RLJ Lodging Trust — 2020 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. RLJ owned 104 hotels with approximately 22,700 rooms in 23 states and Washington, D.C. The business was severely affected by COVID-19 and related travel restrictions. Of 57 hotels whose operations had been suspended, 47 had reopened by quarter-end; three more reopened afterward, leaving seven still suspended at September 30.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $83.9 million | $371.1 million | $382.0 million | $1,219.1 million |
| Net income (loss) | $(173.9) million | $32.5 million | $(320.9) million | $94.5 million |
| Net income (loss) attributable to common shareholders | $(179.4) million; $(1.10) per share | $26.2 million; $0.15 per share | $(336.3) million; $(2.04) per share | $74.3 million; $0.43 per share |
| Adjusted EBITDA | $(19.2) million | $106.3 million | $(28.3) million | $366.2 million |
| Adjusted FFO | $(52.7) million | $79.2 million | $(115.9) million | $281.0 million |
| Operating cash flow | Not presented separately for the quarter | $(86.8) million | $305.6 million |
- Q3 comparable-hotel occupancy was 29.3% versus 81.1%; ADR was $119.26 versus $178.15; RevPAR was $34.92 versus $144.39, a 75.8% decline. For the nine-month period, RevPAR fell 65.0% to $51.61.
- Q3 revenue fell 77.4%; property operating expenses fell 66.1%, reflecting cost containment but not offsetting the revenue decline. Interest expense rose 11.4% to $26.0 million in Q3 and 7.2% to $73.6 million for nine months.
- At September 30, cash and cash equivalents were $996.0 million and restricted cash reserves were $42.7 million, totaling $1.039 billion. Cash, cash equivalents and restricted reserves increased $111.5 million from year-end. Nine-month investing cash outflow was $55.7 million and financing cash inflow was $254.0 million.
- Net debt on the balance sheet was $2.590 billion, up from $2.196 billion at December 31, 2019. The company had drawn $400 million of its $600 million revolver, leaving $200 million undrawn. Management reported approximately $1.0 billion of cash and restricted cash reserves.
- Total equity declined to $2.772 billion from $3.226 billion at year-end. A $64.5 million valuation allowance against deferred tax assets contributed to Q3 tax expense of $64.6 million despite a pretax loss.
Material changes and notable items
- Revenue, hotel operating metrics and cash generation deteriorated sharply year over year, primarily due to COVID-19. Comparability is also affected by portfolio changes, including hotel dispositions in 2019.
- In June 2020, RLJ amended its revolver and term loans. Financial maintenance covenant testing was suspended through the quarter ending March 31, 2021, with revised thresholds thereafter. The agreements require minimum liquidity of $125 million and impose restrictions on debt, asset sales, investments, capital expenditures, distributions and repurchases; certain proceeds must be used for debt prepayments.
- Five mortgage loans were in cash-trap status because they did not meet debt-service-coverage thresholds. The filing says these thresholds trigger lender control over certain cash outflows, rather than constituting an event of default.
- Common dividends were reduced to $0.01 per share for each of the first three quarters, from $0.33 per quarter in 2019. The quarterly Series A preferred dividend remained $0.4875 per share. Share repurchases were suspended in April; $62.6 million had been repurchased during the first nine months.
- RLJ recorded a $6.5 million impairment of an unconsolidated joint-venture investment after determining the property’s ground lease would likely terminate by October 31, 2021 and the property would revert to the lessor. The company reported no impairment of its consolidated hotel properties.
- Q3 results included approximately $8.0 million of severance costs, including $6.7 million for New York City hotel associates, partly offset by a $1.8 million reversal of an accrued liability related to the National Retirement Fund matter. The dispute was settled in October 2020.
Outlook, risks and management commentary
Management said COVID-19 continued to materially harm results and liquidity, and that the effects could persist well beyond containment of the outbreak. It could not reliably estimate the pandemic’s duration or ultimate effect. The company cited reduced staffing and services, deferred most capital projects, suspended most return-on-investment projects, and allowed restricted reserves to support operating shortfalls at certain hotels. Management expected available liquidity to cover obligations for an extended period, based on its assumptions; this is not a quantified earnings or operating forecast. Management said it would assess whether to resume a regular common dividend or pay any required dividend at year-end in light of performance and the outlook.
Further risks include renewed travel restrictions or hotel closures, weak business-travel demand, liquidity and refinancing needs, covenant requirements after the relief period, mortgage cash traps, interest-rate exposure, and uncertainty in estimates affected by the pandemic. Approximately 75.9% of total indebtedness was variable-rate before considering hedges; after swaps, 82.9% of debt was fixed or effectively fixed. The company estimated that a 100-basis-point increase in unhedged variable rates would reduce annual earnings and cash flows by approximately $4.4 million.
Investor verification priorities
- Track hotel reopenings, occupancy, ADR and RevPAR, particularly in business-travel markets and the remaining suspended properties.
- Verify cash availability and cash burn, including the distinction between unrestricted cash and restricted reserves, and whether liquidity remains above the $125 million covenant minimum.
- Review compliance with amended credit terms, covenant testing after March 2021, debt maturities and the status of the five mortgage cash traps.
- Assess the sustainability of common and preferred distributions and whether the common dividend can be restored under the credit restrictions.
- Monitor deferred-tax-asset realizability, the joint-venture ground-lease outcome, interest-rate swap obligations and any further impairments or unusual charges.