RLJ Lodging Trust quarterly report, Q3 FY2018

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RLJ Lodging Trust — Q3 2018 Form 10-Q

Reporting period: Three and nine months ended September 30, 2018; unaudited. Amounts below are in millions except per-share data and operating statistics.

Business context

RLJ is a lodging REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 152 hotels with approximately 29,400 rooms in 25 states and Washington, D.C. Comparisons with 2017 are affected by the August 2017 FelCor merger, which added 37 hotels, and by hotel sales in 2018.

Financial and operating results

  • Q3 revenue: $447.0, up 31.0% from $341.3. Operating income was $67.0 versus $26.2; reported operating margin was approximately 15.0% versus 7.7%.
  • Q3 earnings: Net income was $74.7 versus $4.1; net income attributable to common shareholders was $67.7 versus $1.8. Diluted EPS was $0.39 versus $0.01. Q3 2018 included a $35.9 gain on hotel sales and a $1.7 loss on debt extinguishment; Q3 2017 included $32.6 of transaction costs and a $2.7 gain on settlement of a loan investment.
  • Nine-month results: Revenue was $1,361.3, up 52.3%; operating income was $204.1 versus $120.9; net income was $162.9 versus $68.4; common-shareholder net income was $142.5 versus $65.8; diluted EPS was $0.81 versus $0.50. Results included $33.0 of net hotel-sale gains and a $6.0 net debt-extinguishment gain in 2018.
  • Comparable hotel performance: For 121 comparable properties, Q3 RevPAR declined 1.6% to $128.10, as occupancy fell to 78.4% from 80.3% while ADR rose 0.7% to $163.33. Nine-month RevPAR declined 0.2% to $130.92. Reported revenue growth therefore should not be read as comparable-property growth.
  • Cash flow and investment: Nine-month operating cash flow was $313.5; investing activities provided $303.4, including $447.7 net proceeds from hotel sales, offset partly by $144.2 of hotel improvements. Financing activities used $772.5, including $539.0 to redeem secured notes and about $193.0 in shareholder and unit-holder distributions. Cash, cash equivalents and restricted reserves totaled $503.5 at quarter-end.
  • Debt and liquidity: Net debt was $2,290.2, down from $2,880.5 at year-end 2017. The $600.0 revolver was undrawn and fully available. Debt included $506.5 of senior notes, $1,168.7 of revolver and term loans (net), and $614.9 of mortgage loans (net). The company reported compliance with debt covenants.
  • Margins and non-GAAP measures: Adjusted FFO was $101.4 for Q3 versus $86.5, and $310.8 for nine months versus $239.7. Adjusted EBITDA was $132.7 versus $108.4 for Q3, and $408.3 versus $291.1 for nine months. These company-defined non-GAAP measures are supplemental and are not substitutes for GAAP results.

Material changes, outlook and risks

  • During 2018 RLJ sold six hotels for approximately $454.1 in aggregate and recorded $30.9 of net gains, including $5.1 of debt-extinguishment gains associated with sales. It sold the Holiday Inn San Francisco–Fisherman’s Wharf after quarter-end, on October 15, for $75.3; reported proceeds to RLJ were approximately $30.4.
  • RLJ redeemed $524.0 principal amount of senior secured notes in March. It also extended two term-loan maturities from 2019 to January 2023 and improved pricing. After quarter-end it paid off an $85.1 Scotiabank mortgage in November.
  • Management was cautiously optimistic about U.S. lodging demand, citing employment, consumer confidence and corporate sentiment, but expected RevPAR growth to be moderate given accelerating hotel supply. No specific earnings or RevPAR guidance is provided in the filing.
  • Interest-rate exposure remains a risk: 72.3% of debt was variable-rate before hedges, while $268.0 (11.8% of total indebtedness) remained exposed after swaps. A 100-basis-point increase was estimated to reduce annual earnings and cash flow by approximately $2.7.
  • A pension-fund withdrawal-liability claim associated with former FelCor hotels involved an $8.3 assessment; RLJ accrued approximately $4.6 and said resolution may not occur until 2022. RLJ intends to defend the claims and any indemnification demand.
  • The Knickerbocker joint venture’s preferred equity carries a 3.25% current annual return, rising to 8% if not redeemed before the fifth anniversary for most of the issuance in February 2019. RLJ also expected employee severance and termination costs related to the Fisherman’s Wharf building closure and sale.
  • Management cited rising interest rates, lodging-market competition and supply, economic uncertainty, seasonality, natural disasters, travel disruption, and access to capital among risks. It reported no material change to previously disclosed risk factors; disclosure controls were judged effective.

Important facts for investors to verify

  • How much of reported revenue and earnings growth reflects the FelCor merger, dispositions and sale gains, versus performance of the continuing comparable portfolio.
  • Whether comparable-property RevPAR weakness, particularly in Louisville and Austin, persists, and how supply growth affects future pricing and occupancy.
  • Debt maturities, refinancing and extension conditions, post-quarter mortgage repayment, and the continuing sensitivity of cash flows to interest rates.
  • Final proceeds and any remaining costs or obligations from asset sales, including Fisherman’s Wharf, and the use of capital released through dispositions.
  • Resolution and ultimate cost of the pension claim, and whether the Knickerbocker preferred equity is redeemed before its return step-up.