RLJ Lodging Trust — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Amounts below are in millions of dollars unless noted.
Business context
RLJ is a self-advised REIT focused on premium-branded, focused-service and compact full-service hotels. At year-end, it owned 122 hotels with 20,138 rooms in 21 states and Washington, D.C. Nearly 98% of hotels operated under Marriott, Hilton or Hyatt brands; White Lodging Services managed 71 properties. The company also held an interest in one hotel mortgage loan.
Financial and operating performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $1,160.0 | $1,136.3 | +2.1% |
| Operating income | $220.4 | $203.9 | +8.1% |
| Operating margin | 19.0% | 17.9% | +1.1 percentage points |
| Net income attributable to common shareholders | $200.4 | $218.2 | -8.2% |
| Diluted earnings per share | $1.61 | $1.68 | Down $0.07 |
| FFO attributable to common shareholders and OP unitholders | $317.7 | $348.4 | -8.8% |
| Adjusted FFO | $332.7 | $324.7 | +2.5% |
| EBITDA | $430.6 | $391.4 | +10.0% |
| Adjusted EBITDA | $392.4 | $380.1 | +3.2% |
| Cash from operating activities | $331.4 | $328.9 | +$2.4 |
Comparable-hotel results improved modestly: RevPAR rose 1.2%, ADR rose 1.1% to $164.93, and occupancy was 78.2% (the filing reports a 0.1% increase). Portfolio-wide RevPAR penetration index was 113.9.
Fourth-quarter revenue was $271.5 versus $275.3 in Q4 2015; net income attributable to common shareholders was $75.4 versus $73.8, and diluted EPS was $0.61 versus $0.59.
Year-end cash and cash equivalents were $456.7, up from $134.2. Investing activities provided $173.4, principally from hotel sales, while financing activities used $182.3. Routine hotel improvements and additions were $83.8; restricted cash reserves totaled $67.2.
Year-end debt was approximately $1.6 billion gross ($1,582.7 net carrying value on the balance sheet). Although debt was predominantly variable-rate before hedges, swaps reduced unhedged variable-rate exposure to $142.0 million. The company had $400 million available under its Revolver and reported compliance with debt covenants. Interest expense rose 7.4% to $58.8.
Material changes and unusual items
- Revenue increased 2.1%, while property operating expenses rose 1.6%; operating income improved 8.1%.
- Common-shareholder net income declined despite higher operating income. The comparison reflects 2015’s $39.9 million deferred-tax valuation-allowance release; 2016 recorded $8.2 million of income-tax expense versus a $39.1 million benefit in 2015. Gains on hotel sales were $45.9 million in 2016 versus $28.4 million in 2015.
- RLJ sold four hotels for an aggregate stated sale price of $301.5 million and recorded a $45.9 million gain. Net cash proceeds were $269.2 million; $15.0 million was deferred in connection with post-closing obligations. No hotels were acquired in 2016.
- The company refinanced or modified more than $1.0 billion of debt, extending key maturities and improving pricing and certain covenants. Its 2019 term loans and mortgage maturities warrant attention.
- RLJ repurchased 610,607 shares for approximately $13.3 million during 2016 and declared distributions of $1.32 per share for the year. The board later extended the repurchase program through February 2018 and increased authorization to $440 million.
- The President and CEO resigned in May 2016; the filing attributes lower G&A expense partly to forfeited equity awards. Management stated disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion.
Outlook, risks and contingencies
Management was cautiously optimistic that U.S. economic expansion could support another year of lodging RevPAR growth, but expected growth to be moderate given accelerating hotel supply. It noted fewer acquisition opportunities meeting RLJ’s investment criteria. No specific numerical earnings or RevPAR guidance was provided.
Key risks include lodging-cycle and supply pressures, dependence on business travel and third-party managers, market concentration, brand concentration, labor and operating-cost inflation, significant capital needs, refinancing and interest-rate exposure, and REIT qualification and distribution requirements. New York, South Florida, Austin, Northern California, Chicago and Denver-Boulder were significant revenue markets. The filing reported no material litigation and no off-balance-sheet arrangements. Eight hotels were subject to ground leases.
Important facts for investors to verify
- Whether moderate RevPAR growth can be sustained as new hotel supply increases, especially in weaker markets such as Houston and New York City.
- Debt maturity and refinancing plans, particularly 2019 term-loan maturities and near-term mortgage maturities; confirm available Revolver capacity and covenant headroom.
- The nature, timing and resolution of the $15.0 million post-closing obligations associated with hotel sales.
- How the CEO transition and reliance on WLS and the three principal brand families affect operations and oversight.
- Whether recurring capital expenditures, distributions and any further share repurchases remain supportable from operating cash flow and liquidity.