RLJ Lodging Trust — 2013 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. RLJ owned 147 operating hotels with approximately 22,300 rooms, plus two planned hotel conversions, across 22 states and Washington, D.C. Its portfolio focused on premium-branded, focused-service and compact full-service hotels. Nearly 96% of hotels were affiliated with Marriott, Hilton or Hyatt.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $970.4 million | $849.7 million |
| Operating income | $164.5 million | $127.1 million |
| Operating margin | Approximately 17.0% | Approximately 15.0% |
| Net income attributable to common shareholders | $112.9 million | $41.3 million |
| Basic earnings per share | $0.95 | $0.38 |
| Net cash provided by operating activities | $251.4 million | $176.1 million |
| FFO attributable to common shareholders | $232.8 million | $169.6 million |
| Adjusted FFO | $246.6 million | $185.6 million |
| EBITDA | $306.2 million | $253.6 million |
| Adjusted EBITDA | $311.1 million | $267.7 million |
Comparable-property occupancy was 74.3% (up 1.9 percentage points), ADR was $138.34 (up 4.3%) and RevPAR was $102.85 (up 7.1%). Portfolio RevPAR increased 9.0% to $105.58. The portfolio RevPAR penetration index was 113.2.
For fourth-quarter 2013, revenue was $242.6 million, net income attributable to common shareholders was $27.5 million and basic EPS was $0.23. Fourth-quarter 2012 figures were $221.4 million, $13.7 million and $0.11, respectively.
At year-end, cash and cash equivalents were $332.2 million, restricted cash reserves were $62.4 million, and total debt was $1.410 billion: $559.7 million of mortgage debt and $850.0 million of unsecured term loans. The $300 million revolving facility was undrawn. Operating cash flow less $61.1 million of hotel improvements and additions was approximately $190.3 million, before acquisitions, debt payments and distributions. The company paid $98.1 million in distributions to shareholders and unitholders during 2013 and declared $0.86 per common share, versus $0.70 in 2012.
Material changes versus the prior period
- Revenue rose 14.2%; management attributed $67.1 million of the increase to non-comparable properties and the balance principally to 7.1% comparable RevPAR growth.
- Operating income increased 29.5%, while interest expense declined 23.1% to $64.3 million, primarily following mortgage paydowns. Net income also benefited from a $4.9 million foreclosure gain and gains on property dispositions and debt extinguishments.
- Operating cash flow increased to $251.4 million from $176.1 million. Year-end cash increased to $332.2 million from $115.9 million, supported in part by a March share offering that generated approximately $327.5 million net.
- RLJ acquired six properties for an aggregate purchase price of approximately $212.7 million, repaid $577.4 million of mortgage debt and added $450 million in unsecured term loans and $150 million in secured financing. Ending total debt was $1.410 billion, slightly below $1.414 billion in 2012.
- Comparable RevPAR growth continued a multi-year improvement: 7.1% in 2013, following 6.9% in 2012.
Outlook, risks and unusual items
Management expressed cautious optimism about a multi-year lodging recovery, citing rising corporate profits and expected hotel-supply growth below historical averages. It said attractive acquisition opportunities remained available. The filing provides no quantified earnings or operating guidance. RLJ’s stated financing objective is to keep net debt-to-EBITDA at or below 5.0x and move toward more unsecured, fixed-rate or hedged debt.
- Debt and rates: Approximately 87% of debt was variable-rate before considering hedges; swaps and caps reduced the share exposed to variable rates to 30.8%. Management estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $4.6 million after hedging. The company reported compliance with debt covenants at year-end.
- Near-term maturities: $142 million of mortgage loans were scheduled to mature in October 2014, subject to extension options and lender requirements. Refinancing and access to capital remain important given ongoing capital needs and REIT distribution requirements.
- Concentration and operations: 106 hotels were managed by White Lodging Services; 135 hotels operated under Marriott or Hilton brands. Results are exposed to performance of those partners, local lodging conditions and business travel. New York, Chicago and Austin represented 15.8%, 10.9% and 10.2% of 2013 revenue, respectively.
- Transactions and conversions: Two acquired properties were being converted or renovated, with completion expected in late 2014 and mid-2015. In February 2014, RLJ agreed to acquire ten hotels for approximately $313 million, subject to closing conditions, and sold eleven properties for approximately $84.8 million.
- Unusual items and contingency: Results included gains from foreclosure, sale and extinguishment of debt; net income therefore rose faster than operating income. A lender continued to pursue a disputed guaranty claim related to the Courtyard Goshen foreclosure. Management stated that, apart from routine matters, it knew of no material litigation.
- Other risks: Hotel seasonality, renovation and brand-standard costs, competition, real-estate valuation and impairment estimates, severe weather and environmental liabilities could affect earnings, cash flow and property values. Management reported effective disclosure controls and internal control over financial reporting; the auditor expressed an unqualified opinion.
Important facts for investors to verify
- Comparable-property RevPAR and margin trends, separating same-property growth from acquisitions, closures and renovations.
- The 2014 mortgage maturities, available extensions, refinancing terms and covenant headroom.
- Actual variable-rate exposure after hedges, hedge costs and sensitivity to interest-rate changes.
- Closing and subsequent performance of the ten-hotel acquisition and eleven-property disposition announced after year-end, including their effects on leverage and portfolio comparability.
- The outcome of the disputed Goshen guaranty claim and the capital required to complete hotel conversions and brand-mandated improvements.