RLJ Lodging Trust Q2 FY2025 Earnings Call

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust's 2025 Second Quarter Earnings Call. On today's call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter. Nikhil Bhalla, our Senior Vice President of Finance and Treasurer, will discuss the company's financial results. Tom Bardenett, our Chief Operating Officer, will also be available for Q&A. Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company's actual results to differ materially from what has been communicated. Factors that may impact the results of the company can be found in the company's 10-Q and other reports filed with the SEC. The company undertakes no obligation to update forward-looking statements. Also, as we discuss certain non-GAAP measures, it may be helpful to review the reconciliations to GAAP located in our press release. Finally, please refer to the schedule of supplemental information, which includes pro forma operating results for our current hotel portfolio. I'll now turn the call over to Leslie.

Good morning, everyone, and thank you for joining us today. We achieved second-quarter results that were ahead of our expectations, demonstrating the resiliency and benefits of our diversified portfolio, the continued ramping of our conversions, and our disciplined expense management as we focus on delivering bottom-line results. In addition to our operational focus, during the quarter, we executed on several key initiatives, which included making progress on the repositioning of several key assets, further strengthening our balance sheet by addressing all near-term maturities, and opportunistically recycling capital into accretive share repurchases. Against an evolving landscape, we remain focused on driving earnings growth and executing on our capital allocation initiatives to drive long-term shareholder value. With respect to our operating results, our RevPAR decline of 2.1% in the second quarter was consistent with our expectations we had outlined on our last call. Our RevPAR was constrained largely by a reduction in room nights, driven by the ongoing transformational renovations at high occupancy properties in South Florida, Waikiki, and New York, as well as the planned closure of the Austin Convention Center, which will significantly expand the center and further strengthen the Austin market in the coming years. Excluding these factors, RevPAR growth for our portfolio was slightly positive, outperforming the industry, and we also gained 140 basis points of market share, highlighting the strength of our portfolio. Our urban hotels continue to be the key driver of our portfolio, with RevPAR outperforming our portfolio by 140 basis points. Notably, our hotels in San Francisco CBD achieved 20% RevPAR growth, benefiting from a strong citywide calendar and improving return to office trends. We are encouraged by the ongoing recovery in Northern California, which continues to gain momentum, supported by an improving citywide calendar and a positive local business climate. We believe that the scale and trajectory of AI investments should drive sustained economic expansion in the region and support further improvement in lodging fundamentals over the next several years. We are also encouraged by the continuing positive results in our 7 completed conversions, which collectively achieved 10% RevPAR growth during the second quarter, validating our ability to drive operational upside through our conversion pipeline. Relative to segmentation, we saw strong growth in leisure revenues, which were up 5%, aided by the shift of Easter into April and an elongated spring break. Additionally, leisure revenues benefited from several events such as the U.S. Open in Pittsburgh, Formula One in Miami, the World Cup soccer games in several of our markets, and strong attendance at concerts in several markets such as Chicago and Houston. These events especially benefited our urban leisure segments, which outperformed, achieving 7% revenue growth. These results also reinforce our conviction around urban leisure as another leg that will continue to drive outperformance in our urban markets. As it relates to business travel, underlying trends remain healthy as large corporate accounts are driving momentum in BT, especially in sectors such as consulting, tech, and defense, with return to office trends continuing to create incremental demand. Excluding government-related business, which remains challenged, revenues were up 3%. Our second-quarter group revenues were impacted by holiday shifts, the closure of the Austin Convention Center, and the reduced demand from government-related groups. Softer group demand led to a broader lack of compression during the second quarter overall. Despite softer group demand, our non-room revenues grew by a solid 1.5%, once again underscoring the success of our ROI initiatives aimed at growing food and beverage and other ancillary revenues. This growth, paired with our tight cost containment initiatives, allowed our portfolio to deliver bottom-line results, which exceeded our expectations. Our operators were able to preserve EBITDA through the early implementation of aggressive cost mitigation efforts during the quarter, which included optimizing productivity across all hotel departments, managing F&B direct costs, and adjusting hours of operations. These and many other initiatives allowed our portfolio to achieve flat operating expense growth compared to last year, which limited our margin compression to just 90 basis points. Turning to capital allocation, which continues to be an important source of value creation for RLJ. Our 4 most recent conversions in Nashville, New Orleans, Houston Medical Center, and the University of Pittsburgh achieved a combined RevPAR growth of 26% during the second quarter, underscoring the significant growth embedded in our conversions. We continue to expect our conversions to generate robust double-digit returns, which should enhance our operating performance. We are on track to deliver our conversion of the Renaissance Pittsburgh to an Autograph by Marriott by year-end. Additionally, we are making meaningful progress on our Boston conversion and look forward to sharing an update on the brand selection during the third quarter. In the second quarter, we advanced our transformational renovations at 4 high-occupancy properties in South Florida, Hawaii, and New York. We expect these assets to start ramping in the fourth quarter as they are delivered. Additionally, we took advantage of the dislocation in our share price to execute $6 million of share repurchases, recycling the remaining proceeds from our last disposition. And finally, we further strengthened our balance sheet by addressing our near-term maturities and paying down the remaining balance on our revolver. Our ability to successfully execute on multiple capital allocation opportunities simultaneously continues to highlight the optionality of our strong balance sheet. With respect to fundamentals for the back half of the year, our outlook is mixed as the broader macro environment remains uncertain, which is contributing to shorter booking windows and limited visibility. These dynamics will weigh heavily on the third quarter, while favorable calendar shifts, easier comps, and improved group travel will help support better lodging fundamental trends during the fourth quarter. Relative to the third quarter, we are facing tough citywide comps in markets such as Chicago, which hosted the DNC last year, as well as Boston, San Diego, and New Orleans, which is compounded by the softer-than-expected overall group demand. Additionally, Tampa and Houston will face difficult year-over-year comparisons against last year's hurricanes, which drove outsized FEMA business. We expect leisure demand to remain stable, although with continued rate sensitivity, while government-related and international travel are expected to remain soft for the duration of the year. And we will also be impacted by the continuing renovations in South Florida and Hawaii, and the closure of the Austin Convention Center. Against this backdrop, our preliminary July RevPAR is tracking down by mid-single digits year-over-year. Relative to the fourth quarter, we anticipate tailwinds from a more favorable holiday calendar, the lapping of the presidential election, strong citywide in a number of our markets, including Northern California, and the ramp from our renovations, including Waikiki, as they are delivered. Looking at 2026 and beyond, we see an improving setup for the industry, which should benefit from a positive economic backdrop driven by less regulation, extension of lower tax rates, tariff clarity, and the expectation of lower borrowing costs to allow for business leaders to make decisions around capital planning and investment. This will occur against an extended period of constrained new supply. With this improving backdrop, our portfolio is especially well-positioned for 2026, given our favorable geographic exposure and our urban footprint, which should allow us to see outsized benefit in an improving demand environment. In particular, we should benefit from an improved citywide calendar in a number of our markets, a favorable footprint positioned to capture demand from a strong calendar of special events such as the 250th anniversary celebration of the United States in Boston, D.C., and Philadelphia, NBA and MLB All-Star games in Los Angeles and Philadelphia, the NFL Draft in Pittsburgh, the Super Bowl in San Francisco, as well as the World Cup matches across several of our markets. The ramp from our 8 completed conversions, including the Autograph in Pittsburgh, which should drive incremental growth in our portfolio, and the ramp from our high occupancy renovations in South Florida, Hawaii, and New York that will be completed in 2025. Additionally, we remain constructive on Austin's long-term outlook as the city continues to benefit from economic expansion, including a thriving tech sector. While the convention center renovation will continue to weigh on near-term results, the facility will double its current size and is expected to reinforce Austin's position as a regional economic engine and generate meaningful future demand, particularly across our footprint. Moreover, our portfolio's lean operating model and our relentless focus on cost containment will enable us to drive much of this expected improvement to our bottom line and generate significant free cash flow. We remain confident that our portfolio construct, operational discipline, and embedded growth drivers will allow us to look through any near-term volatility and continue to create long-term value for our shareholders. With that, I will now turn the call over to Nikhil.

Thanks, Leslie. To start, our comparable numbers include our 94 hotels owned at the end of the second quarter. Our reported corporate adjusted EBITDA and AFFO include operating results from all sold and acquired hotels during RLJ's ownership period. We were pleased with our second-quarter results, which came in ahead of our expectations. Our second-quarter occupancy was 75.5%, average daily rate was $205, and RevPAR was $155, which translates to a 2.1% RevPAR contraction versus prior year, including a 1.6% decline in occupancy and a 0.5 percentage point drop in ADR. As Leslie noted, transformational renovations at several key assets, as well as the closure of the convention center in Austin, impacted second-quarter results. Excluding these, our portfolio RevPAR increased by 0.2% RevPAR at our urban hotels outperformed our portfolio, led by 13% and 10.3% growth at our urban hotels in South Florida and Northern California, respectively, as well as positive RevPAR growth in several urban markets such as Atlanta, New York, and Houston. We were especially pleased with our non-room revenues achieving 1.5% growth, demonstrating the momentum behind our ROI initiatives despite slightly lower occupancy this quarter. With respect to the cadence of RevPAR during the quarter, April was effectively flat, influenced by the Easter calendar shift and an elongated spring break. May and June came in approximately 3% below last year, lining up with the closure of the Austin Convention Center and renovations at key properties, which are continuing into the third quarter. Turning to the current operating cost environment. We were pleased to achieve flat expense growth during the second quarter, an improvement of nearly 300 basis points from the first quarter. Our ability to control costs in a soft top-line growth environment speaks to the benefits of our portfolio construct and our lean operating model. Our operators proactively responded to the softening operating environment by initiating cost mitigation efforts early, which limited our margin contraction over the last year to just 90 basis points. Additionally, with respect to our fixed costs, we are now lapping the difficult comparisons to last year and benefiting from over 10% reduction in annual property insurance during last year's renewal. Turning to our bottom-line results. During the second quarter, our portfolio achieved hotel EBITDA of $113 million and hotel EBITDA margins of 31.1%. Excluding the renovations in Austin, our hotel EBITDA margins were flat over last year. We achieved adjusted EBITDA of $104 million and adjusted FFO per diluted share of $0.48 during the second quarter. Our balance sheet remains strong. As previously announced, in the second quarter, we proactively addressed our 2025 and early 2026 debt maturities, including entering into a new $300 million term loan used to refinance our term loan maturing in early 2026 and fully repaying the outstanding balance on our line of credit. The new term loan matures in 2030, inclusive of extension options. Additionally, early in the second quarter, we exercised the extensions on 2 mortgage loans of $96 million and $85 million, respectively. Having addressed all of our 2025 debt maturities, we are now turning our attention to our 2026 maturities. Overall, we have a well-positioned balance sheet with $600 million available under our undrawn corporate revolver, a current weighted average maturity of nearly 4 years, 86 of our 94 hotels unencumbered by debt, an attractive weighted average interest rate of 4.5%, and almost 75% of our debt either fixed or hedged. We ended the second quarter with nearly $1 billion of total liquidity and $2.2 billion of debt. With respect to capital allocation, we are continuing to demonstrate the optionality our strong balance sheet provides by unlocking embedded value in our portfolio through transformative renovations and high-value conversions, while simultaneously remaining committed to returning capital to shareholders through dividends and share repurchases. During the second quarter, we repurchased 0.8 million shares for $6 million at an attractive basis of $7.14 per share. So far during this year, we have repurchased approximately 3.2 million shares for $28 million. Additionally, our quarterly dividend of $0.15 per share is well covered and supported by our free cash flow. Overall, we will maintain a disciplined approach to capital allocation, aiming to ensure stability while positioning our portfolio for growth throughout the lodging cycle. At the same time, we will actively monitor financing markets to identify opportunities to improve the laddering of our debt maturities, lowering our weighted average cost of debt, and enhance the flexibility of our balance sheet. Now turning to our outlook. Given the low-visibility environment we are operating in today and the third-quarter softness we are seeing, we view the bottom end of our guidance range as the most likely outcome. With respect to the third quarter, we expect that the industry will face headwinds from the holiday shift in September, soft leisure, and lower government and international demand, causing RevPAR to be down. In addition to these industry headwinds, our third quarter will also face incremental impacts of approximately 200 basis points due to the revenue displacement from continued renovations in Waikiki and South Florida and the closure of the Austin Convention Center, which will lead to our third quarter being the softest quarter of this year. Our operators are continuing to aggressively execute asset management cost containment initiatives to mitigate the impact on the bottom line. The fourth quarter, on the other hand, will benefit from a number of tailwinds to RevPAR. These include a favorable holiday shift, significantly stronger citywide calendars in many of our markets, notably Northern California, an easier comparison to the presidential election last year, and the ramp in assets under renovation that start to deliver. Finally, please refer to the supplemental information, which will include comparable 2025 and 2024 quarterly and annual operating results for our 94-hotel portfolio. Thank you, and this concludes our prepared remarks. We will now open the line for Q&A.

I appreciate the details around the impact to the portfolio in July. Can you just talk a little bit about the booking pace tracking into, say, August and September? And how much do you think also is attributable to some of the holiday shifts and just some of the other factors you highlighted?

Sure. If I consider the third quarter overall, it's clear that we are experiencing a layering effect that is contributing to it being our weakest quarter. As previously mentioned, there are known factors impacting this quarter, such as the holiday shift affecting September, and challenging comparisons in cities like Chicago, Boston, New Orleans, and San Diego. Additionally, the hurricanes that struck Houston and Tampa starting in July are causing tough comparisons as well. Furthermore, the softness in government and international leisure travel is also influencing our performance in July and August. Overall, these factors are impacting the booking trends in the third quarter, with the pace declining, and we're not seeing a recovery for the quarter. We believe that this layering effect is uniquely affecting the third quarter. Looking at the rhythm of the quarter, July is performing at mid-single digits, we expect August to be similar, and September should show slight improvement.

And I guess, which segments or markets really would you say are underperforming more than you had expected when you revised your guidance last quarter?

I would say that in general, it's the layering effect, Austin. So I think it's a compound effect of all the pieces as a result of the group being softer and not picking up in the quarter for the quarter.

Wondering if we can zero in on what you're seeing in the leisure side of things, perhaps talk about some of the differences between urban leisure versus resort leisure. Just trying to get a good sense of how that business is trending so far in the summer.

Yes, as we mentioned for the second quarter, urban leisure outperformed with a 7% increase, while leisure overall rose by 5%. This success is largely due to our strong involvement in special events during the second quarter. We expect to see continued success in this area throughout the summer; however, international leisure typically plays a more significant role during this season, and it hasn't performed as robustly as usual. Consequently, we experienced some weakness in that segment. Demand remains strong, but leisure rates are facing pressure. Nevertheless, with the presence of special events in various markets, our performance remains relatively strong, and urban leisure continues to excel overall.

To add to that, we are seeing that we can maintain our average rate despite the softness in the third and fourth quarters. Looking ahead, we have a solid foundation in pricing integrity across our market segments, which is reflected in our bar pricing. Even on weekends, despite the softening demand mentioned by Leslie, we are still able to hold our rates, which is positively impacting our profitability. As we enter the fourth quarter, our rates are in a strong position, with a pace of 102%. We are managing to remain competitive even with the challenges on the average rate side, which allows us to adapt to potential demand issues and positively influence our bottom line. This strategy is also supporting us in the fourth quarter as we move forward following the third quarter, independent of the concerns Leslie highlighted.

And my follow-up, can you talk a little bit more about how you're thinking about share repurchases, whether you'd like to be a little more programmatic with that? And just how you think about repurchases compared with your leverage and some of the other uses for your capital?

Sure. Tyler, share repurchases remain appealing in the current environment. The volume of our share purchases is influenced by our assessment of the fundamentals, the macroeconomic situation, and our leverage. We have been consistent in our approach and will continue to be. We were active this quarter, utilizing proceeds from asset sales. We believe that this method allows us to conduct buybacks while maintaining our leverage neutrality. Additionally, we are also focused on advancing our conversions, which have delivered strong returns. As we work to further strengthen our balance sheet, it increases our ability to invest in both buybacks and conversions, allowing us to do both at the same time. You can expect to see us continue this strategy, assuming valuations remain stable.

I'd like to start off with Nashville. Maybe you missed this in the prepared remarks, but could you provide an update on Bankers Alley? We heard from another REIT this earnings about Nashville supply growth impacting how hoteliers, particularly at the high end, are positioning on transient leisure room rates and discounting. I'm curious if you're seeing similar trends from your side of the coin within downtown Nashville. And if so, how impactful is that to your hotel?

Thank you for the question. We are very pleased with how our Nashville asset has performed. We saw a 14% increase in the second quarter. As you know, we recently converted that asset. With only 124 keys, it's well-constructed and conveniently located within walking distance of several demand drivers. We're very satisfied with the performance of our asset. I’ll let Tom provide some additional insights.

Yes, Greg, I understand your knowledge of the market. I would like to add to Leslie's comments that since we transitioned to the Hilton RE system and became a Tapestry hotel, we have created a unique atmosphere. Hilton Honors members appreciate having another option, especially since there wasn’t much Hilton presence in that area. Currently, 60% of our business comes from Hilton Honors. Additionally, having space for an art gallery offers visitors a distinct experience in Nashville, which is a lively destination. As Leslie mentioned, our location on Second Avenue has undergone considerable beautification connecting Printers Alley, Broadway, and Second Avenue. Looking ahead, there is potential for growth with the Titan Stadium being constructed nearby, which will host concerts year-round. We also anticipate positive impacts from the Oracle Campus development, which will serve as a major headquarters with 8,500 jobs. Overall, we believe this market holds bright prospects for us. While there may be some supply and convention center challenges, our smaller property with 124 keys allows us to cater effectively to leisure and corporate customers in our vicinity.

For my second question, I'd like to ask about the transactions environment. This question comes up pretty often on earnings calls, but it looks like there may be a little bit of a pickup of activity in upscale, at least that's what I'm seeing. And I'm curious what you're seeing both for upscale and upper upscale right now. How is volume? How is pricing? And if you can comment, how does that relate to how you view your discount to NAV at present?

Yes, overall, transaction volume remains low. We're primarily seeing smaller deals involving owner-operators, and generally, the process is taking longer. However, I must note that transaction sentiment has improved in the past 45 to 60 days as policy developments have progressed. This could lead to an increase in deal activity in the upcoming months. The debt markets are still performing well, but equity capital is limited. This environment might allow for more activity soon. Bid-ask rates vary from deal to deal, so it's not a one-size-fits-all scenario. The transactions happening typically involve situations with debt maturities, capital needs, or fatigue within the capital structure. In the next month or quarter, we might see improvements. It's also important to mention that we believe our assets are trading significantly below their intrinsic value, indicating a substantial dislocation.

I would like to first ask about the leisure trends you mentioned and how they are performing in the latter half of the year. Are you observing an increase in leisure discounting, any changes in booking and channel mix, and where the discounts might be originating from that could affect the second half?

Yes, I would say that overall, leisure demand remains stable, urban areas are outperforming, and we are noticing more rate sensitivity through the use of discount booking channels. We expect this trend to continue for the rest of the year. Regarding other segments, business travel without government is progressing steadily, driven by national accounts, and we anticipate this will persist. October should be a strong month for business travel. Although group bookings were weak in the third quarter due to challenging booking trends, difficult comparisons, and the holiday shift, we expect a recovery in the fourth quarter. The fourth quarter setup looks promising with the holiday shift providing an advantage, and we will be comparing against last year's election. We have increased citywide events in New Orleans, Boston, Denver, Orlando, Houston, and Louisville, and the booking patterns are improving. Our performance pace is showing positive signs, and our renovations will start to yield benefits. While the third quarter faced challenges due to holidays and tough comparisons, the fourth quarter appears to be shaping up well with easier comparisons and a stronger citywide presence. Lastly, while renovations impacted us in the third quarter, they will benefit us in the fourth quarter. Our projections for the fourth quarter are based on modest assumptions, with expectations of a pace of 102%, which we feel confident about. The outlook for the fourth quarter is different from the third quarter, and the segment softness we noted is limited to that period and does not reflect underlying fundamentals for the fourth quarter.

And then quickly shifting over to expenses. I know you mentioned the fixed expenses as well in Q2, but then overall, just the cost controls. Is there any change in the expense outlook for the second half of the year or your change in assumptions, especially 3Q to 4Q, mostly just top line driven?

Yes. I would say, first of all, I really want to give the team a recognition for the great job they did in terms of being very aggressive around the cost side. The team is really focused on a number of factors around optimizing scheduling, procurement, looking at hours of operation on F&B, energy initiatives, and continuing to cluster, which is unique to our portfolio. And then we were able to flex because of the types of assets that we own. And I think that's the benefit of what we saw in the second quarter. And I would say that our assumption around the back half of the year is about 2% growth, and we feel good about being able to contain that to the extent that there's any incremental weakness on the top side.

And I would add just a couple of things, Daniel. And that is when you think about the level of intensity that we're putting around that, it's really critical to think about how the workforce is changing out there. We're continuing to see a decreasing of contract labor, both in rooms and F&B. We have dedicated time and effort to really making sure that we have labor management systems that are driving productivity. And because our management companies are now having employees working for the company, we're finding that retention is up, turnover is down. And then when you think about our footprint, it allows us to really take advantage of what Leslie talked about earlier, and that is having 50% suites with longer length of stay, 80% rooms revenue, which is less complicated F&B operations. When we really dig in, it's the proximity of our locations and our footprint that is allowing us to grasp that sustainable synergies and savings going forward. And then we made a move in Q2 based on our scale with the amount of assets that we have, we made a procurement decision to really maximize savings by bundling what we buy and driving compliance by adhering to drop sizes that are going to provide us incentives. And we're already seeing to see the window of savings like, for instance, comp F&B, POR was down a couple of percent. Those are early stages of that move. So we're really digging in on that side. And as Leslie said, if we have demand issues, we flex. And when we have revenue increases, we will flow. And that's how we're thinking about our operations.

Maybe we can start with a follow-up on the last question. As you begin planning for 2026, has your expectation changed regarding what it takes to achieve flat margins from a RevPAR perspective compared to what you anticipated for 2025?

Yes, Chris, I mean, I think when I look at the second quarter sort of a proxy, what you saw in the second quarter was a 2:1 relationship where you're down 2 on the top and on the bottom. And I really think that that's a signal that we're moving towards more of a normalized relationship between revenue and expenses, and that's kind of the way I would think about it.

And just as a follow-up, I guess if you maybe drill down a little bit across all your buckets of demand, and you covered a little bit of this already, but is there any discernible change in booking window or sourcing of booking in terms of where it's coming from direct OTA? Anything to kind of highlight there if we're getting back into a more normalized environment in the fourth quarter?

Yes. Yes. I mean the one thing I would say, and then I'm going to let Tom dig into your question around channels, is obviously, the booking window remains short, which is obviously impacting visibility beyond the current trends that we see. So that continues to be our current lens today.

Yes. And to give you some color around how people are booking, when I look at the numbers, Chris, I think it's encouraging that people are continuing to go to brand.com. And we're still growing that. For instance, quarter 2 was up 2.5%. It's our largest mix of business, which is great because you don't want to have to pay transaction fees on that. And so that's roughly almost 40% of our business that's going through the brand. In addition to that, when Leslie talked about BT, we obviously look at global distribution systems. We look at local negotiated rates. We look at the national corporate accounts. That's where we're seeing the growth. So even in the face of adversity within the government market, to get to positive 3% with BT means that our national corporate accounts are coming back. They're booking through GDS. We're really hunting on the ground street corner by street corner to drive local negotiated rates to bring that in. And then when you look at OTAs, they're up a little bit because, obviously, leisure being a little softer, you got to take a little bit of that business. And that's a channel that you can control and turn the valve off and turn the valve on when you need it from a demand standpoint, but it's still a very small percentage of our total mix. So that gives you a little bit of an idea how things are happening. And then more importantly, because we have a significant amount of hard brands, even our collection brands and our conversions at our lifestyle, the brand.com and the loyalty continues to rise, and that's roughly about 60% of our occupancy at our Marriotts, our Hiltons, and our Hyatts. And so we continue to really explore how we drive membership to try to make sure we continue to increase share.

You've got one of the strongest cash positions among your peers, and with portfolio-leading RevPAR growth and attractive returns from your ROI CapEx programs, why not increase the pace of those across the portfolio? Is there something holding you back there operationally from not just the conversions and the upbrandings, but ROI-specific assets like the rooftop at the Mills House?

We really appreciate the rooftop at Mills, and I want to highlight that we have previously mentioned our goal of completing two conversions per year. We are on track with that plan. In our upcoming quarterly update, we will provide details on the brand selection for Boston, and we feel confident about our progress. Regarding returns on investment, we are continuously evaluating them across our portfolio and incorporating them into our renovation plans. This year’s program includes several high-occupancy properties that we are transforming. While we won't be rebranding these properties, we will be upgrading the rooms, reimagining dining options, and enhancing the overall guest experience. This work is significant, and we anticipate seeing its benefits starting in the fourth quarter of next year. We remain focused on ROI evaluations and integrate those within our standard renovation efforts. Tom can provide additional insights as well.

So Zach, I believe a useful statistic to convey the impact of our ROIs is that we experienced a 1.5% increase in non-room revenue spend. Let me provide a few examples of our initiatives. In terms of food and beverage, particularly the reimagined space mentioned by Leslie regarding our renovations, we are focusing on beverage-centered offerings. For instance, our food and beverage profit improved by 180 basis points this quarter. Additionally, due to our scale, we closely manage parking, whether valet or self-service, ensuring we negotiate favorable splits on valet services. We also allocate capital towards gates for surface parking lots as opposed to garages. We aim to implement best practices for third-party opportunities to enhance our services, including partnerships with companies like Spot Hero that help locate parking at some of our airport locations, even for customers who are not staying with us. Furthermore, as Leslie highlighted, during our renovations, we evaluate our markets. Nowadays, travelers often shop only within airports without visiting stores. Our market offerings are located in our lobbies, and we are expanding these. As a result, our per occupied room revenues are rising. We provide convenient grab-and-go options for guests who prefer not to dine in. We are taking advantage of the changing consumer behavior in many of our hotels by investing ROI funds in our lobbies. We are committed to focusing on ROIs and are pleased to see a continued increase in our non-room revenue spend for consecutive quarters.

I wanted to follow up on your comments about food and beverage, noting that while occupancy is down, food and beverage revenue is up by 2.7%. You mentioned it's beverage-centric, but I would like to know what the main drivers are. Is it due to increased customer spending or higher prices? What is the primary factor behind this growth?

Yes. Thanks for the question, Ken. I would say all of the above. When I think about what we're doing on hours of operations and where we're putting most of our time and energy, is where their transactions can be had. Examples of that are when we think about our menus, many people are wanting to go to the bar just to grab a quick meal. They're not looking to sit down. And so we really are allowing them to feel like that's the place to have a meal. And what I would say about beverage-centric, we're adding seats to our bars. Example of that, I'll give you at the Knickerbacker. When we looked at St. Cloud, it's been an incredibly successful rooftop bar, does better numbers than most rooftops in New York. Now obviously, we got a beautiful view of the ball, but we just added a sushi bar in space that was not being maximized. It was really overflow space. And now it's generating income. And that, as you know, is a very profitable business, and we're just seeing the ramp-up of that as an example. So when we think about food and beverage, maximizing our space in our atrium. For instance, we have a fairly significant amount of Embassy Suites. We have now changed the way people are interacting with our lobby space. So you have your meeting space, and then you have your area where you can now congregate. And that's driving more people having lunches, meals, receptions and giving us a chance to be able to not just do it in price, but doing it in volume.

And I would also point out to you in a couple of examples that Tom gave, that we're able to drive F&B revenues from non-hotel guests. And so if you think about what he just described with Nick, also what we did at Sakari Dooms and other examples of our portfolio, that's another reason why F&B is up is because the concepting and reimagining of the spaces are drawing customers that are not just in the hotel.

That's good insight. And the other question I have is, I've seen it mixed with some peers. Is urban performing any different than other hotels when it comes to F&B? Some had shown some declines specifically in urban, and maybe it was just some seasonality because of the calendar. But have you noticed any difference that there's more or less spending on the urban side?

I believe our statistics indicate that we are very pleased with the performance of our urban locations. Overall, urban has outperformed the portfolio this quarter. Specifically, urban leisure showed an increase, likely because we are positioned closer to attractions. People choose urban areas for events such as concerts or ball games. We are particularly excited about our plans for 2026. For instance, in Pittsburgh, we plan to convert the Renaissance into an Autograph hotel, and with the NFL draft coming to town, we anticipate significant foot traffic, similar to when Detroit hosted the event and attracted 75,000 attendees. Urban locations are where activity is thriving; people are living, working, and spending their money there. This trend positively impacts us, particularly in food and beverage, as that is where people are choosing to enjoy themselves.

This really speaks to kind of the construct of our portfolio and the urban signatures nature of it, and the live-work-play environments that we try to have, and all demand drivers.

Thank you all for joining us today. We hope that you enjoy the rest of your summer, and we look forward to seeing many of you in the fall. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.