RLJ Lodging Trust annual report, FY2012

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RLJ Lodging Trust — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; it also presents unaudited quarterly results. Comparisons with 2011 require care because 2011 includes predecessor results and the effects of the IPO and acquisitions.

Business context and operating performance

RLJ is a self-advised lodging REIT focused on premium-branded focused-service and compact full-service hotels. At year-end, it owned interests in 145 hotels with 21,617 rooms across 21 states and Washington, D.C.; 96% of hotels were affiliated with Marriott, Hilton or Hyatt. It relies on independent managers, with White Lodging Services managing 104 hotels.

  • For the year, total revenue was $854.2 million, up 12.6% from $759.0 million. Room revenue was $742.6 million, up 13.0%.
  • Portfolio occupancy was 72.6%, versus 71.5%; ADR was $133.35, up 7.1%; and RevPAR was $96.82, up 8.8%. Comparable-hotel RevPAR increased 6.8%, driven by 5.7% ADR growth and 1.1% occupancy growth. These ownership-period operating statistics differ from the filing’s separate pro forma statistics.
  • Operating income was $126.2 million, compared with $84.0 million. Operating margin was approximately 14.8%, versus 11.1%, calculated as operating income divided by revenue.
  • Net income attributable to common shareholders was $41.3 million, or $0.38 per share, compared with $11.3 million, or $0.12 per share, in 2011. Continuing operations improved from a $10.1 million loss to $41.3 million of income; 2011 net income included $21.8 million from discontinued operations, including a $23.5 million debt-extinguishment gain.
  • FFO attributable to common shareholders was $169.6 million versus $118.5 million; Adjusted FFO was $185.6 million versus $142.2 million. Adjusted EBITDA was $267.7 million versus $234.4 million. These are company-defined/non-GAAP measures and should be read with the reconciliations.
  • Operating cash flow was $176.1 million, up from $134.1 million. Investing used $363.8 million and financing used $6.7 million. Cash and cash equivalents fell to $115.9 million from $310.2 million.
  • Year-end total debt was $1.414 billion, up from $1.342 billion; debt comprised $997.7 million of mortgages, $400.0 million of term loans and $16.0 million drawn on the revolver. Approximately $643 million, or 45.5%, was variable-rate debt before hedges; the filing estimates a 100-basis-point rate increase would reduce annual earnings and cash flow by about $5.7 million after hedging.
  • The $300 million revolving facility had $16 million drawn at year-end, leaving approximately $284 million undrawn before any other availability limitations. The company reported compliance with its financial covenants.
  • Common distributions declared were $0.70 per share for 2012, versus $0.38 in 2011. The fourth-quarter distribution was $0.205 per share; a $0.205 dividend was paid January 15, 2013.

Material changes versus 2011

  • Revenue growth reflected both portfolio expansion and stronger hotel trading: $42.0 million of the increase came from non-comparable hotels, while comparable-hotel RevPAR rose 6.8%. The portfolio ended the year with 145 hotels, versus 141 a year earlier.
  • Hotel operating expenses increased 11.1% to $512.6 million, less than revenue growth. General and administrative expense rose 28.2% to $31.1 million, largely due to higher share-based compensation and public-company costs.
  • Interest expense decreased 11.5% to $85.0 million, principally reflecting lower mortgage and facility interest and expiration of unfavorable hedges.
  • Four hotels were acquired in 2012 for a combined purchase price of approximately $247.2 million. Capital investment remained substantial: about $129.2 million was spent on hotel improvements and additions, and management reported approximately $210 million invested at 93 hotels over 2011–2012.
  • In November 2012, RLJ refinanced and expanded its unsecured financing structure, adding a $275 million five-year term loan and a $125 million seven-year term loan alongside the $300 million revolving facility.

Outlook, risks and unusual items

  • Management was “cautiously optimistic” about a multi-year lodging recovery, citing rising corporate profits and expected lodging-supply growth below historical averages. It did not provide numeric earnings or operating guidance, and acknowledged that economic recovery could weaken.
  • Management’s stated financing objective was to keep net debt-to-EBITDA at or below 5.0x over time and increase reliance on unsecured and fixed or hedged-rate borrowing. The filing does not state the year-end net debt-to-EBITDA ratio.
  • Concentration risks include major markets (New York 15.8%, Chicago 12.1% and Austin 10.5% of 2012 revenue), Marriott/Hilton brand exposure, and WLS management of 104 hotels. Hotel demand is cyclical and seasonal, with sensitivity to business travel, local supply, competition and economic conditions.
  • Debt refinancing, variable interest rates, covenant restrictions and REIT distribution requirements could constrain liquidity or distributions. Hotel renovations and brand-required capital improvements also create ongoing funding needs. Restricted cash reserves for capital expenditures, taxes and insurance were $64.8 million at year-end and are not freely available cash.
  • RLJ recorded a $0.9 million impairment on Fairfield Inn Memphis after deteriorating operating results. The filing also reports a loss on disposal of $0.6 million and $0.7 million of default interest and penalties associated with the SpringHill Suites Southfield mortgage.
  • Southfield’s $5.0 million mortgage was in default; in December 2012 RLJ agreed to a deed in lieu of foreclosure, expected to close in March 2013. Courtyard Goshen was in receivership after payment default; in February 2013 the lender sued RLJ as guarantor, and RLJ disputes the claim and intends to defend it.
  • Three purchase agreements covered five properties at year-end; failure to close could forfeit $9.9 million in deposits. Management reported no material litigation other than ordinary-course matters, while the Goshen guaranty claim is separately described in the debt note.
  • Management and the auditor reported effective internal control over financial reporting at December 31, 2012. The auditor issued an unqualified opinion on the financial statements and internal controls.

Important facts for investors to verify

  • Whether comparable-hotel RevPAR and margins continued to improve after 2012, separating same-hotel performance from acquisitions and renovations.
  • The status and financial consequences of the Southfield deed-in-lieu transaction and the Goshen guaranty litigation, including any further liabilities or cash outflows.
  • Debt maturities, covenant headroom, refinancing options and the actual net debt-to-EBITDA ratio; the filing shows substantial scheduled debt payments in 2014–2016.
  • Cash available after considering restricted reserves, planned hotel capital spending, acquisition commitments and dividend obligations.
  • Whether the company’s high manager, brand and market concentrations remain manageable, and whether planned acquisitions earn returns sufficient to justify additional capital and debt.