Urban Travel Recovery And Major Events Will Slowly Improve Hotel Fundamentals

Catalysts

About RLJ Lodging Trust

RLJ Lodging Trust is a publicly traded real estate investment trust that owns a portfolio of primarily urban, focused-service and compact full-service hotels across major U.S. markets.

What are the underlying business or industry changes driving this perspective?

• Although urban markets such as San Francisco, New York and key tech corridors are showing improving business travel and event demand, continued government-related disruptions and a short booking window could limit pricing power and keep RevPAR growth modest, constraining revenue and EBITDA expansion.
• Major events such as the World Cup, U.S. 250th anniversary celebrations and high-profile sports events should add compression in many RLJ markets; however, any slowdown in air travel reliability and consumer willingness to travel long distances may dilute these benefits, tempering upside to room revenue and out-of-room spend.
• Despite the ramp from recently completed renovations and brand conversions in high-barrier urban locations, elevated construction and property improvement costs combined with delayed demand ramp could elongate payback periods and mute the expected lift to net margins and earnings.
• RLJ is leveraging a lean operating model and labor productivity tools to offset wage and operating cost inflation. Even so, persistent upward pressure on wages and local taxes in core gateway cities may outpace efficiency gains, limiting hotel EBITDA margin recovery even if revenues improve.
• The growing concentration of AI, life sciences and other knowledge-economy tenants in Northern California and Boston is driving higher-quality corporate demand. At the same time, any cyclical pullback in tech and capital investment could slow the trajectory of business travel and group bookings, capping RevPAR and adjusted FFO per share growth.

Assumptions

This narrative explores a more pessimistic perspective on RLJ Lodging Trust compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming RLJ Lodging Trust's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts are not forecasting that RLJ Lodging Trust will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate RLJ Lodging Trust's profit margin will increase from 0.5% to the average US Hotel and Resort REITs industry of 5.8% in 3 years.
• If RLJ Lodging Trust's profit margin were to converge on the industry average, you could expect earnings to reach $82.5 million (and earnings per share of $0.57) by about December 2028, up from $7.2 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, down from 159.6x today. This future PE is lower than the current PE for the US Hotel and Resort REITs industry at 30.4x.
• The bearish analysts expect the number of shares outstanding to decline by 0.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.87%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large scale events and secular urban leisure trends such as the 2026 World Cup, the 250th anniversary celebrations of the U.S. and major sporting events in RLJ's core cities could generate stronger than expected compression in key markets, driving higher room rates and out-of-room spend and lifting revenue and earnings above a flat share price scenario.
• The structural recovery of business travel in tech and finance, the rapid expansion of AI and life sciences tenants in Northern California and Boston and stricter return to office policies could create a sustained rebound in higher rated corporate demand, materially improving RevPAR, hotel EBITDA margins and adjusted FFO per share.
• RLJ's extensive renovation and conversion pipeline in high barrier urban locations, including Waikiki, South Florida, Pittsburgh and Boston, may deliver outsized returns once macro headwinds subside, unlocking more than anticipated EBITDA growth and expanding net margins, which would support a rising valuation.
• Ongoing success in growing higher margin non room revenues through food and beverage concepts, re use of underutilized space and expanded meeting facilities may allow total revenue growth to continue outpacing RevPAR while cost discipline improves operating leverage, accelerating earnings and free cash flow growth.
• The combination of a healthy balance sheet with substantial liquidity, largely fixed or hedged debt, improving credit markets and programmatic share repurchases funded by dispositions could enhance per share earnings and AFFO more than expected, supporting multiple expansion and a higher share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for RLJ Lodging Trust is $7.0, which represents up to two standard deviations below the consensus price target of $8.69. This valuation is based on what can be assumed as the expectations of RLJ Lodging Trust's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $82.5 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $7.73, the analyst price target of $7.0 is 10.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.