RLJ Lodging Trust (NYSE:RLJ) Q3 2022 Earnings Conference Call November 3, 2022 12:00 PM ET
Company Participants
Nikhil Bhalla – Senior Vice President, Finance and Treasurer
Leslie Hale – President and Chief Executive Officer
Sean Mahoney – Chief Financial Officer
Tom Bardenett – Executive Vice President, Asset Management
Conference Call Participants
Anthony Powell – Barclays
Gregory Miller – Truist Securities
Austin Wurschmidt – KeyBanc Capital Markets
Dori Kesten – Wells Fargo
Tyler Batory – Oppenheimer
Neil Malkin – Capital One Securities
Michael Bellisario – Robert W. Baird
Floris Van Dijkum – Compass Point Research
Chris Woronka – Deutsche Bank
Chris Darling – Green Street Advisors
Operator
Welcome to the RLJ Lodging Trust Third Quarter 2022 Earnings Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions]
I would now like to turn the call over to Nikhil Bhalla, RLJ’s Senior Vice President, Finance and Treasurer. Please go ahead.
Nikhil Bhalla
Thank you, operator. Good afternoon, and welcome to RLJ Lodging Trust 2022 third quarter earnings call. On today’s call, Leslie Hale, our President and Chief Executive Officer, will discuss key highlights for the quarter; Sean Mahoney, our Executive Vice President and Chief Financial Officer, will discuss the company’s financial results. Tom Bardenett, our Executive Vice President of Asset Management, will be available for Q&A.
Forward-looking statements made on this call are subject to numerous risks and uncertainties that may lead the company’s actual results to differ materially from what had been communicated. Factors that may impact the results of the company can be found in the company’s 10-Q 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. Finally, please refer to the schedule of supplemental information, which was posted to our website last night, which includes pro forma operating results for our current hotel portfolio for 2019, 2021 and year-to-date 2022.
I will now turn the call over to Leslie.
Leslie Hale
Thanks, Nikhil. Good afternoon, everyone, and thank you for joining us today. We were pleased that the positive momentum in lodging fundamentals continued during the third quarter. Against this backdrop, our operating results exceeded our expectations, led by strong group production with our group revenues achieving 2019 levels for the first time, combined with the continued recovery in business transient and leisure remaining strong, even as normal seasonality returned. We are particularly encouraged by the step-up in trends we saw in September, which outperformed our expectations and enabled us to achieve a new peak relative to 2019 RevPAR at 98%, driven primarily by the rebound in our urban markets.
Based on the positive demand trends and continued pricing power, which allowed RevPAR to achieve a new peak relative to 2019 in September, we believe the current momentum can continue, and we are encouraged to see these trends carry into October. In addition to delivering strong third quarter operating results, we made significant progress on a number of our strategic objectives. We completed the renovations and rebranding of our conversions in Charleston and Mandalay Beach. We completed the acquisition of the 21c Hotel in Nashville. We addressed our near-term debt maturities while further strengthening our balance sheet, and we returned capital to our shareholders with an increase in our quarterly dividend and incremental share repurchases. Our execution on all of these fronts further positioned RLJ to drive growth and create shareholder value.
With respect to our operating performance, our hotels achieved 94% of 2019 RevPAR levels during the third quarter, a new high relative to 2019, led by our ability to continue to drive ADR, which achieved 105% of 2019 levels. Our strong performance was driven by broad improvement across all of our markets with particular strength in our urban markets. Within the quarter, September benefited from the expected step-up in business travel post Labor Day, which led to achieving new highs relative to 2019 across all metrics. As expected, our urban markets, which represent 2/3 of our portfolio saw a significant increase in demand, which improved the pace of momentum for our urban footprint during the third quarter. This allowed for urban RevPAR and ADR to achieve 95% and 106% of 2019 levels, respectively.
In September, we saw a mix shift with business travelers returning in greater numbers, which in addition to increasing levels of attendance at citywides and special events relative to pre-pandemic levels benefited our urban markets. These positive trends led our urban portfolio to achieve 2019 levels of RevPAR, with most of our individual urban markets exceeding 2019 in September. As it relates to pricing, ADR in our urban markets has exceeded 2019 levels since the spring with September recording a significant premium.
In September, our urban lifestyle markets that benefit from 7-day a week demand, saw an ADR premium relative to ’19 that was ahead of our resort hotels. In October, many of the same urban markets that are driving the most significant ADR momentum are forecasted to generate ADR premiums of 10% to 20% over 2019, supported by near-term transient pace tracking above 2019 levels. Our ability to achieve new highs in ADR ahead of the full recovery of our urban markets is an indication of the run room that exists to drive RevPAR. We believe the building blocks for our continued rate growth are more sustainable given our geographical footprint and the diversification of our demand generators.
With respect to segmentation, the most significant improvement to revenues came from the group segment during the third quarter. Most notably, we benefited from improving demand from corporate group, which was a meaningful contributor to the robust recovery in group revenues. Additionally, although booking windows remain short, our group revenues also benefited from significant in the quarter for the quarter pickup, the continuing strength in social groups and increasing citywide attendance in many markets with the scale of the increase in attendance being noteworthy for all of these events. This enabled our group revenues to achieve 2019 levels during the third quarter, representing a 900 basis point improvement from the second quarter, and we were able to drive ADR to 108% of 2019, a 500 basis point improvement.
Relative to business transient, using our special corporate segment as a proxy, BT revenues relative to 2019 saw a 300 basis point improvement from the second quarter. We continue to see travel volumes increase with the return of traditional corporate demand from industries such as consulting, financial services, technology and healthcare on top of continued healthy demand from small-and medium-sized enterprises. This step-up in demand was in line with our expectations that corporate travel volumes would increase after Labor Day and was further evidenced by our weekday RevPAR achieving 93% of 2019 in September, representing a 500 basis point improvement from June. Our September ADR data provides further support of the return of higher rated corporate demand with weekday rates closing the gap as our absolute ADR was in line with weekend ADR for the first time since the pandemic.
As is well known, leisure remained robust during the third quarter, especially in markets such as South Florida, Orlando and Hawaii. The continuing work from anywhere flexibility, for many, has elongated the historic leisure demand patterns and has allowed strong leisure trends to continue post Labor Day, particularly in our urban markets. We are continuing to benefit from strong leisure pricing power as our third quarter leisure ADR achieved a 118% of 2019 levels, with September achieving 121% on the strength of urban leisure. Overall, the step-up in positive trends across all segments, particularly in our urban markets throughout the third quarter, gives us confidence that our portfolio is set up for strong performance relative to improving fundamentals.
In addition to achieving strong operating results, we executed on a number of capital allocation initiatives, which will enhance our growth profile, complement our high-quality portfolio and further strengthen our balance sheet. This quarter, we were pleased to formally reintroduce the iconic Mills House Hotel in Charleston and launched Zachari Dunes on Mandalay Beach, both of which joined the Curio Collection by Hilton after completing transformative renovations, expanding our exposure to the fast-growing lifestyle segment.
For the Mills House Hotel in the historic district of Charleston, we completed a comprehensive reimagination of all public spaces and guest rooms. The renovation included the repositioning of the hotel’s food and beverage experiences, including elevating the hotel’s restaurant, adding specialty coffee bar and transforming the hotel pool into a high-end pool with a new rooftop bar. By activating previously non-revenue generating space, we believe these new F&B concepts will significantly increase our out-of-room spend. Additionally, we added new high-end specialty suites and new suite configurations that are expected to command a meaningful rate premium. Charleston is a high-growth leisure market with strong fundamentals, consistently recognized as a top destination to visit by experiential travelers, and this property is now optimally positioned to capture this segment and benefit from its iconic location.
The Zachari Dunes on Mandalay Beach transitioned from an Embassy Suites to the Curio Collection following a resort-wide transformative renovation. The hotel boasts a rare beachfront location in California. The renovation elevated the quality, look and feel of the property to match the premium beach location of this resort. We also converted our food and beverage offering from the Embassy Suites comp service model, which required approximately $1 million of annual operating costs, historically. We now have multiple new revenue-generating F&B outlets, which will drive meaningful out-of-room spend by our higher-end guests. With an attractive premium beachfront location and a transformed product, Mandalay Beach will draw a diverse base of travelers, including upscale leisure, corporate and groups looking for a unique coastal California experience. Both properties are attracting the higher-rated premium Hilton customer and group booking leads have been strong with meeting planners attracted by these hotels’ reimagined upscale settings.
Based on the current trends, we expect the incremental rate lift from 2019 to be nearly double our original underwriting and are very confident that we will exceed the 40% to 50% underwritten unlevered IRRs for each of these conversions. Completing the renovations and up-branding of these assets located on irreplaceable real estate will also drive NAV appreciation.
With respect to our other capital allocation initiatives, the transformation of the Wyndham Santa Monica is in full swing with the relaunch and rebranding as an independent hotel scheduled to take place at the beginning of the new year. We expanded our footprint to the high-growth Nashville market, which is already performing well relative to our expectations. And finally, we raised our quarterly dividend to $0.05 per share.
Subsequent to the third quarter, we further strengthened our balance sheet by addressing our 2023 maturities and reduced our 2024 maturities while bringing down our borrowing costs by exiting the covenant waiver period. Additionally, we continue to take advantage of the dislocation in our stock price by buying back incremental shares, bringing our total share repurchases to approximately 4.9 million shares so far this year. Our capital allocation execution demonstrates our ability to unlock embedded value and underscores the tremendous optionality our strong balance sheet provides, which will continue to be an advantage as we look to pursue internal and external growth in a disciplined manner.
Looking ahead, while we remain cautious relative to the macro headlines, we expect lodging fundamentals to remain constructive throughout the fourth quarter. October has started out strong with our urban markets continuing to see strength in all segments of demand. We expect leisure trends to remain robust during the upcoming holiday season. Business travel volumes have continued to improve and the most recent positive momentum in group revenues to continue as well. Given the near-term positive trends we are seeing, we expect fourth quarter RevPAR to further narrow the gap to 2019. Overall, we remain optimistic that fundamentals will continue to recover, given the tailwinds from the combination of minimum new hotel supply, continued pent-up demand for travel and the recovery in BT and international travel in urban markets, which remains in early stages with significant room to return to 2019 levels.
Against this overall backdrop, RLJ is especially well-positioned with multiple channels to drive incremental growth, including contributions from our recent conversions, the continuing ramp-up at our recent acquisitions, the ongoing ramp-up of our urban markets, our ability to capture the strong emerging small group trends and the ability of our portfolio to generate significant free cash flow. Our strong position is further supported by our robust balance sheet, which will continue to provide significant optionality as it relates to driving internal and external growth opportunities.
I will now turn the call over to Sean. Sean?
Sean Mahoney
Thanks, Leslie. We were pleased with our third quarter results, which exceeded our expectations and continued to narrow the remaining gap to 2019, including finishing the quarter with September results that were the strongest of the pandemic. Pro forma numbers for our 96 hotels include the acquisition of the 21c Hotel in Nashville, which we acquired 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 third quarter portfolio occupancy was 72.7%, which was 90% of 2019 levels, an average daily rate was $189, exceeding pre-pandemic levels at 105% of 2019, representing 200 basis points of improvement from the second quarter.
The third quarter results reflected the return of normal seasonality, continued pricing power and increased business travel, especially post Labor Day. Our third quarter RevPAR was 94% of 2019 levels, which was stronger than we expected at the beginning of the quarter and was 96%, 90% and 98% of 2019 in July, August and September, respectively. The strong acceleration towards the end of the quarter was driven by outperformance in our urban markets. As Leslie discussed, our urban portfolio benefited from increased volumes of business travel after Labor Day.
In September, our total portfolio generated occupancy of approximately 75% and ADR of $196, resulting in September RevPAR of $142 representing 98% of 2019 levels, an 800 basis point improvement from August. Specifically, our September growth was strongest in our urban markets with ADR achieving 106% of 2019 as these markets benefited from pricing power throughout the quarter. Our September ADR exceeded 2019 levels in key urban markets such as 108% in Denver, 119% in San Diego, 119% in Manhattan, 106% in Atlanta and 137% in Pittsburgh. In our leisure markets, normal seasonality returned during the quarter, but RevPAR remained above 2019 levels as pricing power continued, allowing our operators to continue pushing rates.
Turning to segmentation. Our third quarter leisure revenues remained above 2019 levels and were driven by continued pricing power that led to our resorts achieving 113% of 2019 RevPAR, representing a 300 basis point improvement from the second quarter. While we were pleased with the leisure results, group generated the most significant quarter-over-quarter growth of all our segments. Our third quarter group revenues achieved 100% of 2019 levels, a significant post-pandemic milestone and a substantial improvement from 91% during the second quarter.
Finally, our portfolio benefited from the continued recovery of business transient revenues as evidenced by moving 300 basis points closer to 2019 compared to the second quarter and our weekday RevPAR achieving nearly 90% of third quarter 2019, representing an improvement of 400 basis points from the second quarter. The healthy operating trends during the third quarter led our portfolio to achieve hotel EBITDA of $100 million, which represented 91% of 2019 levels. We were encouraged by the strong third quarter operating margin of 31.4%, which was only 160 basis points below the comparable quarter of 2019. September’s hotel EBITDA was the closest to 2019 since the start of the pandemic and generated margins of 34.6%, which were only 28 basis points below September 2019 margins.
We made the final push on the conversions in Charleston, Mandalay Beach and Santa Monica during the third quarter. Excluding these 3 conversions, our third quarter RevPAR achieved 97% of 2019 levels, hotel EBITDA was 96% of 2019 levels and hotel EBITDA margins were within 40 basis points of 2019. We own several hotels that were in the path of Hurricane Ian. Our hotels suffered limited physical damage and the hurricane had minimal impact to third quarter results. Preliminary October results are expected to benefit from the continuing strength in demand and pricing power. For October, we are forecasting occupancy of approximately 75% and ADR of approximately $204, which represents the highest ADR since 2019 and 105% of 2019. Forecasted October RevPAR of approximately $152 will be approximately 96% of 2019 levels. Looking forward, we expect the fourth quarter to follow normal seasonal patterns.
Turning to the bottom line. Our third quarter adjusted EBITDA was $92 million and adjusted FFO per share was $0.40. While demand was stable during the third quarter, we remain vigilant in maintaining cost efficiencies that have been effective in this new environment. Underscoring our continued effective model, our third quarter operating costs, including wages and benefits, remain below the comparable period of 2019. On a relative basis, our portfolio remains better positioned to operate in the current labor environment as a result of fewer FTEs required in our hotels, given our lean operating model, smaller footprints with limited F&B operations and longer length of stay with suites, representing 50% of our rooms inventory. While third quarter occupancy was at approximately 90% of 2019 levels, our hotels operated with approximately 20% fewer FTEs than we operated with pre-COVID.
Overall, we are encouraged that the labor environment is improving. We have been very active managing the balance sheet to create additional flexibility and further lower our cost of capital so far this year. These accomplishments include entering into a new $200 million term loan to address 100% of our 2023 debt maturities and proactively address $100 million of our 2024 debt maturities, exiting all restrictions under our corporate credit facilities, which lowered our consolidated weighted average interest rate by approximately 40 basis points, representing annual interest savings close to $9 million.
Exercising our 1-year extension options on $225 million of term loans to extend these maturities until 2024, exercising the first of 2 1-year extension options on a $200 million secured loan and maintaining an undrawn corporate revolver. The execution of these transactions is a testament to our strong lender relationships and favorable credit profile. Our current weighted average maturity is 4 years and our weighted average interest rate is 3.5%. We are benefiting from the successful execution of our prudent balance sheet strategy to mitigate refinancing and interest rate risk. As of the end of the third quarter, 99% of our debt was fixed or hedged under valuable swap agreements, which protect us from the current rising interest rate environment. We continue to maintain significant flexibility on our balance sheet with 81 of our 96 hotels unencumbered by debt.
Turning to liquidity. We ended the quarter with approximately $488 million of unrestricted cash, $600 million of availability on our corporate revolver and $2.2 billion of debt.
Now turning to capital allocation. We previously announced a $250 million share repurchase program. We have been active under our share repurchase program so far this year, where we have repurchased approximately 4.9 million shares for $57 million at an average price of approximately $11.75 per share, including $7 million in share repurchases so far during the fourth quarter. Additionally, the Board recently increased the quarterly dividend to $0.05 per share starting with the recent third quarter dividend. The combination of share repurchases and increased dividends demonstrate the strength of our balance sheet and our commitment to enhancing shareholder returns. We continue to estimate RLJ capital expenditures will be approximately $100 million during 2022. We maintained a disciplined approach to managing our balance sheet.
Even as fundamentals have recovered, we remain focused on making prudent capital allocation decisions to position our portfolio to drive results during the entire lodging cycle. We will continue to monitor the financing markets to identify additional opportunities to improve the laddering of our maturities, reduced our weighted average cost of debt and increased our overall balance sheet flexibility. Overall, RLJ remains well-positioned with a flexible balance sheet, ample liquidity, lean operating model and an urban-centric portfolio with many embedded growth catalysts.
Thank you, and this concludes our prepared remarks. We will now open up the line for Q&A. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Anthony Powell with Barclays.
Anthony Powell
Yes. So in terms of, I guess, the business transient acceleration that you’ve seen in September and October, how durable do you think that is? I mean we’ve seen kind of a lot of announcements that layoffs and whatnot, the macro environment is uncertain. So I guess, as you look to later this year into next, what’s the profit of that continuing kind of, given kind of the uncertainty that we’re facing here.
Leslie Hale
And Anthony, we feel pretty good about continuing because of who’s traveling, right? And so, I think from our perspective, we’re seeing the national accounts expand and these are national accounts that are really sort of in the growth industries. They are national accounts where it’s relationship driven, right? And so the need to get out is part of the necessity of their — from a business perspective. We’re also seeing the SMEs continue to travel as well. And when we look forward at the pace, it continues to demonstrate that they’re going to continue to travel. I’ll let Tom give some color on also who’s traveling as well on some of the accounts.
Tom Bardenett
Anthony, so when we break it down, we kind of get our brand reports and we look at September and October, and we saw a nice step-up to Leslie’s point about the national accounts starting to produce some volume. And that’s encouraging because when we think about the categories where we’re looking for the higher rated companies to come back, we’re seeing like Deloitte, PwC, Ernst & Young, all increasing their volume from September to October. And that’s a good step up, not only because those are good business travel months, but those were the companies that weren’t traveling as much in the past.
When we look out West, we look at Samsung, Qualcomm, Tesla, all had nice increases from September to October, with October being the most significant amount of travel in BT. And so, we’re looking at accounts that we had not seen that type of travel before. As they’re picking up now, we’re going to go into negotiations for the RFP in 2023, and we’re also encouraged that we’re going to be able to get some rate increases going into 2023. As you know, we rolled over rates from ’19, in 2020, ’21 and ’22. So we’re encouraged based on what’s happening on the national account front, and we can see the step-up from September to October to give us a little bit of a boost.
Leslie Hale
Yes. But I think, in general, when we sort of boil it down, it’s about who’s traveling. The SMEs have been traveling throughout because it’s critical to their business. And who’s picking up now it’s more relationship-driven than necessity part of their business. And so we’re not talking about sort of office dwellers, who are coming to sit next to their clients, we’re talking about people who need to get out and be able to sell. We’re looking at industries and sort of in the biotech and life sciences, we’re seeing that part of the growth as well, Anthony. So I think it’s a function of who’s traveling and who’s causing the step-up in the BT demand.
Anthony Powell
And maybe one more on transactions. You did Nashville this year, but I think there are — one deal this year versus three last year. What’s the prospect for maybe accelerating acquisitions next year? Are you seeing more product out there? And just curious what you’re seeing in the market right now?
Leslie Hale
Yes Anthony, from our perspective, just sort of given what’s going on in the debt market and the dislocation, the transaction market is really not actionable, whether it’s from a buy or a sell side perspective, deals are very difficult to get done in this environment. And I think this is an environment where you’re patient and thoughtful and you sort of cultivate conversations. But from an ability to sort of transact, I don’t think the environment is supportive and constructive around that right now. I do think at some point, when things sort of move and sort of settle down is what I would say, all cash buyers will have an advantage. As we’ve talked about before, we focus on off-market transactions and our ability to do that will increase as the backdrop improves. But I would say today that the current environment is not supportive of transactions right now.
Operator
Next question comes from Gregory Miller with Truist Securities.
Gregory Miller
I’d like to start off with New York City. You mentioned in the prepared remarks about the improved performance there and it’s reflected in the supplemental. I imagine some of this could be related to The Knick, just looking at the room rate growth, could be wrong. Just love to get some thoughts from your end as to how you see the New York City market today and perhaps anything on The Knick, specifically?
Nikhil Bhalla
Yes, Greg. So you’ve picked it right. The Knickerbocker is the leading indicator. We also obviously have a Courtyard that’s up on 92nd Street and we’re very pleased with the average rate performance of both assets. What I would say is similar to what we just discussed on the BT front, we’re seeing some of the top accounts come back in traveling in September and again continuing into October, we expect a good fourth quarter in New York as well. Accounts like Bank of America, Morgan Stanley are starting to now pick up rooms. In addition to that, we are seeing international start to really show its opportunities as we go into the fourth quarter for shopping as well as the holidays. And we’re seeing that come through longer-term booking window now where we’re actually encouraged based on having higher average rates going into the fourth quarter in that location.
The last thing I would say is banquets, rooftop, everything related to food and beverage is also people are now back out. You see a business buy when you travel to New York City versus leisure only in the summertime. And that’s encouraging because we’re seeing parties start to book events on our rooftop up at St. Cloud, and we’re seeing that activity really pick up speed as well. So a little bit of banquets catering as well as December Christmas parties are a new thing again, right, where we’re 2 years in a row, they didn’t really have events. So I would say we’re encouraged by what’s happening in New York and think it can continue into Q4.
Gregory Miller
Terrific to hear. This follow-up also right back to you. And I’d like to ask you about the labor front. At the property level and maybe taking the rooms department out and just focusing on F&B and other operating departments, could you give us the latest in terms of how staffing and labor costs have held up relative to your expectations?
Leslie Hale
Yes, Greg, I’ll start on that. I would say, first of all, obviously, everybody has the same pressures as it relates to wage pressure. But I would say the one thing that we’ve been able to do relatively well across our portfolio is maintain the FTE efficiency. As we’ve been talking about for the last several quarters, we’ve talked about the fact that our portfolio, given our footprint, given the number of assets in our portfolio that we have the ability to cluster.
And that clustering is across more assets than we’ve done before and is deeper within the organization. We also talked about the fact that the average size of our asset would allow us to maintain that clustering even as occupancy move back to normalization. And that larger bigger boxes would have a problem with that when demand came back. And that’s playing out for us. And that’s how you see that we’re kind of averaging — we’re about 77% of 2019 levels of FTEs and our ability to sort of maintain those levels is a function of our ability to be efficient around the clustering.
The other thing I would say, the other area that we’ve been able to be pretty efficient around is on the F&B side. As we talked about before, we have a significant portion of our portfolio that has a fixed food service model, and that allows us to control the offering, the hours of operation and also the labor model associated with that. And so as a result of that, we’ve seen margins improve by a couple of hundred basis points. And so, I think it’s a function of the average size of our asset, our footprint and the types of assets that we have that’s allowing us to be efficient on the FTE side.
Sean Mahoney
Yes. And then to bolt-on Leslie’s comments to give you some specifics, Greg, I think it’s as much — and I’m going to draw down on F&B, it’s as much what’s open in F&B because the thing — the outlets that are open and that are more profitable outlets. And so that’s banquet and catering, et cetera. So when you look at our wages and benefits on a per occupied room versus ’19, it’s down over 13% relative to ’19. In addition, our direct costs on food, beverage and AV is down 6.5% on a per occupied room basis in F&B.
And so that’s driving that couple of hundred basis points of margin expansion that Leslie mentioned. And lastly, Greg, I would say the most profitable portion of F&B is banquets as well as beverage. And we got back to 95% of 2019 levels in Q3. And for the first time, we actually exceeded beverage at 105% in ’19. So you got some great metrics that are combined, both on the top line and the bottom line in F&B.
Gregory Miller
I’ll leave there and done. And ask you some follow-ups in San Francisco in a couple of weeks. I appreciate it.
Operator
Next question comes from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt
Speaking of the Bay Area. I was wondering if you could provide your updated outlook on how you think Northern California, more broadly, trends versus your other markets from here? And I’m also curious where you think occupancy needs to reach before operators are more comfortable getting aggressive on ADR?
Leslie Hale
Sure. We’ll tag team on this, Austin. I mean, obviously, Northern California for us saw good improvement quarter-over-quarter on a RevPAR basis. And that was obviously driven by improved citywides. And it demonstrates that when the citywides come, the demand emerges, and that’s encouraging. Clearly, the fourth quarter is not going to have that same dynamic because 2019 had a record demand, record citywise in 2019. And so I think overall, San Francisco is really going to be a 2023 story where we expect room nights to be 2x what they were this year from our perspective.
Sean Mahoney
The other thing I would add, because of our footprint to — when we think about Silicon Valley, I’ll give you some examples of where we’re seeing some demand come back compared to CBD, which we know Leslie just referred to the citywide compression it needs to be in that environment. But we’ve had like a significant amount of project business out there. In fact, year-to-date, our extended stay assets are at 53% of 5-plus nights, and that indicates that we’ve got project business that’s coming back, the corporations that are having new hires and offices actually filling again, that’s helping us where we’re seeing meaningful improvement on the BT front in Silicon Valley. And as we move into 2023, I think when you look at who is expected to have the highest growth, again, it’s coming from a lower mark. It is going to be San Francisco based on 2x the citywide development, which really pushes out to Emeryville and airport as well when you have the higher peak night concentration when the citywides come in, in the top 25 markets.
Tom Bardenett
And then — Austin, the question with respect to the ability to drive rate at what occupancy level, I think when there is compression in the city as we saw during the third quarter, the operators were able to drive rate. I mean using September in a vacuum in San Francisco, we ran about 84%, 85% of 2019 occupancy levels, but we were able to drive rate of 93%, 94% of ’19 levels. And so I think the dynamics there, similar to the rest of the country is that when there is compression, our operators are able to push rates.
Austin Wurschmidt
And I think based on your prepared remarks, you guys mentioned BT had improved 300 basis points sequentially, which I think puts BT revenue as a percent of ’19 in that 65% to 70% range. And I’m just curious how wide that range is across your top 10 markets?
Tom Bardenett
Yes. I think — so the one thing to caution around BT is that that high 60s percent you’re referring to is special corporate. And that is a proxy or an indicator of BT. But what we’re seeing in the data now is our — a lot of our traditional business transient travelers are booking via bar. And so, I think the midweek stats that Leslie mentioned, are probably a better proxy for that, which are approaching and met 2019 levels. And so, I think our view around BT and across the markets, we’re seeing it widespread across the markets. When you look at BT correlates mostly with our urban markets as well, our urban markets, the majority of our urban markets were able to drive rate during the quarter in excess of 2019 levels. And so that gives us confidence around the health of the business traveler and BT specifically.
Operator
Next question Dori Kesten with Wells Fargo.
Dori Kesten
I know there [Technical Difficulty]
Leslie Hale
Operator, we can’t discern the question. Go ahead Dori.
Dori Kesten
You can hear me?
Sean Mahoney
Okay. We can hear you now Dori.
Dori Kesten
Okay. I know September actuals outpaced your budget significantly. But if you can pay your monthly budget stack over the last few quarters, are they getting tighter, in general? And is that what you’re looking for when you consider, when you’d like to restart providing guidance?
Sean Mahoney
So Dori, to make sure I understand the question, you’re asking about how much variability there is relative to our internal forecast actual and whether that’s narrowing. Is that the question?
Dori Kesten
Yes.
Sean Mahoney
Yes. So the short answer is, yes, we are continuing to — and we did outperform our internal forecast as we said on the internal call. The further you get into the recovery, where you’re from the steep ramp to the sort of — there’s a more stable environment, that outperformance is narrowing because you just have less upside with which to capture. But our outperformance is, as I said, is continuing, but the gap is narrower because you just have a smaller gap with which to fill. As Leslie mentioned in her prepared remarks on a go-forward basis, in the fourth quarter, we would expect to further narrow that gap during the fourth quarter relative to the third quarter.
Dori Kesten
Okay. And regarding the 6 Wyndham hotels or just now a few less. If you compare your initial underwriting of them to what you would prepare today, how different would that, I guess, EBITDA upside be? And is that entirely on rate?
Sean Mahoney
Yes. So the question around the EBITDA, the EBITDA upside continues. I think the thing that makes it a little difficult to answer that question specifically. And so I’m just going to give you the directional answer is that you have market forces, which have driven both of those markets ahead of 2019 levels. But I think the rate upside, which is ultimately driving that EBITDA upside, is roughly double where we thought it was going to be as part of our initial underwriting and our unlevered IRRs, which were 40% to 50%, depending on the 2 that we completed are going to be in excess of that. So we are outperforming and it’s rate driven.
Operator
Next question comes from Tyler Batory with Oppenheimer.
Tyler Batory
Just one question from me. What do you think about the relative valuation gap between you and peers and how you close that gap? I mean narrowing a bit today, which is good. I mean it seems to be unwarranted to begin with, in my opinion. But this is a topic that comes up with investors. So one is now your thoughts and your messaging in terms of rent quarter priorities for closing that valuation gap?
Leslie Hale
Well, I mean, obviously, with the backup that we face today, the soft prices don’t reflect the value of anybody’s underwriting real estate ours or anyone, right? We know that there’s a general skepticism around lodging fundamentals, not to mention the overall economic backdrop. But as those things improve, clearly, the sentiment towards BT and Urban will improve as well, and that will help our position given our urban centric portfolio. But in addition to that, we have the building blocks to be able to close that gap. We’re delivering on the value creation just having launched the 2 of the 3 conversions, and we have more in the pipeline to come.
Additionally, we have the balance sheet, Tyler, that we’re going to be able to deploy towards incremental growth. In the meantime, of that, whether dislocation exists, we do have our buyback program. We have been active in that, and we’re taking advantage of the dislocation and using that tool as well.
Operator
Next question comes from Neil Malkin with Capital One Securities.
Neil Malkin
First one, I think it may have been talked about in some context, but maybe over the next 12 to 18 months, you think about the brand’s reinstating PIPs, a lot of owners are CapEx. Hotels are CapEx starved, cash strapped, elevated CMBS maturities, et cetera, tough financing environment. You kind of overlay all that with your elevated cash balance. I understand it’s a difficult environment right now for penciling deals. But what do you guys see over the next, again, 12 to 18 months opportunities to potentially take advantage of some distress across markets you’re in or potentially would want to gain exposure to?
Leslie Hale
Yes. I think what I would say is that your window is kind of 12 to 18 months based on the backdrop that you sort of articulated, whether it is maturity pressure or having to put capital into an asset. I think those will create opportunities over the next 12 to 18 months. I do think that given our balance sheet and our cash position, that we will be in a position to be able to take advantage of that. What I would say though is that, it’s going to be less about describing those as distressed and more about looking at assets that will come to the market that we otherwise might not have gotten access to as a result of those pressures. But what I would say is that we never put our pencil down. We’re always cultivating relationships. We’re always talking about deals so that when the window opens up that we’re in a position to be in a pole position, you should expect us to be able to do that in the next 12 to 18 months that you just described.
Neil Malkin
Okay. Great. And then I just want to be clear. You talked about BT, the weekday is close to ’19 levels, right? Is that the commentary you mentioned during the call.
Leslie Hale
Yes.
Neil Malkin
Okay. So I guess what’s preventing a recovery to ’19 RevPAR in the fourth quarter. Seasonality aside, considering BT weekday is kind of back to ’19, inclusive of obviously San Francisco, is it your whole portfolio. Leisure continues to be really strong. And all the data we’re hearing holidays on the leisure side are very strong, particularly on the rate side and group continues to surprise. So maybe can you kind of like bridge that gap? Because a lot of companies have laid out a lot of really strong numbers but the numbers you’re kind of talking about for the fourth quarter kind of seemed to fall short. Is it conservatism or am I missing something?
Sean Mahoney
Yes. So Neil, on the fourth quarter specifically, I think our house view was and is that the industry in RLJ gets back to 2019 levels next year. I think that as we look forward to the fourth quarter, our prepared comments were that we expect to bridge the gap, but we are not indicating that we are going to be at that. I think the headwind tailwind sort of thought about what could impact the fourth quarter is about to continue to recover. I think the urban markets and the midweek stat that Leslie mentioned is midweek rate in September equal weekend rate.
But we still, from an industry standpoint, are still, from an occupancy perspective, still high single digits to 10% below 2019 level from an occupancy standpoint. And so that dynamic would need to change, albeit at a higher rate, but you’re still from a total RevPAR level still recovering. I think the other driver there is going to be as BT, it’s continued to recover. We like the trend lines in BT, but we’re not there yet. And so that would have to happen to hit 2019 levels.
And then the last impact within our portfolio, Northern California in the fourth quarter and in San Francisco specifically, had a blockbuster citywide calendar in the fourth quarter of 2019. And so when you look across all our portfolio, the ability to eclipse that relative to what the citywide activity is in the fourth quarter is just — it’s going to create an incremental headwind as well.
But I think the key takeaway for us from our — the trajectory of our fundamentals continue to be strong. We think that our portfolio is positioned and stable to be able to continue to bridge that gap based on the types of hotels we have, the diverse demand generators we have, et cetera. But we are not willing to call fourth quarter equaling ’19. We would love for it to happen, but that’s certainly not our base case.
Operator
Next question comes from Michael Bellisario with Baird.
Michael Bellisario
First question is for you, Tom. When you look at flow through to the bottom line today, just trying to better understand kind of incremental flow from here with occupancy still having room to recover. So maybe can you help us understand, how much of the cost structure today is fixed versus variable and how that mix has changed versus 2019 levels?
Tom Bardenett
Yes. So I’ll start with, as you know, Mike, ADR is leading the charge, and occupancy is going to be the secondary improvement that we still need to achieve. I think what’s interesting on the top line, we’re set up successfully because the type of accounts that gave us the ADR, even before the national accounts started to come, we’re giving us lift. And so now we think that that’s going to help ADR continue to drive while the occupancy is coming back with it. So those are critical elements.
The other thing I would mention to you on the revenue side is group for the first time, got back to 100% levels and the group ADRs were also higher than Q3 in 2019. And so we see, as we look into 2023, that we’re continuing to press the accelerator on rates on the group side. So when we think about the room revenue picture, we think we’re set up positively as the occupancy starts to come back that we’re going to have a higher rate of BT, the proper group that’s going to be coming in and set us up to have those metrics as you think about occupancy growth that’s going to happen with the BT at the higher rates on the national account basis.
The other thing that I would add before we get into the flow through is we’ve taken a real strong approach towards other income, food and beverage that we talked about earlier, the type of mix that we’re focusing on. And so we’re seeing nice lift on the other income side when we think about miscellaneous revenues, whether that’s parking, cancellations, attrition, everything related to trying to drive profit. So we think that’s also a positive as we go into the flows. When I think about flow-through coming down into the margin side, earlier conversations that we already had was about FTE.
We know that wage pressures are always going to be there, and we know that we got to be market when we talk about retaining individuals to be able to clean rooms as well as work in food and beverage in our smaller footprint. But I would say that we have control of the wheel when it comes to FTE and the type of payroll that we’re putting against those type of revenues because of our footprint, the longer length of stay, the suites, the actual footprint of a compact full-service and select-service urban that gives you that flexibility with the proximity of our hotels.
So I think on the flow through, we’ll continue to generate good flow because of the FTE count. That’s really the main driver because labor is 40% of our total fixed side. And on the variable side, I know you want to make a comment, Sean.
Sean Mahoney
Yes, I would actually — to helicopter up, Mike. I think our operating cost environment today and to the balance of the year is stable is how I would characterize it. When you look at our operating costs continue to be below 2019 levels, we expect that to continue through the balance of the year. And our overall cost environment is stable to fix costs, et cetera, the things that have been put back in the business and generally been put back in the business.
And so the incremental costs from here are going to be, as Tom mentioned, the variable costs that we’ll put in as revenues go up. And so because of the portfolio construct, the room’s only nature of the portfolio, we’ve reached stability probably in our portfolio earlier because of the types of hotels we have, than maybe some of the other full service-centric portfolios. And so we feel good about what you see in this quarter and next quarter are going to be a fair proxy to what our cost structure looks like.
Michael Bellisario
And then, Sean, one more for you. I mean to the extent you can, can you maybe talk about the process that you just went through with the banks on the relationship side for the term loans that you just refinanced and extended where you see the high-yield market today? And then maybe just more broadly, overall view on the debt capital markets for hotels.
Sean Mahoney
Sure. I’ll start at the high level. The debt markets continue to be challenging across the board within high yield specifically, CMBS secured and even the bank market. I believe and have optimism that this will pass. I think as we enter into next year, the expectation, particularly from some of the bold bracket lenders is that they would expect as the calendar turned to get more constructive.
But at this moment in time, it’s pretty challenging. I think on our deal specifically, we were able to — we have great relationship with our lenders. We were able to leverage those relationships within the bank market and get support for this deal. I think that our leverage point is certainly a differentiator. Our operating model with higher free cash flow as a differentiator for the lenders as well as this being a leverage-neutral transaction.
At the end of the day, where it’s $200 million for $200 million like-for-like corporate debt or corporate debt. But it was a — the process was leveraging our very strong relationships with the bank market. On the high yield specifically, it’s actually gotten a little better or at least pricing has gotten a little better, although volumes are still low over the last couple of weeks. I expect there will be continued volatility in that market through the balance of the year until things settle down with respect to where the Fed is going, et cetera.
Operator
Next question, Floris Van Dijkum with Compass Point.
Floris Van Dijkum
Just given the — some of the uncertainty still, but it’s — that seems to be lifting the fact that BT is recovering, the group is sort of back at ’19 levels. Do you feel comfortable when you report your fourth quarter earnings? Do you think you’re going to be in a position to provide with full year ’23 guidance at that stage?
Sean Mahoney
Yes, Floris listen, as you know, we’ve historically provided guidance. And if things remain the way they are today, our bias with next year would be to provide guidance. Obviously, that is a decision between us and the Board. But if things continue to sort of be as stable as they are today, that would be our intent today. We believe it’s important as a public company, providing guidance is important when the environment is right to provide. And we would hope and expect that in 2023 that the stars would align for that.
Floris Van Dijkum
And maybe if you guys could also comment, I had 1 or 2 investors reach out to me this morning. Just about obviously, you’re in a really solid position, as you indicated in terms of sitting on a lot of cash. The transaction markets are sort of come up right now. Hopefully, there’ll be some one-off opportunities here. But why are you not a little bit more aggressive on the share buybacks, given the fact that there are a few assets that are trading right now.
Leslie Hale
Yes. I mean I think what I would say is that, first of all, we’ve been pretty active on a number of fronts, right? We’ve leveraged the optionality that our balance sheet has provided us relative to the tools that we have. We’ve been very thoughtful about identifying the windows in which to deploy those tools, all the tools that we have available to us, whether it’s buybacks, looking at the internal growth or external growth, all those tools have benefits, but you have to be thoughtful and disciplined about how you deploy them.
Now we acknowledge that buybacks are the most attractive tool today. But given the macro headwinds that we’re all seeing and hearing, we need to be measured. I think you’ve also seen us sort of deploy it at different windows when we’re maximizing the dislocation where we bought at most recently relative to where stocks were trading since our last earnings call, we’ve been very thoughtful about that, and we’re going to continue to do that.
We’re looking at where the trends are today, where we think the trends are heading and determining where — what’s the right window and right amount to deploy. So we’re being thoughtful about it. We’re going to be disciplined about it. We do acknowledge that buybacks are the most attractive use of capital today, particularly where we’re trading at and given the dislocation of what we’re seeing from the fundamentals and the underlying value of the real estate relative to where we’re trading at today.
Floris Van Dijkum
Maybe if I can ask one more. In terms of cap rates, your outlook, I mean, obviously, rates are going higher, return expectations from the private market is going higher. But obviously, hotels reset rents every night. Do you see much of an impact in terms of cap rate expectations from buyers for hotels?
Leslie Hale
Look, I think there’s no doubt that with the movement in interest rates is having an impact on spot values and, therefore, implied cap rates, but the market is efficient. And that as the macro backdrop improves or moves one way or the other, that ultimately cap rates will settle down in a way that we think is constructive and that ultimately, you won’t see significant movement in cap rates.
You’ll see an appropriate movement in cap rates, but not significant movements from our perspective. I think that investors are smarter today. They know that values will move up and down and that unless you are a motivated seller, the game plan here is to be patient, and that was going to allow cap rates to move in a much smaller movements because investors, buyers and sellers are smarter today.
Operator
Next question comes from Chris Woronka with Deutsche Bank.
Chris Woronka
A bit of a longer-term question because I — Leslie, I hear what you said about the transaction markets being pretty quiet right now. But as you look out, is there possibly an appetite to have less select service in the portfolio? And I’m kind of defining that as non-suite upper mid-scale stuff or upscale stuff, not the — we’ll call the embassies and the residence ends not in that category. Is there an appetite to do that, just think about how the public markets appear to be kind of valuing full service versus select service right now?
Leslie Hale
I would say our appetite is clearly defined in what you’ve seen us most recently acquired. I think they speak to perfect examples of what we’re focused on. It is the assets that speaks to what we’ve done in Nashville, speak to what we did in Atlanta and in Boston, the characteristics of that is what we’re focused on. It doesn’t matter if it’s a hard brand or a soft brand. It matters the characteristics of its location, the demand drivers that are around it, the growth that’s in that market. And I think the quality and the age of the asset matter as well. And I think all of those things are represented in what we’ve acquired most recently. And that’s what I would look to from a quality perspective of what we’re adding to our portfolio and what we have the appetite for.
Chris Woronka
And then as a follow-up, you guys have brought in a few of the soft brands through the Wyndham conversions and maybe some more to go. But as you look at your markets, do you worry at all that there’s more competitive supply coming in the form of conversions into soft brands? And you could say, well, it’s not net additional room supply, the hotel is there, but it’s obviously maybe more competitive against you? Because we hear the brands talking about a lot more soft conversions to come and just your thoughts on whether that’s a competitive pressure on the radar or not?
Sean Mahoney
I think about — just look at our two examples, okay, as a proxy for that, Chris. If you think about the markets that we are doing it and we think about Charleston, the rate was already there in the market, but the product and the brand were not going to lift us. We needed to be able to make the changes and then put us into a system that has changed the way people think about our hotel. So for instance, if the rate already exists in the market, we know we’re chasing something that we feel like is desirable.
And we can tell already that the national salespeople from Hilton, the type of accounts that wouldn’t have considered us before now are because of the things that we did to that location. So it wasn’t a new product. It was new higher-rated product as we think about Mills House. Same thing in Mandalay. When we think about it’s not new product coming in, it was a conversion, but here we are sitting between L.A. and Santa Barbara with a irreplaceable beach location that people and meeting planners are looking to try to do a rotational where are they going to go?
So for instance, we have groups that have actually booked at Ritz-Carlton, the monetize that have already booked with us because we’re a Curio by Hilton. And we are focused on that opportunity where you know you’re changing the opportunity within those markets to be able to attract a clientele that maybe wouldn’t have considered you before as an Embassy Suite. So to answer your question, in our situation and our 2 that I would say that are a good proxy for us, we know the rates in the market. We know the clientele is looking for something different, and we don’t feel like that supply is going to impact us if we were the other guy in the situation where we were in that environment.
Tom Bardenett
Yes. And Chris, two other sort of comments around sort of supply in general as well as the soft brand. I mean, supply is going to be a net tailwind for the industry for several years, which is a normal cycle trend, but I think it’s going to be even more pronounced in light that you’ve got COVID and then whatever happens over the next couple of years is in the financing markets have sort of both been tailwinds from a supply perspective.
And so I think that will also help insulate any risk of new competition. The other thing is that these soft brands, although they’re having strong unit growth are still relatively new in their life cycle. And so when you look at where, how many of them there are in a specific market, a, we’ve got territorials on our assets, which is important from a protection standpoint. But also, there’s just — they are in growth mode, but the distribution of those is still relatively early in their life cycle. So there’s just not as many of them as you would, as the other, as the harder brands because they’re newer in their life cycle.
Operator
Next question, Chris Darling with Green Street.
Chris Darling
Just going back to the recent conversions, you’ve obviously given plenty of detail around the long-term kind of stabilized outlook. But curious if you could comment on the extent to which you expect some immediate uplift to portfolio performance, just given that you’re presumably no longer dealing with any renovation disruptions there. Maybe if you could frame it, what you might expect 4Q and early ’23 to look like relative to what you saw in the second and third quarters.
Sean Mahoney
Yes. Chris, obviously, we’re limited because we haven’t given guidance for the fourth quarter or next year. But for the conversions in general, we do expect immediate benefits from those conversions. There’s obviously a soft comp against the renovations. But that will be transitory. I think more importantly, the way we think about these conversions and the ramp, conversion usually takes 2 to 3 years to ramp. We think because of these locations, we believe that we’ll be at the low end of that ramp.
And so what we underwrote is a couple of years to stabilization. But the rate upside that we’ve seen in the market because both of these markets have already seen significant rate uplift in 2019 already exist within the market. And so we feel good about the upside, but we still believe it’s — as these get — it’s a 2-year ramp.
Tom Bardenett
And the thing I would add to you as far as immediacy, Chris. So when we created some ROI opportunities at both these locations, we know by changing the food and beverage concepts that that’s an immediate win. For instance, at the Mills House, we have a Black door cafe when we talked about — it was really underutilized space. It’s already producing revenue. And it’s a real plus. The same thing on the rooftop bar. When we have weddings in the destination location like historic Charleston, we already see the bookings happening pretty quick that they want to be able to secure that space as a great location where you can be outdoors for a ceremony of that size.
In Mandalay, same thing, we converted from complementary food and beverage to now we have a restaurant called Ox and Ocean and an Airstream that will actually produce opportunities to be outdoors with people enjoying the coffee as well as the beverages facing the ocean. So we think that the immediacy of those type of outlets and the ROIs help us to move that along to Sean’s environment in regards to ramping faster.
Leslie Hale
Yes. I mean, I think we’re thrilled to be able to reintroduce the Mills House and launch Zachari Dunes. I do want to thank our design and construction team that did an amazing heavy lift on bringing these assets to life. We’re very confident based on the asset, the location, the market dynamics and the new product that we’re going to get outsized returns.
I think that what Sean and Tom summarized from a standpoint of what’s in the market, the out-of-room spend, but also how they perform during the pandemic before the renovation gives us confidence in our ability to achieve and see incremental lift with these assets. But we look forward to you all being able to see these assets and really experience them.
Operator
Thank you. I would like to turn the floor over to Leslie Hale for closing remarks.
Leslie Hale
Well, thank you, everybody. Thank you for joining us this afternoon, and we look forward to seeing many of you at NAREIT. Have a good afternoon, the rest of your day.
Operator
This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.
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