RLJ Lodging Trust — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. RLJ is a lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 122 hotels with approximately 20,100 rooms across 21 states and Washington, D.C.
Financial and operating performance
- Revenue was $260.2 million, down 5.4% year over year. Room revenue fell 6.1% to $225.0 million; food and beverage revenue rose 0.5% to $26.7 million.
- Comparable-hotel occupancy was 74.4%, down from 75.0%; ADR was $166.82, up 0.1%; RevPAR was $124.12, down 0.6%. Louisville and Northern California were weak, partly offset by Washington, D.C. and Southern California gains.
- Operating income declined 10.9% to $36.7 million; operating margin was approximately 14.1%, versus 15.0% in Q1 2016. Net income was $21.8 million, down 14.1%; net income attributable to common shareholders was $21.8 million, or $0.17 per diluted share, versus $25.3 million, or $0.20.
- FFO attributable to common shareholders and OP unitholders was $60.5 million, down from $66.3 million; Adjusted FFO was $64.4 million, down from $70.8 million. Adjusted EBITDA was $79.0 million, down from $86.0 million. These are non-GAAP measures.
- Operating cash flow was $49.9 million, versus $55.2 million. Capital improvements used $18.5 million; investing cash outflow was $12.9 million. Financing cash outflow was $42.7 million, chiefly distributions of $41.3 million. Cash and equivalents ended at $451.0 million; restricted cash reserves were $61.5 million.
- Debt, net, was $1.58 billion, little changed from year-end 2016. The company had no revolver borrowings and $400 million of available capacity; it reported compliance with debt covenants. Total liabilities were $1.77 billion.
Changes versus the prior comparable period
Total revenue declined $14.9 million. Management attributed $10.6 million of the room-revenue decrease to non-comparable properties, including dispositions, and $3.9 million to comparable properties. Comparable RevPAR decreased 0.6%. Property operating expenses fell 4.5%, partly reflecting the smaller portfolio, while comparable-property operating expenses increased modestly. Interest expense declined 3.8%, primarily due to lower borrowing costs following 2016 refinancing and mortgage principal payments. Transaction and pursuit costs rose to $0.6 million from $0.1 million.
Outlook, risks, and unusual items
- Management was cautiously optimistic about U.S. lodging demand and another year of industry RevPAR growth, but expected growth to be moderate amid accelerating supply. It emphasized disciplined capital allocation and cited cash, revolver availability and access to capital as funding sources. No numerical earnings guidance was provided.
- Interest-rate exposure remained material: approximately $142 million of debt was variable-rate after swaps. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by about $1.4 million. The company stated derivatives were used for hedging, not speculation.
- On April 23, 2017, RLJ agreed to acquire FelCor in an all-stock merger. FelCor common shares would convert into 0.362 RLJ common shares each; closing was expected by year-end 2017, subject to approvals and other conditions. RLJ disclosed execution, integration, dilution, leverage, dividend and termination-fee risks, including possible fees of $95 million and/or expense reimbursement of $20 million under specified circumstances.
- The company reported no material litigation, no asset impairment in either comparison period, and no off-balance-sheet arrangements. It extended its share repurchase authorization through February 28, 2018 and increased the authorized total to $440 million; no program repurchases occurred in Q1 2017.
Important facts for investors to verify
- Whether FelCor merger approvals and closing conditions are satisfied, and the final financing, integration costs and impact on leverage and dividends.
- Whether comparable RevPAR and hotel-level performance recover, particularly in weaker markets, and how supply growth affects pricing and occupancy.
- Debt maturities, refinancing terms, covenant headroom and sensitivity to interest rates despite the existing hedges.
- Cash generation after distributions and recurring hotel capital spending, and the distinction between GAAP results and non-GAAP FFO/EBITDA measures.