RLJ Lodging Trust quarterly report, Q1 FY2014

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

MetricQ1 2014Q1 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 billionNot 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

  1. How much of revenue and operating improvement came from comparable hotels versus acquired properties, and how comparable RevPAR and costs develop in later quarters.
  2. The expected funding, returns, and integration or renovation requirements for the ten-hotel acquisition, alongside proceeds and realized economics from the 13 dispositions.
  3. Debt maturities, covenant headroom, available revolver capacity, and sensitivity to interest-rate changes given the variable-rate debt and hedge positions.
  4. The eventual scope, claims, costs, and any financial or legal consequences of the payment-card data breach.
  5. 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.