RLJ Lodging Trust — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020. Although the request references 2020 Q4, this filing reports full-year results; it does not provide a clear standalone fourth-quarter financial summary.
Business context
RLJ is a U.S. lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At year-end, it owned 103 hotels with approximately 22,675 rooms across 23 states and Washington, D.C.; about 87% of hotels operated under Marriott, Hilton or Hyatt brands. Most properties are leased to taxable REIT subsidiaries and operated by third-party managers.
Key financial and operating metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $473.1 million | $1,566.2 million |
| Net income (loss) | $(408.8) million | $129.4 million |
| Net income (loss) attributable to common shareholders | $(429.6) million; $(2.61) per share | $102.7 million; $0.59 per share |
| Operating cash flow | $(168.7) million | $397.3 million |
| Capital improvements and additions | $73.3 million | $157.4 million |
| Adjusted EBITDA | $(41.1) million | $462.5 million |
| Adjusted FFO | $(161.4) million | $350.3 million |
| Comparable-hotel occupancy | 33.8% | 79.1% |
| Comparable-hotel ADR | $142.41 | $183.18 |
| Comparable-hotel RevPAR | $48.13 | $144.80 |
Revenue fell 69.8%; comparable RevPAR declined 66.8%. At year-end, cash and cash equivalents were $899.8 million, with another $35.0 million in restricted cash reserves. Debt, net, was $2.588 billion, up from $2.196 billion. Interest expense rose 9.7% to $100.2 million. Management reported 81.3% of total indebtedness fixed or effectively fixed after swaps; excluding the $400 million Revolver balance, the proportion was 97%. A 100-basis-point increase on unhedged variable-rate debt was estimated to reduce annual earnings and cash flow by less than $5.8 million.
Material changes versus prior year
- COVID-19 drove a steep reduction in lodging demand, revenue and operating cash flow. Room revenue declined 69.8%; food and beverage revenue declined 77.2%.
- RLJ suspended operations at 57 hotels during the year. It had reopened 50 by year-end and two more after year-end; five remained closed at December 31, 2020. Seven of 103 hotels were reported closed at year-end.
- Common dividends were reduced from $0.33 per share each quarter in 2019 to $0.01 per quarter in 2020. Common distributions totaled $0.04 per share for the year. The Series A preferred dividend remained $1.95 per share annually.
- Debt increased primarily because RLJ drew $400 million on its $600 million Revolver. It also amended its Revolver and term loans to obtain covenant relief and liquidity protections.
- RLJ sold one hotel for approximately $4.9 million in 2020, versus 47 hotels sold for approximately $721 million in 2019. It recorded a $2.7 million gain on 2020 hotel sales, compared with a $9.3 million loss in 2019.
Outlook, risks and unusual items
- Outlook: Management provided no quantified earnings or operating guidance. It said the pandemic’s duration and financial effects could not be estimated, and that adverse effects could continue beyond containment and vaccine distribution. Management expected available liquidity to cover obligations for an extended period, subject to uncertain assumptions.
- Liquidity and covenants: Amendments waived quarterly financial covenant testing through Q4 2021, with modified thresholds thereafter. RLJ must maintain at least $125 million of liquidity. Restrictions include limits on repurchases, distributions, additional debt, investments and capital spending, and mandatory use of certain proceeds. The company cautioned it might not meet amended covenants once testing resumes.
- Debt and maturities: Scheduled principal payments shown for 2022, 2023 and 2024 were $490.4 million, $625.0 million and $581.0 million, respectively. Five mortgage loans were in cash-trap status for failing debt-service-coverage thresholds. The filing also reports an interest-coverage covenant issue under the Senior Notes that restricts FelCor LP from incurring additional debt.
- Unusual items: RLJ recorded a $59.3 million valuation allowance against deferred tax assets, contributing to $52.0 million of income tax expense. An unconsolidated joint venture impairment of $6.5 million followed the decision not to extend a ground lease; the property is expected to revert to the lessor on October 31, 2021. The company recognized $17.8 million of Wyndham termination payments as a reduction to management and franchise expense and incurred $8.7 million in severance costs.
- Other risks: Key exposures include recovery in business and leisure travel, hotel closures and operating costs, refinancing and covenant compliance, brand and third-party manager dependence, and interest-rate and ground-lease risks. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion and identified hotel-property impairment assessment as a critical audit matter.
Important facts for investors to verify
- Confirm the pace of hotel reopenings, current occupancy and RevPAR trends, and the status of the five hotels still closed at year-end.
- Review unrestricted cash separately from restricted reserves, Revolver availability, cash burn and the assumptions behind management’s liquidity assessment.
- Check the timing and terms of upcoming maturities, the status of mortgage cash traps, and covenant compliance as relief provisions expire.
- Assess whether the steep decline in hotel-property carrying values or future recovery assumptions could lead to impairment charges; 2020 had no consolidated hotel impairment, but the auditor highlighted this estimate as a critical audit matter.
- Verify the sustainability of common and preferred dividends given operating cash flow, debt restrictions, REIT distribution requirements and the common-dividend reduction.
- Reconcile the filing’s debt-rate disclosures: it reports 76.0% variable-rate debt before considering swaps and 81.3% fixed or effectively fixed after swaps.