RLJ Lodging Trust — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless noted. Financial amounts are in U.S. dollars.
Business context
RLJ is a self-advised lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end, it owned 148 properties, including 147 hotels and one planned hotel conversion, with approximately 22,000 rooms in 21 states and Washington, D.C. Independent operators manage the properties.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $215.9 million | $183.2 million | +17.8% |
| Operating income | $25.5 million | $13.4 million | +90.8% |
| Net income (loss) | $8.6 million | $(6.9) million | +$15.5 million |
| Net income (loss) attributable to common shareholders | $8.5 million | $(6.5) million | +$15.0 million |
| Diluted EPS | $0.08 | $(0.06) | Turned profitable |
| Operating cash flow | $34.0 million | $10.5 million | +$23.6 million |
| FFO attributable to common shareholders | $39.9 million | $27.0 million | +47.7% |
| Adjusted FFO | $44.1 million | $28.5 million | +54.5% |
| Adjusted EBITDA | $61.3 million | $49.1 million | +24.8% |
Operating margin was approximately 11.8%, compared with 7.3% a year earlier; net margin was approximately 4.0%, versus a loss margin of 3.8%. These are calculated from reported revenue and operating or net income.
Portfolio occupancy was 70.4% versus 67.8%, average daily rate (ADR) was $135.59 versus $125.62, and portfolio RevPAR was $95.49 versus $85.11. Portfolio RevPAR rose 12.2%; comparable-property RevPAR rose 10.6%, driven by 3.6% higher occupancy and 6.8% higher ADR.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $347.0 million at March 31, up from $115.9 million at December 31, 2012. Restricted cash reserves were $64.0 million.
- Total debt was approximately $1.394 billion: $994.1 million of mortgage loans and $400.0 million of unsecured term loans. No revolver borrowings were outstanding; the facility provides up to $300 million, subject to its terms.
- Debt was approximately 45% variable-rate, with a weighted average rate of 2.68%. Management estimated that a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $5.6 million after hedges.
- Total liabilities were $1.517 billion; total equity was $2.121 billion. The company reported compliance with debt covenants and no off-balance-sheet arrangements.
- Net cash from financing was $285.3 million, principally reflecting $327.7 million in net proceeds from a March follow-on offering of 15.87 million shares, partly offset by debt repayments and distributions. Quarter-end common shares outstanding were 122.7 million, versus 106.6 million at year-end.
Material changes and unusual items
- Revenue increased $32.7 million. Management attributed $14.6 million to properties not comparable across periods and the remainder principally to 10.6% comparable-property RevPAR growth. The portfolio count rose to 148 properties from 141 at the prior-year quarter-end.
- Total operating expenses rose 12.1% to $190.4 million, including $9.9 million attributable to non-comparable properties. Transaction and pursuit costs were $1.1 million, compared with less than $0.1 million.
- Interest expense declined 15.6% to $17.0 million, primarily reflecting prior mortgage paydowns and expiration of unfavorable hedges, partly offset by interest on the term loans and revolver.
- Operating cash flow improved to $34.0 million. Investing cash outflow was $88.2 million, including $79.5 million for acquisitions and $11.4 million of property improvements.
- Three Houston-area acquisitions closed March 19 for a total purchase price of approximately $79.3 million: Courtyard Houston Downtown, Residence Inn Houston Downtown and Humble Tower Apartments. The latter is expected to be converted into a 166-room SpringHill Suites by mid-2015.
- The company declared a quarterly dividend of $0.205 per common share; it paid that amount on April 15 to shareholders of record March 28.
Outlook, risks and contingencies
- Management was cautiously optimistic about a multi-year lodging recovery and cited expected below-historical-average supply growth and rising corporate profits. It did not provide specific full-year earnings or revenue guidance.
- RLJ expected to begin renovations at 25 hotels during 2013, with estimated spending of $40 million to $45 million, mostly scheduled for the fourth quarter. Capital needs, acquisitions and distributions mean the company expects to rely on operating cash, existing cash, its revolver and future debt or equity capital.
- Management identified economic and lodging downturns, business-travel weakness, competition, seasonality, natural disasters, interest-rate changes, and access to financing and acquisition opportunities as risks. It expects lower revenue, operating income and cash flow in the first and fourth quarters than in the second and third quarters.
- Two troubled mortgage situations remain notable: a deed-in-lieu transfer for SpringHill Suites Southfield, Michigan, was expected to close in Q2 2013; and a receiver controlled Courtyard Goshen, Indiana. In February 2013, the Goshen lender sued RLJ over alleged guarantor obligations; RLJ disputed the claim and intended to defend itself.
- The filing reported no impairment in either comparison quarter and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective as of March 31, 2013.
Important facts for investors to verify
- Whether comparable-property RevPAR gains persist, and how much reported growth continues to depend on acquisitions and newly acquired properties.
- Progress and actual costs of the planned $40–$45 million hotel renovation program, as well as the Humble Tower conversion timeline and budget.
- Debt maturities, refinancing plans and sensitivity to higher rates, including the $142 million of variable debt shown due in 2014 and the larger 2015–2017 maturities.
- Resolution and financial exposure related to the Southfield deed-in-lieu and Goshen guaranty litigation.
- How the follow-on offering proceeds, increased share count and distributions affect per-share results, liquidity and future capital requirements.