Business context and reporting period
RLJ Lodging Trust’s unaudited Form 10-Q covers the three months ended March 31, 2014. The REIT primarily owns premium-branded focused-service and compact full-service hotels. At quarter-end, it owned 146 properties: 144 hotels with approximately 22,400 rooms, two planned hotel conversions, and an interest in a hotel-secured mortgage loan.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Revenue | $236.4 million | $214.9 million; up 10.0% |
| Operating income / margin | $29.0 million / 12.3% | $25.5 million / 11.9% |
| Net income | $12.0 million | $8.6 million |
| Net income attributable to common shareholders; diluted EPS | $11.9 million; $0.10 | $8.5 million; $0.08 |
| Operating cash flow | $31.6 million | $34.0 million |
| FFO / Adjusted FFO | $47.4 million / $53.5 million | $39.9 million / $44.1 million |
| EBITDA / Adjusted EBITDA | $59.8 million / $67.4 million | $57.2 million / $61.3 million |
| Cash and cash equivalents | $270.8 million | $332.2 million at Dec. 31, 2013 |
| Total debt | $1.56 billion | Not stated as a comparable total in the filing text |
| Total assets / total liabilities | $3.84 billion / $1.71 billion | $3.72 billion / $1.57 billion at Dec. 31, 2013 |
Comparable-property occupancy was 73.5% versus 71.2%, ADR was $142.09 versus $138.26, and RevPAR was $104.46 versus $98.47. RevPAR increased 6.1%. The company reported $210.6 million of net cash used in investing activities and $117.5 million provided by financing activities; cash declined $61.5 million during the quarter.
Material changes versus the prior comparable period
- Revenue increased 10.0%, including $11.1 million from non-comparable properties and a 6.1% increase in comparable-property RevPAR.
- Operating expenses rose 9.5% to $207.3 million. Property operating expense increased 9.1%; management fees, property tax and insurance, and G&A also increased.
- Interest expense fell 13.2% to $14.6 million, mainly as mortgage balances declined, partially offset by greater term-loan borrowing. Net income includes a $2.6 million loss on hotel disposals; the company also incurred $0.8 million in defeasance costs.
- Cash from operations decreased to $31.6 million from $34.0 million, including a larger cash outflow from changes in operating assets and liabilities.
Outlook, management commentary, risks and unusual items
- Management described its outlook as cautiously optimistic, citing expected below-historical-average lodging supply growth and rising corporate profits, while acknowledging economic and geopolitical uncertainty. It did not provide numerical earnings or operating guidance in the supplied filing text.
- In March, the company acquired ten hotels with 1,560 rooms for approximately $312.5 million and sold 13 hotels for approximately $114.5 million. It recorded the disposal loss noted above. The acquisition was funded partly by increased term loans and partly with cash.
- The company amended its credit agreement: the 2012 five-year term loan maturity was extended to March 2019, its margin was reduced by 0.15%, and term-loan borrowings were increased. Term loans totaled $1.025 billion at quarter-end; the $300 million revolving facility had no outstanding balance. The company reported compliance with debt covenants.
- Interest-rate exposure is significant: approximately $1.391 billion of debt was variable-rate, or 89.1% of total indebtedness. Management estimated that a 100-basis-point rate increase would reduce annual earnings and cash flows by approximately $5.9 million after hedging.
- A third-party hotel manager reported a data breach affecting 14 managed hotels, including seven owned by RLJ. Malware may have captured data from approximately 95,000 credit cards. No claims had been made; the company could not estimate costs or assessments, but management then expected any impact not to be material.
- Other considerations include seasonal hotel demand, dependence on access to debt and equity capital for acquisitions and renovations, and the need to fund property improvements. Restricted cash reserves were $57.2 million. No material litigation, off-balance-sheet arrangements, or material change in previously disclosed risk factors was reported.
- The company declared a quarterly dividend of $0.22 per share, up 7.3% from Q4 2013; it was paid April 15, 2014. It adopted revised discontinued-operations guidance for the quarter.
Important facts for investors to verify
- How much of revenue and operating improvement came from comparable hotels versus acquired properties, and how comparable RevPAR and costs develop in later quarters.
- The expected funding, returns, and integration or renovation requirements for the ten-hotel acquisition, alongside proceeds and realized economics from the 13 dispositions.
- Debt maturities, covenant headroom, available revolver capacity, and sensitivity to interest-rate changes given the variable-rate debt and hedge positions.
- The eventual scope, claims, costs, and any financial or legal consequences of the payment-card data breach.
- Whether operating cash flow can support dividends, recurring capital needs, and growth plans while cash balances are lower and REIT distribution requirements constrain retained earnings.