RLJ Lodging Trust

NYSE:RLJ

Earnings Call Transcript 2022-Q1

[Operator]

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. [Operator Instructions]

I would now like to turn the call over to Nikhil Bhalla, RLJ's Senior Vice President, Finance and Treasurer. Please go ahead.

[Nikhil Bhalla, Vice President of Investor Relations]

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.

[Leslie Hale, President and Chief Executive Officer]

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 one room that exists to drive rate.

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 2/3 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 compression created by citywide, 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 citywides. 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 citywides being held as in-person events with attendance levels holding, all of which drove a meaningful increase in our in-the-quarter, for-the-quarter group revenues, with March RevPAR achieving 74% of 2019, which was also 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. And relative to 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 validates 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. And 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. Sean?

[Sean Mahoney]

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 sales 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 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.

Thank you, and this concludes our prepared remarks. We will now open up the line for Q&A. Operator?

[Operator]

[Operator Instructions] And our first question is from the line of Anthony Powell with Barclays.

[Anthony Powell, 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?

[Leslie Hale, President and Chief Executive Officer]

Okay. So we are seeing an improvement in booking windows and transient pace. And so we are very encouraged 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.

[Tom Bardenett, Executive Vice President of Asset Management]

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 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.

[Anthony Powell, Barclays]

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?

[Leslie Hale, President and Chief Executive Officer]

Yes. What I would say, Anthony -- I'll start and then Tom will give some incremental color on the specific weekend trends that you're talking about. But what I would say -- only say is that we're not seeing any weakness on the leisure side. And keep in mind that 2/3 of our portfolio is urban. And if you think about the urban markets last year, many of the leisure attractions were actually not open. Broadway was not open. Museums were not open. They're now open. So we expect not only to see the benefit of what we're seeing from a BT and group perspective, but we also expect to benefit from urban leisure as well. And so we're pretty positive on leisure continuing to be strength throughout summer.

[Tom Bardenett, Executive Vice President of Asset Management]

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.

[Operator]

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

[Austin Wurschmidt, 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?

[Sean Mahoney]

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 from a -- as the recovery on -- particularly on the urban assets, you'd expect margins to continue to improve in -- just in nominal amounts as the recovery unfolds.

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 as well, that will have an impact on short-term margins. But our view around both what we think of post-COVID margin expansion remains intact. And 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, et cetera.

[Leslie Hale, President and Chief Executive Officer]

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. And so we are seeing the ability to fill roles, less job openings, less total roles. And so that's what the incremental putting back in the labor that Sean was referring to.

[Austin Wurschmidt, KeyBanc]

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?

[Sean Mahoney]

Yes. That number is the number of FTEs that we expect to put back in the business, which will be -- 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.

[Austin Wurschmidt, KeyBanc]

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?

[Leslie Hale, President and Chief Executive Officer]

So the answer on the March number is about 55% of revenues. And keep in mind, 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.

[Operator]

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

[Michael Bellisario, 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?

[Leslie Hale, President and Chief Executive Officer]

Sure. Look, I think the transaction market remains very active. We're not seeing a change in flow -- deal flow either up or down. There continues to be a wide range of buyers looking for yield. We've actually seen new entrants as people ship from other asset classes. And so sellers don't have any motivation to lower values at this time. For us, we continue to be focused on off-market transactions and we'll remain disciplined around acquisitions.

I would say from a value perspective, as I said on our last call, we've seen value stabilize. As they were increasing throughout last year, we've generally seen them sort of stabilize. And interest rates really have not had an impact on the amount of capital that's chasing hospitality today.

From our perspective, we had ended the year expecting to be a net acquirer. And as fundamentals have improved and stock prices have not responded, obviously, buybacks have become more attractive. Now the good thing is from our perspective, given our balance sheet and liquidity, we have the optionality to pursue multiple channels of value creation and optionality relative to capital allocation.

It's very clear that where we're trading doesn't reflect the underlying value of our assets, so when you look at every metric, obviously, clearly based on our internal house view. And the most recent transactions that have happened in the market validates that. And so buybacks have become more attractive to us, Mike, in general. We're going to remain balanced. We think that buybacks are obviously have contextual perspectives related to that, but asset acquisitions have a long-term strategic view as well. And so we'll continue to look at both. But clearly, buybacks are more attractive today based on where things are trading.

[Michael Bellisario, Baird]

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?

[Leslie Hale, President and Chief Executive Officer]

A great question, Mike. I would say that from our perspective, less than kind of 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 the 300 a key range. And we're very confident that the vast majority of our portfolio rise on the higher end of that range.

[Operator]

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

[Tyler Batory, 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?

[Sean Mahoney]

Sure. Thanks, Tyler. What we've seen midweek is that, that gap has closed. The most recent month was around 87% on the weekday occupancy relative to '19. If you look from a trend line perspective, that was the highest month we've had since the start of the pandemic, and it's been trending up since the beginning of the year. It's up 2,000 basis points since January and 300 basis points from March from a mid-week occupancy perspective.

And so that is very encouraging to us as well, but we don't want to ignore the fact that our rate midweek is actually also improving as well. And so our mid-day or midweek ADR is approaching 2019 levels as well, and that's the highest once again, it's been in April, and that was a 500 basis point improvement from March. And so I think our view around midweek is that it is a function of our urban markets performing better. It's a function of the business transient and the group customer getting better and recovering. And really, that's -- we view as really a driver of our growth for the balance of the year. It's really that midweek combination of occ and ADR.

[Tom Bardenett, Executive Vice President of Asset Management]

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 regards to our structure in regards to how we're quoting.

[Tyler Batory, Oppenheimer]

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?

[Sean Mahoney]

Great. Well, let me start with -- just to reiterate what our house view on dividends is that we believe that they are a critical tool for us to return capital to shareholders and important for lodging REITs. We've historically been an active dividend payer, and we are working hard to get ourselves back to being a dividend payer. We think it's critical to our business model. To reiterate Leslie's comments earlier, we have the balance sheet and liquidity to be able to both buy back stock, do acquisitions as well as dividends. And so we have the financial flexibility to do that.

Specific to the current environment, we cannot resume our dividends until we're out of the covenant waivers. We are on track to exit the covenant waivers after we report our second quarter results. So you would expect us to be able to provide an update next quarter on how we think about the cadence of returning dividends. But the factors that are going to influence how we think about returning dividends is our continued positive outlook on lodging fundamentals, how our taxable income is stacking up as well as our market expectations around investor and analyst expectations around dividends. But with all that said, we expect to provide an update on the next quarterly call about how our thinking has evolved once we're out of the covenant waivers.

[Operator]

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

[Gregory Miller, Truist Securities]

I'd like to talk about the return to office since you brought it up on the prepared remarks. I know your team looks at the Kastle Systems return to office barometer like I do. And do you think we, the collective hotel industry and analyst community, are overweighing the importance of people returning to the office before going back on the road to travel for work? And I'm thinking particularly of salespeople and account management, road warriors that frequently stay in select service hotels and would be less often working from an office setting even in a pre-pandemic environment. Some of your properties trying to differentiate your -- some of your properties from, say, very high-rated, upper upscale and luxury hotels and some of the full-service, pure REIT comp set.

[Leslie Hale, President and Chief Executive Officer]

So Greg, I'll start and then Tom will add some incremental color. What I would say is that if you look how BT was coming back in kind of 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 -- return to offices in line with markets with similar profile, you've seen snapback relative to there as well. And so there's definitely a correlation but it's not 100%, and people are traveling ahead of that.

[Tom Bardenett, Executive Vice President of Asset Management]

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 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.

[Gregory Miller, Truist Securities]

Appreciate the thoughts there. My second question is maybe a little more minutia from what Tyler was asking and focusing on room rates. I was looking at your supplementals both last quarter and this quarter. And the RevPAR variance versus the equivalent quarter in 2019 was weaker in some of your extended stay brands than the equivalent transient brand, for example Residence Inn, underperforming Courtyard. I'm not trying to call out the brands here or my former employer, but there, you have more hotels within Marriott than, say, the Hyatt and Hilton equivalents. So I was looking at that in particular.

And where the gap was most material was in ADR. In 1Q, the spread versus 1Q '19 was over 1,100 bps. So I'm curious -- I'm not sure if I'm reading too much into the variance or there's market-specific recovery or other factors involved. But how do you see your extended stay hotels recovering actually on the rate side versus transient this year?

[Tom Bardenett, Executive Vice President of Asset Management]

So Greg, what we see is, first and foremost, it's really footprint-related versus brand-related depending upon where they're located. And 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 together, 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.

And so many times, it's -- we have same pad Residence Inns and Courtyards. And 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 makes more margin, if you will. So it's 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.

[Gregory Miller, Truist Securities]

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

[Sean Mahoney]

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.

[Operator]

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

[Neil Malkin, Capital One Securities]

The first one, Tom, maybe for you. You called out some of the ROI initiatives in terms of space config -- or 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?

[Sean Mahoney]

Sure, Neil. I'm going to -- I'll hop in on this. And so within our $20 million to $23 million -- or sorry, $23 million to $28 million of margin enhancements, we had the revenue enhancements, which are what you're talking about, were $9 million to $11 million of that. These projects are really being done in conjunction with what I'll call the normal run rate renovations. And the ramp-up of those is usually one to two years.

Now these capital investments have been split roughly 50-50 between the 2021 and the 2022 cycle renovations. And so we would expect the stabilization of that to come in for the 2021 projects between 2022 and 2023, and the '22 projects between 2023 and 2024. So what we're seeing is this year would be the start of the 2021, the fruit from that labor and then we'd expect it to be filled over the next -- between now and 2024.

[Neil Malkin, Capital One Securities]

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?

[Sean Mahoney]

So we've been very successful in adding keys. Over the last couple of years, we've added somewhere in the neighborhood of between 60 and 70 keys to our portfolio. And we've done that through a lot of -- primarily through conversion of suites into the ability to sell as two rooms. Now we've done that in a creative way through adding doors in between, will allow them during certain periods of time to be sold as separate rooms and during periods of time where we -- where you would -- and that covers a period of time where you wouldn't get a big rate premium for the suite but also allow them to continue to be sold as suites during periods of time where you can sell them as suites.

And so from our perspective, we're sort of maximizing our optionality for those rooms. And so it's something that we've spent a lot of time on as we've done the ROI initiatives within the portfolio. And our pipeline going forward, there's more to come as well.

[Neil Malkin, Capital One Securities]

Other one for me is just guidance, some of the lodging REITs have given quarterly guidance. And just curious as to your view on that? And if you think maybe next quarter, you'll give quarterly or, dare I say, annual guidance. And what would be the thing that changes that?

[Sean Mahoney]

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.

[Operator]

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

[Floris Van Dijkum, Compass Point]

Maybe if you could give some comments on the -- obviously, we've seen some of the select service -- more urban-focused select service portfolios trade. Maybe talk about the availability of debt and your view on the values achieved that you're seeing out there? And how does that relate to your portfolio?

[Leslie Hale, President and Chief Executive Officer]

You said the availability of debt, right, Floris?

[Floris Van Dijkum, Compass Point]

Yes. Yes. So our lenders are willing to finance urban hotels in -- particularly urban-like service hotels?

[Leslie Hale, President and Chief Executive Officer]

Yes. I mean we've seen buyers being able to achieve structured financing in order to effectuate. We haven't seen the capital markets be a hinderance 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 had a challenge in terms of being able to execute those from a capital -- there hasn't had been a need for seller financing in any of those transactions.

[Sean Mahoney]

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, et cetera. It's a much easier story for underwriters to lend on versus some of the more bigger box type assets where you've seen seller financing in the market.

[Floris Van Dijkum, Compass Point]

Maybe a follow-up question on something that's been asked previously. But in terms -- as you weigh share buybacks versus acquisitions and frankly, the ROI projects, you've got tremendous return potential from your existing ROI pipeline but also the future pipeline, which could be quite large. How do you weigh those? And as you think about it, you've got $450 million or $479 million of cash to play with. How aggressive -- I guess another way, how aggressive will you be to take up your repurchase and use up all of the capability this year if your shares continue to trade where they are?

[Sean Mahoney]

Sure. So I'll start to reiterate Leslie's comments, Floris, around the fact that we have the liquidity and the balance sheet to not just be limited to one choice on the capital allocation. I think within our baseline expectations, the ROI initiatives were already baked in to sort of how we think about those investments. And those dollars have been going into those projects in the past, and they are baked into the $100 million of CapEx that I provided in the prepared remarks.

I think relative to what I'll think about as incremental capital today, right, our choices are really all about acquisitions, share repurchases and dividends, right -- are the three incremental choices we have in front of us today. Once we have the choice to do all of them -- but I think relative to where we started the year, share repurchases have become much more interesting, which is why we proactively went out to our lender group and got the ability earlier than we otherwise would have, to be able to buy shares. And so I think that's an important tell of sort of what our attitude is around share repurchases. And they are attractive at this price.

But acquisitions are also -- we also remain constructive on acquisitions as well and believe that that's something that we are actively looking at. And as Leslie mentioned in her remarks, we have an active pipeline.

And then the dividend question, which I addressed earlier, is we expect to be a dividend payer. We are going to really spend a lot of time on that as we emerge from the covenant waivers after the end of the second quarter.

But I think what you'd expect from us is that we're going to be acting on all of them. What lever we actually pull and how much volume we pull is going to be a function of what the relative returns available on those are at the time that we make those decisions. We don't make them in isolation nor do we make them now for the balance of the year, right? Things change rapidly throughout the year, and you would expect us to be able to pull the right lever at the right time.

[Leslie Hale, President and Chief Executive Officer]

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

[Operator]

Our final question is from Chris Darling at Green Street.

[Chris Darling, 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 portfolio?

[Sean Mahoney]

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

[Chris Darling, Green Street]

Got you. And any conversations around PIPs in any other areas of the portfolio that you might see through?

[Leslie Hale, President and Chief Executive Officer]

I think your question -- you're a little muffled there, but I think your question is, is there any more opportunity for incremental dispositions. Was that the question?

[Chris Darling, Green Street]

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 and any other areas of the portfolio that you would see through?

[Leslie Hale, President and Chief Executive Officer]

Yes. We're very constructive on Denver. I mean we just bought the -- our asset in Cherry Creek. And this was just a function of looking at the existing portfolio we had with -- given -- in light of the acquisition that we did and determining whether or not we wanted to put capital back in these assets or just reposition our footprint, but it's not a read through to our view on Denver. We're very constructive of that overall market. We think that it's a top five migration market where companies and individuals are moving to. And so the economic backdrop, the overall framework for Denver, we're very constructive on.

[Sean Mahoney]

Yes. And then the other thing, just to add on to Leslie's comment with respect to a read-through the portfolio, we've been very actively investing in our portfolio over the last three to five years. And so we are sitting on a primarily renovated portfolio of hotels. And so 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. And so 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.

[Operator]

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.

[Leslie Hale, President and Chief Executive Officer]

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.

[Operator]

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