RLJ Lodging Trust — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are U.S. dollars; financial statement amounts are in millions unless noted. RLJ is a hotel REIT focused on premium-branded, focused-service and compact full-service properties. At quarter-end it owned 96 hotels with approximately 21,300 rooms.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $330.5 | $194.3 | $573.4 | $313.8 |
| Net income (loss) | $33.2 | $(52.2) | $17.7 | $(131.3) |
| Net income (loss) attributable to common shareholders | $26.7 | $(57.7) | $5.2 | $(142.0) |
| Basic EPS | $0.16 | $(0.35) | $0.03 | $(0.87) |
| Adjusted EBITDA (non-GAAP) | $111.0 | $43.6 | $165.6 | $47.2 |
Revenue and recovery: Q2 revenue grew 70% year over year; first-half revenue grew 83%. Management attributed the increase principally to stronger demand, higher room rates, and hotels being open for more of the period. Comparable-property Q2 occupancy was 74.7%, ADR was $195.64 and RevPAR was $146.05. RevPAR remained below Q2 2019’s $157.45. First-half comparable RevPAR of $126.83 was also below 2019’s $151.26.
Margins: Adjusted EBITDA margin, calculated as Adjusted EBITDA divided by revenue, was approximately 33.6% in Q2 2022 versus 22.4% in Q2 2021, and 28.9% for the first half versus 15.0%. These are non-GAAP-derived calculations, not company-reported margin measures. Property operating expenses increased with demand; management also cited higher insurance premiums and ground rent, while some expense comparisons benefited from prior-year items.
Cash flow: Operating cash flow was $116.3 for the first half, compared with cash use of $24.0 in 2021. Investing activities used $4.8, including $51.4 of hotel improvements, partly offset by $48.1 of net sale proceeds. Financing activities used $269.6, including repayment of $200.0 on the revolver and $47.4 of share repurchases.
Debt and liquidity: June 30 cash and cash equivalents were $511.5; restricted cash reserves were $44.3. Net carrying value of debt was $2,211.7, down from $2,409.4 at year-end 2021. The $600.0 revolving facility was undrawn at quarter-end. The company reported compliance with applicable debt covenants. After hedges, management stated all debt was fixed or effectively fixed; $1.2 billion was classified as variable-rate debt before considering the hedges.
Material changes and notable items
- Q2 common-share earnings turned positive from a substantial year-earlier loss. First-half earnings were also positive, versus a large prior-year loss. The comparisons include prior-year impairment and debt-extinguishment charges and hedge-related reclassifications.
- Interest expense fell to $23.9 in Q2 from $26.4 and to $48.4 for the first half from $54.3, primarily reflecting lower average debt and lower effective rates after hedges.
- The company sold two hotels for a combined stated sales price of approximately $49.9 and recorded a first-half net gain of $1.1. It repurchased approximately 4.0 million shares for $47.4 during the first half; the new program authorizes up to $250.0 of repurchases.
- In July, RLJ acquired the 124-room 21c Museum Hotel in Nashville for $59.0 and declared a common dividend of $0.05 per share. The common dividend was $0.01 per share in each of the first two quarters of 2022.
- Interest-rate swap fair values improved substantially, with $29.1 of swap assets at June 30 versus net swap liabilities of $19.9 at year-end 2021. First-half results included $8.0 of other income, primarily affected by reclassifications related to discontinued cash-flow hedges.
Outlook, risks and contingencies
The filing provides no quantified forward guidance. Management described demand as improved year over year but noted comparable RevPAR remained below 2019 levels. It cautioned that business travel is an important demand source and that macroeconomic factors affecting business travel can materially affect results. Forward-looking statements are subject to risks and actual results may differ; the filing refers investors to risk factors in the company’s 2021 Form 10-K and reports no material changes to those factors.
In August 2022, after quarter-end, RLJ exited the Leverage Relief Period under its revolver and term-loan agreements. The filing says this reinstated financial covenants and the original leverage-based pricing grid, eliminated the minimum-liquidity covenant and removed share-repurchase limitations. Several term loans and a $200.0 mortgage loan have stated 2023 maturities, with extension options or other conditions described in the filing; refinancing and covenant capacity warrant attention. One mortgage loan was in a cash-trap event at June 30, with approximately $12.3 of lender-held restricted cash. Management reported no litigation expected to have a material adverse effect; ordinary-course litigation remains possible.
Key facts for investors to verify
- Whether hotel demand, occupancy, ADR and RevPAR continue to improve, particularly relative to 2019 and amid business-travel or broader economic weakness.
- Upcoming 2023 debt maturities, available extension options, refinancing terms and covenant compliance following the August 2022 end of covenant relief.
- Cash available for operations and capital spending after restricted reserves, the Nashville acquisition, repurchases and dividends.
- The sustainability of operating margins as property costs rise and prior-period comparison benefits, including hedge reclassifications and Wyndham agreement amortization, change.
- Post-quarter developments in share repurchases, acquisitions, dividends and mortgage cash-trap restrictions.