RLJ Lodging Trust

NYSE:RLJ

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the RLJ Lodging Trust Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Nikhil Bhalla, RLJ’s Vice President and Treasurer of Corporate Strategy and Investor Relations. Please go ahead.

[Nikhil Bhalla, Vice President of Investor Relations]

Thank you, operator. Good morning, and welcome to RLJ Lodging Trust’s 2021 Fourth Quarter and Year End 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 pleased that lodging fundamentals continue their recovery relative to 2019 throughout the fourth quarter with the industries faster than expected recovery being the most significant event of 2021. Against this accelerating recovery, our portfolio achieved strong operating performance throughout the year. Additionally, our team successfully executed on all of our strategic priorities, which included acquiring three high-quality hotels during the year, which were accretively match funded with proceeds from non-core dispositions. Generating strong operating results, which allowed us to achieve positive corporate cash flow for the full-year, advancing our value creation initiatives, which are expected to deliver an incremental $23 million to $28 million of hotel EBITDA and actively managing our balance sheet to increase flexibility, extend covenant waivers, further later debt maturities, and lower our cost of debt through refinancing of over $1 billion dollars of debt. Our confidence in our strategic initiatives was bolstered by the industry’s recovery throughout the year, with RevPAR sequentially improving each quarter culminating with the fourth quarter ending at nearly 97% of 2019 levels. The recovery during the year was driven by the continuation of robust leisure demand, which is well documented and at levels exceeding 2019 in many resort markets. Just as important, there was clear evidence of an acceleration in recovery in both group and business transit demand as business travel volume increased and in many cases in advance of returning to corporate offices, this trend was particularly noticeable with respect to small and medium sized companies. Finally, we were encouraged that international travel picked up in gateway markets after the borders reopened in early November, although short-lived due to the emergence of Omicron, the quick ramp up provided us with a strong indication of significant pent up demand to visit the U.S. With respect to our operating performance, our portfolio outperformed our expectations during the fourth quarter and also gained 340 basis points of market share. Our portfolio RevPAR achieved 75% of 2019 levels representing an improvement of approximately 400 basis points from the third quarter. We were encouraged by our ability to drive ADR with almost a third of our exceeding 2019 levels, and our overall portfolio achieving 91% of 2019 levels representing the strongest quarter since the start of the pandemic. Our portfolio ended 2021 having significantly closed the GAAP to 2019 with our December RevPAR achieving 87% of 2019 levels. Importantly, our ADR with 99% of 2019 with particular strength in our leisure markets, such as Charleston, Key West, Miami, Mandalay Beach in New Orleans, as well as many of our urban markets including Atlanta, San Diego, Pittsburgh, and Los Angeles, despite the slower recovery in our Northern California market. The ability to drive ADR underscores our capability to continue to push rates, which will allow us to capture the meaningful rate upside in our segments. In particular, there was positive momentum in the recovery of our urban hotels, which represent two-thirds of our portfolio. Our urban portfolio achieved 83% of 2019 RevPAR in December. We believe that the continued momentum in the recovery of our urban hotels will be the driving force for our portfolios growth going forward, and we expect outside growth in business transient and group demand throughout the year. We saw evidence of the recovery of these segments throughout the fourth quarter as improved business transient demand drove our weekday occupancy to 78% of 2019, a 400 basis point increase from the third quarter, while our group [indiscernible] improved significantly up 20% quarter-over-quarter, as we benefited from the travel small, social, and sports oriented groups. These trends have further bolstered our confidence in the positive trajectory of these segments. Now turning to capital allocation, we advanced our internal and external growth objectives, which improved our growth profile and key operating metrics such as RevPAR, EBITDA per key end margins, while enhancing our overall positioning for this cycle. Our capital recycling initiatives this year alone led to 150 basis points improvement in our Pro forma margins over 2019. Specifically, during the fourth quarter, we closed on the acquisition of the AC Hotel Boston downtown, which opened in 2018 and both an A plus location within the ink block development of Boston’s highly desirable South End neighborhoods. We also closed in the acquisition of the Moxy Cherry Creek in Denver, which opened in late 2017 and is located in the heart of the highly desirable Cherry Creek submarket of Denver. And we completed the disposition of a DoubleTree metropolitan in New York City. This disposition was highly accretive and reduced to our concentration in New York City to less than 3.5%. In total, we have deployed nearly $200 million to acquire three high quality hotels located in top growth markets at an aggregate stabilized EBITDA multiple of approximately 12 times. These acquisitions were creatively match funded with proceeds from non-core dispositions during the year, which were sold at an aggregate multiple of approximately 30 times 2019 hotel EBITDA. The net impact of match funding will result in an incremental $8 million of stabilized hotel EBITDA. We are pleased to report that all three of our recent acquisitions are already outperforming our underwriting with the aggregate 2022 hotel EBITDA expected to exceed our underwriting by approximately 35%. By fully match funding our recent acquisitions, we were able to retain our acquisition capacity, which will prove valuable given our robust acquisition pipeline. We expect to be a net acquirer this year and are encouraged by the quality of our assets within our pipeline, which includes several off market opportunities. On the internal growth fund, we are continuing to make progress towards generating an incremental $23 million to $28 million in stabilized EBITDA from our embedded value creation opportunities. These include $7 million to $10 million from our three conversions, which remain on track. $9 million to $11 million from our revenue enhancement opportunities that are being completed as part of our normal cycle renovations, and $7 million representing 50 basis points of margin expansion from management agreement amendments that finalizing, which will be incremental to any industrywide margin efficiencies from post-COVID operating synergies. Our efficient capital recycling and the unlocking of our internal growth catalyst have created multiple channels of growth to drive EBITDA expansion throughout this cycle and our balance sheet with the capacity to fund the opportunities to drive internal and external growth initiatives. Looking ahead, we are seeing a resurgence of demand in February as the industry moves past Omicron. This reinforces our confidence in the expectation for strong accelerating growth and lodging fundamentals this year, especially in urban markets, which we believe will dry the next leg of the lodging recovery. This improving backdrop is being driven by the release of pent-up demand across all segments. We believe that in addition to the continued strength and leisure that is expected throughout the year, business travel should see meaningful improvement, especially in the back half of year. This will be driven by the continuation of strong demand from SMEs and the reemergence of travel from global companies, such as Wells Fargo, Bank of America and Microsoft, who have pulled forward office reopenings and ease travel restrictions. The return of the traditional corporate travel represents an outside runway for growth in urban markets. Group demand should accelerate throughout the year as well with a mix of corporate groups increasing. Our confidence in the momentum of the group recovery has increased with our definite currently representing 68% of 2019 levels. Within the first 30-days of this year, we saw an impressive in the year for the year booking pace, which is already at 25% of last year’s in the year pickup. Finally, an uptick in international volume while the borders were opened at late 2021 from provides us with a cautious optimism that international travel could provide a surprise to the upside, if travel restrictions or eased, which would benefit gateway markets such as New York City, San Francisco, Boston, and Miami. As we think about the cadence of the recovery, we expect trends to improve sequentially each quarter, with growth accelerating in the third and fourth quarter, as recovery broadens to urban and key gateway markets. Our portfolio is well positioned in 2022 given our geographical footprint with two-thirds of our EBITDA generated in urban markets. As we look at the overall cycle, our outside EBITDA growth will come from the recovery of both business transient group, which will significantly benefit urban portfolios like ours, the ramp up of our recent acquisitions, as well as future acquisitions funded with existing capacity, our lean operating model, which will allow us to operate with fewer FTEs compared to full service portfolios and be less impacted by the current inflationary wage environment. The realization of incremental EBITDA from our embedded growth catalyst and our strong balance sheet, which provides a competitive advantage as well as a flexibility to pursue both internal and external growth opportunities. Over the last three years, we have significantly enhanced the overall quality of our portfolio, which is evidenced by an 8% increase in absolute RevPAR, a 12% increase in hotel EBITDA per key, and a 50 basis point improvement in hotel EBITDA margins. We believe we are well-positioned to achieve outsize growth this year and beyond. Finally, I would like to thank all of our hotel associates, our management companies and our entire corporate team for their hard work, commitment and support during this recovery. I will now turn the call over to Sean. Sean.

[Sean Mahoney]

Thanks, Leslie. We were pleased with our fourth quarter results, which further narrowed the gap to 2019 and represented the closest quarter to 2019, since the start pandemic. As expected, fourth quarter results followed normal seasonal patterns around the holiday season, with October being the strongest month of the quarter. Pro forma numbers for our 97 hotels include the acquisitions of the AC Hotel, Boston Downtown and the Moxy Denver Cherry Creek and exclude the sale of the DoubleTree Metropolitan, which was sold during the quarter. Our reported corporate adjusted EBITDA and FFO include operating results from all sold and acquired hotels during RLJ’s ownership period. Our fourth quarter portfolio occupancy of 62.2% was 83% of 2019 levels, which represented a 340 basis point improvement from the third quarter and was better-than-expected. The continuation of strong leisure demand, the return of more traditional corporate customers and strong demand from social and sports groups provided our hotel operators with the ability to yield rates, during the fourth quarter, resulting in average daily rate growing approximately 2% from the third quarter to $163 during the fourth quarter. Our leisure markets such as Key West, Charleston, Tampa, Mandalay Beach and Miami generated ADRs in excess of 2019 by 32%, 22%, 11%, 15% and 24% respectively. Our progress towards 2019 improved throughout the year with fourth quarter RevPAR at approximately 75% of 2019 levels. Our portfolio RevPAR recovery to 2019 accelerated throughout the quarter at 69% in October, 73% in November and 87% in December, which was stronger than we expected at the beginning of the quarter. Turning the segmentation performance. Strong leisure demand continued throughout the fourth quarter and was at 96% of 2019 levels. Business transient revenues continued recovering and improved approximately 50% of 2019 levels, which was a result of demand at 62% of 2019, an average daily rate at 79% of 2019, representing a strongest quarter since the start of the pandemic and a 1200 basis point improvement from the third quarter. And group revenues also continued to recover and improved to approximately 60% of 2019 levels, which was the result of demand at 67% of 2019, an average daily rate at 88% of 2019. The improving operating trends during the fourth quarter led our entire portfolio to achieve hotel EBITDA of $64.8 million, which improved to 64% of 2019 levels. We are further encouraged with our ability to drive strong operating margins of 27%, which were only 425 basis points behind the comparable period of 2019. Despite revenues still being 25% below 2019. During January, which is expected to be the weakest month of the quarter due to both Omicron, and normal seasonality, our portfolio is forecasted to generate occupancy of approximately 49.4% and ADR of approximately $158, which represents RevPAR growth of 99% over last year, and 64% of 2019 levels. Turning to the bottom line, our fourth quarter adjusted EBITDA was $54.7 million and adjusted FFO per share was $0.14. As Leslie mentioned, while fourth quarter demand was strong throughout the quarter, we remained vigilant in maintaining cost contained initiatives that are appropriate for the current environment. Underscoring our continued focus, our fourth quarter operating costs maintain more than 20% below the comparable period of 2019. Within operating expenses, wages and benefits, which represent 38% of total fourth quarter operating expenses were 25% below the comparable quarter of 2019. On a relative basis, our portfolio is better positioned to operate in this challenging labor environment as a result of fewer FTE’s required in our hotels, given our lean operating model and smaller footprints with limited F&B operations. While our portfolio occupancy was at approximately 83% of 2019 levels, our hotel is operated with approximately 40% fewer FTE’s from the comparable period of 2019. Overall, while we expect the tight labor environment to persist near-term, we are increasingly encouraged by recent positive momentum with success in attracting applicants and filling open positions at our hotels, which we expect to continue to improve throughout 2022. We have been very active managing the balance sheet to create additional flexibility and further lower our cost to capital since the beginning of 2021. These accomplishments include raising a billion dollars through two high yield bond offerings that were both oversubscribed with annual coupons of 3.75% for the five-year bonds and 4% for the eight-year bonds, using the bond proceeds to repay all of our 2022, and a portion of 2023 maturing debt and fully redeem the $475 million 6% sale core senior notes, which represented our most expensive debt. Expending maturity debt of a $100 million term loan from January, 2022 to June, 2024, adding a one year extension option on $225 million of our 2023 maturing term loans. Amending our corporate credit agreements to extend covenant waivers through the first quarter of 2022, increase our acquisition capacity to $450 million and add flexibility to retain certain proceeds for general corporate purposes and recently repay the remaining $200 million outstanding on our corporate revolver. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. These initiatives resulted in extending our weighted average maturity to 4.5 years and reducing our weighted average interest rate by approximately 50 basis points. Turning into liquidity. We ended the quarter with approximately $665 million of unrestricted cash. $400 million of availability on our corporate revolver. $2.4 billion of debt, and no debt maturities until 2023. We continue to maintain significant flexibility on our balance sheet. Currently, a 100% of our debt is fixed or hedged and 82 of our 97 hotels are unencumbered. As we expected, our portfolio generated positive corporate cash during the fourth quarter and we were pleased that we also generate a positive corporate cash for the full-year of 2021. We maintain a disciplined approach to managing our balance sheet, even if as fundamentals have covered, 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 position lodging rate to take advantage of ROI investment and external growth opportunities, which we demonstrated through our recent acquisitions. Additionally, we continue to prioritize high value revenue enhancement projects, margin expansion initiatives, and our three 2022 conversions. Looking ahead, we estimate RLJ capital expenditures will be approximately a $100 million in 2022. In closing, RLJ remains well positioned with a flexible balance sheet, ample of 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. I will now open the line for Q&A. Operator.

[Operator]

Thank you [Operator Instructions] Our first question comes from line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

[Austin Wurschmidt, KeyBanc Capital Markets]

Hey good morning everybody. Leslie, you referenced the new acquisitions are expected to exceed your underwriting by 35% in 2022. And I’m just trying to understand what that 35 outperformance reflects or how it compares to the initial underwriting. Is it extrapolating performance simply from 4Q or do you have some additional pickup beyond what you achieved in 4Q 2021? Any detail would be appreciated?

[Sean Mahoney]

Sure, Austin, this is Sean. I will hop in there. I mean, so the bottom-line out performance of the [indiscernible] was 35%. It was really a combination of quicker ramp in these assets, particularly in the urban markets, like a Boston that it is recovering quicker than we thought in our underwriting, which is driving a lot of the outperformance. But also, as we have gotten into these assets and implemented sort of what would be institutional quality asset management initiatives. We found more synergies on the cost side to do things more efficiently, but also more revenue opportunities within each one of these hotels to drive the top-line. And so, when you put that all together, it was outperform really across all three of the acquisitions.

[Austin Wurschmidt, KeyBanc Capital Markets]

What was the period you underwrote for stabilization across the assets and does that pull it forward - does it pull that forward pretty significantly?

[Sean Mahoney]

So, we underwrote stabilization leads somewhere in the three to four-year timeframe from acquisition. And so, I think it more is a function of our view on the ability of these hotels to compete in the marketplace. I will break it into two pieces. The ramp up in the urban market like a Boston is a 2022 specific outperformance, because our house view on Boston has evolved and has gotten more bullish since we underwent the asset. Whereas the asset management initiatives, which are meaningful are something that is going to be a permanent enhancement to both the top and the bottom-line. So I think it is a combination of both of those things, Austin. Some of it is the timing of 2022 specifically and some of it is - there is more opportunity within these assets than we initially underwrote on the asset management side.

[Thomas Bardenett, Executive Vice President of Asset Management]

I think it also demonstrates Austin, our continuous discipline in terms of how we underwrite. We are pretty conservative in general.

[Austin Wurschmidt, KeyBanc Capital Markets]

Yes. That is very helpful. And I’m curious, then kind of just switching over to the portfolio within Northern California, you are clearly upbeat about the recovery in urban markets. This market is clearly lagged certainly no secret there. But one I’m wondering if there has been any notable dispersion and performance across the region in various submarkets you are in, and what is the expectation for that market relative to your other urban markets?

[Leslie Hale, President and Chief Executive Officer]

Yes. I mean obviously there is no secret that San Francisco CBD is going to struggle. It needs to see production from BT city wise and international, which is also challenge at this point in time. But keep in mind that, our portfolio only has two assets in the CBD and as you sort of articulate it, we have got a much broader footprint. We are seeing the non-CBD assets start to perform a little bit better as we are starting to see BT pick up this year. And so we do expect our non-CBD to outperform the CBD assets. Having said that, we still expect all of Northern California to recover slower than the broader market.

[Sean Mahoney]

And Austin, I would add one thing to that and that is, with the office re-openings what we noticed in Northern California is, they are the same national accounts that we have across the board. So, when you start to see Microsoft, BoA, Wells Fargo starting to move their offices forward that is an encouraging sign. And to Leslie’s point about our footprint, we have already seen pickup in Silicon Valley just over the last three weeks, which is encouraging because of those offices reopening and the type of demand that we know can come with that on the national accounts versus the SMEs that we talked about in our script.

[Thomas Bardenett, Executive Vice President of Asset Management]

And then I think the last point on Northern California and San Francisco specifically is, we do continue to be believers in the market long-term. Despite the short-term headwinds and then it is going to be a lagging market and the recovery, it doesn’t change our overall view on the dynamic within that market. The airlift, it is a world class city, the demand generators, the biz, all those things still are positive long-term for San Francisco. It is just a function of the ramp is just going to be longer in that market.

[Austin Wurschmidt, KeyBanc Capital Markets]

Got it. And then just last one, assuming the next leg of the recovery continues in the months ahead. Do you guys expect to be a net acquirer in 2022?

[Leslie Hale, President and Chief Executive Officer]

We do expect to be a net acquirer. Our pipeline continues to be robust and active. And as I have mentioned in previous calls, we are very focused on off market transactions and so our pipeline has continued to grow and we feel pretty good about being a net acquirer for this year.

[Austin Wurschmidt, KeyBanc Capital Markets]

Thank you very. I appreciate the time.

[Operator]

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

[Michael Bellisario, Robert W. Baird]

Good morning, everyone. Just wanted to follow-up on that last question - has your view changed at all on dispositions? Your commentary is much more focused on acquisitions this year. Any change in your view, given the heavy lifting that you did last year maybe in a rear view mirror?

[Leslie Hale, President and Chief Executive Officer]

Mike, you broke up a little bit, so I want to make sure that I understood your question. You are asking about what our sort of our house view on acquisitions relative to our portfolio, I believe, I’m sorry, disposition?

[Michael Bellisario, Robert W. Baird]

Yes, dispositions. Thanks.

[Leslie Hale, President and Chief Executive Officer]

Got it. What I would say is, is that clearly we did heavy lifting in 2019, and we continued to be an active portfolio manager and disposing of assets as we see trends in a particular market that we want to move away from. So we sold seven assets last year, including the BT met, which we have obviously given color on that as well. I would say that as we look forward, we will continue to be active portfolio managers, but it is going to really be more opportunistic. For example, if we want to reposition ourselves in a particular market, as way I would sort of think about dispositions for this year. We still may some, but I wouldn’t expect it to be similar volume in terms of what we did last year.

[Michael Bellisario, Robert W. Baird]

Got it. That is helpful. And then just, back to your comments about the reacceleration and demand in booking trends over the last few weeks. Any markets or customer segments, excuse me, in particular that you are seeing a faster reacceleration in?

[Leslie Hale, President and Chief Executive Officer]

It is actually broad base Mike, which is what is giving us confidence that Urban is going to outperform this year. We think that both BT and group are going to be strong and accelerate. And it is looking at all of the trends, looking at the fourth quarter trends, looking at the current trends we are seeing in February, and our forward booking, and also keep in mind where we are starting those two segments at the beginning of this year is from a lower base. So all of that gives us confidence in it being moving forward. But let me give you a couple of data points, on the BT side, we are definitely seeing midweek pickup in February. And if we look at our numbers most recently month-to-date we are seeing occupancy at 60% in the most recent week, we were at 68% over the weekend most recently, obviously because of the holiday, we were at 80%. So February is proving out to be strong. And within that timeframe in February, we are seeing a pickup in GDS contribution, which is really telling us that not only are SMEs, giving us production, but also in national council giving us production as well. And that is across all markets including we are seeing with Tom mentioned it in Northern California as well. So our transient pace, our BT contribution we feel the pickup in what we are seeing is broad based. I would also say that is also on the group side as well. We started the year at 60% pace relative to 2019. We are now at 68%, which is an eight point pickup. And we are only two-months into the year, we have already booked 25% of the end the year for the year contribution that we picked up last year. And when we look at the mix of what we are getting from a contribution, corporate group is representing 50% of what we are booking today. I would tell you that was running 5% to 10% prior to this year. The other thing that is interesting for us is that the booking window continues to be short and so that means that the in the quarter, for the quarter production, we expect to continue to be strong. And just to give you a data point, we picked up 20% of our group in the fourth quarter. And so, when we look at all of the data points, the momentum and the pace of it and the fact that it is broad base, we feel pretty good about the trend lines that we are seeing for BT.

[Austin Wurschmidt, KeyBanc Capital Markets]

Helpful, thank you.

[Operator]

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

[Neil Malkin, Capital One Securities]

Good morning everyone. First question, maybe for Tom or Sean, but if you think about what the new operating models kind of the enhanced brand standards, all those things. I’m just wondering if you can give your kind of thoughts on the difference between sort of select service and full service in terms of I guess the net benefit or most to gain. Just, curious thinking about your portfolio, a lot of extended stay, mostly housekeeping and F&B are other largest parts. So then if you kind of juxtapose that to the group side where there is so many more outlets, so kind of like that a lot more fat to cut type of thing. So, I know Sean you have had experience in both models. So, if you could maybe just kind of elaborate on your thoughts there and how a portfolio like RLJ would fair compared to a larger group focused portfolio?

[Leslie Hale, President and Chief Executive Officer]

I will start and I will let Tom add incremental color. I would generally say that our house view about the overall industry being able to pick-up a 100, 200 basis points of margin expansion has not changed. We recognize that wage inflation may affect where we end up in that range, but overall, we feel very confident that there has been cost taken out of the industry on a permanent basis. We do believe that RLJ and our portfolio is in better position to see sustained savings and it is a lot of what you are articulating. The segmentation that we play in on the largely in the limited service space allows us to be able to what I would say, have our customer adapt to those changes more at a higher level and they would see at a traditional full service hotel. I would also say the length of stay for us is also a benefit relative to those savings. The F&B you touched on as well. We have a generally a fixed food service model and a significant portion of our portfolio, which also gives us an advantage relative to being able to maintain a savings. And then lastly, if you think about the size of our overall portfolio and the average size of the footprint of our asset, that allows us to continue to cluster and allow for employees to do job share when you have a smaller footprint. So when we think about our portfolio at all in aggregate, relative to where we play in segmentation, our length of stay, the size of our portfolio, the F&B model, all of those things are giving us confidence that our RLJ will be able to benefit from that savings at a higher level than many of our traditional full service peers. The other thing that I would remind you of is that we have 50 basis points of margin expansion from our value creation that is above and beyond what we are expecting from the industry as well.

[Thomas Bardenett, Executive Vice President of Asset Management]

Neil, what I would say, just adding on to what Leslie talked about, these last two years have been very informative in regards to how we complex, as you know, prior to the COVID, we were complexing on the same pad locations where we would have a residence in and a courtyard and shared services. And that could be one GM shared a sales office, potentially some engineering. What we have done after it was we have really focused on a wider geographic area, even across ownership groups. And so, we feel we are coming out after these last two years, with a whole different FTE model in regards to how to run our business. And so, we think that is sustainable and we have seen the benefit of that by having a great skill set oversee more and have more accountability and responsibility in a wider net. And so, that shared services and expansion of that role gives us confidence that, in our select service model and compact full service model we will continue to have that margin increase, based on those sustainable efforts.

[Neil Malkin, Capital One Securities]

That is great. Super helpful. Other one for me, it is kind of on, I guess, balance sheet related. You guys have been, Leslie, Sean, I mean, since I have known you guys just really good stewards of capital or especially just having a good balance sheet, being very active, managing at low leverage, et cetera. I mean, you guys have, you guys went into to COVID with a very low leverage and a ton of cash. Just thinking about the business and your balance sheet, how do you guys think about the decision with waivers? When to bring back the dividend, how much and how do you kind of weigh the priority of the elevated cash balance and liquidity that you have in a pivotal year like 2022?

[Sean Mahoney]

Well Neil thanks for the feedback on the balance sheet, which we appreciate. Obviously, we take it very seriously with a CFO and an ex-CFO on the call recovering, sometimes occasionally still going into discipline model. But, I think on the dividends specifically, and then I could talk about capital allocation second, right. It is a very timely question. It is a live discussion right now going on with both boards, as well as management teams on the dividends. Let me sort of start by framing what is the RLJ house view on how we think about dividends, right. I feel obligated to reiterate the fact that dividends are Board decision. But, when you think about dividends, it is core to our REIT model and a critical tool for us to return capital to shareholders. Obviously, it is also a key driver of our long-term TSR for our shareholders. I think from RLJ specifically, what allows us to differentiate ourselves a little bit is that, we have got an operating model that generates more free cash flow, as well as the balance sheet and liquidity with which to provide us optionality on the dividend and that is an important distinction within the Lodging REIT community. I think the way we are thinking about dividends in the post-COVID world is that we are going to have more discretion in the post-COVID world because of the NOLs that were generated during COVID, with respect to dividend policy. So, pre-COVID dividend policy was generally dictated by taxable income and distributing at a 100% of taxable income, because of the NOLs that is going to provide management teams with more flexibility around how we pay ends dividends, sequencing structure, et cetera. And it is going to increase the importance of relative yield as well as FFO payout. And so, there are things that are going to be within our arithmetic. It is important to note that, our dividends, by the way, when we come out of the waivers, which will be after the second quarter is when really the hourglass turns for us on dividends, because until we are out the waivers, we still - our dividends will stay at current levels. But, after the second quarter, when we are out, that is really when the things change from a standpoint of having the ability under the line of credit. But I will say that dividends are important to us. It is a live discussion. It is something that we are taking very seriously and we believe that companies like RLJ with our model should be in the early movers in the dividend game. Shifting to capital allocation and balance sheet, I think, the one benefit that we have, because of our liquidities, you mentioned a lot from the 2019 sales, as well as what we have done since provides us with the ability to pull multiple levers, right. And I think we have demonstrated that through our internal value creation initiatives that we have outlined, the acquisition strategy that we have outlined, as well as the ability to pay dividends. And so we are going to continue our cost to capital gets mark-to-market every day. And so we make any capital allocation decision, we are going to make the decision, which best based on our cost to capital at that moment in time. But the beauty of our balance sheet is that it provides us with the liquidity and the capacity to pick - not just choose one of those options.

[Neil Malkin, Capital One Securities]

Okay. Thank you for the thoughts.

[Operator]

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

[Anthony Powell, Barclays Capital]

Hi, good morning. Just question on the pipeline of acquisitions you seem to be favoring urban markets now, and maybe tell us kind of what markets are targeting and how pricing is trended for urban flex service given I guess the improving outlook for the segment.

[Leslie Hale, President and Chief Executive Officer]

Sure. Yes. What I would say about pricing just in general Anthony is that we saw pricing increase over summer last year, and coming into the fourth quarter, and then we saw pricing stabilizing the fourth quarter. And part of that what was driving that was that we moved from motivated sellers to opportunistic sellers who were seeing the amount of capital and volume for demand for hotels particularly given on the yield side and so they were opportunities to see how far they can push pricing. That is stabilized and we continue to see it stabilize what I would say about us. We lost in a lot of our deals prior that ramp. And so we feel pretty good about the pricing that we got relative to we are pricing to today overall. I would simply say that when you look at sort of the overall what is coming to the market, there is been an entry deals, but it is still limited and mindful. Obviously, anything that is sort of leisure oriented is getting a lot of looks and again, opportunistic sellers there. On the urban side, there is more product coming to the market because you do now point to the green shoots of demand recovering, and keep in mind that urban select services been cash flow for a while throughout the pandemic. So there is a lot of demand for those assets and given the yield, there is a lot of players who were chasing the assets. Many of them are not necessarily traditional hoteliers. And so between the demand, limited supply values have continued to remain above 2019 levels is the way I would put it. But what I was focusing on is how we approach to transactions, one is that we focus on off market transactions. We leverage unique relationships and situations to allow to get to assets that we might not otherwise. And that has played out in the value and the yields of the deals that we have acquired most recently.

[Anthony Powell, Barclays Capital]

Okay. Thanks. And I guess on Boston, you seem bullish on that market. Could that makes sense? Because it makes sense to make you to pull forward the Windham, I guess Boston renovation can the strength in the market. So you can maybe benefit from the recovery there a bit earlier.

[Leslie Hale, President and Chief Executive Officer]

I mean, we are evaluating all of our conversions to make sure we hit the right time, but keep in mind that the Windham, Boston does have a ground lease that we are working through. We would want to make sure that we extended that before we, um, we execute the conversion.

[Anthony Powell, Barclays Capital]

Okay. Alright, thank you.

[Operator]

Thank you. Our next question comes in line of Tyler Batory with Janney. Please proceed with your question.

[Tyler Batory, JanneyMontgomery Scott]

Thank you. Good morning. Question on CapEx spend that you just said a $100 million for this year, as much is for conversions versus other projects. Is there any deferred CapEx assumed in that number this year? And how are you thinking about a run rate for CapEx, whether it is a percentage of revenue or an absolute number going forward?

[Sean Mahoney]

Tyler, this is Sean. You are right, we said we expect the total spend of a $100 million in 2022. This is going to include normal cycle renovations. And what we have done is we have allocated that really to markets and hotels that we expect to outperform during the cycle. So that is going to include hotels in Miami, Deerfield Beach, Phoenix, Orlando, and Los Angeles. It also includes spillover from our 2021 either the three conversions, which are pace to launch by the end of the year. And so there is just the timing of the capital there will spill over. And that is a subset of the $100 million as well. As a reminder, our midpoint of our range last year was $80 million. We ended up at about a little under $50 million at CapEx. And so that accounts for a lot of that spill over, it is just the timing of when that is going to happen. But I think, with respect to how we think about CapEx and our portfolio, I think the beauty of what we have done over the last several years and we have planned for 2022 is that we are going to emerge with a broadly renovated portfolio in good shape and are well position to compete. We have done a lot of the heavy lifting particularly in renovating a lot of the assets that we bought as part of the sell core merger. And so we are through the vast majority of those assets are certainly will be by the end of 2022. And so our portfolio is well positioned and set up to compete.

[Tyler Batory, JanneyMontgomery Scott]

Okay, great. And then apologize if I missed this earlier, interested your thoughts or updated thoughts perhaps on leverage and leverage targets a little bit longer-term. Obviously think business is moving in the right direction, certainly seems like some normalization coming here. I mean, once we kind of get into the more normal post-COVID period, how are you thinking about leverage? And kind of how are you evaluating where you might shake out? I mean, you kind of looking at a net that the EBITDA metric in terms of a target or some sort of a gross assets ratio as well, just interested any updated thoughts there.

[Sean Mahoney]

Sure. Our view on sort of the appropriate leverage for lodging REIT has not changed, our view is that it should be at or below four times net debt to EBITDA, which is a metric based on sort of stabilized EBITDA. We are on track to get back to that level through growth of EBITDA. But our view is that is the appropriate metric and the appropriate level for lodging REIT. So it has not changed. And as I said, that we are on track through just improved operations to hit that number.

[Tyler Batory, JanneyMontgomery Scott]

Okay, great. That is all for me. Thank you for the detail.

[Operator]

Thank you. Our next question comes from line of Gregory Miller with Truist Securities. Please proceed with your question.

[Gregory Miller, Truist Securities]

Thanks, good morning. I would like to start off on the macro front, given the current events in Ukraine, we have received investor questions on how the geopolitical situation translates to domestic demand impact based on what you know today and I recognize the situation is fast moving. How material are rising gas prices or other macro factors to your near-term hotel demand, say looking out to March or April?

[Leslie Hale, President and Chief Executive Officer]

So, I mean, obviously, the events are unfolding today. We think on the domestic side, which has been driving the vast majority of our demand today, we don’t think there is an impact. Clearly, on the international travel that could have a significant impact just in terms of what is happening on a macro geopolitical perspective. What I would say though is that, we have not baked in any international into our general house view this year. As we said in our prepared remarks that international could surprise the upside. But that was generally in the back half of a year, Greg. So, from our perspective, clearly, macro events could have all kinds of unseen intent and ramifications. But as we sit here today, the way we have built our budgets and what we are seeing, we don’t see an immediate impact. We also haven’t necessarily talked about the fact that there could be an incremental variant and so, all of the marks that we have given today are in absence of that as well. So clearly, there are macro things that it could occur. But what we see today from a domestic perspective, we are not necessarily seeing an impact from that.

[Gregory Miller, Truist Securities]

Okay. Thanks. Second question is a bit offbeat, but I thought to ask given your portfolio is diversified by product type and geography. When your hotel associates are allowed to not wear masks, I’m curious about the operational impact. Have you noticed any changes to guest satisfaction scores or employee retention or even operational efficiencies, positive or negatively, and this impact pretty broad based across the portfolio?

[Thomas Bardenett, Executive Vice President of Asset Management]

Hey, Greg. It is Tom. What I would say is obviously every state, every city, every municipality is a little bit different on how they are reacting to the mask mandate lifts. So first and foremost, before we get into the associate side of it, what we have seen is because of these mask mandate lifts, it is an immediate opportunity to be able to see pace pickup, both transient group and so, there is more activity when those cities that have all been talking about doing it at the 28th of February, beginning of March, all that has been transpiring into what you are seeing on the pace side, where more people are traveling. It is a new normal, and we are all having to adjust to that, not only with guests, but, offices as well as the associate. And so, what I would say initially is, I think there is an excitement out there in regards to the new normal for associates to be able to smile and greet guests in a way that they used to do it on a regular basis, first and foremost. The second thing that I would say is because there is more demand midweek. We are starting to see some of the same customers that we used to see on a regular basis on those national corporate accounts that we talked about that are now traveling again, because those were the road warriors that we had that relationship with versus a transaction in the past. So, I think it is early to say any impact on that, but on the concern about health and safety and security, we take that very seriously and working with our management companies to make sure we are making those right decisions, at each and every level, depending upon where our portfolio sit.

[Leslie Hale, President and Chief Executive Officer]

And Greg, the other thing I would just sort of add which much more broader is in fact the psychology around COVID as a result of Omicron given how widespread it was, the number of people who were impacted and the less severity of it has really changed the general psychology. And so people are more mobile in all aspects of their lives, not just sort of travel, right. And so that is generally changing the overall reflex when you see somebody without a mask, and so I just generally think that it is, we are moving to a point of being an endemic and less of a concern for most people. Now again, all of that, I’m saying in the absence of something else spiking, but I think in general, the psychology around mask wearing actually is a benefit. I’m sorry, the lifting of mask wearing is a benefit for the psychology for people and mobility in all aspects of their lives.

[Gregory Miller, Truist Securities]

Thanks everyone. I appreciate it.

[Operator]

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

[William Crow, Raymond James]

Yes, thanks. Good morning, just a quick one for me on CapEx. A follow-up to the prior discussion. I’m just curious whether the brands are starting to push back and deferred CapEx, not so much Leslie in your portfolio, but more broadly speaking, whether that doesn’t eventually free up more acquisition opportunities.

[Leslie Hale, President and Chief Executive Officer]

I think the great question, Bill. I do think that we are going to have a multiyear buying opportunity and I do think as a result of owners having to put more capital in assets that is going to flush some owners who had to survive off of their [F&E] (Ph) reserves, and who had to dip into different proceeds not wanting to put more capital in. I don’t think that it is necessarily going to be driven by the brands. I think the brands continue to be accommodating and working with owners. I think, it is going to be a function of preserving the operations of the asset, and that the longer that you go in terms of not putting in the capital that is needed and the degradation that may cost somebody’s going to want to get ahead of that. And then eventually the brands will put pressure. I don’t see that in the next kind of 12, 24 months. Based on the accommodations that the brands are trying to make, but I do see that being an eventual push, but I think it is going to be more the necessity in order to maintain the competitiveness of an asset.

[William Crow, Raymond James]

Thank you for that. How sensitive are the brands to guest satisfaction scores and how much at risk are the changes to guest facing services that have been implemented in reaction to the pandemic to these changes in guest satisfaction scores. So I think what I’m getting at is just, if we start to see dissatisfaction, do these savings start to get eroded.

[Leslie Hale, President and Chief Executive Officer]

Yes. So I think, that it is an evolving question Bill, because the brands are sensitive to the guest satisfaction scores, but they have also adjusted the guest satisfaction scores to accommodate the current environment we saw we see today. But those guest satisfaction scores benchmarks will push back up over time. So keep that in mind and it has been some adjustments, but they are increasingly becoming sensitive. But what I would say though is, and I will let Tom give some more color on specifics. I do believe that our portfolio, because of where we play from a segmentation perspective, the nature of our customer, we will be able to have customers who adopt to the changes in a way that doesn’t affect our guest satisfaction scores, as you may see in sort of the higher end segment that we don’t play in.

[Thomas Bardenett, Executive Vice President of Asset Management]

Yes. So Bill, just to give you some specifics around that, when you think about the guest experience, it comes down to obviously wanting to have their room clean and the type of clean that they were getting. And I think the adjustments that the brands were making are real positive giving the option to the consumer to ask. And I think, what we are finding is that interaction between the employee and the guest is giving us an opportunity to have that chance to ask questions about how they want to view their stay and the length of stay that Leslie mentioned really gets you into a relationship with somebody because of suites and 50% of extended stay that you are asking them how they would like to view that opportunity when they are with us. The second thing that I would say because of the collaboration around food and beverage, I think there was a good opportunity to reshift and reimagine that experience. So for instance, yes, our cost per occupied room is down the, because we have removed some items, but there was so many significant items on there that people didn’t actually take that I think it was more of what they really wanted versus what they needed, if you will, in the past. And so those changes in addition to hours of operations have been met with I think a welcome experience in regards to that were giving them what they are looking for and having the hours of operations be acceptable to the fact that they know they still can rely on it when they come in that area. And then lastly, to Leslie’s point about our footprint versus full service, we feel that our customer is a little bit more accepting of that because they only have maybe one outlet or they have an opportunity that breakfast is included in the rate. So more of an experience versus the optionality of a full service hotels, where they are going to have room service or two or three different outlets when they come in their expectations are going to be a little bit different in regards to the level of services being provided when they experience that.

[William Crow, Raymond James]

Alright, I appreciate all the color. That is it for me. Thanks.

[Operator]

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

[Floris van Dijkum, Compass Point]

Thanks for taking my question guys. You know getting back to the balance sheet, Sean. - cash I know you don’t have any maturities, so presumably, that is going to get deployed into acquisitions - earnings enhancing, even if you buying it low cap rate. Is that the right way to think about it?

[Sean Mahoney]

You broke up a little bit Floris and so I just want to make sure I understand your question, which is because of the liquidity that we have on the balance sheet today, you would expect us to be in a better position to deploy that on external growth. Is that the question?

[Floris van Dijkum, Compass Point]

Yes.

[Sean Mahoney]

Okay, alright thanks for that. Yes, so you are right. I think, we are uniquely positioned because of the heavy lifting that we did in 2019 and the liquidity that we have on our balance sheet today to use acquisitions is one of the sources. I mean, in 2021, we were active on the acquisition front, but it was also funded with these positions and so the capacity that we had at the beginning of 2021 is the same as it is today. So acquisitions are certainly one tool that we have at our disposal to rate value. I do think on the comment around being able to buy lower cap rate things, I mean, you would expect us to continue to be disciplined and underwrite deals in a way that allows us to deliver returns. I mean the data point that we provided and we talked about earlier on the call and the outperforming underwriting is a good testament of that of our ability to underwrite conservatively, get the deals and sort of have the strong returns. But on the acquisitions front, you would expect - and then the other point acquisition as Leslie mentioned, we are going to be net acquirers this year. So we have a pipeline we are actively looking at acquisitions, and we are going to remain disciplined. And we think with our liquidity, we have the capacity to do that. But I want to just add the additional point is the acquisitions are just one of the tools we have at our disposal, because we have liquidity, we can do the acquisitions. We have within our base case model, the internal growth catalyst with the conversions and the CapEx, et cetera, is also going to deliver outsized returns for us within our ROI initiatives. And then lastly, as I mentioned earlier, we have the liquidity when dividends resume and returning capital through shareholders that is also an option that is in our toolkit. So, we have the liquidity for all of it, is how we think about it.

[Floris van Dijkum, Compass Point]

Thanks. And maybe if you could also comment on your value and where, obviously investors have been thinking potentially you could be one of the more attractive options for private equity being select service.

[Sean Mahoney]

Sorry, you cut out. Finish your question.

[Floris van Dijkum, Compass Point]

No. If you could just comment on where you think your underlying value is, that would be helpful.

[Sean Mahoney]

Sure. Thanks, Mark. So, it is important to affirm our strong view that we are trading at a discount to both consensus NAV, as well as our internal view of NAV. From a public NAV perspective, the discount is in the 35% range, today. Obviously today is a tough day in the market with the global things going on. But the discount is even wider, based on our internal view of our NAV as well as replacement cost. Our internal view of our internal value is really based on the fact that when we look at what asset - comparable assets are trading at offset around $200,000 is a key or slightly more than $200,000 is key is materially below where comparable assets are trading today in the marketplace, that gives us confidence around the value of the underlying assets. We also have seen, and you know as Leslie mentioned in her remarks is that, assets are trading at, or above 2019 levels, which also gives us confidence around value. There are areas that we believe the market is not giving us credit for today and the overall quality of our portfolio, which is from a RevPAR and a metric standpoint to strongest that has been in our life as a public company. We also to all of your earlier question, we have investment capacity to deploy, right. We think that needs to get factored in. Also we have discussed the $23 million to $28 million of incremental EBITDA, right. We think that is a, we need to put points on the Board to demonstrate that. So that is future credit, if you will within our value. And then finally, we have a pipeline of internal ROI initiatives, as well as future conversions that we are continuing to work on and so, there is more value within our portfolio. All that being said, we are going to work hard and continue to work hard to bridge that gap to NAV through executing these initiatives. It is important RLJ for us to bridge that NAV gap and you would expect the us to act in a commercial manner to make sure that we take steps to bridge that gap.

[Operator]

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Ms. Hale for any final comments.

[Leslie Hale, President and Chief Executive Officer]

Well, I want to say thank you to everybody for joining us today. We look forward to providing updates throughout the year as recovery continues to unfold. And we look forward to being able to provide an update on our progress relative to that. Have a good rest of the week.

[Operator]

Thank you. This concludes today’s conference. You may disconnect your at this time. Thank you for your participation.