RLJ Lodging Trust — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; quarterly figures below include the three months ended December 31, 2018. RLJ is a self-advised REIT focused on premium-branded, focused-service and compact full-service hotels. At year-end it owned 151 hotels with 28,768 rooms across 25 states and Washington, D.C.; approximately 97% of its hotels operated under Marriott, Hilton, Hyatt or Wyndham brands. The 2018 results include the full-year contribution of hotels acquired in the August 2017 FelCor merger, while 2017 included those hotels only from the acquisition date.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1.761 billion | $1.356 billion |
| Net income | $190.9 million | $75.7 million |
| Net income attributable to common shareholders | $163.5 million; $0.93 per diluted share | $66.5 million; $0.47 per diluted share |
| Operating cash flow | $394.8 million | $260.6 million |
| FFO | $377.3 million | $245.5 million |
| Adjusted FFO | $395.7 million | $339.1 million |
| Adjusted EBITDA | $522.1 million | $427.6 million |
| Interest expense | $101.6 million | $78.3 million |
| Debt, net of deferred financing costs | $2.203 billion | $2.880 billion |
Revenue rose 29.9%, but the increase was primarily attributable to acquired properties; comparable-property room revenue declined $11.8 million. At the 121 comparable hotels, occupancy was 77.1% versus 77.9%, ADR was $166.01 versus $166.39, and RevPAR decreased 1.3% to $127.96. Comparable RevPAR was weakest in Louisville, Houston and Austin, partly offset by gains in Northern California, Chicago and New York City.
Property operating expenses rose 32.7% to $1.077 billion, faster than total revenue growth. Total operating expenses were $1.505 billion. The filing does not provide a single headline operating-margin measure; its reported costs and hotel statistics show pressure from labor and other property expenses. Net income also reflects a $30.9 million gain on hotel sales and a $6.0 million gain on extinguishment of debt.
Fourth-quarter 2018 revenue was $399.9 million, net income was $27.9 million, and net income attributable to common shareholders was $21.0 million, or $0.12 per share. Fourth-quarter 2017 revenue was $462.5 million, net income was $7.4 million, and common-shareholder net income was $0.6 million. The year-over-year quarter comparison is affected by the timing of the FelCor merger and subsequent property sales.
Liquidity, debt and capital allocation
Year-end cash and cash equivalents were $320.1 million, with a further $64.7 million in restricted cash reserves; combined cash and restricted cash was $384.8 million, down from $659.1 million a year earlier. The $600 million revolving credit facility was undrawn at year-end. Operating cash flow was $394.8 million; investing activities provided $277.1 million, mainly from $475.1 million of net hotel-sale proceeds, offset by $197.3 million of hotel improvements. Financing activities used $946.2 million, including redemption of secured notes, distributions, debt repayments and share repurchases.
RLJ redeemed $524 million of senior secured notes in March 2018 for approximately $539 million, repaid an $85 million mortgage in November, and extended and repriced two term loans, moving their maturities to January 2023. At year-end, $192 million of debt remained exposed to variable rates after swaps; a 100-basis-point rate increase was estimated to raise annual interest expense by approximately $1.9 million. Management targets net debt to EBITDA of 4.0x or below. All reported debt covenants were in compliance at year-end.
The company paid common distributions of $1.32 per share for 2018, unchanged from 2017, and declared $1.95 per Series A preferred share. It repurchased and retired approximately 1.2 million common shares for $21.8 million. A new authorization approved in February 2019 permits repurchases of up to $250 million through February 2020. The filing also reports a $45.6 million redemption of Knickerbocker joint-venture preferred equity in February 2019.
Changes, outlook, risks and unusual items
- Portfolio recycling: RLJ sold seven hotels and a parcel of land in 2018 for aggregate stated sale prices of approximately $530.9 million, recognizing a $30.3 million net gain on hotel sales. Year-end hotel count was 151 versus 158 in 2017.
- Management said it was cautiously optimistic about continued U.S. economic expansion and lodging demand, but expected moderate RevPAR growth given accelerating supply and signs of slowing economic growth. Low unemployment and wage increases were identified as cost pressures. No numerical 2019 earnings or RevPAR guidance is provided in the supplied filing text.
- Other notable year-over-year items include lower merger-related transaction costs ($2.1 million versus $44.4 million) and lower income tax expense ($8.8 million versus $42.1 million), primarily reflecting the reduction in the U.S. corporate tax rate. Interest expense increased 29.8%, in part because of FelCor-assumed debt.
- Under the senior unsecured notes indenture, 2018 hotel-sale proceeds trigger a covenant requiring specified action within the indenture’s 24-month period. RLJ said it planned to make a tender offer during 2019 for at least the required amount of notes at no less than par.
- Key risks include lodging-cycle and economic weakness, new room supply and alternative lodging competition, concentrated exposure to certain metropolitan markets and major hotel brands, labor-cost inflation, reliance on third-party hotel managers, refinancing and interest-rate exposure, capital needs, ground leases, weather and natural disasters, and REIT qualification and distribution requirements. LIBOR transition risk was also disclosed.
- A claim involving an $8.3 million pension withdrawal-liability assessment related to former FelCor hotels remained disputed; management said resolution might not occur until 2022 and intended to defend the claims. Apart from this matter and routine litigation, the company reported no material litigation it believed would adversely affect its financial position, results or cash flows.
Most important facts for investors to verify
- Comparable-hotel operating trends and the extent to which portfolio additions and sales explain reported revenue growth.
- Whether moderate RevPAR growth can offset supply growth, wage inflation and property-tax reassessments.
- The 2019 note tender-offer requirement, debt maturity schedule and continued availability of the revolving facility.
- Cash remaining after distributions, hotel capital improvements, share repurchases and the February 2019 preferred-equity redemption.
- Progress on the disputed pension liability, ground-lease obligations and interest-rate/LIBOR transition exposure.
- Reliance on four major brand families and on Interstate, which managed 72 hotels at year-end.