RLJ Lodging Trust — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. 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 144 hotels with 21,342 rooms. The nine-month 2011 comparison includes the predecessor before the May 2011 IPO and is not fully comparable with 2012.
Financial performance and position
Amounts below are in millions, except per-share and hotel operating data.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $225.2 | $197.3 | $631.7 | $569.7 |
| Operating income | $36.8 | $30.3 | $89.9 | $66.0 |
| Operating margin | 16.3% | 15.3% | 14.2% | 11.6% |
| Income from continuing operations | $15.3 | $8.7 | $27.4 | Loss of $8.9 |
| Net income attributable to common shareholders | $15.2 | $31.3 | $27.6 | $12.6 |
| Diluted EPS | $0.14 | $0.30 | $0.26 | $0.14 |
| FFO attributable to common shareholders | $46.9 | $37.7 | $125.0 | $83.2 |
| Adjusted FFO | $50.6 | $39.4 | $134.9 | $104.8 |
| Adjusted EBITDA | $71.7 | $61.8 | $197.0 | $177.4 |
Q3 portfolio occupancy was 76.7% versus 75.2%; average daily rate (ADR) was $132.43 versus $122.75; and RevPAR was $101.55 versus $92.37. Comparable-hotel RevPAR rose 7.4% in Q3 and 5.7% for the first nine months. Nine-month portfolio occupancy was 73.8%, ADR $131.22 and RevPAR $96.87.
- Cash flow: Nine-month operating cash flow was $123.7, investing cash outflow $262.0 and financing cash inflow $20.2. Cash and equivalents declined $118.1 to $192.1; restricted cash reserves were $68.3.
- Debt and liquidity: Mortgage loans totaled $1,332.0 and revolving-credit borrowings were $85.0 at September 30. The revolving facility has a $300.0 commitment, matures June 2014 with a one-year extension option, and had no outstanding letters of credit or swingline loans. The company reported compliance with its credit-facility and mortgage covenants.
- Interest-rate exposure: Management reported $558.0 of variable-rate debt, or 41.9% of total indebtedness, with a 4.79% weighted-average rate; a 100-basis-point increase was estimated to reduce annual earnings and cash flow by about $2.8 after hedging. Separately, the filing says 25.3% of borrowings were subject to variable rates after swaps and caps.
- Distributions: The company paid a $0.165-per-share dividend on October 15, 2012. Nine-month distributions on common shares and units totaled $53.4.
Material changes versus prior periods
- Q3 revenue grew 14.2%; management attributed the increase to acquisitions and 7.4% comparable-property RevPAR growth. Q3 continuing-operations income rose to $15.3 from $8.7, while total net income fell because Q3 2011 included $23.0 of discontinued-operations income, principally a debt-extinguishment gain.
- For the first nine months, revenue increased 10.9% and continuing operations improved from an $8.9 loss to $27.4 of income. Interest expense decreased 17.6% to $62.2. The 2011 period included $10.3 of IPO costs and $21.8 of discontinued-operations income, including a $23.5 gain on extinguishment of debt.
- Three hotels were acquired in 2012 for approximately $182.7 in total, adding 691 rooms. Hotel improvements and additions used $98.2 of cash in the first nine months, compared with $52.0 in 2011.
- General and administrative expense rose 27.6% in Q3 and 30.3% year to date, primarily reflecting higher share-based compensation and professional fees. A $0.9 impairment was recorded for the Fairfield Inn Memphis after deteriorating operating results indicated its carrying value was not recoverable.
Outlook, risks and unusual items
- Outlook: Management was cautiously optimistic about a multi-year lodging recovery, citing expected below-historical supply growth and rising corporate profits; it did not provide numerical earnings or operating guidance. It said attractive acquisitions remained available.
- Capital plan: The approximately $95.0 program to upgrade or reposition 45 hotels was entering its final phase. About $65 million of upgrades had been initiated across 25 hotels year to date; the remaining 20 were expected to be initiated in Q4.
- Hurricane Sandy: The storm made landfall after quarter-end. Initial estimates indicated minimal hotel impact and no expected significant effect on overall Q4 2012 results, but the company said it was too early to estimate the full impact.
- Defaults and property risk: RLJ had ceased subsidizing debt service on the SpringHill Suites Southfield loan and reported a default notice; it was working with the lender on an orderly transfer. A receiver took control of the Courtyard Goshen in June 2012. Outstanding principal was $5.0 and $5.6, respectively, at quarter-end.
- Funding and operating risks: Acquisitions and renovations depend on access to debt and equity capital; REIT distribution requirements limit retained earnings. The filing cites economic conditions, business-travel demand, competition, interest rates, financing availability and lodging seasonality as risks. Management expects weaker revenue and cash flow in Q1 and Q4 than in Q2 and Q3.
- Contingencies and controls: Management reported no litigation expected to materially affect financial position, operations or liquidity, no off-balance-sheet arrangements, no material risk-factor changes, and effective disclosure controls as of September 30, 2012.
Important facts for investors to verify
- How much of reported revenue and RevPAR growth reflects comparable-hotel performance versus acquisitions, and how the differing 2011 reporting basis affects comparisons.
- Current status and potential financial consequences of the Southfield and Goshen defaults, including any transfer, recourse exposure or additional costs.
- Debt maturities and refinancing needs: the maturity table shows $331.0 of variable-rate debt in 2013, $142.0 in 2014 and substantial 2015–2016 fixed-rate maturities; confirm extensions, refinancing plans and facility availability.
- Whether the hotel renovation program remains within its stated scope and budget, and the resulting effect on cash, restricted reserves and operating performance.
- The final operational and financial effect of Hurricane Sandy, and any impairment or other asset-value changes after quarter-end.
- How adjusted FFO and adjusted EBITDA reconciliations treat recurring compensation, transaction costs and default-related expenses; these non-GAAP measures are not substitutes for GAAP results.