnings Call

Welcome to RLJ Lodging Trust First Quarter 2022 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the call over to Nikhil Bhalla, RLJ's Senior Vice President, Finance and Treasurer. Please go ahead.

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust 2022 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-K 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 today. We are encouraged by the rapid acceleration of the recovery since our last call, which exceeded our expectations as lodging fundamentals sequentially improved throughout the quarter with mandates lifting, seasonality improving and offices reopening. This momentum was most notable in the resurgence of demand in urban markets, which has continued into the second quarter. Against this improving backdrop, not only did we achieve strong first quarter operating results that were ahead of our expectations, but we also advanced our value-creation initiatives, repaid the remaining balance on our line of credit and amended our corporate credit facility to allow for share repurchases, expanding the range of capital allocation opportunities available to us. All of these efforts have further strengthened our overall positioning for the year. As it relates to fundamentals, the pace of the recovery throughout the first quarter was driven by the broad improvement across all segments and markets. The ability of the industry to maintain rate integrity and push ADR to new highs is evidence of the strength of demand that is materializing. With this accelerating industry backdrop, our portfolio experienced positive momentum across all of our markets throughout the first quarter. Our RevPAR rapidly improved from 64% of 2019 in January to 84% in March, which was driven by robust growth in business and group demand, leading to increased pricing power, with our ADR in March achieving 96% of 2019 levels. This momentum carried into April, which further improved from March to achieve 91% of 2019 RevPAR, and ADR eclipsed 2019 levels. Our ability to achieve new highs in ADR ahead of the full recovery of our urban markets is an indication of the potential that exists to drive rates. We continue to believe that the next leg of the recovery will be driven by the strengthening of urban demand. The pace of the recent improvement in urban markets underscores our confidence that this recovery is underway. Demand at our urban hotels, which represents approximately two-thirds of our portfolio, saw a significant inflection point in March as employees returned to offices and group attendance improved. In March, RevPAR at our urban hotels achieved 81% of 2019, which was a 40% increase over January. ADR at our urban hotels achieved 95% of 2019 with a number of our urban markets such as Southern California, Atlanta, Boston, Washington, D.C. and New York exceeding or approaching 2019 levels. Notably, our Northern California markets also saw significant momentum during the first quarter, benefiting from office reopenings and citywide events, such as the Game Developers Conference and the NCAA tournament. Our Northern California RevPAR increased by 65% between January and March, with March RevPAR achieving 57% and ADR achieving 74% of 2019 levels, which had record citywide events. With the continuation of office reopenings and a stronger citywide calendar going forward, we expect the recovery of our Northern California hotels to continue to build throughout the year. The substantial improvement in our midweek trends further validates that the acceleration in business transient and group demand is driving our urban performance. Our weekday RevPAR in March was nearly 80% higher than in January and represented a new high of the pandemic, achieving 76% of 2019, with our weekday ADR achieving 91%. With respect to business transient, the continuing growth of SME travel was bolstered by the return of our traditional corporate accounts from a diverse base of industries such as aerospace, financial services, and the insurance sector. This accelerated our business transient revenue by 70% between January and March, with March achieving 55% of 2019 levels, which was the highest watermark of the pandemic. Our RevPAR growth was aided by our corporate rates, maintaining strength, which we expect to continue going forward. Our group segment also accelerated throughout the first quarter, as group demand broadened to include more corporate events such as employee trainings and off-site meetings. Corporate groups now represent approximately 50% of our current group bookings. We also benefited from citywide events being held as in-person gatherings with attendance levels maintaining, all of which drove a meaningful increase in our group revenues for the quarter, with March RevPAR achieving 74% of 2019, driven by ADR increasing to 95% of 2019. With citywide calendars and booking volumes improving, our second quarter pace has increased by over 40% since the beginning of the year. Additionally, we benefited from the return of urban leisure demand as museums, theaters, and related venues, many of which were not open last year, reopened at full capacity. This led our weekend RevPAR to increase by 68% between January and March. March weekend RevPAR was the highest of the pandemic and exceeded 2019 by 5%. Our weekend ADR remained elevated throughout the first quarter and exceeded 2019 by 10% in March. The improving demand environment led our margins to improve sequentially each month and achieved hotel EBITDA margins of 34.4% in March. Moving to capital allocation. We continue to make great progress on our internal growth initiatives. The transformation of the Embassy Suites Mandalay Beach, the Wyndham Mills House Charleston, and the Wyndham Santa Monica conversions are well underway and are on track to be delivered by the end of this year. We look forward to providing an overview of the reimagined hotels as we approach their relaunch. We are beginning to see results from the completed revenue enhancement initiatives and are making progress on a number of incremental projects focused on space reconfiguration and the addition of keys, which are being executed as part of normal cycle renovations. We expect the returns from these projects to coincide with the ramp of revenues back to 2019 levels. Regarding margin expansion, we have completed the amendment of several additional agreements that will contribute to the 50 basis points of margin enhancements that we expect, which will be incremental to the industry-wide post-pandemic operating synergies. As it relates to capital recycling, with the acquisition of the Moxy Denver Cherry Creek last year, we took advantage of an active transaction market to opportunistically sell two hotels in Denver, which has further repositioned our footprint in the market. Our four remaining hotels are now concentrated in desirable Cherry Creek, Denver South, and Boulder submarkets. Relative to external growth, we have demonstrated the ability to source attractive acquisitions. We expect to continue to be active this year, and our pipeline of acquisition opportunities remains robust. That said, we will remain disciplined, as we have demonstrated with our recent acquisitions, which are expected to exceed our 2022 underwriting by over 30%. Additionally, on the capital markets front, we recently completed the amendment of our corporate credit facility to allow share repurchases during the covenant waiver period, and our Board authorized a $250 million share repurchase program. This provides us with another potential tool to allocate capital in light of the current volatility and dislocation in lodging stocks relative to underlying asset values. As it relates to RLJ today, we believe that based on every metric that this is the best portfolio we have owned as a public company, and comparable trades over the last several quarters further validate the high quality and value of our assets. Looking ahead, we remain confident that each of the demand segments will strengthen throughout the year. Our confidence is bolstered by the robust demand trends we saw in March, which have accelerated into April. We expect demand trends to remain healthy during the second quarter. Given that, business transient is expected to continue to benefit from pent-up demand as employees return to offices. In April, we have already seen a pickup in volume from national accounts, continued improvement in our transient pace, and expansion of the booking window. Our in-the-year, for-the-year bookings so far this year are 123% of the total in-the-year group revenues we picked up last year, which is robust, with half of these bookings falling into the second quarter. Urban leisure, which was muted last year, should continue to see greater strength as we move into summer with urban attractions fully reopened. Finally, any uptick in international demand trends should benefit our urban and gateway markets such as Northern California, New York, and Florida. Based on the improving trajectory of these segments, we expect the recovery to continue to gain momentum throughout the year with particular strength in our urban markets. Additionally, with respect to operating expenses, while we are continuing to operate in a challenging cost environment, we are seeing signs of easing tight labor conditions with improved hiring, reduced employee turnover, and fewer open positions. That said, we recognize that while inflation, geopolitical events, and rising interest rates to date have not had a measurable impact on lodging fundamentals, they could be potential headwinds. Overall, we are encouraged by the strengthening fundamentals and our unique position to create significant value given our embedded growth drivers, which include returns from our conversions, revenue enhancement and margin expansion initiatives, the continuing ramp from our recent acquisitions, our ability to better capture post-pandemic industry margin expansion given our lean operating model, smaller footprint, fewer FTEs and longer length of stay, our well-located urban-focused portfolio and our strong balance sheet with significant liquidity that will allow us to pursue multiple capital allocation opportunities. Given this backdrop, we are confident that our portfolio positioning and unique value-creation initiatives will allow us to drive outsized growth this year and throughout the cycle. I will now turn the call over to Sean.

Thanks, Leslie. We were pleased with our first quarter results, which further narrowed the gap to 2019 and accelerated throughout the quarter. After the January impact of Omicron and normal seasonality, fundamentals reaccelerated in February and continued through March, which was the strongest month since the start of the pandemic. Pro forma numbers for our 95 hotels exclude the sale of the Marriott at Denver International Airport, which was sold during the quarter and the SpringHill Suite in Westminster, Colorado, which was sold in April. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. Our first quarter portfolio occupancy was 61.2%, which was 80% of 2019 levels. Accelerating demand allowed our hotels to drive incremental rates during the first quarter. Our first quarter average daily rate of $176 grew over 7% from the fourth quarter and represented approximately 93% of the first quarter of 2019. March was the strongest month of the quarter and generated ADR of $188, which represented 96% of 2019. Our leisure markets, such as Key West, Charleston, Miami, and Waikiki, generated ADRs in excess of 2019 by 38%, 29%, 18%, and 7%, respectively. Growth in our urban markets accelerated throughout the quarter as we benefited from pricing power in March. During March, we were encouraged by the fact that ADRs in many of our urban markets were near or above 2019 levels, such as 106% in Downtown Chicago, 113% in San Diego, 99% in Manhattan, 95% in Boston, and 92% in Atlanta. Despite January being impacted by Omicron, our first quarter RevPAR was approximately 74% of 2019 levels and was stronger than we had expected at the beginning of the quarter and accelerated throughout the quarter to 84% in March. Turning to segmentation. While leisure remained strong and achieved 85% of 2019 revenues during the first quarter, our group revenues relative to 2019 grew over 400 basis points from the fourth quarter to 63%, with March revenues at 98% of 2019 levels. Finally, while the growth of business transient within the quarter was encouraging, first quarter BT revenues were at 46% of 2019 levels, which underscores the remaining growth runway as business transient revenues return to 2019 levels. The improving operating trends during the first quarter led our entire portfolio to achieve hotel EBITDA of $63.2 million, which represented 61% of 2019 levels. We are encouraged with our ability to drive strong operating margins of 26.3%. Our hotel EBITDA improved as demand increased throughout the quarter and was $35.6 million in March, representing 78% of 2019 levels and generated hotel EBITDA margins of 34.4%, which represented the highest margin since the start of the pandemic. Preliminary April results are even stronger than March as a result of increasing demand and pricing power. For April, our portfolio would generate occupancy of approximately 75% and ADR of approximately $192, resulting in April RevPAR achieving 91% of 2019 levels, which represents a 7 percentage point improvement from March. Importantly, our April ADR slightly exceeded 2019 levels, which is a great indication of the improving fundamentals in our urban-centric portfolio. Turning to the bottom line. Our first quarter adjusted EBITDA was $54.6 million, and adjusted FFO per share was $0.14. As Leslie mentioned, while demand accelerated throughout the first quarter, we remain vigilant in maintaining cost-containment initiatives that are appropriate for the current environment. Underscoring our continued focus, our first quarter operating costs remained approximately 19% below the comparable period of 2019. Within operating expenses, wages and benefits, which represent 39% of total first quarter operating expenses, were approximately 21% below the comparable quarter of 2019. On a relative basis, our portfolio remains better positioned to operate in the current labor environment as a result of fewer FTEs required in our hotels given our lean operating model, smaller footprints with limited F&B operations and longer length of stay, with suites representing 50% of our rooms inventory. While first quarter occupancy was at approximately 80% of 2019 levels, our hotels operated with approximately 37% fewer FTEs than we operated with pre-COVID. Overall, we are encouraged that the labor environment is improving. We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital so far this year. These accomplishments include repaying the remaining $200 million outstanding on our corporate revolver, exercising the first of two, one-year extension options on a $200 million secured loan, which extended the maturity to April 2023, and amending our corporate credit agreements to allow share repurchases during our covenant waiver period. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. Our weighted average maturity is 4.1 years, and our weighted average interest rate is 3.89%. Turning to liquidity. We ended the quarter with approximately $479 million of unrestricted cash, $600 million of availability on our corporate revolver, $2.2 billion of debt and no debt maturities until 2023. We continue to maintain significant flexibility on our balance sheet, and 80 of our 95 hotels remain unencumbered. Currently, 100% of our debt is fixed or hedged, which will protect us from the current rising interest rate environment. We maintained a disciplined approach to managing our balance sheet. Even as fundamentals have recovered, we remain focused on making prudent capital allocation decisions to position our portfolio to drive results during the entire lodging cycle. We remain among the best positioned lodging REITs to take advantage of ROI investment and external growth opportunities. We continue to estimate RLJ capital expenditures will be approximately $100 million during 2022. Additionally, at the end of April, our Board approved a one-year $250 million share repurchase program, which will provide us with an additional tool to take advantage of recent volatility in the capital markets to repurchase shares. We continue to view share repurchases as an important capital allocation tool to return capital to our shareholders. In closing, RLJ remains well positioned with a flexible balance sheet, ample liquidity, lean operating model and a transient-oriented portfolio with many embedded catalysts. We will continue to monitor the financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt and increase our overall balance sheet flexibility.

And our first question is from Anthony Powell with Barclays.

A lot of detail on business travel coming back. I guess I'm curious, I wanted to see if you can talk a bit more about the booking window. How is that lengthening? And are you able to get good insight into pace for the next few months in BT?

Okay. So we are seeing an improvement in booking windows and transient pace. And so we are very encouraged by what we're seeing on the business side. There's plenty of momentum. It's important to recognize that it is real time in terms of what we're seeing. Obviously, the trends that we saw from January to March, and now what we're seeing in April and that we're continuing to see today, but I'll let Tom give some color on the booking window.

Yes. So Anthony, not only what Leslie said about the booking window and timing, what's happening is the SMEs are still continuing to grow, and that's what kind of filled this up in 2021. But now the surge is really the national corporate accounts. And so what we're finding is those offices are reopening, people traveling. The larger accounts are now coming. So we're seeing the largest amount of growth coming from the national corporate accounts, and that booking window typically is sometime between 7 and 14 days when their travel patterns are kind of being set up. Also, I would say that we're seeing the Tuesday, Wednesday and Thursday at the highest levels compared to the beginning of the pandemic, which is really showing up in regards to what you would expect midweek demand, and that's where our mid-week growth is happening. And they're coming in at dynamic pricing, which is what we also stated in regards to the strategy we took, so the rates are coming with it at the same time that the volumes are increasing.

Got it. And that's all positive. I guess the concern a lot of people have is as we get into the summer that the weekend strength that you've cited may start to decline year-over-year given inflation and economic issues. I'm just curious, what are you seeing in terms of forward bookings and price sensitivity on the leisure side? And do you think that can at least maintain the strength that it had the past year as you benefit from this BT recovery?

Yes, I will start and then Tom will provide some additional insights on the specific weekend trends you mentioned. I want to emphasize that we are not observing any weaknesses in the leisure segment. It's important to note that two-thirds of our portfolio is in urban areas. Last year, many leisure attractions in urban markets were closed, including Broadway and museums. They are now open, and we anticipate not only benefiting from our business travel and group bookings but also from urban leisure activities. We are optimistic about the leisure segment remaining strong throughout the summer.

And the thing I would add too, Anthony, when you think about the RLJ portfolio, we have 50% suites. And typically, customers love that extra bay. They want to search for that value that the people are seeking in regards to the traveling not only with kids on the transient side. And then on the group side, what we've seen is concerts, venues, the same thing Leslie was referring to in regards to the attractions, they're all open now. And so we're expecting some significant demand on weekends to continue, and the booking pace indicates that as we look out into the future so far for the summertime.

Our next question comes from the line of Austin Wurschmidt with KeyBanc.

Sean, I think you mentioned hotel EBITDA margin in March was nearing that mid-30% range and probably near the best quarterly result, I think, you achieved in fall of 2019. So with the continued improvement in various demand segments that you and Leslie had highlighted, should we expect that margin to improve further in the quarters ahead?

Yes, Austin, from a seasonality perspective, you would expect our margins to be the strongest just based on normal seasonality as we show in our supplemental during the second quarter. But as the recovery unfolds, particularly on the urban assets, you'd expect margins to continue to improve in nominal amounts. I think it's important to note that within 2022, we expect there to be some level of quarter-over-quarter noise within margins only because as costs get reinserted back into the business to prepare ourselves for the recovery, things like sales and marketing and labor and benefits will have an impact on short-term margins. But our view around both what we think of post-COVID margin expansion remains intact. We think that our hotels specifically are best positioned to capture that margin because of the things that we've articulated in the past with our footprint, lower FTEs, less complicated business models, etc.

And just to add some numbers to what Sean was talking about, for the quarter, we were at 80% of 2019 levels of occupancy, but we're only at 60% of the FTEs. We still think that we need to be in the 75% to 80%, and the labor market is improving. So we are seeing the ability to fill roles, less job openings, less total roles. And so that's what the incremental labor that Sean was referring to.

On that 75% number you just cited, Leslie, what number does that relate to, to the extent you continue to see revenue get to or even above what you had in '19?

Yes. That number is the number of FTEs that we expect to put back in the business, which will be more efficient, and what we've seen from markets and hotels that have reached prior peak levels of occupancy is that that's sort of a level that we think is a stabilized level and that our hotels can operate within.

Okay. That's helpful. And then just last one for me. I think you said BT revenue in the first quarter was 46% in '19. I was curious if you had that figure for March or April? And then just with all the positive commentary you cited for the recovery in urban markets really across all segments, when do you think you could get that revenue for BT back to fully close the gap versus '19?

So the answer on the March number is about 55% of revenues. And keep in mind, the full year for 2021 was at 35%. So you're seeing the momentum there, Austin. Our general perspective is that we see BT get back at 2023. There's a case to be made that you can reach those levels in the fourth quarter of this year, but 2023 still remains our general house view.

Our next question is from the line of Michael Bellisario with Baird.

Leslie, first question, can you maybe triangulate what you're seeing in the transaction market, where you think values are for your types of assets? And then how that all plays into your decision to maybe reallocate some capital to buybacks today?

The transaction market continues to be very active, with no significant changes in deal flow. There is still a wide range of buyers seeking yield, and we've seen new participants enter as they move from other asset classes. As a result, sellers have no reason to lower prices right now. We are focused on off-market transactions and will remain disciplined with our acquisitions. From a valuation standpoint, we noted on our last call that values have stabilized after an increase last year. Interest rates have not affected the capital targeting the hospitality sector. We ended the year expecting to acquire more assets, and with improved fundamentals and stagnant stock prices, buybacks have become a more appealing option. Our strong balance sheet and liquidity give us the flexibility to explore various avenues for value creation and capital allocation. It's evident that our current trading levels do not reflect the true value of our assets, as supported by recent market transactions. Consequently, buybacks appear more attractive now, though we will maintain a balanced approach, continuing to consider both buybacks and asset acquisitions with a long-term strategy in mind.

That's helpful. And then sort of a follow-up there. You guys have sold a couple of hotels, call it, $125 a key. You bought three hotels, $350 key. I think, presumably, those hotels are closer to $400 a key today. Maybe just roundly not looking for a specific number, but how would you kind of bucket your portfolio in terms of how much of what you own is in that high-value bucket and how much of what you own today is sort of in that lower value bucket, so to speak?

A great question, Mike. I would say that from our perspective, less than about 3% to 5% is in that lower bucket, and the vast majority is well north of that. You're not going to find assets for under $200,000 a key or under $300,000 a key in markets like Key West, Charleston, Santa Monica, Boston, Tampa, beachfront in Deerfield or Mandalay, Downtown Austin and D.C., which is the vast majority of our portfolio. You're not going to find those less than that $300 a key range. And we're very confident that the vast majority of our portfolio lies on the higher end of that range.

Our next question comes from the line of Tyler Batory with Oppenheimer.

I wanted to circle back to the discussion on what's going on midweek in the business. And you gave some statistics in terms of RevPAR and ADR as well. Can you talk a little bit about the gap in occupancy midweek, where we are right now versus '19? How do you think about that gap closing? Were there any catalysts or anything that you're tracking or watching in terms of closing that gap? And what's your perspective on the ADR strength as some of that occupancy starts to come back a little bit more?

What we've observed midweek is that the gap has narrowed. The latest month recorded approximately 87% weekday occupancy compared to 2019, representing the highest level we've experienced since the pandemic began, and it has been on an upward trend since the start of the year. We've seen an increase of 2,000 basis points since January and 300 basis points since March in terms of mid-week occupancy, which is quite encouraging. It's important to note that our rates during the week are also improving. Our midweek ADR is nearing 2019 levels, marking the highest it has been in April with a 500 basis point increase from March. We believe that the improvement in midweek performance is largely due to better results in our urban markets, alongside an uptick in business transient and group customers. This midweek combination of occupancy and ADR is considered a key driver of our growth for the remainder of the year.

And Tyler, just as Sean referred to the average rate side, with our revenue management systems and the ability to price each day and the dynamic pricing methodology that's going with it, that's where we're leaning in when it comes to midweek. At the same time, when we think about channel distribution, with GDS starting to grow because the national corporate accounts are coming back, remixing and really charging bar or retail more often as well as kind of figuring out where the OTA mix should be on shoulders versus peak night, those are all happening at the same time, which is giving us confidence in how we're quoting.

Okay. Great. Appreciate that. And just a follow-up on the capital allocation discussion here. In terms of the dividend, as you exit the covenant waivers, where does the dividend fit in, in terms of the options you have available to you? And what sort of trigger points are you looking at in terms of reinstating the dividend? Is it possible maybe that's something you look at in the second half of this year? Or do you think really it's more of a 2023 sort of event?

Great. Let me start by reaffirming our perspective on dividends. We consider them an essential means of returning capital to shareholders and a key aspect for lodging REITs. We have a history of being an active dividend payer, and we are striving to return to that status. We believe it's vital for our business model. As Leslie mentioned earlier, our balance sheet and liquidity allow us to buy back stock, pursue acquisitions, and pay dividends, giving us the financial flexibility to do so. Regarding the current situation, we cannot reinstate our dividends until we are free from the covenant waivers. We expect to exit those waivers after we report our second-quarter results, so you can anticipate an update next quarter about our approach to resuming dividends. The factors influencing our decision will include our optimistic outlook on lodging fundamentals, our taxable income performance, and market expectations regarding dividends from investors and analysts. With that in mind, we plan to provide an update in the next quarterly call on how our views have progressed after we exit the covenant waivers.

Our next question is from the line of Gregory Miller with Truist Securities.

I'd like to mention the return to office since you brought it up in your prepared remarks. I know your team monitors the Kastle Systems return to office barometer similarly to me. Do you think that the hotel industry and the analyst community may be placing too much emphasis on the significance of people returning to the office before they travel for work? I’m particularly considering salespeople and account managers, who often stay in select service hotels and were likely less frequently working from an office even before the pandemic. This could be relevant for your properties as they aim to distinguish themselves from high-rated, upper upscale, luxury hotels and the full-service, pure REIT competitive set.

So Greg, I'll start and then Tom will add some incremental color. What I would say is that if you look at how BT was coming back prior to this year and in February, it was coming back ahead of offices reopening. So we do know that business travel is not necessarily 100% coupled with offices reopening. Having said that, with offices reopening in a material way starting in March, we saw a key inflection point in business travel at that time, even in San Francisco, which is now the offices returning to work are in line with markets with similar profiles. You've seen snapback relative to there as well. There's definitely a correlation but it's not 100%, and people are traveling ahead of that.

Yes. And to add in regards to the who and where they're staying, I think it was a great question, Greg, when you think about the type of travelers that stay at our hotels, many times are middle management, sales folks, people that are conducting business for their company. What we've found initially is when offices weren't opening to that degree, it wasn't slowing those type of travelers down because that's where they do business and how they stay and how they interact with their customers. But the moment offices have reopened, what we've seen is more of a resurgence in regards to the hiring that we've all talked about within our industry. It's also happening in those industries. For instance, Leslie referring to the Northern California area as an example out in the Silicon Valley, not only did the Company hire but now they've got interns coming in for project business. So we're seeing that give us project business right away as soon as offices are reopening because they had not had that for the last couple of years. Those are interns and individuals trying to become a part of that company going through that cycle. So we're encouraged that the office reopenings is a key element, but it's not the only thing driving BT.

I appreciate your insights. My second question delves a bit deeper into room rates. I examined your supplemental information from both last quarter and this quarter. I noticed that the RevPAR variance compared to the same quarter in 2019 was weaker in some of your extended stay brands compared to the transient brands, such as Residence Inn underperforming Courtyard. I'm not aiming to criticize the brands or my previous employer, but it’s worth noting that you have a larger number of hotels within Marriott compared to Hyatt and Hilton. In particular, the most significant gap was in ADR, with the spread versus 1Q '19 exceeding 1,100 basis points. I'm curious if I'm possibly overanalyzing the variance or if there are specific market recovery factors at play. How do you see your extended-stay hotels recovering in terms of rates compared to transient hotels this year?

So Greg, what we see is, first and foremost, it's really footprint-related versus brand-related depending upon where they're located. Typically, first quarter is usually a little slower on the project business depending upon where the extended-stay business is located and then it starts to really build in Q2 and Q3. When I think about the different performances within the brands, I really look at markets more than I do the brands, and I kind of think about that. For instance, when we have hotels in Austin, where we have a Courtyard and Residence Inn next to each other, they really play off of each other in regards to the rate plateau and how that works and how they handle project business versus BT and citywide business. Many times, we have same pad Residence Inns and Courtyards. We think about strategically how we fill the occupancy and then fill that Courtyard after the Residence Inn has been filled with some project business. That really is long term, and that makes more margin, if you will. So how they play off of each other in those markets is more related to as well as the footprint and how we think about the brands and the performance quarter-over-quarter.

Okay. So the expectation would be that you would see some degree of the rate variance between your equivalent transient and extended-stay hotels that are coupled together, that should narrow over the course of the year.

Yes. I mean, Greg, I think what we would expect is we don't see any changes to the relationship, the historical relationship between where Residence Inn and Courtyard are going to perform. When you look at one quarter data point, obviously, it's a narrow set of time, but we don't see any dynamic change between how those brands are going to perform.

Our next question is from the line of Neil Malkin with Capital One Securities.

The first one, Tom, maybe for you. You called out some of the ROI initiatives in terms of space reconfigurations and key ads. Can you just maybe talk about size, scale, scope, kind of like what in totality that looks like, at least kind of what you have on the docket and when we can expect those things to be completed and starting to add notably to quarterly results?

Sure, Neil. I’ll provide some insights on this. Within our projected margin enhancements of $23 million to $28 million, the revenue enhancements you mentioned account for $9 million to $11 million. These projects are being executed alongside our standard renovation activities, which typically ramp up over one to two years. The capital investments have been divided approximately evenly between the 2021 and 2022 renovation cycles. We anticipate that the benefits from the 2021 projects will stabilize between 2022 and 2023, while the 2022 projects are expected to stabilize between 2023 and 2024. This year marks the beginning of the 2021 projects, with the benefits emerging soon, and we expect stabilization over the next couple of years.

Okay. And then in terms of like total keys do you think you're going to add like what does that number look like? Or what could that be?

We have been quite successful in increasing our portfolio of keys. Over the past couple of years, we have added approximately 60 to 70 keys. This addition has primarily come from converting suites into two-room offerings. We've creatively implemented this by adding doors between suites, which allows us to sell them as separate rooms during certain times. For periods when we cannot achieve a significant premium on the suite rate, we can still sell them as suites when the pricing is more favorable. Our goal is to maximize the flexibility of these rooms. We have dedicated considerable effort to this as part of our return on investment initiatives within the portfolio, and we have more additions planned for the future.

Other one for me is just guidance. Some of the lodging REITs have given quarterly guidance. Just curious as to your view on that? If you think maybe next quarter, you'll give quarterly or, dare I say, annual guidance. What would change that?

Sure, Neil. Listen, as you know, we've historically provided earnings guidance and have a preference to return to providing future guidance. I think our view is that we are comfortable providing guidance when we believe we have enough visibility to forecast results and provide the Street information within a relatively narrow range of outcomes. We acknowledge our visibility has significantly improved. It continues to improve, but we still think the range of possible outcomes is still a little wide today to provide guidance with a high degree of certainty. That being said, it's an active discussion within the team here and the Board, and we're going to continue to evaluate that every quarter on a go-forward basis.

The next question is from the line of Floris Van Dijkum with Compass Point.

Could you provide some insights on the recent trading of select service portfolios that are more urban-focused? Specifically, what is your perspective on the availability of debt and the values you are observing in the market? Additionally, how does this relate to your portfolio?

Yes. I mean we've seen buyers being able to achieve structured financing in order to execute trades. We haven't seen the capital markets be a hindrance to the ability to execute trades. I mean where you think we see things trade at over 400 a key in Midtown Atlanta, 450, these are all select-service type assets in Downtown Austin. Assets in Charleston are trading above 500 a key, Downtown D.C., 4.25. There's plenty of trades that are happening with four and five handles on a per key basis, and buyers have not faced challenges in executing those from a capital perspective. There hasn't been a need for seller financing in any of those transactions.

And relative to the broader landscape of hotels, Floris, urban select service is viewed very favorably among the lender community because of the high margins, the free cash flows, etc. It's a much easier story for underwriters to lend on compared to some of the more significant box type assets where you've seen seller financing in the market.

Could you clarify how you balance the decision between share buybacks and acquisitions, especially considering the return on investment opportunities you have? Your current ROI pipeline shows great potential, and there's also a promising future pipeline ahead. With around $450 million to $479 million in cash available, how aggressive do you plan to be in repurchasing shares this year if their price remains where it is?

I want to reiterate Leslie's points regarding our liquidity and balance sheet, which allow us to explore multiple options for capital allocation. Our return on investment initiatives are already integrated into our investment strategy, and the funds allocated to these projects are included in the $100 million of capital expenditures I mentioned earlier. Looking at our incremental capital options today, we can consider acquisitions, share repurchases, and dividends. While we have the flexibility to pursue all three, share repurchases have become particularly appealing, which is why we've proactively secured earlier access to buy back shares. This demonstrates our positive outlook on repurchases at current prices. We also remain optimistic about acquisitions and have an active pipeline to explore. Regarding dividends, we plan to continue being a dividend payer and will focus on this as we move past covenant waivers following the second quarter. We aim to act on all options, but the specific decisions we make will depend on the relative returns available at the time. Our approach will be responsive to changes throughout the year, ensuring we pull the right lever at the right moment.

Yes. I think Sean did a great summary there. I think the only thing I'd also throw in there from a consideration standpoint is that some of these are tools and some of these are strategy-based. So when we think about acquisitions, we think long-term and we think strategically, and the same thing with ROI. On the buybacks, it's obviously contextually driven and how long that context maintained itself, so.

Our final question is from Chris Darling at Green Street.

Just one quick question from me. Regarding the Denver sales, which I realized it's relatively small in the scheme of things, but hoping you can provide some of the figures around the brand required CapEx. And then more broadly, can you speak to any conversations with the brands that we are reinvesting in other portfolios?

Sorry. The color around the brand required CapEx is as part of those sales, there were PIPs required. So we have good granularity on that and what they were going to be. They were about 1.5 turns on value is I think the way to think about it from a purchase price.

I think your question is a bit unclear, but I believe you're asking if there are additional opportunities for incremental dispositions. Was that your question?

No. Sorry if I'm not coming through clear. Just asking around property improvement plans, right, with the Denver sales. Is there any other kind of conversations around those with brands in any other areas of the portfolio that you would see through?

Yes, we have a positive outlook on Denver. We recently acquired the asset in Cherry Creek, which prompted us to evaluate our existing portfolio and decide whether to reinvest in these assets or adjust our presence. However, this does not change our overall view on Denver. We believe it is one of the top five migration markets for both companies and individuals. The economic conditions and overall environment in Denver are very promising.

Yes. And then the other thing, just to add on to Leslie's comment with respect to a read-through of the portfolio, we've been very actively investing in our portfolio over the last three to five years. We are sitting on a primarily renovated portfolio of hotels. One of the drivers on these two transactions as well as some of our previous dispositions was the decision around investing incremental capital in those hotels of that market relative to other assets and markets with our portfolio that we thought had higher returns. What we have left today with the 95 hotels are, as Leslie mentioned, are almost all what we view as long-term holds and keepers, and they have been largely renovated.

Thank you. At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to Leslie Hale for closing comments.

Well, thank you all for joining us. We are encouraged by the trends we've seen. We're optimistic that they're going to continue. We look forward to meeting with you all and giving you an update over the next several weeks at various investor meetings and conferences. Take care, everybody.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.