RLJ Lodging Trust — Q2 2017 Form 10-Q
Business context and period: Unaudited results for the three and six months ended June 30, 2017, compared with the same periods in 2016. RLJ is a self-advised lodging REIT focused on premium-branded, focused-service and compact full-service hotels. At quarter-end it owned 122 hotels with approximately 20,100 rooms and held an interest in a hotel mortgage loan.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Revenue | $292.3 million | $317.1 million | (7.8%) |
| Operating income | $58.1 million | $75.9 million | (23.5%) |
| Net income attributable to common shareholders | $42.2 million | $58.4 million | (27.7%) |
| Diluted earnings per share | $0.34 | $0.47 | Down $0.13 |
| FFO attributable to common shareholders and unitholders | $80.6 million | $99.5 million | (19.0%) |
| Adjusted FFO | $88.8 million | $102.1 million | (13.1%) |
| Adjusted EBITDA | $103.7 million | $117.2 million | (11.5%) |
Q2 operating margin was approximately 19.9%, compared with 23.9% a year earlier; net income attributable to common shareholders was approximately 14.5% of revenue, versus 18.4%. The company declared dividends of $0.33 per common share for the quarter.
For the six months ended June 30, revenue was $552.5 million, down 6.7%; operating income was $94.8 million, down 19.1%; net income attributable to common shareholders was $64.0 million, down 23.6%; and diluted EPS was $0.51, versus $0.67. Operating cash flow was $141.5 million, compared with $164.2 million. Hotel improvements and additions used $39.2 million.
- Comparable hotel metrics: Q2 occupancy was 80.8% versus 82.6%; ADR was $171.28 versus $173.42; and RevPAR was $138.47 versus $143.28, a 3.4% decline. For the first half, RevPAR declined 2.1% to $131.34.
- Balance sheet and liquidity: Cash and cash equivalents were $479.9 million, and restricted cash reserves were $60.7 million. Debt, net of financing costs, was $1.582 billion. The $400 million revolving facility was undrawn and fully available. Total liabilities were $1.777 billion and total equity was $2.225 billion.
- Debt and rates: The company reported $1.6 billion of total variable-rate debt before considering hedges; after swaps, $142 million, or 8.9% of total indebtedness, was exposed to variable rates. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by approximately $1.4 million. The company was in compliance with its debt covenants.
Changes, outlook, risks and unusual items
- Revenue declines reflected both hotel dispositions and weaker comparable-property results. Comparable Q2 RevPAR fell 14.2% in Houston and 8.7% in Austin, partly offset by gains in Southern California and South Florida. For the first half, Louisville and Northern California were notable areas of weakness.
- Q2 transaction and pursuit costs rose to $3.7 million from $0.1 million, primarily for the proposed FelCor merger. First-half costs were $4.3 million. General and administrative expense also increased, partly because the prior-year period benefited from forfeitures of awards after the former CEO’s resignation.
- Management was cautiously optimistic about U.S. lodging demand and expected another year of industry RevPAR growth, but anticipated moderate growth given accelerating supply. No specific company earnings or RevPAR guidance was provided.
- RLJ agreed to acquire FelCor in an all-stock merger, with each FelCor common share converting into 0.362 RLJ common shares. Closing was expected August 31, 2017, subject to shareholder approvals and other conditions. The company identified integration, dilution, leverage, costs, and possible failure or delay to close as risks. It disclosed possible termination payments of up to $95 million and/or $20 million in expense reimbursement under specified circumstances.
- Two shareholder class-action suits related to the merger named RLJ and affiliates; plaintiffs sought, among other relief, to enjoin the merger. RLJ said it disputed the allegations and would defend the actions. The cases were at an early stage, and timing and outcome were uncertain.
- Management reported no hotel-property impairment and no off-balance-sheet arrangements. Disclosure controls were assessed as effective at June 30, 2017.
Important facts for investors to verify
- Whether the FelCor merger received required approvals and closed on the expected terms and timetable, including the impact of litigation and merger-related costs.
- Whether comparable RevPAR and occupancy stabilize, particularly in weak markets, and whether results are being affected by portfolio changes or underlying hotel demand.
- Post-merger leverage, liquidity, debt maturities and interest-rate exposure, including the effect of hedges and any refinancing needs.
- Cash available for dividends and capital spending; the current quarterly dividend was $0.33 per share, but future dividends were not guaranteed.