Executive Summary / Key Takeaways

• RLJ Lodging Trust is an urban-centric hotel REIT focused on premium-branded, rooms-oriented, high-margin hotels, strategically positioned to benefit from the recovery in business and group travel and constrained urban supply.
• Recent performance, including Q1 2025 RevPAR growth of 1.6% driven by rate and market share gains, demonstrates the resilience of its portfolio and operating model despite macroeconomic headwinds and softening trends in March and April.
• The company is actively creating value through high-return internal conversion projects, which are significantly outpacing portfolio averages, and disciplined capital allocation, including recycling asset sale proceeds into accretive share repurchases.
• A flexible balance sheet with ample liquidity, laddered debt maturities, and a high percentage of unencumbered hotels provides strategic optionality to navigate uncertainty, invest in the portfolio, and return capital to shareholders.
• While near-term visibility is low, leading to a revised 2025 outlook (-1% to +1% comparable RevPAR growth), the long-term thesis remains constructive, supported by secular trends favoring travel, limited new supply, and the expected continued outperformance of urban markets.

Setting the Scene: An Urban-Centric Strategy in a Dynamic Market

RLJ Lodging Trust, a self-advised and self-administered Maryland REIT, has carved out a distinct identity within the lodging real estate sector. Formed in 2011, the company's foundational strategy centers on owning primarily premium-branded, rooms-oriented, high-margin, focused-service and compact full-service hotels. These assets are strategically located within "heart of demand locations," predominantly in high-growth urban markets across 23 states and the District of Columbia. This focus on urban centers with multiple demand generators – spanning business, leisure, and group travel – positions RLJ to capture a broad spectrum of the lodging market.

The company's business model emphasizes efficiency. Focused-service and compact full-service hotels derive the majority of their revenue from room rentals, requiring less extensive food and beverage operations and meeting space compared to traditional full-service properties. This lean operating model is designed to achieve RevPAR levels competitive with full-service hotels while maintaining higher profit margins and less volatile cash flows.

Within the competitive landscape, RLJ operates alongside larger, more diversified hotel REITs like Host Hotels & Resorts (HST) and brand giants like Marriott International (MAR) and Hilton Worldwide Holdings (HLT), as well as peers like Apple Hospitality REIT (APLE). While giants like MAR and HLT boast vast global scale and dominant brand recognition, leveraging extensive franchise networks and sophisticated loyalty programs, RLJ differentiates itself through its focused portfolio strategy and self-advised structure. This structure is cited as enabling greater cost efficiency, potentially leading to lower management fees and superior margins compared to externally managed peers.

RLJ's operational approach leverages technology, often facilitated through its brand partnerships, to drive revenue management and efficiency. This includes utilizing dynamic pricing strategies, managing distribution across various channels like Global Distribution Systems (GDS), brand.com, and Online Travel Agencies (OTAs), and employing data analytics. While the company may not possess unique, proprietary technological moats in the same vein as a manufacturing process, its ability to effectively implement these operational technologies and strategies is crucial for optimizing performance. Competitors like HLT are noted for significant tech investments, including AI for revenue management and personalization, which could offer advantages in forecasting accuracy and customer acquisition speed. RLJ's focus on leveraging brand systems and internal asset management expertise is its counterpoint, aiming for cost-effective operational excellence within its niche.

The company's history, including significant portfolio pruning around 2019 and navigating the severe disruption of the COVID-19 pandemic, has refined its focus and underscored the importance of a flexible balance sheet and disciplined capital allocation. Emerging from the pandemic, RLJ has actively pursued a strategy of enhancing portfolio quality through targeted acquisitions and high-return internal conversion projects, while simultaneously recycling capital from non-core asset sales into share repurchases.

Performance and Operational Execution: Resilience in a Choppy Environment

RLJ's recent financial performance reflects the benefits of its urban-centric strategy and operational focus, even as the broader macroeconomic environment presents challenges. In the first quarter of 2025, the company reported comparable RevPAR growth of 1.6% over the prior year, reaching $141.23. This growth was primarily driven by a 2.1% increase in Average Daily Rate (ADR), partially offset by a 0.5 percentage point decline in occupancy. This rate-driven performance, particularly strong in urban markets which saw 3.6% RevPAR growth, highlights the company's ability to maintain pricing power despite softening demand trends that emerged in March and continued into April.

The strength of urban hotels was a key driver, benefiting from a mix of demand segments. Group business was the best-performing segment in Q1 2025, with revenue growth of 10% fueled by a 9% increase in demand. Business Transient (BT) trends remained healthy, contributing positive revenue growth and driving a 4.9% increase in midweek urban RevPAR, supported by demand from both small and medium-sized enterprises (SMEs) and larger corporate accounts. While government and international demand showed softness, leisure revenues increased by 2%, with urban leisure outperforming at 3% growth.

Beyond room revenue, RLJ has successfully driven growth in out-of-room spend, which increased by 3.8% in Q1 2025 and 6.3% in Q4 2024. This growth in non-room revenues (including food and beverage, parking, and other services) has contributed to total revenue growth outpacing RevPAR growth and underscores the benefits of past ROI initiatives focused on enhancing F&B venues and operating models.

Operational efficiency remains a core focus. Total hotel operating cost growth moderated to 2.9% in Q1 2025, a significant improvement from the prior quarter. This reflects diligent cost controls and initiatives to manage expenses, including efforts to reduce contract labor and manage fixed costs like property taxes and insurance. While fixed costs were a headwind in the first half of 2024, they began to moderate in the latter half, with property insurance premiums seeing a decrease in November 2024. Management expects continued moderation in cost growth, aiming for normal inflationary levels in 2025.

Despite a $3 million contraction in Hotel EBITDA in Q1 2025 compared to the prior year (impacted by one-time credits in 2024 and one less day), the portfolio achieved a 26.1% Hotel EBITDA margin. While this was lower than the prior year, the moderation in operating cost growth helped mitigate the impact of softer top-line trends later in the quarter. The company's ability to manage costs effectively in response to the revenue environment is a critical component of its operational resilience.

Strategic Initiatives and Capital Allocation: Unlocking Value

RLJ has actively employed its flexible balance sheet to pursue strategic initiatives aimed at enhancing portfolio quality and creating shareholder value. A key focus has been on high-return internal conversion projects. The company has a multiyear pipeline and aims to complete approximately two conversions per year. The six initial conversions completed by early 2025 have demonstrated strong performance, achieving 14% RevPAR growth in Q1 2025, significantly outpacing the portfolio average. The three most recent conversions saw an even more impressive 35% RevPAR growth in the quarter. The Nashville conversion, nearing completion, achieved 16% RevPAR growth in Q1 2025, indicating the potential for continued upside as these assets stabilize under their new premium brands (e.g., DoubleTree, Marriott Tribute, Courtyard). Future conversions are planned, including the Renaissance Pittsburgh to Marriott's Autograph Collection in 2025 and the Wyndham Boston in 2026.

In addition to conversions, RLJ has been opportunistic in managing its portfolio through acquisitions and dispositions. In 2024, the company acquired the Hotel Teatro in Denver and the fee simple interest in the Wyndham Boston Beacon Hill, aligning with its strategy for high-margin, urban-centric assets. Simultaneously, RLJ has recycled capital from the sale of non-core assets, including the Courtyard Atlanta Buckhead in Q1 2025 for $24.3 million (generating a $1.3 million gain), the Residence Inn in Merrillville, Indiana, and a hotel in Denver in 2024.

Proceeds from these dispositions have been strategically redeployed into accretive share repurchases. Under its share repurchase programs, RLJ repurchased approximately 2.3 million common shares for $22 million at an average price of $9.39 in 2024, and a further 2.7 million shares for $24.3 million at an average price of $8.91 in early 2025. A new $250 million share repurchase program was approved in April 2025, providing continued flexibility to capitalize on market volatility.

The company has also enhanced shareholder returns through its dividend policy, increasing the quarterly cash dividend to $0.15 per common share, which management states is well covered by free cash flow.

Balance Sheet Strength: A Foundation for Optionality

A key enabler of RLJ's strategic flexibility is its strong balance sheet and liquidity position. As of March 31, 2025, the company held $372.4 million in cash, cash equivalents, and restricted cash reserves. Subsequent to the quarter, RLJ proactively addressed near-term debt maturities, refinancing a $200 million term loan to $300 million and extending its maturity to April 2028, using the incremental $100 million to pay off its corporate revolver. The company also exercised extension options on $181 million in mortgage loans, extending their maturities to April 2026.

These actions have further strengthened the balance sheet, resulting in $600 million available under the undrawn corporate revolver, a weighted-average debt maturity of nearly four years, and approximately 75% of debt fixed or effectively fixed through hedges. With 86 of its 94 consolidated hotels unencumbered by debt, RLJ possesses significant financial flexibility. Total liquidity stood at over $0.8 billion at the end of Q1 2025, against $2.2 billion of debt. This robust financial position provides RLJ with the optionality to continue investing in its portfolio, pursue opportunistic external growth if the transaction market improves, and return capital to shareholders, positioning it to navigate the current environment and capitalize on future opportunities.

Outlook, Guidance, and Risks: Navigating Uncertainty

RLJ's outlook for 2025 reflects the current macroeconomic uncertainty and moderated fundamentals observed since the start of the year. Forecasting visibility remains low, influenced by elevated macroeconomic risks and headline volatility. Based on recent trends, which saw preliminary April RevPAR decline between 1% and 2%, the company has adjusted its full-year 2025 guidance.

The revised outlook projects comparable RevPAR growth to range between -1% and +1%. Comparable Hotel EBITDA is expected to be between $365.5 million and $395.5 million, Corporate Adjusted EBITDA between $332.5 million and $362.5 million, and Adjusted FFO per diluted share between $1.38 and $1.58. This guidance assumes that current operating trends persist, with government and international demand remaining soft, and BT and leisure demand outside of government staying stable.

The company anticipates the second quarter of 2025 to be the weakest due to difficult prior-year comparisons, with the back half of the year expected to be slightly better, benefiting from renovation timing, special events, and lapsing the prior year's election impact. The outlook incorporates anticipated displacement from scheduled renovations in key markets and the impact of the Austin Convention Center closure.

Key risks to this outlook include the potential for further deterioration in macroeconomic conditions, which could impact business investment and consumer confidence, leading to softer demand across segments. The shortening of booking windows across all segments adds to the uncertainty. Specific risks include the duration and depth of softness in government and international travel, potential for less rate growth in group or slower BT growth, and the possibility of incremental displacement from renovations. While the company has diversified its FF&E sourcing to mitigate tariff impacts on renovations, this remains a potential cost risk.

Management acknowledges the choppy backdrop but remains constructive on the longer-term outlook for lodging fundamentals, citing consumer preference for experiences, continued tailwinds for group travel, the ongoing recovery in business travel, and historically constrained new supply, particularly in urban markets.

Conclusion

RLJ Lodging Trust stands as a resilient, urban-centric player in the hotel REIT sector. Its focused strategy on premium-branded, high-margin assets in heart-of-demand locations, coupled with a lean operating model, has enabled it to outperform the broader industry and gain market share even amidst a challenging and uncertain macroeconomic environment.

The company's commitment to value creation is evident in its successful high-return conversion projects and disciplined capital allocation, including the strategic recycling of asset sale proceeds into accretive share repurchases. Supported by a flexible balance sheet with significant liquidity and proactively managed debt, RLJ is well-positioned to navigate near-term headwinds, continue investing in its portfolio, and capitalize on opportunities as the lodging recovery unfolds. While the revised 2025 outlook reflects current uncertainties, the long-term thesis remains compelling, underpinned by secular travel trends, favorable supply dynamics in urban markets, and RLJ's strategic positioning to capture future growth. Investors should monitor the trajectory of macroeconomic conditions, the pace of business and group travel recovery, and the continued execution of RLJ's conversion pipeline and capital allocation strategy.