RLJ Lodging Trust — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; financial statements are unaudited. RLJ is a REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end, it owned 127 hotels with approximately 21,100 rooms.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $289.4 million | $297.7 million | $861.1 million | $829.1 million |
| Operating income | $53.4 million | $50.6 million | $159.9 million | $145.0 million |
| Net income attributable to common shareholders | $40.6 million | $36.8 million | $144.4 million | $101.6 million |
| Diluted earnings per share | $0.31 | $0.28 | $1.10 | $0.79 |
| FFO attributable to common shareholders | $79.9 million | $83.1 million | $236.3 million | $217.9 million |
| Adjusted FFO attributable to common shareholders | $84.6 million | $87.4 million | $249.9 million | $234.6 million |
| Cash provided by operating activities | — | — | $232.9 million | $224.1 million |
Q3 operating margin was approximately 18.4%, versus 17.0% a year earlier; net margin was approximately 14.1%, versus 12.4%. These ratios are calculated from reported operating income and net income attributable to common shareholders, respectively.
- Comparable hotel trends: Q3 occupancy was 80.7% (down 2.9%); ADR was $160.12 (up 3.8%); and RevPAR was $129.19 (up 0.8%). For the first nine months, occupancy was 79.6% (down 1.7%), ADR was $162.36 (up 4.8%), and RevPAR was $129.18 (up 3.0%).
- Cash and debt: Cash and cash equivalents were $140.5 million, down from $262.5 million at December 31, 2014; restricted cash reserves were $57.5 million. Debt comprised $1.175 billion of term loans and $407.4 million of mortgage loans, totaling approximately $1.582 billion. The $300 million revolver was undrawn, and the company reported covenant compliance.
- Cash uses and capital returns: Nine-month investing cash flow was a net use of $4.9 million, reflecting $232.9 million in net hotel sale proceeds, $143.8 million spent on acquisitions and $100.3 million on hotel improvements and additions. Financing cash flow was a net use of $350.0 million, including $199.9 million of share repurchases, $165.7 million of mortgage principal payments and approximately $129.5 million in distributions on common shares and OP units.
Material changes versus comparable periods
- Q3 revenue declined 2.8%, but comparable-property revenue rose $3.5 million as comparable RevPAR increased 0.8%. The total revenue decline reflected a $11.8 million decrease from non-comparable properties, including portfolio changes.
- Q3 common-shareholder net income increased 10.4%; the prior-year quarter included a $9.2 million impairment charge, while Q3 2015 had no impairment. Q3 FFO declined 3.9% and adjusted FFO declined 3.2% year over year.
- For the nine-month period, revenue increased 3.9%, common-shareholder net income increased 42.2%, FFO increased 8.5% and adjusted FFO increased 6.5%. Net income included a $23.8 million gain on hotel disposals, compared with a $1.0 million disposal loss in 2014.
- During the first nine months, RLJ acquired three hotels for $175.9 million and sold 22 hotels for approximately $238.5 million. It repurchased 6.99 million shares for approximately $199.9 million under its repurchase program.
- Total interest expense fell 6.5% for the nine months, as lower mortgage interest more than offset higher term-loan interest. At quarter-end, the company reported $1.549 billion of variable-rate debt before hedging; after swaps, $131 million, or 8.3% of total indebtedness, was exposed to variable rates.
Outlook, risks and unusual items
- Management described itself as cautiously optimistic about a positive multi-year lodging cycle, citing record lodging demand and hotel supply below historical averages. No quantified earnings or operating guidance was provided in the filing.
- Management expects short-term liquidity needs to be met through operating cash flow, cash balances and, if needed, the revolving facility. Longer-term capital needs may be funded through debt, equity, property mortgage financing, working capital and operating cash flow. Access to capital and the ability to fund acquisitions, renovations and other capital needs are identified as important uncertainties.
- Management noted risks from economic and lodging-market weakness, competition, seasonality, interest rates, financing access, natural disasters and other events that may affect travel. The company expects seasonally lower revenue, operating income and cash flow in the first and fourth quarters.
- Interest-rate swaps had a $32.3 million fair-value liability at September 30, compared with $13.6 million at year-end 2014. Approximately $17.5 million of accumulated hedge losses was expected to be reclassified into interest expense within 12 months. A 100-basis-point increase in rates was estimated to reduce future earnings and cash flows by approximately $1.1 million annually, after hedges.
- Two data breaches at a third-party hotel manager affected seven RLJ hotels in the first incident and six in the second. Potential fines, assessments and related costs could not be estimated with certainty; management believed any amounts ultimately payable would not be material.
- After quarter-end, RLJ sold a 221-room hotel for $14.1 million. On October 30, the board extended the repurchase program through December 31, 2016 and increased its authorization by $200 million, to $400 million total.
Important facts for investors to verify
- Whether comparable-property RevPAR growth and pricing gains can continue despite lower occupancy, and how portfolio acquisitions and dispositions affect reported revenue trends.
- Debt maturities and extensions, including approximately $224 million of debt shown as maturing in 2016, and continued compliance with loan covenants.
- Cash available for planned capital expenditures and distributions, given the sharp reduction in cash balances and the expanded share-repurchase authorization.
- The future effect of interest-rate changes, swap valuations and expected hedge-loss reclassifications on interest expense and cash flow.
- Any developments, costs or claims related to the hotel-manager data breaches; the filing states that the ultimate exposure was not yet estimable.