RLJ Lodging Trust — Q2 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2014. RLJ is a self-advised lodging REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 148 properties, including 146 hotels with approximately 22,900 rooms and two planned hotel conversions, across 21 states and Washington, D.C.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $295.0 million | $260.8 million | $531.4 million | $475.7 million |
| Operating income | $65.4 million | $55.4 million | $94.4 million | $80.9 million |
| Net income attributable to common shareholders | $52.9 million | $40.5 million | $64.8 million | $49.0 million |
| Diluted earnings per share | $0.42 | $0.33 | $0.52 | $0.43 |
| Cash flow from operations | Not separately stated for the quarter | $132.0 million | $99.7 million |
Q2 operating margin was approximately 22.2%, versus 21.2% a year earlier; six-month operating margin was approximately 17.8%, versus 17.0%. Comparable-hotel RevPAR rose 6.4% in Q2 and 6.3% for the first half, driven by higher occupancy and average daily rates. Q2 comparable occupancy was 82.4% (79.3% prior year), ADR was $152.49 ($149.11), and RevPAR was $125.71 ($118.19).
At June 30, cash and cash equivalents were $373.7 million, with restricted cash reserves of $60.6 million. Total assets were $4.109 billion; total liabilities were $1.726 billion and total equity was $2.383 billion. Debt comprised $1.025 billion of term loans and $534.9 million of mortgage loans; no revolver borrowings were outstanding. The $300 million revolving facility was available subject to its terms. RLJ reported compliance with debt covenants.
Variable-rate debt was approximately $1.391 billion, or 89.2% of total indebtedness, at a weighted-average rate of 2.99% after hedges. Management estimated a 100-basis-point rate increase would raise annual interest expense and reduce future earnings and cash flows by approximately $4.1 million. Interest-rate hedge losses in accumulated other comprehensive loss increased to $14.2 million from $5.9 million at year-end.
Material changes versus prior comparable periods
- Revenue increased 13.1% in Q2 and 11.7% for the first half. Management attributed the increases to comparable-property RevPAR growth and contributions from acquisitions; Q2 included $19.4 million of revenue from non-comparable properties, while the first half included $30.2 million.
- Common-shareholder net income increased 30.6% in Q2 and 32.3% for the first half. Q2 2013 included income from discontinued operations, including a debt-extinguishment gain; 2014 included a $1.3 million loss on property disposals for the first half, so reported comparisons also reflect portfolio changes and unusual items.
- First-half operating cash flow increased to $132.0 million from $99.7 million. Investing used $410.6 million, principally for hotel acquisitions and capital improvements; financing provided $320.0 million, including net proceeds from a share offering.
- During the first half, RLJ acquired 13 hotels for approximately $504.2 million and disposed of 14 hotels for an aggregate sale price of approximately $128.0 million. Disposal proceeds net of costs were $124.1 million. The company raised $232.8 million net from issuing 9.2 million common shares.
- Term-loan balances increased from $850.0 million at December 31, 2013 to $1.025 billion at June 30, 2014; mortgage balances declined from $559.7 million to $534.9 million.
Outlook, commentary, risks and unusual items
- Management described itself as cautiously optimistic about a multi-year lodging recovery, citing improving U.S. economic indicators and lodging supply growth expected to remain below historical averages. It said it did not currently anticipate a significant slowdown in lodging fundamentals. The filing provides no specific earnings or RevPAR guidance.
- Management expects to pursue acquisitions and fund capital needs through operating cash, cash balances, the revolver, and future equity or debt financing. It cautioned that capital-market conditions, leverage, operating performance, lender restrictions and market perceptions could limit access to financing. REIT distribution requirements limit retained cash available for investment.
- Three major redevelopment projects were underway. First-half costs were $3.2 million and cumulative costs were $6.1 million; management expected a further $40–$45 million of costs and completion from late 2014 through mid-2015.
- A third-party hotel manager reported a payment-card data breach spanning nine months through December 2013 at 14 managed hotels, including seven RLJ-owned hotels. Information from approximately 95,000 cards may have been collected. Potential fines, assessments and investigation costs remained uncertain; management believed amounts payable by RLJ would not be material, but could not estimate them with certainty.
- A $142 million mortgage loan had an October 2014 maturity, with up to two one-year extensions subject to lender requirements; RLJ said it intended to exercise the extensions. The filing also identifies seasonality, labor and operating-cost pressures, competitive limits on room-rate increases, interest-rate exposure and risks from acquisitions and property valuations.
- After quarter-end, RLJ acquired the 194-room Hyatt Atlanta Midtown for $49.5 million on July 14, 2014. It paid a $0.22-per-share dividend on July 15.
Most important facts for investors to verify
- How much of revenue and earnings growth reflects same-property performance versus acquisitions, dispositions, and other non-comparable properties.
- The refinancing or extension outcome for the $142 million mortgage maturing in October 2014, and the company’s compliance with loan covenants.
- Remaining redevelopment spending, completion schedules, and whether project returns meet management’s expectations.
- Any financial, legal or reputational consequences of the payment-card breach as investigations and claims progress.
- Liquidity and funding needs for acquisitions, renovations and distributions, given the company’s reliance on debt and equity capital and its variable-rate debt exposure.