RLJ Lodging Trust — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, with quarterly results through Q4. This was RLJ’s first year as a public REIT: it completed its IPO and formation transactions on May 16, 2011. The 2011 annual results combine the predecessor’s operations with the company’s post-IPO results; prior-year figures reflect the predecessor and are not fully comparable.
Business context and operating performance
RLJ owned 141 hotels with 20,646 rooms across 20 states and the District of Columbia at year-end, primarily premium-branded focused-service and compact full-service properties. Marriott and Hilton brands accounted for 128 hotels; White Lodging Services managed 104 hotels.
- FY 2011 occupancy was 71.4%, ADR was $124.60 and RevPAR was $88.99. For properties owned throughout both 2011 and 2010, RevPAR rose 7.4%, from a 3.4% increase in occupancy and a 3.9% increase in ADR.
- Year-end portfolio RevPAR penetration index was 112.6, indicating RevPAR above the portfolio’s selected competitive sets; management notes that competitive sets are subjective.
- Q4 revenue was $189.3 million. Continuing-operations loss was $1.2 million and net loss attributable to common shareholders was $1.3 million.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | $759.0 million | $516.7 million |
| Operating income | $84.0 million | $41.5 million |
| Net income (loss) | $11.7 million | ($22.6 million) |
| Net income (loss) from continuing operations | ($10.1 million) | ($42.2 million) |
| Net income (loss) attributable to common shareholders | $11.3 million | ($22.5 million) |
| Cash provided by operating activities | $134.1 million | $64.1 million |
| Cash used in investing activities | ($347.0 million) | ($786.6 million) |
| Cash provided by financing activities | $255.7 million | $838.6 million |
- Room revenue made up 86.6% of 2011 total revenue. Hotel operating expenses were $461.3 million; the resulting hotel operating contribution was $297.6 million, or approximately 39.2% of revenue. GAAP operating margin was approximately 11.1%; net margin was approximately 1.5%, including discontinued operations.
- FFO attributable to common shareholders was $118.5 million and Adjusted FFO was $142.2 million. EBITDA was $238.5 million and Adjusted EBITDA was $234.4 million. These are non-GAAP measures; the filing cautions they may not be comparable across companies.
- Cash and cash equivalents were $310.2 million, with a further $87.3 million in restricted reserves. Total assets were $3.29 billion and total equity was $1.83 billion.
- Mortgage debt was $1.342 billion, down from $1.747 billion at year-end 2010. Variable-rate debt was $558 million; management estimated a 100-basis-point rate increase would reduce annual earnings and cash flow by approximately $2.4 million after hedging.
- The undrawn unsecured revolving facility provided up to $300 million and matured in June 2014, with a one-year extension option. The company reported compliance with its covenants at year-end. Scheduled mortgage principal maturities were concentrated in 2013 ($345.2 million) and 2016 ($551.8 million).
Changes versus prior periods and unusual items
- Revenue increased 46.9% year over year, with $210.3 million attributed to the net impact of acquisitions and improving same-property lodging performance. Hotel operating expenses rose 47.9%; depreciation and amortization rose 32.2%.
- Continuing-operations loss narrowed by $32.1 million. Total net income turned positive largely because discontinued operations included a $23.5 million gain on extinguishment of debt. That gain should not be treated as recurring operating earnings.
- Interest expense increased 10.7% to $96.0 million, reflecting acquisition-related debt, financing costs and payoff costs, partly offset by lower hedge-related expense and debt repayments.
- The IPO generated $567.7 million in gross share proceeds, including the overallotment. Net IPO proceeds and cash on hand were used in part to repay approximately $472.6 million of secured debt; overallotment proceeds were held as cash for working capital or investment.
- In Q4, RLJ recorded a $3.1 million out-of-period depreciation adjustment, primarily for underreported depreciation in the first three quarters of 2011. Management stated that the errors and correction were not material.
- Capital investment was significant: $93.5 million of hotel improvements and additions were paid during 2011, and $115.0 million of capital improvements were authorized for projects at 48 hotels, including brand conversions.
Outlook, risks and contingencies
- Management described itself as cautiously optimistic about a multiyear lodging recovery, citing rising corporate profits and expected hotel supply growth below historical averages. It did not provide quantified earnings or RevPAR guidance in the supplied filing text.
- Management’s financing objective is to keep net debt-to-EBITDA at or below 5.0x, pursue staggered maturities, and increase use of fixed-rate or hedged debt and, over time, unsecured borrowing.
- Two mortgage defaults require close attention. RLJ ceased subsidizing debt service on Courtyard Goshen and SpringHill Suites Southfield; Goshen was in default at year-end, and the Southfield default notice arrived in January 2012. Combined year-end principal was approximately $10.6 million. RLJ intended to work with lenders on orderly transfers.
- RLJ transferred the New York LaGuardia Airport Marriott to lenders through a deed-in-lieu arrangement in August 2011, recognizing the $23.5 million debt-extinguishment gain in discontinued operations.
- Key exposures include lodging-cycle and business-travel sensitivity, seasonality, local-market concentration, refinancing and interest-rate risk, recurring renovation requirements, and dependence on third-party managers and major hotel brands. Manager and brand concentration is notable: WLS managed 104 hotels and Marriott/Hilton brands accounted for 128.
- REIT qualification depends on complex income, asset, ownership and distribution tests. The company intends to distribute at least 90% of REIT taxable income; restrictions on retained cash may increase reliance on debt or equity financing for acquisitions and capital needs.
- The filing reports no material litigation and no off-balance-sheet arrangements. Management concluded disclosure controls were effective at year-end; the 10-K did not include management’s assessment or auditor attestation of internal control over financial reporting because of the newly public company transition period.
Most important facts for investors to verify
- Underlying same-property RevPAR and margin trends, separating organic growth from acquisitions and the predecessor/public-company reporting transition.
- Refinancing plans and available liquidity for the 2012–2016 mortgage maturities, including covenant headroom and the status of the Goshen and Southfield defaults.
- Recurring capital requirements, progress and returns on the $115.0 million improvement program, and whether restricted FF&E reserves are sufficient.
- Cash generation and recurring FFO/EBITDA after excluding debt-extinguishment gains, IPO costs and other adjustments; assess the definitions and reconciliations of non-GAAP measures.
- Ongoing REIT compliance, distributions relative to taxable income and operating cash flow, and the effect of financing needs on potential dilution.