RLJ Lodging Trust — Q1 2020 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2020, compared with Q1 2019. RLJ owned 104 hotels with approximately 22,700 rooms at quarter-end, versus 151 hotels a year earlier; 47 dispositions completed between January 2019 and March 2020 limit comparability. COVID-19 sharply reduced travel demand, and the company had suspended operations at more than half its hotels by quarter-end.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $265.5 million | $399.3 million |
| Net income (loss) | $(30.8) million | $28.3 million |
| Net income (loss) attributable to common shareholders | $(35.6) million; $(0.21) per share | $21.0 million; $0.12 per share |
| Adjusted EBITDA | $41.4 million | $111.5 million |
| Adjusted FFO | $16.9 million | $82.6 million |
| Cash flow from operations | $30.1 million | $75.0 million |
| Cash and cash equivalents | $1,157.8 million | $882.5 million at Dec. 31, 2019 |
| Debt, net | $2,594.5 million | $2,195.7 million at Dec. 31, 2019 |
- Revenue fell 33.5%; room revenue declined 35.2%. Comparable-property RevPAR fell 24.5% to $106.54, as occupancy dropped to 60.5% from 76.0% and ADR declined 5.1% to $176.23.
- Total operating expenses declined 20.7% to $277.9 million, less than the revenue decline. Operating expenses therefore consumed a larger share of revenue; the filing does not state a single comparable operating margin.
- Operating cash flow decreased by $45.0 million year over year. Investing used $29.4 million, chiefly for hotel improvements; financing provided $273.6 million, largely from a $400 million revolver draw.
- Debt rose by approximately $398.8 million from year-end. At March 31, $200 million remained undrawn on the $600 million revolver. Cash, cash equivalents and restricted cash totaled $1,201.4 million, including $43.5 million restricted.
- Approximately 75.9% of total indebtedness was variable-rate; after swaps, 84.3% was fixed or effectively fixed. Management estimated a 100-basis-point increase in unhedged variable rates would reduce annual earnings and cash flow by about $4 million.
Material changes, outlook and risks
- Management attributed the hotel-demand shock to COVID-19 and related restrictions. By May 8, 2020, 57 hotels were temporarily suspended. The company expected occupancy and RevPAR pressure at least through year-end 2020, but said the pandemic’s full impact and recovery timing could not be reliably estimated.
- Liquidity measures included a $400 million revolver draw, substantial operating-cost reductions, an expected reduction of more than 80% in 2020 capital spending, and suspension of 90% of planned return-on-investment projects. Management said liquidity should cover obligations for an extended period, subject to uncertain assumptions.
- The first-quarter common dividend was reduced to $0.01 per share from $0.33 in Q1 2019. Management said it would reassess future common dividends and might pay any required REIT distribution at year-end. Preferred dividends remained $0.4875 per share.
- The company repurchased $62.6 million of common shares in Q1, including $36.6 million under a new program, despite the emerging liquidity crisis. The new program had $213.4 million of remaining capacity at quarter-end.
- A key credit-facility covenant was not met: unsecured interest coverage was 1.69x against a required minimum of 2.00x. The company was negotiating amendments expected to waive financial maintenance covenants through March 31, 2021, potentially with higher interest, a minimum-liquidity covenant, subsidiary equity pledges and limits on cash outflows. Approval and final terms were not assured; failure to secure a waiver or repay debt could trigger default, acceleration and substantial doubt about the company’s ability to continue as a going concern. The filing reported compliance with the other listed revolver/term-loan covenants and the Senior Notes covenants.
- Unrealized losses on designated interest-rate derivatives were $56.5 million in Q1 and accumulated other comprehensive loss was $76.0 million at March 31. Interest expense increased 18.7% to $23.8 million, partly because of unrealized losses on discontinued cash-flow hedges.
- No hotel-property impairment was recorded for the quarter. A disputed $8.3 million employee withdrawal-liability claim related to a former hotel manager remains a contingency; management intends to defend it.
Most important facts for investors to verify
- Whether lender amendments and covenant waivers were approved, on what terms, and whether liquidity and covenant tests remain satisfied.
- Cash burn, hotel reopening pace, occupancy and RevPAR trends, and the duration of COVID-related operating suspensions.
- Actual capital spending and operating-cost reductions versus management’s plans, and whether restricted reserves are needed for operating shortfalls.
- Future common-dividend decisions and any required year-end REIT distributions; also whether the share-repurchase program continues.
- Debt maturities, interest-rate exposure and hedge-related losses, plus the outcome of the disputed withdrawal-liability claim.