RLJ Lodging Trust — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. RLJ is a lodging REIT focused primarily on premium-branded, focused-service and compact full-service hotels. It reported 156 hotels with approximately 30,400 rooms at quarter-end. The comparison with Q1 2017 is significantly affected by the August 2017 FelCor merger and subsequent hotel sales.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $429.6 million | $260.2 million | Up 65.1%, primarily reflecting acquired FelCor properties |
| Operating income | $48.1 million | $36.7 million | Up 31.0%; operating margin approximately 11.2%, versus 14.1% |
| Net income | $23.9 million | $21.8 million | Up 9.7% |
| Net income attributable to common shareholders | $17.4 million | $21.8 million | Down 20.0%; Q1 2018 included $6.3 million of preferred dividends |
| Diluted earnings per common share | $0.10 | $0.17 | Common-share dividends declared were $0.33 per share in both periods |
| Operating cash flow | $51.0 million | $49.9 million | Increase of approximately $1.1 million |
| Adjusted FFO | $81.5 million | $64.4 million | Company-defined non-GAAP measure |
| Adjusted EBITDA | $115.8 million | $78.9 million | Company-defined non-GAAP measure |
Hotel trends: For the 122 comparable hotels, occupancy increased to 75.0% from 74.4%, while ADR declined 1.5% to $164.32 and RevPAR declined 0.7% to $123.26. Comparable room revenue fell $1.6 million; non-comparable properties contributed a $134.2 million increase.
Margins and expenses: Total operating expenses rose 70.7%, faster than revenue, including property operating expenses up 75.1%. Depreciation and amortization increased 58.8%. Interest expense doubled to $28.7 million, mainly reflecting debt assumed in the FelCor merger.
Cash, debt and capital: Cash and cash equivalents were $401.9 million and restricted cash reserves were $76.4 million at March 31. Combined cash and restricted cash totaled $478.3 million, down from $659.1 million at year-end. Net debt on the balance sheet was $2.62 billion, down from $2.88 billion. The company had $300 million available on its $600 million revolving facility. Q1 investing cash flow was positive $77.5 million, including $116.1 million net proceeds from hotel sales, partly offset by $38.6 million of hotel improvements. Financing cash outflow was $309.2 million, including the senior secured note redemption and distributions.
Material changes and notable transactions
- The FelCor merger expanded the portfolio; 37 acquired hotels were identified in the filing. The acquired portfolio substantially explains the year-over-year increases in reported revenue and many expenses, so headline growth is not like-for-like growth.
- RLJ sold Embassy Suites Boston Marlborough for $23.7 million in February and Sheraton Philadelphia Society Hill for $95.5 million in March. The two sales totaled approximately $119.2 million and produced a reported $3.7 million loss on sale.
- In March, RLJ redeemed $524 million principal amount of senior secured notes, paying approximately $539.0 million including the redemption premium. It recorded a $7.7 million gain on extinguishment of indebtedness.
- In January, RLJ extended two term-loan maturities previously due in 2019 to January 2023 and improved pricing on modified term loans. It also extended one mortgage-loan maturity in March, subject to lender conditions.
- Series A preferred shares issued in connection with the merger resulted in $6.3 million of preferred dividends in Q1. The company declared a $0.4875 dividend per Series A preferred share.
Outlook, risks and contingencies
- Management described itself as cautiously optimistic about U.S. economic growth and lodging demand, but expected RevPAR growth to be moderate given accelerating hotel supply. No quantified company guidance was provided in the supplied filing text.
- Management said short-term liquidity needs are expected to be met through operating cash flow, cash balances and, if needed, the revolver; long-term needs may be funded through operating cash flow, debt and equity offerings, mortgage loans and other capital sources.
- Interest-rate exposure remains important: $1.9 billion, or 74.8% of total indebtedness, was classified as variable-rate debt before the effect of swaps; after hedging, $577 million, or 22.3%, remained exposed to variable rates. A 100-basis-point increase was estimated to reduce annual earnings and cash flow by approximately $5.8 million.
- RLJ accrued approximately $5.1 million for a disputed pension withdrawal-liability matter associated with former FelCor hotels. The underlying assessment was $8.3 million; management stated resolution might not occur until 2022 and said it intended to defend the claims and any indemnification demand.
- Hotel operations face lodging-demand, competition, economic, seasonality, natural-disaster, travel-disruption, financing and interest-rate risks. Management reported compliance with debt covenants and no material changes to previously disclosed risk factors.
- The company adopted the new revenue recognition standard in 2018 with no financial statement impact. It expected to adopt lease accounting in 2019; management anticipated recognition of right-of-use assets and lease liabilities, primarily for ground and equipment leases, without a material income-statement effect.
- Management concluded disclosure controls were effective as of March 31, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate acquired-portfolio effects from underlying comparable-property performance, especially the modest RevPAR decline and weaker Houston and Louisville markets.
- Assess the effect of preferred-share dividends and the enlarged common-share base on per-share earnings and distributions.
- Review debt maturities, remaining revolver capacity, floating-rate exposure after hedges, and the terms and conditions attached to maturity extensions.
- Confirm the ultimate proceeds and accounting effects of the two hotel dispositions and the note redemption, including the reported sale loss and extinguishment gain.
- Monitor the pension withdrawal-liability dispute, the $5.1 million accrual and any later developments affecting potential exposure.
- Evaluate capital spending needs, restricted hotel reserves, and the company’s outlook under moderate RevPAR growth and rising industry supply.