RLJ Lodging Trust — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions unless stated otherwise. RLJ is a hotel REIT focused primarily on premium-branded, focused-service and compact full-service properties. At quarter-end it owned 109 hotels with approximately 23,400 rooms, compared with 152 hotels a year earlier.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $371.1m | $447.0m | $1,219.1m | $1,361.3m |
| Net income | $32.5m | $74.7m | $94.5m | $162.9m |
| Net income attributable to common shareholders | $26.2m | $67.7m | $74.3m | $142.5m |
| GAAP diluted EPS | $0.15 | $0.39 | $0.43 | $0.81 |
| Adjusted FFO | $79.2m | $101.4m | $281.0m | $310.8m |
| Adjusted EBITDA | $106.3m | $132.7m | $366.2m | $408.3m |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $305.6m | $313.5m |
- Q3 GAAP operating income was $53.4m, or approximately 14.4% of revenue, versus $67.0m, or 15.0%, a year earlier.
- Comparable-hotel Q3 RevPAR declined 0.3% to $143.05, as occupancy rose 0.5% to 80.8% while ADR fell 0.8% to $176.93. For the nine-month period, comparable RevPAR increased 1.1% to $146.39.
- At September 30, cash and cash equivalents were $845.9m and restricted cash reserves were $48.6m. Net cash from operating activities was $305.6m for the nine months. Net cash provided by investing activities was $507.5m, including $623.6m in net hotel-sale proceeds; financing activities used $303.4m.
- Debt, net, was $2.199bn, versus $2.203bn at year-end 2018. The revolver was undrawn, with $600m of available capacity. Cash and cash equivalents less reported debt equaled approximately $1.353bn of net debt, excluding restricted cash.
- Quarter-end equity was $3.256bn. The company repurchased 3.84m common shares for $65.6m during the nine months and declared common dividends of $0.33 per share in each of the first three quarters.
Material changes versus the prior period
- Q3 revenue decreased 17.0%, while common-shareholder net income declined 61.3%. The comparison was affected by a smaller portfolio following dispositions and by prior-year sale gains: Q3 2018 included a $35.9m net hotel-sale gain, whereas Q3 2019 recorded a $1.0m net loss on hotel sales.
- For the first nine months, revenue declined 10.4% and common-shareholder net income declined 47.9%. RLJ sold 42 hotels in four transactions for approximately $653.4m in aggregate sales price and recorded a $25.9m net loss on hotel sales. The company attributed the revenue reduction primarily to disposed properties; comparable-property RevPAR rose 1.1%.
- Comparable-property operating expenses increased 1.4% in Q3 and 2.3% year to date. Management cited labor-cost pressure, along with higher administrative, sales and marketing, and repair and maintenance expenses.
- Interest expense declined 5.3% in Q3 and 12.9% year to date, mainly reflecting lower borrowings and refinancing activity. The company completed three mortgage financing transactions in April and repaid certain mortgage loans.
- Adoption of the new lease accounting standard added $145.7m of lease right-of-use assets and $121.8m of lease liabilities at September 30; management said adoption did not materially affect operating results or cash flows.
Outlook, risks and unusual items
- Management expressed cautious optimism about moderate U.S. economic growth and lodging demand, while noting increased geopolitical uncertainty and continuing industry cost pressure from a tight labor market. The filing provides no specific numerical earnings or operating guidance.
- In September, RLJ agreed to terminate Wyndham management agreements and the related net operating income guarantee effective December 31, 2019. It expects a $35.0m termination payment and forgiveness of a $4.6m key-money loan; both are to be recognized as reductions to management-fee expense over the estimated term of transitional agreements beginning in 2020. Transitional agreements may run through 2020, with an extension option through 2021.
- On November 1, 2019, after quarter-end, RLJ launched a tender offer for the entire principal amount of its $500m senior notes at par, then trading at approximately 105% of par. The offer was expected to expire December 4, 2019.
- Interest-rate exposure is a key financial risk. RLJ reported $1.6bn of variable-rate debt, 71.4% of total indebtedness, but said swaps reduced unhedged variable-rate exposure to approximately $1.0m. A 100-basis-point rise in rates on unhedged variable debt was estimated to reduce annual earnings and cash flow by approximately $1.5m.
- A disputed employee withdrawal-liability claim assessed against a former FelCor affiliate is $8.3m, with potential indemnification exposure involving IHG. RLJ plans to defend the claim; resolution may not occur until 2022. Management stated that other than this matter, it knew of no litigation expected to materially harm financial position, results or cash flows.
- Other risks include lodging-demand and economic downturns, competition, labor and operating costs, interest rates and access to financing, seasonality, and natural disasters or events that disrupt travel. Management reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Investor verification points
- Separate portfolio shrinkage from same-property performance when assessing the sharp year-over-year revenue decline; review comparable-hotel RevPAR, occupancy and ADR trends by market.
- Confirm how hotel-sale proceeds and the $25.9m net sale loss reconcile to the four transactions, portfolio changes and future operating base.
- Track progress and final terms of the post-quarter senior-note tender, including its funding source and any resulting debt or liquidity changes.
- Verify receipt and accounting treatment of Wyndham’s $35.0m payment and $4.6m loan forgiveness, and the terms and duration of transitional agreements.
- Monitor refinancing and maturity needs, covenant compliance, swap coverage and the effect of interest-rate movements; the revolver was scheduled to mature in April 2020, with an extension option subject to conditions.
- Assess the resolution and potential financial exposure from the $8.3m withdrawal-liability claim, along with capital spending, distributions and share repurchases relative to cash generation.