Tom Baltimore speaks in measured tones and rarely shies away from blunt truths. He certainly doesn’t need to raise his voice to make a point. RLJ Lodging Trust’s blockbuster success has everyone from institutional investors to hotel company CEOs paying close attention to what Baltimore has to say. And over the past three years, the Bethesda, Md.-based real estate investment trust (REIT) has put itself in a prime position to continue making strategic deals that create outsized returns for investors.
Since going public in 2011, RLJ has acquired 23 hotels for about $900 million and sold 14 properties. In that same time, the company has managed total shareholder returns north of 65 percent. “We’ve paid out about $2.16 in dividends and about $220 million in aggregate,” Baltimore says. “And the balance sheet is in impeccable shape, so the company is really well positioned for growth.” As part of an investment strategy specializing in acquiring limited-service or focused-service assets in urban markets with high barriers to entry, RLJ has been relentless in pursuing results from its owned properties and in recycling capital into high growth markets.
This public REIT was established after more than a decade of work by Baltimore and RLJ Chairman Robert L. Johnson, the founder of Black Entertainment Television (BET). When they first met in the late ’90s, Baltimore was an executive at Hilton and Johnson was on the company’s board. The two were presented with an opportunity to go into business together when Hilton bought Promise Hotels in 1999. “In that deal, Hilton inherited 17 hotels that it wanted to franchise and manage, but not own,” Baltimore says. “So we bought seven from the company using the Johnson family balance sheet and five other properties through our capital platform.” After it was established, this platform, RLJ Development, was given a shot in the arm when Johnson sold BET to Viacom for $3 billion in 2001.
Over the next decade, RLJ Development assembled three private equity funds, with the first two totaling $315 million and $743 million respectively. These funds fueled a string of hotel acquisitions at a time—in the aftermath of 9/11—when most investors were trying to steer clear of the lodging space. “We enjoyed a lot of early success,” Baltimore says. “In 2007, we were a net seller, unloading a bunch of our assets for eye-popping returns.” In 2008, the firm sold its first private equity fund, just before the recession hit.
Yet, in the face of an economic downturn, Baltimore managed to assemble a top-notch group of investors to launch the firm’s third fund with $1.2 billion in capital. The company now had two funds; one was heavily leveraged having been largely used to buy the White Lodging portfolio of 100 hotels for about $1.7 billion, and the other still had a lot of liquidity in it. “Given where market conditions were at that point, we decided to merge the two funds in 2010 and take the company public the next year,” Baltimore says. “This was in the best interest of all the stakeholders since multiples were higher for public companies than what we could trade for in the private markets.”
RLJ Lodging Trust was one of the last hotel REITs to get an IPO in 2011. “Our plan was to take the proceeds from the IPO and de-lever the company, which is what we ended up doing.” Since going public, Baltimore adds, RLJ has refinanced about $1.6 billion in debt, which has saved it $40 million in interest. “We believe that the group with the lowest cost of capital wins over the long term,” he says. “De-levering the balance sheet has given us flexibility and will allow us to weather any storm.”
Now, as one of the largest hotel REITs in the country, RLJ has an equity market cap of around $3.2 billion and an enterprise value of well north of $4.2 billion. The company owns a total of 146 hotels with about 22,000 rooms across 21 states, mostly on the coasts, since Baltimore is laser focused on being in dense urban and suburban markets.
Along with having a management team that has been with him for more than 10 years, Baltimore attributes RLJ’s success to its disciplined approach to deal making. “I’ve believed from day one that owning limited-service or focused-service hotels in urban markets or dense suburban markets is a superior investment thesis,” Baltimore says. “Essentially, it gives you a RevPAR that’s equal to or greater than a full-service hotel but with a much leaner operating structure.” And not just any brand will do. RLJ is a big believer in the Marriott, Hilton, and Hyatt brands operating in the select- and focused-service space. That means brands like Marriott Courtyard and Residence Inn, Hilton Garden Inn and Homewood Suites, and Hyatt Place and Hyatt House. “If you look at RevPAR index and how these hotels perform vis-a-vis their respective comp sets, they do a lot better than most of their peers,” Baltimore says. “So you’re getting more revenue, and given the fact that you have an embedded margin advantage, you’re getting a higher return on invested capital.”
He points out that the recession in 2009 demonstrated the flip side of his investment thesis since RLJ’s portfolio of select-service hotels didn’t fall as far in profitability as full-service properties did when the markets softened, due in part because of their leaner staffing models. “In 2009, we were down about 19 percent in RevPAR just like our peers, but we only fell about 29 percent in net operating income,” Baltimore says. “And typically you’d expect a 2-to-1, which would mean our profitability was expected to be down about 38 percent.” Baltimore refers to this as an all-weather strategy since these same select-service properties generate revenues at the top of the cycle that are close to or exceed full-service hotels. There are hotel REITs that employ a similar investment strategy, but not on the scale that RLJ does.
Baltimore is still bullish on the space, adding 10 properties to its portfolio recently through an off-market acquisition from Hyatt Hotels. RLJ agreed to pay $312.5 million for the properties, which total 1,560 rooms. And seven of the hotels are on the West Coast, which is an area that Baltimore is eager to be in. “There’s no doubt that you’re seeing increased supply in limited service, but a lot of that is in secondary and tertiary markets,” Baltimore says. “There’s still benign supply growth when you look on a historical average. I think it will remain that way for several years. So we’ll remain a net buyer.” And the industry will continue paying close attention to what Baltimore says and does.