RLJ Lodging Trust — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. RLJ is a hotel REIT focused primarily on premium-branded, focused-service and compact full-service properties. At quarter-end, it owned 128 hotels with approximately 25,600 rooms. Unless otherwise noted, amounts below are in millions.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total revenue | $448.7 | $484.7 | (7.4%) |
| Operating income | $88.2 | $89.1 | (1.0%) |
| Net income | $33.7 | $64.4 | (47.7%) |
| Net income attributable to common shareholders | $27.2 | $57.4 | (52.7%) |
| EPS, basic and diluted | $0.16 | $0.33 | Down $0.17 |
| FFO | $110.6 | $119.1 | (7.2%) |
| Adjusted EBITDA | $148.4 | $159.8 | (7.2%) |
Operating income margin was approximately 19.6%, compared with 18.4% in Q2 2018. For comparable hotels, occupancy was 82.4% versus 82.1%, ADR was $182.44 versus $181.77, and RevPAR increased 0.7% to $150.25. The company reported six-month revenue of $848.0 million, net income of $62.0 million, common-shareholder income of $48.1 million, and diluted EPS of $0.27.
For the six months ended June 30, operating cash flow was $193.2 million, versus $195.8 million a year earlier. Investing activities provided $359.0 million, chiefly from hotel-sale proceeds, while financing activities used $191.1 million. Cash, cash equivalents and restricted cash totaled $745.9 million at June 30; unrestricted cash was $697.6 million.
Net debt was $2.201 billion, compared with $2.203 billion at December 31, 2018. Debt included $503.0 million of 6.00% senior notes, $1.170 billion of revolver and term loans, and $527.8 million of mortgage loans. The $600 million revolver was undrawn, and the company reported compliance with debt covenants. Variable-rate debt totaled approximately $1.6 billion before hedges; after swaps, $149.3 million, or 6.8% of total debt, remained exposed to variable rates. A 100-basis-point increase in rates was estimated to reduce annual earnings and cash flow by approximately $1.5 million.
Material changes versus the prior comparable period
- Reported Q2 revenue fell 7.4%, primarily because of hotel dispositions. Management said comparable-property room revenue rose $2.5 million, while non-comparable properties reduced room revenue by $26.9 million. The portfolio had 128 hotels at June 30, 2019, compared with 156 a year earlier.
- Six-month comparable RevPAR increased 1.2% to $142.68, on a 1.3% increase in ADR, while occupancy was nearly flat at 78.8%.
- Comparable-property operating expenses rose 2.4% in Q2 and 2.7% for the first half. Management cited increased labor costs among the drivers.
- Q2 net income included a $24.8 million net loss on hotel sales and held-for-sale properties. This included a $48.1 million write-down of an 18-hotel portfolio, partly offset by gains on completed sales. Q2 2018 included a small net gain on sales.
- Six-month interest expense decreased 16.3% to $45.3 million, reflecting, among other factors, the 2018 redemption of senior secured notes, lower average revolver borrowings and 2019 refinancing transactions.
Outlook, management commentary, risks and unusual items
- Management described itself as cautiously optimistic about U.S. lodging demand, citing employment trends and consumer confidence, while noting moderating economic growth, geopolitical and trade uncertainty, and cost pressure in a tight labor market. The filing provides no specific earnings or operating guidance.
- RLJ sold 21 non-core hotels for approximately $311.9 million and two Myrtle Beach resort hotels for approximately $153.3 million in June. An 18-hotel sale was expected to close in August 2019; the properties were classified as held for sale at quarter-end.
- In July, RLJ signed a non-binding letter of intent with Wyndham to terminate management agreements and an NOI guarantee effective December 31, 2019. The proposed terms include a $35 million lump-sum payment and an additional $1 million if a U.S. recession occurs before December 31, 2022. A definitive agreement was still being finalized.
- Other notable items include redemption of $45.6 million of joint-venture preferred equity in February and $18.4 million of common-share repurchases in the first half. The quarterly common dividend was $0.33 per share; the Series A preferred dividend was $0.4875 per share.
- A legacy claim relates to an $8.3 million employee withdrawal-liability assessment involving a former FelCor hotel manager and the National Retirement Fund. RLJ said it plans to defend the claim; resolution may not occur until 2022. Management reported no other material litigation and no material changes to previously disclosed risk factors.
- Adoption of lease accounting guidance in January resulted in $147.0 million of lease right-of-use assets and $122.4 million of lease liabilities at June 30; management said adoption had no material effect on the statements of operations or cash flows.
Important facts for investors to verify
- Whether the 18-hotel portfolio sale closed as expected, its final proceeds and any additional impact beyond the $48.1 million write-down.
- Whether the proposed Wyndham termination became a definitive agreement, and the timing and conditions of the proposed payments.
- How comparable RevPAR and hotel-level costs, particularly labor costs, developed after the quarter.
- Debt maturities and refinancing plans, including the revolver’s April 2020 maturity, and the effect of interest-rate changes despite hedges.
- Developments in the $8.3 million withdrawal-liability claim and the company’s capacity to fund capital needs, debt service and distributions.