RLJ Lodging sets sights on acquisitions


Most big investors like full-service hotels but Thomas Baltimore says RLJ Lodging Trust takes a different path. (Jeffrey MacMillan/Capital Business)

The sign that once welcomed visitors to RLJ Development in Bethesda now signals your arrival at RLJ Lodging Trust, the publicly traded iteration of the hotel company started by Black Entertainment Television founder Robert L. Johnson.

Not much else has changed. Pictures of some of the $5.7 billion in hotels purchased or sold through RLJ Development still hang outside of the conference room. Industry awards still fill the shelves, and the firm’s 50 employees remain at their desks.

And, perhaps most importantly, the same strategy that turned RLJ Development into one of the largest hotel owners will be used to make RLJ Lodging even larger: buying select-service hotels — those that offer little to no food and beverage service.

“We like that space, particularly in urban and dense suburban markets, because you get higher revenue per room that’s comparable to full-service hotels, but with a much leaner operating structure,” said chief executive Thomas J. Baltimore Jr.

There are but a handful of companies playing in that niche segment of the hotel market. Most of the big hotel investors, such as Bethesda’s DiamondRock Hospitality, are chasing full-service, upscale assets.

But there are only so many of those to go around. And when the opportunities dry up, or the prices get too high, analysts suspect more investors will turn to select-service properties, heightening competition for companies like RLJ Lodging.

Baltimore isn’t worried. If anything, he believes the company is now in a better position to compete. Proceeds from its recent initial public offering, which raised $495 million, helped to nearly halve the company’s debt load. With a stronger balance sheet and “excellent liquidity,” Baltimore said RLJ Lodging plans to buy north of $400 million in properties in the coming 12 months.

There is nothing pending at this point, but he assured the company has never had trouble finding deals. As a private operation, RLJ amassed a portfolio of 140 hotels, with more than 20,400 rooms, in 19 states, operating under the Marriott, Hilton and Hyatt brands.

Nearly half of the deals executed in its 11- year existence were limited-bid or off-market transactions — a nod to the relationships Baltimore, a former Marriott and Hilton executive, and Johnson, a former Hilton board member, have cultivated in the industry.

“RLJ is well capitalized and they’re big, so people are going to come out of the woodwork with deals,” said real estate investment banker Justin Glasgow of Robert W. Baird & Co.

Opportunities are out there, but investors have been a bit reluctant to make a play. Real Capital Analytics tracked $372 million in limited-service hotel sales in the first quarter, a 14 percent decline from a year earlier.

“Pricing hasn’t dropped enough to make some of these deals attractive,” said Ben Thypin, senior market analyst at Real Capital Analytics.

There are some lingering risks in the niche. Supply is mostly located in second-tier markets and demand is heavily reliant on the health of the business travel market, Thypin said.

Baltimore is nonetheless bullish. A resurgence in business and leisure travel has firmed up occupancy, which, coupled with limited construction, should continue to drive up room prices throughout the industry. What’s more, he said, select-service hotels “are still trading at significant discount to replacement cost,” or the cost to build from scratch, though competition is intensifying in top-tier markets.

Danielle Douglas covers the banking industry for The Washington Post.
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