RLJ Lodging Trust — Q3 2011 Form 10-Q
Business context and reporting period
Quarter and nine months ended September 30, 2011. 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 140 hotels with 20,488 rooms across 19 states and Washington, D.C.
The company completed its IPO and formation transactions on May 16, 2011. Accordingly, 2011 results combine the predecessor’s operations with the post-IPO company, while 2010 comparative results reflect the predecessor; acquisitions and the expanded hotel portfolio also materially affect comparisons.
Financial and operating highlights
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $197.3 million | $136.5 million | $569.7 million | $378.8 million |
| Operating income | $30.3 million | $11.1 million | $66.0 million | $31.2 million |
| Income (loss) from continuing operations | $8.7 million | $(7.9) million | $(8.9) million | $(31.1) million |
| Net income (loss) | $31.6 million | $(8.5) million | $12.9 million | $(12.1) million |
| Net cash from operating activities | — | $90.6 million | $47.0 million |
- Q3 revenue rose 44.6%; management attributed $50.6 million of the increase to acquired hotels and reported 7.9% RevPAR growth at hotels held throughout both periods. Nine-month revenue increased 50.4%, including $164.5 million from acquisitions; same-property RevPAR grew 8.0%.
- Portfolio Q3 RevPAR was $92.37, occupancy 75.2%, and average daily rate (ADR) $122.75. For the nine-month period, RevPAR was $90.24, occupancy 73.2%, and ADR $123.28. These portfolio figures include the impact of added hotels.
- Operating margin was approximately 15.3% in Q3 2011 versus 8.2% in Q3 2010, and 11.6% for the first nine months of 2011 versus 8.2% in 2010.
- Q3 adjusted FFO was $39.4 million and adjusted EBITDA $61.9 million; nine-month adjusted FFO was $104.1 million and adjusted EBITDA $176.7 million. These are non-GAAP measures defined by the company and are not substitutes for GAAP results.
- Cash and cash equivalents were $368.5 million at September 30, up from $267.5 million at year-end 2010; restricted cash reserves were $89.6 million. Nine-month investing cash outflow was $265.8 million, largely hotel purchases, improvements and reserve funding.
- Mortgage loans totaled $1.203 billion and the term loan was $140 million at quarter-end; no borrowings were outstanding on the $300 million revolving facility. Total debt shown in the filing’s maturity table was $1.343 billion. The company reported compliance with debt covenants.
Material changes, outlook and risks
- Revenue growth reflected both acquisitions and improving same-property performance. Hotel operating expense rose 46.5% in Q3, while total operating expense rose 33.3%. Nine-month operating expenses included $10.3 million of nonrecurring IPO and formation costs.
- Reported net income includes unusual discontinued-operations gains: a $23.5 million gain from transferring the New York LaGuardia Airport Marriott to lenders through a deed in lieu of foreclosure. Excluding discontinued operations, nine-month results remained a loss.
- Mortgage debt fell from $1.747 billion at December 31, 2010, in part after the company used IPO proceeds and cash to repay approximately $472.6 million of secured debt. The IPO and overallotment generated net proceeds of approximately $464.1 million and $69.1 million, respectively.
- After quarter-end, the company raised $142 million through five secured mortgage loans and used $140 million to repay the term loan. It also acquired the 176-room Courtyard Charleston Historic District for approximately $42 million.
- In November 2011, the company elected to stop subsidizing debt service on the Courtyard Goshen and Springhill Suites Southfield loans, with quarter-end balances of $5.6 million and $5.0 million, and said it would work with lenders on deed-in-lieu processes.
- Management was cautiously optimistic about a multiyear lodging recovery and cited improving fundamentals and acquisition opportunities, but did not provide quantitative earnings or operating guidance. Risks include economic and lodging-industry weakness, business-travel exposure, seasonality, interest rates, access to capital, refinancing needs and the ability to fund renovations and acquisitions.
- The company had authorized $115 million of 2011 renovation projects, focused largely on 24 hotels acquired in 2010 and 2011, including seven brand conversions. Management reported no material litigation, no off-balance-sheet arrangements, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much same-property revenue and RevPAR growth persists after separating acquisition effects; confirm comparable hotel populations and metrics.
- The recurring earnings and cash-flow profile excluding the $23.5 million debt-extinguishment gain, IPO costs, transaction costs and other adjustments in non-GAAP measures.
- Debt maturities, refinancing terms and the effect of post-quarter secured borrowing and the term-loan repayment on leverage, interest costs and unencumbered assets.
- Expected renovation spending versus available unrestricted cash and restricted reserves, and whether the authorized capital program remains on schedule and budget.
- The outcomes and potential costs of the Goshen and Southfield loan negotiations and any resulting property transfers or additional losses.
- Whether distributions are supported by recurring cash generation while meeting REIT distribution requirements; Q3 declared distribution was $0.15 per common share.