RLJ Lodging Trust: Undervalued Urban Exposure Amid Sector Volatility

The U.S. lodging sector is navigating a complex landscape in 2025, marked by macroeconomic uncertainty, inflationary pressures, and shifting consumer demand. Yet, within this volatility, RLJ Lodging Trust (NYSE: RLJ) stands out as a compelling case study in strategic capital allocation and dividend sustainability. As a REIT focused on high-demand urban markets, RLJ's 8.14% dividend yield, disciplined cost management, and selective outperformance in RevPAR growth position it as an undervalued opportunity for patient income-focused investors.

Urban RevPAR: Mixed Results, Strong Fundamentals

RLJ's second-quarter 2025 results reflect the challenges of a softening operating environment. Portfolio Comparable RevPAR declined 2.1% year-over-year to $155.08, driven by a 1.6% drop in occupancy to 75.5% and a 0.5% decline in Average Daily Rate (ADR) to $205.27. However, this performance masks significant variation across urban markets. For instance, San Francisco saw a 20% RevPAR surge, while New York City posted 1.2% growth despite a 2.7% occupancy decline. These pockets of resilience highlight RLJ's strategic focus on urban centers, which remain critical for business and group travel.

Industry benchmarks suggest urban RevPAR growth will lag behind historical averages in 2025, with CBRE forecasting 2.8% year-on-year growth for urban markets versus 1.3% for the broader sector. RLJ's full-year guidance of -1.0% to +1.0% RevPAR growth aligns with this cautious outlook but underscores the company's ability to outperform in key markets through renovations and brand conversions. For example, seven completed hotel conversions in 2025 delivered a 10% RevPAR boost, demonstrating the power of asset-level improvements.

Strategic Capital Allocation: Balancing Shareholder Returns and Growth

RLJ's capital allocation strategy is a cornerstone of its value proposition. The company has repurchased 3.2 million shares year-to-date for $28 million, with $246.3 million remaining under its 2025 share repurchase program. These buybacks, executed at an average price of $7.14 per share, reflect management's confidence in RLJ's intrinsic value. Meanwhile, the REIT has refinanced $300 million in near-term debt maturities and maintains $600 million in undrawn liquidity, ensuring flexibility to navigate interest rate volatility.

The company's urban-focused conversions and renovations further amplify its growth potential. High-impact projects in South Florida, Hawaii, and New York are expected to ramp up in Q4 2025, driving double-digit returns. These initiatives are funded by disciplined cost controls, with operating expenses growing by just 90 basis points year-to-date. By prioritizing capital efficiency, RLJ is positioning itself to capitalize on a projected recovery in urban demand, particularly as the 2026 FIFA World Cup and U.S. 250th anniversary drive inbound travel.

Dividend Sustainability: A High-Yield with Strong Coverage

RLJ's 8.14% dividend yield is among the most attractive in the REIT sector, but sustainability is paramount for income investors. The company's Q2 2025 Adjusted FFO per diluted share was $0.48, translating to a 31.25% payout ratio for the common dividend of $0.15 per share. This conservative ratio—well below the 80% threshold often cited as a warning sign—demonstrates RLJ's ability to maintain its dividend even amid near-term headwinds.

Full-year 2025 guidance for Adjusted FFO per share of $1.38–$1.58 implies a projected annual payout ratio of 44.6% at the low end, assuming consistent quarterly dividends. This provides ample room for reinvestment in growth initiatives or further share repurchases. RLJ's 15-year streak of uninterrupted dividends, combined with its lean operating model and $1 billion in total liquidity, reinforces the durability of its payout.

Undervaluation and Long-Term Potential

RLJ's current valuation appears disconnected from its fundamentals. With a price-to-FFO multiple of 8.5x (as of August 2025), the stock trades at a discount to its historical average of 10.5x and peers like Host Hotels & Resorts (HST) and Digital Realty (DLR). This undervaluation is partly due to near-term concerns about occupancy declines and macroeconomic risks, but it overlooks RLJ's structural advantages:

1. Urban Resilience: Urban markets are expected to outperform suburban and small-town locations in 2025, with RevPAR growth of 2.8% versus 1.3% and 1.8%, respectively.
2. Supply Constraints: U.S. hotel supply growth remains below historical averages, limiting new competition and supporting pricing power.
3. Balance Sheet Strength: RLJ's 86 out of 94 hotels are unencumbered by debt, and its weighted average interest rate of 4.5% insulates it from rising borrowing costs.

For patient investors, RLJ's current discount offers a compelling entry point. The company's fourth-quarter 2025 outlook—bolstered by favorable calendar dynamics, completed renovations, and easier year-over-year comparisons—positions it to deliver a rebound in earnings and RevPAR. Additionally, the 2026 macroeconomic environment, with potential tax cuts and lower regulation, could further enhance lodging fundamentals.

Conclusion: A High-Yield Play on Urban Recovery

RLJ Lodging Trust is a rare combination of defensive qualities and growth potential. Its 8.14% dividend yield is supported by a conservative payout ratio, while its urban-focused strategy and disciplined capital allocation create a runway for long-term value creation. Despite near-term challenges, the REIT's undervaluation and alignment with resilient urban markets make it an attractive holding for investors seeking income and capital appreciation. In a sector marked by volatility, RLJ's strategic clarity and operational discipline offer a compelling case for a long-term, buy-and-hold approach.