Negative Points

• Expense growth was higher than anticipated in Q2 due to occupancy growth exceeding expectations, leading to increased variable costs such as credit card fees, travel agent commissions, and higher F&B expenses.

• The company faces limited visibility due to short booking windows and geopolitical uncertainty, which could impact future demand and performance.

• Fourth quarter group pace is down year-over-year due to the shift of Salesforce from October to September, and the election is expected to offset benefits from the lapsing of the government shutdown.

• Energy costs remained elevated, and fixed costs increased by 6.4% (3.4% excluding a prior-year tax benefit), putting pressure on margins.

• The company is initiating conversion renovations for Boston and Key West in the second half of 2026, which will cause displacement and potentially impact near-term performance.

• RLJ Lodging Trust ( NYSE:RLJ ) sold the Fremont Silicon Valley hotel at a high multiple, but this disposition reduces its portfolio and reflects a market that is not expected to recover to the same degree as others.

Q & A Highlights

Q: Can you provide more detail on the strength of business transient (BT) demand, specifically regarding booking channels and notable industries? A: Leslie Hale (CEO) noted that BT revenues increased by 10% for the second consecutive quarter, with room nights up 6%. The growth is broad-based, coming from national accounts and GDS, with strength in tech, finance, and defense industries. This is the company's highest-rated customer segment, benefiting both rate and food and beverage (F&B) spend. A company representative added that the transient mix increased by 1% and GDS bookings also rose, which is encouraging as that channel typically books business travelers.

Q: What is the outlook for expense growth in the second half of the year, and what factors are driving the current cost increases? A: Leslie Hale (CEO) explained that second-quarter fixed expenses were up 6.4%, but only 3.5% excluding a prior-year tax benefit. Expense growth was driven by higher-than-anticipated occupancy, a higher transient mix (leading to increased credit card and travel agent fees), shorter length of stay, and higher F&B outlet spend. For the back half of 2026, the guidance implies total expense growth of 3% at the midpoint and 4% at the high end, a deceleration from Q2.

Q: How are you thinking about the relative performance of the business segments (BT, leisure, group) for the remainder of the year, and what is the booking pace? A: Leslie Hale (CEO) stated that the raised guidance assumes continued strength in BT, healthy leisure demand, and group pace actualizing at current levels (104% for the full year, 110% for Q3). She noted that Q3 is expected to be stronger than Q4, with July up 11%, August expected to be relatively flat, and September benefiting from the Salesforce conference. Q4 pace is down year-over-year due to the Salesforce shift, but will benefit from lapping the government shutdown, partially offset by the election. The company is also starting conversion renovations in Boston and Key West in the back half.

Q: Can you provide more details on the new Margaritaville conversion in Key West, including the expected financial impact and how it will compete with the existing Margaritaville property? A: Leslie Hale (CEO) stated that the company generally achieves returns north of 40% on incremental conversion capital. For Key West specifically, they expect about a 50% upside in EBITDA. Tom Bardinet (COO) added that the property is located on the way to Duval Street, and they believe the enhanced pool and beverage experience will attract locals, given the lack of supply in the market. The average daily rate (ADR) in Key West nearly mirrors New York City's, and the Margaritaville brand's strong recognition in the area makes it a natural fit.

Q: Given the high returns on conversions, is there consideration to accelerate the pace beyond the current two projects per year? A: Leslie Hale (CEO) responded that the company is thoughtful about managing displacement caused by renovations and must time projects according to factors like franchise expirations. She believes that two to three conversions per year is the right cadence to balance these considerations.

Q: How is the transaction market evolving, and does the recent sale of the Fremont asset indicate more opportunities for dispositions? A: Leslie Hale (CEO) noted that the transaction market is more constructive, with more deals in the pipeline and a competitive debt market. The buyer pool has widened to include owner-operators, family offices, and some private equity. Pricing is being assessed on a case-by-case basis. The Fremont sale was driven by that specific market's dynamics moving away from the broader Northern California recovery, and the pending capital requirements didn't make sense for the company. They sold it to a regional operator at a healthy multiple.

Q: What is the status of the conversion opportunity in San Diego, and are there other conversion opportunities in the pipeline? A: Leslie Hale (CEO) confirmed the company has a healthy pipeline of conversions and is on pace to deliver two per year. Regarding San Diego, they are making progress with the port authority, executing an extension, and finalizing the design for a transformative repositioning. They expect to make meaningful progress on this asset through the remainder of the year.

Q: How are you thinking about capital allocation, specifically regarding share repurchases versus acquisitions and dispositions? A: Leslie Hale (CEO) stated that the company is focused on optimizing all tools to drive shareholder value. With a strong balance sheet and ample liquidity, they have optionality. The strong results from high-impact renovations (50% EBITDA growth) and conversions (11% EBITDA growth) demonstrate the effectiveness of their investments. They continue to believe the stock is undervalued and remain constructive on the transaction side, expecting to be active with dispositions while remaining disciplined.

Q: Regarding the recent sale of the Fremont Silicon Valley hotel, does this reflect any change in the company's view of the Hyatt brand? A: Leslie Hale (CEO) clarified that the decision to sell was not related to the Hyatt brand, which has produced well for the company for many years. The sale was driven by the specific market's demand dynamics moving away from the rest of Northern California, and the capital requirements didn't align with their go-forward view. Tom Bardinet (COO) added that they have a good footprint in Silicon Valley with other Hyatt properties in Santa Clara and San Jose performing well, and they love those locations.

Q: With the industry seeing some cost pressures, do you anticipate a delayed catch-up in room rates, and how are you balancing rate versus occupancy growth? A: Leslie Hale (CEO) stated that rate growth has been healthy over the last several quarters, but the company is focused on growing the bottom line, which grew 7% for the second consecutive quarter. Their strategy is broad-based, focusing on capturing consumer demand trends in the lifestyle segment and being thoughtful with revenue management to balance rate and occupancy. Higher occupancy drives higher demand, which benefits out-of-room spend, a key growth area for the company.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .