RLJ Lodging Trust — Q3 2022 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2022. RLJ is a lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end, it owned 97 hotels with approximately 21,400 rooms across 23 states and Washington, D.C.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $318.1 million | $233.8 million | $891.5 million | $547.6 million |
| Net income (loss) | $17.7 million | $(151.8) million | $35.4 million | $(283.2) million |
| Net income (loss) attributable to common shareholders | $11.3 million | $(154.3) million | $16.5 million | $(296.3) million |
| Basic EPS | $0.07 | $(0.94) | $0.10 | $(1.81) |
| Adjusted EBITDA (non-GAAP) | $92.0 million | $60.1 million | $257.5 million | $107.3 million |
| Cash from operations | — | $203.7 million | $20.2 million |
Q3 comparable-property occupancy was 72.8%, ADR was $186.97, and RevPAR was $136.09, versus 63.9%, $160.17, and $102.36, respectively, in Q3 2021. Despite improvement, Q3 2022 RevPAR remained below Q3 2019’s $144.13. For the nine-month period, comparable RevPAR was $129.94 versus $80.75 in 2021 and $148.86 in 2019.
Q3 property operating expenses were $199.2 million against $318.1 million of revenue. Total operating expenses were $279.2 million; the filing does not present a single GAAP operating-margin measure. Interest expense was $22.6 million in Q3 and $71.0 million year to date.
At September 30, 2022, cash and cash equivalents were $488.1 million and restricted cash reserves were $51.5 million. Total debt, net, was $2.213 billion, down from $2.409 billion at December 31, 2021. Total liabilities were $2.528 billion and total equity was $2.439 billion.
Material changes and notable items
- Q3 revenue rose $84.3 million year over year, led by room revenue growth of $67.3 million. Management attributed the increase mainly to higher demand and ADR; food and beverage revenue also benefited from more group business and reopened outlets.
- Q3 net income improved by $169.5 million from the prior-year loss. A major comparison factor was the $138.9 million impairment charge recorded in Q3 2021 for the DoubleTree Metropolitan New York City, sold in December 2021; there was no impairment charge in 2022.
- Q3 interest expense fell $4.3 million year over year, which management attributed to lower average debt balances and lower effective rates. Year-to-date other income included reclassification of gains and losses on discontinued cash-flow hedges.
- Operating cash flow increased to $203.7 million for the first nine months. Investing activities used $97.8 million, including $86.6 million of hotel improvements and the $59.2 million net acquisition cost of the 21c Hotel Nashville; hotel-sale proceeds were $48.1 million. Financing activities used $280.1 million, including repayment of the $200 million revolver balance and $50 million of share repurchases.
- RLJ sold two hotels for approximately $49.9 million and acquired the 124-room 21c Hotel Nashville for a stated purchase price of $59.0 million during the first nine months.
Liquidity, debt, risks and outlook
- At quarter-end, the $600 million revolving credit facility was undrawn. The company reported $600 million of remaining revolver capacity and compliance with its debt covenants. In August, it exited the Leverage Relief Period; covenant testing and the original leverage-based pricing grid resumed, and the minimum-liquidity covenant and share-repurchase limitations were eliminated.
- Near-term maturities were significant: term loans included maturities in January and June 2023, and a $200 million mortgage loan matured in April 2023. Subsequent to quarter-end, RLJ extended approximately $224.7 million of term-loan principal to January 2024 and, in November, amended a term loan to increase it up to $200 million and extend maturity to January 2026.
- Approximately 53.9% of indebtedness was variable-rate before considering swaps; management said 98.9% of total debt was fixed or effectively fixed after hedging. Its stated sensitivity was that a 100-basis-point increase on variable-rate debt not covered by swaps would reduce annual earnings and cash flows by about $0.2 million.
- One mortgage loan was in a cash-trap event at September 30, 2022; approximately $20.4 million was held by lenders due to cash traps. A DSCR covenant for one mortgage loan had been waived through December 31, 2022.
- Management identifies business travel as a key demand driver, making results exposed to macroeconomic conditions affecting business travel. Other disclosed sensitivities include operating costs, insurance premiums, ground rent and interest rates. No quantitative operating or earnings guidance is provided in this filing.
- There were no material litigation matters identified by management and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Progress toward refinancing or repaying 2023 debt maturities, and terms and availability of extensions or amended facilities.
- Hotel demand and RevPAR recovery relative to 2019, particularly business-travel trends and any seasonal or market-specific weakness.
- Whether higher hotel revenues are translating into sustained operating cash flow after labor, franchise, insurance and capital expenditure costs.
- Liquidity available for renovations and other capital needs, including the use and restrictions on cash reserves and lender-controlled cash.
- Effects of ongoing share repurchases and common and preferred distributions on cash balances and per-share results.