Business context and reporting period
RLJ Lodging Trust’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The Maryland REIT completed its IPO and predecessor formation transactions on May 16, 2011; therefore, 2011 results combine predecessor and company activity, while prior-year results reflect the predecessor. Comparisons are affected by portfolio growth and are not fully like-for-like. At quarter-end, RLJ owned interests in 141 hotels with 20,924 rooms across 19 states and Washington, D.C.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $211.5 million | $139.4 million | $385.8 million | $254.9 million |
| Operating income | $25.6 million | $16.5 million | $35.0 million | $19.2 million |
| Loss from continuing operations | $(2.5) million | $(7.0) million | $(18.7) million | $(26.1) million |
| Net income (loss) | $(2.5) million | $14.7 million | $(18.7) million | $(3.6) million |
| Operating margin | 12.1% | 11.8% | 9.1% | 7.5% |
| Operating cash flow | Not separately provided for the quarter | $52.6 million | $24.6 million |
For the six months, investing activities used $245.9 million and financing activities provided $288.4 million. Cash and cash equivalents rose to $362.6 million from $267.5 million at December 31, 2010; restricted cash reserves were $95.3 million.
At June 30, mortgage loans were $1.264 billion and the term loan was $140 million, for total debt of approximately $1.404 billion, down from $1.747 billion in mortgage loans at year-end 2010. The $300 million unsecured revolver had no borrowings outstanding. Variable-rate debt was $614 million, or 43.7% of indebtedness, with a 5.17% weighted-average rate. Management estimated that a 100-basis-point rate increase would reduce annual earnings and cash flows by about $1.6 million after hedging.
For supplemental, non-GAAP measures, Q2 FFO was $29.0 million and Adjusted FFO was $45.4 million; six-month FFO was $45.5 million and Adjusted FFO was $65.4 million. Adjusted EBITDA was $69.5 million for Q2 and $115.6 million for the six months. These measures include specified adjustments and should not be viewed as substitutes for GAAP results.
Material changes versus the prior comparable period
- Revenue increased 51.7% in Q2 and 51.4% for the six months. Acquisitions accounted for $62.3 million and $112.5 million of the respective increases; same-property RevPAR rose 8.1% in Q2 and 8.2% for the six months.
- For the 117 hotels held throughout both comparison periods, Q2 RevPAR grew 8.1%, supported by 3.4% occupancy growth and 4.5% higher average daily rate (ADR). Across the reported portfolio, RevPAR was up 19.7% in both Q2 and the six-month comparison, reflecting additions as well as operating gains.
- Q2 loss from continuing operations narrowed by $4.5 million, despite $10.2 million of IPO-related costs and higher interest expense. The six-month continuing-operations loss also narrowed, but reported net loss increased because 2010 included $22.5 million of discontinued-operations income, including a $23.7 million hotel-sale gain.
- RLJ acquired nine hotels for approximately $204.6 million in the first half; no hotel acquisitions were completed in Q2. IPO and overallotment proceeds supported repayment of approximately $472.6 million of secured debt, while the company also entered into a $140 million term loan.
Outlook, commentary, risks and unusual items
- Management cited improving lodging fundamentals and potential for additional acquisitions and RevPAR and EBITDA growth, but provided no quantified earnings or operating guidance in the supplied filing text.
- RLJ released a 2011 renovation program totaling $115 million across 51 properties, focused largely on upgrades or repositioning at 24 hotels acquired in 2010–2011, including seven brand conversions. Restricted reserves for capital expenditures, taxes and insurance totaled approximately $93.5 million; $55.7 million was identified as FF&E reserves.
- The $140 million term loan originally matured September 30, 2011, with two six-month extension options subject to conditions. Management said it was evaluating refinancing or extension options. The company reported compliance with applicable financial covenants at June 30.
- The New York LaGuardia Airport Marriott mortgage was in default and had matured in July 2010. RLJ transferred the hotel to lenders on August 5, 2011 under a deed-in-lieu arrangement and expected to record an approximately $23 million gain from debt forgiveness in Q3.
- Risks cited include economic and lodging-industry weakness, seasonality, competition, acquisition execution, access to capital, interest rates, and the ability to fund renovations and distributions. Management also discussed uncertainty following the U.S. debt-ceiling legislation and credit-rating downgrade. Inflation-related operating-cost increases could be difficult to offset if competition limits room-rate increases.
- The filing reports no material litigation, no off-balance-sheet arrangements, and effective disclosure controls as of June 30. RLJ intended to qualify as a REIT beginning with the portion of its 2011 taxable year ending December 31, subject to meeting applicable requirements.
Important facts for investors to verify
- How much reported growth reflects same-property performance versus hotel acquisitions, and how the new portfolio performs after integration and renovations.
- The term-loan refinancing or extension outcome, debt maturities and covenant headroom, including the effect of the LaGuardia transfer on debt and cash flows.
- Whether the $115 million renovation program remains on budget and schedule, and its expected impact on hotel availability and operating results.
- Liquidity available for capital needs after restricted reserves, distributions, and planned investment; the filing does not provide a classified current-liability breakdown or a formal liquidity forecast.
- Progress toward REIT qualification and the effect of nonrecurring IPO and formation costs on recurring performance measures.