RLJ Lodging Trust — 2017 Form 10-K
Business context and reporting period
For the fiscal year ended December 31, 2017. RLJ is a self-advised REIT focused on premium-branded focused-service and compact full-service hotels. At year-end it owned 158 hotels with 30,972 rooms across 26 states and Washington, D.C.; approximately 96% of hotels operated under Marriott, Hilton, Hyatt, or Wyndham brands.
The August 31, 2017 FelCor merger added 37 hotels and was accounted for as an acquisition. RLJ sold The Fairmont Copley Plaza in December for $170 million. Consequently, reported year-over-year results include only four months of FelCor operations and are not directly comparable.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $1.356 billion | $1.160 billion |
| Operating income | $181.1 million | $220.4 million |
| Net income | $75.7 million | $201.3 million |
| Net income attributable to common shareholders | $66.5 million | $200.4 million |
| Diluted earnings per common share | $0.47 | $1.61 |
| FFO attributable to common shareholders and unitholders | $245.5 million | $317.7 million |
| Adjusted FFO | $339.1 million | $332.7 million |
| EBITDA | $382.2 million | $430.6 million |
| Adjusted EBITDA | $427.2 million | $392.4 million |
| Cash provided by operating activities | $260.6 million | $331.4 million |
| Debt, net of deferred financing costs | $2.880 billion | $1.583 billion |
| Cash and cash equivalents | $586.5 million | $456.7 million |
Revenue increased 16.9%, chiefly from the acquired hotels. For comparable hotels, room revenue fell $9.7 million and RevPAR declined 0.7%; occupancy was 77.8% versus 78.2%, and ADR was $166.10 versus $166.62. Portfolio RevPAR penetration index was 109.8.
Property operating expenses rose 21.5%, faster than revenue; property operating income before depreciation and amortization was approximately 40.1% of revenue, compared with 42.4% in 2016. Operating income decreased 17.8%. Net income attributable to common shareholders fell 66.8%, reflecting higher interest expense, merger costs, increased income tax expense, and lower gains on hotel sales. The $44.4 million of transaction costs included about $38.4 million related to the merger and $5.7 million of integration costs. A $31.7 million deferred tax charge resulted from remeasuring deferred tax assets after the corporate tax rate reduction.
Adjusted FFO increased modestly despite lower GAAP earnings, while FFO declined. These non-GAAP measures include adjustments and should be considered alongside GAAP results. Quarterly Q4 revenue was $462.5 million and net income was $7.4 million; net income attributable to common shareholders was $0.6 million, or less than $0.01 per share. The quarterly increase in revenue primarily reflects the merger and is not evidence of comparable-property growth.
Liquidity, debt, and capital allocation
Year-end cash and cash equivalents were $586.5 million, with an additional $72.6 million of restricted cash, principally for property reserves, taxes, and insurance. The $600 million revolving credit facility was undrawn and available. Operating cash flow was $260.6 million; capital improvements and additions were $103.0 million. Distributions to shareholders and unitholders totaled approximately $177 million in cash flows, and common distributions remained $1.32 per share for the year.
Debt was approximately $2.9 billion. After swaps, $277 million, or 9.8% of indebtedness, was exposed to variable rates; a 100-basis-point increase was estimated to reduce annual earnings and cash flows by about $2.8 million. RLJ reported compliance with debt covenants at year-end and targets net debt-to-EBITDA of 5.0x or below. Significant scheduled maturities included approximately $381.6 million of principal in 2018 and $628.8 million in 2019 as presented at year-end; in January 2018, two term loans totaling $625 million were extended to January 2023 and pricing was reduced. In February 2018 RLJ announced early redemption of approximately $553 million of secured notes, with redemption scheduled for March 9, 2018.
Outlook, risks, contingencies, and unusual items
- Management was cautiously optimistic that U.S. economic expansion and tax reform would support lodging demand, but expected moderate RevPAR growth given accelerating hotel supply. No specific earnings, revenue, or RevPAR guidance is provided in the filing text.
- Management identified lodging demand and supply, business travel, competition, labor and operating costs, interest rates, capital access, and local market conditions as key performance drivers. Revenue is concentrated in several metro areas, including Northern California, South Florida, New York City, Austin, Southern California, and Denver-Boulder.
- Merger integration and anticipated synergies remained execution risks; full integration was expected by late 2018, and savings could be delayed or fail to materialize. Merger-related transaction and integration costs totaled approximately $44.1 million in 2017.
- Interstate acquired 62 RLJ management agreements from WLS on January 24, 2018. RLJ then had 73 agreements with Interstate and nine with WLS; management agreements remain important because REIT rules require third-party hotel operators.
- The 2017 merger resulted in Section 382 limitations on use of acquired tax losses. The filing reports $333.4 million of RLJ TRS net operating losses and, separately, $237.9 million of FelCor TRS net operating losses, with utilization limitations. Tax attributes and their future realization require monitoring.
- RLJ accrued approximately $5.4 million for a disputed pension withdrawal-liability matter assumed from FelCor; resolution may not occur until 2022. Merger-related shareholder suits were dismissed without prejudice, and no such litigation remained outstanding at year-end.
- Other material exposures include refinancing and covenant risk, renovation and brand-standard capital needs, ground leases (17 consolidated and two unconsolidated hotel properties), environmental and weather-related losses, and REIT qualification and distribution requirements. Ten properties may face ownership-change property-tax reassessment, with potential expense increases not quantified.
Most important facts for investors to verify
- Separate comparable-hotel trends from merger-driven growth: comparable RevPAR declined 0.7%, while reported revenue rose 16.9%.
- Track integration costs, realized synergies, and operating performance of the 37 acquired FelCor hotels.
- Review debt maturities, the subsequent loan extensions and secured-note redemption, refinancing capacity, and progress toward management’s leverage target.
- Assess cash available after capital spending and required REIT distributions, as well as the sustainability of the $1.32 annual common distribution.
- Monitor lodging supply and demand, market-level performance, the tax-asset valuation and NOL limitations, and the pension liability and potential property-tax reassessments.