RLJ Lodging Trust Q4 FY2023 Earnings Call

Thank you, operator. Good morning and welcome to RLJ Lodging Trust 2023 fourth quarter and full year 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 Chief Operating Officer, 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. Finally, please refer to the schedule of supplemental information, which was posted to our website last night, which includes our pro forma operating results for our current hotel portfolio. I will now turn the call over to Leslie.

Thanks, Nikhil. Good morning everyone, and thank you for joining us. We are very pleased with our fourth quarter results, which outperformed the industry for the fourth consecutive quarter, demonstrating our strong growth profile and underscoring our ability to capture emerging demand trends. Our results this quarter exceeded our expectations and capped off a very successful year for RLJ where we achieved top quartile RevPAR growth of 9%, driven by our urban portfolio and strong performance from our conversions. We exceeded our initial projections for our 2022 conversions, revenue enhancement, and margin expansion initiatives. We made significant progress on our second wave of conversions in Nashville, Houston, and New Orleans. We announced two more conversions, which included our two Pittsburgh assets. We further strengthened our balance sheet while returning capital to our shareholders, and we recently acquired the fee simple interest in our Boston Wyndham asset, pulling forward another growth opportunity. Our strong execution and results this year validate our thoughtful efforts to curate a high quality portfolio with multiple channels of growth, allowing us to outperform on a relative basis this year and beyond. Now, regarding our operating performance for the quarter, our RevPAR grew by 5.2% over the prior year, outperforming the industry by 4 times and our competitive set by 290 basis points. Our year-over-year RevPAR growth accelerated from the third quarter by 180 basis points, benefiting from a balance between occupancy and ADR demonstrating additional room and demand, and continued pricing power across our portfolio. We are pleased to see this positive momentum carry into January, which achieved close to 6% RevPAR growth. Our urban markets were the underlying driver of our RevPAR growth. These markets continue to benefit from robust group demand, ongoing improvement in business travel, and emerging international inbound demand. Additionally, urban leisure remained healthy as large-scale events related to concerts and sports, as well as other leisure activities drove strong weekend demand. These trends were broad-based with several of our urban markets such as Boston, Pittsburgh, Southern California, South Florida, and Denver achieving double-digit RevPAR growth. The fourth quarter also saw exceptional growth at our three conversions in Charleston, Mandalay Beach, and Santa Monica. In terms of segmentation, the positive momentum in business travel led our BT revenues to increase to 79% of 2019 levels, a new high watermark, and a 400 basis point improvement from the third quarter. Our growth in BT revenues was balanced between 7% growth in room nights and 6% growth in ADR, contributing to our weekday revenues achieving 94% of 2019 levels, which was a hundred basis point sequential improvement from the third quarter. In addition to strong demand from SMEs, we are also seeing continued improvement in production from traditional BT sources such as finance, technology, pharma, and aerospace. Relative to group demand, it remains healthy in addition to strong attendance at city-wide events. The growth in small self-contained group is driving improvement in this segment, all of which led our fourth quarter group revenues to increase by mid-single digits over the prior year. We expect small group demand to remain strong, and our hotels are in the sweet spot to cater to this growing segment, given the attractiveness of our meeting space configuration. Finally, we were encouraged to see healthy leisure trends persist throughout the quarter, especially around holidays, benefiting our resorts which achieved 6.6% RevPAR growth with many people settling into a hybrid schedule. Weekend demand continued to be strong across our portfolio, especially for urban weekends, which outperformed our portfolio. The strength across all segments of demand during the fourth quarter, combined with strong growth of 8.1% in our non-room revenues led our total revenues to increase by 5.7%. This strong growth translated into positive year-over-year EBITDA growth of 2.3%, which speaks to our lean operating model. Turning to capital allocation, our initial conversions are yielding strong results that are pacing ahead of our expectations. We were pleased to provide updated projections outlining the incremental upside, and to showcase the high-quality renovations at the Pierside in Santa Monica and Zachari Dunes on Mandalay Beach to many of you recently. The strong results from these assets bolstered our confidence in the next wave of our conversions. During the year, we initiated the physical conversions in New Orleans and Houston, which will position them for a strong ramp, and we are on track to begin Nashville's renovation later this year. We have made great strides towards unlocking incremental embedded growth by announcing that the Renaissance Pittsburgh Hotel will join Marriott's autograph collection, and that the Wyndham Pittsburgh University Center will be converted to a courtyard by Marriott. Additionally, we executed the optionality that our strong balance sheet provides by returning capital to our shareholders through opportunistically repurchasing $77 million of shares at an attractive price while doubling our dividend during the year. The execution of these initiatives has been made possible by the strength of our balance sheet, which also gives us the capacity for external growth. More recently, we acquired the fee simple interest in the 304 room Boston Wyndham Beacon Hill from the ground lessor. We took advantage of our unique position to secure full ownership in order to unlock another compelling conversion opportunity. We acquired this irreplaceable real estate for $125 million, representing $411,000 per key, a meaningful discount to recent hotel trades in Boston. The hotel benefits from an A-plus location in Boston's Beacon Hill neighborhood surrounded by Mass General, which is currently undergoing a $1.8 billion expansion. The acquisition will allow us to move forward with executing the same conversion playbook that has been successful for RLJ. This asset is highly attractive to numerous brands given the demand dynamics of the market. Our deep institutional knowledge of the overall market, the hotel's prime location within the submarket, and the quality of the asset gives us confidence that upon conversion there is 40% plus upside to the hotel's current EBITDA. We look forward to providing additional details around the conversion of the hotel after we finalize negotiations with the brand. Overall, we are encouraged by the pipeline of off-market external growth opportunities that we are seeing. The current backdrop of constrained lending provides a significant advantage to all cash buyers like RLJ. That said, we will continue to maintain our discipline as we have demonstrated. As we look ahead to 2024, while economic uncertainty persists, we remain optimistic that industry fundamentals will achieve positive growth this year, especially against a backdrop of minimal new supply. We believe that urban markets will continue to outperform the industry as urban is poised to disproportionately benefit from the strong group trends, the recovery in business transient demand, and improving inbound international travel. We also expect more pronounced divergence in individual market performance to emerge given citywide calendars, the location of large leisure-oriented events, and inbound international travel. Given our footprint, which should benefit from these trends, we are positioned to outperform this year. There are several key markets which we expect to be strong this year. Boston should outperform due to a strong citywide calendar, robust business travel from Boston-based industries such as biotech and higher education, and Boston's attractive positioning to inbound international travelers. Southern California should outperform as a result of a strong San Diego citywide calendar, business transient from aerospace, a backlog of demand from Hollywood-related industries post-rider strike, and increased inbound international visitation, especially from Asia. New York is expected to benefit from improving travel related to the financial sector, continued strong leisure, and increasing inbound international demand during a period of favorable demand supply dynamics. While we remain cautious about Northern California's slow recovery and fewer citywides this year, there are some encouraging signs in the market, such as improving perceptions of San Francisco's safety, increasing return to office mandates by tech companies, and venture capitalists returning to San Francisco due to the concentration of tech talent and AI startups. Additionally, we expect that group demand will continue to benefit from robust self-contained and small group bookings as well as strong citywide calendars in many major US markets supported by our group booking pace being 12% ahead of 2023. Overall leisure travel should remain healthy, led by the strength in urban leisure, which should continue to benefit from hybrid work flexibility and large-scale events including sports concerts and other activities. Longer-term, we are optimistic about the positive trajectory of lodging fundamentals. Our confidence continues to be supported by the ongoing shift of consumer preferences towards experiences, the improvement in business demand, the continued recovery in inbound international travel, and the growth of citywide events and attendance. All these positive trends will disproportionately benefit urban markets, especially against the backdrop of an elongated period of limited new supply, allowing these markets to outpace the overall industry growth for several years. As this new normal takes hold, our portfolio is well positioned to capture growth in all segments of demand. Over the last several years, we have intentionally repositioned our portfolio into prime locations that benefit from seven-day-a-week demand within urban markets, allowing us to benefit from these emerging trends. In addition to growth from our acquisitions and conversions, we believe that all of these tailwinds should allow us to continue to exceed the industry. Our growth profile will be bolstered by our high quality portfolio, which is built to capture the growing live-work-play trends in urban markets, the continuing and future upside from our announced conversions, the embedded incremental growth from executing on our future pipeline of conversions and ROI opportunities, the tailwinds from our recent renovations in South Florida and Southern California, the significant free cash flow generated by our portfolio to self-fund growth, and the continued optionality created by our strong balance sheet, which would allow us to deliver attractive shareholder returns long-term. Overall, I could not be more proud of the efforts of our entire team, including our operators, whose many contributions have positioned us to drive significant shareholder value over the next several years. I will now turn the call over to Sean.

Thanks, Leslie. To start, our comparable numbers include our 96 hotels owned throughout the fourth quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ's ownership period. We were pleased to report strong fourth quarter operating results, which once again demonstrated the runway for growth embedded in our urban-centric portfolio. Our fourth quarter RevPAR growth of 5.2% was driven by a 1.5% increase in ADR and a 3.6% increase in occupancy. Fourth quarter occupancy was 69.3%, which was 92% of 2019 levels. Average daily rate was $193, achieving 107% of 2019 and RevPAR was $134, which achieved 99% of 2019—the highest level since the start of the pandemic. In particular, our urban markets outperformed with RevPAR exceeding 2019 levels at 101%, including ADR at 111% of 2019. RevPAR in most of our urban markets exceeded 2022, including Boston at 121%, Los Angeles at 118%, Pittsburgh at 119%, San Francisco at 113%, Denver at 110%, New York at 104%, and Washington DC at 105%. Monthly RevPAR growth throughout the fourth quarter exceeded 2022 for each month. RevPAR growth was 6.4% in October, 5.6% in November, and 3% in December, achieving 101%, 96%, and 99% of 2019 levels during those months, respectively. Similar to RevPAR, our monthly total revenue growth above 2022 benefited from continued out-of-room spend, coming at 7.6% in October, 5.3% in November, and 3.7% in December, achieving 102%, 96%, and 100% of 2019 levels during those months, respectively. We are encouraged by the start of the year, where we saw positive momentum in January, which is always a seasonally slower month, with RevPAR growth of 5.8% above January 2023. January's RevPAR was driven by occupancy of 62% and ADR of approximately $191, representing 104% and 102% of January 2023. Turning to the current operating cost environment, recent inflationary pressures continued to normalize during the fourth quarter. On a per occupied room basis, total hotel operating cost growth was limited to 3.4%, which is 260 basis points lower than the third quarter, underscoring the benefits of our portfolio construct and our initiatives to redefine our operating cost model. Total fourth quarter hotel operating costs were only 4.3% above 2019 levels, meaningfully below the aggregate core CPI growth rates since 2019. Drilling down further into hotel operating expenses, fixed costs such as insurance and property taxes were the most significant driver of the year-over-year increases in hotel operating expenses, increasing 16% during the fourth quarter. The increases in fixed costs are impacting most industries and are not specific to the lodging industry. We are encouraged by the trends on the more controllable variable hotel operating costs, which grew 6.6% above 2022, or only 2.8% on a per occupied room basis. Finally, fourth quarter wages and benefits, our most significant operating cost at approximately 40% of total costs, remain generally in line with 2019 levels at 104%. There are many factors that influence these positive results, with the most significant contributors being the successful restructuring of many of our third-party operating agreements and our lean operating model with 18% fewer FTEs than 2019. Our fourth quarter operating trends led our portfolio to achieve hotel EBITDA of $89.6 million and hotel EBITDA margins of 28.1%. We were pleased with our operating margin performance, which was only 93 basis points lower than the comparable quarter of 2022 despite continued cost pressures. Turning to the bottom line, our fourth quarter adjusted EBITDA was $79.2 million, and adjusted FFO per diluted share was $0.34, which came in towards the high end of our guidance. During 2023, we were very active in managing our balance sheet to create additional flexibility and further lower our cost of capital, which included extending $425 million of mortgage debt, recasting our $600 million corporate revolver, and entering into a $225 million term loan. The execution of these transactions demonstrates our strong lender relationships and favorable credit profile. We also took advantage of interest rate volatility to proactively manage our interest rate risk by entering into $525 million of new interest rate swaps during the year. Turning to 2024, we will extend our $181 million of mortgage loans and are in the process of refinancing our $200 million secured loan, which is on track to wrap up during the second quarter. Today, our balance sheet is well positioned with an undrawn corporate revolver. Our current weighted average maturity is approximately 2.9 years. 81 of our 96 hotels are unencumbered by debt. Our weighted average interest rate is an attractive 4.12%, and 89% of debt is either fixed or hedged. Regarding our liquidity, we ended the quarter with approximately $517 million of unrestricted cash, $600 million of availability on our corporate revolver, and $2.2 billion of debt. With respect to capital allocation, as Leslie mentioned, we remain committed to returning capital to shareholders through a combination of both share purchases and dividends. During the fourth quarter, we were active under our $250 million share repurchase program and repurchased approximately 930,000 shares for $9.9 million at an average price of $10.69 per share. In total, during 2023, we repurchased approximately 7.6 million shares for $77.2 million at an average price of $10.20 per share. Additionally, we ended the year with a quarterly common dividend of $0.10 per share, which is well covered and supported by our free cash flow. We will continue making prudent capital allocation decisions to position our portfolio to drive results throughout the lodging cycle while monitoring financing markets to identify additional opportunities to improve the laddering of our maturities, reduce our weighted average cost of debt, and increase overall balance sheet flexibility. Turning to our outlook, based on our current view, we are providing full-year 2024 guidance that anticipates a continuation of the current operating and macroeconomic environment. For the full year 2024, we expect comparable RevPAR growth between 2.5% and 5.5%, comparable hotel EBITDA between $395 million and $425 million, corporate adjusted EBITDA between $360 million and $390 million, and adjusted FFO per diluted share between $1.55 and $1.75. Our outlook assumes no additional acquisitions after the Wyndham Boston and no dispositions, refinancings, or share purchases. We estimate 2024 RLJ capital expenditures will be in the range of $100 million to $120 million, and net interest expense will be in the range of $91 million and $93 million. Our net interest expense will be above 2023 due to the impact of expiring swaps that had lower interest rates. With respect to the cadence for the year, we expect 2024 to follow similar quarterly seasonal patterns as 2023, other than the first quarter, which will be impacted by the timing of Easter and difficult comparisons to the significant growth rates during the first quarter of 2023. Finally, please refer to the supplemental information, which includes comparable 2023, 2022, and 2019 quarterly and annual operating results for our 96 hotel portfolio. Thank you, and this concludes our prepared remarks. We'll now open the line for Q&A.

Our first question comes from Anthony Powell with Barclays. Please go ahead with your question.

Just a few questions on the Wyndham Beacon Hill deal. Could you maybe talk about the multiple or cap rate or any way you can quantify, I guess, the evaluation of the transaction?

Let me frame the transaction and will answer your question. I think that, through our leasehold, we had the right to the cash flows for the next four and a half years. This transaction gave us the ability to buy the asset fee-simple and have the rights to the cash flows forever. We took advantage of our unique position as leaseholder to have a competitive advantage. We used that competitive advantage and the current backdrop to purchase the asset at a very attractive level. The most recent transaction that happened at the Whitney was only four blocks away from our asset and traded for $875,000 a key. We believe the value we bought this at is a significant discount to what we would've had to pay at the end of our lease. Keep in mind that this is prime real estate with significant FAR and a scarcity of land value in Boston. We would've had no leverage and would have been competing not only against hotel operators but also against alternative uses. We believe that gaining access to the upside of this asset earlier, getting a discount of what we would've had to compete for at the end of our lease, more than offsets any remaining cash flow that we would've had in our lease term. It allows us to unlock another compelling value creation opportunity, and we believe it has 40% plus upside to the current EBITDA. From our perspective, we underwrote this to stabilize at an 8 to 8.5 multiple on the purchase price. If you add in the CapEx based on the brands that we're looking at, it would be another turn to turn and a half.

So, 9 to 9.5, I guess, stabilized after CapEx, is that the way to think about it?

Yes, roughly.

And this may be one more in terms of leisure trends. You combine your weekend leisure plus your resort demand. It seems like you guys are doing pretty well in leisure generally. So maybe talk about how leisure as a whole is looking through this year? How did the trend in the back half of last year and do you see that stabilization and improvement happening in that part of the business?

Our general perspective is that leisure remains healthy. Our total revenues were up 4.3% year-over-year in the fourth quarter, driven by room night demand. If we look at our weekends, our weekends were up 4.4% year-over-year, and that was driven by two-thirds demand as well. Urban weekends continued to be strong. We're about 114% of 2019 levels on urban weekends, and that's 200 basis points ahead of where our overall portfolio is at. As you mentioned, our results were strong in the fourth quarter at 6.6%, benefiting from our conversions. We saw strength in South Florida, which was up 10% in the fourth quarter, and Southern California as well. We are clearly benefiting from the continued flexibility that work-life balance provides us. As we look forward into the year, we expect leisure to remain strong and to be balanced between rate and urban leisure will drive that for us.

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

I'd like to start off with the Marriott and Louisville. Could you share your thoughts about that property, the expectations for you all for ‘24 on that property, maybe about group pace or overall growth expectations relative to the full portfolio guidance?

What I would say is, the Marriott, Louisville not only is coming off of a good year this year because in 2023 it had about a 22% RevPAR growth. The great thing about that RevPAR growth is that nearly all of it came in ADR compared to 2019. When we look into 2024, we're also very encouraged. Your question about group pace, we're at 107%, and as you know, our location is connected to the convention center. So, we're in position A. A couple of things that I would also add: this year we got a couple of special events. It's the 150th year of the Kentucky Derby, and one of the four major golf tournaments, the PGA tournaments, will be in Valhalla this year, so we get some benefits from that. Lastly, as Leslie mentioned, urban leisure, the bourbon trail is another example of enjoying the venues that drive demand in an urban environment like that.

I would just sort of add, just in general, that our portfolio diversification is going to be really strong this year. We mentioned in our prepared remarks that Boston, New York, and Southern California are going to be strong, but we are also seeing strength in Atlanta, Louisville, in terms of what Tom talked about, Denver, Pittsburgh, and Orlando as well. So diversification is obviously benefiting our portfolio.

Further, the follow-up question, I'd like to ask about the transactions environment today, and your current expectations for upscale chain scale transactions this year perhaps coming out of the ALIS Conference. Do you anticipate that there's going to be a pickup in activity in the back half of this year? Or at this stage, do you think some hype is likely to be unrealized?

Look, as we sit here today, transaction volume continues to be constrained. However, we do expect, like the broader market, that transactions will improve. Volume will increase in the back half of the year, given the expectations around interest rates coming down. That optimism has been evident in increased conversations in general. More previews of assets at ALIS, which you just mentioned, BOVs, are being done. And I think in general, because the concept of a recession is generally off the table, sellers have been able to underwrite with a bit more clarity. As a result, while the bid-ask hasn't closed, it's gotten a little bit closer and that makes things more actionable. We also think that creates a very attractive environment for all cash buyers for the next couple of quarters until interest rates come down. The longer it takes for interest rates to come down, the more that window for all cash buyers is elongated from that perspective. Our team is actively underwriting, and our pipeline is largely focused on unique situations that benefit all cash buyers. It could be related to a seller's maturity, fatigue by an equity partner, or incremental capital that needs to be put in.

Our next question comes from line of Michael Bellisario with Baird. Please proceed with your question.

First question on guidance, maybe big picture, how are you thinking about the split between rate and occupancy growth in 2024? And then, if my math is correct, it looks like expenses are maybe up 5.5% at the midpoint. Maybe help us understand what the building blocks are to get to that 5.5 number? Thanks.

Yes, Mike. Our perspective is that our growth is going to be split two-thirds demand and one-third rate. If you think about how our portfolio is indexed, we're indexed to urban, which is tied to BT, and BT revenue is still low as our BT revenues were only at 73% of 2019 levels. This suggests room for growth from both demand and occupancy. That’s how we envisioned it.

Yes. Mike, on the operating expenses, you're correct that the midpoint of guidance assumes mid-5% increases year-over-year. The drivers of that are fixed costs, which we expect will continue to pressure throughout 2024. We would expect those fixed costs to be up in the low double digits again next year. On the variable costs, we'd expect them to be roughly a hundred basis points lower growth rate than the overall operating costs. Driven on a preoccupied room basis, we expect our cost to only be up about 2% year-over-year. We think, net-net, the operating cost environment improved throughout 2023, and we expect that improvement to continue into 2024 as inflationary pressures decline.

And then just one follow-up, just on Boston, could you provide what the hotel level EBITDA was in ‘23? And how much was the ground rent expense? i.e., what's going away in ‘24? And then any initial thoughts on San Diego given that that lease expires in ‘29?

The hotel did roughly $10.5 million of EBITDA in 2023, and the ground lease expense of 2023 was roughly three-quarters of a million.

As it relates to San Diego, we're in active negotiations with the Port of San Diego to extend the lease. We feel very good about where we are in our discussions, and we are a tenant that's in good standing. We see a path forward in terms of extending the lease.

Our next question comes from line of Dori Kesten with Wells Fargo. Please proceed with your question.

As you think through the phasing of your conversions renovations over the next few years, should we assume that the upside of completed work fully offsets ongoing renovation headwinds or are there certain projects that stick out as being particularly disruptive?

From a renovation displacement perspective, we do not expect either a headwind or tailwind over the next several years related to renovations. This is because we have an in-house design and construction team that can sequence the rooms out of service on the conversions and renovations to minimize the time out of service, and also ensure the scope gets hotels back up and running as quickly as possible. Therefore, renovation disruption for us is not expected to be a headwind or tailwind for this year or for the next several years. Generally speaking on our conversions, we underwrite a ramp of two to three years, with a more leisure-centric ramp generally being in the two-year timeframe. All of this is included in the bridges we provided as part of our Santa Monica deck, illustrating potential EBITDA growth from the conversions over the next three years.

Sean, while I have you, you said that the expiration of swaps was the headwind in your ‘24 FFO guide. Can you provide us with your view on your fixed versus floating exposure as we look out of the next year?

We ended the year with a little under 90% of our debt fixed or hedged. Our long-term strategy targets keeping 20% to 30% of our debt floating as a hedge against a downturn. If we did nothing else, we would end 2024 with just under 30% of our debt floating. We were proactive in 2023, and you can expect us to manage it actively again in 2024. We entered into $525 million of swaps in 2023 at an average rate of roughly 3.5%. You would expect us to continue managing it actively, but generally speaking, the 20% to 30% floating is what we target for our long term.

And then just last, should we expect your dividend payout as a percentage of FFO per share to look more like 2019 by 2025? I'm just trying to get a sense of where your NOLs are, and how you might use those over the medium term?

We have several years of NOLs remaining. Our dividend policy is primarily based on what we think an appropriate payout ratio is. The way we're considering the payout ratio in a normalized environment is going to be less than it was in 2019 for all lodging REITs. Our current payout ratio, as a percentage of FFO, is in the mid-30s, and we think our current payout ratio has room for increases both this year and over the next couple of years. We think a normalized payout ratio could end up being somewhere in the 60% to 65% of FFO at the peak of this cycle. You can expect us to manage increases throughout the cycle. The NOLs provide us the flexibility to make those decisions based on what we think is appropriate for the market.

My next question comes from line of Tyler Batory with Oppenheimer. Please proceed with your question.

Can you please talk through your industry RevPAR assumption that's implied in your guidance this year? I'm just trying to get a sense of what sort of outperformance you expect from your portfolio versus the broader lodging space?

The baseline for our assumption is that our portfolio should perform in line with urban, which is projected to be 3.8%. Our midpoint of guidance aligns with that since we expect urban to outperform the industry. Our fourth quarter urban performance outperformed the industry by 4x, and if you look at the full year, urban outperformed the industry by 2x.

Marco specific, can you talk through a little more on what you're seeing in San Francisco, CBD, and then also talk about Silicon Valley as well, please?

Overall, we keep in mind that we have a diversified footprint and we only have a few assets in the CBD. In the fourth quarter, our CBD benefited from citywides and office self-contained events. Silicon Valley saw relatively weak transient demand, which was reflected in the numbers in our supplement. As we look forward, San Francisco is experiencing a soft citywide but we are seeing improvement in BT coming this year, particularly as the return to office increases and activity around AI continues to grow. The city's recent positive headlines regarding leasing activity and safety suggest ongoing interest and recovery.

And then how about Silicon Valley, any commentary there, I mean, it's probably similar to what you just articulated in terms of San Francisco?

In Silicon Valley, it's critical to have international deployment. We have seen encouraging signs with forward bookings from China and robust project business. We noticed that in September, October, and November we were getting closer to about 95% of international deployment from a forward booking perspective. For 2024, projections indicate the number of bookings from China could be three times what it was in 2023. We have more extended stay hotels in Silicon Valley, and one is under renovation, which we anticipate will be ready for the summer of 2024. We're encouraged by the early 2024 performance, showing improved demand compared to Q4.

Our next question comes from the line of Chris Darling with Green Street Advisors. Please proceed with your question.

Leslie, going back to your comments about the transaction market, how are you considering incremental asset sales in light of the implied EBITDA multiple at which you trade relative to private hotel pricing?

You should expect us to be active portfolio managers. As the industry and market dynamics unfold, we will evaluate the impact on our portfolio as a new normal takes hold. We don't have to sell assets given our balance sheet, but we can be opportunistic. As we analyze growth rates in certain markets and how that compares to our overall portfolio or capital needs relative to prospective returns, we'll look to recycle assets, but it's going to be an asset-by-asset approach.

And then maybe just following up on your comments about the Bay Area, I see that 2023 EBITDA margins finished about 300 basis points below comparable 2019 levels. I'm curious what that would look like if you excluded the Bay Area. Just trying to get a sense of what the upside might be as that region continues to ramp.

Without the Bay Area, the primary driver of the margins' delta to '19 comes from Northern California. If you exclude Northern California, the margins are much closer to or right on top of 2019. Our view of Northern California's recent trends offers encouragement moving forward, which should help close that gap.

Our next question comes from line of Austin Wurschmidt with KeyBanc. Please proceed with your question.

Just going back to the transactions theme, Leslie, I think you discussed looking for unique opportunities that benefit all cash buyers. I guess how much additional dry powder do you have before you'd need to match fund any capital outlays with either dispositions or some other capital raise?

I don't have a specific number for you, but we feel optimistic about what’s in our pipeline relative to our current balance sheet.

At year-end, we had a little over $500 million of corporate cash. We used $125 million of that for Boston, so pro forma that leaves us with approximately $375 million. Our cash portfolio generates around 25% of our EBITDA in the US, translating into over $100 million of incremental free cash flow annually, creating additional capacity. The key takeaway is that with our existing balance sheet and free cash flow, we have flexibility for deals without needing to go to the markets unless conditions are favorable.

Of that free cash flow that you highlighted, how much goes towards some of the renovations you are doing and how much is freed up for share buybacks, acquisitions, and other capital allocation opportunities?

Those percentages and numbers are after accounting for everything, including assumptions around dividends and CapEx.

How soon could you commence renovations at the Boston Wyndham? Do you have a sense today of the capital spend necessary to achieve that 40% upside to hotel EBITDA that you highlighted?

We're still negotiating with the brands. The number is a range we're working through. Our aim is to have the ESK completed before the World Cup, which is mid-2026.

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

Let me flip it on its head. I know there are a couple of questions here on Northern California, but I still see a $46 million delta relative to 2019 levels. Can you comment on the markets that are performing the best in terms of exceeding 2019 levels of EBITDA and how much further do you think you can push your urban markets in ‘24? Is that growth you're expecting to come from areas other than Northern California, or do you see steady progress in all of your markets in ‘24?

Our performance this year is broadly driven. We mentioned markets like Boston, which is strong due to its citywide base and self-contained events. There’s also a robust base of BT in New York. Leisure is remaining strong and ramping in addition to limited new supply. Atlanta will benefit from a backlog in the writers' strike. Southern California will benefit from San Diego citywide events, alongside a strong economic base. Given the industries it caters to, Louisville has shown strength. Denver, Pittsburgh, and Orlando also offer diversification that offsets the slower ramp we are seeing in San Francisco.

We provided a detailed EBITDA bridge as part of our materials for Santa Monica and Boston, indicating the potential for over $500 million of EBITDA, compared to roughly $450 million in 2019. We wouldn't have shared that data without confidence in the portfolio's ability to exceed that. Urban demand has been a primary driver to date. The conversions and associated incremental EBITDA are also contributing to this growth. The portfolio allows for some markets to perform better while others may underperform, but overall, we expect to surpass the 2019 levels in the coming years.

Since you cannot buy the freehold in San Diego, can we expect similar costs going forward on that? Will there be greater profit-share to the city or local municipality that owns the freehold amount?

Unfortunately, Floris, we’re in confidential negotiations, so I can’t comment.

For Sean, your weighted average term of your debt is relatively short at 2.9 years today. Are you waiting for rates to come down and will you be looking to extend the maturity on your debts when that occurs? How are you thinking about the balance sheet and the term of your debt going forward?

As a general rule, we aim to stay ahead of our debt maturities. We have just under $400 million of maturities in the next quarter. We are in the process of extending $181 million of that, represented by two loans. The combined debt yield of those two loans is 14.5x, showing these are low-leverage, well-covered loans. We have contractual rights and are currently working with the lender on extending that. Additionally, we have a $200 million loan that we are refinancing, which will add financial maturity. We have excellent relationships, have successfully extended debt, and should complete these tasks shortly, positively impacting the weighted average maturity.

Thank you, Ms. Hale. We have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you everybody for joining us. The strong results that we've shown and we expect to continue are the direct results of what we've been executing around curating a portfolio that benefits from seven-day-a-week demand in key urban markets. We look forward to providing you with additional updates as we progress throughout the year. Thank you again for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.