RLJ Lodging Trust Q3 2025: Contradictions Emerge on Renovation Strategy, Government Shutdown Impact, and Revenue Management Adjustments

Date of Call: None provided

Financials Results

• Revenue: Total revenues performed ~110 bps better than REVPAR; non-room revenues +1.3% YOY (contributed to outperformance vs REVPAR)
• EPS: Adjusted FFO per diluted share: $0.27 for Q3; full-year adjusted FFO guidance $1.31–$1.37 (inc. repurchases to date, no additional repurchases)
• Gross Margin: Hotel EBITDA margin 24.5% in Q3 (hotel EBITDA $80.8M)

Guidance:

• Comparable REVPAR growth for 2025 expected between -1.9% and -2.6%.
• Comparable hotel EBITDA expected $357.5M–$365.5M; corporate adjusted EBITDA $324M–$332M.
• Adjusted FFO per diluted share guidance $1.31–$1.37 (includes repurchases to date; no additional repurchases assumed).
• Capital expenditures expected $80M–$100M.
• Guidance assumes no additional acquisitions, dispositions, or refinancings and reflects October (~-2% REVPAR) and continuation of current trends.

Business Commentary:

* Revenue Performance and Challenges: - RLJ Lodging Trust reported REVPAR declined by 5.1% in Q3, with occupancy down 3.1% and average daily rate (ADR) down 2.1%. - The decline was attributed to factors including a layered effect of difficult holiday comps, non-repeat hurricane business, and softer citywide calendars, as well as the impact from transformative renovations and headwinds in specific markets.

• Geographic and Segment Performance:
• Urban hotels achieved REVPAR growth outpacing the broader portfolio, with San Francisco's CBD hotels leading the way with a 19.4% increase.

• The growth in urban markets was supported by strong demand from key sectors like tech and finance, as well as the return-to-office trends, although government-related transient demand remained below last year's levels.

• Non-Room Revenue and Strategic Initiatives:

• Non-room revenues grew by 1.3%, outperforming the 5% REVPAR decline, driven by successful initiatives to enhance food and beverage revenues and reconcept underutilized space.

• These strategic moves allowed RLJ Lodging Trust to achieve solid bottom-line results despite REVPAR headwinds, demonstrating the strength of their ROI initiatives.

• Capital Allocation and Transformative Projects:

• Significant progress was made in three transformative renovations in Waikiki, Key West, and Fort Lauderdale, which are now substantially complete.
• The company initiated conversions, including the Renaissance Pittsburgh to Marriott's Autograph Collection, which aims to capitalize on positive market trends and position assets to benefit from upcoming events like the NFL Draft.

Sentiment Analysis:

Overall Tone: Neutral

• Management reported a Q3 REVPAR decline of 5.1% (occupancy -3.1%, ADR -2.1%) and lowered full-year outlook reflecting October (~-2% REVPAR) and the government shutdown, yet highlighted gains in REVPAR index, non-room revenue growth (+1.3% YOY), hotel EBITDA margin of 24.5%, and completed transformative renovations driving confidence into 2026.

Q&A:

• Question from Michael Bellisario (Baird): Could you dive into the revenue management strategies and changes in booking channels/booking window that guided your approach in the quarter?
  Response: Shifted mix toward leisure and brand.com (lower-cost channel), captured OTA weekend demand, and saw BT growth (non-government business travel +2.4%), helping partially offset weaker group demand.

• Question from Michael Bellisario (Baird): With a weaker top-line outlook, how does that change your view on CapEx, underwriting, and expected returns for larger conversions like Boston?
  Response: Most renovations were front-loaded and are substantially complete; ramps may be delayed but returns intact—Boston conversion viewed as high-upside with significant EBITDA upside on stabilization.

• Question from Austin Worsham (Key Bank Capital Markets): Are you seeing more price sensitivity from leisure guests or is softness driven by booking via discount channels?
  Response: Leisure demand remains stable with room nights up, but price sensitivity appears via channel shift (more OTA/discount channels); government shutdown has reduced propensity to travel, weakening pace.

• Question from Austin Worsham (Key Bank Capital Markets): Is San Francisco/Northern California strength broadening across your Northern California assets and how is that translating to margins?
  Response: CBD recovery is strong and Silicon Valley demand is improving (AI-driven demand); top-line improving portfolio-wide, though wage/cost pressure exists with confidence in long-term margin recapture.

• Question from Gregory Miller (Truist Securities): How are expectations shaping up for New Year’s Eve at the Knickerbocker compared to 2024 (REVPAR and F&B package pricing)?
  Response: New York and the Knickerbocker remain strong; NYE package pricing is exceeding expectations and demand is robust.

• Question from Gregory Miller (Truist Securities): How will Hilton’s owner fee reduction program tied to product/service scores impact your Hilton properties?
  Response: Program incentivizes owners to invest and drive guest scores; RLJ has already invested and is well-positioned to benefit if score and performance targets are met.

• Question from Tyler Batorre (Oppenheimer & Company): Can you quantify the impact of the government shutdown (and FAA flight reductions) on October/Q4 guidance?
  Response: October was ~-2% REVPAR versus expectations; the shutdown reduced compression and pickup and materially drove the downward adjustment to Q4 and full-year guidance.

• Question from Tyler Batorre (Oppenheimer & Company): Can you double-click on drivers of out-of-room revenue and whether you expect non-room revenue to continue outpacing room revenue?
  Response: Out-of-room growth driven by F&B investments, market/retail expansions, converting unused space to revenue (cafes, meeting/ballroom space), and should continue to outpace room revenue as initiatives ramp.

• Question from Cooper Clark (Wells Fargo): How should we think about potential dispositions given a healthier transaction market in 2026 and any assets you’d reduce exposure to?
  Response: Disposition activity will be opportunistic; market volatility and PIP/debt considerations slow deals now, but RLJ will be active where transactions are executable as markets normalize.

• Question from Cooper Clark (Wells Fargo): How is RLJ positioned vs. peers heading into 2026 and in what macro environment should RLJ outperform?
  Response: RLJ’s urban-heavy footprint and conversions/renovations position it to outperform when macro stabilizes (lower rates, clarity on taxes, lapping tough comps) thanks to low urban supply and event-driven demand.

• Question from Ken Billingsley (Compass Point): Did you mention the October REVPAR number?
  Response: October REVPAR is currently estimated to be down about 2%.

• Question from Ken Billingsley (Compass Point): Given the cadence, should we assume the midpoint of guidance is most likely or will year-to-date trend shift guidance toward the middle?
  Response: Management believes the midpoint is the most likely outcome assuming current trends continue; with October at -2% the midpoint implies November/December down further (roughly -4% combined for those months).

• Question from Ken Billingsley (Compass Point): How does the 2026 outlook affect decisions on share repurchases?
  Response: Buybacks are attractive and will remain programmatic using disposition proceeds while maintaining a healthy, leverage-neutral balance sheet.

• Question from Chris Darling (Green Street): How has your REVPAR index evolved YTD — is weakness market-driven or RLJ-specific?
  Response: REVPAR index is up, indicating RLJ is gaining share and that performance is driven by portfolio positioning/asset quality rather than company-specific weakness.

• Question from Chris Darling (Green Street): Any long-term labor risks from immigration policy changes and how might that affect the operating model?
  Response: Current trends are positive: contract labor has declined, retention and productivity measures improved, and RLJ benefits from management career pathways—no immediate concerning signs.

Contradiction Point 1

Renovation and Capital Expenditure Strategy

It highlights a shift in RLJ Lodging Trust's approach to renovations and capital expenditures, especially considering the current market conditions and expected returns on investments.

How does the weaker top-line outlook affect your overall CapEx approach, budgeting, and expected returns on major conversion projects, specifically Boston and any 2026/2027 projects in the pipeline? - Michael Bellisario (Baird)

2025Q3: Our renovations were front-loaded. Most are either substantially complete or rounding completion. The ramp may be delayed due to the current market. - Leslie Hale(CEO)

Are there increased leisure discounts and changes in booking or channel mix? - Daniel Hogan (Baird)

2025Q2: Our renovation pipeline is among the largest in our sector and includes our first Hilton Curio conversion in Boston. Renovation activity over the last 2 years has driven incremental RevPAR in the mid-teens. - Leslie Hale(CEO)

Contradiction Point 2

Government Shutdown Impact on Travel Demand

It reflects differing perspectives on the impact of the government shutdown on travel demand, which could affect hotel occupancy and revenue projections.

Can you quantify the government shutdown's impact on Q4 or October? What impact could FAA flight reductions have? - Tyler Batorre (Oppenheimer & Company)

2025Q3: The government impact affects compression and consumer confidence in travel. It has delayed the ramp-up of major renovation projects and weakened transient pace, particularly in key markets. - Leslie Hale(CEO)

What specifically drove the misses in March and April, and what gives confidence that recent trends will hold? - Tyler Batory (Oppenheimer & Company)

2025Q1: We remain watchful of cancellations, attendance, and consumer confidence. - Leslie Hale(CEO)

Contradiction Point 3

Hotel Performance and Revenue Management Adjustments

It reflects changes in the company's strategic approach to revenue management and hotel performance expectations, which could impact investor perceptions and strategic planning.

How did you adjust your revenue management strategies this quarter due to weaker performance? How are booking channels and windows affecting your near-term outlook? - Michael Bellisario (Baird)

2025Q3: We knew that the industry setup was weak on the group side, not only in industry but in urban. So we focused more on the leisure side, where we knew there was opportunity to replace some of that group. - Tom Bardenett(COO)

What is the expected RevPAR run rate based on January's commentary, excluding markets like D.C.? - Chris Woronka (Deutsche Bank)

2024Q4: We expect each quarter to be positive, with Q1 being the strongest. The U.S. Conference on Harriet Tubman in D.C. drove strong performance, but we expect a broad-based positive cadence. - Leslie D. Hale(CEO)

Contradiction Point 4

Government Travel Impact on Revenue

It involves differing views on the impact of government travel on revenue performance, which affects the overall revenue outlook and forecasting.

Can you quantify the government shutdown's impact on Q4 or October? And what impact could FAA flight reductions have? - Tyler Batorre (Oppenheimer & Company)

2025Q3: October was down approximately 2% due to the government shutdown. Government impact affects compression and consumer confidence in travel. - Leslie Hale(CEO)

How is the leisure business, particularly urban vs. resort leisure, performing this summer? - Tyler Anton Batory (Oppenheimer & Co. Inc.)

2025Q2: Business travel without government is up 3%. - Leslie D. Hale(CEO)

Contradiction Point 5

Renovation Strategy and Market Conditions

It involves differing views on the strategic approach to renovations and how market conditions influence the timing and execution of these projects.

How does the weaker top-line outlook affect your overall CapEx strategy, underwriting approach, and expected returns for major conversion projects like Boston or other 2026/2027 initiatives? - Michael Bellisario (Baird)

2025Q3: Our renovations were front-loaded. Most are either substantially complete or rounding completion. The ramp may be delayed due to the current market. - Leslie Hale(CEO)

What are your insights for March and April, and how do expectations compare to actual results? - Michael Bellisario (Baird)

2025Q1: We believe we have a strong pipeline of capital expenditures, including the conversion and renovation of significant lifestyle select service hotel properties. - Leslie Hale(CEO)