RLJ Lodging Trust — Q3 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2023. RLJ is a lodging REIT focused on premium-branded, rooms-oriented hotels. At quarter-end, it owned 97 hotels with approximately 21,400 rooms across 23 states and Washington, D.C.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $334.4 million | $318.1 million | $1,005.9 million | $891.5 million |
| Net income | $16.3 million | $17.7 million | $68.6 million | $35.4 million |
| Net income attributable to common shareholders | $10.2 million; $0.06/share | $11.3 million; $0.07/share | $49.6 million; $0.31/share | $16.5 million; $0.10/share |
| Adjusted EBITDA (non-GAAP) | $88.8 million | $92.0 million | $285.3 million | $257.5 million |
| Adjusted FFO attributable to common shareholders and OP unitholders (non-GAAP) | $63.1 million | $64.0 million | $207.0 million | $168.3 million |
Q3 revenue increased 5.1%, while net income declined 7.6%; net margin was approximately 4.9%, versus 5.6% a year earlier. For the nine months, revenue rose 12.8% and net income rose 93.6%; net margin was approximately 6.8%, versus 4.0%. These margins are calculated from reported GAAP net income and revenue.
- Hotel performance: Comparable-property Q3 occupancy was 74.2% versus 72.8%; ADR was $191.07 versus $188.21; RevPAR was $141.81 versus $136.98. Nine-month comparable RevPAR increased to $143.60 from $130.25.
- Costs and interest: Q3 property operating expenses rose $14.4 million, faster than revenue growth. Property tax, insurance and other expense rose $6.2 million, including higher insurance premiums, Chicago-area property taxes and ground rent. Q3 interest expense increased $2.2 million to $24.8 million, primarily from higher rates on unhedged variable-rate debt and a larger unhedged balance.
- Cash flow and investment: Nine-month operating cash flow was $226.2 million, compared with $203.7 million. Investing cash outflow was $102.0 million, including $102.0 million of hotel improvements and additions; no hotel acquisitions were reported in 2023. Operating cash flow less hotel improvements was approximately $124.2 million, before other investing items.
- Liquidity and debt: At September 30, cash and cash equivalents were $494.6 million and restricted cash reserves were $35.8 million. Debt, net, was $2.220 billion. The $600 million revolver was undrawn. Approximately 54.1% of indebtedness was variable-rate, but 93.0% was fixed or effectively fixed after hedging. Management reported compliance with applicable debt covenants.
Material changes versus prior periods
- Nine-month revenue growth reflected stronger comparable RevPAR, increased leisure travel, recovering business and group bookings, and recently converted hotels. Q3 room revenue, food and beverage revenue, and other revenue all increased year over year.
- Profit trends diverged: nine-month net income and adjusted EBITDA rose, but Q3 net income, adjusted EBITDA and adjusted FFO were lower than in Q3 2022. Increased property-level expenses and interest costs weighed on quarterly results.
- RLJ refinanced and extended term debt in 2023, received $95 million of term-loan proceeds, amended its revolver to a May 2027 maturity, and paid approximately $7.5 million of lender fees and legal costs. It also exercised a final extension on a mortgage loan to April 2024.
- RLJ repurchased approximately 6.6 million common shares for $66.8 million during the nine months and declared common dividends of $0.08 per share in each of Q1 and Q2 and $0.10 in Q3. The $250 million share-repurchase authorization remained in effect through May 8, 2024.
Outlook, risks and unusual items
The filing does not provide numerical forward guidance. Management attributes operating improvement to travel demand, business and group booking recovery, and hotel conversions, while noting that business travel and broader economic conditions are important demand exposures. The filing cautions that forward-looking statements are not guarantees of future results.
- Refinancing and rate exposure: The maturity schedule includes approximately $381 million of variable-rate debt in 2024, including three mortgage loans due in April 2024, and $400 million of term debt due in 2025. RLJ estimates that a 100-basis-point increase on variable-rate debt not subject to swaps would reduce annual earnings and cash flow by approximately $1.6 million. Refinancing terms and rates remain important to monitor.
- Operating cost pressure: Higher labor, insurance, property taxes, marketing and revenue-based fees may constrain margins. The company also has ongoing hotel renovation and maintenance requirements.
- Hedges and unusual items: Nine-month results included a $169,000 loss on extinguishment of debt. Q3 adjusted measures excluded $0.6 million of one-time management-company transition costs. Interest-rate swap gains in accumulated other comprehensive income are expected to be reclassified into earnings, including approximately $23.3 million within the next 12 months.
- Contingencies and controls: Management said it was not aware of material litigation expected to adversely affect the company. It reported effective disclosure controls as of September 30, 2023 and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether hotel demand and RevPAR growth continue, especially in business-travel-dependent markets, and whether revenue gains translate into profit growth.
- Progress and terms for refinancing the April 2024 mortgage maturities and subsequent term-loan maturities.
- Exposure to floating rates, hedge expirations and the effect of interest expense on cash generation.
- Capital spending needs, cash and revolver availability, and the sustainability of dividends and share repurchases.
- Performance of recent hotel conversions and the impact of rising labor, insurance, property-tax and ground-rent costs.