RLJ Lodging Trust — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are unaudited. RLJ owned 104 hotels with approximately 22,700 rooms in 23 states and the District of Columbia at year-end, compared with 151 hotels a year earlier. Its portfolio primarily comprises premium-branded focused-service and compact full-service hotels.
Financial and operating performance
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $1.566 billion | $1.761 billion |
| Net income | $129.4 million | $190.9 million |
| Net income attributable to common shareholders | $102.7 million; $0.59 per diluted share | $163.5 million; $0.93 per diluted share |
| FFO attributable to common shareholders and unitholders (non-GAAP) | $341.7 million | $377.3 million |
| Adjusted FFO (non-GAAP) | $350.3 million | $395.7 million |
| Adjusted EBITDA (non-GAAP) | $462.5 million | $522.1 million |
| Cash from operating activities | $397.3 million | $394.8 million |
| Cash and cash equivalents at year-end | $882.5 million | $320.1 million |
| Total debt, net | $2.196 billion | $2.203 billion |
| Common dividends declared per share | $1.32 | $1.32 |
Comparable hotels reported occupancy of 79.0% versus 78.6%, ADR of $182.96 versus $182.53, and RevPAR of $144.51 versus $143.55. The comparable-property RevPAR increase was 0.7%. Property operating expenses were $957.2 million, down 11.1% year over year; total property operating margin was approximately 38.8% of revenue, broadly stable from 2018 (derived from reported revenue and property operating expenses). Interest expense declined 10.2% to $91.3 million.
Fourth-quarter revenue was $347.1 million versus $399.9 million in Q4 2018. Net income attributable to common shareholders was $28.4 million, or $0.17 per diluted share, compared with $21.0 million, or $0.12 per diluted share, in the prior-year quarter.
Operating cash flow was nearly flat year over year and included a $35.0 million Wyndham termination payment. Investing activities provided $530.4 million, primarily from hotel sales, partly offset by $157.4 million of property improvements. Financing activities used $385.4 million, including distributions, share repurchases, and redemption of joint-venture preferred equity. Cash, cash equivalents, and restricted cash totaled $927.2 million at year-end, including $44.7 million restricted.
Material changes and significant transactions
- RLJ sold 47 hotels in 2019 for aggregate stated sales prices of approximately $721 million and recorded a net loss on hotel sales of $9.3 million. The portfolio contraction makes reported annual revenue comparisons less representative of continuing-property trends; 54 properties sold in 2018–2019 were identified as non-comparable.
- Revenue fell 11.1%, largely because of lower revenue from properties sold. Comparable-property room revenue increased $8.1 million, while comparable-property operating expenses increased $19.2 million, principally reflecting higher labor costs.
- The company recorded a $13.5 million impairment on two hotels because of adverse operating performance. No impairment was recorded in 2018.
- RLJ repurchased and retired approximately 4.6 million common shares for $77.8 million. It reported $182.5 million of remaining capacity under its 2019 program at year-end; a new authorization of up to $250 million was approved for March 2020–February 2021.
- In December, RLJ received $35.0 million from Wyndham to terminate management agreements and related income guarantees, and Wyndham forgave a $4.6 million key-money loan. Both amounts are to reduce management and franchise fee expense over the estimated term of transitional agreements beginning in 2020, rather than being fully recognized as 2019 income.
- RLJ refinanced approximately $381 million of secured debt and amended its credit facilities, improving covenants and pricing and extending a $400 million term loan to May 2025 and the $600 million revolving facility to May 2024, with a one-year extension option.
Debt, liquidity, outlook, and risks
Debt was approximately $2.2 billion at year-end. The $600 million revolving facility had no borrowings outstanding. Although approximately 71.4% of debt was variable-rate before considering hedges, RLJ reported that 99.9% of total indebtedness was fixed or effectively fixed after swaps. Management’s stated financing objective is to keep net debt-to-EBITDA at or below 4.0x. The filing lists significant scheduled principal maturities, including $490.4 million in 2022 and $625.0 million in 2023; refinancing and access to capital remain important.
Management described itself as cautiously optimistic about moderate U.S. economic expansion and positive lodging demand, but expected new supply to limit RevPAR growth. It cited labor-cost inflation and uncertainty in the global economy. The filing provides no quantified 2020 revenue, earnings, or RevPAR guidance.
Key risks include lodging-cycle and economic sensitivity, new hotel supply and alternative lodging competition, geographic concentration, labor-cost pressures, dependence on third-party hotel managers and major brand families, required renovations, debt refinancing and covenant compliance, and exposure to weather, natural disasters, disease outbreaks, cyber incidents, and environmental or regulatory claims. The company also disclosed LIBOR transition uncertainty, REIT qualification and distribution requirements, and ground-lease exposure. It reported compliance with debt covenants at December 31, 2019 and no material litigation other than a disputed pension-withdrawal indemnity matter related to FelCor; management planned to defend the claims.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Hotel-property impairment assessment was identified as a critical audit matter because it required significant judgment about projected cash flows, disposition plans, comparable sales, and valuation inputs.
Important facts for investors to verify
- Separate the impact of 47 hotel dispositions from underlying comparable-hotel trends; review property-level RevPAR and expense performance.
- Assess the debt maturity schedule, refinancing assumptions, available revolver capacity, and the effects of interest-rate hedges and LIBOR replacement.
- Confirm the timing and accounting for the Wyndham termination payment and loan forgiveness, including the expected 2020 expense reductions.
- Review the sustainability of distributions and buybacks against operating cash flow, capital needs, debt service, and REIT distribution requirements.
- Evaluate the impairment assumptions for the two affected hotels and the operating outlook for markets with weaker comparable RevPAR.