RLJ Lodging Trust — Q3 2016 Form 10-Q
Business and period: Unaudited results for the three and nine months ended September 30, 2016, compared with the same periods in 2015. RLJ is a lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 125 hotels with approximately 20,800 rooms across 21 states and the District of Columbia.
Financial and operating performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $296.3 million | $289.4 million | $888.5 million | $861.1 million |
| Operating income | $56.8 million | $53.4 million | $173.9 million | $159.9 million |
| Net income | $41.4 million | $40.9 million | $125.5 million | $145.4 million |
| Net income attributable to common shareholders | $41.2 million; $0.33/share | $40.6 million; $0.32 basic/share | $124.9 million; $1.00/share | $144.4 million; $1.10/share |
| Operating cash flow | — | — | $250.4 million | $232.9 million |
| Capital improvements and additions to hotels | — | — | $58.9 million | $100.3 million |
Quarterly revenue rose 2.4%; operating income rose 6.5%. Operating margin was approximately 19.2%, versus 18.4%. For the nine months, revenue increased 3.2% and operating income 8.8%; operating margin was approximately 19.6%, versus 18.6%.
Comparable-hotel RevPAR increased 0.6% in Q3 and 1.4% for the nine months. Q3 occupancy was 81.6% and ADR $164.81; nine-month occupancy was 80.2% and ADR $168.20. Comparable results were mixed by market: Q3 gains in Washington, D.C. and South Florida were partly offset by declines in Houston and Austin; year-to-date California gains were partly offset by Houston and Chicago declines.
At September 30, cash and cash equivalents were $178.6 million, restricted cash reserves $65.4 million, total assets $4.0 billion and total liabilities $1.8 billion. Gross debt was approximately $1.591 billion before deferred financing costs: $1.176 billion of term loans and $415.9 million of mortgage principal. The $400 million revolver was undrawn and fully available. The company reported covenant compliance. It paid $123.3 million in common-share distributions and declared a $0.33-per-share dividend in each of the first three quarters.
Management-reported non-GAAP measures: Q3 FFO was $82.3 million and Adjusted FFO $85.4 million; nine-month FFO was $248.0 million and Adjusted FFO $258.3 million. Adjusted EBITDA was $100.2 million for Q3 and $303.4 million for the nine months. These measures are supplemental and are not substitutes for GAAP results.
Material changes versus prior periods
- Nine-month common-shareholder net income fell 13.5%, despite higher revenue and operating income. A key factor was the absence of the prior-year $23.8 million gain from hotel sales; 2016 recorded a $0.2 million sale loss.
- Interest expense increased 10.9% for the nine months to $44.2 million, reflecting new swaps and higher term-loan interest, among other factors. Income-tax expense rose to $5.4 million from $0.6 million, primarily from deferred tax expense as tax-loss carryforwards were used after the valuation allowance had been fully released in 2015.
- Cash increased from $134.2 million at year-end 2015 to $178.6 million. Financing cash use declined to $139.6 million from $350.0 million in the prior-year period, which included substantially higher share repurchases and mortgage principal repayments.
- The company repurchased 610,607 shares for $13.3 million in the first nine months of 2016, versus 6.99 million shares for $199.9 million in the comparable 2015 period. The repurchase program had $161.5 million of stated remaining dollar capacity at quarter-end.
Outlook, commentary and risks
Management expressed cautious optimism for moderate U.S. economic growth and modest near-term RevPAR growth, citing record lodging demand and aggregate new supply below long-term historical averages. It also cited slowing global growth, a strong dollar and fewer acquisition opportunities meeting its investment criteria, and said it would remain disciplined in capital allocation. The filing provides no numerical earnings or RevPAR guidance.
During 2016, RLJ refinanced or modified more than $1.0 billion of debt, extending maturities and improving pricing or covenants. Management identified exposure to lodging demand and business travel, economic and real-estate conditions, competition, interest rates, financing and capital access, seasonality, and natural disasters or disruptions to travel. Approximately $1.6 billion of debt was variable-rate before hedging; after swaps, $142 million, or 8.9% of total indebtedness, was exposed to variable rates. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flows by approximately $1.4 million, after hedges. No material litigation, off-balance-sheet arrangements or changes to previously disclosed risk factors were reported. The CEO resigned in May 2016; restricted awards were forfeited, and new CEO and CFO employment agreements were entered into in August.
Investor verification priorities
- Assess the underlying hotel trend: comparable RevPAR growth was modest and varied materially by market; verify whether weakness in Houston and other markets continued.
- Separate recurring operating performance from prior-year property-sale gains, tax effects, and non-GAAP adjustments; review the reconciliations and definitions of FFO and Adjusted EBITDA.
- Verify debt maturity, covenant and refinancing details, and the sensitivity of interest expense and cash flow to rates despite the swap program.
- Compare cash generation with distributions, hotel capital spending and reserve requirements; restricted reserves are not freely available for general liquidity.
- Review the assumptions behind management’s cautious outlook, the acquisition pipeline, and capital-allocation decisions, including share repurchases and dividends.