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RLJ > SEC Filings for RLJ > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for RLJ LODGING TRUST



Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013 (the "Annual Report"), which is accessible on the SEC's website at

Statement Regarding Forward-Looking Information

The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," "may" or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates. Given these uncertainties, undue reliance should not be placed on such statements.

Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.


We are a self-advised and self-administered Maryland real estate investment trust, or REIT, that acquires primarily premium-branded, focused-service and compact full-service hotels. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in urban and dense suburban markets that we believe exhibit multiple demand generators and high barriers to entry.

Our strategy is to acquire primarily premium-branded, focused-service and compact full-service hotels. Focused-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service and compact full-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve Revenue per Available Room, or RevPAR, levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

We recognize the challenging geopolitical environment and the possibility that the current economic recovery might not be as robust as anticipated or that economic conditions could deteriorate. However, with growth in lodging supply expected to be below historical averages for the next few years and corporate profits rising, we currently do not anticipate any significant slowdown in lodging fundamentals. Accordingly, we remain cautiously optimistic that we are in the midst of a multi-year lodging recovery.

Furthermore, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our cash on hand and expected access to capital (including availability under our unsecured revolving

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credit facility) along with our senior management team's experience, extensive industry relationships and asset management expertise, will enable us to compete effectively for such acquisitions and enable us to generate additional internal and external growth.

As of September 30, 2013, we owned 149 properties, comprised of 147 hotels with approximately 22,300 rooms and two planned hotel conversions, located in 22 states and the District of Columbia, interests in land parcels located adjacent to certain hotels and an interest in a mortgage loan secured by a hotel. We own, through wholly-owned subsidiaries, 100% of the interests in 146 hotels and two planned hotel conversions and a 95% interest in one hotel.

We elected to be taxed as a REIT, for U.S. federal income tax purposes, when we filed our U.S. federal tax return for the taxable year ended December 31, 2011. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the "Operating Partnership"). We are the sole general partner of our operating partnership. As of September 30, 2013, we owned, through a combination of direct and indirect interests, 99.3% of the units of limited partnership interest in the Operating Partnership ("OP units").

Recent Significant Activities

Our recent significant activities reflect our commitment to maximizing
shareholder value through selective acquisitions in urban and dense suburban
markets with high barriers to entry, value-add renovations and conservative
balance sheet management. During the three months ended September 30, 2013, the
following significant activities took place:

            Acquired the Residence Inn Atlanta Midtown/Historic through the
             foreclosure of a mortgage loan collateralized by the property. The
             property is currently closed for operations and will be undergoing a
             comprehensive renovation and is expected to reopen in the third
             quarter of 2014;

            Disposed of the Courtyard Goshen through a foreclosure sale. In
             conjunction with this transaction, we recorded a $3.3 million gain
             on extinguishment of indebtedness which is included in discontinued
             operations in our Statement of Operations;

            Refinanced approximately $565.0 million in debt, which decreased our
             weighted average cost of debt by almost 100 basis points. As a
             result of this refinancing, we expect to realize significant
             interest expense savings in future periods;

            Completed $150.0 million of financing secured by four hotels. A
             significant portion of this amount was used to repay borrowings on
             our revolving credit facility which was used to temporarily finance
             a portion of the $565.0 million debt refinancing. After these two
             debt transactions, our total number of unencumbered assets is now
             110; and

Declared a cash dividend of $0.205 per share for the quarter.

Our Customers

Substantially all of our hotels consist of premium-branded focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in the business districts and dense suburban markets of major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.

Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, group business that utilizes meeting space represents a small component of our customer base.

A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.

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Our Revenues and Expenses

Our revenue is primarily derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists of telephone, parking and other guest services.

Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other operating expenses. Room expense includes housekeeping wages and payroll taxes, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

Key Indicators of Financial Performance

We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with GAAP as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our porfolio and potential acquisitions to determine each hotel's contribution to the cash flow and its potential to provide attractive long-term total returns. These key indicators include:


Average Daily Rate (ADR)


Occupancy, ADR and RevPAR are measures commonly used within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis, comparing the results to our budget and RevPAR for prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.

We also use FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as non-GAAP measures of the operating performance of our business. See "Non-GAAP Financial Measures."

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the combined consolidated financial statements included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.

Investment in Hotel and Other Properties

Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. We may also acquire intangibles related to in-place leases, management agreements

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and franchise agreements when properties are acquired. We allocate the purchase price among the assets acquired and liabilities assumed based on their respective fair values.

Our investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangibles arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement. Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposition of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in discontinued operations.

We consider each individual property to be an identifiable component of the business. In accordance with the guidance on impairment or disposal of long-lived assets, we do not consider a property as "held for sale" until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. Once a property is designated as held for sale the operations for that property are included in discontinued operations. We do not depreciate properties so long as they are classified as held for sale. Upon designation of a property as being held for sale and quarterly thereafter, we review the realizability of the carrying value, less cost to sell, in accordance with the guidance. Any such adjustment in the carrying value of a property classified as held for sale is reflected in discontinued operations.

We assess the carrying values of each property whenever events or changes in circumstances indicate that the carrying amounts of these properties may not be fully recoverable. Recoverability of the property is measured by comparison of the carrying amount of the property to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of the property. If our analysis indicates that the carrying value of the property is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the property. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.

The use of projected future cash flows is based on assumptions that are consistent with a market participant's future expectations for the travel industry and economy in general and our plans to manage the underlying properties. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and our ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the properties.

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Results of Operations

At September 30, 2013, we owned 149 properties. All properties owned at September 30, 2013 have been included in our results of continuing operations for the three and nine months ended September 30, 2013 and 2012. There were two hotels disposed of during the periods presented, which are included in discontinued operations for the three and nine months ended September 30, 2013 and 2012. Based on when a property is acquired or closed for renovation, operating results for certain properties are not comparable for the three and nine months ended September 30, 2013 and 2012. The properties listed in the table below are hereafter referred to as non-comparable properties:

                                                                        Non-comparable property for the
                                                                        three months        nine months
                                                                       ended September    ended September
                                                                        30, 2013 and       30, 2013 and
Property                           Location        Acquisition Date         2012               2012
Hotel Indigo New Orleans
Garden District (1)            New Orleans, LA     October 26, 2010           x                  x
Residence Inn Bethesda Hotel
Downtown                       Bethesda, MD          May 29, 2012                                x
Courtyard New York /
Manhattan Upper East Side      New York, NY          May 30, 2012                                x
Hilton Garden Inn San
Francisco / Oakland Bay
Bridge                         Emeryville, CA        June 11, 2012                               x
Embassy Suites
Boston/Waltham                 Waltham, MA         November 13, 2012          x                  x
Courtyard Houston Downtown     Houston, TX          March 19, 2013            x                  x
Residence Inn Houston
Downtown                       Houston, TX          March 19, 2013            x                  x
Humble Tower Apartments (2)    Houston, TX          March 19, 2013            x                  x
Courtyard Waikiki Beach        Honolulu, HI          June 17, 2013            x                  x
Vantaggio Suites Cosmo (3)     San Francisco, CA     June 21, 2013            x                  x
Residence Inn Atlanta
Midtown/Historic               Atlanta, GA          August 6, 2013            x                  x

1. Property was closed for renovation until December 27, 2012.

2. Conversion to a 166-room SpringHill Suites expected to be complete by mid-2015.

3. The property is not currently open for operations. Conversion to a 150-room Courtyard expected to be complete by late 2014.

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Comparison of the three months ended September 30, 2013 to the three months

ended September 30, 2012

                                        For the three months ended
                                               September 30,
                                          2013                2012          $ change       % change
                                                  (amounts in thousands)
Operating revenue
Room revenue                        $    221,597         $    196,642     $   24,955           12.7  %
Food and beverage revenue                 22,907               21,345          1,562            7.3  %
Other operating department revenue         7,891                6,263          1,628           26.0  %
Total revenue                            252,395              224,250         28,145           12.6  %
Operating expense
Room expense                              49,497               43,299          6,198           14.3  %
Food and beverage expense                 16,629               15,135          1,494            9.9  %
Management fee expense                     8,783                7,877            906           11.5  %
Other operating expense                   74,631               67,098          7,533           11.2  %
Total property operating expense         149,540              133,409         16,131           12.1  %
Depreciation and amortization             31,575               30,737            838            2.7  %
Impairment loss                                -                  896           (896 )       (100.0 )%
Property tax, insurance and other         16,651               14,175          2,476           17.5  %
General and administrative                 8,969                8,101            868           10.7  %
Transaction and pursuit costs                478                  326            152           46.6  %
Total operating expense                  207,213              187,644         19,569           10.4  %
Operating income                          45,182               36,606          8,576           23.4  %
Other income                                 164                   68             96          141.2  %
Interest income                              241                  416           (175 )        (42.1 )%
Interest expense                         (16,511 )            (20,723 )        4,212          (20.3 )%
Gain on foreclosure                        4,831                    -          4,831              -
Income from continuing operations
before income taxes                       33,907               16,367         17,540          107.2  %
Income tax expense                          (181 )               (339 )          158          (46.6 )%
Income from continuing operations         33,726               16,028         17,698          110.4  %
Income (loss) from discontinued
operations                                 3,202                 (727 )        3,929         (540.4 )%
Net income                                36,928               15,301         21,627          141.3  %
Net (income) loss attributable to
non-controlling interests
Noncontrolling interest in joint
venture                                     (166 )                 44           (210 )       (477.3 )%
Noncontrolling interest in common
units of Operating Partnership              (293 )               (149 )         (144 )         96.6  %
Net income attributable to common
shareholders                        $     36,469         $     15,196     $   21,273          140.0  %


Total revenue increased $28.1 million, or 12.6%, to $252.4 million for the three months ended September 30, 2013 from $224.3 million for the three months ended September 30, 2012. The increase was a result of $16.5 million in revenue attributable to non-comparable properties and a 5.1% increase in RevPAR at the comparable properties.

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The following are the quarter-to-date key hotel operating statistics for hotels owned at September 30, 2013 and 2012, respectively:

                                       For the three months ended September 30,
                                            2013                        2012             % Change
Number of properties (at end of
period)                                            149                          142         4.9 %
Occupancy %                                       78.1 %                       76.7 %       1.9 %
ADR                               $             138.61         $             132.87         4.3 %
RevPAR                            $             108.29         $             101.91         6.3 %

Portfolio RevPAR increased to $108.29 from $101.91, a 6.3% increase. RevPAR, excluding non-comparable properties, increased 5.1% and was driven by a 1.8% increase in occupancy and a 3.3% increase in ADR.

Room Revenue

Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales. Room revenue increased $25.0 million, or 12.7%, to $221.6 million for the three months ended September 30, 2013 from $196.6 million for the three months ended September 30, 2012. This increase was a result of $14.3 million of room revenue from non-comparable properties and an 5.1% increase in RevPAR at the comparable properties.

Food and Beverage Revenue

Food and beverage revenue increased $1.6 million, or 7.3%, to $22.9 million for the three months ended September 30, 2013 from $21.3 million for the three months ended September 30, 2012. The increase includes $0.9 million in food and beverage revenue arising from non-comparable properties. Food and beverage revenue for the remainder of the portfolio increased $0.7 million.

Other Operating Department Revenue

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $1.6 million, or 26.0%, to $7.9 million for the three months ended September 30, 2013 from $6.3 million for the three months ended September 30, 2012. This increase was primarily due to $1.3 million of other operating department revenue from non-comparable properties.

Hotel Operating Expense

Hotel operating expense increased $16.1 million, or 12.1%, to $149.5 million for the three months ended September 30, 2013 from $133.4 million for the three months ended September 30, 2012. This increase includes $9.8 million in hotel operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees at the comparable properties. Room expense, food and beverage expense, and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs. Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.

Depreciation and Amortization

Depreciation and amortization expense increased $0.8 million, or 2.7%, to $31.6 million for the three months ended September 30, 2013 from $30.7 million for the three months ended September 30, 2012. The increase is the result of a $2.1 million increase in depreciation and amortization expense arising from . . .

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