Business context and reporting period
RLJ Lodging Trust’s Form 10-K covers the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. RLJ is a self-advised REIT that owns primarily premium-branded focused-service and compact full-service hotels. At year-end it owned 144 operating hotels with approximately 22,900 rooms, two planned conversions and an interest in one hotel mortgage loan, across 21 states and Washington, D.C. Marriott, Hilton and Hyatt represented nearly all of the portfolio; White Lodging Services managed 93 hotels.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $1.109 billion | $970.4 million |
| Operating income | $191.4 million | $164.5 million |
| Net income attributable to common shareholders | $135.4 million | $112.9 million |
| Diluted EPS | $1.05 | $0.94 |
| Operating cash flow | $298.8 million | $251.4 million |
| Adjusted EBITDA | $366.9 million | $311.1 million |
| Adjusted FFO | $310.7 million | $246.6 million |
Revenue grew 14.3% and operating income 16.3%; operating margin was approximately 17.3%, versus 17.0% in 2013. Common-shareholder net income increased 19.9%. These comparisons include substantial portfolio changes as well as same-property growth: comparable-hotel RevPAR rose 6.9%, with occupancy up 2.8 percentage points to 78.4% and ADR up 3.1% to $148.50. The portfolio-wide RevPAR penetration index was 111.7.
Investing cash outflow was $611.2 million, principally reflecting $631.6 million of hotel acquisitions and $118.8 million of hotel improvements and additions, partly offset by $132.7 million of net sale proceeds. Financing cash inflow was $242.6 million. Cash and cash equivalents ended the year at $262.5 million, down from $332.2 million.
Total debt was $1.558 billion at year-end: $532.7 million of mortgage debt and $1.025 billion of unsecured term loans. The $300 million revolving facility was undrawn, and the company reported compliance with its debt covenants. Although $1.392 billion of debt was variable-rate before hedges, swaps reduced debt exposed to variable rates to $249 million. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by approximately $2.5 million. The company declared $1.04 per share in 2014 distributions, up 21.6% from 2013.
Material changes versus the prior comparable period
- Revenue increased by $138.8 million, including $83.1 million attributed to non-comparable properties and comparable-property RevPAR growth.
- Property operating expenses rose 12.4%, below revenue growth, while management fees rose 23.7%. Depreciation and amortization increased 13.4%.
- Interest expense declined 11.7% to $56.8 million, mainly due to mortgage repayments and lower mortgage balances; higher term-loan borrowings partly offset the decline.
- RLJ acquired 15 hotels for approximately $632.0 million and sold 18 for approximately $137.8 million during 2014. A $9.2 million impairment was recorded on three hotels in connection with expected sales.
- A 9.2 million-share follow-on offering generated approximately $232.7 million in net proceeds. Year-end common shares outstanding were approximately 132.0 million, versus 122.6 million a year earlier.
Outlook, risks and unusual items
Management described itself as cautiously optimistic about a positive multi-year lodging cycle, citing strong U.S. lodging demand, supply below historical averages and expected corporate-profit growth. It saw acquisition opportunities and planned to pursue acquisitions, asset improvements and selective dispositions. The filing provides no specific quantified earnings, revenue or RevPAR guidance.
Management expected additional costs of $20–22 million for three major redevelopment projects; two remaining projects were expected to finish in mid-2015. In February 2015, the company completed the sale of 20 hotels for approximately $230.3 million, following a sale agreement entered into in November 2014.
Key risks include lodging cyclicality and seasonality; concentration in particular metropolitan markets and three major brand families; reliance on third-party managers, especially WLS; significant debt and refinancing needs; interest-rate exposure; continuing renovation and capital requirements; and the ability to access debt or equity capital. Mortgage loans totaling approximately $165.7 million in principal were scheduled to mature in 2015, and management said it was evaluating repayment options for certain loans. REIT qualification and distribution requirements also constrain capital retention and operations.
A third-party manager reported a payment-card data breach affecting 14 hotels, including seven owned by RLJ. Malware may have collected information from approximately 95,000 cards. The investigation was ongoing; RLJ could not estimate total related costs, though management then believed any amounts payable by the company would not be material. The company also disputed a lender’s claim under a guaranty related to the former Courtyard Goshen property. Management reported no other material litigation known to it. PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Important facts investors should verify
- Whether the 2015 hotel-loan maturities were refinanced, repaid or otherwise resolved, and the resulting cost and effect on liquidity.
- Net proceeds and realized gains or losses from the February 2015 sale of 20 hotels, and the use of proceeds.
- Comparable-hotel RevPAR, occupancy and ADR trends, separating same-property performance from acquisitions and dispositions.
- Actual redevelopment spending and completion timing, together with required ongoing capital expenditures and brand-improvement obligations.
- Any final costs, claims or assessments arising from the payment-card breach, and the status of the Goshen guaranty dispute.
- Debt levels, hedge coverage, covenant headroom and distribution sustainability, including the impact of the share issuance and increased per-share distributions.