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RLJ > SEC Filings for RLJ > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for RLJ LODGING TRUST

Form 10-Q for RLJ LODGING TRUST


6-Aug-2014

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, 2013, filed with the SEC on February 27, 2014 (the "Annual Report"), which is accessible on the SEC's website at www.sec.gov.

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.

Overview

We are a self-advised and self-administered Maryland real estate investment trust ("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 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 and compact full-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 ("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 are encouraged by recent improvements in the U.S. economy. Unemployment rates, corporate profits, and consumer confidence are showing signs of steady improvement. We expect that these improvements will bode well for the lodging sector. We recognize that geopolitical challenges remain and, if elevated, may deteriorate economic conditions. However, with growth in lodging supply expected to be below the historical average for the next few years and improvements in the economy 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 June 30, 2014, we owned 148 properties, comprised of 146 hotels with approximately 22,900 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in a mortgage loan secured by a hotel. We own, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of one property in which we own a 98.1% controlling interest in a joint venture.

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 June 30, 2014, 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 markets with high barriers
to entry, value-add renovations and conservative balance sheet management.
During the three months ended June 30, 2014, the following significant
activities took place:

            Completed a follow-on public offering of 9,200,000 common shares of
             beneficial interest at a public offering price of $26.45 per share,
             for net proceeds of approximately $232.8 million, after deducting
             the underwriting discount and other estimated offering costs;

Acquired three hotels for an aggregate purchase price of $191.7 million;

Sold one hotel for $13.5 million and recorded a gain on sale of $1.3 million; and

Declared a cash dividend of $0.22 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 business districts within 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.

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 and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other 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


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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 accounting principles generally accepted in the United States of America ("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 portfolio 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:

Occupancy

Average Daily Rate ("ADR")

RevPAR

Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring revenue 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 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 Hotels 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 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. Interest used to finance real estate under development is capitalized as an additional cost of development. Upon the sale or disposal of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is recognized.


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In accordance with the guidance on impairment or disposal of long-lived assets, we do not consider "held for sale" classification until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. We do not depreciate properties so long as they are classified as held for sale. Upon designation as 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 is reflected as an impairment charge.

We assess carrying value whenever events or changes in circumstances indicate that the carrying amounts may not be fully recoverable. Recoverability is measured by comparison of the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of properties. If our analysis indicates that the carrying value 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. 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.

Recently Issued Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which significantly changed the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on operations and final results should be presented as discontinued operations. The guidance also provides additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance applies to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We adopted the new guidance for the quarterly period ended March 31, 2014. Prior to January 1, 2014, properties disposed of were presented in discontinued operations for all periods presented.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and will expand disclosures about revenue. The guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years. Early adoption is not permitted. We are currently evaluating whether this ASU will have a material impact on our financial position, results of operations or cash flows.


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Results of Operations

At June 30, 2014, we owned 148 properties. Based on when a property is acquired, disposed of or closed for renovation, operating results for certain properties are not comparable for the three and six months ended June 30, 2014 and 2013. The non-comparable properties include 20 acquisitions which took place between January 1, 2013 and June 30, 2014 and 14 dispositions which took place in 2014. The 20 acquisitions include three properties that are closed for renovation. There were three hotels disposed of during 2013 which are included in discontinued operations for the six months ended June 30, 2013, and therefore not included in the comparisons presented.

Comparison of the three months ended June 30, 2014 to the three months ended

June 30, 2013
                                        For the three months ended June 30,
                                            2014                   2013            $ change       % change
                                                      (amounts in thousands)
Revenue
Operating revenue
Room revenue                         $        259,447       $        228,390     $   31,057          13.6  %
Food and beverage revenue                      27,481                 25,088          2,393           9.5  %
Other operating department revenue              8,119                  7,345            774          10.5  %
Total revenue                                 295,047                260,823         34,224          13.1  %
Expense
Operating expense
Room expense                                   54,136                 47,065          7,071          15.0  %
Food and beverage expense                      18,746                 17,220          1,526           8.9  %
Management fee expense                         11,957                  9,370          2,587          27.6  %
Other operating expense                        78,932                 73,070          5,862           8.0  %
Total property operating expense              163,771                146,725         17,046          11.6  %
Depreciation and amortization                  35,422                 31,853          3,569          11.2  %
Property tax, insurance and other              17,938                 16,536          1,402           8.5  %
General and administrative                     10,135                  9,084          1,051          11.6  %
Transaction and pursuit costs                   2,411                  1,255          1,156          92.1  %
Total operating expense                       229,677                205,453         24,224          11.8  %
Operating income                               65,370                 55,370         10,000          18.1  %
Other income                                      405                     91            314         345.1  %
Interest income                                   962                    240            722         300.8  %
Interest expense                              (14,142 )              (16,785 )        2,643         (15.7 )%
Income from continuing operations
before income taxes                            52,595                 38,916         13,679          35.2  %
Income tax expense                               (494 )                 (345 )         (149 )        43.2  %
Income from continuing operations              52,101                 38,571         13,530          35.1  %
Income from discontinued operations                 -                  2,410         (2,410 )           -  %
Gain on disposal of hotel properties            1,260                      -          1,260             -  %
Net income                                     53,361                 40,981         12,380          30.2  %
Net income attributable to
non-controlling interests
Noncontrolling interest in joint
venture                                           (79 )                 (203 )          124         (61.1 )%
Noncontrolling interest in common
units of Operating Partnership                   (378 )                 (268 )         (110 )        41.0  %
Net income attributable to common
shareholders                         $         52,904       $         40,510     $   12,394          30.6  %


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Revenue

Total revenue increased $34.2 million, or 13.1%, to $295.0 million for the three
months ended June 30, 2014 from $260.8 million for the three months ended June
30, 2013. The increase was a result of $19.4 million in revenue attributable to
non-comparable properties and a 6.4% increase in RevPAR at the comparable
properties.

The following are the quarter-to-date key hotel operating statistics for hotels
owned at June 30, 2014 and 2013, respectively:
                                          For the three months ended June 30,
                                            2014                        2013
Number of comparable properties
(at end of period)                                 128                          128           - %
Occupancy                                         82.4 %                       79.3 %       4.0 %
ADR                               $             152.49         $             149.11         2.3 %
RevPAR                            $             125.71         $             118.19         6.4 %

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 $31.1 million, or 13.6%, to $259.4 million for the three months ended June 30, 2014 from $228.4 million for the three months ended June 30, 2013. This increase was a result of $17.6 million of room revenue from non-comparable properties and a 6.4% increase in RevPAR at the comparable properties.

Food and Beverage Revenue

Food and beverage revenue increased $2.4 million, or 9.5%, to $27.5 million for the three months ended June 30, 2014 from $25.1 million for the three months ended June 30, 2013. The increase includes $1.2 million of food and beverage revenue from non-comparable properties. Food and beverage revenue for the remainder of the portfolio increased $1.2 million.

Other Operating Department Revenue

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $0.8 million, or 10.5%, to $8.1 million for the three months ended June 30, 2014 from $7.3 million for the three months ended June 30, 2013. The majority of this increase was due to $0.6 million of other operating department revenue from non-comparable properties.

Property Operating Expense

Property operating expense increased $17.0 million, or 11.6%, to $163.8 million for the three months ended June 30, 2014 from $146.7 million for the three months ended June 30, 2013. This increase includes $9.7 million in property 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 $3.6 million, or 11.2%, to $35.4 million for the three months ended June 30, 2014 from $31.9 million for the three months ended June 30, 2013. The increase is a result of a $3.2 million increase in depreciation and amortization expense arising from non-comparable properties.

Property Tax, Insurance and Other

Property tax, insurance and other expense increased $1.4 million, or 8.5%, to $17.9 million for the three months ended June 30, 2014 from $16.5 million for the three months ended June 30, 2013. The increase includes $1.6 million in property tax, insurance and other expense attributable to non-comparable properties. The remaining decrease of $0.2 million represents the


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net impact of increasing property tax assessments, partially offset by favorable resolution of property tax appeals at the comparable properties.

General and Administrative

General and administrative expense increased $1.1 million, or 11.6%, to $10.1 million for the three months ended June 30, 2014 from $9.1 million for the three months ended June 30, 2013. The increase in general and administrative expense is primarily attributable to an increase in salary expense of $0.3 million and amortization of restricted share awards of $0.5 million.

Interest Expense

The components of our interest expense for the three months ended June 30, 2014
and 2013 were as follows (in thousands):
                                                    For the three months ended June 30,
                                                    2014                           2013
. . .
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