Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
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| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35169
RLJ LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
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| | |
Maryland | | 27-4706509 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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| | |
3 Bethesda Metro Center, Suite 1000 | | |
Bethesda, Maryland | | 20814 |
(Address of Principal Executive Offices) | | (Zip Code) |
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| | | | | | |
Large accelerated filer | | ý | | Accelerated filer | | o |
| | | | | | |
Non-accelerated filer | | o | | Smaller reporting company | | o |
| | | | | | |
| | | | Emerging growth company | | o |
| | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of November 1, 2018, 175,199,264 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
TABLE OF CONTENTS
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| Consolidated Financial Statements (unaudited) | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
(unaudited)
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Assets | |
| | |
|
Investment in hotel properties, net | $ | 5,373,171 |
| | $ | 5,791,925 |
|
Investment in unconsolidated joint ventures | 22,472 |
| | 23,885 |
|
Cash and cash equivalents | 425,384 |
| | 586,470 |
|
Restricted cash reserves | 78,113 |
| | 72,606 |
|
Hotel and other receivables, net of allowance of $610 and $510, respectively | 76,914 |
| | 60,011 |
|
Deferred income tax asset, net | 52,415 |
| | 56,761 |
|
Intangible assets, net | 53,633 |
| | 133,211 |
|
Prepaid expense and other assets | 77,154 |
| | 69,936 |
|
Assets of hotel properties held for sale, net | 25,449 |
| | — |
|
Total assets | $ | 6,184,705 |
| | $ | 6,794,805 |
|
Liabilities and Equity | |
| | |
|
Debt, net | $ | 2,290,164 |
| | $ | 2,880,488 |
|
Accounts payable and other liabilities | 203,982 |
| | 225,664 |
|
Deferred income tax liability | 5,547 |
| | 5,547 |
|
Advance deposits and deferred revenue | 29,506 |
| | 30,463 |
|
Accrued interest | 14,296 |
| | 17,081 |
|
Distributions payable | 65,746 |
| | 65,284 |
|
Total liabilities | 2,609,241 |
| | 3,224,527 |
|
Commitments and Contingencies (Note 12) |
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| |
|
|
Equity | | | |
|
Shareholders’ equity: | | | |
|
Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized | | | |
Series A Cumulative Convertible Preferred Shares, $0.01 par value, 12,950,000 shares authorized; 12,879,475 shares issued and outstanding, liquidation value of $328,266, at September 30, 2018 and December 31, 2017 | 366,936 |
| | 366,936 |
|
Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 175,215,202 and 174,869,046 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | 1,752 |
| | 1,749 |
|
Additional paid-in capital | 3,215,208 |
| | 3,208,002 |
|
Accumulated other comprehensive income | 38,315 |
| | 8,846 |
|
Distributions in excess of net earnings | (113,841 | ) | | (82,566 | ) |
Total shareholders’ equity | 3,508,370 |
| | 3,502,967 |
|
Noncontrolling interest: | |
| | |
|
Noncontrolling interest in consolidated joint ventures | 11,640 |
| | 11,700 |
|
Noncontrolling interest in the Operating Partnership | 11,024 |
| | 11,181 |
|
Total noncontrolling interest | 22,664 |
| | 22,881 |
|
Preferred equity in a consolidated joint venture, liquidation value of $45,515 and $45,430 at September 30, 2018 and December 31, 2017, respectively | 44,430 |
| | 44,430 |
|
Total equity | 3,575,464 |
| | 3,570,278 |
|
Total liabilities and equity | $ | 6,184,705 |
| | $ | 6,794,805 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Revenues | | | | | | | |
Operating revenues | | | | | | | |
Room revenue | $ | 377,237 |
| | $ | 292,046 |
| | $ | 1,138,115 |
| | $ | 770,751 |
|
Food and beverage revenue | 47,211 |
| | 35,580 |
| | 157,850 |
| | 91,392 |
|
Other revenue | 22,594 |
| | 13,629 |
| | 65,362 |
| | 31,628 |
|
Total revenues | $ | 447,042 |
| | $ | 341,255 |
| | $ | 1,361,327 |
| | $ | 893,771 |
|
Expenses | |
| | |
| | | | |
Operating expenses | |
| | |
| | | | |
Room expense | $ | 95,161 |
| | $ | 69,380 |
| | $ | 279,589 |
| | $ | 176,523 |
|
Food and beverage expense | 37,780 |
| | 27,061 |
| | 121,450 |
| | 66,458 |
|
Management and franchise fee expense | 34,838 |
| | 29,571 |
| | 107,766 |
| | 86,110 |
|
Other operating expense | 105,646 |
| | 78,120 |
| | 320,325 |
| | 195,000 |
|
Total property operating expenses | 273,425 |
| | 204,132 |
| | 829,130 |
| | 524,091 |
|
Depreciation and amortization | 60,373 |
| | 45,231 |
| | 183,429 |
| | 122,136 |
|
Property tax, insurance and other | 34,382 |
| | 23,618 |
| | 104,418 |
| | 60,929 |
|
General and administrative | 11,622 |
| | 9,506 |
| | 38,059 |
| | 28,757 |
|
Transaction costs | 261 |
| | 32,607 |
| | 2,181 |
| | 36,923 |
|
Total operating expenses | 380,063 |
| | 315,094 |
| | 1,157,217 |
| | 772,836 |
|
Operating income | 66,979 |
| | 26,161 |
| | 204,110 |
| | 120,935 |
|
Other income | 856 |
| | 110 |
| | 2,514 |
| | 323 |
|
Interest income | 1,149 |
| | 1,157 |
| | 3,339 |
| | 2,306 |
|
Interest expense | (24,629 | ) | | (19,650 | ) | | (78,772 | ) | | (48,527 | ) |
Gain (loss) on sale of hotel properties, net | 35,895 |
| | (19 | ) | | 32,957 |
| | (49 | ) |
(Loss) gain on extinguishment of indebtedness, net | (1,656 | ) | | — |
| | 6,010 |
| | — |
|
Gain on settlement of investment in loan | — |
| | 2,670 |
| | — |
| | 2,670 |
|
Income before equity in income from unconsolidated joint ventures | 78,594 |
| | 10,429 |
| | 170,158 |
| | 77,658 |
|
Equity in income from unconsolidated joint ventures | 219 |
| | 57 |
| | 637 |
| | 57 |
|
Income before income tax expense | 78,813 |
| | 10,486 |
| | 170,795 |
| | 77,715 |
|
Income tax expense | (4,156 | ) | | (6,375 | ) | | (7,852 | ) | | (9,362 | ) |
Net income | 74,657 |
| | 4,111 |
| | 162,943 |
| | 68,353 |
|
Net (income) loss attributable to noncontrolling interests: | |
| | |
| | | | |
Noncontrolling interest in consolidated joint ventures | (9 | ) | | (32 | ) | | 170 |
| | 5 |
|
Noncontrolling interest in the Operating Partnership | (299 | ) | | (43 | ) | | (626 | ) | | (318 | ) |
Preferred distributions - consolidated joint venture | (374 | ) | | (122 | ) | | (1,109 | ) | | (122 | ) |
Net income attributable to RLJ | 73,975 |
| | 3,914 |
| | 161,378 |
| | 67,918 |
|
Preferred dividends | (6,279 | ) | | (2,093 | ) | | (18,836 | ) | | (2,093 | ) |
Net income attributable to common shareholders | $ | 67,696 |
| | $ | 1,821 |
| | $ | 142,542 |
| | $ | 65,825 |
|
| | | | | | | |
Basic per common share data: | | | | | | | |
Net income per share attributable to common shareholders | $ | 0.39 |
| | $ | 0.01 |
| | $ | 0.81 |
| | $ | 0.50 |
|
Weighted-average number of common shares | 174,326,198 |
| | 140,249,961 |
| | 174,253,393 |
| | 129,317,120 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | |
Diluted per common share data: | | | | | | | |
Net income per share attributable to common shareholders | $ | 0.39 |
| | $ | 0.01 |
| | $ | 0.81 |
| | $ | 0.50 |
|
Weighted-average number of common shares | 174,479,341 |
| | 140,307,269 |
| | 174,365,101 |
| | 129,399,177 |
|
| | | | | | | |
Comprehensive income: | | | | | | | |
Net income | $ | 74,657 |
| | $ | 4,111 |
| | $ | 162,943 |
| | $ | 68,353 |
|
Unrealized gain on interest rate derivatives | 4,675 |
| | 1,746 |
| | 29,469 |
| | 5,579 |
|
Comprehensive income | 79,332 |
| | 5,857 |
| | 192,412 |
| | 73,932 |
|
Comprehensive (income) loss attributable to noncontrolling interests: | | | | | | | |
Noncontrolling interest in consolidated joint ventures | (9 | ) | | (32 | ) | | 170 |
| | 5 |
|
Noncontrolling interest in the Operating Partnership | (299 | ) | | (43 | ) | | (626 | ) | | (318 | ) |
Preferred distributions - consolidated joint venture | (374 | ) | | (122 | ) | | (1,109 | ) | | (122 | ) |
Comprehensive income attributable to RLJ | $ | 78,650 |
| | $ | 5,660 |
| | $ | 190,847 |
| | $ | 73,497 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | Noncontrolling Interest | | | | |
| Preferred Stock | | Common Stock | | | | | | | | | | | | |
| Shares | | Amount | | Shares | | Par Value | | Additional Paid-in Capital | | Distributions in excess of net earnings | | Accumulated Other Comprehensive Income | | Operating Partnership | | Consolidated Joint Ventures | | Preferred Equity in a Consolidated Joint Venture | | Total Equity |
Balance at December 31, 2017 | 12,879,475 |
| | $ | 366,936 |
| | 174,869,046 |
| | $ | 1,749 |
| | $ | 3,208,002 |
| | $ | (82,566 | ) | | $ | 8,846 |
| | $ | 11,181 |
| | $ | 11,700 |
| | $ | 44,430 |
| | $ | 3,570,278 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 161,378 |
| | — |
| | 626 |
| | (170 | ) | | 1,109 |
| | 162,943 |
|
Unrealized gain on interest rate derivatives | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 29,469 |
| | — |
| | — |
| | — |
| | 29,469 |
|
Contributions from joint venture partners | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 110 |
| | — |
| | 110 |
|
Issuance of restricted stock | — |
| | — |
| | 591,851 |
| | 6 |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of share-based compensation | — |
| | — |
| | — |
| | — |
| | 10,135 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,135 |
|
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — |
| | — |
| | (132,370 | ) | | (2 | ) | | (2,924 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,926 | ) |
Forfeiture of restricted stock | — |
| | — |
| | (113,325 | ) | | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions on preferred shares | — |
| | — |
| | — |
| | — |
| | — |
| | (18,836 | ) | | — |
| | — |
| | — |
| | — |
| | (18,836 | ) |
Distributions on common shares and units | — |
| | — |
| | — |
| | — |
| | — |
| | (173,817 | ) | | — |
| | (783 | ) | | — |
| | — |
| | (174,600 | ) |
Preferred distributions - consolidated joint venture | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,109 | ) | | (1,109 | ) |
Balance at September 30, 2018 | 12,879,475 |
| | $ | 366,936 |
| | 175,215,202 |
| | $ | 1,752 |
| | $ | 3,215,208 |
| | $ | (113,841 | ) | | $ | 38,315 |
| | $ | 11,024 |
| | $ | 11,640 |
| | $ | 44,430 |
| | $ | 3,575,464 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | Noncontrolling Interest | | | | |
| Preferred Stock | | Common Stock | | | | | | | | | | | | |
| Shares | | Amount | | Shares | | Par Value | | Additional Paid-in Capital | | Retained Earnings (Distributions in excess of net earnings) | | Accumulated Other Comprehensive Income (Loss) | | Operating Partnership | | Consolidated Joint Ventures | | Preferred Equity in a Consolidated Joint Venture | | Total Equity |
Balance at December 31, 2016 | — |
| | $ | — |
| | 124,364,178 |
| | $ | 1,244 |
| | $ | 2,187,333 |
| | $ | 38,249 |
| | $ | (4,902 | ) | | $ | 7,380 |
| | $ | 5,973 |
| | $ | — |
| | $ | 2,235,277 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 67,918 |
| | — |
| | 318 |
| | (5 | ) | | 122 |
| | 68,353 |
|
Unrealized gain on interest rate derivatives | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,579 |
| | — |
| | — |
| | — |
| | 5,579 |
|
Issuance of common shares | — |
| | — |
| | 50,358,104 |
| | 504 |
| | 1,015,723 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,016,227 |
|
Issuance of Operating Partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,342 |
| | — |
| | — |
| | 4,342 |
|
Issuance of Series A Cumulative Convertible Preferred Shares | 12,879,475 |
| | 366,936 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 366,936 |
|
Noncontrolling interest recorded in connection with the Mergers | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,157 |
| | — |
| | 5,157 |
|
Preferred equity in a consolidated joint venture | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,430 |
| | 44,430 |
|
Issuance of restricted stock | — |
| | — |
| | 425,076 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Amortization of share-based compensation | — |
| | — |
| | — |
| | — |
| | 7,964 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,964 |
|
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — |
| | — |
| | (105,378 | ) | | (2 | ) | | (2,214 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,216 | ) |
Shares acquired as part of a share repurchase program | — |
| | — |
| | (122,508 | ) | | (1 | ) | | (2,609 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,610 | ) |
Forfeiture of restricted stock | — |
| | — |
| | (5,866 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Distributions on preferred shares | — |
| | — |
| | — |
| | — |
| | — |
| | (2,093 | ) | | — |
| | — |
| | — |
| | — |
| | (2,093 | ) |
Distributions on common shares and units | — |
| | — |
| | — |
| | — |
| | — |
| | (129,400 | ) | | — |
| | (577 | ) | | — |
| | — |
| | (129,977 | ) |
Preferred distributions - consolidated joint venture | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (122 | ) | | (122 | ) |
Balance at September 30, 2017 | 12,879,475 |
| | $ | 366,936 |
| | 174,913,606 |
| | $ | 1,749 |
| | $ | 3,206,193 |
| | $ | (25,326 | ) | | $ | 677 |
| | $ | 11,463 |
| | $ | 11,125 |
| | $ | 44,430 |
| | $ | 3,617,247 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited) |
| | | | | | | |
| For the nine months ended September 30, |
| 2018 | | 2017 |
Cash flows from operating activities | |
| | |
|
Net income | $ | 162,943 |
| | $ | 68,353 |
|
Adjustments to reconcile net income to cash flow provided by operating activities: | |
| | |
|
(Gain) loss on sale of hotel properties, net | (32,957 | ) | | 49 |
|
Gain on extinguishment of indebtedness, net | (6,010 | ) | | — |
|
Gain on settlement of investment in loan | — |
| | (2,670 | ) |
Depreciation and amortization | 183,429 |
| | 122,136 |
|
Amortization of deferred financing costs | 2,688 |
| | 2,597 |
|
Other amortization | (2,450 | ) | | (104 | ) |
Equity in income from unconsolidated joint ventures | (637 | ) | | (57 | ) |
Distributions of income from unconsolidated joint ventures | 2,050 |
| | 750 |
|
Accretion of interest income on investment in loan | — |
| | (664 | ) |
Amortization of share-based compensation | 9,722 |
| | 7,964 |
|
Deferred income taxes | 6,145 |
| | 7,972 |
|
Changes in assets and liabilities: | | | |
|
Hotel and other receivables, net | (18,420 | ) | | (16,493 | ) |
Prepaid expense and other assets | 12,871 |
| | 74 |
|
Accounts payable and other liabilities | (6,916 | ) | | 28,411 |
|
Advance deposits and deferred revenue | 3,801 |
| | (1,238 | ) |
Accrued interest | (2,785 | ) | | (9,751 | ) |
Net cash flow provided by operating activities | 313,474 |
| | 207,329 |
|
Cash flows from investing activities | |
| | |
|
Acquisition of FelCor, net of cash acquired | — |
| | (24,883 | ) |
Proceeds from the sale of hotel properties, net | 447,737 |
| | (49 | ) |
Improvements and additions to hotel properties | (144,195 | ) | | (58,853 | ) |
Additions to property and equipment | (116 | ) | | (152 | ) |
Proceeds from the settlement of an investment in loan | — |
| | 12,792 |
|
Net cash flow provided by (used in) investing activities | 303,426 |
| | (71,145 | ) |
Cash flows from financing activities | |
| | |
|
Borrowings under Revolver | 300,000 |
| | — |
|
Repayments under Revolver | (300,000 | ) | | — |
|
Redemption of senior notes | (539,025 | ) | | — |
|
Payments of mortgage loans principal | (32,942 | ) | | (3,168 | ) |
Repurchase of common shares under a share repurchase program | — |
| | (2,610 | ) |
Repurchase of common shares to satisfy employee withholding requirements | (2,925 | ) | | (2,216 | ) |
Distributions on preferred shares | (18,836 | ) | | — |
|
Distributions on common shares | (173,367 | ) | | (150,701 | ) |
Distributions on Operating Partnership units | (766 | ) | | (667 | ) |
Payments of deferred financing costs | (3,615 | ) | | (1,050 | ) |
Preferred distributions - consolidated joint venture | (1,113 | ) | | (126 | ) |
Contributions from joint venture partners | 110 |
| | — |
|
Net cash flow used in financing activities | (772,479 | ) | | (160,538 | ) |
Net change in cash, cash equivalents, and restricted cash reserves | (155,579 | ) | | (24,354 | ) |
Cash, cash equivalents, and restricted cash reserves, beginning of year | 659,076 |
| | 523,878 |
|
Cash, cash equivalents, and restricted cash reserves, end of period | $ | 503,497 |
| | $ | 499,524 |
|
The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Notes to the Consolidated Financial Statements
(unaudited)
1. Organization
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that owns primarily premium-branded, high-margin, focused-service and compact full-service hotels. The Company elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2011.
Substantially all of the Company’s assets and liabilities are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of September 30, 2018, there were 175,989,104 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.6% of the outstanding OP units.
As of September 30, 2018, the Company owned 152 hotel properties with approximately 29,400 rooms, located in 25 states and the District of Columbia. The Company, through wholly-owned subsidiaries, owned a 100% interest in 148 of its hotel properties, a 98.3% controlling interest in the DoubleTree Metropolitan Hotel New York City, a 95% controlling interest in The Knickerbocker, and 50% interests in entities owning two hotel properties. The Company consolidates its real estate interests in the 150 hotel properties in which it holds a controlling financial interest, and the Company records the real estate interests in the two hotels in which it holds an indirect 50% interest using the equity method of accounting. The Company leases 151 of the 152 hotel properties to its taxable REIT subsidiaries ("TRS"), of which the Company owns a controlling financial interest.
2. Summary of Significant Accounting Policies
The Company's Annual Report on Form 10-K for the year ended December 31, 2017 contains a discussion of the Company's significant accounting policies. Other than noted below, there have been no other significant changes to the Company's significant accounting policies since December 31, 2017.
Basis of Presentation and Principles of Consolidation
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. The unaudited financial statements include all adjustments that are necessary, in the opinion of management, to fairly state the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows.
The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2018.
The consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, and joint ventures in which the Company has a majority voting interest and control. For the controlled subsidiaries that are not wholly-owned, the third-party ownership interest represents a noncontrolling interest, which is presented separately in the consolidated financial statements. The Company also records the real estate interests in two joint ventures in which it holds an indirect 50% interest using the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income and comprehensive income, shareholders’ equity or cash flows.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. The Company adopted this standard on January 1, 2018 using the modified retrospective transition method. Accordingly, the Company's revenue beginning on January 1, 2018 is presented under ASC 606, while prior period revenue is reported under the accounting standards in effect for those historical periods. Based on the Company's assessment, the adoption of this standard did not have an impact to the Company's consolidated financial statements but it did result in additional disclosures in the notes to the consolidated financial statements. Refer to Note 7, Revenue, for the Company's disclosures about revenue.
Substantially all of the Company's revenues are derived from the operation of hotel properties. The Company generates room revenue by renting hotel rooms to customers at its hotel properties. The Company generates food and beverage revenue from the sale of food and beverage to customers at its hotel properties. The Company generates other revenue from parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees at its hotel properties.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. The Company's contracts generally have a single performance obligation, such as renting a hotel room to a customer, or providing food and beverage to a customer, or providing a hotel property-related good or service to a customer. The Company's performance obligations are generally satisfied at a point in time.
The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company determines the standalone selling price based on the price it charges each customer for the use or consumption of the promised good or service.
The Company's revenue is recognized when control of the promised good or service is transferred to the customer, in an amount that reflects the consideration the Company expects to receive in exchange for the promised good or service. The revenue is recorded net of any sales and occupancy taxes collected from the customer. All rebates or discounts are recorded as a reduction to revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotel properties.
The timing of revenue recognition, billings, and cash collections results in the Company recognizing hotel and other receivables and advance deposits and deferred revenue on the consolidated balance sheet. Hotel and other receivables are recognized when the Company has provided a good or service to the customer but is only waiting for the passage of time before the customer submits consideration to the Company. Advance deposits and deferred revenue are recognized on the consolidated balance sheets when cash payments are received in advance of the Company satisfying its performance obligation. Advance deposits and deferred revenue consist of amounts that are refundable and non-refundable to the customer. The advance deposits and deferred revenue are recognized as revenue in the consolidated statements of operations and comprehensive income when the Company satisfies its performance obligation to the customer.
For the majority of its goods or services and customers, the Company requires payment at the time the respective good or service is provided to the customer. The Company's payment terms vary by the type of customer and the goods or services offered to the customer. The Company applied a practical expedient to not disclose the value of unsatisfied performance obligations for contracts that have an original expected length of one year or less. Any contracts that have an original expected length of greater than one year are insignificant.
An allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the existing accounts receivable portfolio and increases to the allowance for doubtful accounts are recorded as bad debt expense. The allowance for doubtful accounts is calculated as a percentage of the aged accounts receivable.
Investment in Hotel Properties
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. The Company may also acquire intangible assets or liabilities related to in-place leases, management agreements, franchise agreements and advanced bookings. The Company allocates the purchase price among the assets acquired and the liabilities assumed based on their respective fair values at the date of acquisition. The Company determines the fair value by using market data and independent appraisals available to us and making numerous estimates and assumptions. Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance clarifies the definition of a business by adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar identifiable asset(s), then the transaction is considered to be an asset acquisition (or disposition). As a result of this standard, the Company anticipates the majority of its hotel purchases will be considered asset acquisitions as opposed to business combinations, although the determination will be made on a transaction-by-transaction basis. Transaction costs associated with asset acquisitions will be capitalized rather than expensed as incurred. The Company adopted this guidance on January 1, 2018 on a prospective basis. The Company does not believe the accounting for each future acquisition (or disposal) of assets or a business will be materially different, therefore, the adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.
The Company’s investments in hotel properties are carried at cost and are depreciated using the straight-line method over the 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. Maintenance and repairs are expensed and major renewals or improvements to the hotel properties are capitalized. Indirect project costs, including interest, salaries and benefits, travel and other related costs that are directly attributable to the development, are also capitalized. Upon the sale or disposition of a hotel property, the asset and related accumulated depreciation accounts are removed and the related gain or loss is included in the gain or loss on sale of hotel properties in the consolidated statements of operations and comprehensive income. A sale or disposition of a hotel property that represents a strategic shift that has or will have a major effect on the Company's operations and financial results is presented as discontinued operations in the consolidated statements of operations and comprehensive income.
In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider the "held for sale" classification on the consolidated balance sheet until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. The Company does not depreciate assets so long as they are classified as held for sale. Upon designation as held for sale and quarterly thereafter, the Company reviews the realizability of the carrying value, less costs to sell, in accordance with the guidance. Any such adjustment to the carrying value is recorded as an impairment loss.
The Company assesses the carrying value of its hotel properties whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The recoverability is measured by comparing the carrying amount to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of the hotel properties. If the Company’s analysis indicates that the carrying value is not recoverable on an undiscounted cash flow basis, the Company will recognize an impairment loss for the amount by which the carrying value exceeds the fair value. The fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions or third-party appraisals.
Sale of Real Estate
ASU 2014-09 also applies to the sale of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This guidance clarifies that ASC 610-20 applies to the derecognition of nonfinancial assets, including real estate, and in substance nonfinancial assets, which are defined as assets or a group of assets
for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a business. As a result of this guidance, sales and partial sales of real estate assets will be accounted for similar to all other sales of nonfinancial and in substance nonfinancial assets. The Company adopted this guidance on January 1, 2018 using the modified retrospective transition method. Based on the Company's assessment, the adoption of this guidance did not have an impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance will require lessees to recognize a right-of-use asset and a lease liability for most of their leases on the balance sheet, and an entity will need to classify its leases as either an operating or finance lease in order to determine the income statement presentation. Leases with a term of 12 months or less will be accounted for similar to the existing guidance today for operating leases. Lessors will classify their leases using an approach that is substantially equivalent to the existing guidance today for operating, direct financing, or sales-type leases. Lessors may only capitalize the incremental direct costs of leasing, so any indirect costs of leasing will be expensed as incurred. The guidance requires an entity to separate the lease components from the non-lease components in a contract, with the lease components being accounted for in accordance with ASC 842 and the non-lease components being accounted for in accordance with other applicable accounting guidance. The guidance is effective for annual reporting periods beginning after December 15, 2018, and the interim periods within those annual periods, with early adoption permitted. The Company will adopt this new standard on January 1, 2019. The Company has not yet completed its analysis on this standard, but it believes the application of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet for each of its ground leases, parking leases, and equipment leases, which represent the majority of the Company's current operating lease payments. The Company does not expect the adoption of this standard will materially affect its consolidated statements of operations and comprehensive income.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance amends the hedge accounting recognition and presentation requirements in ASC 815. The guidance is meant to simplify the application of hedge accounting and better align the financial reporting for hedging activities with the entity's economic and risk management activities. Under the new guidance, all changes in the fair value of highly effective cash flow hedges will be recorded in other comprehensive income and they will be reclassified to earnings when the hedged item impacts earnings. The guidance is effective for annual reporting periods beginning after December 15, 2018, and the interim periods within those annual periods, with early adoption permitted. The Company will adopt this new standard on January 1, 2019. Based on the Company's assessment, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the SEC issued SEC Final Rule 33-10532, Disclosure Update and Simplification. The amendments simplify or eliminate duplicative, overlapping, or outdated disclosure requirements. The amendments also add certain disclosure requirements, such as requiring entities to disclose the current and comparative quarter and year-to-date changes in shareholders' equity for interim periods. The amended rules are effective for reports filed on or after November 5, 2018. However, the SEC issued Compliance & Disclosure Interpretation 105.09 that allows entities to defer the adoption of the new disclosure requirement relating to changes in shareholders' equity for interim periods until the Form 10-Q for the quarterly period that begins after November 5, 2018. The Company will adopt the new disclosure requirement relating to changes in shareholders' equity for interim periods on January 1, 2019. Based on the Company's assessment, the adoption of the new disclosures will not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The guidance modifies the disclosure requirements for fair value measurements by removing or modifying some of the disclosures, while also adding new disclosures. The guidance is effective for annual reporting periods beginning after December 15, 2019, and the interim periods within those annual periods, with early adoption permitted. The Company will adopt this new standard on January 1, 2020. Based on the Company's assessment, the adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.
3. Merger with FelCor Lodging Trust Incorporated
On August 31, 2017 (the "Acquisition Date"), the Company, the Operating Partnership, Rangers Sub I, LLC, a wholly owned subsidiary of the Operating Partnership ("Rangers"), and Rangers Sub II, LP, a wholly owned subsidiary of the Operating Partnership ("Partnership Merger Sub"), consummated the transactions contemplated by the Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 23, 2017, with FelCor Lodging Trust Incorporated ("FelCor") and FelCor Lodging Limited Partnership ("FelCor LP") pursuant to which Partnership Merger Sub merged with and into FelCor LP, with FelCor LP surviving as a wholly owned subsidiary of the Operating Partnership (the "Partnership Merger"), and, immediately
thereafter, FelCor merged with and into Rangers, with Rangers surviving as a wholly owned subsidiary of the Operating Partnership (the "REIT Merger" and, together with the Partnership Merger, the "Mergers").
Upon completion of the REIT Merger and under the terms of the Merger Agreement, each issued and outstanding share of common stock, par value $0.01 per share, of FelCor (other than shares held by any wholly owned subsidiary of FelCor or by the Company or any of its subsidiaries) was converted into the right to receive 0.362 (the "Common Exchange Ratio") common shares of beneficial interest, par value $0.01 per share, of the Company (the "Common Shares"), and each issued and outstanding share of $1.95 Series A cumulative convertible preferred stock, par value $0.01 per share, of FelCor was converted into the right to receive one $1.95 Series A Cumulative Convertible Preferred Share, par value $0.01 per share, of the Company (a "Series A Preferred Share").
Upon completion of the Partnership Merger and under the terms of the Merger Agreement, each limited partner of FelCor LP was entitled to elect to exchange its outstanding common limited partnership units in FelCor LP (the "FelCor LP Common Units") for a number of newly issued Common Shares based on the Common Exchange Ratio. Upon completion of the Partnership Merger, each outstanding FelCor LP Common Unit of any holder who did not make the foregoing election was converted into the right to receive a number of common limited partnership units in the Operating Partnership (the "OP Units") based on the Common Exchange Ratio. No fractional shares of units of Common Shares or OP Units were issued in the Mergers, and the value of any fractional interests was paid in cash.
The Company accounted for the Mergers under the acquisition method of accounting in ASC 805, Business Combinations. As a result of the Mergers, the Company acquired an ownership interest in the following 37 hotel properties:
|
| | | | | | | | |
Hotel Property Name | | Location | | Ownership Interest | | Management Company | | Rooms |
DoubleTree Suites by Hilton Austin | | Austin, TX | | 100% | | Hilton | | 188 |
DoubleTree Suites by Hilton Orlando - Lake Buena Vista | | Orlando, FL | | 100% | | Hilton | | 229 |
Embassy Suites Atlanta - Buckhead | | Atlanta, GA | | 100% | | Hilton | | 316 |
Embassy Suites Birmingham | | Birmingham, AL | | 100% | | Hilton | | 242 |
Embassy Suites Boston Marlborough (1) | | Marlborough, MA | | 100% | | Hilton | | 229 |
Embassy Suites Dallas - Love Field | | Dallas, TX | | 100% | | Aimbridge Hospitality | | 248 |
Embassy Suites Deerfield Beach - Resort & Spa | | Deerfield Beach, FL | | 100% | | Hilton | | 244 |
Embassy Suites Fort Lauderdale 17th Street | | Fort Lauderdale, FL | | 100% | | Hilton | | 361 |
Embassy Suites Los Angeles - International Airport South | | El Segundo, CA | | 100% | | Hilton | | 349 |
Embassy Suites Mandalay Beach - Hotel & Resort | | Oxnard, CA | | 100% | | Hilton | | 250 |
Embassy Suites Miami - International Airport | | Miami, FL | | 100% | | Hilton | | 318 |
Embassy Suites Milpitas Silicon Valley | | Milpitas, CA | | 100% | | Hilton | | 266 |
Embassy Suites Minneapolis - Airport | | Bloomington, MN | | 100% | | Hilton | | 310 |
Embassy Suites Myrtle Beach - Oceanfront Resort | | Myrtle Beach, SC | | 100% | | Hilton | | 255 |
Embassy Suites Napa Valley (2) | | Napa, CA | | 100% | | Hilton | | 205 |
Embassy Suites Orlando - International Drive South/Convention Center | | Orlando, FL | | 100% | | Hilton | | 244 |
Embassy Suites Phoenix - Biltmore | | Phoenix, AZ | | 100% | | Hilton | | 232 |
Embassy Suites San Francisco Airport - South San Francisco | | San Francisco, CA | | 100% | | Hilton | | 312 |
Embassy Suites San Francisco Airport - Waterfront | | Burlingame, CA | | 100% | | Hilton | | 340 |
Embassy Suites Secaucus - Meadowlands (3) | | Secaucus, NJ | | 50% | | Hilton | | 261 |
Hilton Myrtle Beach Resort | | Myrtle Beach, SC | | 100% | | Hilton | | 385 |
Holiday Inn San Francisco - Fisherman's Wharf (4) | | San Francisco, CA | | 100% | | InterContinental Hotels | | 585 |
San Francisco Marriott Union Square | | San Francisco, CA | | 100% | | Marriott | | 400 |
Sheraton Burlington Hotel & Conference Center (5) (6) | | Burlington, VT | | 100% | | Marriott | | 309 |
Sheraton Philadelphia Society Hill Hotel (7) | | Philadelphia, PA | | 100% | | Marriott | | 364 |
The Fairmont Copley Plaza (8) | | Boston, MA | | 100% | | FRHI Hotels & Resorts | | 383 |
The Knickerbocker New York | | New York, NY | | 95% | | Highgate Hotels | | 330 |
The Mills House Wyndham Grand Hotel | | Charleston, SC | | 100% | | Wyndham | | 216 |
The Vinoy Renaissance St. Petersburg Resort & Golf Club (9) | | St. Petersburg, FL | | 100% | | Marriott | | 361 |
Wyndham Boston Beacon Hill | | Boston, MA | | 100% | | Wyndham | | 304 |
Wyndham Houston - Medical Center Hotel & Suites | | Houston, TX | | 100% | | Wyndham | | 287 |
Wyndham New Orleans - French Quarter | | New Orleans, LA | | 100% | | Wyndham | | 374 |
Wyndham Philadelphia Historic District | | Philadelphia, PA | | 100% | | Wyndham | | 364 |
Wyndham Pittsburgh University Center | | Pittsburgh, PA | | 100% | | Wyndham | | 251 |
Wyndham San Diego Bayside | | San Diego, CA | | 100% | | Wyndham | | 600 |
Wyndham Santa Monica At The Pier | | Santa Monica, CA | | 100% | | Wyndham | | 132 |
Chateau LeMoyne - French Quarter, New Orleans (10) | | New Orleans, LA | | 50% | | InterContinental Hotels | | 171 |
| | | | | | | | 11,215 |
| |
(1) | In February 2018, the Company sold this hotel property for a sale price of $23.7 million. |
| |
(2) | In July 2018, the Company sold this hotel property for a sale price of $102.0 million. |
| |
(3) | The Company owns an indirect 50% ownership interest in the real estate at this hotel property and records the real estate interests using the equity method of accounting. The Company leases the hotel property to its TRS, of which the Company owns a controlling financial interest in the operating lessee, so the Company consolidates its ownership interest in the leased hotel. |
| |
(4) | In October 2018, the Company sold this hotel property for a sale price of $75.3 million. |
| |
(5) | In December 2017, this hotel property was converted to the DoubleTree by Hilton Burlington Vermont. |
| |
(6) | In September 2018, the Company sold this hotel property for a sale price of $35.0 million. |
| |
(7) | In March 2018, the Company sold this hotel property for a sale price of $95.5 million. |
| |
(8) | In December 2017, the Company sold this hotel property for a sale price of $170.0 million. |
| |
(9) | In August 2018, the Company sold this hotel property for a sale price of $185.0 million. |
| |
(10) | The Company owns an indirect 50% ownership interest in this hotel property and accounts for its ownership interest using the equity method of accounting. This hotel property is operated without a lease. |
The total consideration for the Mergers was approximately $1.4 billion, which included the Company's issuance of approximately 50.4 million common shares at $20.18 per share to former FelCor common stockholders, the Company's issuance of approximately 12.9 million Series A Preferred Shares at $28.49 per share to former FelCor preferred stockholders, the Operating Partnership's issuance of approximately 0.2 million OP Units at $20.18 per unit to former FelCor LP limited partners, and cash. The total consideration consisted of the following (in thousands):
|
| | | | |
| | Total Consideration |
Common Shares | | $ | 1,016,227 |
|
Series A Preferred Shares | | 366,936 |
|
OP Units | | 4,342 |
|
Cash, net of cash, cash equivalents, and restricted cash reserves acquired | | 24,883 |
|
Total consideration | | $ | 1,412,388 |
|
The Company allocated the purchase price consideration as follows (in thousands):
|
| | | | |
| | August 31, 2017 |
Investment in hotel properties | | $ | 2,661,114 |
|
Investment in unconsolidated joint ventures | | 25,651 |
|
Hotel and other receivables | | 28,308 |
|
Deferred income tax assets | | 58,170 |
|
Intangible assets | | 139,673 |
|
Prepaid expenses and other assets | | 23,811 |
|
Debt | | (1,305,337 | ) |
Accounts payable and other liabilities | | (118,360 | ) |
Advance deposits and deferred revenue | | (23,795 | ) |
Accrued interest | | (22,612 | ) |
Distributions payable | | (4,312 | ) |
Noncontrolling interest in consolidated joint ventures | | (5,493 | ) |
Preferred equity in a consolidated joint venture | | (44,430 | ) |
Total consideration | | $ | 1,412,388 |
|
The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the equity interests acquired:
| |
• | Investment in hotel properties — The Company estimated the fair values of the land and improvements, buildings and improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the market, cost, and income approaches. These valuation methodologies are based on significant Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures, and cash flow projections at the respective hotel properties. |
| |
• | Investment in unconsolidated joint ventures — The Company estimated the fair value of its real estate interests in the unconsolidated joint ventures by using the same valuation methodologies for the investment in hotel properties noted |
above and for the debt noted below. The Company recognized the net assets acquired based on its respective ownership interest in the joint venture according to the joint venture agreement.
| |
• | Deferred income tax assets — The Company estimated the future realizable value of the deferred income tax assets by estimating the amount of the net operating loss that will be utilized in future periods by the acquired taxable REIT subsidiaries. The Company then applied its applicable effective tax rate against the net operating losses to determine the appropriate deferred income tax assets to recognize. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. |
| |
• | Intangible assets — The Company estimated the fair value of its below market ground lease intangible assets by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancelable term of the lease. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The below market ground lease intangible assets are amortized over the remaining terms of the respective leases as adjustments to rental expense in property tax, insurance and other in the consolidated statements of operations and comprehensive income. The Company estimated the fair value of the advanced bookings intangible asset by using the income approach to determine the projected cash flows that a hotel property will receive as a result of future hotel room and guests events that have already been reserved and pre-booked at the hotel property as of the Acquisition Date. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The advanced bookings intangible asset is amortized over the duration of the hotel room and guest event reservations period at the hotel property to depreciation and amortization in the consolidated statements of operations and comprehensive income. The Company recognized the following intangible assets in the Mergers (dollars in thousands): |
|
| | | | | | |
| | | | Weighted Average Amortization Period (in Years) |
Below market ground leases | | $ | 118,050 |
| | 54 |
Advanced bookings | | 13,862 |
| | 1 |
Other intangible assets | | 7,761 |
| | 6 |
Total intangible assets | | $ | 139,673 |
| | 46 |
| |
• | Above market ground lease liabilities — The Company estimated the fair value of its above market ground lease liabilities by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancelable term of the lease. This valuation methodology is based on Level 3 inputs in the fair value hierarchy. The Company recognized approximately $15.5 million of above market ground lease liabilities in the Mergers, which are included in accounts payable and other liabilities in the accompanying consolidated balance sheet. The above market ground lease liabilities are amortized over the remaining terms of the respective leases as adjustments to rental expense in property tax, insurance and other in the consolidated statements of operations and comprehensive income. |
| |
• | Debt — The Company estimated the fair value of the Senior Notes (as defined in Note 8) by using publicly available trading prices, market interest rates, and spreads for the Senior Notes, which are Level 3 inputs in the fair value hierarchy. The Company estimated the fair value of the mortgage loans using a discounted cash flow model and incorporated various inputs and assumptions for the effective borrowing rates for debt with similar terms and the loan to estimated fair value of the collateral, which are Level 3 inputs in the fair value hierarchy. The Company recognized approximately $71.7 million in above market debt fair value adjustments on the Senior Notes and the mortgage loans assumed in the Mergers, which is included in debt, net in the accompanying consolidated balance sheet. The above market debt fair value adjustments are amortized over the remaining terms of the respective debt instruments as adjustments to interest expense in the consolidated statements of operations and comprehensive income. |
| |
• | Noncontrolling interest in consolidated joint ventures — The Company estimated the fair value of the consolidated joint ventures by using the same valuation methodologies for the investment in hotel properties noted above. The Company then recognized the fair value of the noncontrolling interest in the consolidated joint ventures based on the joint venture partner's ownership interest in the consolidated joint venture. This valuation methodology is based on Level 3 inputs and assumptions in the fair value hierarchy. |
| |
• | Preferred equity in a consolidated joint venture — The Company estimated the fair value of the preferred equity in a consolidated joint venture by comparing the contractual terms of the preferred equity agreement to market-based terms of a similar preferred equity agreement, which is based on Level 3 inputs in the fair value hierarchy. |
| |
• | Hotel and other receivables, prepaid expenses and other assets, accounts payable and other liabilities, advance deposits and deferred revenue, accrued interest, and distributions payable — The carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities. |
For the hotel properties acquired during the nine months ended September 30, 2017, the total revenues and net income from the date of acquisition through September 30, 2017 are included in the accompanying consolidated statements of operations as follows (in thousands):
|
| | | |
| For the one month ended September 30, 2017 |
Revenue | $ | 66,457 |
|
Net income | $ | 6,768 |
|
The following table presents the costs that were incurred in connection with the Mergers (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Transaction costs | $ | 86 |
| | $ | 30,270 |
| | $ | (527 | ) | | $ | 34,517 |
|
Integration costs | 156 |
| | 2,193 |
| | 1,881 |
| | 2,193 |
|
| $ | 242 |
| | $ | 32,463 |
| | $ | 1,354 |
| | $ | 36,710 |
|
The transaction costs primarily related to transfer taxes, including any refund of transfer taxes, and financial advisory, legal, and other professional service fees in connection with the Mergers. The integration costs primarily related to professional fees and employee-related costs, including compensation for transition employees. The merger-related costs noted above were expensed to transaction costs in the accompanying consolidated statements of operations and comprehensive income.
The following unaudited condensed pro forma financial information presents the results of operations as if the Mergers had taken place on January 1, 2016. The unaudited condensed pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Mergers had taken place on January 1, 2016, nor is it indicative of the results of operations for future periods. The unaudited condensed pro forma financial information is as follows (in thousands):
|
| | | | | | | |
| For the three months ended September 30, 2017 | | For the nine months ended September 30, 2017 |
| (unaudited) |
Revenue | $ | 482,839 |
| | $ | 1,431,409 |
|
Net income attributable to common shareholders | $ | 35,275 |
| | $ | 104,528 |
|
Net income per share attributable to common shareholders - basic | $ | 0.20 |
| | $ | 0.60 |
|
Net income per share attributable to common shareholders - diluted | $ | 0.20 |
| | $ | 0.60 |
|
Weighted-average number of shares outstanding - basic | 174,186,944 |
| | 174,141,367 |
|
Weighted-average number of shares outstanding - diluted | 174,244,252 |
| | 174,223,424 |
|
4. Investment in Hotel Properties
Investment in hotel properties consisted of the following (in thousands): |
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Land and improvements | $ | 1,208,365 |
| | $ | 1,275,030 |
|
Buildings and improvements | 4,660,962 |
| | 4,890,266 |
|
Furniture, fixtures and equipment | 785,418 |
| | 756,546 |
|
| 6,654,745 |
| | 6,921,842 |
|
Accumulated depreciation | (1,281,574 | ) | | (1,129,917 | ) |
Investment in hotel properties, net | $ | 5,373,171 |
| | $ | 5,791,925 |
|
For the three and nine months ended September 30, 2018, the Company recognized depreciation expense related to its investment in hotel properties of approximately $58.5 million and $176.4 million, respectively. For the three and nine months ended September 30, 2017, the Company recognized depreciation expense related to its investment in hotel properties of approximately $44.1 million and $120.8 million, respectively.
Held for Sale
In July 2018, the Company entered into a purchase and sale agreement to sell the Holiday Inn San Francisco - Fisherman's Wharf. At September 30, 2018, this hotel property has been included in assets of hotel properties held for sale, net in the accompanying consolidated balance sheet. The transaction closed on October 15, 2018.
The following table is a summary of the major classes of assets held for sale (in thousands):
|
| | | |
| September 30, 2018 |
Land and improvements | $ | 12,203 |
|
Buildings and improvements | 10,900 |
|
Furniture, fixtures and equipment | 2,074 |
|
Total investment in hotel properties, net | 25,177 |
|
Intangible assets | 272 |
|
Total assets of hotel properties held for sale, net | $ | 25,449 |
|
5. Investment in Unconsolidated Joint Ventures
As of September 30, 2018 and December 31, 2017, the Company owned 50% interests in joint ventures that owned two hotel properties. The Company also owned 50% interests in joint ventures that owned real estate and a condominium management business that are associated with two of our resort hotel properties. The Company accounts for the investments in these unconsolidated joint ventures under the equity method of accounting. The Company makes adjustments to the equity in income (loss) from unconsolidated joint ventures related to the difference between the Company's basis in the investment in the unconsolidated joint ventures as compared to the historical basis of the assets and liabilities of the joint ventures. As of September 30, 2018 and December 31, 2017, the unconsolidated joint ventures' debt consisted entirely of non-recourse mortgage debt.
The following table summarizes the components of the Company's investments in unconsolidated joint ventures (in thousands):
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Equity basis of the joint venture investments | $ | (58 | ) | | $ | 253 |
|
Cost of the joint venture investments in excess of the joint venture book value | 22,530 |
| | 23,632 |
|
Investment in unconsolidated joint ventures | $ | 22,472 |
| | $ | 23,885 |
|
The following table summarizes the components of the Company's equity in income from unconsolidated joint ventures (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Unconsolidated joint ventures net income attributable to the Company | $ | 587 |
| | $ | 150 |
| | $ | 1,739 |
| | $ | 150 |
|
Depreciation of cost in excess of book value | (368 | ) | | (93 | ) | | (1,102 | ) | | (93 | ) |
Equity in income from unconsolidated joint ventures | $ | 219 |
| | $ | 57 |
| | $ | 637 |
| | $ | 57 |
|
6. Sale of Hotel Properties
During the nine months ended September 30, 2018, the Company sold six hotel properties for a total sale price of approximately $454.1 million. In connection with these transactions, the Company recorded an aggregate $30.9 million net gain on sales, which is included in gain (loss) on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income. The gain on sale includes a gain on extinguishment of indebtedness of $5.1 million associated with two of the hotel properties that were sold.
The following table discloses the hotel properties that were sold during the nine months ended September 30, 2018:
|
| | | | | | | |
Hotel Property Name | | Location | | Sale Date | | Rooms |
Embassy Suites Boston Marlborough | | Marlborough, MA | | February 21, 2018 | | 229 |
|
Sheraton Philadelphia Society Hill Hotel | | Philadelphia, PA | | March 27, 2018 | | 364 |
|
Embassy Suites Napa Valley | | Napa, CA | | July 13, 2018 | | 205 |
|
DoubleTree Hotel Columbia | | Columbia, MD | | August 7, 2018 | | 152 |
|
The Vinoy Renaissance St. Petersburg Resort & Golf Club | | St. Petersburg, FL | | August 28, 2018 | | 362 |
|
DoubleTree by Hilton Burlington Vermont | | Burlington, VT | | September 27, 2018 | | 309 |
|
| | | | Total | | 1,621 |
|
During the nine months ended September 30, 2018, the Company also sold a parcel of land for a sale price of $1.5 million. In connection with this transaction, the Company recorded a $1.4 million gain on sale, which is included in gain on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income.
During the year ended December 31, 2016, the Company sold two hotel properties and deferred a gain of $15.0 million related to the Company's maximum exposure to loss with respect to certain post-closing obligations. During the nine months ended September 30, 2018, the Company satisfied certain post-closing obligations and recognized an additional $0.7 million gain on sale, which is included in gain on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income. The Company has satisfied all post-closing obligations with respect to the sale of the two hotel properties.
On October 15, 2018, the Company sold the Holiday Inn San Francisco - Fisherman's Wharf for $75.3 million. In connection with the sale, the Company transferred its purchase option on the land underlying the ground lease to the buyer. The proceeds to the Company as a result of the sale was approximately $30.4 million.
During the nine months ended September 30, 2017, the Company did not sell any hotel properties.
7. Revenue
The Company recognized revenue from the following geographic markets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, 2018 | | For the three months ended September 30, 2017 |
| Room Revenue | | Food and Beverage Revenue | | Other Revenue | | Total Revenue | | Room Revenue | | Food and Beverage Revenue | | Other Revenue | | Total Revenue |
Northern California | $ | 67,161 |
| | $ | 4,705 |
| | $ | 2,238 |
| | $ | 74,104 |
| | $ | 39,998 |
| | $ | 2,808 |
| | $ | 1,064 |
| | $ | 43,870 |
|
Southern California | 36,820 |
| | 4,189 |
| | 2,612 |
| | 43,621 |
| | 21,268 |
| | 2,293 |
| | 1,130 |
| | 24,691 |
|
New York City | 34,935 |
| | 4,093 |
| | 1,164 |
| | 40,192 |
| | 26,987 |
| | 2,158 |
| | 800 |
| | 29,945 |
|
South Florida | 24,678 |
| | 4,426 |
| | 1,773 |
| | 30,877 |
| | 18,186 |
| | 2,966 |
| | 992 |
| | 22,144 |
|
Chicago | 21,935 |
| | 3,457 |
| | 577 |
| | 25,969 |
| | 20,553 |
| | 3,648 |
| | 473 |
| | 24,674 |
|
Denver | 21,503 |
| | 3,186 |
| | 372 |
| | 25,061 |
| | 22,432 |
| | 3,330 |
| | 428 |
| | 26,190 |
|
Austin | 17,399 |
| | 2,058 |
| | 865 |
| | 20,322 |
| | 17,356 |
| | 2,103 |
| | 688 |
| | 20,147 |
|
Houston | 14,041 |
| | 853 |
| | 1,150 |
| | 16,044 |
| | 13,549 |
| | 617 |
| | 741 |
| | 14,907 |
|
Washington, DC | 15,570 |
| | 487 |
| | 614 |
| | 16,671 |
| | 16,511 |
| | 814 |
| | 675 |
| | 18,000 |
|
Louisville | 8,233 |
| | 3,361 |
| | 468 |
| | 12,062 |
| | 9,935 |
| | 2,215 |
| | 566 |
| | 12,716 |
|
Other | 114,962 |
| | 16,396 |
| | 10,761 |
| | 142,119 |
| | 85,271 |
| | 12,628 |
| | 6,072 |
| | 103,971 |
|
Total | $ | 377,237 |
| | $ | 47,211 |
| | $ | 22,594 |
| | $ | 447,042 |
| | $ | 292,046 |
| | $ | 35,580 |
| | $ | 13,629 |
| | $ | 341,255 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the nine months ended September 30, 2018 | | For the nine months ended September 30, 2017 |
| Room Revenue | | Food and Beverage Revenue | | Other Revenue | | Total Revenue | | Room Revenue | | Food and Beverage Revenue | | Other Revenue | | Total Revenue |
Northern California | $ | 184,087 |
| | $ | 15,586 |
| | $ | 6,120 |
| | $ | 205,793 |
| | $ | 86,288 |
| | $ | 5,126 |
| | $ | 2,168 |
| | $ | 93,582 |
|
South Florida | 102,940 |
| | 15,413 |
| | 5,470 |
| | 123,823 |
| | 64,933 |
| | 9,871 |
| | 3,297 |
| | 78,101 |
|
Southern California | 100,838 |
| | 12,545 |
| | 6,688 |
| | 120,071 |
| | 48,326 |
| | 4,654 |
| | 2,039 |
| | 55,019 |
|
New York City | 93,612 |
| | 11,722 |
| | 3,106 |
| | 108,440 |
| | 62,678 |
| | 4,353 |
| | 1,995 |
| | 69,026 |
|
Austin | 63,968 |
| | 7,035 |
| | 2,696 |
| | 73,699 |
| | 59,469 |
| | 6,723 |
| | 1,941 |
| | 68,133 |
|
Chicago | 56,451 |
| | 9,895 |
| | 1,470 |
| | 67,816 |
| | 53,451 |
| | 10,343 |
| | 1,282 |
| | 65,076 |
|
Denver | 55,292 |
| | 9,423 |
| | 976 |
| | 65,691 |
| | 57,038 |
| | 9,745 |
| | 1,109 |
| | 67,892 |
|
Washington, DC | 51,577 |
| | 2,047 |
| | 1,785 |
| | 55,409 |
| | 52,664 |
| | 2,410 |
| | 1,831 |
| | 56,905 |
|
Houston | 47,469 |
| | 2,803 |
| | 3,199 |
| | 53,471 |
| | 41,339 |
| | 2,080 |
| | 2,197 |
| | 45,616 |
|
Louisville | 28,830 |
| | 10,461 |
| | 1,525 |
| | 40,816 |
| | 33,303 |
| | 9,977 |
| | 1,856 |
| | 45,136 |
|
Other | 353,051 |
| | 60,920 |
| | 32,327 |
| | 446,298 |
| | 211,262 |
| | 26,110 |
| | 11,913 |
| | 249,285 |
|
Total | $ | 1,138,115 |
| | $ | 157,850 |
| | $ | 65,362 |
| | $ | 1,361,327 |
| | $ | 770,751 |
| | $ | 91,392 |
| | $ | 31,628 |
| | $ | 893,771 |
|
8. Debt
The Company's debt consisted of the following (in thousands):
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Senior Notes | $ | 506,503 |
| | $ | 1,062,716 |
|
Revolver and Term Loans, net | 1,168,736 |
| | 1,170,954 |
|
Mortgage loans, net | 614,925 |
| | 646,818 |
|
Debt, net | $ | 2,290,164 |
| | $ | 2,880,488 |
|
Senior Notes
The Company's senior secured notes and the senior unsecured notes are collectively the "Senior Notes". The Company's Senior Notes consisted of the following (in thousands):
|
| | | | | | | | | | | | | | |
| | | | | | | | Outstanding Borrowings at |
| | Number of Assets Encumbered | | Interest Rate | | Maturity Date | | September 30, 2018 | | December 31, 2017 |
Senior secured notes (1) (2) (3) | | 9 | | 5.63% | | — | | $ | — |
| | $ | 552,669 |
|
Senior unsecured notes (1) (2) (4) | | — | | 6.00% | | June 2025 | | 506,503 |
| | 510,047 |
|
Total Senior Notes | | | | | | | | $ | 506,503 |
| | $ | 1,062,716 |
|
| |
(1) | Requires payments of interest only through maturity. |
| |
(2) | The senior secured notes include $28.7 million at December 31, 2017, and the senior unsecured notes include $31.5 million and $35.1 million at September 30, 2018 and December 31, 2017, respectively, related to fair value adjustments on the Senior Notes that were assumed in the Mergers. |
| |
(3) | On March 9, 2018 (the "Redemption Date"), the Company completed the early redemption of the senior secured notes in full for an aggregate amount of approximately $539.0 million, which included the redemption price of 102.813% for the outstanding principal amount. The Company recognized a gain of approximately $7.7 million on the early redemption, which is included in gain (loss) on extinguishment of indebtedness, net in the accompanying consolidated statements of operations and comprehensive income. The gain on extinguishment of indebtedness excludes $5.1 million related to two hotel properties that were sold during the nine months ended September 30, 2018 that is included in gain (loss) on sale of hotel properties, net in the accompanying consolidated statement of operations and comprehensive income. |
| |
(4) | The Company has the option to redeem the senior unsecured notes beginning June 1, 2020 at a premium of 103.0%. |
The Senior Notes are subject to customary financial covenants. As of September 30, 2018 and December 31, 2017, the Company was in compliance with all financial covenants.
Revolver and Term Loans
The Company has the following unsecured credit agreements in place:
| |
• | $600.0 million revolving credit facility with a scheduled maturity date of April 22, 2020 with a one-year extension option if certain conditions are satisfied (the "Revolver"); |
| |
• | $400.0 million term loan with a scheduled maturity date of April 22, 2021 (the "$400 Million Term Loan Maturing 2021"); |
| |
• | $150.0 million term loan with a scheduled maturity date of January 22, 2022 (the "$150 Million Term Loan Maturing 2022"); |
| |
• | $400.0 million term loan with a scheduled maturity date of January 25, 2023 (the "$400 Million Term Loan Maturing 2023"). This term loan was referred to as the $400 Million Term Loan Maturing 2019 in previous periodic filings; and |
| |
• | $225.0 million term loan with a scheduled maturity date of January 25, 2023 (the "$225 Million Term Loan Maturing 2023"). This term loan was referred to as the $225 Million Term Loan Maturing 2019 in previous periodic filings. |
The $400 Million Term Loan Maturing 2021, the $150 Million Term Loan Maturing 2022, the $400 Million Term Loan Maturing 2023, and the $225 Million Term Loan Maturing 2023 are collectively the "Term Loans". The Revolver and Term
Loans are subject to customary financial covenants. As of September 30, 2018 and December 31, 2017, the Company was in compliance with all financial covenants.
The Company's unsecured credit agreements consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | | | | Outstanding Borrowings at |
| | Interest Rate at September 30, 2018 (1) | | Maturity Date | | September 30, 2018 | | December 31, 2017 |
Revolver (2) | | 3.76% | | April 2020 | | $ | — |
| | $ | — |
|
$400 Million Term Loan Maturing 2021 | | 3.08% | | April 2021 | | 400,000 |
| | 400,000 |
|
$150 Million Term Loan Maturing 2022 | | 3.08% | | January 2022 | | 150,000 |
| | 150,000 |
|
$400 Million Term Loan Maturing 2023 | | 3.19% | | January 2023 | | 400,000 |
| | 400,000 |
|
$225 Million Term Loan Maturing 2023 | | 3.44% | | January 2023 | | 225,000 |
| | 225,000 |
|
| | | | | | 1,175,000 |
| | 1,175,000 |
|
Deferred financing costs, net (3) | | | | | | (6,264 | ) | | (4,046 | ) |
Total Revolver and Term Loans, net | | | | | | $ | 1,168,736 |
| | $ | 1,170,954 |
|
| |
(1) | Interest rate at September 30, 2018 gives effect to interest rate hedges. |
| |
(2) | At both September 30, 2018 and December 31, 2017, there was $600.0 million of borrowing capacity on the Revolver. The Company has the ability to further increase the borrowing capacity to $750.0 million, subject to certain lender requirements. |
| |
(3) | Excludes $1.7 million and $2.6 million as of September 30, 2018 and December 31, 2017, respectively, related to deferred financing costs on the Revolver, which are included in prepaid expense and other assets in the accompanying consolidated balance sheets. |
Mortgage Loans
The Company's mortgage loans consisted of the following (in thousands):
|
| | | | | | | | | | | | | | |
| | | | | | | | Principal balance at |
Lender | | Number of Assets Encumbered | | Interest Rate at September 30, 2018 (1) | | Maturity Date | | September 30, 2018 | | December 31, 2017 |
Wells Fargo (5) | | 4 | | 4.05% | | March 2019 | (3) | $ | 141,000 |
| | $ | 143,250 |
|
Wells Fargo (2) | | 4 | | 4.08% | | October 2019 | (4) | 150,000 |
| | 150,000 |
|
PNC Bank (2) (6) | | 5 | | 4.36% | | March 2021 | (7) | 85,000 |
| | 85,000 |
|
Wells Fargo (8) | | 1 | | 5.25% | | June 2022 | | 32,269 |
| | 32,882 |
|
PNC Bank/Wells Fargo (9) | | 3 | | 4.95% | | October 2022 | | 92,322 |
| | 120,893 |
|
Prudential (10) | | 1 | | 4.94% | | October 2022 | | 29,758 |
| | 30,323 |
|
Scotiabank (2) (11) | | 1 | | LIBOR + 3.00% | | November 2018 | (12) | 85,073 |
| | 85,404 |
|
| | 19 | | | | | | 615,422 |
| | 647,752 |
|
Deferred financing costs, net | | | | | | | | (497 | ) | | (934 | ) |
Total mortgage loans, net | | | | | | | | $ | 614,925 |
| | $ | 646,818 |
|
| |
(1) | Interest rate at September 30, 2018 gives effect to interest rate hedges. |
| |
(2) | Requires payments of interest only through maturity. |
| |
(3) | In March 2018, the Company extended the maturity date for a one-year term. The maturity date may be extended for three additional one-year terms at the Company’s option, subject to certain lender requirements. |
| |
(4) | In October 2018, the Company extended the maturity date for a one-year term. The maturity date may be extended for two additional one-year terms at the Company's option, subject to certain lender requirements. |
| |
(5) | Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized. |
| |
(6) | The five hotels encumbered by the PNC Bank loan are cross-collateralized. |
| |
(7) | The maturity date may be extended for two one-year terms at the Company’s option, subject to certain lender requirements. |
| |
(8) | Includes $0.7 million and $0.8 million at September 30, 2018 and December 31, 2017, respectively, related to a fair value adjustment on the mortgage loan that was assumed in conjunction with an acquisition. |
| |
(9) | Includes $2.0 million and $3.0 million at September 30, 2018 and December 31, 2017, respectively, related to fair value adjustments on the mortgage loans that were assumed in the Mergers. |
| |
(10) | Includes $0.6 million and $0.7 million at September 30, 2018 and December 31, 2017, respectively, related to a fair value adjustment on the mortgage loan that was assumed in the Mergers. |
| |
(11) | Includes $0.1 million and $0.4 million at September 30, 2018 and December 31, 2017, respectively, related to a fair value adjustment on the mortgage loan that was assumed in the Mergers. |
| |
(12) | On November 5, 2018, the Company paid off the Scotiabank mortgage loan in full. |
Certain mortgage agreements are subject to customary financial covenants. The Company was in compliance with all financial covenants at September 30, 2018 and December 31, 2017.
Interest Expense
The components of the Company's interest expense consisted of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Senior Notes | $ | 5,954 |
| | $ | 3,980 |
| | $ | 22,485 |
| | $ | 3,980 |
|
Revolver and Term Loans | 11,042 |
| | 9,834 |
| | 33,428 |
| | 28,981 |
|
Mortgage loans | 6,753 |
| | 4,943 |
| | 20,171 |
| | 12,969 |
|
Amortization of deferred financing costs | 880 |
| | 893 |
| | 2,688 |
| | 2,597 |
|
Total interest expense | $ | 24,629 |
| | $ | 19,650 |
| | $ | 78,772 |
| | $ | 48,527 |
|
9. Derivatives and Hedging
The Company's interest rate swaps consisted of the following (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Notional value at | | Fair value at |
Hedge type | | Interest rate | | Maturity | | September 30, 2018 | | December 31, 2017 | | September 30, 2018 | | December 31, 2017 |
Swap-cash flow | | 1.56% | | March 2018 | | $ | — |
| | $ | 175,000 |
| | $ | — |
| | $ | (38 | ) |
Swap-cash flow | | 1.64% | | March 2018 | | — |
| | 175,000 |
| | — |
| | (71 | ) |
Swap-cash flow | | 1.83% | | September 2018 | | — |
| | 15,758 |
| | — |
| | (23 | ) |
Swap-cash flow | | 1.75% | | September 2018 | | — |
| | 15,758 |
| | — |
| | (14 | ) |
Swap-cash flow | | 1.83% | | September 2018 | | — |
| | 38,678 |
| | — |
| | (57 | ) |
Swap-cash flow | | 1.75% | | September 2018 | | — |
| | 39,632 |
| | — |
| | (35 | ) |
Swap-cash flow | | 1.83% | | September 2018 | | — |
| | 17,190 |
| | — |
| | (25 | ) |
Swap-cash flow | | 1.75% | | September 2018 | | — |
| | 16,235 |
| | — |
| | (14 | ) |
Swap-cash flow | | 2.02% | | March 2019 | | 125,000 |
| | 125,000 |
| | 212 |
| | (383 | ) |
Swap-cash flow | | 1.94% | | March 2019 | | 100,000 |
| | 100,000 |
| | 207 |
| | (213 | ) |
Swap-cash flow | | 1.27% | | March 2019 | | 125,000 |
| | 125,000 |
| | 750 |
| | 836 |
|
Swap-cash flow | | 1.96% | | March 2019 | | 100,000 |
| | 100,000 |
| | 224 |
| | (230 | ) |
Swap-cash flow | | 1.85% | | March 2019 | | 50,000 |
| | 50,000 |
| | 142 |
| | (43 | ) |
Swap-cash flow | | 1.81% | | March 2019 | | 50,000 |
| | 50,000 |
| | 153 |
| | (19 | ) |
Swap-cash flow | | 1.74% | | March 2019 | | 25,000 |
| | 25,000 |
| | 86 |
| | 13 |
|
Swap-cash flow | | 1.80% | | September 2020 | | 33,000 |
| | 33,000 |
| | 589 |
| | 202 |
|
Swap-cash flow | | 1.80% | | September 2020 | | 82,000 |
| | 82,000 |
| | 1,463 |
| | 502 |
|
Swap-cash flow | | 1.80% | | September 2020 | | 35,000 |
| | 35,000 |
| | 624 |
| | 214 |
|
Swap-cash flow | | 1.81% | | October 2020 | | 143,000 |
| | 143,000 |
| | 2,958 |
| | 803 |
|
Swap-cash flow | | 1.15% | | April 2021 | | 100,000 |
| | 100,000 |
| | 4,346 |
| | 2,880 |
|
Swap-cash flow | | 1.20% | | April 2021 | | 100,000 |
| | 100,000 |
| | 4,217 |
| | 2,726 |
|
Swap-cash flow | | 2.15% | | April 2021 | | 75,000 |
| | 75,000 |
| | 1,323 |
| | (144 | ) |
Swap-cash flow | | 1.91% | | April 2021 | | 75,000 |
| | 75,000 |
| | 1,793 |
| | 415 |
|
Swap-cash flow | | 1.61% | | June 2021 | | 50,000 |
| | 50,000 |
| | 1,699 |
| | 769 |
|
Swap-cash flow | | 1.56% | | June 2021 | | 50,000 |
| | 50,000 |
| | 1,778 |
| | 869 |
|
Swap-cash flow | | 1.71% | | June 2021 | | 50,000 |
| | 50,000 |
| | 1,566 |
| | 598 |
|
Swap-cash flow (1) | | 2.29% | | December 2022 | | 200,000 |
| | 200,000 |
| | 4,849 |
| | (413 | ) |
Swap-cash flow (1) | | 2.29% | | December 2022 | | 125,000 |
| | 125,000 |
| | 3,054 |
| | (259 | ) |
Swap-cash flow (1) | | 2.38% | | December 2022 | | 200,000 |
| | — |
| | 4,180 |
| | — |
|
Swap-cash flow (1) | | 2.38% | | December 2022 | | 100,000 |
| | — |
| | 2,102 |
| | — |
|
| | | | | | $ | 1,993,000 |
| | $ | 2,186,251 |
| | $ | 38,315 |
| | $ | 8,846 |
|
| |
(1) | Effective between the maturity of the existing swaps in March 2019 and December 2022. |
As of September 30, 2018 and December 31, 2017, the aggregate fair value of the interest rate swap assets of $38.3 million and $10.8 million, respectively, was included in prepaid expense and other assets in the accompanying consolidated balance sheets. As of December 31, 2017, the aggregate fair value of the interest rate swap liabilities of $2.0 million was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.
As of September 30, 2018 and December 31, 2017, there was approximately $38.3 million and $8.8 million, respectively, of unrealized gains included in accumulated other comprehensive income related to interest rate hedges that are effective in offsetting the variable cash flows. There was no ineffectiveness recorded on the designated hedges during the three and nine month periods ended September 30, 2018 and 2017. For the three and nine months ended September 30, 2018, approximately $1.4 million and $1.7 million, respectively, of the amounts included in accumulated other comprehensive income were
reclassified into interest expense. For the three and nine months ended September 30, 2017, approximately $1.3 million and $6.2 million, respectively, of the amounts included in accumulated other comprehensive loss were reclassified into interest expense. Approximately $10.1 million of the unrealized gains included in accumulated other comprehensive income at September 30, 2018 is expected to be reclassified into interest expense within the next 12 months.
10. Fair Value
Fair Value Measurement
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The fair value hierarchy has three levels of inputs, both observable and unobservable:
| |
• | Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities. |
| |
• | Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data. |
| |
• | Level 3 — Inputs are unobservable and corroborated by little or no market data. |
Fair Value of Financial Instruments
The Company used the following market assumptions and/or estimation methods:
| |
• | Cash and cash equivalents, restricted cash reserves, hotel and other receivables, accounts payable and other liabilities — The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value because of their short term maturities. |
| |
• | Debt — The Company estimated the fair value of the Senior Notes by using publicly available trading prices, market interest rates, and spreads for the Senior Notes, which are Level 2 and Level 3 inputs in the fair value hierarchy. The Company estimated the fair value of the Revolver and Term Loans by using a discounted cash flow model and incorporating various inputs and assumptions for the effective borrowing rates for debt with similar terms, which are Level 3 inputs in the fair value hierarchy. The Company estimated the fair value of the mortgage loans by using a discounted cash flow model and incorporating various inputs and assumptions for the effective borrowing rates for debt with similar terms and the loan to estimated fair value of the collateral, which are Level 3 inputs in the fair value hierarchy. |
The fair value of the Company's debt was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior Notes | $ | 506,503 |
| | $ | 503,969 |
| | $ | 1,062,716 |
| | $ | 1,038,892 |
|
Revolver and Term Loans, net | 1,168,736 |
| | 1,175,000 |
| | 1,170,954 |
| | 1,179,052 |
|
Mortgage loans, net | 614,925 |
| | 613,712 |
| | 646,818 |
| | 643,078 |
|
Debt, net | $ | 2,290,164 |
| | $ | 2,292,681 |
| | $ | 2,880,488 |
| | $ | 2,861,022 |
|
Recurring Fair Value Measurements
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value at September 30, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Interest rate swap asset | $ | — |
| | $ | 38,315 |
| | $ | — |
| | $ | 38,315 |
|
Interest rate swap liability | — |
| | — |
| | — |
| | — |
|
Total | $ | — |
| | $ | 38,315 |
| | $ | — |
| | $ | 38,315 |
|
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value at December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Interest rate swap asset | $ | — |
| | $ | 10,827 |
| | $ | — |
| | $ | 10,827 |
|
Interest rate swap liability | — |
| | (1,981 | ) | | — |
| | (1,981 | ) |
Total | $ | — |
| | $ | 8,846 |
| | $ | — |
| | $ | 8,846 |
|
The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows for each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2018, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
11. Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to shareholders. The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT. As a REIT, the Company is generally not subject to federal corporate income tax on the portion of taxable income that is distributed to shareholders. If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and it may not be able to qualify as a REIT for four subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on undistributed taxable income. The Company’s TRSs will generally be subject to U.S. federal, state, and local income taxes at the applicable rates.
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company had no accruals for tax uncertainties as of September 30, 2018 and December 31, 2017.
12. Commitments and Contingencies
Restricted Cash Reserves
The Company is obligated to maintain cash reserve funds for future capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of September 30, 2018 and December 31, 2017, approximately $78.1 million and $72.6 million, respectively, was available in the restricted cash reserves for future capital expenditures, real estate taxes and insurance.
Litigation
Other than the legal proceeding mentioned below, neither the Company nor any of its subsidiaries is currently involved in any regulatory or legal proceedings that management believes will have a material and adverse effect on the Company's financial position, results of operations or cash flows.
Prior to the Mergers, on March 24, 2016, an affiliate of InterContinental Hotels Group PLC ("IHG"), which was previously the hotel management company for three of FelCor's hotels (two of which were sold in 2006, and one of which was converted by FelCor into a Wyndham brand and operation in 2013), notified FelCor that the National Retirement Fund in which the employees at those hotels had participated had assessed a withdrawal liability of $8.3 million, with required quarterly payments including interest, in connection with the termination of IHG’s operation of those hotels. FelCor's hotel management agreements with IHG stated that it may be obligated to indemnify and hold IHG harmless for some or all of any amount ultimately contributed to the pension trust fund with respect to those hotels.
Based on the current assessment of the claim, the resolution of this matter may not occur until 2022. As of September 30, 2018, the Company maintained an accrual of approximately $4.6 million for the future quarterly payments to the pension trust fund, which is included in accounts payable and other liabilities in the accompanying consolidated balance sheet.
The Company plans to vigorously defend the underlying claims and, if appropriate, IHG’s demand for indemnification.
Management Agreements
As of September 30, 2018, 151 of the Company's hotel properties were operated pursuant to long-term management agreements with initial terms ranging from 3 to 25 years. This number includes 42 hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, Marriott, Wyndham, and other hotel brands. Each management company receives a base management fee generally between 3.0% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally between 2.0% and 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel.
Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2018, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $14.7 million and $45.7 million, respectively. For the three and nine months ended September 30, 2017, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $10.9 million and $32.5 million, respectively.
The Wyndham management agreements guarantee minimum levels of annual net operating income at each of the Wyndham-managed hotels for each year of the initial 10-year term to 2023, subject to an aggregate $100.0 million limit over the term and an annual $21.5 million limit. The Company recognizes the pro-rata portion of the projected aggregate full-year guaranties as a reduction of Wyndham's contractual management and other fees.
Franchise Agreements
As of September 30, 2018, 108 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes 42 hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, Marriott, Wyndham, and other hotel brands. In addition, The Knickerbocker is not operated with a hotel brand so the hotel does not have a franchise agreement. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs generally between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee of generally 3.0% of food and beverage revenues.
Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2018, the Company incurred franchise fee expense of approximately $20.2 million and $62.1 million, respectively. For the three and nine months ended September 30, 2017, the Company incurred franchise fee expense of approximately $18.6 million and $53.6 million, respectively.
13. Equity
Common Shares of Beneficial Interest
In 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $400.0 million of the Common Shares through December 31, 2016. On February 17, 2017, the Company's board of trustees increased the authorized amount that may be repurchased by $40.0 million to a total of $440.0 million. On February 16, 2018, the Company's board of trustees extended the duration of the share repurchase program to February 28, 2019.
During the nine months ended September 30, 2018, the Company did not repurchase and retire any of its Common Shares under the share repurchase program. As of September 30, 2018, the share repurchase program had a remaining capacity of $198.9 million. During the nine months ended September 30, 2017, the Company repurchased and retired 122,508 Common Shares for approximately $2.6 million.
As a result of the REIT Merger, on August 31, 2017, the Company issued 50.4 million Common Shares at a price of $20.18 per share to former FelCor common stockholders as consideration in the REIT Merger.
During the nine months ended September 30, 2018, the Company declared a cash dividend of $0.33 per Common Share in each of the first, second, and third quarters of 2018. During the nine months ended September 30, 2017, the Company declared a cash dividend of $0.33 per Common Share in each of the first, second, and third quarters of 2017.
Series A Preferred Shares
On August 31, 2017, the Company designated and authorized the issuance of up to 12,950,000 $1.95 Series A Preferred Shares. The Company issued 12,879,475 Series A Preferred Shares, at a price of $28.49 per share, to former FelCor preferred stockholders as consideration in the REIT Merger. The holders of the Series A Preferred Shares are entitled to receive dividends that are payable in cash in an amount equal to the greater of (i) $1.95 per annum or (ii) the cash distributions declared or paid for the corresponding period on the number of Common Shares into which a Series A Preferred Share is then convertible.
During the nine months ended September 30, 2018, the Company declared a cash dividend of $0.4875 on each Series A Preferred Share in each of the first, second, and third quarters of 2018. During the nine months ended September 30, 2017, the Company declared a cash dividend of $0.4875 on each Series A Preferred Share in the third quarter of 2017.
Noncontrolling Interest
The Company consolidates the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. The outstanding OP Units held by the limited partners are redeemable for cash, or at the option of the Company, for a like number of Common Shares. As a result of the Partnership Merger, the Operating Partnership issued 215,152 OP units at a price of $20.18 per unit, to former FelCor LP limited partners as consideration in the Partnership Merger. As of September 30, 2018, 773,902 outstanding OP Units are held by the limited partners. The noncontrolling interest is included in the noncontrolling interest in the Operating Partnership on the consolidated balance sheets.
Consolidated Joint Venture Preferred Equity
The Company's joint venture that redeveloped The Knickerbocker raised $45.0 million ($44.4 million net of issuance costs) through the sale of redeemable preferred equity under the EB-5 Immigrant Investor Program. The purchasers receive a 3.25% current annual return (which increases to 8% if the Company does not redeem the equity interest before the fifth anniversary of the respective equity issuance), plus a 0.25% non-compounding annual return payable at redemption. The fifth anniversary for the majority of the equity issuance is in February 2019. The preferred equity raised by the joint venture is included in preferred equity in a consolidated joint venture on the consolidated balance sheets.
14. Equity Incentive Plan
The Company may issue share-based awards to officers, employees, non-employee trustees and other eligible persons under the RLJ Lodging Trust 2015 Equity Incentive Plan (the "2015 Plan"). The 2015 Plan provides for a maximum of 7,500,000 Common Shares to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.
Share Awards
From time to time, the Company may award unvested restricted shares under the 2015 Plan as compensation to officers, employees and non-employee trustees. The issued shares vest over a period of time as determined by the board of trustees at the date of grant. The Company recognizes compensation expense for time-based unvested restricted shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.
Non-employee trustees may also elect to receive unrestricted shares under the 2015 Plan as compensation that would otherwise be paid in cash for their services. The shares issued to non-employee trustees in lieu of cash compensation are unrestricted and include no vesting conditions. The Company recognizes compensation expense for the unrestricted shares issued in lieu of cash compensation on the date of issuance based upon the fair market value of the shares on that date.
A summary of the unvested restricted shares as of September 30, 2018 is as follows:
|
| | | | | | |
| 2018 |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Unvested at January 1, 2018 | 700,325 |
| | $ | 22.88 |
|
Granted | 591,851 |
| | 21.42 |
|
Vested | (348,580 | ) | | 23.22 |
|
Forfeited | (113,325 | ) | | 21.58 |
|
Unvested at September 30, 2018 | 830,271 |
| | $ | 21.87 |
|
For the three and nine months ended September 30, 2018, the Company recognized approximately $3.8 million and $8.1 million, respectively, of share-based compensation expense related to restricted share awards, which includes the accelerated vesting of restricted share awards as a result of the Company's President and Chief Executive Officer retiring in August 2018. For the three and nine months ended September 30, 2017, the Company recognized approximately $2.0 million and $6.7 million, respectively, of share-based compensation expense related to restricted share awards. As of September 30, 2018, there was $15.9 million of total unrecognized compensation costs related to unvested restricted share awards and these costs are expected to be recognized over a weighted-average period of 2.5 years. The total fair value of the shares vested (calculated as the number of shares multiplied by the vesting date share price) during the nine months ended September 30, 2018 and 2017 was approximately $7.7 million and $5.7 million, respectively.
Performance Units
In February 2017, the Company awarded 259,000 performance units with a grant date fair value of $14.93 per unit to certain employees. The performance units vest over a four-year period, including three years of performance-based vesting plus an additional one year of time-based vesting.
In February 2018, the Company awarded 264,000 performance units with a grant date fair value of $13.99 per unit to certain employees. The performance units vest over a four-year period, including three years of performance-based vesting (the "2018 performance units measurement period") plus an additional one year of time-based vesting. These performance units may convert into restricted shares at a range of 25% to 150% of the number of performance units granted contingent upon the Company achieving an absolute total shareholder return and a relative total shareholder return over the measurement period at specified percentiles of the peer group, as defined by the award. If at the end of the 2018 performance units measurement period the target criterion is met, then 50% of the restricted shares will vest immediately. The remaining 50% will vest one year later. The award recipients will not be entitled to receive any dividends prior to the date of conversion. For any restricted shares issued upon conversion, the award recipient will be entitled to receive payment of an amount equal to all dividends that would have been paid if such restricted shares had been issued at the beginning of the 2018 performance units measurement period. The fair value of the performance units is determined using a Monte Carlo simulation with the following assumptions: a risk-free interest rate of 2.42%, volatility of 27.44%, and an expected term equal to the requisite service period for the awards. The Company estimated the compensation expense for the performance units on a straight-line basis using a calculation that recognizes 50% of the grant date fair value over three years and 50% of the grant date fair value over four years.
For the three and nine months ended September 30, 2018, the Company recognized approximately $0.2 million and $1.6 million, respectively, of share-based compensation expense related to the performance unit awards. For the three and nine months ended September 30, 2017, the Company recognized approximately $0.5 million and $1.3 million, respectively, of share-based compensation expense related to the performance unit awards. As of September 30, 2018, there was $3.8 million of total unrecognized compensation costs related to the performance unit awards and these costs are expected to be recognized over a weighted-average period of 2.3 years.
As of September 30, 2018, there were 2,981,978 Common Shares available for future grant under the 2015 Plan.
15. Earnings per Common Share
Basic earnings per Common Share is calculated by dividing net income attributable to common shareholders by the weighted-average number of Common Shares outstanding during the period excluding the weighted-average number of unvested restricted shares outstanding during the period. Diluted earnings per Common Share is calculated by dividing net income attributable to common shareholders by the weighted-average number of Common Shares outstanding during the period, plus any shares that could potentially be outstanding during the period. The potential shares consist of the unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to the participating shares, they would be deducted from net income attributable to common shareholders used in the basic and diluted earnings per share calculations.
The limited partners’ outstanding OP Units (which may be redeemed for Common Shares under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three and nine months ended September 30, 2018 and 2017, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.
The computation of basic and diluted earnings per Common Share is as follows (in thousands, except share and per share data):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Numerator: | | | | | | | |
Net income attributable to RLJ | $ | 73,975 |
| | $ | 3,914 |
| | $ | 161,378 |
| | $ | 67,918 |
|
Less: Preferred dividends | (6,279 | ) | | (2,093 | ) | | (18,836 | ) | | (2,093 | ) |
Less: Dividends paid on unvested restricted shares | (274 | ) | | (243 | ) | | (937 | ) | | (798 | ) |
Less: Undistributed earnings attributable to unvested restricted shares | (46 | ) | | — |
| | — |
| | — |
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | 67,376 |
| | $ | 1,578 |
| | $ | 141,605 |
| | $ | 65,027 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted-average number of Common Shares - basic | 174,326,198 |
| | 140,249,961 |
| | 174,253,393 |
| | 129,317,120 |
|
Unvested restricted shares | 129,075 |
| | 57,308 |
| | 109,523 |
| | 82,057 |
|
Unvested performance units | 24,068 |
| | — |
| | 2,185 |
| | — |
|
Weighted-average number of Common Shares - diluted | 174,479,341 |
| | 140,307,269 |
| | 174,365,101 |
| | 129,399,177 |
|
| | | | | | | |
Net income per share attributable to common shareholders - basic | $ | 0.39 |
| | $ | 0.01 |
| | $ | 0.81 |
| | $ | 0.50 |
|
| | | | | | | |
Net income per share attributable to common shareholders - diluted | $ | 0.39 |
| | $ | 0.01 |
| | $ | 0.81 |
| | $ | 0.50 |
|
16. Supplemental Information to Statements of Cash Flows (in thousands)
|
| | | | | | | |
| For the nine months ended September 30, |
| 2018 | | 2017 |
Reconciliation of cash, cash equivalents, and restricted cash reserves | | | |
Cash and cash equivalents | $ | 425,384 |
| | $ | 421,181 |
|
Restricted cash reserves | 78,113 |
| | 78,343 |
|
Cash, cash equivalents, and restricted cash reserves | $ | 503,497 |
| | $ | 499,524 |
|
| | | |
Interest paid | $ | 84,377 |
| | $ | 34,170 |
|
| | | |
Income taxes paid | $ | 1,902 |
| | $ | 1,107 |
|
| | | |
Supplemental investing and financing transactions | | | |
In conjunction with the sale of hotel properties, the Company recorded the following: | | | |
Sale of hotel properties | $ | 456,600 |
| | $ | — |
|
Transaction costs | (8,432 | ) | | (49 | ) |
Operating prorations | (431 | ) | | — |
|
Proceeds from the sale of hotel properties, net | $ | 447,737 |
| | $ | (49 | ) |
| | | |
Supplemental non-cash transactions (1) | | | |
Accrued capital expenditures | $ | 5,879 |
| | $ | 5,465 |
|
(1) Refer to Note 3, Merger with FelCor Lodging Trust Incorporated, for information related to the non-cash investing and financing activities associated with the acquisition of FelCor.
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, 2017, filed with the SEC on February 28, 2018 (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," 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 "Forward-Looking Statements," "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as the 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 owns primarily premium-branded, high-margin, 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 attractive long-term growth prospects. We believe premium-branded, focused-service and compact full-service hotels with these characteristics generate high levels of Revenue per Available Room ("RevPAR"), strong operating margins and attractive returns.
Our strategy is to own 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 these types of hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve 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.
As we look at factors that could impact our business, we find that the consumer is generally in good financial health, job creation remains positive, and an increase in wages is adding to consumers' disposable income. While geopolitical and global economic uncertainty still exists and interest rates are rising, we remain cautiously optimistic that positive employment trends, high consumer confidence, and elevated corporate sentiment will continue to drive economic expansion in the U.S. and generate positive lodging demand and RevPAR growth for the industry. However, in light of accelerating supply, RevPAR growth is likely to be moderate.
We continue to follow a prudent and disciplined capital allocation strategy. We will continue to look for and weigh all possible investment decisions against the highest and best returns for our shareholders over the long term. We believe that our cash on hand and expected access to capital (including availability under our revolving credit facility ("Revolver")) along with our senior management team's experience, extensive industry relationships and asset management expertise, will enable us to pursue investment opportunities that generate additional internal and external growth.
As of September 30, 2018, we owned 152 hotel properties with approximately 29,400 rooms, located in 25 states and the District of Columbia. We owned, through wholly-owned subsidiaries, a 100% interest in 148 of our hotel properties, a 98.3% controlling interest in the DoubleTree Metropolitan Hotel New York City, a 95% controlling interest in The Knickerbocker, and 50% interests in entities owning two hotel properties. We consolidate our real estate interests in the 150 hotel properties in which we hold a controlling financial interest, and we record the real estate interests in the two hotels in which we hold an indirect 50% interest using the equity method of accounting. We lease 151 of the 152 hotel properties to our taxable REIT subsidiaries ("TRS"), of which we own a controlling financial interest.
For U.S. federal income tax purposes, we elected to be taxed as a REIT commencing with our taxable year ended December 31, 2011. Substantially all of our assets and liabilities 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 the Operating Partnership. As of September 30, 2018, we owned, through a combination of direct and indirect interests, 99.6% of the units of limited partnership interest in the Operating Partnership ("OP units").
Recent Significant Activities
Our significant activities reflect our commitment to creating long-term shareholder value through enhancing our hotel portfolio's quality, recycling capital and maintaining a prudent capital structure. During the nine months ended September 30, 2018, the following significant activities took place:
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• | In January 2018, we modified our $400.0 million term loan initially due in 2019, our $225.0 million term loan initially due in 2019, and our $150 million term loan due in 2022. We extended the maturity for both the $400.0 million term |
loan and the $225.0 million term loan to January 2023, and we improved the overall pricing for each of the modified term loans.
| |
• | In February 2018, we sold the Embassy Suites Boston Marlborough in Marlborough, Massachusetts for $23.7 million. |
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• | In March 2018, we completed the early redemption of the senior secured notes in full for an aggregate principal amount of $524.0 million. |
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• | In March 2018, we sold the Sheraton Philadelphia Society Hill Hotel in Philadelphia, Pennsylvania for $95.5 million. |
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• | In July 2018, we sold the Embassy Suites Napa Valley in Napa, California for $102.0 million. |
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• | In July 2018, we entered into a purchase and sale agreement to sell the Holiday Inn San Francisco - Fisherman's Wharf. At September 30, 2018, this hotel property has been included in assets of hotel properties held for sale, net on the consolidated balance sheet. The transaction closed on October 15, 2018. |
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• | In August 2018, we sold the DoubleTree Hotel Columbia in Columbia, Maryland for $12.9 million. |
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• | In August 2018, we sold The Vinoy Renaissance St. Petersburg Resort & Golf Club in St. Petersburg, Florida for $185.0 million. |
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• | In September 2018, we sold the DoubleTree by Hilton Burlington Vermont in Burlington, Vermont for $35.0 million. |
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• | We declared a cash dividend of $0.4875 on each Series A Preferred Share in each of the first, second, and third quarters of 2018. |
| |
• | We declared a cash dividend of $0.33 per Common Share in each of the first, second, and third quarters of 2018. |
Our Customers
The majority 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 hotel properties are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer.
Our Revenues and Expenses
Our revenues are primarily derived from the operation of hotels, including the sale of rooms, food and beverage revenue and other revenue, which consists of parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees.
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management and franchise 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 operating expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance and utility costs. Our hotels that are subject to franchise agreements are charged a royalty fee, plus additional fees for marketing, central reservation systems and other franchisor costs, in order for the hotel properties to operate under the respective brands. Franchise fees are based on a percentage of room revenue and for certain hotels additional franchise fees are charged for food and beverage revenue. Our hotels are managed by independent, third-party management companies under long-term agreements pursuant to which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of
each individual hotel property. 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, financial 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 acquisition opportunities to determine each hotel's contribution to cash flow and its potential to provide attractive long-term total returns. The key indicators include:
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• | Average Daily Rate ("ADR") |
ADR, Occupancy and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring the operating performance at the individual hotel property level and across our entire business. We evaluate the individual hotel RevPAR performance on an absolute basis with comparisons to budget and prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.
We also use non-GAAP measures such as FFO, Adjusted FFO, EBITDA, EBITDAre, and Adjusted EBITDA to evaluate the operating performance of our business. For a more in depth discussion of the non-GAAP measures, please refer to the "Non-GAAP Financial Measures" section.
Critical Accounting Policies
The preparation of the 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. It is possible that the actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. Our Annual Report on Form 10-K for the year ended December 31, 2017 contains a discussion of our critical accounting policies. As discussed in Note 2 to our accompanying consolidated financial statements, Summary of Significant Accounting Policies, we adopted ASU 2014-09 on January 1, 2018. Other than noted below, there have been no other significant changes to our critical accounting policies since December 31, 2017.
Revenue
Our revenue consists of room revenue, food and beverage revenue, and revenue from other hotel operating departments (such as parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees). A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when the performance obligation is satisfied. Our contracts generally have a single performance obligation, such as renting a hotel room to a customer, or providing food and beverage to a customer, or providing a hotel property-related good or service to a customer. Our performance obligations are generally satisfied at a point in time. We recognize revenue when control of the promised good or service is transferred to the customer, in an amount that reflects the consideration we expect to receive in exchange for the promised good or service. The revenue is recorded net of any sales and occupancy taxes collected from the customer. All rebates or discounts are recorded as a reduction to revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotel properties.
Advance deposits and deferred revenue are recognized on the consolidated balance sheets when cash payments are received prior to the satisfaction of a performance obligation. Advance deposits and deferred revenue consist of amounts that are refundable and non-refundable to the customer. The advance deposits and deferred revenue are recognized as revenue in the consolidated statements of operations and comprehensive income when we satisfy our performance obligation to the customer.
An allowance for doubtful accounts is our best estimate of the amount of probable credit losses in the existing accounts receivable portfolio and increases to the allowance for doubtful accounts are recorded as bad debt expense. The allowance for doubtful accounts is calculated as a percentage of the aged accounts receivable.
Results of Operations
At September 30, 2018 and 2017, we owned 152 and 159 hotel properties, respectively. Based on when a hotel property is acquired, sold or closed for renovation, the operating results for certain hotel properties are not comparable for the three and nine months ended September 30, 2018 and 2017. The non-comparable hotel properties include 37 hotel properties that were acquired in the Company's merger with FelCor Lodging Trust Incorporated ("FelCor") and seven dispositions that were completed between January 1, 2017 and September 30, 2018.
Comparison of the three months ended September 30, 2018 to the three months ended September 30, 2017
|
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
| (amounts in thousands) | | |
|
Revenues | |
| | |
| | |
| | |
|
Operating revenues | |
| | |
| | |
| | |
|
Room revenue | $ | 377,237 |
| | $ | 292,046 |
| | $ | 85,191 |
| | 29.2 | % |
Food and beverage revenue | 47,211 |
| | 35,580 |
| | 11,631 |
| | 32.7 | % |
Other revenue | 22,594 |
| | 13,629 |
| | 8,965 |
| | 65.8 | % |
Total revenues | $ | 447,042 |
| | $ | 341,255 |
| | $ | 105,787 |
| | 31.0 | % |
Expenses | |
| | |
| | |
| | |
|
Operating expenses | |
| | |
| | |
| | |
|
Room expense | $ | 95,161 |
| | $ | 69,380 |
| | $ | 25,781 |
| | 37.2 | % |
Food and beverage expense | 37,780 |
| | 27,061 |
| | 10,719 |
| | 39.6 | % |
Management and franchise fee expense | 34,838 |
| | 29,571 |
| | 5,267 |
| | 17.8 | % |
Other operating expense | 105,646 |
| | 78,120 |
| | 27,526 |
| | 35.2 | % |
Total property operating expenses | 273,425 |
| | 204,132 |
| | 69,293 |
| | 33.9 | % |
Depreciation and amortization | 60,373 |
| | 45,231 |
| | 15,142 |
| | 33.5 | % |
Property tax, insurance and other | 34,382 |
| | 23,618 |
| | 10,764 |
| | 45.6 | % |
General and administrative | 11,622 |
| | 9,506 |
| | 2,116 |
| | 22.3 | % |
Transaction costs | 261 |
| | 32,607 |
| | (32,346 | ) | | (99.2 | )% |
Total operating expenses | 380,063 |
| | 315,094 |
| | 64,969 |
| | 20.6 | % |
Operating income | 66,979 |
| | 26,161 |
| | 40,818 |
| | — | % |
Other income | 856 |
| | 110 |
| | 746 |
| | — | % |
Interest income | 1,149 |
| | 1,157 |
| | (8 | ) | | (0.7 | )% |
Interest expense | (24,629 | ) | | (19,650 | ) | | (4,979 | ) | | 25.3 | % |
Gain (loss) on sale of hotel properties, net | 35,895 |
| | (19 | ) | | 35,914 |
| | — | % |
Loss on extinguishment of indebtedness | (1,656 | ) | | — |
| | (1,656 | ) | | 100.0 | % |
Gain on settlement of an investment in loan | — |
| | 2,670 |
| | (2,670 | ) | | (100.0 | )% |
Income before equity in income from unconsolidated joint ventures | 78,594 |
| | 10,429 |
| | 68,165 |
| | — | % |
Equity in income from unconsolidated joint ventures | 219 |
| | 57 |
| | 162 |
| | — | % |
Income before income tax expense | 78,813 |
| | 10,486 |
| | 68,327 |
| | — | % |
Income tax expense | (4,156 | ) | | (6,375 | ) | | 2,219 |
| | (34.8 | )% |
Net income | 74,657 |
| | 4,111 |
| | 70,546 |
| | — | % |
Net income attributable to noncontrolling interests: | |
| | |
| | |
| | |
Noncontrolling interest in consolidated joint ventures | (9 | ) | | (32 | ) | | 23 |
| | (71.9 | )% |
Noncontrolling interest in the Operating Partnership | (299 | ) | | (43 | ) | | (256 | ) | | — | % |
Preferred distributions - consolidated joint venture | (374 | ) | | (122 | ) | | (252 | ) | | — | % |
Net income attributable to RLJ | 73,975 |
| | 3,914 |
| | 70,061 |
| | — | % |
Preferred dividends | (6,279 | ) | | (2,093 | ) | | (4,186 | ) | | — | % |
Net income attributable to common shareholders | $ | 67,696 |
| | $ | 1,821 |
| | $ | 65,875 |
| | — | % |
Revenues
Total revenues increased $105.8 million, or 31.0%, to $447.0 million for the three months ended September 30, 2018 from $341.3 million for the three months ended September 30, 2017. The increase was a result of an $85.2 million increase in room revenue, an $11.6 million increase in food and beverage revenue, and a $9.0 million increase in other revenue.
Room Revenue
Room revenue increased $85.2 million, or 29.2%, to $377.2 million for the three months ended September 30, 2018 from $292.0 million for the three months ended September 30, 2017. The increase was a result of an $89.0 million increase in room revenue attributable to the non-comparable properties, partially offset by a $3.8 million decrease in room revenue attributable to the comparable properties. The decrease in room revenue from the comparable properties was attributable to a 1.6% decrease in RevPAR, led by RevPAR decreases in our Louisville and Austin markets of 17.1% and 9.0%, respectively, which were partially offset by RevPAR increases in our Northern California and Chicago markets of 7.3% and 6.7%, respectively.
The following are the quarter-to-date key hotel operating statistics for the comparable properties owned at September 30, 2018 and 2017, respectively:
|
| | | | | | | | | | |
| For the three months ended September 30, | | |
| 2018 | | 2017 | | % Change |
Number of comparable properties (at end of period) | 121 |
| | 121 |
| | — |
|
Occupancy | 78.4 | % | | 80.3 | % | | (2.3 | )% |
ADR | $ | 163.33 |
| | $ | 162.15 |
| | 0.7 | % |
RevPAR | $ | 128.10 |
| | $ | 130.18 |
| | (1.6 | )% |
Food and Beverage Revenue
Food and beverage revenue increased $11.6 million to $47.2 million for the three months ended September 30, 2018 from $35.6 million for the three months ended September 30, 2017. The increase was a result of an $11.3 million increase in food and beverage revenue attributable to the non-comparable properties and a $0.3 million increase in food and beverage revenue attributable to the comparable properties.
Other Revenue
Other revenue, which includes revenue derived from ancillary sources such as parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees, increased $9.0 million to $22.6 million for the three months ended September 30, 2018 from $13.6 million for the three months ended September 30, 2017. The increase was due to an $8.5 million increase in other revenue attributable to the non-comparable properties and a $0.4 million increase in other revenue attributable to the comparable properties.
Property Operating Expenses
Property operating expenses increased $69.3 million, or 33.9%, to $273.4 million for the three months ended September 30, 2018 from $204.1 million for the three months ended September 30, 2017. The increase was due to a $66.4 million increase in property operating expenses attributable to the non-comparable properties and a $2.9 million increase in property operating expenses attributable to the comparable properties.
The components of our property operating expenses for the comparable properties owned at September 30, 2018 and 2017, respectively, were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Room expense | $ | 58,000 |
| | $ | 55,765 |
| | $ | 2,235 |
| | 4.0 | % |
Food and beverage expense | 19,022 |
| | 18,539 |
| | 483 |
| | 2.6 | % |
Management and franchise fee expense | 26,649 |
| | 26,991 |
| | (342 | ) | | (1.3 | )% |
Other operating expense | 60,429 |
| | 59,939 |
| | 490 |
| | 0.8 | % |
Total property operating expenses | $ | 164,100 |
| | $ | 161,234 |
| | $ | 2,866 |
| | 1.8 | % |
The increase in property operating expenses attributable to the comparable properties was due to higher room expense, food and beverage expense, and other operating expense. Room expense, food and beverage expense, and other operating expense 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, decreased as a result of lower revenues at the comparable properties.
Depreciation and Amortization
Depreciation and amortization expense increased $15.1 million, or 33.5%, to $60.4 million for the three months ended September 30, 2018 from $45.2 million for the three months ended September 30, 2017. The increase was a result of a $13.9 million increase in depreciation and amortization expense attributable to the non-comparable properties and a $1.2 million increase in depreciation and amortization expense attributable to the comparable properties.
Property Tax, Insurance and Other
Property tax, insurance and other expense increased $10.8 million, or 45.6%, to $34.4 million for the three months ended September 30, 2018 from $23.6 million for the three months ended September 30, 2017. The increase was attributable to a $10.3 million increase in property tax, insurance and other expense attributable to the non-comparable properties and a $0.4 million increase in property tax, insurance and other expense attributable to the comparable properties. The increase in property tax, insurance and other expense attributable to the non-comparable properties includes property tax reassessments in certain jurisdictions as a result of the merger with FelCor.
General and Administrative
General and administrative expense increased $2.1 million, or 22.3%, to $11.6 million for the three months ended September 30, 2018 from $9.5 million for the three months ended September 30, 2017. The increase in general and administrative expense was primarily due to the Company's larger operating platform as a result of the merger with FelCor, which included a $1.8 million increase in compensation expense and an increase of $1.2 million in professional fees and other general and administrative costs. The increase in compensation expense for the three months ended September 30, 2018 was due to an increase in salary, bonus, and other employee compensation costs, which includes the accelerated vesting of restricted share awards as a result of the Company's President and Chief Executive Officer retiring in August 2018. The increase in general and administrative expense was partially offset by a net decrease of $0.9 million related to expenses that were outside of the normal course of operations, including debt modification costs, executive transition costs, receipts of prior year employee tax credits, and professional fees incurred related to an activist shareholder defense.
Transaction Costs
Transaction costs decreased $32.3 million, or 99.2%, to $0.3 million for the three months ended September 30, 2018 from $32.6 million for the three months ended September 30, 2017. The decrease in transaction costs was attributable to a decrease of approximately $32.2 million in transaction and integration costs related to the merger with FelCor during the three months ended September 30, 2018.
Interest Expense
The components of our interest expense for the three months ended September 30, 2018 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| For the three months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Senior Notes | $ | 5,954 |
| | $ | 3,980 |
| | $ | 1,974 |
| | 49.6 | % |
Revolver and Term Loans | 11,042 |
| | 9,834 |
| | 1,208 |
| | 12.3 | % |
Mortgage loans | 6,753 |
| | 4,943 |
| | 1,810 |
| | 36.6 | % |
Amortization of deferred financing costs | 880 |
| | 893 |
| | (13 | ) | | (1.5 | )% |
Total interest expense | $ | 24,629 |
| | $ | 19,650 |
| | $ | 4,979 |
| | 25.3 | % |
Interest expense increased $5.0 million, or 25.3%, to $24.6 million for the three months ended September 30, 2018 from $19.7 million for the three months ended September 30, 2017. The increase in interest expense was primarily due to assuming the senior secured notes and the senior unsecured notes (collectively the "Senior Notes") and mortgage loans in the merger with FelCor, along with the outstanding borrowings under the Revolver during the three months ended September 30, 2018. The increase in interest expense was partially offset by the redemption of the senior secured notes in March 2018 and the payoff of the Revolver in August 2018.
Loss on Extinguishment of Indebtedness
During the three months ended September 30, 2018, the Company recognized a loss on extinguishment of indebtedness of approximately $1.7 million, which was due to the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the three months ended September 30, 2018.
Gain on Settlement of Investment in Loan
During the three months ended September 30, 2017, the Company recognized a gain on settlement of investment in loan of approximately $2.7 million as a result of the investment in loan maturing in September 2017.
Income Taxes
As part of our structure, we own TRSs that are subject to federal and state income taxes. Income tax expense decreased $2.2 million, or 34.8%, to $4.2 million for the three months ended September 30, 2018 from $6.4 million for the three months ended September 30, 2017. The decrease in income tax expense was due to a decrease in the U.S. corporate income tax rate from 35% to 21% for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017.
Comparison of the nine months ended September 30, 2018 to the nine months ended September 30, 2017
|
| | | | | | | | | | | | | | |
| For the nine months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
| (amounts in thousands) | | |
|
Revenues | |
| | |
| | |
| | |
|
Operating revenues | |
| | |
| | |
| | |
|
Room revenue | $ | 1,138,115 |
| | $ | 770,751 |
| | $ | 367,364 |
| | 47.7 | % |
Food and beverage revenue | 157,850 |
| | 91,392 |
| | 66,458 |
| | 72.7 | % |
Other revenue | 65,362 |
| | 31,628 |
| | 33,734 |
| | — | % |
Total revenues | $ | 1,361,327 |
| | $ | 893,771 |
| | $ | 467,556 |
| | 52.3 | % |
Expenses | |
| | |
| | |
| | |
|
Operating expenses | |
| | |
| | |
| | |
|
Room expense | $ | 279,589 |
| | $ | 176,523 |
| | $ | 103,066 |
| | 58.4 | % |
Food and beverage expense | 121,450 |
| | 66,458 |
| | 54,992 |
| | 82.7 | % |
Management and franchise fee expense | 107,766 |
| | 86,110 |
| | 21,656 |
| | 25.1 | % |
Other operating expense | 320,325 |
| | 195,000 |
| | 125,325 |
| | 64.3 | % |
Total property operating expenses | 829,130 |
| | 524,091 |
| | 305,039 |
| | 58.2 | % |
Depreciation and amortization | 183,429 |
| | 122,136 |
| | 61,293 |
| | 50.2 | % |
Property tax, insurance and other | 104,418 |
| | 60,929 |
| | 43,489 |
| | 71.4 | % |
General and administrative | 38,059 |
| | 28,757 |
| | 9,302 |
| | 32.3 | % |
Transaction costs | 2,181 |
| | 36,923 |
| | (34,742 | ) | | (94.1 | )% |
Total operating expenses | 1,157,217 |
| | 772,836 |
| | 384,381 |
| | 49.7 | % |
Operating income | 204,110 |
| | 120,935 |
| | 83,175 |
| | 68.8 | % |
Other income | 2,514 |
| | 323 |
| | 2,191 |
| | — | % |
Interest income | 3,339 |
| | 2,306 |
| | 1,033 |
| | 44.8 | % |
Interest expense | (78,772 | ) | | (48,527 | ) | | (30,245 | ) | | 62.3 | % |
Gain (loss) on sale of hotel properties, net | 32,957 |
| | (49 | ) | | 33,006 |
| | — | % |
Gain on extinguishment of indebtedness, net | 6,010 |
| | — |
| | 6,010 |
| | 100.0 | % |
Gain on settlement of an investment in loan | — |
| | 2,670 |
| | (2,670 | ) | | (100.0 | )% |
Income before equity in income from unconsolidated joint ventures | 170,158 |
| | 77,658 |
| | 92,500 |
| | 76.6 | % |
Equity in income from unconsolidated joint ventures | 637 |
| | 57 |
| | 580 |
| | — | % |
Income before income tax expense | 170,795 |
| | 77,715 |
| | 93,080 |
| | 77.3 | % |
Income tax expense | (7,852 | ) | | (9,362 | ) | | 1,510 |
| | (16.1 | )% |
Net income | 162,943 |
| | 68,353 |
| | 94,590 |
| | — | % |
Net loss (income) attributable to noncontrolling interests: | |
| | |
| | |
| | |
Noncontrolling interest in consolidated joint ventures | 170 |
| | 5 |
| | 165 |
| | — | % |
Noncontrolling interest in the Operating Partnership | (626 | ) | | (318 | ) | | (308 | ) | | 96.9 | % |
Preferred distributions - consolidated joint venture | (1,109 | ) | | (122 | ) | | (987 | ) | | — | % |
Net income attributable to RLJ | 161,378 |
| | 67,918 |
| | 93,460 |
| | — | % |
Preferred dividends | (18,836 | ) | | (2,093 | ) | | (16,743 | ) | | — | % |
Net income attributable to common shareholders | $ | 142,542 |
| | $ | 65,825 |
| | $ | 76,717 |
| | — | % |
Revenues
Total revenues increased $467.6 million, or 52.3%, to $1.36 billion for the nine months ended September 30, 2018 from $893.8 million for the nine months ended September 30, 2017. The increase was a result of a $367.4 million increase in room revenue, a $66.5 million increase in food and beverage revenue, and a $33.7 million increase in other revenue.
Room Revenue
Room revenue increased $367.4 million, or 47.7%, to $1.14 billion for the nine months ended September 30, 2018 from $770.8 million for the nine months ended September 30, 2017. The increase was a result of a $368.6 million increase in room revenue attributable to the non-comparable properties, partially offset by a $1.2 million decrease in room revenue attributable to the comparable properties. The decrease in room revenue from the comparable properties was attributable to a 0.2% decrease in RevPAR, led by RevPAR decreases in our Louisville and Austin markets of 13.4% and 5.2%, respectively, which were partially offset by RevPAR increases in our Northern California and Chicago markets of 7.7% and 5.6%, respectively.
The following are the year-to-date key hotel operating statistics for the comparable properties owned at September 30, 2018 and 2017, respectively:
|
| | | | | | | | | | |
| For the nine months ended September 30, | | |
| 2018 | | 2017 | | % Change |
Number of comparable properties (at end of period) | 121 |
| | 121 |
| | — |
|
Occupancy | 78.5 | % | | 78.6 | % | | (0.1 | )% |
ADR | $ | 166.71 |
| | $ | 166.93 |
| | (0.1 | )% |
RevPAR | $ | 130.92 |
| | $ | 131.16 |
| | (0.2 | )% |
Food and Beverage Revenue
Food and beverage revenue increased $66.5 million, or 72.7%, to $157.9 million for the nine months ended September 30, 2018 from $91.4 million for the nine months ended September 30, 2017. The increase was a result of a $68.0 million increase in food and beverage revenue attributable to the non-comparable properties, partially offset by a $1.5 million decrease in food and beverage revenue attributable to the comparable properties.
Other Revenue
Other revenue, which includes revenue derived from ancillary sources such as parking fees, golf, pool and other resort fees, gift shop sales and other guest service fees, increased $33.7 million to $65.4 million for the nine months ended September 30, 2018 from $31.6 million for the nine months ended September 30, 2017. The increase was due to a $33.0 million increase in other revenue attributable to the non-comparable properties and a $0.7 million increase in other revenue attributable to the comparable properties.
Property Operating Expenses
Property operating expenses increased $305.0 million, or 58.2%, to $829.1 million for the nine months ended September 30, 2018 from $524.1 million for the nine months ended September 30, 2017. The increase was due to a $295.5 million increase in property operating expenses attributable to the non-comparable properties and a $9.6 million increase in property operating expenses attributable to the comparable properties.
The components of our property operating expenses for the comparable properties owned at September 30, 2018 and 2017, respectively, were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| For the nine months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Room expense | $ | 167,782 |
| | $ | 162,383 |
| | $ | 5,399 |
| | 3.3 | % |
Food and beverage expense | 58,891 |
| | 57,417 |
| | 1,474 |
| | 2.6 | % |
Management and franchise fee expense | 83,190 |
| | 83,211 |
| | (21 | ) | | — | % |
Other operating expense | 178,504 |
| | 175,797 |
| | 2,707 |
| | 1.5 | % |
Total property operating expenses | $ | 488,367 |
| | $ | 478,808 |
| | $ | 9,559 |
| | 2.0 | % |
The increase in property operating expense attributable to the comparable properties was due to higher room expense, food and beverage expense, and other operating expense. Room expense, food and beverage expense, and other operating expense 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, decreased as a result of lower revenues at the comparable properties.
Depreciation and Amortization
Depreciation and amortization expense increased $61.3 million, or 50.2%, to $183.4 million for the nine months ended September 30, 2018 from $122.1 million for the nine months ended September 30, 2017. The increase was a result of a $59.7 million increase in depreciation and amortization expense attributable to the non-comparable properties and a $1.6 million increase in depreciation and amortization expense attributable to the comparable properties.
Property Tax, Insurance and Other
Property tax, insurance and other expense increased $43.5 million, or 71.4%, to $104.4 million for the nine months ended September 30, 2018 from $60.9 million for the nine months ended September 30, 2017. The increase was primarily attributable to a $41.7 million increase in property tax, insurance and other expense attributable to the non-comparable properties and a $1.8 million increase in property tax, insurance and other expense attributable to the comparable properties. The increase in property tax, insurance and other expense attributable to the non-comparable properties includes property tax reassessments in certain jurisdictions as a result of the merger with FelCor.
General and Administrative
General and administrative expense increased $9.3 million, or 32.3%, to $38.1 million for the nine months ended September 30, 2018 from $28.8 million for the nine months ended September 30, 2017. The increase in general and administrative expense was primarily attributable to the Company's larger operating platform as a result of the merger with FelCor, which included an increase of $3.6 million in professional fees and other general and administrative costs and a $2.9 million increase in compensation expense. The increase in compensation expense for the nine months ended September 30, 2018 was due to an increase in salary, bonus, and other employee compensation costs, which includes the accelerated vesting of restricted share awards as a result of the Company's President and Chief Executive Officer retiring in August 2018. The remaining increase in general and administrative expense was due to an increase of $2.8 million related to expenses that were outside of the normal course of operations, including debt modification costs, executive transition costs, receipts of prior year employee tax credits, and professional fees incurred related to an activist shareholder defense.
Transaction Costs
Transaction costs decreased $34.7 million, or 94.1%, to $2.2 million for the nine months ended September 30, 2018 from $36.9 million for the nine months ended September 30, 2017. The decrease in transaction costs was attributable to a decrease of approximately $35.4 million in transaction and integration costs related to the merger with FelCor during the nine months ended September 30, 2018, partially offset by an increase of approximately $0.6 million in transaction costs that were incurred by the Company as a result of the higher volume of asset disposition transactions during the nine months ended September 30, 2018.
Interest Expense
The components of our interest expense for the nine months ended September 30, 2018 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| For the nine months ended September 30, | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
Senior Notes | $ | 22,485 |
| | $ | 3,980 |
| | $ | 18,505 |
| | 464.9 | % |
Revolver and Term Loans | 33,428 |
| | 28,981 |
| | 4,447 |
| | 15.3 | % |
Mortgage loans | 20,171 |
| | 12,969 |
| | 7,202 |
| | 55.5 | % |
Amortization of deferred financing costs | 2,688 |
| | 2,597 |
| | 91 |
| | 3.5 | % |
Total interest expense | $ | 78,772 |
| | $ | 48,527 |
| | $ | 30,245 |
| | 62.3 | % |
Interest expense increased $30.2 million to $78.8 million for the nine months ended September 30, 2018 from $48.5 million for the nine months ended September 30, 2017. The increase in interest expense was primarily due to assuming the Senior Notes and mortgage loans in the merger with FelCor, along with the outstanding borrowings under the Revolver during the nine months ended September 30, 2018. The increase in interest expense was partially offset by the redemption of the senior secured notes in March 2018 and the payoff of the Revolver in August 2018.
Gain on Extinguishment of Indebtedness, net
During the nine months ended September 30, 2018, the Company recognized a net gain on extinguishment of indebtedness of approximately $6.0 million. In March 2018, the Company recognized a $7.7 million gain on extinguishment of indebtedness, which was due to the early redemption of the senior secured notes. The gain on extinguishment of indebtedness related to the early redemption of the senior secured notes excludes $5.1 million related to two hotel properties that were sold during the nine months ended September 30, 2018, which is included in gain on sale of hotel properties in the accompanying consolidated statement of operations and comprehensive income. In July 2018, the Company recognized a $1.7 million loss on extinguishment of indebtedness, which was due to the early payoff of a mortgage loan that was encumbered by a hotel property that was sold during the nine months ended September 30, 2018.
Gain on Settlement of Investment in Loan
During the nine months ended September 30, 2017, the Company recognized a gain on settlement of investment in loan of approximately $2.7 million as a result of the investment in loan maturing in September 2017.
Income Taxes
As part of our structure, we own TRSs that are subject to federal and state income taxes. Income tax expense decreased $1.5 million, or 16.1%, to $7.9 million for the nine months ended September 30, 2018 from $9.4 million for the nine months ended September 30, 2017. The decrease in income tax expense was due to a decrease in the U.S. corporate income tax rate from 35% to 21% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) EBITDAre and (5) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance. FFO, Adjusted FFO, EBITDA, EBITDAre, and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA, EBITDAre and Adjusted EBITDA as reported by other companies that do not define such terms exactly as we define such terms.
Funds From Operations
We calculate funds from operations ("FFO") in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income or loss, excluding gains or losses from sales of real estate, impairment, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs. We present FFO attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares. We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units.
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction costs, non-cash income tax expense or benefit, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted FFO provides useful supplemental information
to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor’s understanding of our operating performance.
The following table is a reconciliation of our GAAP net income to FFO attributable to common shareholders and unitholders and Adjusted FFO attributable to common shareholders and unitholders for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 74,657 |
| | $ | 4,111 |
| | $ | 162,943 |
| | $ | 68,353 |
|
Preferred dividends | (6,279 | ) | | (2,093 | ) | | (18,836 | ) | | (2,093 | ) |
Preferred distributions - consolidated joint venture | (374 | ) | | (122 | ) | | (1,109 | ) | | (122 | ) |
Depreciation and amortization | 60,373 |
| | 45,231 |
| | 183,429 |
| | 122,136 |
|
(Gain) loss on sale of hotel properties, net | (35,895 | ) | | 19 |
| | (32,957 | ) | | 49 |
|
Noncontrolling interest in consolidated joint ventures | (9 | ) | | (32 | ) | | 170 |
| | 5 |
|
Adjustments related to consolidated joint ventures (1) | (78 | ) | | (46 | ) | | (233 | ) | | (109 | ) |
Adjustments related to unconsolidated joint ventures (2) | 661 |
| | 193 |
| | 1,998 |
| | 193 |
|
FFO | 93,056 |
| | 47,261 |
| | 295,405 |
| | 188,412 |
|
Transaction costs | 261 |
| | 32,607 |
| | 2,181 |
| | 36,923 |
|
Loss (gain) on extinguishment of indebtedness, net | 1,656 |
| | — |
| | (6,010 | ) | | — |
|
Gain on settlement of investment in loan | — |
| | (2,670 | ) | | — |
| | (2,670 | ) |
Amortization of share-based compensation | 4,036 |
| | 2,495 |
| | 9,722 |
| | 7,964 |
|
Non-cash income tax expense | 3,217 |
| | 5,711 |
| | 6,171 |
| | 7,972 |
|
Other (income) expenses (3) | (839 | ) | | 1,116 |
| | 3,330 |
| | 1,116 |
|
Adjusted FFO | $ | 101,387 |
| | $ | 86,520 |
| | $ | 310,799 |
| | $ | 239,717 |
|
| |
(1) | Includes depreciation and amortization expense allocated to the noncontrolling interest in the consolidated joint ventures. |
| |
(2) | Includes our ownership interest of the depreciation and amortization expense of the unconsolidated joint ventures. |
| |
(3) | Represents income and expenses outside of the normal course of operations, including debt modification costs, hurricane-related costs that were not reimbursed by insurance, executive transition costs, receipts of prior year employee tax credits, and activist shareholder costs. |
EBITDA and EBITDAre
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales of assets; and (3) depreciation and amortization. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and disposals.
In addition to EBITDA, we present EBITDAre in accordance with NAREIT guidelines, which defines EBITDAre as net income or loss excluding interest expense, income tax expense, depreciation and amortization expense, gains or losses from sales of real estate, impairment, and adjustments for unconsolidated joint ventures. We believe that the presentation of EBITDAre provides useful information to investors regarding the Company’s operating performance and can facilitate comparisons of operating performance between periods and between REITs.
We also present Adjusted EBITDA, which includes additional adjustments for items such as gains or losses on extinguishment of indebtedness, transaction costs, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income, EBITDA, and EBITDAre, is beneficial to an investor’s understanding of our operating performance. We previously presented Adjusted EBITDA in a similar manner, with the exception of the adjustments for noncontrolling interests in consolidated joint ventures, which totaled less than $0.1 million for both the three and nine months ended September 30, 2017. The rationale for including
100% of Adjusted EBITDA for the consolidated joint ventures with noncontrolling interests is that the full amount of any debt for the consolidated joint ventures is reported in our consolidated balance sheet and the metrics using debt to EBITDA provide a better understanding of the Company’s leverage. This is also consistent with NAREIT’s definition of EBITDAre.
The following table is a reconciliation of our GAAP net income to EBITDA, EBITDAre and Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 74,657 |
| | $ | 4,111 |
| | $ | 162,943 |
| | $ | 68,353 |
|
Depreciation and amortization | 60,373 |
| | 45,231 |
| | 183,429 |
| | 122,136 |
|
Interest expense, net (1) | 23,479 |
| | 18,873 |
| | 75,433 |
| | 47,589 |
|
Income tax expense | 4,156 |
| | 6,375 |
| | 7,852 |
| | 9,362 |
|
Adjustments related to unconsolidated joint ventures (2) | 788 |
| | 236 |
| | 2,379 |
| | 236 |
|
EBITDA | 163,453 |
| | 74,826 |
| | 432,036 |
| | 247,676 |
|
(Gain) loss on sale of hotel properties, net | (35,895 | ) | | 19 |
| | (32,957 | ) | | 49 |
|
EBITDAre | 127,558 |
| | 74,845 |
| | 399,079 |
| | 247,725 |
|
Transaction costs | 261 |
| | 32,607 |
| | 2,181 |
| | 36,923 |
|
Loss (gain) on extinguishment of indebtedness, net | 1,656 |
| | — |
| | (6,010 | ) | | — |
|
Gain on settlement of investment in loan | — |
| | (2,670 | ) | | — |
| | (2,670 | ) |
Amortization of share-based compensation | 4,036 |
| | 2,495 |
| | 9,722 |
| | 7,964 |
|
Other (income) expenses (3) | (839 | ) | | 1,116 |
| | 3,330 |
| | 1,116 |
|
Adjusted EBITDA | $ | 132,672 |
| | $ | 108,393 |
| | $ | 408,302 |
| | $ | 291,058 |
|
| |
(1) | Excludes amounts attributable to investment in loans of $0.4 million and $1.4 million for the three and nine months ended September 30, 2017, respectively. |
| |
(2) | Includes our ownership interest of the interest, depreciation, and amortization expense of the unconsolidated joint ventures. |
| |
(3) | Represents income and expenses outside of the normal course of operations, including debt modification costs, hurricane-related costs that were not reimbursed by insurance, executive transition costs, receipts of prior year employee tax credits, and activist shareholder costs. |
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of the funds necessary to pay for operating expenses and other expenditures directly associated with our hotel properties, including:
| |
• | recurring maintenance and capital expenditures necessary to maintain our hotel properties in accordance with brand standards; |
| |
• | interest expense and scheduled principal payments on outstanding indebtedness; and |
| |
• | distributions necessary to qualify for taxation as a REIT. |
In addition, we expect to incur severance and termination payments to certain employees who were terminated in connection with the closure of one of the two buildings at the Holiday Inn San Francisco - Fisherman’s Wharf hotel property. The building closed due to the underlying ground lease expiring on October 31, 2018, which resulted in the land and the building reverting to the ground lessor. The second building at the Holiday Inn San Francisco - Fisherman’s Wharf hotel property was sold in connection with the sale of the hotel property, which is discussed in Note 6 to our accompanying consolidated financial statements, Sale of Hotel Properties.
We expect to meet our short-term liquidity requirements generally through the net cash provided by operations, existing cash balances, short-term borrowings under our Revolver, of which $600.0 million was available at September 30, 2018, proceeds from the sale of hotel properties, and proceeds from public offerings of common shares.
Our long-term liquidity requirements consist primarily of the funds necessary to pay for the costs of acquiring additional hotel properties, the redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our hotel properties, and scheduled debt payments, at maturity or otherwise. We expect to meet our long-term liquidity requirements through various sources of capital, including our Revolver and future equity (including OP units) or debt offerings, existing working capital, the net cash provided by operations, long-term mortgage loans and other secured and unsecured borrowings, and the proceeds from the sale of hotel properties.
Sources and Uses of Cash
As of September 30, 2018, we had $503.5 million of cash, cash equivalents, and restricted cash reserves as compared to $659.1 million at December 31, 2017.
Cash flows from Operating Activities
The net cash flow provided by operating activities totaled $313.5 million and $207.3 million for the nine months ended September 30, 2018 and 2017, respectively. Our cash flows provided by operating activities generally consist of the net cash generated by our hotel operations, partially offset by the cash paid for corporate expenses and other working capital changes. Refer to the "Results of Operations" section for further discussion of our operating results for the nine months ended September 30, 2018 and 2017.
Cash flows from Investing Activities
The net cash flow provided by investing activities totaled $303.4 million for the nine months ended September 30, 2018 primarily due to $447.7 million of net cash proceeds from the sale of hotel properties, partially offset by $144.2 million in routine capital improvements and additions to our hotel properties.
The net cash flow used in investing activities totaled $71.1 million for the nine months ended September 30, 2017 primarily due to $58.9 million in routine capital improvements and additions to our hotel properties and a net cash payment of $24.9 million for the acquisition of FelCor. The net cash flow used in investing activities was partially offset by $12.8 million in proceeds on the settlement of an investment in loan.
Cash flows from Financing Activities
The net cash flow used in financing activities totaled $772.5 million for the nine months ended September 30, 2018 primarily due to a payment of $539.0 million to redeem the senior secured notes, $193.0 million in distributions to shareholders and unitholders, $32.9 million in mortgage loans principal payments, $3.6 million in deferred financing cost payments, and $2.9 million paid to repurchase common shares.
The net cash flow used in financing activities totaled $160.5 million for the nine months ended September 30, 2017 primarily due to $151.4 million in distributions to shareholders and unitholders, $2.6 million paid to repurchase common shares under a share repurchase program, $2.2 million paid to repurchase common shares, and $3.2 million in mortgage loans principal payments.
Capital Expenditures and Reserve Funds
We maintain each of our hotel properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of all such routine improvements and alterations are paid out of furniture, fixtures and equipment ("FF&E") reserves, which are funded by a portion of each hotel property’s gross revenues. Routine capital expenditures are administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our hotel properties.
From time to time, certain of our hotel properties may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. In addition, upon acquisition of a hotel property we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or sufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand, our Revolver and/or other sources of available liquidity.
With respect to some of our hotels that are operated under franchise agreements with major national hotel brands and for some of our hotels subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of September 30, 2018, approximately $73.2 million was held in FF&E reserve accounts for future capital expenditures.
Off-Balance Sheet Arrangements
As of September 30, 2018, we owned 50% interests in joint ventures that owned two hotel properties. We own more than 50% of the operating lessee for one of these hotels and the other hotel is operated without a lease. The Company also owned 50% interests in joint ventures that owned real estate and a condominium management business that are associated with two of our resort hotel properties. None of our trustees, officers or employees holds an ownership interest in any of these joint ventures or entities.
One of the 50% unconsolidated joint ventures that owns a hotel property has $21.1 million of non-recourse mortgage debt, of which our pro rata portion was $10.6 million, none of which is reflected as a liability on our consolidated balance sheet. Our liabilities with regard to the non-recourse debt and the liabilities of our subsidiaries that are members or partners in joint ventures are generally limited to guaranties of the borrowing entity's obligations to pay for the lender's losses caused by misconduct, fraud or misappropriation of funds by the venture and other typical exceptions from the non-recourse provisions in the mortgages, such as for environmental liabilities. In addition, this joint venture is subject to two ground leases with terms expiring in 2044.
The other 50% unconsolidated joint venture that owns a hotel property is subject to a ground lease with an initial term expiring in 2021. After the initial term, the joint venture may extend the ground lease for an additional term of 10 years to 2031.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk includes the risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of September 30, 2018, we had approximately $1.6 billion of total variable rate debt outstanding (or 72.3% of total indebtedness) with a weighted-average interest rate of 3.51% per annum. After taking into consideration the effect of interest rate swaps, $268.0 million (or 11.8% of total indebtedness) was subject to variable rates. As of September 30, 2018, if market interest rates on our variable rate debt not subject to interest rate swaps were to increase by 1.00%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $2.7 million annually, taking into account our existing contractual hedging arrangements.
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. We have entered into derivative financial instruments such as interest rate swaps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of September 30, 2018, the following table presents the principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
Fixed rate debt (1) | $ | 517 |
| | $ | 3,215 |
| | $ | 3,361 |
| | $ | 3,558 |
| | $ | 140,386 |
| | $ | 475,000 |
| | $ | 626,037 |
|
Weighted-average interest rate | 5.01 | % | | 5.01 | % | | 5.01 | % | | 5.01 | % | | 5.01 | % | | 6.00 | % | | 5.76 | % |
Variable rate debt (1) | $ | 85,750 |
| | $ | 290,250 |
| | $ | — |
| | $ | 485,000 |
| | $ | 150,000 |
| | $ | 625,000 |
| | $ | 1,636,000 |
|
Weighted-average interest rate (2) | 5.25 | % | | 4.07 | % | | — | % | | 3.31 | % | | 3.08 | % | | 3.28 | % | | 3.51 | % |
Total (3) | $ | 86,267 |
| | $ | 293,465 |
| | $ | 3,361 |
| | $ | 488,558 |
| | $ | 290,386 |
| | $ | 1,100,000 |
| | $ | 2,262,037 |
|
| |
(1) | Excludes $6.3 million and $0.5 million of net deferred financing costs on the Term Loans and mortgage loans, respectively. |
| |
(2) | The weighted-average interest rate gives effect to interest rate swaps, as applicable. |
| |
(3) | Excludes a total of $34.9 million related to fair value adjustments on debt. |
Our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time.
Changes in market interest rates on our fixed rate debt impact the fair value of our debt, but such changes have no impact to our consolidated financial statements. As of September 30, 2018, the estimated fair value of our fixed rate debt was $0.7 billion, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. If interest rates were to rise by 1.00%, or 100 basis points, and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease by approximately $32.7 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company’s management, under the supervision and participation of the Company's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2018.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The nature of the operations of our hotels exposes our hotel properties, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. Other than routine litigation arising out of the ordinary course of business, the Company is not presently subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the Company.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, please refer to the "Risk Factors" section in the Annual Report which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
The Company did not sell any securities during the quarter ended September 30, 2018 that were not registered under the Securities Act of 1933, as amended (the "Securities Act").
Issuer Purchases of Equity Securities
During the nine months ended September 30, 2018, certain of the Company's employees surrendered common shares owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares of beneficial interest issued under the 2015 Plan.
The following table summarizes all of the share repurchases during the nine months ended September 30, 2018:
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| | | | | | | | | | | | | | |
Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number of shares that may yet be purchased under the plans or programs (1) | |
January 1, 2018 through January 31, 2018 | | 3,453 |
| | $ | 23.20 |
| | — |
| | 8,604,348 |
| |
February 1, 2018 through February 28, 2018 | | 17,578 |
| | $ | 21.75 |
| | — |
| | 10,042,025 |
| |
March 1, 2018 through March 31, 2018 | | — |
| | $ | — |
| | — |
| | 10,233,154 |
| |
April 1, 2018 through April 30, 2018 | | 1,605 |
| | $ | 20.58 |
| | — |
| | 9,577,878 |
| |
May 1, 2018 through May 31, 2018 | | 22,836 |
| | $ | 22.00 |
| | — |
| | 8,501,390 |
| |
June 1, 2018 through June 30, 2018 | | — |
| | $ | — |
| | — |
| | 9,021,883 |
| |
July 1, 2018 through July 31, 2018 | | 1,297 |
| | $ | 22.57 |
| | — |
| | 8,806,220 |
| |
August 1, 2018 through August 31, 2018 | | 85,601 |
| | $ | 22.17 |
| | — |
| | 9,079,531 |
| |
September 1, 2018 through September 30, 2018 | | — |
| | $ | — |
| | — |
| | 9,030,073 |
| |
Total | | 132,370 |
| | |
| | — |
| | |
| |
| |
(1) | The maximum number of shares that may yet be repurchased under the share repurchase program is calculated by dividing the total dollar amount available to repurchase shares by the closing price of our common shares on the last business day of the respective month. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are noted below:
Exhibit Index
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| | | | |
Exhibit Number | | Description of Exhibit |
| | |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
3.6 | | |
10.1 | | |
31.1* | | |
31.2* | | |
32.1* | | |
101.INS | | XBRL Instance Document | | Submitted electronically with this report |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Submitted electronically with this report |
101.CAL | | XBRL Taxonomy Calculation Linkbase Document | | Submitted electronically with this report |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Submitted electronically with this report |
101.LAB | | XBRL Taxonomy Label Linkbase Document | | Submitted electronically with this report |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | Submitted electronically with this report |
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| RLJ LODGING TRUST |
| |
Dated: November 7, 2018 | /s/ LESLIE D. HALE |
| Leslie D. Hale |
| President and Chief Executive Officer |
| |
| |
Dated: November 7, 2018 | /s/ SEAN M. MAHONEY |
| Sean M. Mahoney |
| Executive Vice President, Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
| |
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Dated: November 7, 2018 | /s/ CHRISTOPHER A. GORMSEN |
| Christopher A. Gormsen |
| Chief Accounting Officer |
| (Principal Accounting Officer) |
Exhibit
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Leslie D. Hale, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| |
| RLJ LODGING TRUST |
| |
Dated: November 7, 2018 | /s/ LESLIE D. HALE |
| Leslie D. Hale |
| President and Chief Executive Officer |
|
Exhibit
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Sean M. Mahoney, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| RLJ LODGING TRUST |
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Dated: November 7, 2018 | /s/ SEAN M. MAHONEY |
| Sean M. Mahoney |
| Executive Vice President, Chief Financial Officer and Treasurer |
|
Exhibit
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of RLJ Lodging Trust (the “Company”) on Form 10-Q for the quarter ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leslie D. Hale, President and Chief Executive Officer of the Company, and I, Sean M. Mahoney, Executive Vice President, Chief Financial Officer and Treasurer of the Company, certify, to our knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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| RLJ LODGING TRUST |
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Dated: November 7, 2018 | /s/ LESLIE D. HALE |
| Leslie D. Hale |
| President and Chief Executive Officer |
| |
| /s/ SEAN M. MAHONEY |
| Sean M. Mahoney |
| Executive Vice President, Chief Financial Officer and Treasurer |
|