RLJ Lodging Trust — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. The filing compares the quarter with Q1 2011, when results reflect the RLJ Predecessor before the May 2011 IPO; 2012 results reflect the Company. The comparison is also affected by hotels acquired in 2011 and one hotel closed for renovations in the prior-year period.
Business context
RLJ is a self-advised lodging REIT focused on premium-branded focused-service and compact full-service hotels. At quarter-end it owned interests in 141 hotels with 20,646 rooms across 20 states and Washington, D.C.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 | Change / context |
|---|---|---|---|
| Total revenue | $183.2 million | $168.2 million | Up 8.9%; includes revenue from non-comparable hotels |
| Operating income | $13.4 million | $10.2 million | Up 30.9% |
| Net loss from continuing operations | $6.9 million | $15.3 million | Loss narrowed by $8.4 million |
| Net loss attributable to common shareholders | $6.5 million | $16.1 million | Basic and diluted loss per share was $0.06 in 2012 |
| FFO attributable to common shareholders | $27.0 million | $16.5 million | Non-GAAP measure |
| Adjusted FFO | $28.5 million | $20.0 million | Non-GAAP measure |
| EBITDA | $47.6 million | $42.6 million | Non-GAAP measure |
| Adjusted EBITDA | $49.1 million | $46.1 million | Non-GAAP measure |
| Net cash from operating activities | $10.5 million | $15.4 million | Down $4.9 million |
| Cash and cash equivalents | $261.1 million | $310.2 million at Dec. 31, 2011 | Quarter-end balance |
| Mortgage debt | $1,338.5 million | $1,341.7 million at Dec. 31, 2011 | No revolver borrowings at quarter-end |
- Portfolio RevPAR rose 4.1% to $85.11; ADR rose 5.5% to $125.62 while occupancy declined to 67.8% from 68.6%.
- Operating cash flow was more than offset by $39.8 million of investing outflows, primarily $40.9 million of hotel improvements, and $19.8 million of financing outflows, primarily distributions and mortgage repayments. Cash declined $49.2 million during the quarter.
- Restricted cash reserves were $86.3 million. The filing reports $50.3 million held in FF&E reserves for capital spending.
Material changes and unusual items
- Revenue increased by $15.0 million, including $7.6 million from non-comparable hotels; comparable-property RevPAR increased 4.0%.
- Interest expense declined $5.7 million, principally reflecting prior debt paydowns, the absence of prior-year term-loan interest, and lower hedge-related expense.
- Operating expenses increased $11.9 million. General and administrative costs rose 44.9%, largely due to restricted-share compensation, professional fees and public-company expenses. Transaction and pursuit costs fell from $2.7 million to less than $0.1 million because there were no Q1 2012 acquisitions.
- Q1 2012 included $3.1 million of accelerated depreciation on furniture, fixtures and equipment at hotels undergoing renovations. No hotel impairment was recorded in either comparative quarter.
Debt, liquidity and capital plans
The company had $1,338.5 million of mortgage debt at March 31, 2012, including $558.0 million of variable-rate debt (41.7% of total indebtedness), with a weighted-average rate of approximately 4.75%. Management estimated that a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $2.2 million after hedging. The company was in compliance with its credit-facility and mortgage covenants at quarter-end.
The $300 million unsecured revolving facility had no borrowings outstanding at March 31. After quarter-end, RLJ borrowed $85 million and repaid $85 million of KeyBank and State Street loans that matured in April. As of the filing date, $85 million was outstanding on the revolver. The filing identifies no off-balance-sheet arrangements.
RLJ authorized approximately $95 million of renovation projects at 45 hotels in 2012, as part of a two-year capital-improvements program. It paid a $0.165-per-share dividend on April 13, 2012. The filing provides no numerical full-year earnings or operating guidance.
Management outlook, risks and contingencies
- Management was cautiously optimistic about a multi-year lodging recovery, citing expected below-historical lodging supply growth and rising corporate profits, while acknowledging economic and geopolitical uncertainty. It believed acquisition opportunities remained available.
- Management expects lower revenue, operating income and cash flow in the first and fourth quarters and higher results in the second and third quarters due to hotel seasonality.
- Management cited risks including economic weakness, competition, lodging-industry declines, interest rates, financing availability, capital-market conditions, and the ability to identify and close acquisitions. Hotel performance and business-travel demand are important exposures.
- RLJ had stopped subsidizing debt service on the Courtyard Goshen and SpringHill Suites Southfield loans. Both were in payment default; balances were $5.6 million and $5.0 million, respectively, and the company was working with lenders on orderly asset transfers.
- Management reported no material litigation expected to adversely affect financial position, operations or liquidity, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective.
Important facts for investors to verify
- Confirm the post-quarter refinancing and ongoing revolver balance, availability, interest cost and covenant headroom.
- Monitor resolution of the Goshen and Southfield defaults, including any transfers, losses or further obligations.
- Assess whether RevPAR gains—driven primarily by ADR despite lower occupancy—are sustained and whether expense growth remains controlled.
- Track the funding, timing and expected returns of the $95 million renovation program and the use of restricted reserves.
- Interpret year-over-year comparisons with care because Q1 2011 reflects the predecessor and includes acquisition, renovation and discontinued-operation effects.
- Review non-GAAP FFO, Adjusted FFO and EBITDA reconciliations alongside GAAP results; the filing cautions these measures may not be comparable across companies.