RLJ Lodging Trust — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited; amounts below are in U.S. dollars. The company is a hotel REIT focused on premium-branded, focused-service and compact full-service properties. At quarter-end it owned 150 properties, including 148 hotels with approximately 23,300 rooms and two planned conversions.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $297.7 million | $252.1 million | $829.1 million | $727.8 million |
| Operating income | $50.6 million | $45.2 million | $145.0 million | $126.1 million |
| Net income attributable to common shareholders | $36.8 million | $36.5 million | $101.6 million | $85.5 million |
| Diluted earnings per share | $0.28 | $0.30 | $0.79 | $0.72 |
| Net cash provided by operating activities | — | — | $224.1 million | $185.2 million |
- Revenue rose 18.1% in Q3 and 13.9% for the nine-month period. Comparable-property RevPAR increased 9.4% in Q3 and 7.3% year to date. Q3 comparable occupancy was 82.6% versus 78.4%; ADR was $145.97 versus $140.45.
- Q3 operating income increased 11.9%, slower than revenue growth; operating margin was approximately 17.0% versus 17.9%. The nine-month operating margin was approximately 17.5% versus 17.3%.
- Q3 diluted EPS declined despite higher net income, alongside an increase in weighted-average diluted shares to 132.4 million from 122.8 million. For nine months, diluted EPS increased to $0.79 from $0.72.
- Adjusted FFO was $87.4 million for Q3 versus $65.1 million, and $234.6 million for nine months versus $183.9 million. These are non-GAAP measures and include company-defined adjustments.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $274.4 million, down from $332.2 million at year-end 2013; restricted cash reserves were $59.5 million. Total assets were $4.13 billion and total equity was $2.39 billion.
- Debt comprised $1.025 billion of term loans and $533.3 million of mortgage loans, or approximately $1.56 billion total. The $300 million revolving facility had no outstanding balance at quarter-end. The company reported covenant compliance.
- Approximately $1.391 billion, or 89.3% of total indebtedness, was variable-rate debt. Management estimated a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $3.1 million after hedges.
- Nine-month investing cash outflow was $569.4 million, including $631.6 million of hotel acquisitions and $71.0 million of improvements and additions, partly offset by $124.1 million of property-sale proceeds. Financing cash inflow was $287.5 million, including $232.8 million net proceeds from a common-share offering. Cash decreased by $57.8 million over the period.
- The company declared a quarterly dividend of $0.30 per share, paid October 15, 2014.
Material changes and significant items
- The company acquired 15 properties for a total purchase price of approximately $632.0 million and sold 14 hotels for approximately $128.0 million during the first nine months. Acquisitions added $68.0 million of revenue from acquisition dates through September 30; the filing cautions that portfolio changes limit year-over-year comparability.
- Three hotels were impaired by $9.2 million after management concluded their carrying values were not recoverable in light of expected sales before the end of their estimated useful lives. The company also recorded a $1.0 million loss on hotel disposals and $0.8 million of mortgage defeasance cost.
- In Q3 2013, results included a $4.8 million gain on foreclosure and $3.2 million of discontinued-operations income. The company adopted revised discontinued-operations guidance in 2014, affecting presentation and comparison of disposed properties.
- On October 17, 2014, after quarter-end, the company refinanced five mortgage loans totaling $142 million with four loans totaling $143 million, bearing interest at LIBOR plus 2.25%. A subsequent swap fixed LIBOR at 1.80% on $50 million of that balance.
Outlook, risks and contingencies
- Management was cautiously optimistic about a multi-year lodging recovery, citing economic improvement and expected lodging-supply growth below historical averages. It anticipated continued acquisition opportunities and described its capital and industry relationships as supporting growth. The filing provides no quantified earnings or operating guidance.
- Management identified macroeconomic and geopolitical uncertainty, business-travel exposure, competition, seasonality, interest rates, access to debt and equity capital, acquisition execution, and renovation and capital needs as risks. The company expects seasonally weaker revenue, operating income and cash flow in the first and fourth quarters.
- Three redevelopment projects had incurred $13.9 million in total through September 30; management expected another $33–$35 million of costs. Two projects were expected to finish in early 2015 and the third was complete.
- A third-party hotel manager disclosed a data breach affecting 14 hotels, including seven owned by RLJ; information from approximately 95,000 credit cards may have been collected. Potential fines, assessments and investigation costs remained uncertain, although the company did not then expect its ultimate costs to be material.
- Management reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors. It stated that disclosure controls were effective.
Important facts for investors to verify
- Comparable-property RevPAR and operating trends separately from acquisition, disposition and renovation effects.
- The performance and financing of the acquired hotels, and the costs and completion timing of remaining redevelopment work.
- Debt maturities, refinancing terms, covenant headroom and sensitivity to interest-rate changes, including the post-quarter mortgage refinancing.
- Whether impairment assumptions and expected hotel sales change, and any resulting additional charges or proceeds.
- Updates on the card-data breach, including claims, assessments and final costs.