RLJ Lodging Trust — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. RLJ is a lodging REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 124 hotels with approximately 20,400 rooms, two planned hotel conversions, and an interest in a hotel mortgage loan.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $270.4 million | $236.4 million |
| Operating income | $39.2 million | $29.0 million |
| Net income | $48.1 million | $12.0 million |
| Net income attributable to common shareholders | $47.9 million; $0.36 per diluted share | $11.9 million; $0.10 per diluted share |
| Operating cash flow | $44.1 million | $31.6 million |
| Adjusted EBITDA | $81.1 million | $67.4 million |
| Adjusted FFO | $67.3 million | $53.5 million |
Revenue rose 14.4%; operating income rose 34.8%. Comparable-property RevPAR increased 4.4% to $117.91, driven by a 5.1% increase in ADR to $156.81, partly offset by occupancy declining 0.7% to 75.2%. Reported net income included a $22.3 million gain on hotel sales; the gain materially boosted the year-over-year comparison. Operating margin was approximately 14.5% of revenue, versus 12.3% a year earlier.
Cash and cash equivalents were $339.8 million at quarter-end, up from $262.5 million at December 31, 2014; restricted cash reserves were $56.8 million. Total debt was approximately $1.43 billion, comprising $1.025 billion of term loans and $403.3 million of mortgage loans. The company had no revolver borrowings and $300 million of revolver capacity, plus $150 million available under an undrawn term loan. It reported compliance with debt covenants. Shareholders’ equity was $2.36 billion.
Investing cash flow was $204.3 million, primarily reflecting $225.6 million of net proceeds from hotel sales; financing cash flow was a $171.1 million outflow, including $129.4 million of mortgage principal payments and $39.9 million of distributions on common shares and OP units. The company spent $27.5 million on hotel improvements and additions. Distributions declared were $0.33 per share, a 10% increase from the prior quarter.
Material changes and unusual items
- In February 2015, RLJ sold 20 hotels in a single transaction for approximately $230.3 million and recorded a $22.3 million gain. The portfolio comprised 2,461 rooms.
- No hotels were acquired in Q1 2015. The prior-year quarter included acquisitions of ten hotels for $312.5 million, limiting comparability; management said non-comparable properties contributed $23.1 million of the year-over-year revenue increase.
- Mortgage debt declined from $532.7 million at year-end to $403.3 million at March 31. The filing says certain loans were repaid in April 2015; it also says the company was evaluating repayment options for a remaining loan maturing in September 2015.
- Interest-rate swap liabilities increased to $23.0 million from $13.6 million, producing a $9.4 million unrealized loss in other comprehensive income. After swaps, $249 million, or 17.4% of total debt, was exposed to variable rates; a 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by approximately $1.8 million.
- Two redevelopment projects were underway. RLJ incurred $8.6 million during the quarter and $29.5 million cumulatively, expected another $10–$12 million of costs, and anticipated completion in mid-2015.
Outlook, risks and contingencies
Management described itself as cautiously optimistic about a positive multi-year lodging cycle, citing strong U.S. lodging demand and hotel supply below historical averages. It expected acquisition opportunities to remain available, but provided no specific earnings or operating guidance in the supplied filing text. Management noted that quarterly results are seasonal, typically with lower revenue, operating income and cash flow in the first and fourth quarters.
Key risks include economic and lodging-market weakness, competition, travel disruptions, interest-rate changes, access to debt or equity capital, and the funding needs of renovations and acquisitions. Management noted that the REIT distribution requirement limits retained cash available for investment and capital spending. A third-party manager reported a second potential data breach in Q1 2015, affecting six RLJ-owned hotels; the company could not estimate potential claims, fines or related costs, though it believed amounts ultimately payable would not be material. The filing reported no material litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Subsequent to quarter-end, the board authorized a share repurchase program of up to $200 million on May 1, 2015. Shareholders also approved an amended equity incentive plan increasing the available share pool by 2.5 million shares.
Investor verification points
- Separate underlying hotel operating performance from the $22.3 million disposal gain when assessing earnings growth.
- Review comparable-property RevPAR, ADR and occupancy trends, and account for the portfolio changes that affect year-over-year comparisons.
- Confirm the April mortgage repayments, the status of the September 2015 maturity and the company’s post-quarter debt and liquidity position.
- Track redevelopment spending and completion, and whether capital needs affect distributions or planned investments.
- Monitor potential costs or claims associated with the reported data breaches, as the ultimate exposure was not yet estimable.
- Assess execution and funding of the $200 million repurchase authorization alongside the company’s debt, capital expenditure and acquisition plans.