RLJ Lodging Trust — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. RLJ is a lodging REIT. On August 31, 2017, it completed its merger with FelCor, adding 37 hotels. At quarter-end, RLJ owned interests in 159 hotels with approximately 31,350 rooms. Reported results include FelCor for one month and are not directly comparable with 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $341.3 million | $296.3 million | $893.8 million | $888.5 million |
| Operating income | $26.2 million | $56.8 million | $120.9 million | $173.9 million |
| Net income | $4.1 million | $41.4 million | $68.4 million | $125.5 million |
| Net income attributable to common shareholders | $1.8 million | $41.2 million | $65.8 million | $124.9 million |
| Diluted EPS | $0.01 | $0.33 | $0.50 | $1.00 |
| Operating cash flow | — | $207.3 million | $250.4 million | |
| Adjusted FFO | $86.5 million | $85.4 million | $239.7 million | $258.3 million |
| Adjusted EBITDA | $108.3 million | $100.2 million | $290.9 million | $303.4 million |
Q3 operating margin was approximately 7.7%, compared with 19.2% a year earlier; nine-month operating margin was approximately 13.5%, compared with 19.6%. These GAAP margins include merger-related costs.
Material changes and operating performance
- Q3 revenue rose 15.2%, largely because of FelCor properties. On a comparable-property basis, RevPAR fell 2.3% in Q3 and 2.1% for the first nine months. Q3 comparable occupancy was 80.2% and ADR was $161.86; nine-month occupancy was 78.5% and ADR was $166.64.
- Management attributed weaker comparable results to market-specific RevPAR declines, including Chicago and Austin in Q3, and Louisville and New York year to date. Growth in other markets partly offset these declines.
- Q3 transaction and integration costs were $32.6 million; nine-month costs were $36.9 million. Interest expense rose 35.0% in Q3 to $19.7 million, primarily reflecting debt assumed in the FelCor merger. Q3 income tax expense rose to $6.4 million.
- Nine-month cash from operations decreased to $207.3 million. Investing activities used $82.3 million, including $58.9 million for hotel improvements and $41.9 million net cash paid for the FelCor acquisition; financing activities used $160.5 million, chiefly for distributions.
Debt, liquidity and capital
- At September 30, 2017, cash and cash equivalents were $421.2 million, restricted cash reserves were $78.3 million, and net debt carrying value was $2.886 billion. The $600 million revolving credit facility was undrawn and available.
- Debt included $1.066 billion of FelCor senior notes, $1.171 billion net of revolving and term loans, and $649 million net of mortgage loans. A $85 million mortgage loan was due in December 2017, with a one-year extension subject to conditions; the company also reported a one-year extension of a separate mortgage maturity in October 2017.
- After swaps, $227 million, or 8.1% of indebtedness, was exposed to variable rates. Management estimated a 100-basis-point rate increase would reduce annual earnings and cash flows by approximately $2.3 million. The company reported compliance with debt covenants.
- Common distributions were $0.33 per share each quarter; nine-month distributions were $0.99 per share. The merger added 50.4 million common shares and 12.9 million Series A preferred shares. Preferred shares carry a stated annual distribution of $1.95 per share, subject to their terms.
Outlook, risks and unusual items
- Management was cautiously optimistic about U.S. lodging demand but expected industry RevPAR growth to be moderate amid accelerating supply. It cited positive employment and consumer trends while noting global and geopolitical uncertainty. No specific earnings or RevPAR guidance is provided in the supplied filing text.
- Management expects merger-related integration to continue, with full integration and anticipated cost savings not expected until 2018. Risks include costs exceeding savings, execution challenges, disruption to operations, and failure to realize expected synergies.
- Four shareholder suits challenged the FelCor merger. The filings report voluntary dismissals without prejudice on October 26 and November 2, 2017. A separate pension withdrawal-liability matter had approximately $5.7 million accrued; management said resolution might not occur until 2022 and planned to defend the claims.
- Merger-related property tax reappraisals could increase expense; the potential effect was not quantified. Other disclosed risks include substantial indebtedness, interest-rate exposure, REIT qualification and distribution requirements, and limitations on use of certain acquired tax-loss carryforwards.
- The filing reports no hotel impairment for the periods presented and no off-balance-sheet arrangements. Management said disclosure controls were effective, but FelCor, representing approximately 43% of quarter-end assets, was excluded from the internal-control assessment while integration proceeded.
Important facts for investors to verify
- Comparable-property performance and the contribution of acquired FelCor hotels; reported year-over-year revenue growth is not a same-store measure.
- Progress, costs, timing and realized savings from merger integration, including whether 2018 synergy expectations are achieved.
- Debt maturities, extension conditions, refinancing needs, covenant headroom and sensitivity to interest rates.
- Effects of property tax reassessments, pension-liability claims and REIT-related tax risks.
- Whether operating cash generation can support capital spending, debt service and distributions following the merger; the board retains discretion over future distributions.