RLJ Lodging Trust — Q3 2013 Form 10-Q
Business context and reporting period. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the same 2012 periods. RLJ is a self-advised hotel REIT focused on premium-branded focused-service and compact full-service properties. At quarter-end it owned 149 properties, including 147 hotels with approximately 22,300 rooms and two planned conversions. Results include acquisitions and other properties that were not comparable across periods; Marriott-managed hotels also used a different reporting calendar in the 2012 comparison.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $252.4 million | $224.3 million | $728.6 million | $629.1 million |
| Operating income | $45.2 million | $36.6 million | $126.1 million | $89.8 million |
| Net income | $36.9 million | $15.3 million | $86.5 million | $27.4 million |
| Net income attributable to common shareholders | $36.5 million | $15.2 million | $85.5 million | $27.6 million |
| Diluted EPS | $0.30 | $0.14 | $0.72 | $0.26 |
| Operating margin (calculated) | 17.9% | 16.3% | 17.3% | 14.3% |
| Operating cash flow | Not presented by quarter | $185.2 million | $123.7 million |
For Q3, revenue rose 12.6% and comparable-property RevPAR increased 5.1%; portfolio occupancy was 78.1%, ADR was $138.61 and RevPAR was $108.29. For the first nine months, revenue rose 15.8%, comparable RevPAR increased 7.9%, occupancy was 75.9%, ADR was $140.38 and RevPAR was $106.48.
Management reported FFO attributable to common shareholders of $65.0 million for Q3 and $175.1 million for the nine months, versus $46.9 million and $125.0 million in 2012. Adjusted FFO was $65.1 million and $183.9 million, respectively, versus $50.6 million and $134.9 million. Adjusted EBITDA was $80.8 million for Q3 and $234.2 million year to date, versus $71.7 million and $197.0 million.
Balance sheet, debt and liquidity
- At September 30, 2013, cash and cash equivalents were $343.5 million, compared with $115.9 million at year-end 2012; restricted cash reserves were $53.8 million. Current ratio is not stated in the filing text.
- Total debt was approximately $1.411 billion: $561.3 million of mortgage loans and $850.0 million of term loans; nothing was drawn on the $300 million revolving facility at quarter-end. Cash less stated debt implies net debt of approximately $1.068 billion.
- During August, RLJ refinanced approximately $565 million of debt, lowered its weighted-average cost of debt by almost 100 basis points, and added term-loan borrowings. Management said it expected significant future interest savings. The company reported 110 unencumbered assets and compliance with debt covenants.
- Approximately 86.9% of total indebtedness was variable-rate debt. RLJ estimated that a 100-basis-point increase in rates would reduce annual earnings and cash flow by about $5.1 million after existing hedges. Term loans and the revolver bear variable rates; hedging activity produced an $11.4 million unrealized loss in accumulated other comprehensive loss.
- Nine-month investing cash outflow was $213.0 million, including $184.2 million for property acquisitions and $41.7 million for hotel improvements. Financing cash inflow was $255.5 million, including $327.5 million net proceeds from a March common-share offering. Distributions on common shares and OP units totaled $72.7 million.
Material changes and unusual items
- Revenue growth reflected both stronger comparable-property trading and acquisitions: non-comparable properties contributed $16.5 million of Q3 revenue growth and $53.3 million of nine-month growth.
- Lower interest expense supported earnings: it fell 20.3% in Q3 and 17.8% for the nine months. Property operating expenses increased 12.1% and 13.9%, respectively, alongside portfolio growth and higher comparable-property costs.
- Reported earnings included a $4.8 million gain on foreclosure related to the Residence Inn Atlanta Midtown/Historic, acquired for $4.7 million at foreclosure, and $5.7 million of debt-extinguishment gains in discontinued operations from the Southfield and Goshen properties. These gains are not recurring operating performance.
- Five properties were acquired during the first nine months for an aggregate purchase price of approximately $188.7 million. Several were closed or planned for conversion or renovation; the Atlanta property was expected to reopen in Q3 2014, and conversions were expected to finish in late 2014 and mid-2015.
- On October 8, 2013, RLJ acquired a 106-room Oregon hotel for $24.0 million. On October 15 it paid a $0.205-per-share dividend to holders of record at September 30.
Outlook, commentary and risks
Management described itself as cautiously optimistic about a multi-year lodging recovery, citing expected lodging-supply growth below historical averages and rising corporate profits, while acknowledging economic and geopolitical uncertainty. It saw acquisition opportunities and expected to use operating cash, existing cash, credit availability, and future debt or equity financing to fund liquidity needs and growth. The filing provides no specific numerical earnings or RevPAR guidance.
- Risks identified include weaker economic or lodging conditions, competition, seasonality, travel disruptions and natural disasters, interest-rate changes, access to capital, acquisition execution, and the ability to fund renovations and other capital needs. The company noted that REIT distribution requirements limit retained earnings available for investment.
- A Goshen lender sued in February 2013 over amounts it claims RLJ owes as guarantor; RLJ disputes liability and is defending the claim. Management said it knew of no legal proceeding expected to have a material adverse effect on financial position, operations or liquidity.
- RLJ had no off-balance-sheet arrangements and reported no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2013.
Important facts for investors to verify
- How much reported earnings growth came from recurring hotel operations versus foreclosure and debt-extinguishment gains, and how acquisition-related growth affects comparisons.
- Whether comparable RevPAR gains and cost trends continue, particularly property taxes, labor, insurance and other hotel expenses.
- The timing and cost of planned hotel conversions and renovations, and their expected contribution to operating results.
- Debt maturities, covenant headroom, refinancing plans and sensitivity to variable interest rates; confirm the effect of hedges and the expected savings from the August refinancing.
- The status and potential exposure of the Goshen guaranty litigation, along with capital needs, liquidity and distributions following the share offering and acquisitions.