RLJ Lodging Trust — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited consolidated results. RLJ is a hotel REIT focused on premium-branded, focused-service and compact full-service properties. At quarter-end, it owned 125 hotels with approximately 20,800 rooms, plus an interest in a hotel-secured mortgage loan.
Financial and operating performance
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the corresponding 2015 period.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $317.1 (+5.3%) | $301.3 | $592.3 (+3.6%) | $571.7 |
| Operating income | $75.9 | $67.3 | $117.1 | $106.5 |
| Net income | $58.7 | $56.4 | $84.1 | $104.5 |
| Net income attributable to common shareholders | $58.4 | $56.0 | $83.7 | $103.8 |
| Diluted EPS | $0.47 | $0.42 | $0.67 | $0.78 |
| Operating cash flow | Not presented separately | Not presented separately | $164.2 | $145.9 |
| Capital improvements and additions | Not presented separately | Not presented separately | $41.3 | $64.7 |
Q2 operating margin was approximately 23.9%, compared with 22.4%; first-half operating margin was approximately 19.8%, compared with 18.6%. The company reported Q2 comparable-hotel occupancy of 83.2% (up 0.2 percentage points), ADR of $174.30 (up 1.7%) and RevPAR of $145.03 (up 2.0%). For the first half, comparable occupancy was 79.5% (flat), ADR was $169.96 (up 1.8%) and RevPAR was $135.09 (up 1.8%). Comparable properties numbered 120.
Q2 FFO attributable to common shareholders and unitholders was $99.5 million, versus $93.4 million; Adjusted FFO was $102.1 million, versus $98.1 million. First-half FFO was $165.8 million, versus $156.5 million; Adjusted FFO was $172.9 million, versus $165.3 million. These are non-GAAP measures defined by the company and are not substitutes for GAAP results.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $160.1 million, compared with $134.2 million at December 31, 2015. Restricted cash reserves were $61.3 million, compared with $55.5 million; these funds are earmarked principally for property capital expenditures, taxes and insurance.
- Debt carrying values were $414.8 million of mortgage loans and $1,168.4 million of term loans and revolver, net of financing costs. Gross principal debt was approximately $1.592 billion. The $400 million revolver was undrawn, with $400 million of borrowing capacity available.
- First-half financing cash outflow was $93.6 million, including $82.8 million of shareholder and OP-unit distributions, $13.3 million of share repurchases and $5.3 million of deferred financing costs. Cash increased $25.9 million during the half-year.
- Interest expense rose 19.9% in Q2 to $14.8 million and 14.9% for the half-year to $29.7 million. Management attributed the increase principally to term-loan/revolver interest, new swaps, refinancing costs and the absence of capitalized interest recorded in 2015.
- Approximately $1.6 billion, or 97.9% of total indebtedness, was variable-rate debt before the effect of swaps; after hedging, $142 million, or 8.9% of indebtedness, remained subject to variable rates. A 100-basis-point increase was estimated to reduce annual earnings and cash flow by approximately $1.4 million, assuming existing hedges.
Changes, outlook and other material items
- Reported revenue increased in both comparison periods. Q2 comparable-hotel RevPAR growth was 2.0%; management attributed room-revenue growth to both comparable and non-comparable hotels. Results are not fully comparable because of acquisitions, dispositions and renovation closures. First-half 2015 included a $23.0 million gain from selling 21 hotels; first-half 2016 included a $0.2 million loss on the sale of one hotel. This helps explain why first-half net income and EPS declined despite higher operating income.
- Management said it was cautiously optimistic about moderate U.S. economic growth and modest RevPAR growth in upcoming quarters, while noting global growth uncertainty, a strong dollar, market-specific new supply and fewer acquisition opportunities meeting its investment criteria. No numerical earnings or RevPAR guidance was provided in the supplied filing text.
- During the first half, the company refinanced secured loans and amended its credit agreements, extending or modifying maturities, improving pricing and covenants, and increasing revolver capacity to $400 million. It reported compliance with debt covenants at June 30.
- The company repurchased 610,607 shares for approximately $13.3 million during the first half; $161.5 million remained under its share repurchase program. It declared a $0.33-per-share cash dividend for each of Q1 and Q2.
- The President and CEO resigned in May 2016. Related forfeitures of equity awards reduced compensation expense; the filing also reports a letter agreement with Thomas J. Baltimore, Jr. The effect of the leadership transition on future operations is not quantified.
- Interest-rate swap fair-value liabilities were $42.2 million at June 30, compared with $17.1 million net liabilities at year-end 2015. The first-half unrealized derivative loss was $25.6 million, recorded in other comprehensive loss; approximately $15.7 million of accumulated net unrealized losses was expected to be reclassified to interest expense within 12 months.
- Management reported no material litigation, no off-balance-sheet arrangements, no material change in previously disclosed risk factors, and effective disclosure controls. The filing identifies lodging-demand and economic conditions, business travel, competition, interest rates, capital access, acquisition execution, seasonality, and natural disasters or other events affecting travel as risks.
Important facts for investors to verify
- Whether comparable RevPAR growth and the regional weakness in Houston and Chicago persist; Q2 comparable RevPAR fell 10.5% in Houston and 7.0% in Chicago.
- How much reported growth depends on non-comparable properties, and the continuing effects of prior acquisitions, dispositions and renovation closures.
- Debt maturity, covenant and refinancing terms, available revolver capacity, and the impact of interest rates as swaps expire or are reclassified into interest expense.
- The sustainability of operating cash flow alongside distributions, capital spending and share repurchases, including the company’s plans for the remaining buyback authorization.
- The earnings effect of the CEO transition, property-level operating costs, and the first-half tax expense associated with using net operating loss carryforwards.