RLJ Lodging Trust — 2015 Q2 Form 10-Q
Business and period: Unaudited results for the three and six months ended June 30, 2015, compared with the same periods in 2014. RLJ is a lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end, it owned 125 properties, including 123 hotels with approximately 20,400 rooms and two planned conversions.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $301.3 million | $295.0 million | $571.7 million | $531.4 million |
| Operating income | $67.3 million | $65.4 million | $106.5 million | $94.4 million |
| Net income | $56.4 million | $53.4 million | $104.5 million | $65.3 million |
| Net income attributable to common shareholders | $56.0 million | $52.9 million | $103.8 million | $64.8 million |
| Diluted EPS | $0.42 | $0.42 | $0.78 | $0.52 |
| Operating cash flow | Not separately provided | Not separately provided | $145.9 million | $132.0 million |
Revenue increased 2.1% in Q2 and 7.6% year to date; operating income rose 3.0% and 12.8%, respectively. Operating margin was approximately 22.4% in Q2 versus 22.2% a year earlier, and 18.6% year to date versus 17.8%. First-half net income included a $23.0 million gain on hotel dispositions; the comparable 2014 period had a $1.3 million loss.
Comparable-property RevPAR increased 4.0% in Q2 and 4.2% year to date, principally reflecting higher average daily rates (ADR: $169.02, up 5.6%, in Q2) despite lower occupancy (82.5%, down 1.5%). Year-to-date ADR rose 5.3% to $163.31, while occupancy declined 1.1% to 78.9%.
For the first six months, FFO attributable to common shareholders was $156.5 million versus $134.8 million; Adjusted FFO was $165.3 million versus $147.2 million. Adjusted EBITDA was $191.5 million versus $175.0 million. These are non-GAAP measures and should be considered alongside GAAP results.
Cash, debt and capital
- Cash and cash equivalents were $263.9 million at June 30, 2015; restricted cash reserves were $59.9 million. Operating cash flow was $145.9 million.
- Investing activities provided $159.0 million, mainly from $227.8 million of net proceeds from selling 21 hotels, partly offset by $64.7 million of hotel improvements and additions and $7.0 million of purchase deposits. Financing activities used $303.5 million, including mortgage principal payments, distributions and share repurchases.
- Debt comprised $1.025 billion of term loans and $376.9 million of mortgage loans, approximately $1.402 billion total. The revolving facility had no borrowings and $300 million of available capacity; another $150 million under a term loan was undrawn at quarter-end. RLJ reported compliance with debt covenants.
- Interest-rate swaps reduced the portion of total debt exposed to variable rates to $124 million. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by about $1.2 million.
- The board authorized a $200 million share-repurchase program in May 2015. RLJ repurchased approximately 2.0 million shares for $59.8 million during the quarter; about $140.2 million remained available at June 30. It declared a $0.33-per-share quarterly dividend.
Changes, outlook and risks
RLJ sold 21 hotels for approximately $232.7 million in the first half and recorded the $23.0 million gain. No acquisitions occurred during the first half, unlike 2014, when the company acquired 13 hotels for approximately $504.2 million. The company noted that acquisitions, dispositions and renovation closures make some year-over-year comparisons non-comparable.
Management described lodging demand as strong, with record-level demand and hotel supply below historical averages, and said it was cautiously optimistic about a positive multi-year lodging cycle. It saw acquisition opportunities and expected to fund near-term needs through operations, cash and, if needed, its revolver. No quantified earnings or operating guidance was provided. Two redevelopment projects were expected to finish in Q3 2015; management estimated a further $1.7–$3.7 million of costs.
Risks include lodging and business-travel cyclicality, seasonality, competition, interest rates, capital-market access, property renovation needs and the ability to source acquisitions. A third-party manager disclosed data breaches affecting RLJ hotels (seven hotels in the 2013 breach and six in a separate breach ending February 2015). Potential fines, assessments and related costs remained uncertain; management believed any ultimate amounts would not be material. Management reported no material-adverse legal proceedings and no material change to previously disclosed risk factors.
Subsequent to quarter-end, RLJ drew the $150 million available under the 2014 term loan, borrowed $7 million under a mortgage, sold one hotel for $5.8 million, and acquired two hotels for a combined $105.9 million.
Investor verification priorities
- Assess the sustainability of RevPAR and revenue growth given falling comparable-property occupancy and the contribution of non-comparable assets.
- Separate recurring operating performance from the first-half $23.0 million disposition gain and review FFO/Adjusted FFO reconciliations.
- Review debt maturities, extension conditions and refinancing plans, including the $9.9 million mortgage due September 2015, and the effect of post-quarter borrowing.
- Track redevelopment spending, capital requirements, acquisition returns and the use of proceeds from hotel sales and share repurchases.
- Monitor the data-breach investigation and possible financial exposure as facts, claims and potential assessments become clearer.