RLJ Lodging Trust — Q1 2019 10-Q Summary
Business context and reporting period
For the three months ended March 31, 2019, RLJ Lodging Trust operated 151 hotels with approximately 28,800 rooms across 25 states and Washington, D.C. The REIT focuses primarily on premium-branded, focused-service and compact full-service hotels. Results are compared with Q1 2018; the company had 151 hotels at quarter-end versus 156 a year earlier, and seven dispositions made some property results non-comparable.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $399.3 million | $429.6 million |
| Net income | $28.3 million | $23.9 million |
| Net income attributable to common shareholders | $21.0 million; $0.12 per diluted share | $17.4 million; $0.10 per diluted share |
| Operating cash flow | $75.0 million | $51.0 million |
| Adjusted EBITDA | $111.5 million | $115.8 million |
| Adjusted FFO | $82.6 million | $81.5 million |
- Revenue declined 7.1%, with decreases in room, food and beverage, and other revenue. Comparable-property RevPAR rose 1.3% to $131.19: ADR increased 2.0% to $175.32 while occupancy decreased 0.5 percentage points to 74.8%.
- Property operating expenses fell 8.6% overall, largely reflecting dispositions. At comparable properties, expenses increased 2.8%, primarily due to higher labor costs; management also cited wage and benefit inflation as a risk to results.
- Interest expense decreased 30.1% to $20.1 million, principally reflecting prior debt repayments and a $2.3 million hedge gain reclassified to interest expense. Q1 2018 included a $7.7 million gain on extinguishment of debt and a $3.7 million net loss on hotel sales; neither item recurred in Q1 2019.
- Net cash used in investing activities was $44.1 million, including $43.4 million of hotel improvements. Net cash used in financing activities was $120.1 million. Cash, cash equivalents and restricted cash totaled $295.7 million at quarter-end, comprising $241.5 million cash and $54.2 million restricted cash.
Debt, liquidity and capital allocation
- Debt, net was $2.20 billion at March 31, 2019. The balance included $504.1 million of senior notes, $1.31 billion of revolver and term loans, and $386.4 million of mortgage loans, net.
- At quarter-end, $460 million was available on the $600 million revolving facility. The company reported compliance with its debt covenants. It stated that 71.3% of indebtedness was variable-rate before the effect of swaps; after swaps, $142.5 million, or 6.6% of total indebtedness, was exposed to variable rates. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by about $1.4 million.
- After quarter-end, the company entered into $200 million and $96 million mortgage loans, using proceeds to repay the $140 million revolver balance and a $150 million mortgage. It also refinanced an $85 million mortgage, extending its maturity to April 2026, subject to extension options.
- The company repurchased 602,309 common shares for approximately $10.6 million during the quarter; $249.8 million remained under the new $250 million repurchase authorization. It declared a $0.33 common-share dividend and a $0.4875 Series A preferred-share dividend for the quarter.
Outlook, risks and unusual items
- Management was cautiously optimistic about U.S. lodging demand, citing employment, consumer confidence and corporate sentiment, but expected industry RevPAR growth to be moderate amid accelerating hotel supply and signs of slower economic growth. The filing provides no quantified earnings or operating guidance.
- Disclosed risks include economic and lodging-industry weakness, competition, labor-cost increases, interest-rate changes and access to financing, seasonality, natural disasters, and events that disrupt travel. Management cautioned that forward-looking statements are uncertain.
- In February, the company redeemed $45.6 million of preferred equity in a consolidated joint venture. Q1 cash flows also reflected $139.5 million of mortgage repayment, $45.6 million preferred-equity redemption, and approximately $63.9 million of shareholder and unitholder distributions.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of $150.8 million of right-of-use assets and $124.7 million of lease liabilities at adoption, with no reported impact on the income statement or cash flows. Quarter-end lease liabilities were $124.1 million.
- A legacy pension withdrawal-liability dispute involves an $8.3 million assessment against a former hotel manager and a possible company indemnification obligation. Management said resolution may not occur until 2022 and intends to defend the claims. The filing identifies no other litigation it believes would materially adversely affect the company.
Important facts for investors to verify
- How much of the reported revenue decline reflects hotel dispositions versus underlying comparable-property trends, and whether moderate RevPAR growth assumptions are being met.
- Whether labor and other comparable-property cost increases continue to outpace revenue growth, and the resulting effect on property-level margins.
- Current debt maturities, borrowing capacity, interest-rate exposure after hedging, and the terms and impact of the April 2019 refinancing transactions.
- Cash available for operations and capital spending after restricted reserves, dividends, repurchases, and planned hotel improvements.
- The status and potential financial exposure of the pension withdrawal-liability and indemnification dispute.