RLJ Lodging Trust — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. RLJ is a hotel REIT focused on premium-branded, focused-service and compact full-service properties. At quarter-end it owned 104 hotels with approximately 22,700 rooms, versus 128 hotels a year earlier; prior-year hotel sales make some comparisons non-comparable.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $32.6 million | $448.7 million | $298.1 million | $848.0 million |
| Net income (loss) | $(116.2) million | $33.7 million | $(147.0) million | $62.0 million |
| Net income (loss) attributable to common shareholders | $(121.4) million | $27.2 million | $(157.0) million | $48.1 million |
| Adjusted EBITDA (non-GAAP) | $(50.5) million | $148.4 million | $(9.1) million | $259.9 million |
| Net cash from operating activities | Six-month comparison: $(54.4) million vs. $193.2 million |
Q2 comparable-hotel occupancy was 11.7% versus 83.2%; ADR was $115.94 versus $188.41; RevPAR was $13.56 versus $156.78, a 91.4% decline. For the first half, comparable RevPAR declined 59.7% to $60.04, with occupancy of 36.1% and ADR of $166.46.
At June 30, cash and cash equivalents were $1.048 billion and restricted cash reserves were $44.6 million, totaling $1.093 billion. Debt, net of financing costs, was $2.592 billion, up from $2.196 billion at year-end 2019. The company had drawn $400 million of its $600 million revolver, leaving $200 million undrawn. Six-month investing cash outflow was $43.1 million, primarily hotel improvements; financing cash inflow was $263.3 million, mainly from the revolver draw.
Material changes and management actions
- COVID-19 caused a steep decline in hotel demand: Q2 revenue fell 92.7% year over year. Property operating expenses fell 80.8%, but remained above revenue for the quarter, before depreciation, corporate costs and interest.
- Management had suspended operations at 57 hotels; 21 had reopened by June 30 and another 15 reopened afterward. Open hotels operated with reduced staffing and services. Capital spending and most return-on-investment projects were deferred or suspended.
- The board authorized common dividends of $0.01 per share for each of the first three quarters of 2020, compared with $0.33 per share in each of the first two quarters of 2019. Series A preferred dividends remained $0.4875 per share per quarter. Share repurchases were suspended after $62.6 million of common shares were repurchased in the first half.
- June amendments to the revolver and term loans waived quarterly financial covenant testing through Q1 2021, with modified thresholds thereafter through Q2 2022. Amendments also imposed a $125 million minimum liquidity requirement, higher borrowing pricing, limits on specified dividends, repurchases, debt, asset sales and capital spending, and collateral pledges. Certain asset-sale, equity and debt proceeds may be required to repay debt.
Outlook, risks and unusual items
- Management said COVID-19’s impact on results and liquidity could continue through at least the end of 2020 and potentially beyond. It could not reliably estimate the pandemic’s ultimate impact or when normal operations might resume. Management expected available liquidity, based on its assumptions, to cover obligations for an extended period.
- Key risks include renewed restrictions or hotel closures, weak travel demand and consumer confidence, reopening costs, reduced access to capital, increased indebtedness, and the possibility that deferred property investment affects asset condition or value. The company noted that its business is particularly exposed to business travel.
- One mortgage loan was in a debt-service-coverage cash trap at June 30; four additional mortgages had failed the threshold and were expected to enter cash traps. These events restrict control over certain property cash outflows.
- Interest-rate exposure remained material: approximately $2.0 billion, or 75.9% of indebtedness, was variable rate before considering swaps; 88.2% of total debt was fixed or effectively fixed after hedging. Management estimated a 100-basis-point increase on unhedged variable debt would reduce annual earnings and cash flow by approximately $3.1 million.
- The filing reported no hotel-property impairment for the periods presented. The first-half results include $8.8 million of management and franchise fee reductions from amortization of a prior $35 million Wyndham termination payment. A pre-merger dispute involves an $8.3 million employee withdrawal-liability assessment and a potential indemnity claim; the company said it would vigorously defend the claim.
Most important facts for investors to verify
- Hotel reopening pace, occupancy, ADR and RevPAR trends, including demand recovery after quarter-end.
- Cash burn, unrestricted versus restricted cash availability, and whether liquidity remains above the $125 million covenant minimum.
- Compliance with amended loan terms, covenant thresholds after Q1 2021, borrowing costs and the status of mortgage cash traps.
- Dividend sustainability, required REIT distributions, and any further limits on capital allocation under the credit amendments.
- Whether the COVID-19 outlook, hotel closures, deferred capital spending or the disclosed legal and indemnity matter have materially changed since the filing.