Welcome to the RLJ Lodging Trust third-quarter 2022 earnings call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the call over to Nikhil Bhalla, RLJ's Senior Vice President, Finance and Treasurer. Please go ahead.
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.
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 Museum 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 position 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 two-thirds 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 our 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 seven-day-a-week demand saw an ADR premium relative to 2019 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%-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 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 launch Zachari Dunes on Mandalay Beach, both of which join 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 a 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%-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. 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 to continue 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?
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 Museum 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, and 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 three 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 remained 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 till 2024. Exercising the first of two 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 four 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. Reduce our weighted average cost of debt, and increase 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?
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Anthony Powell with Barclays. Please go ahead.
Oh, hi. Good afternoon, everyone.
Good afternoon, Anthony.
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, you know, announcements about layoffs and whatnot, the macro environment is uncertain. I guess, as you look to later this year into next, what's the prospect of that continuing kind of given kind of the uncertainty that we're facing here?
Anthony, we feel pretty good about it continuing because of who's traveling, right? I think, you know, 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're national accounts where it's relationship -driven, right? The need to get out is part of the necessity of their from a business perspective. We're also seeing, you know, the SMEs continue to travel, you know, as well. When we look forward at the pace, it continues to demonstrate, you know, that they're gonna continue to travel. I'll let Tom give some color on also who's, you know, traveling as well on some of the accounts.
Yeah. Good afternoon, 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. That's encouraging because when we think about the categories where we're looking for the higher-rated companies to come back, you know, we're seeing like Deloitte, PwC, Ernst & Young, all increasing their volume from September to October. That's a good step up, not only 'cause 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, you know, Samsung, Qualcomm, Tesla, all had nice increases from September to October, with October being the most significant amount of travel in BT.
We're looking at, you know, accounts that we had not seen that type of travel before. As they're picking up now, we're gonna go into negotiations for the RFP in 2023, and we're also encouraged that we're gonna be able to get some rate increases going into 2023. As you know, we rolled over rates from 2019 in 2020, 2021, and 2022. 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.
Yeah. 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. Who's picking up now, it's more relationship -driven and necessity, a part of their business. We're not talking about sort of office dwellers who are coming to sit next to, you know, 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. I think it's a function of who's traveling and who's causing the step up in the BT demand.
Thanks for the detail. Maybe one more on transactions. You know, you did none this year, but I think there are one deal this year versus three last year. What's the prospects for maybe accelerating acquisitions next year? Are you seeing more product out there? Just curious what you're seeing in the market right now.
Yeah. I mean, Anthony, from our perspective, just sort of given what's going on in the debt market and the dislocation there, the transaction market is really not actionable, whether it's from a buy or a sell side perspective. You know, deals are, you know, very difficult to get done in this environment. I think this is an environment where you're patient and thoughtful , and you sort of cultivate conversations. But from 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, you know, when things sort of move, you know, and sort of settle down, is what I would say, you know, all-cash buyers will have an advantage.
You know, as we've talked about before, you know, we focus on off-market transactions, and our ability to do that will increase as the backdrop improves. I would say today that the current environment is not supportive of transactions right now.
Great. Thank you.
Next question comes from Gregory Miller with Truist Securities. Please go ahead.
Hi. Thanks. Good afternoon, everyone. 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 how you see the New York City market today and perhaps anything on The Knick specifically.
Yeah. Good afternoon, Greg. You 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 you know, 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 vibe when you travel to New York City versus leisure only in the summertime, and that's encouraging because we're seeing parties start to , you know, book events on our rooftop up at St. Cloud, and we're seeing that activity really pick up speed as well.
A little bit of banquets, catering, as well as December Christmas parties are a new thing again, right? Where two years in a row, they didn't really have events. I would say we're encouraged by what's happening in New York and think it can continue into Q4.
Terrific to hear. 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?
Yeah, Greg, I'll start on that. I would say, you know, first of all, obviously, you know, everybody has the same pressures as it relates to, you know, to wage pressure. I would say that one thing that we've been able to do relatively well across our portfolio is maintain the FTE efficiency. You know, 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. 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 moved back to normalization, and that larger, bigger boxes would have a problem with that, you know, when demand came back. That's playing out for us. That's how you see that we're kind of averaging, we're about 77% of 2019 levels of FTEs. 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, you know, we have a, you know, 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. As a result of that, you know, we've seen margins improve by a couple hundred basis points. I think it's a function of the average size of our asset, our footprint, and the, you know, types of assets that we have that's allowing us to be efficient on the FTE side.
To bolt on to Leslie's comments, to give you some specifics, Greg, I think it's as much, and I'm going to drill down on F&B, it's as much what's open in F&B, because the outlets that are open, and that are our more profitable outlets, you know, that's banquet and catering, et cetera. When you look at our wages and benefits on a per occupied room versus 2019, it's down over 13% relative to 2019. In addition, our direct costs, you know, on food, beverage, and AV is down 6.5% on a per occupied room basis in F&B. That's driving that couple hundred basis points of margin expansion that Leslie mentioned.
Lastly, Greg, I would say the most profitable portion of F&B is banquets as well as beverage. We got back to 95% of 2019 levels in Q3, and for the first time, we actually exceeded beverage at 105% of 2019. You got some great metrics that are combined both on the top line and the bottom line in F&B.
I'll leave it there, and may ask you some follow-ups in San Francisco in a couple of weeks. I appreciate it.
Thank you.
Next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Hey, good afternoon, everyone. Speaking of the Bay Area, I was wondering if you could provide your updated outlook on how you think, you know, Northern California more broadly trends versus your other markets from here. I'm also curious where you think occupancy needs to reach before, you know, operators are more comfortable getting, you know, aggressive on ADR.
Sure. We'll tag team on this, Austin. I mean, obviously, Northern California for us, you know, saw you know good improvement quarter-over-quarter on a RevPAR basis. That was obviously driven by improved citywide. You know, it demonstrates that when the citywides come, the demand , you know, emerges, and that's encouraging. You know, clearly, the fourth quarter is not gonna have that same dynamic, because you know 2019 had record demand, record citywides in 2019. I think overall, you know, San Francisco is really gonna be a 2023 story, where we expect room nights to be kind of 2x what they were this year, you know, from our perspective.
Yeah. The other thing I would add, because of our footprint too, when we think about, you know, Silicon Valley, I'll give you know, some examples of where we're seeing some demand come back, compared to CBD, which we know Leslie just referred to the citywide compression that needs to be, you know, in that environment. 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+ nights, and that indicates that we've got, you know, project business that's coming back. The corporations that are having, you know, new hires and offices actually filling again. That's helping us where we're seeing meaningful improvement on the BT front in Silicon Valley.
As we move into 2023, I think when you look at who's expected to have the highest growth, again, it's coming from a lower, Mark, it is gonna be San Francisco based on 2 times 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.
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, you know, during the third quarter, the operators were able to drive rate. I mean, using September, in a vacuum, in San Francisco, we ran about 80%, you know, 84%-85% of 2019 occupancy levels, but we were able to drive rate of 93%-94% of 2019 levels. I think, you know, the dynamics there, similar to the rest of the country, is that when there is compression, you know, our operators are able to push rates.
No, that's helpful. Thanks for all the detail there. 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 total revenue in that 65%-70% range. I'm just curious how wide that range is across your top 10 markets.
I think the one thing to caution around BT is that the high 60s% you're referring to is special corporate. That is a proxy or an indicator of BT. What we're seeing in the data now is a lot of our traditional business transient travelers are booking via bar. I think the midweek stats that Leslie mentioned are probably a better proxy for that, which are, you know, approaching and met 2019 levels. I think our view around BT and across the markets, we're seeing it, you know, widespread across the markets. When you look at BT correlates mostly with our urban markets as well.
Our urban markets, you know, the majority of our urban markets, we're able to drive rate during the quarter in excess of 2019 levels. You know, that gives us confidence around the health of the business traveler and BT specifically.
Great. Thanks, Sean. Appreciate the time.
Next question, Dori Kesten with Wells Fargo. Please go ahead.
Thanks. Good morning, everyone. I know September actuals outpaced your budget significantly, but if you can share the-
Hey, operator. Operator, we can't discern the question. That's better. Go ahead, Dori.
Yes. Go ahead, Dori.
You can hear me?
Dori, it's coming from your line. Or can you pick up the handset?
It is up.
Okay, we can hear you now, Dori.
We can hear you now.
Sorry about that. So I know September actuals outpaced your budget significantly, but if you can compare your monthly budgets to actuals over the last few quarters, are they getting tighter in general? Is that what you're looking for, when you consider when you'd like to restart providing guidance?
Dori, to make sure I understand the question, you're asking about how much variability there is relative to our internal forecasts, forecast actual and whether that's narrowing. Is that the question?
Yes.
The short answer is yes, we are continuing to outperform our internal forecast, as we said on the internal call. The further you get into the recovery, where you go from the steep ramp to a more stable environment, that outperformance is narrowing because you just have less upside with which to capture. But you know, our outperformance, 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, you know, in the fourth quarter, we would expect to further narrow that gap during the fourth quarter relative to the third quarter.
Regarding the six Wyndham hotels, or I guess 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? Is that entirely on rate?
Yeah. 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 gonna 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 gonna be, as part of our initial underwriting. And our unlevered IRRs, which were 40%-50%, depending on the two that we completed, are gonna be in excess of that. We are outperforming, and it's rate driven.
Okay, thanks.
Next question comes from Tyler Batory with Oppenheimer. Please go ahead.
Thank you. Good afternoon. 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. This is a topic that comes up with investors. One is, you know, your thoughts and your messaging in terms of rank order priorities for closing that valuation gap.
Well, I mean, obviously, you know, with the backdrop that we face today, the stock prices don't reflect the value of anybody's underlying real estate, ours or anyone's, right? We know that there's a general skepticism around lodging fundamentals, not to mention the overall, you know, economic backdrop. As those things improve, clearly, the sentiment towards, you know, BT and urban will improve as well, and that will help, you know, our position given our urban-centric portfolio. In addition to that, you know, we have the building blocks to be able to close that gap. We're delivering on the value creation, just having launched the two of the three conversions, and we have more in the pipeline to come. Additionally, we have the balance sheet, Tyler, that we're gonna be able to deploy towards incremental growth.
In the meantime of that, you know, where the 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, you know, as well.
Okay, perfect. That, that's very helpful. That's all for me. Thank you.
Next question comes from Neil Malkin with Capital One Securities. Please go ahead.
Thanks, everyone. Good afternoon. The first one, I think it may have been talked about in some context, but you know, maybe over the next 12-18 months, you think about the brands 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, you know, elevated cash balance. You know, I understand it's a difficult environment right now for penciling deals, but what do you guys see over the next, again, 12-18 months, you know, opportunities to potentially take advantage of some distress, you know, across markets you're in or potentially would want to gain exposure to?
Yeah. I think what I would say is that your window's kind of 12-18 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 12-18 months. I do think that, you know, given our balance sheet and our cash position, you know, that we will be in a position to be able to take advantage of that. What I would say, though, is that it's gonna 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. What I would say is that we never put our pencil down.
We're always cultivating relationships. We're always talking about, you know, deals so that when the window opens up, that we're in a position to be in the pole position. You should expect us to be able to do that, you know, in the next 12-18 months that you just described.
I just wanna be clear. You talked about BT, the weekday is close to 19 levels, right? Is that what the commentary you mentioned during the call?
Yes.
Okay. I guess what's preventing a recovery to 19 RevPAR in the fourth quarter, seasonality aside, considering BT's weekday is kind of back to 19, inclusive of obviously, San Francisco because it's 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. Maybe you know, can you kind of like bridge that gap? 'Cause 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 seem to fall short. Is it conservatism, or am I missing something?
Yeah, Neil, on the fourth quarter specifically, I think our house view was and is that the industry and RLJ gets back to 2019 levels next year. I think as we look forward to the fourth quarter, you know, our prepared comments were that we expect to bridge the gap, but we are not indicating that we are gonna be at that. I think you know, the headwind/tailwind sort of thought about what could impact the fourth quarter is about the continued recovery. I think the urban markets and the midweek stat that Leslie mentioned is midweek rate in September equaled weekend rate.
We still, you know, from an industry standpoint, are still from an occupancy perspective, you know, still, you know, high single digits to 10% below 2019 levels from an occupancy standpoint. 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 gonna be as BT is continuing to recover. We like the trend lines in BT, but we're not there yet. That would have to happen to hit 2019 levels. The last impact within our portfolio, Northern California, in the fourth quarter, and San Francisco specifically, had a blockbuster citywide calendar in the fourth quarter of 2019.
When you look across our portfolio, the ability to eclipse that relative to what the citywide activity is in the fourth quarter, you know, is just, you know, is gonna create, you know, an incremental headwind as well. But I think the key takeaway for us from the trajectory of our fundamentals continues 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 2019. We would love for it to happen, but that's certainly not our base case.
Okay, that's helpful. Thanks.
Next question comes from Michael Bellisario with Baird. Please go ahead.
Thanks. Good afternoon, everyone. 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. 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?
Yeah. I'll start with, as you know, Mike, ADR is leading the charge, and occupancy is gonna 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, were giving us lifts. Now we think that that's gonna help ADR continue to drive while the occupancy is coming back with it. 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.
We see as we look into 2023 that we're continuing to press the accelerator on rates on the group side. 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 gonna have a higher rate of BT, the proper group that's gonna be coming in and set us up, you know, to have those metrics as you think about occupancy growth that's gonna 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, you know, focusing on.
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, you know, trying to drive profit. We think that's also a positive as we go into the flows. When I think about, you know, flow-through coming down into, you know, the margin side, earlier conversation that we already had was about FTE. We know that wage pressures are always gonna be there, and we know that we got to be market when we talk about retaining, you know, individuals to be able to clean rooms as well as work in food and beverage in our smaller footprint.
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. 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. On the variable side, I know you want to make a comment, Sean.
I would actually just to helicopter up, Mike. I think our operating cost environment today and through the balance of the year is stable, is how I would characterize it. You know, when you look at our operating costs continue to be below 2019 levels, we expect that to continue through the balance of the year. Our overall cost environment is stable. The fixed costs, et cetera, the things that have been put back in the business have generally been put back in the business. You know, the incremental costs from here are gonna be, as Tom mentioned, the variable costs that we'll put in as revenues go up.
Because of the portfolio construct, you know, the rooms-only nature of the portfolio, you know, we've reached stability probably in our portfolio, you know, earlier because of the types of hotels we have than maybe some of the, you know, some of the other full-service-centric portfolios. We feel good about, you know, what you see in this quarter and next quarter are gonna be, you know, a fair proxy to what our cost structure looks like.
Got it. That's helpful. Sean, one more for you. I mean, to the extent you 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?
Sure. I'll start at the high level. You know, the debt markets continue to be challenging, you know, across the board, within high yield, specifically, CMBS, secured, and even the bank market. You know, I believe and have optimism that this will pass, I think, as we enter into next year. The expectation, particularly from some of the bulge bracket lenders, is that they would expect, as the calendar turned, To get more constructive. 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, you know, for this deal. I think that you know, our leverage point is certainly a differentiator. Our operating model with higher free cash flow was a differentiator for the lenders as well as this being a leverage -neutral transaction. At the end of the day, it's $200 million for $200 million, dollar for dollar, like for like, corporate debt for corporate debt. It was the process leveraging our very strong relationships with the bank market. On the high yield, specifically, it's actually gotten a little better, or at least the, you know, pricing has gotten a little better, although volumes are still low over the last couple weeks.
I expect there to be continued volatility in that market through the balance of the year, you know, until things settle down with respect to, you know, where the Fed's going, et cetera.
Thank you.
Next question, Floris van Dijkum with Compass Point. Please go ahead.
Hey, thanks guys for taking my question. Just, given the, you know, some of the uncertainty still, but it's, you know, that seems to be lifting, you know, the fact that BT is recovering, the group, you know, is sort of back at 19 levels. Do you feel comfortable, you know, when you report your fourth quarter earnings, do you think you're gonna be in a position to provide with full year 2023 guidance at that stage?
Yeah, Floris, listen, as you know, we've historically provided guidance. If things remain the way they are today, our bias with next year would be, you know, to provide guidance. Obviously, that is, you know, a decision between us and the board. If things continue to sort of be as stable as they are today, that would be our intent today. We believe it's important, you know, as a public company, providing guidance is important when the environment is right to provide it. We would hope and expect that in 2023 the stars would align for that.
Thanks, Sean. Maybe if you guys could also comment, I had one or two 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 gummed up right now. Hopefully, there'll be some one-off opportunities here. Why are you not a little bit more aggressive on the share buybacks, given the fact that there are few assets that are trading right now?
Yeah, I mean, I think what I would say is, you know, 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 we have available to us, whether it's buybacks, looking at the internal growth or external growth. You know, 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 where we're maximizing the dislocation.
Where we bought at most recently relative to, you know, where stocks were trading at since our last earnings call, we've been very thoughtful about that, and we're gonna continue to do that. We're looking at where the trends are today, where we think the trends are heading, and determining you know, what's the right window, and right amount to deploy. We're being thoughtful about it. We're gonna 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 dislocation, what we're seeing from the fundamentals and the underlying, value of the real estate relative to where we're trading at today.
Thanks, Leslie. Maybe if I can ask one more. What in terms of cap rates, your outlook, I mean, obviously rates are going higher, return expectations from the private market is going higher. Obviously , hotels reset, you know, rents every night. Do you see much of an impact in terms of cap rate expectations from buyers for hotels?
Look, I think there's no doubt that with the movement in interest rates, it's having an impact on spot values and therefore implied cap rates, but the market is sufficient. That as the macro backdrop improves or moves one way or the other, that ultimately, you know, 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 a appropriate movement in cap rates, but not significant movements from our perspective. You know, I think that investors are smarter today. They know that values will move up and down, and that unless you are a you know, motivated seller, the game plan here is to be patient. That is gonna allow, you know, cap rates to move in a much smaller movements because investors are buyers and sellers are smarter today.
Thanks, Leslie.
Next question comes from Chris Woronka with Deutsche Bank. Please go ahead.
Hey, good afternoon. Thanks for taking the question. A bit of a longer-term question because, Leslie, I hear what you said about transaction markets being pretty quiet right now. As you look out, is there possibly an appetite to have less select service in the portfolio? I'm kind of defining that as non-suite, you know, upper mid-scale stuff or upscale stuff, not the we'll call the embassies and the residence inns, not in that category. Is there an appetite to do that, just thinking about how the public markets appear to be kind of valuing full service versus select service right now?
Look, I would say, Chris, that our appetite is clearly defined in what you've seen us most recently acquire. I think they speak to perfect examples of what we're focused on. It is, you know, the assets that speak 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. You know, I think the quality and the age of the asset matter as well. I think all of those things are, you know, represented in what we've acquired most recently.
That's what I would look to, you know, from a quality perspective of what we're adding to our portfolio and what we have the appetite for.
Okay. Thanks. Appreciate that. As a follow-up, you know, you guys have brought in a few of the soft brands through the Wyndham conversions, and maybe some more to go. If you look at your markets, do you worry at all that there's more competitive supply coming in the form of, you know, conversions into soft brands? You could say, well, it's not net addition of room supply, the hotel is there, but it's obviously maybe more competitive against you. 'Cause 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.
You know, I think about, you know, 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. 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.
It wasn't new product, it was new higher-rated product as we think about Mills House. Same thing in Mandalay. You know, 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 an irreplaceable beach location that people and meeting planners are looking to try to do a rotation. Where are they gonna go? For instance, we have groups that have actually booked at Ritz-Carltons, the Montage that have already booked with us because we're a Curio by Hilton, and we're 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 Suites.
To answer your question, in our situation, in our two, that I would say that are a good proxy for us, we know the rates in the market, we know the clientele's looking for something different, and we don't feel like that supply is gonna impact us if we were the other guy in the situation where we were in, you know, in that environment.
Yeah, Chris, two other sort of comments around sort of supply in general as well as the soft brands. I mean, supply is gonna be a net tailwind for the industry, you know, for several years, which is, you know, a normal cycle trend, but I think it's gonna be even more pronounced in light of you've got COVID and then whatever happens over the next couple years, and the financing markets have sort of, you know, both been tailwinds from a supply perspective. I think, you know, 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.
When you look at where, you know, 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, you know, there's just, you know, they are, you know, in growth mode, but there is, you know, the distribution of those is still relatively early in their life cycle. There's, you know, there's just not as many of them as you would as the other hard brands because they're newer in their life cycle.
Okay. Very helpful. Thanks for all the input.
Next question, Chris Darling with Green Street. Please go ahead.
Thank you. Just going back to the recent conversions. You know, you've obviously given plenty of detail around you know, the long-term kind of stabilized outlook. Curious if you could comment on you know, the extent to which you expect some immediate uplift to portfolio performance, just given that you're you know, presumably no longer dealing with any renovation disruptions there. You know, maybe if you could frame it, what you might expect you know, for Q4 and early 2023 to look like relative to what you saw in the second and third-quarters.
Chris, obviously, we're limited because we haven't given guidance for the fourth quarter or next year. For the conversions in general, you know, 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. A conversion usually takes 2-3 years to ramp. We think because of these locations, we believe that we'll be at the low end of that ramp. What we underwrote is a couple of years to stabilization. The rate upside that we've seen in the market, because both of these markets have already seen significant rate uplift to 2019, you know, already exist within the market. We feel good about the upside, but we still believe it's you know, as these get you know. It's a two-year ramp.
The thing I would add to you as far as immediacy, Chris, 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 Café where 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 a destination location like historic Charleston, we already see the bookings happening pretty quick, that they wanna be able to secure that space as it's a great location where you can be outdoors for a ceremony of that size.
In Mandalay, same thing, w e converted from complimentary comp, you know, food and beverage to now we have a restaurant called Ox & Ocean and an Airstream that'll actually produce, you know, opportunities to be outdoors with people enjoying the coffee as well as the beverages facing the ocean. We think that the immediacy of those type of outlets and the ROIs help us to move that along to Sean's, you know, environment in regards to ramping faster.
Yeah. I mean, I think, you know, we're thrilled to be able to reintroduce the Mills House and launch Zachari Dunes. I do wanna 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 gonna 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 performed during the pandemic before the renovation.
Yeah.
You know, gives us confidence in our ability to achieve and see incremental you know lift with these assets. We look forward to you all being able to see these assets and really experience them.
Got it. Very helpful color. Thank you.
Thank you. I would like to turn the floor over to Leslie Hale for closing remarks.
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.
This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.