RLJ Lodging Trust annual report, FY2015

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Business context and reporting period

RLJ Lodging Trust’s Form 10-K covers the fiscal year ended December 31, 2015. The company is a REIT that owns premium-branded focused-service and compact full-service hotels, which are operated by third-party managers. At year-end, it owned 126 hotels with approximately 20,900 rooms across 21 states and the District of Columbia; nearly 97% of the hotels were affiliated with Marriott, Hilton or Hyatt.

The filing also reports unaudited fourth-quarter results. Annual figures below are for 2015 compared with 2014 unless stated otherwise.

Financial and operating performance

  • Revenue: Annual revenue was $1.136 billion, up 2.4% from $1.109 billion. Room revenue rose 1.6% to $985.4 million. For comparable hotels, RevPAR increased 2.4% to $127.33, as ADR rose 4.4% to $163.01 while occupancy declined to 78.1% from 79.6%.
  • Fourth quarter: Revenue was $275.3 million, down from $280.1 million in Q4 2014. Net income was $74.4 million versus $34.1 million; net income attributable to common shareholders was $73.8 million versus $33.8 million. Basic and diluted EPS were $0.58 and $0.59, compared with $0.26 and $0.25, respectively.
  • Profit and margins: Annual operating income increased 6.5% to $203.9 million; operating margin was approximately 17.9%, versus 17.3%. Net income attributable to common shareholders was $218.2 million, or $1.69 basic EPS, compared with $135.4 million, or $1.06. Adjusted EBITDA was $380.1 million versus $366.9 million; Adjusted FFO attributable to common shareholders was $324.7 million versus $310.7 million.
  • Cash flow: Cash provided by operations was $328.9 million, up from $298.8 million. Investing activities used $38.1 million, and financing activities used $419.1 million. Year-end cash was $134.2 million, down from $262.5 million.
  • Debt and liquidity: Total debt was $1.583 billion, versus $1.558 billion, including $407.8 million of mortgage loans and $1.175 billion of term loans. The $300 million revolving credit facility was undrawn and available at year-end. Although $1.548 billion of debt was classified as variable-rate before hedging, swaps left $131.0 million, or 8.3% of total indebtedness, exposed to variable rates. The company reported compliance with debt covenants.
  • Distributions and capital: The company declared $1.32 per share for 2015, up 26.9% year over year. It repurchased 8.04 million shares for approximately $225.2 million, at an average $27.99 per share. Its repurchase authorization was increased to $400 million and extended through December 31, 2016.

Material changes versus the prior period

  • Comparable-hotel RevPAR rose, driven by higher room rates despite lower occupancy; annual revenue growth was modest and Q4 revenue declined year over year.
  • Annual net income increased substantially, but the comparison includes a $39.1 million income tax benefit, primarily from releasing a $39.9 million deferred-tax valuation allowance, and a $28.4 million gain on hotel sales. These items are not equivalent to recurring hotel operating improvement.
  • Property operating expenses increased 1.7%, slower than revenue growth. Depreciation and amortization rose 8.3% to $156.2 million, while impairment losses declined to $1.0 million from $9.2 million.
  • The portfolio contracted from 146 hotels at the end of 2014 to 126 at the end of 2015. During 2015, the company acquired three hotels for $175.9 million and sold 23 for $252.5 million.

Outlook, risks and unusual items

Management described itself as cautiously optimistic about a positive U.S. lodging cycle in the near term, citing record lodging demand and hotel supply below historical averages, while acknowledging greater uncertainty in global economic growth. The filing provides no numerical earnings or RevPAR guidance. Management stated an intent to keep net debt to EBITDA at or below 5.0x and to pursue selective acquisitions, dispositions and capital investment.

  • Key business risks include lodging-cycle and economic sensitivity, new hotel supply, seasonality, concentrated exposure to certain metropolitan markets, and reliance on third-party managers and a small number of major hotel brands. WLS managed 72 of the 126 hotels.
  • Debt refinancing and interest-rate exposure warrant attention. Contractual obligations show significant scheduled debt payments in 2016 and 2018–2019; the $300 million revolver had a scheduled November 2016 maturity, subject to an extension option and conditions.
  • Two data breaches at a third-party manager affected company hotels: seven hotels in a breach ending in December 2013 and six in a separate breach ending in February 2015. The company could not estimate potential costs, fees or assessments, but believed any eventual amounts would not be material.
  • The company faces ongoing hotel maintenance and brand-related capital needs; approximately $55.1 million was held in restricted FF&E reserves at year-end. It also had $444.2 million of future minimum ground-lease payments, largely due thereafter.
  • Management reported no material litigation expected to adversely affect the company. The filing also describes a disputed lender claim related to the former Courtyard Goshen property; the company is defending the claim.

Important facts for investors to verify

  1. How much of reported earnings growth reflects recurring hotel operations versus the deferred-tax valuation-allowance release and property-sale gains?
  2. What drove the Q4 revenue decline, and did the comparable-property pattern of higher ADR but lower occupancy persist after year-end?
  3. What are the company’s current refinancing plans for near-term maturities, and how do debt covenants and interest-rate hedges affect available liquidity?
  4. What are the eventual financial and operational consequences of the reported data breaches and the disputed Goshen guaranty claim?
  5. How will share repurchases, distributions, hotel renovations and other capital needs be balanced against cash balances and debt reduction?