RLJ Lodging Trust — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. RLJ is a hotel REIT focused primarily on premium-branded, focused-service and compact full-service hotels. At quarter-end, it owned 125 hotels with approximately 20,800 rooms and held an interest in one hotel mortgage loan.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $275.2 million | $270.4 million | +1.8% |
| Operating income | $41.2 million | $39.2 million | +5.2% |
| Operating margin | 15.0% | 14.5% | +0.5 percentage points |
| Net income | $25.4 million | $48.1 million | -47.3% |
| Net income attributable to common shareholders | $25.3 million | $47.9 million | -47.1% |
| Diluted EPS | $0.20 | $0.36 | Down $0.16 |
| FFO attributable to common shareholders | $66.3 million | $63.0 million | +5.1% |
| Adjusted FFO attributable to common shareholders | $70.8 million | $67.3 million | +5.2% |
| Adjusted EBITDA attributable to common shareholders | $86.0 million | $81.1 million | +6.1% |
| Cash flow from operations | $55.2 million | $44.1 million | +$11.1 million |
Comparable-hotel occupancy was 75.8% versus 75.9%; average daily rate (ADR) rose 1.9% to $165.20 and RevPAR increased 1.7% to $125.14. Room revenue grew 3.0% to $239.5 million, while food and beverage revenue fell 8.4% to $26.6 million.
Net income declined chiefly because Q1 2015 included a $22.3 million gain on the sale of 20 hotels; Q1 2016 recorded a $0.2 million loss on the sale of one hotel. Income from continuing operations was $25.5 million, down 1.1%. Interest expense rose 10.2% to $14.9 million. Adjusted FFO and Adjusted EBITDA are company-defined non-GAAP measures and should be considered alongside GAAP results.
Balance sheet, debt and liquidity
- At March 31, 2016, cash and cash equivalents were $126.0 million, restricted cash reserves were $54.5 million, and total assets were $3.94 billion.
- Debt carrying values were $1.17 billion for term loans and the revolving facility and $415.5 million for mortgage loans, or approximately $1.59 billion combined, net of deferred financing costs. The $300 million revolver was undrawn and fully available at quarter-end.
- Quarter-end equity was $2.15 billion. Cash declined $8.2 million during the quarter. Investing activities used $18.9 million, primarily for $22.3 million of hotel improvements; financing activities used $44.4 million, including $41.4 million of distributions and $11.3 million of share repurchases.
- Approximately 97.9% of total indebtedness was variable-rate debt before considering hedges; after swaps, $142 million (8.9% of total indebtedness) remained exposed to variable rates. A 100-basis-point rate increase was estimated to reduce annual earnings and cash flow by about $1.4 million, assuming existing hedges.
- Restricted reserves for future hotel capital expenditures, real estate taxes and insurance were approximately $54.5 million. The company reported compliance with its debt covenants and no off-balance-sheet arrangements.
Material changes, outlook and risks
- Comparable-property revenue growth was attributed to a 1.7% increase in RevPAR. The company reported lodging demand at record levels and industry supply below historical averages, and described its near-term lodging-cycle outlook as “cautiously optimistic.” It provided no specific earnings or operating guidance in the supplied filing text.
- During Q1, RLJ sold one 62-room hotel for approximately $2.9 million, modified two mortgage loans to lower interest rates and extend maturities, repurchased 510,498 shares for approximately $11.3 million at an average $22.11 per share, and declared a $0.33-per-share quarterly dividend.
- On April 22, 2016, after quarter-end, RLJ amended and restated its revolver and one term loan: revolver capacity increased from $300 million to $400 million and its maturity was extended to 2020; the term loan maturity was extended to 2021.
- Interest-rate swap liabilities increased to $36.9 million from $17.1 million at year-end, and the quarter included a $20.2 million unrealized loss on derivatives in other comprehensive income. Approximately $14.7 million of net unrealized hedge losses was expected to be reclassified to interest expense within 12 months.
- Management identified risks including economic and lodging-market weakness, seasonality, competition, travel disruptions and natural disasters, interest-rate changes, access to capital and financing, acquisition execution, and uncertainty in accounting estimates. Management reported no material change to previously disclosed risk factors, no material litigation, and effective disclosure controls.
Important facts for investors to verify
- How comparable RevPAR, ADR and occupancy perform in later quarters, and whether room-revenue growth offsets continued pressure in food and beverage revenue.
- Whether the amended credit facilities’ terms, covenants and extended maturities improve financing flexibility, and how much debt remains exposed to floating rates after hedging.
- Whether operating cash flow covers capital needs, distributions and share repurchases; note that the quarter’s $41.4 million of distributions exceeded net income.
- How the $14.7 million expected hedge-loss reclassification and higher interest expense affect future reported earnings and cash flow.
- The effect of the prior-year hotel-sale gain on year-over-year GAAP comparisons; assess recurring operations using GAAP results together with clearly reconciled non-GAAP measures.