RLJ Lodging Trust — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; dollar amounts below are in millions unless noted. RLJ is a hotel REIT focused primarily on premium-branded focused-service and compact full-service hotels. At quarter-end it owned 149 properties, including 147 operating hotels with approximately 22,300 rooms and two planned conversions.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $261.6 | $222.8 | $477.0 | $405.6 |
| Operating income | $55.5 | $39.7 | $80.9 | $53.1 |
| Net income attributable to common shareholders | $40.5 | $18.9 | $49.0 | $12.4 |
| Diluted earnings per share | $0.33 | $0.18 | $0.43 | $0.11 |
| Interest expense | $16.9 | $20.4 | $33.8 | $40.5 |
Revenue increased 17.4% in the quarter and 17.6% year to date. Management attributed the increases to acquisitions and stronger comparable-property performance. Comparable-property RevPAR rose 8.4% in Q2 and 9.5% year to date. Portfolio Q2 occupancy was 78.7% versus 76.9%, average daily rate (ADR) was $145.71 versus $135.09, and RevPAR was $114.67 versus $103.86. Year-to-date portfolio RevPAR increased 11.3% to $105.28.
Calculated operating margin was approximately 21.2% in Q2 2013 versus 17.8% in Q2 2012, and 17.0% for the first half versus 13.1% in the prior-year period. The quarter’s net income includes a $2.4 million gain on extinguishment of debt from a deed-in-lieu transfer; excluding that item, reported net income would have been lower. Adjusted FFO was $74.8 million for Q2 and $118.8 million for the first half; Adjusted EBITDA was $92.1 million and $153.4 million, respectively. These are non-GAAP measures and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- Six-month operating cash flow was $99.7 million, compared with $58.2 million in 2012. Investing cash outflow was $207.8 million, primarily for acquisitions and hotel improvements; financing cash inflow was $255.0 million, principally reflecting the equity offering.
- Cash and cash equivalents were $262.9 million at June 30, 2013, up from $115.9 million at year-end 2012. Restricted cash reserves were $65.1 million and are not unrestricted liquidity.
- Total debt was approximately $1.386 billion: $985.6 million of mortgage loans and $400.0 million of term loans. The $300 million revolving facility had no balance outstanding, leaving capacity subject to its terms. Debt declined from approximately $1.414 billion at year-end 2012.
- Variable-rate debt was approximately $627 million, or 45.3% of total indebtedness, with a 2.68% weighted-average rate. Management estimated a 100-basis-point rate increase would reduce annual earnings and cash flow by about $5.7 million after hedging. The company reported compliance with debt covenants.
- Operating cash flow and existing cash, revolving-credit availability and capital markets were identified as liquidity sources. A March 2013 offering of 15.87 million common shares generated $327.5 million net proceeds. The company paid $47.4 million in distributions on common shares and OP units during the first half.
Material changes, outlook and risks
- Q2 and first-half performance improved substantially, with comparable RevPAR gains as well as contributions from acquired properties. Acquisitions accounted for a material portion of reported growth; the company acquired five properties for a total purchase price of $184.0 million in the first half. Two acquired properties were not yet operating as hotels and are planned for conversion.
- Interest expense fell 17.2% in Q2 and 16.4% year to date, primarily reflecting prior mortgage paydowns and the expiration of unfavorable hedges, partly offset by interest on term loans.
- Management described itself as cautiously optimistic about a multiyear lodging recovery, citing expected below-historical lodging supply growth and rising corporate profits, while acknowledging economic and geopolitical uncertainty. It saw acquisition opportunities but provided no quantified earnings or operating guidance in the supplied filing text.
- On May 30, 2013, RLJ transferred the SpringHill Suites Southfield, Michigan, to its lenders under a deed-in-lieu arrangement, recording a $2.4 million gain on extinguishment of debt. The company reported no property impairment for the periods presented.
- RLJ disputes a lender’s claim against it as guarantor of obligations relating to the Courtyard Goshen, Indiana, and intends to defend the claim. Management said it knew of no legal proceedings expected to have a material adverse effect. The filing also identifies risks from lodging demand and seasonality, interest rates, capital-market access, acquisitions, operating costs, and natural or geopolitical events.
- The July 2013 dividend was $0.205 per common share. In August, RLJ was the successful bidder at a foreclosure sale of a 78-room hotel that collateralized one of its mortgage loans.
Important facts for investors to verify
- How much of revenue and RevPAR growth reflects comparable hotel performance versus acquisitions, renovations and other non-comparable properties.
- The timing and funding needs for the planned hotel conversions, property-improvement plans and ongoing capital expenditures.
- Debt maturities, refinancing plans and exposure to variable interest rates, including the effect of hedges and covenant requirements.
- The status and potential financial impact of the Courtyard Goshen guaranty litigation and the foreclosure-sale asset.
- The sustainability of operating improvement and distributions, given share issuance, seasonal cash flows and the REIT distribution requirement.