UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2019
OR
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
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
(Address of Principal Executive Offices) | (Zip Code) | ||
(301 ) 280-7777
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
Title of Class | Trading Symbol | Name of Exchange on Which Registered | ||
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. ☒ Yes ☐ 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). ☒ Yes ☐ 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.
☒ | Accelerated filer | ☐ | ||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||
Emerging growth company | ||||||
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. ☐ | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ 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, 2019, 170,504,920 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
TABLE OF CONTENTS
Page | ||
Consolidated Financial Statements (unaudited) | ||
ii
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, 2019 | December 31, 2018 | ||||||
Assets | |||||||
Investment in hotel properties, net | $ | $ | |||||
Investment in unconsolidated joint ventures | |||||||
Cash and cash equivalents | |||||||
Restricted cash reserves | |||||||
Hotel and other receivables, net of allowance of $271 and $598, respectively | |||||||
Lease right-of-use assets | |||||||
Deferred income tax asset, net | |||||||
Intangible assets, net | |||||||
Prepaid expense and other assets | |||||||
Total assets | $ | $ | |||||
Liabilities and Equity | |||||||
Debt, net | $ | $ | |||||
Accounts payable and other liabilities | |||||||
Deferred income tax liability | |||||||
Advance deposits and deferred revenue | |||||||
Lease liabilities | |||||||
Accrued interest | |||||||
Distributions payable | |||||||
Total liabilities | |||||||
Commitments and Contingencies (Note 11) | |||||||
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, 2019 and December 31, 2018 | |||||||
Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 170,632,364 and 174,019,616 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | |||||||
Additional paid-in capital | |||||||
Accumulated other comprehensive (loss) income | ( | ) | |||||
Distributions in excess of net earnings | ( | ) | ( | ) | |||
Total shareholders’ equity | |||||||
Noncontrolling interest: | |||||||
Noncontrolling interest in consolidated joint ventures | |||||||
Noncontrolling interest in the Operating Partnership | |||||||
Total noncontrolling interest | |||||||
Preferred equity in a consolidated joint venture, liquidation value of $45,544 at December 31, 2018 | |||||||
Total equity | |||||||
Total liabilities and equity | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
1
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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenues | |||||||||||||||
Operating revenues | |||||||||||||||
Room revenue | $ | $ | $ | $ | |||||||||||
Food and beverage revenue | |||||||||||||||
Other revenue | |||||||||||||||
Total revenues | |||||||||||||||
Expenses | |||||||||||||||
Operating expenses | |||||||||||||||
Room expense | |||||||||||||||
Food and beverage expense | |||||||||||||||
Management and franchise fee expense | |||||||||||||||
Other operating expense | |||||||||||||||
Total property operating expenses | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Property tax, insurance and other | |||||||||||||||
General and administrative | |||||||||||||||
Transaction costs | ( | ) | |||||||||||||
Total operating expenses | |||||||||||||||
Other income | |||||||||||||||
Interest income | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
(Loss) gain on sale of hotel properties, net | ( | ) | ( | ) | |||||||||||
(Loss) gain on extinguishment of indebtedness, net | ( | ) | |||||||||||||
Income before equity in (loss) income from unconsolidated joint ventures | |||||||||||||||
Equity in (loss) income from unconsolidated joint ventures | ( | ) | ( | ) | |||||||||||
Income before income tax expense | |||||||||||||||
Income tax benefit (expense) | ( | ) | ( | ) | ( | ) | |||||||||
Net income | |||||||||||||||
Net loss (income) attributable to noncontrolling interests: | |||||||||||||||
Noncontrolling interest in consolidated joint ventures | ( | ) | |||||||||||||
Noncontrolling interest in the Operating Partnership | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Preferred distributions - consolidated joint venture | ( | ) | ( | ) | ( | ) | |||||||||
Redemption of preferred equity - consolidated joint venture | ( | ) | |||||||||||||
Net income attributable to RLJ | |||||||||||||||
Preferred dividends | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Net income attributable to common shareholders | $ | $ | $ | $ | |||||||||||
2
Basic per common share data: | |||||||||||||||
Net income per share attributable to common shareholders | $ | $ | $ | $ | |||||||||||
Weighted-average number of common shares | |||||||||||||||
Diluted per common share data: | |||||||||||||||
Net income per share attributable to common shareholders | $ | $ | $ | $ | |||||||||||
Weighted-average number of common shares | |||||||||||||||
Comprehensive income: | |||||||||||||||
Net income | $ | $ | $ | $ | |||||||||||
Unrealized (loss) gain on interest rate derivatives | ( | ) | ( | ) | |||||||||||
Reclassification of unrealized gain on discontinued cash flow hedges to interest expense | ( | ) | |||||||||||||
Comprehensive income | |||||||||||||||
Comprehensive loss (income) attributable to noncontrolling interests: | |||||||||||||||
Noncontrolling interest in consolidated joint ventures | ( | ) | |||||||||||||
Noncontrolling interest in the Operating Partnership | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Preferred distributions - consolidated joint venture | ( | ) | ( | ) | ( | ) | |||||||||
Redemption of preferred equity - consolidated joint venture | ( | ) | |||||||||||||
Comprehensive income attributable to RLJ | $ | $ | $ | $ | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
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 (Loss) | Operating Partnership | Consolidated Joint Ventures | Preferred Equity in a Consolidated Joint Venture | Total Equity | |||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized loss on interest rate derivatives | — | — | — | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Reclassification of unrealized gain on discontinued cash flow hedges to interest expense | — | — | — | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Redemption of Operating Partnership units | — | — | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||||
Contributions from consolidated joint venture partners | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Amortization of share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — | — | ( | ) | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Shares acquired as part of a share repurchase program | — | — | ( | ) | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Forfeiture of restricted stock | — | — | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Distributions on preferred shares | — | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | — | — | ( | ) | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Preferred distributions - consolidated joint venture | — | — | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Redemption of preferred equity - consolidated joint venture | — | — | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
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 Loss | Operating Partnership | Consolidated Joint Ventures | Preferred Equity in a Consolidated Joint Venture | Total Equity | |||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized loss on interest rate derivatives | — | — | — | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Contributions from consolidated joint venture partners | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Amortization of share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — | — | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Shares acquired as part of a share repurchase program | — | — | ( | ) | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Forfeiture of restricted stock | — | — | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Distributions on preferred shares | — | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | — | — | ( | ) | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
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 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||
Unrealized gain on interest rate derivatives | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Contributions from consolidated joint venture partners | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Amortization of share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — | — | ( | ) | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Forfeiture of restricted stock | — | — | ( | ) | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Distributions on preferred shares | — | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | — | — | ( | ) | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Preferred distributions - consolidated joint venture | — | — | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
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 June 30, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||
Unrealized gain on interest rate derivatives | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Contributions from consolidated joint venture partners | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock | — | — | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Amortization of share-based compensation | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | — | — | ( | ) | ( | ) | ( | ) | — | — | — | — | — | ( | ) | ||||||||||||||||||||||||||
Forfeiture of restricted stock | — | — | ( | ) | ( | ) | — | — | — | — | — | ||||||||||||||||||||||||||||||
Distributions on preferred shares | — | — | — | — | — | ( | ) | — | — | — | — | ( | ) | ||||||||||||||||||||||||||||
Distributions on common shares and units | — | — | — | — | — | ( | ) | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||||||||
Preferred distributions - consolidated joint venture | — | — | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
For the nine months ended September 30, | |||||||
2019 | 2018 | ||||||
Cash flows from operating activities | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to cash flow provided by operating activities: | |||||||
Loss (gain) on sale of hotel properties, net | ( | ) | |||||
Gain on extinguishment of indebtedness, net | ( | ) | |||||
Depreciation and amortization | |||||||
Amortization of deferred financing costs | |||||||
Other amortization | ( | ) | ( | ) | |||
Unrealized loss on discontinued cash flow hedges | |||||||
Equity in loss (income) from unconsolidated joint ventures | ( | ) | |||||
Distributions of income from unconsolidated joint ventures | |||||||
Amortization of share-based compensation | |||||||
Deferred income taxes | |||||||
Changes in assets and liabilities: | |||||||
Hotel and other receivables, net | ( | ) | ( | ) | |||
Prepaid expense and other assets | |||||||
Accounts payable and other liabilities | ( | ) | ( | ) | |||
Advance deposits and deferred revenue | |||||||
Accrued interest | ( | ) | |||||
Net cash flow provided by operating activities | |||||||
Cash flows from investing activities | |||||||
Proceeds from the sale of hotel properties, net | |||||||
Improvements and additions to hotel properties | ( | ) | ( | ) | |||
Contributions to unconsolidated joint ventures | ( | ) | |||||
Distributions from unconsolidated joint ventures in excess of earnings | |||||||
Net cash flow provided by investing activities | |||||||
Cash flows from financing activities | |||||||
Borrowings under Revolver | |||||||
Repayment of borrowings under Revolver | ( | ) | ( | ) | |||
Redemption of senior notes | ( | ) | |||||
Proceeds from mortgage loans | |||||||
Scheduled mortgage loan principal payments | ( | ) | ( | ) | |||
Repayments of mortgage loans | ( | ) | ( | ) | |||
Repurchase of common shares under a share repurchase program | ( | ) | |||||
Repurchase of common shares to satisfy employee tax withholding requirements | ( | ) | ( | ) | |||
Distributions on preferred shares | ( | ) | ( | ) | |||
Distributions on common shares | ( | ) | ( | ) | |||
Distributions on and redemption of Operating Partnership units | ( | ) | ( | ) | |||
Payments of deferred financing costs | ( | ) | ( | ) | |||
Preferred distributions - consolidated joint venture | ( | ) | ( | ) | |||
Redemption of preferred equity - consolidated joint venture | ( | ) | |||||
Contributions from consolidated joint venture partners | |||||||
Net cash flow used in financing activities | ( | ) | ( | ) | |||
Net change in cash, cash equivalents, and restricted cash reserves | ( | ) | |||||
Cash, cash equivalents, and restricted cash reserves, beginning of year | |||||||
Cash, cash equivalents, and restricted cash reserves, end of period | $ | $ | |||||
The accompanying notes are an integral part of these consolidated financial statements.
8
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, 2019, there were 171,405,107 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.5 % of the outstanding OP units.
2. Summary of Significant Accounting Policies
The Company's Annual Report on Form 10-K for the year ended December 31, 2018 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, 2018.
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, 2018, included in the Company's Annual Report on Form 10-K filed with the SEC on March 1, 2019.
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.
9
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.
Derivative Financial Instruments
In August 2017, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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 simplifies the application of hedge accounting and it better aligns the financial reporting for hedging activities with the entity's economic and risk management activities. 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 Company adopted this new standard on January 1, 2019. Based on the Company's assessment, the adoption of this standard did not have a material impact on the Company's consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which provides the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The Company adopted this standard on January 1, 2019 using the modified retrospective transition approach. There are two methods of applying the modified retrospective transition approach and the Company elected to not adjust the comparative periods in the consolidated financial statements and footnotes, so the Company did not recognize a cumulative effect adjustment on the date of adoption. The comparative historical periods will be presented in accordance with ASC 840, Leases.
As a lessee in a lease contract, the Company recognizes a lease right-of-use asset and a lease liability on the consolidated balance sheet. The Company is a lessee in a variety of lease contracts, such as ground leases, parking leases, office leases and equipment leases. The Company classifies its leases as either an operating lease or a finance lease based on the principle of whether or not the lease is effectively a financed purchase of the leased asset. For operating leases, the Company recognizes lease expense on a straight-line basis over the term of the lease. For finance leases, the Company recognizes lease expense on the effective interest method, which results in the interest component of each lease payment being recognized as interest expense and the lease right-of-use asset being amortized into amortization expense using the straight-line method over the term of the lease. For leases with an initial term of 12 months or less, the Company will not recognize a lease right-of-use asset and a lease liability on the consolidated balance sheet and lease expense will be recognized on a straight-line basis over the lease term.
At the lease commencement date, the Company determines the lease term by incorporating the fixed, non-cancelable lease term plus any lease extension option terms that are reasonably certain of being exercised. The ability to extend the lease term is at the Company's sole discretion. The Company calculates the present value of the future lease payments over the lease term in order to determine the lease liability and the related lease right-of-use asset that is recognized on the consolidated balance sheet.
Certain lease contracts may include an option to purchase the leased property, which is at the Company's sole discretion. The Company's lease contracts do not contain any material residual value guarantees or material restrictive covenants.
The Company's leases include a base lease payment, which is recognized as lease expense on a straight-line basis over the lease term. In addition, certain of the Company's leases may include an additional lease payment that is based on either (i) a percentage of the respective hotel property's financial results, or (ii) the frequency to which the leased asset is used, or (iii) the lease payments are adjusted periodically for inflation; all of which are recognized as variable lease expense, when incurred, in the consolidated statements of operations and comprehensive income.
The Company will use the implicit rate in a lease contract in order to determine the present value of the future lease payments over the lease term. If the implicit rate in the lease contract is not available, then the Company will use its incremental borrowing rate at the lease commencement date. The Company determined its incremental borrowing rate for each lease contract by using the U.S. Treasury interest rates yield curve, and then making adjustments for the lease term, the Company’s credit spread, the Company’s ability to borrow on a secured basis, the quality and condition of the leased asset and
10
the current economic environment. For purposes of adopting ASC 842, the Company used its incremental borrowing rate on January 1, 2019 for the operating leases that commenced prior to that date.
As a lessor in a lease contract, the Company classifies its leases as either an operating lease, direct financing lease, or a sales-type lease. The Company leases space at its hotel properties to third parties, who use the space for their restaurants or retail locations. The Company classifies these lease contracts as operating leases, so the Company will continue to recognize the underlying leased asset as an investment in hotel properties on the consolidated balance sheets. Lease revenue is recognized on a straight-line basis over the lease term. Variable lease revenue is recognized over the lease term when it is earned and becomes receivable from the lessee, according to the provisions of the respective lease contract. The Company only capitalizes the incremental direct costs of leasing, so any indirect costs of leasing will be expensed as incurred.
The Company elected the following practical expedients in adopting the new standard:
• | The Company elected the package of practical expedients that allows the Company to not reassess: |
(i) | whether any expired or existing contracts meet the definition of a lease; |
(ii) | the lease classification for any expired or existing leases; and |
(iii) | the initial direct costs for any existing leases. |
• | The Company elected a practical expedient to make an accounting policy election to not recognize a right-of-use asset and a lease liability for leases with an initial term of 12 months or less. |
• | The Company elected a practical expedient to allow the Company to not reassess whether an existing land easement not previously accounted for as a lease under ASC 840 would now be considered to be a lease under ASC 842. |
• | The Company elected a practical expedient whereby lessors, by class of underlying asset, are not required to separate the nonlease components from the lease components, if certain conditions are met. |
Upon adoption of this standard on January 1, 2019, the Company recognized lease liabilities and the related lease right-of-use assets on the consolidated balance sheet for its ground leases, parking leases, office leases and equipment leases. In addition to recognizing the lease liabilities and the related lease right-of-use assets on the date of adoption, the Company reclassified its below market ground lease intangible assets from intangible assets, net, on the consolidated balance sheet to the lease right-of-use assets. In addition, the Company reclassified its above market ground lease liabilities and deferred rent liabilities from accounts payable and other liabilities on the consolidated balance sheet to the lease right-of-use assets.
The following table summarizes the impact of adopting this guidance on the consolidated balance sheet (in thousands):
January 1, 2019 | |||||||||||
As Previously Reported | Impact of the Adoption of ASC 842 | As Adjusted | |||||||||
Lease right-of-use assets | $ | $ | $ | ||||||||
Intangible assets, net | $ | $ | ( | ) | $ | ||||||
Accounts payable and other liabilities | $ | $ | ( | ) | $ | ||||||
Lease liabilities | $ | $ | $ | ||||||||
There was no impact to the Company’s consolidated statements of operations and comprehensive income and the consolidated statements of cash flows. Refer to Note 11, Commitments and Contingencies, for the Company's disclosures about its lease contracts.
Recently Issued Accounting Pronouncements
In August 2018, the SEC issued SEC Final Rule 33-10532, Disclosure Update and Simplification. The amendments 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 Company adopted 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 did not have a material impact on the Company's consolidated financial statements.
11
3. Investment in Hotel Properties
Investment in hotel properties consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
Land and improvements | $ | $ | |||||
Buildings and improvements | |||||||
Furniture, fixtures and equipment | |||||||
Accumulated depreciation | ( | ) | ( | ) | |||
Investment in hotel properties, net | $ | $ | |||||
4. Investment in Unconsolidated Joint Ventures
As of September 30, 2019 and December 31, 2018, the Company owned 50 % interests in joint ventures that owned two hotel properties. As of December 31, 2018, the Company also owned 50 % interests in joint ventures that were associated with two resort hotel properties owned by the Company in Myrtle Beach, SC. In June 2019, the Company sold the two hotels and the joint ventures sold their assets. The Company recorded a loss of $2.9 million related to the sale, which is included in equity in (loss) income of unconsolidated entities in the accompanying consolidated statements of operations. Refer to Note 5, Sale of Hotel Properties, for more information regarding the sale of the hotels.
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, 2019 and December 31, 2018, 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, 2019 | December 31, 2018 | ||||||
Equity basis of the joint venture investments | $ | ( | ) | $ | |||
Cost of the joint venture investments in excess of the joint venture book value | |||||||
Investment in unconsolidated joint ventures | $ | $ | |||||
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The following table summarizes the components of the Company's equity in (loss) income from unconsolidated joint ventures (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Operating income | $ | $ | $ | $ | |||||||||||
Depreciation of cost in excess of book value | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss on sale | ( | ) | |||||||||||||
Equity in (loss) income from unconsolidated joint ventures | $ | ( | ) | $ | $ | ( | ) | $ | |||||||
5. Sale of Hotel Properties
During the nine months ended September 30, 2019, the Company sold 42 hotel properties in four separate transactions for a total sales price of approximately $653.4 million. In connection with these transactions, the Company recorded a net loss of $25.9 million, which is included in (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
On June 25, 2019, the Company sold a portfolio of 21 hotels for $311.9 million. In connection with this transaction, the Company recorded a gain on sale of $44.4 million, which is included in (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
On June 27, 2019, the Company sold two resort hotels in Myrtle Beach, South Carolina for $153.3 million. In connection with this transaction, the Company recorded a loss on sale of $21.5 million, which is included in (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
On August 14, 2019, the Company sold a portfolio of 18 hotels for $175.4 million. In connection with this transaction, the Company recorded a loss on sale of $49.0 million, which is included in (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
On September 12, 2019, the Company sold a hotel in Columbia, Maryland for $12.7 million. In connection with this transaction, the Company recorded a gain on sale of $0.3 million, which is included in (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
The following table discloses the hotel properties that were sold during the nine months ended September 30, 2019:
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Hotel Property Name | Location | Sale Date | Rooms | ||||
Courtyard Boulder Longmont | Longmont, CO | June 25, 2019 | |||||
Courtyard Salt Lake City Airport | Salt Lake City, UT | June 25, 2019 | |||||
Courtyard Fort Lauderdale SW Miramar | Miramar, FL | June 25, 2019 | |||||
Courtyard Austin Airport | Austin, TX | June 25, 2019 | |||||
Fairfield Inn & Suites San Antonio Downtown | San Antonio, TX | June 25, 2019 | |||||
Hampton Inn & Suites Clearwater St. Petersburg | Clearwater, FL | June 25, 2019 | |||||
Hampton Inn Fort Walton Beach | Fort Walton, FL | June 25, 2019 | |||||
Hampton Inn & Suites Denver Tech Center | Denver, CO | June 25, 2019 | |||||
Hampton Inn West Palm Beach Airport Central | West Palm Beach, FL | June 25, 2019 | |||||
Hilton Garden Inn Bloomington | Bloomington, IN | June 25, 2019 | |||||
Hilton Garden Inn West Palm Beach Airport | West Palm Beach, FL | June 25, 2019 | |||||
Hilton Garden Inn Durham Raleigh Research Triangle Park | Durham, NC | June 25, 2019 | |||||
Residence Inn Longmont Boulder | Longmont, CO | June 25, 2019 | |||||
Residence Inn Detroit Novi | Novi, MI | June 25, 2019 | |||||
Residence Inn Chicago Oak Brook | Oak Brook, IL | June 25, 2019 | |||||
Residence Inn Fort Lauderdale Plantation | Plantation, FL | June 25, 2019 | |||||
Residence Inn Salt Lake City Airport | Salt Lake City, UT | June 25, 2019 | |||||
Residence Inn San Antonio Downtown Market Square | San Antonio, TX | June 25, 2019 | |||||
Residence Inn Fort Lauderdale SW Miramar | Miramar, FL | June 25, 2019 | |||||
Residence Inn Silver Spring | Silver Spring, MD | June 25, 2019 | |||||
Springhill Suites Boulder Longmont | Longmont, CO | June 25, 2019 | |||||
Embassy Suites Myrtle Beach Oceanfront Resort | Myrtle Beach, SC | June 27, 2019 | |||||
Hilton Myrtle Beach Resort | Myrtle Beach, SC | June 27, 2019 | |||||
Courtyard Austin Northwest Arboretum | Austin, TX | August 14, 2019 | |||||
Courtyard Denver West Golden | Golden, CO | August 14, 2019 | |||||
Courtyard Boulder Louisville | Louisville, CO | August 14, 2019 | |||||
Courtyard Louisville Northeast | Louisville, KY | August 14, 2019 | |||||
Courtyard South Bend Mishawaka | Mishawaka, IN | August 14, 2019 | |||||
Hampton Inn Houston Galleria | Houston, TX | August 14, 2019 | |||||
Hyatt House Houston Galleria | Houston, TX | August 14, 2019 | |||||
Hyatt House Austin Arboretum | Austin, TX | August 14, 2019 | |||||
Hyatt House Dallas Lincoln Park | Dallas, TX | August 14, 2019 | |||||
Hyatt House Dallas Uptown | Dallas, TX | August 14, 2019 | |||||
Residence Inn Austin Northwest Arboretum | Austin, TX | August 14, 2019 | |||||
Residence Inn Austin North Parmer Lane | Austin, TX | August 14, 2019 | |||||
Residence Inn Denver West Golden | Golden, CO | August 14, 2019 | |||||
Residence Inn Boulder Louisville | Louisville, CO | August 14, 2019 | |||||
Residence Inn Louisville Northeast | Louisville, KY | August 14, 2019 | |||||
Springhill Suites Austin North Parmer Lane | Austin, TX | August 14, 2019 | |||||
Springhill Suites Louisville Hurstbourne North | Louisville, KY | August 14, 2019 | |||||
Springhill Suites South Bend Mishawaka | Mishawaka, IN | August 14, 2019 | |||||
Residence Inn Columbia | Columbia, MD | September 12, 2019 | |||||
Total | |||||||
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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 (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income. The gain on sale is presented net of a gain on extinguishment of indebtedness of $5.1 million associated with the two 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 | |||||
Sheraton Philadelphia Society Hill Hotel | Philadelphia, PA | March 27, 2018 | |||||
Embassy Suites Napa Valley | Napa, CA | July 13, 2018 | |||||
DoubleTree Hotel Columbia | Columbia, MD | August 7, 2018 | |||||
The Vinoy Renaissance St. Petersburg Resort & Golf Club | St. Petersburg, FL | August 28, 2018 | |||||
DoubleTree by Hilton Burlington Vermont | Burlington, VT | September 27, 2018 | |||||
Total | |||||||
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 (loss) gain on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.
6. Revenue
The Company recognized revenue from the following geographic markets (in thousands):
For the three months ended September 30, 2019 | For the three months ended September 30, 2018 | ||||||||||||||||||||||||||||||
Room Revenue | Food and Beverage Revenue | Other Revenue | Total Revenue | Room Revenue | Food and Beverage Revenue | Other Revenue | Total Revenue | ||||||||||||||||||||||||
Northern California | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Southern California | |||||||||||||||||||||||||||||||
New York City | |||||||||||||||||||||||||||||||
South Florida | |||||||||||||||||||||||||||||||
Chicago | |||||||||||||||||||||||||||||||
Denver | |||||||||||||||||||||||||||||||
Austin | |||||||||||||||||||||||||||||||
Louisville | |||||||||||||||||||||||||||||||
Washington DC | |||||||||||||||||||||||||||||||
Houston | |||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
15
For the nine months ended September 30, 2019 | For the nine months ended September 30, 2018 | ||||||||||||||||||||||||||||||
Room Revenue | Food and Beverage Revenue | Other Revenue | Total Revenue | Room Revenue | Food and Beverage Revenue | Other Revenue | Total Revenue | ||||||||||||||||||||||||
Northern California | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Southern California | |||||||||||||||||||||||||||||||
South Florida | |||||||||||||||||||||||||||||||
New York City | |||||||||||||||||||||||||||||||
Austin | |||||||||||||||||||||||||||||||
Chicago | |||||||||||||||||||||||||||||||
Denver | |||||||||||||||||||||||||||||||
Houston | |||||||||||||||||||||||||||||||
Washington, DC | |||||||||||||||||||||||||||||||
Louisville | |||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
7. Debt
The Company's debt consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
Senior Notes | $ | $ | |||||
Revolver and Term Loans, net | |||||||
Mortgage loans, net | |||||||
Debt, net | $ | $ | |||||
Senior Notes
The Company's senior unsecured notes are referred to as 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, 2019 | December 31, 2018 | ||||||||||
Senior unsecured notes (1) (2) (3) | June 2025 | $ | $ | |||||||||||
(1) | Requires payments of interest only through maturity. |
(2) | The senior unsecured notes include $ |
(3) | The Company has the option to redeem the senior unsecured notes beginning June 1, 2020 at a price of |
The Senior Notes are subject to customary financial covenants. As of September 30, 2019 and December 31, 2018, the Company was in compliance with all financial covenants. On November 1, 2019, the Company launched a tender offer expected to expire on December 4, 2019, for the entire principal amount of the Senior Notes at par. The Senior Notes were trading at approximately 105 % of par at that time.
16
Revolver and Term Loans
The Company has the following unsecured credit agreements in place:
• | $ |
• | $ |
• | $ |
• | $ |
• | $ |
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, 2019 and December 31, 2018, 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, 2019 (1) | Maturity Date | September 30, 2019 | December 31, 2018 | |||||||||
Revolver (2) | April 2020 | $ | $ | |||||||||
$400 Million Term Loan Maturing 2021 | April 2021 | |||||||||||
$150 Million Term Loan Maturing 2022 | January 2022 | |||||||||||
$400 Million Term Loan Maturing 2023 | January 2023 | |||||||||||
$225 Million Term Loan Maturing 2023 | January 2023 | |||||||||||
Deferred financing costs, net (3) | ( | ) | ( | ) | ||||||||
Total Revolver and Term Loans, net | $ | $ | ||||||||||
(1) | Interest rate at September 30, 2019 gives effect to interest rate hedges. |
(2) | At both September 30, 2019 and December 31, 2018, there was $ |
(3) | Excludes $ |
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Mortgage Loans
The Company's mortgage loans consisted of the following (in thousands):
Outstanding Borrowings at | ||||||||||||||
Number of Assets Encumbered | Interest Rate at September 30, 2019 (1) | Maturity Date | September 30, 2019 | December 31, 2018 | ||||||||||
Mortgage loan (2) | April 2022 | (7) | ||||||||||||
Mortgage loan (3) | June 2022 | |||||||||||||
Mortgage loan (4) | October 2022 | |||||||||||||
Mortgage loan (5) | October 2022 | |||||||||||||
Mortgage loan (2) | April 2024 | (6) | ||||||||||||
Mortgage loan (2) | April 2024 | (8) | ||||||||||||
Mortgage loan | — | (9) | ||||||||||||
Mortgage loan | — | (10) | ||||||||||||
Deferred financing costs, net | ( | ) | ( | ) | ||||||||||
Total mortgage loans, net | $ | $ | ||||||||||||
(1) | Interest rate at September 30, 2019 gives effect to interest rate hedges. |
(2) | The hotels encumbered by the mortgage loan are cross-collateralized. Requires payments of interest only through maturity. |
(3) | Includes $ |
(4) | Includes $ |
(5) | Includes $ |
(6) | In April 2019, the Company refinanced the $ |
(7) | In April 2019, the Company entered into a new mortgage loan that bears interest at |
(8) | In April 2019, the Company entered into a new mortgage loan that bears interest at |
(9) | In March 2019, the Company paid off the mortgage loan in full. |
(10) | In April 2019, the Company paid off the 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, 2019 and December 31, 2018.
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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Senior Notes | $ | $ | $ | $ | |||||||||||
Revolver and Term Loans | |||||||||||||||
Mortgage loans | |||||||||||||||
Amortization of deferred financing costs | |||||||||||||||
Undesignated interest rate swaps | |||||||||||||||
Total interest expense | $ | $ | $ | $ | |||||||||||
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8. Derivatives and Hedging Activities
The following interest rate swaps have been designated as cash flow hedges (in thousands):
Notional value at | Fair value at | |||||||||||||||||||
Hedge type | Interest rate | Maturity | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | ||||||||||||||
Swap-cash flow | March 2019 | $ | $ | $ | $ | |||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow | March 2019 | |||||||||||||||||||
Swap-cash flow (1) | September 2020 | |||||||||||||||||||
Swap-cash flow (1) | September 2020 | |||||||||||||||||||
Swap-cash flow (1) | September 2020 | |||||||||||||||||||
Swap-cash flow (1) | October 2020 | |||||||||||||||||||
Swap-cash flow | April 2021 | |||||||||||||||||||
Swap-cash flow | April 2021 | |||||||||||||||||||
Swap-cash flow | April 2021 | ( | ) | |||||||||||||||||
Swap-cash flow | April 2021 | ( | ) | |||||||||||||||||
Swap-cash flow | June 2021 | ( | ) | |||||||||||||||||
Swap-cash flow | June 2021 | ( | ) | |||||||||||||||||
Swap-cash flow | June 2021 | ( | ) | |||||||||||||||||
Swap-cash flow | December 2022 | ( | ) | |||||||||||||||||
Swap-cash flow | December 2022 | ( | ) | |||||||||||||||||
Swap-cash flow | December 2022 | ( | ) | |||||||||||||||||
Swap-cash flow | December 2022 | ( | ) | |||||||||||||||||
Swap-cash flow (2) | November 2023 | ( | ) | ( | ) | |||||||||||||||
Swap-cash flow (3) | December 2023 | ( | ) | |||||||||||||||||
Swap-cash flow (3) | December 2023 | ( | ) | |||||||||||||||||
Swap-cash flow | September 2021 | |||||||||||||||||||
Swap-cash flow | September 2022 | |||||||||||||||||||
Swap-cash flow (4) | September 2025 | |||||||||||||||||||
$ | $ | $ | ( | ) | $ | |||||||||||||||
(1) | During the nine months ended September 30, 2019, the Company discontinued accounting for these interest rate swaps as cash flow hedges because the hedged forecasted transactions were no longer probable of occurring as a result of debt paydowns in March and April 2019. Therefore, the Company reclassified approximately $ |
(2) | Effective in November 2020. |
(3) | Effective in January 2021. |
(4) | Effective in September 2021. |
19
The following interest rate swaps have not been designated as hedging instruments (in thousands):
Notional value at | Fair value at | |||||||||||||||||||
Derivative type | Interest rate | Maturity | September 30, 2019 | December 31, 2018 | September 30, 2019 | December 31, 2018 | ||||||||||||||
Interest rate swap (1) | September 2020 | $ | $ | $ | ( | ) | $ | |||||||||||||
Interest rate swap (1) | September 2020 | ( | ) | |||||||||||||||||
Interest rate swap (1) | September 2020 | ( | ) | |||||||||||||||||
Interest rate swap (1) | October 2020 | ( | ) | |||||||||||||||||
$ | $ | $ | ( | ) | $ | |||||||||||||||
(1) | During the nine months ended September 30, 2019, the Company discontinued accounting for these interest rate swaps as cash flow hedges. The Company recognized all changes in the fair value of these interest rate swaps in interest expense in the consolidated statements of operations and comprehensive income. |
As of September 30, 2019 and December 31, 2018, the aggregate fair value of the interest rate swap assets of $2.3 million and $17.2 million, respectively, was included in prepaid expense and other assets in the accompanying consolidated balance sheets. As of September 30, 2019 and December 31, 2018, the aggregate fair value of the interest rate swap liabilities of $30.2 million and $1.0 million, respectively, was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.
As of September 30, 2019, there was approximately $27.5 million of unrealized losses included in accumulated other comprehensive (loss) income related to interest rate hedges that are effective in offsetting the variable cash flows. As of December 31, 2018, there was approximately $16.2 million of unrealized gains included in accumulated other comprehensive (loss) 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 or nine month periods ended September 30, 2019 or 2018. For the three and nine months ended September 30, 2019, approximately $1.1 million and $5.6 million, respectively, of the amounts included in accumulated other comprehensive (loss) income were reclassified into interest expense for the interest rate swaps that have been designated as cash flow hedges. 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 interest rate swaps that have been designated as cash flow hedges. Approximately $3.1 million of the unrealized losses included in accumulated other comprehensive (loss) income at September 30, 2019 is expected to be reclassified into interest expense within the next 12 months.
9. 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. |
20
• | 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, 2019 | December 31, 2018 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Senior Notes | $ | $ | $ | $ | |||||||||||
Revolver and Term Loans, net | |||||||||||||||
Mortgage loans, net | |||||||||||||||
Debt, net | $ | $ | $ | $ | |||||||||||
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, 2019 (in thousands):
Fair Value at September 30, 2019 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest rate swap asset | $ | $ | $ | $ | |||||||||||
Interest rate swap liability | ( | ) | ( | ) | |||||||||||
Total | $ | $ | ( | ) | $ | $ | ( | ) | |||||||
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, 2018 (in thousands):
Fair Value at December 31, 2018 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Interest rate swap asset | $ | $ | $ | $ | |||||||||||
Interest rate swap liability | ( | ) | ( | ) | |||||||||||
Total | $ | $ | $ | $ | |||||||||||
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, 2019, 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.
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10. 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 U.S. 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, 2019 and December 31, 2018.
11. Commitments and Contingencies
Leases
As of September 30, 2019, 12 of the Company's hotel properties were subject to ground leases that cover the land underlying the respective hotels. The ground leases are classified as operating leases. During the three months ended September 30, 2019, the total ground lease expense was $4.0 million, which consisted of $2.9 million of fixed lease expense and $1.1 million of variable lease expense. During the nine months ended September 30, 2019, the total ground lease expense was $11.8 million, which consisted of $8.7 million of fixed lease expense and $3.1 million of variable lease expense. The ground lease expense is included in property tax, insurance and other in the accompanying consolidated statements of operations and comprehensive income.
The Residence Inn Chicago Oak Brook is subject to a ground lease with an initial term expiring in 2100. After the initial term, the Company may extend the ground lease for an additional term of 99 years. The ground lease expense was de minimis for the three and nine months ended September 30, 2019. The Company sold the Residence Inn Chicago Oak Brook on June 25, 2019.
The Marriott Louisville Downtown is subject to a ground lease with an initial term expiring in 2053. After the initial term, the ground lease may be extended for up to four additional 25 year terms at the Company's option. The ground lease expense was de minimis for the three and nine months ended September 30, 2019.
The Courtyard Austin Downtown Convention Center and Residence Inn Austin Downtown Convention Center are subject to a ground lease with a term expiring in 2100. For the three and nine months ended September 30, 2019, the ground lease expense was $0.2 million and $0.6 million, respectively.
The Hilton Garden Inn Bloomington is subject to a ground lease with an initial term expiring in 2053. After the initial term, the ground lease automatically extends for up to five additional 10 year terms unless certain conditions are met. The ground lease expense was de minimis for the three and nine months ended September 30, 2019. The Company sold the Hilton Garden Inn Bloomington on June 25, 2019.
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A portion of the site of the Courtyard Charleston Historic District is subject to a ground lease with a term expiring in 2096. For the three and nine months ended September 30, 2019, the ground lease expense was $0.3 million and $0.8 million, respectively.
The Courtyard Waikiki Beach is subject to a ground lease with a term expiring in 2112. For the three and nine months ended September 30, 2019, the ground lease expense was $0.9 million and $2.7 million, respectively.
A portion of the site of the Residence Inn Palo Alto Los Altos is subject to a ground lease with a term expiring in 2033. The ground lease expense was de minimis for the three and nine months ended September 30, 2019.
The DoubleTree Suites by Hilton Orlando Lake Buena Vista is subject to a ground lease with an initial term expiring in 2032. After the initial term, the Company may extend the ground lease for an additional term of 25 years to 2057. For the three and nine months ended September 30, 2019, the ground lease expense was $0.2 million and $0.6 million, respectively.
The Embassy Suites San Francisco Airport Waterfront is subject to a ground lease with a term expiring in 2059. For the three and nine months ended September 30, 2019, the ground lease expense was $0.6 million and $1.8 million, respectively.
The Wyndham Boston Beacon Hill is subject to a ground lease with a term expiring in 2028. For the three and nine months ended September 30, 2019, the ground lease expense was $0.3 million and $0.7 million, respectively.
The Wyndham New Orleans French Quarter is subject to a ground lease with a term expiring in 2065. For the three and nine months ended September 30, 2019, the ground lease expense was $0.1 million and $0.4 million, respectively.
The Wyndham Pittsburgh University Center is subject to a ground lease with an initial term expiring in 2038. After the initial term, the Company may extend the ground lease for up to five additional nine year renewal terms to 2083. For the three and nine months ended September 30, 2019, the ground lease expense was $0.2 million and $0.5 million, respectively.
The Wyndham San Diego Bayside is subject to a ground lease with a term expiring in 2029. For the three and nine months ended September 30, 2019, the ground lease expense was $1.3 million and $3.7 million, respectively.
The future lease payments for the Company's operating leases were as follows (in thousands):
September 30, 2019 | December 31, 2018 | ||||||
2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Total future lease payments | $ | ||||||
Imputed interest | ( | ) | |||||
Lease liabilities | $ | ||||||
The following table presents certain information related to the Company's operating leases as of September 30, 2019:
Weighted average remaining lease term | ||
Weighted average discount rate (1) | % | |
(1) | Upon adoption of the new lease accounting standard, the discount rates used for the Company's operating leases were determined at January 1, 2019. |
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 furniture, fixtures and equipment ("FF&E")) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise
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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. 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, 2019 and December 31, 2018, approximately $48.6 million and $64.7 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 Company's merger with FelCor, an affiliate of InterContinental Hotels Group PLC ("IHG"), which previously managed three of FelCor's hotels, notified FelCor that National Retirement Fund had assessed an employee withdrawal liability of $8.3 million, with required quarterly payments including interest, in connection with the termination of IHG’s management of those hotels. FelCor's management agreements with IHG stated that it may be obligated to indemnify and hold IHG harmless for some or all of any amount ultimately paid to National Retirement Fund with respect to the claim. Based on the current assessment of the claim, resolution of this matter may not occur until 2022. The Company plans to vigorously defend the claim and, if appropriate, IHG’s demand for indemnification.
Management Agreements
As of September 30, 2019, 108 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 37 hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, Marriott, or Wyndham. Each management company receives a base management fee generally between 2.0 % and 3.5 % of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally between 3.0 % 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, 2019, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $9.0 million and $36.8 million, respectively. 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.
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Franchise Agreements
As of September 30, 2019, 70 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes 37 hotel properties that receive the benefits of a franchise agreement pursuant to management agreements with Hilton, Hyatt, Marriott, or Wyndham. In addition, one hotel is not operated with a hotel brand so it 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.
12. 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 common shares through December 31, 2016 (the "2015 Share Repurchase Program"). 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 2015 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.
On February 15, 2019, the Company's board of trustees approved a new share repurchase program to acquire up to $250.0 million of common shares from March 1, 2019 to February 28, 2020 (the "2019 Share Repurchase Program"). During the nine months ended September 30, 2019, the Company repurchased and retired 3,836,582 common shares for approximately $65.6 million, of which $10.3 million was repurchased under the 2015 Share Repurchase Program and $55.3 million was repurchased under the 2019 Share Repurchase Program. As of September 30, 2019, the 2019 Share Repurchase Program had a remaining capacity of $194.7 million.
During the nine months ended September 30, 2019 and 2018, the Company declared a cash dividend of $0.33 per Common Share in each of the first, second, and third quarters of 2019 and 2018.
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. 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, 2019 and 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 2019 and 2018.
Noncontrolling Interest in Consolidated Joint Ventures
The Company consolidates the joint venture that owns the DoubleTree Metropolitan Hotel New York City, which has a third-party partner that owns a noncontrolling 1.7 % ownership interest in the joint venture. In addition, the Company consolidates the joint venture that owns The Knickerbocker, which has a third-party partner that owns a noncontrolling 5 % ownership interest in the joint venture. Lastly, the Company owns a controlling financial interest in the operating lessee of the Embassy Suites Secaucus Meadowlands, which has a third-party partner that owns a noncontrolling 49 % ownership interest in the joint venture. The third-party ownership interests are included in the noncontrolling interest in consolidated joint ventures on the consolidated balance sheets.
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Noncontrolling Interest in the Operating Partnership
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 of September 30, 2019, 772,743 outstanding OP Units were 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 received a 3.25 % annual return, plus a 0.25 % non-compounding annual return that was paid upon redemption. The preferred equity raised by the joint venture is included in preferred equity in a consolidated joint venture on the consolidated balance sheets. On February 15, 2019, the Company redeemed the preferred equity in full.
13. 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, 2019 is as follows:
2019 | ||||||
Number of Shares | Weighted-Average Grant Date Fair Value | |||||
Unvested at January 1, 2019 | $ | |||||
Granted (1) | ||||||
Vested | ( | ) | ||||
Forfeited | ( | ) | ||||
Unvested at September 30, 2019 | $ | |||||
(1) |
For the three and nine months ended September 30, 2019, the Company recognized approximately $2.2 million and $6.5 million, respectively, of share-based compensation expense related to restricted share awards. 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. As of September 30, 2019, there was $16.5 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 2.4 years. The total fair value of the shares vested (calculated as the number of shares multiplied
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by the vesting date share price) during the nine months ended September 30, 2019 and 2018 was approximately $4.1 million and $7.7 million, respectively.
Performance Units
In May 2016, the Company awarded 280,000 performance units to certain employees. The performance units vested over a four years period, including three years of performance-based vesting ("measurement period") plus an additional 1 year of time-based vesting if the applicable performance criteria were met. In May 2019, following the end of the measurement period, the Company did not meet certain target criterion and no performance units were converted into restricted shares.
In February 2019, the Company awarded 260,000 performance units with a grant date fair value of $19.16 per unit to certain employees. The performance units vest over a four years period, including three years of performance-based vesting (the "2019 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 200 % 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 2019 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 2019 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 2.52 %, volatility of 27.19 %, 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, 2019, the Company recognized approximately $0.7 million and $2.2 million, respectively, of share-based compensation expense related to the performance unit awards. 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. As of September 30, 2019, there was $5.9 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 2.5 years.
14. 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, 2019 and 2018, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.
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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, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Numerator: | |||||||||||||||
Net income attributable to RLJ | $ | $ | $ | $ | |||||||||||
Less: Preferred dividends | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Less: Dividends paid on unvested restricted shares | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Less: Undistributed earnings attributable to unvested restricted shares | ( | ) | |||||||||||||
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | $ | $ | $ | |||||||||||
Denominator: | |||||||||||||||
Weighted-average number of common shares - basic | |||||||||||||||
Unvested restricted shares | |||||||||||||||
Unvested performance units | |||||||||||||||
Weighted-average number of common shares - diluted | |||||||||||||||
Net income per share attributable to common shareholders - basic | $ | $ | $ | $ | |||||||||||
Net income per share attributable to common shareholders - diluted | $ | $ | $ | $ | |||||||||||
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15. Supplemental Information to Statements of Cash Flows (in thousands)
For the nine months ended September 30, | |||||||
2019 | 2018 | ||||||
Reconciliation of cash, cash equivalents, and restricted cash reserves | |||||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash reserves | |||||||
Cash, cash equivalents, and restricted cash reserves | $ | $ | |||||
Interest paid | $ | $ | |||||
Income taxes paid | $ | $ | |||||
Operating cash flow lease payments for operating leases | $ | ||||||
Supplemental investing and financing transactions | |||||||
In connection with the sale of hotel properties, the Company recorded the following: | |||||||
Sale of hotel properties | $ | $ | |||||
Transaction costs | ( | ) | ( | ) | |||
Operating prorations | ( | ) | ( | ) | |||
Proceeds from the sale of hotel properties, net | $ | $ | |||||
Supplemental non-cash transactions | |||||||
Accrued capital expenditures | $ | $ | |||||
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, 2018, filed with the SEC on March 1, 2019 (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.
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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. 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 economic growth is showing signs of moderation and geopolitical uncertainty has increased due to trade wars, we remain cautiously optimistic that positive employment trends and high consumer confidence will continue to drive moderate economic expansion in the U.S. and generate positive lodging demand and RevPAR growth for the industry. As it relates to operating expenses, our industry continues to face cost pressures in a tight labor market.
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, 2019, we owned 109 hotel properties with approximately 23,400 rooms, located in 23 states and the District of Columbia. We owned, through wholly-owned subsidiaries, a 100% interest in 105 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 107 hotel properties in which we hold a controlling financial interest, and we record the real estate interests in the two hotel properties in which we hold an indirect 50% interest using the equity method of accounting. We lease 108 of the 109 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, 2019, we owned, through a combination of direct and indirect interests, 99.5% of the units of limited partnership interest in the Operating Partnership ("OP units").
2019 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. The following significant activities took place:
• | In February 2019, we fully redeemed the preferred equity under the EB-5 Immigrant Investor Program for $45.6 million. |
• | In March 2019, we paid off a mortgage loan in full for an aggregate principal amount of $139.5 million by using cash borrowings from our Revolver. In April 2019, we entered into a new $200.0 million mortgage loan and a new $96.0 |
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million mortgage loan. We used the cash proceeds that were received from the two new mortgage loans to pay off the outstanding balance on the Revolver and to pay off a $150.0 million mortgage loan in full.
• | In June 2019, we sold 21 non-core hotel properties for a total sales price of approximately $311.9 million. |
• | In June 2019, we sold two resort hotel properties, real estate and a condominium management business that were owned by unconsolidated joint ventures, for a total sales price of approximately $156.0 million. |
• | In August 2019, we sold 18 non-core hotel properties for a total sales price of approximately $175.4 million. |
• | In September 2019, we sold a hotel property for a total sales price of approximately $12.7 million. |
• | During the nine months ended September 30, 2019, we repurchased and retired 3.8 million common shares for approximately $65.6 million at an average price per share of $17.11. As of September 30, 2019, we had $194.7 million of remaining capacity under the share repurchase program. |
• | We declared a cash dividend of $0.4875 on each Series A Preferred Share in each of the first, second, and third quarters of 2019. |
• | We declared a cash dividend of $0.33 per common share in each of the first, second, and third quarters of 2019. |
• | In September 2019, we entered into an agreement with Wyndham to terminate their management agreements and the related net operating income guarantee effective December 31, 2019. |
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 the 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 management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.
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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:
• | Average Daily Rate ("ADR") |
• | Occupancy |
• | RevPAR |
ADR, Occupancy and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel property level and across our entire business. We evaluate 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, 2018 contains a discussion of our critical accounting policies. There have been no significant changes to our critical accounting policies since December 31, 2018.
Results of Operations
At September 30, 2019 and 2018, we owned 109 and 152 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, 2019 and 2018. The non-comparable hotel properties include 49 dispositions that were completed between January 1, 2018 and September 30, 2019.
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Comparison of the three months ended September 30, 2019 to the three months ended September 30, 2018
For the three months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
(amounts in thousands) | ||||||||||||||
Revenues | ||||||||||||||
Operating revenues | ||||||||||||||
Room revenue | $ | 314,195 | $ | 377,237 | $ | (63,042 | ) | (16.7 | )% | |||||
Food and beverage revenue | 39,447 | 47,211 | (7,764 | ) | (16.4 | )% | ||||||||
Other revenue | 17,482 | 22,594 | (5,112 | ) | (22.6 | )% | ||||||||
Total revenues | 371,124 | 447,042 | (75,918 | ) | (17.0 | )% | ||||||||
Expenses | ||||||||||||||
Operating expenses | ||||||||||||||
Room expense | 80,650 | 95,161 | (14,511 | ) | (15.2 | )% | ||||||||
Food and beverage expense | 31,425 | 37,780 | (6,355 | ) | (16.8 | )% | ||||||||
Management and franchise fee expense | 26,432 | 34,838 | (8,406 | ) | (24.1 | )% | ||||||||
Other operating expense | 90,048 | 105,646 | (15,598 | ) | (14.8 | )% | ||||||||
Total property operating expenses | 228,555 | 273,425 | (44,870 | ) | (16.4 | )% | ||||||||
Depreciation and amortization | 49,295 | 60,373 | (11,078 | ) | (18.3 | )% | ||||||||
Property tax, insurance and other | 28,798 | 34,382 | (5,584 | ) | (16.2 | )% | ||||||||
General and administrative | 11,262 | 11,622 | (360 | ) | (3.1 | )% | ||||||||
Transaction costs | (211 | ) | 261 | (472 | ) | — | % | |||||||
Total operating expenses | 317,699 | 380,063 | (62,364 | ) | (16.4 | )% | ||||||||
Operating income | 53,425 | 66,979 | (13,554 | ) | (20.2 | )% | ||||||||
Other income | 315 | 856 | (541 | ) | (63.2 | )% | ||||||||
Interest income | 2,691 | 1,149 | 1,542 | — | % | |||||||||
Interest expense | (23,333 | ) | (24,629 | ) | 1,296 | (5.3 | )% | |||||||
(Loss) gain on sale of hotel properties, net | (1,037 | ) | 35,895 | (36,932 | ) | — | % | |||||||
Loss on extinguishment of indebtedness, net | — | (1,656 | ) | 1,656 | (100.0 | )% | ||||||||
Income before equity in (loss) income from unconsolidated joint ventures | 32,061 | 78,594 | (46,533 | ) | (59.2 | )% | ||||||||
Equity in (loss) income from unconsolidated joint ventures | (135 | ) | 219 | (354 | ) | — | % | |||||||
Income before income tax expense | 31,926 | 78,813 | (46,887 | ) | (59.5 | )% | ||||||||
Income tax benefit (expense) | 529 | (4,156 | ) | 4,685 | — | % | ||||||||
Net income | 32,455 | 74,657 | (42,202 | ) | (56.5 | )% | ||||||||
Net loss (income) attributable to noncontrolling interests: | ||||||||||||||
Noncontrolling interest in consolidated joint ventures | 104 | (9 | ) | 113 | — | % | ||||||||
Noncontrolling interest in the Operating Partnership | (96 | ) | (299 | ) | 203 | (67.9 | )% | |||||||
Preferred distributions - consolidated joint venture | — | (374 | ) | 374 | (100.0 | )% | ||||||||
Net income attributable to RLJ | 32,463 | 73,975 | (41,512 | ) | (56.1 | )% | ||||||||
Preferred dividends | (6,279 | ) | (6,279 | ) | — | — | % | |||||||
Net income attributable to common shareholders | $ | 26,184 | $ | 67,696 | $ | (41,512 | ) | (61.3 | )% | |||||
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Revenues
Total revenues decreased $75.9 million, or 17.0%, to $371.1 million for the three months ended September 30, 2019 from $447.0 million for the three months ended September 30, 2018. The decrease was the result of a $63.0 million decrease in room revenue, a $7.8 million decrease in food and beverage revenue, and a $5.1 million decrease in other revenue.
Room Revenue
Room revenue decreased $63.0 million, or 16.7%, to $314.2 million for the three months ended September 30, 2019 from $377.2 million for the three months ended September 30, 2018. The decrease was the result of a $62.3 million decrease in room revenue attributable to the non-comparable properties and a $0.7 million decrease in room revenue attributable to the comparable properties. The decrease in room revenue from the comparable properties was attributable to a 0.3% decrease in RevPAR, led by RevPAR decreases in our South Florida and Northern California markets of 7.1% and 3.2%, respectively, which were partially offset by RevPAR increases in our Louisville and Austin markets of 43.3% and 11.1%, respectively.
The following are the quarter-to-date key hotel operating statistics for the comparable properties owned at September 30, 2019 and 2018, respectively:
For the three months ended September 30, | ||||||||||
2019 | 2018 | % Change | ||||||||
Occupancy | 80.8 | % | 80.4 | % | 0.5 | % | ||||
ADR | $ | 176.93 | $ | 178.29 | (0.8 | )% | ||||
RevPAR | $ | 143.05 | $ | 143.42 | (0.3 | )% | ||||
Food and Beverage Revenue
Food and beverage revenue decreased $7.8 million to $39.4 million for the three months ended September 30, 2019 from $47.2 million for the three months ended September 30, 2018. The decrease was the result of a $9.5 million decrease in food and beverage revenue attributable to the non-comparable properties, partially offset by a $1.7 million increase in food and beverage revenue attributable to the comparable properties. The increase in food and beverage revenue attributable to the comparable properties included increases in our Louisville and Northern California markets of $1.2 million and $0.5 million, respectively.
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, decreased $5.1 million to $17.5 million for the three months ended September 30, 2019 from $22.6 million for the three months ended September 30, 2018. The decrease was due to a $6.4 million decrease in other revenue attributable to the non-comparable properties, partially offset by a $1.3 million increase in other revenue attributable to the comparable properties, including an increase in parking and resort fee revenue.
Property Operating Expenses
Property operating expenses decreased $44.9 million, or 16.4%, to $228.6 million for the three months ended September 30, 2019 from $273.4 million for the three months ended September 30, 2018. The decrease was due to a $47.9 million decrease in property operating expenses attributable to the non-comparable properties, partially offset by a $3.1 million increase in property operating expenses attributable to the comparable properties.
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The components of our property operating expenses for the comparable properties owned at September 30, 2019 and 2018, respectively, were as follows (in thousands):
For the three months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
Room expense | $ | 78,212 | $ | 78,303 | $ | (91 | ) | (0.1 | )% | |||||
Food and beverage expense | 31,241 | 30,038 | 1,203 | 4.0 | % | |||||||||
Management and franchise fee expense | 25,297 | 27,230 | (1,933 | ) | (7.1 | )% | ||||||||
Other operating expense | 86,886 | 83,015 | 3,871 | 4.7 | % | |||||||||
Total property operating expenses | $ | 221,636 | $ | 218,586 | $ | 3,050 | 1.4 | % | ||||||
The increase in property operating expenses attributable to the comparable properties was due to an increase in food and beverage expense and other operating expense, partially offset by a decrease in management and franchise fee expense. Food and beverage expense increased primarily as a result of higher labor costs. Other operating expense increased due to higher labor costs, administrative and general expense, sales and marketing expense and repairs and maintenance expense. Management and franchise fee expense decreased primarily as a result of an increase in the amount recognized under the Wyndham net operating income guarantee during the three months ended September 30, 2019.
Depreciation and Amortization
Depreciation and amortization expense decreased $11.1 million, or 18.3%, to $49.3 million for the three months ended September 30, 2019 from $60.4 million for the three months ended September 30, 2018. The decrease was a result of a $10.7 million decrease in depreciation and amortization expense attributable to the non-comparable properties and a $0.4 million decrease in depreciation and amortization expense attributable to the comparable properties.
Property Tax, Insurance and Other
Property tax, insurance and other expense decreased $5.6 million, or 16.2%, to $28.8 million for the three months ended September 30, 2019 from $34.4 million for the three months ended September 30, 2018. The decrease was attributable to a $5.8 million decrease in property tax, insurance and other expense attributable to the non-comparable properties, partially offset by a $0.2 million increase in property tax, insurance and other expense attributable to the comparable properties.
General and Administrative
General and administrative expense decreased $0.4 million, or 3.1%, to $11.3 million for the three months ended September 30, 2019 from $11.6 million for the three months ended September 30, 2018. The decrease was attributable to the increased costs arising from the accelerated vesting of restricted share awards during the three months ended September 30, 2018 as a result of the Company's former President and Chief Executive Officer retiring in August 2018, partially offset by employee tax credits received during the three months ended September 30, 2018 that were not received during three months ended September 30, 2019.
Interest Expense
The components of our interest expense for the three months ended September 30, 2019 and 2018 were as follows (in thousands):
For the three months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
Senior Notes | $ | 5,954 | $ | 5,954 | $ | — | — | % | ||||||
Revolver and Term Loans | 10,805 | 11,042 | (237 | ) | (2.1 | )% | ||||||||
Mortgage loans | 5,001 | 6,753 | (1,752 | ) | (25.9 | )% | ||||||||
Amortization of deferred financing costs | 1,116 | 880 | 236 | 26.8 | % | |||||||||
Undesignated interest rate swaps | 457 | — | 457 | 100.0 | % | |||||||||
Total interest expense | $ | 23,333 | $ | 24,629 | $ | (1,296 | ) | (5.3 | )% | |||||
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Interest expense decreased $1.3 million, or 5.3%, to $23.3 million for the three months ended September 30, 2019 from $24.6 million for the three months ended September 30, 2018. The decrease in interest expense was primarily due to the repayment of an $85.0 million mortgage loan in November 2018, the lower average outstanding borrowings under the Revolver, and the impact of three refinancing transactions in April 2019.
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 encumbered a hotel property sold during the three months ended September 30, 2018. There was no gain or loss on extinguishment of indebtedness during the three months ended September 30, 2019.
Income Taxes
As part of our structure, we own TRSs that are subject to federal and state income taxes. The Company's effective tax rates were (1.7)% and 5.3% for the three months ended September 30, 2019 and 2018, respectively. Income tax expense decreased $4.7 million for a benefit of $0.5 million for the three months ended September 30, 2019, compared to a $4.2 million expense for the three months ended September 30, 2018.
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Comparison of the nine months ended September 30, 2019 to the nine months ended September 30, 2018
For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
(amounts in thousands) | ||||||||||||||
Revenues | ||||||||||||||
Operating revenues | ||||||||||||||
Room revenue | $ | 1,030,722 | $ | 1,138,115 | $ | (107,393 | ) | (9.4 | )% | |||||
Food and beverage revenue | 133,151 | 157,850 | (24,699 | ) | (15.6 | )% | ||||||||
Other revenue | 55,245 | 65,362 | (10,117 | ) | (15.5 | )% | ||||||||
Total revenues | 1,219,118 | 1,361,327 | (142,209 | ) | (10.4 | )% | ||||||||
Expenses | ||||||||||||||
Operating expenses | ||||||||||||||
Room expense | 253,736 | 279,589 | (25,853 | ) | (9.2 | )% | ||||||||
Food and beverage expense | 101,544 | 121,450 | (19,906 | ) | (16.4 | )% | ||||||||
Management and franchise fee expense | 96,376 | 107,766 | (11,390 | ) | (10.6 | )% | ||||||||
Other operating expense | 288,761 | 320,325 | (31,564 | ) | (9.9 | )% | ||||||||
Total property operating expenses | 740,417 | 829,130 | (88,713 | ) | (10.7 | )% | ||||||||
Depreciation and amortization | 162,654 | 183,429 | (20,775 | ) | (11.3 | )% | ||||||||
Property tax, insurance and other | 90,595 | 104,418 | (13,823 | ) | (13.2 | )% | ||||||||
General and administrative | 34,187 | 38,059 | (3,872 | ) | (10.2 | )% | ||||||||
Transaction costs | 773 | 2,181 | (1,408 | ) | (64.6 | )% | ||||||||
Total operating expenses | 1,028,626 | 1,157,217 | (128,591 | ) | (11.1 | )% | ||||||||
Other income | 939 | 2,514 | (1,575 | ) | (62.6 | )% | ||||||||
Interest income | 4,935 | 3,339 | 1,596 | 47.8 | % | |||||||||
Interest expense | (68,632 | ) | (78,772 | ) | 10,140 | (12.9 | )% | |||||||
(Loss) gain on sale of hotel properties, net | (25,872 | ) | 32,957 | (58,829 | ) | — | % | |||||||
Gain on extinguishment of indebtedness, net | — | 6,010 | (6,010 | ) | (100.0 | )% | ||||||||
Income before equity in (loss) income from unconsolidated joint ventures | 101,862 | 170,158 | (68,296 | ) | (40.1 | )% | ||||||||
Equity in (loss) income from unconsolidated joint ventures | (2,919 | ) | 637 | (3,556 | ) | — | % | |||||||
Income before income tax expense | 98,943 | 170,795 | (71,852 | ) | (42.1 | )% | ||||||||
Income tax expense | (4,475 | ) | (7,852 | ) | 3,377 | (43.0 | )% | |||||||
Net income | 94,468 | 162,943 | (68,475 | ) | (42.0 | )% | ||||||||
Net loss (income) attributable to noncontrolling interests: | ||||||||||||||
Noncontrolling interest in consolidated joint ventures | 360 | 170 | 190 | — | % | |||||||||
Noncontrolling interest in the Operating Partnership | (329 | ) | (626 | ) | 297 | (47.4 | )% | |||||||
Preferred distributions - consolidated joint venture | (186 | ) | (1,109 | ) | 923 | (83.2 | )% | |||||||
Redemption of preferred equity - consolidated joint venture | (1,153 | ) | — | (1,153 | ) | |||||||||
Net income attributable to RLJ | 93,160 | 161,378 | (68,218 | ) | (42.3 | )% | ||||||||
Preferred dividends | (18,836 | ) | (18,836 | ) | — | — | % | |||||||
Net income attributable to common shareholders | $ | 74,324 | $ | 142,542 | $ | (68,218 | ) | (47.9 | )% | |||||
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Revenues
Total revenues decreased $142.2 million, or 10.4%, to $1.2 billion for the nine months ended September 30, 2019 from $1.4 billion for the nine months ended September 30, 2018. The decrease was the result of a $107.4 million decrease in room revenue, a $24.7 million decrease in food and beverage revenue and a $10.1 million decrease in other revenue.
Room Revenue
Room revenue decreased $107.4 million, or 9.4%, to $1.0 billion for the nine months ended September 30, 2019 from $1.1 billion for the nine months ended September 30, 2018. The decrease was the result of a $117.7 million decrease in room revenue attributable to the non-comparable properties, partially offset by a $10.3 million increase in room revenue attributable to the comparable properties. The increase in room revenue from the comparable properties was attributable to a 1.1% increase in RevPAR, led by RevPAR increases in our Louisville, Austin, and Northern California markets of 27.5%, 5.9%, and 5.8%, respectively, which were partially offset by RevPAR decreases in our South Florida and Houston markets of 4.3% and 3.4%, respectively.
The following are the year-to-date key hotel operating statistics for the comparable properties owned at September 30, 2019 and 2018, respectively:
For the nine months ended September 30, | ||||||||||
2019 | 2018 | % Change | ||||||||
Occupancy | 80.0 | % | 79.7 | % | 0.4 | % | ||||
ADR | $ | 182.94 | $ | 181.68 | 0.7 | % | ||||
RevPAR | $ | 146.39 | $ | 144.78 | 1.1 | % | ||||
Food and Beverage Revenue
Food and beverage revenue decreased $24.7 million, or 15.6%, to $133.2 million for the nine months ended September 30, 2019 from $157.9 million for the nine months ended September 30, 2018. The decrease was the result of a $29.0 million decrease in food and beverage revenue attributable to the non-comparable properties, partially offset by a $4.3 million increase in food and beverage revenue attributable to the comparable properties. The increase in food and beverage revenue attributable to the comparable properties included increases in our Louisville and Northern California markets of $2.4 million and $1.9 million, respectively.
Other Revenue
Other revenue, which includes revenue derived from ancillary sources such as parking fees, resort fees, gift shop sales and other guest service fees, decreased $10.1 million, or 15.5%, to $55.2 million for the nine months ended September 30, 2019 from $65.4 million for the nine months ended September 30, 2018. The decrease was due to a $14.3 million decrease in other revenue attributable to the non-comparable properties, partially offset by a $4.1 million increase in other revenue attributable to the comparable properties, including an increase in parking and resort fee revenue.
Property Operating Expenses
Property operating expenses decreased $88.7 million, or 10.7%, to $740.4 million for the nine months ended September 30, 2019 from $829.1 million for the nine months ended September 30, 2018. The decrease was due to a $103.7 million decrease in property operating expenses attributable to the non-comparable properties, partially offset by a $15.0 million increase in property operating expenses attributable to the comparable properties.
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The components of our property operating expenses for the comparable properties owned at September 30, 2019 and 2018, respectively, were as follows (in thousands):
For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
Room expense | $ | 230,365 | $ | 227,373 | $ | 2,992 | 1.3 | % | ||||||
Food and beverage expense | 94,431 | 92,407 | 2,024 | 2.2 | % | |||||||||
Management and franchise fee expense | 83,825 | 83,378 | 447 | 0.5 | % | |||||||||
Other operating expense | 256,407 | 246,840 | 9,567 | 3.9 | % | |||||||||
Total property operating expenses | $ | 665,028 | $ | 649,998 | $ | 15,030 | 2.3 | % | ||||||
The increase in property operating expenses attributable to the comparable properties was due to an increase in room expense, food and beverage expense, and other operating expense. Room expense and food and beverage expense increased primarily as a result of higher labor costs. Other operating expense increased due to higher labor costs, administrative and general expense, sales and marketing expense and repairs and maintenance expense.
Depreciation and Amortization
Depreciation and amortization expense decreased $20.8 million, or 11.3%, to $162.7 million for the nine months ended September 30, 2019 from $183.4 million for the nine months ended September 30, 2018. The decrease was a result of a $23.4 million decrease in depreciation and amortization expense attributable to the non-comparable properties, partially offset by a $2.6 million increase in depreciation and amortization expense attributable to the comparable properties.
Property Tax, Insurance and Other
Property tax, insurance and other expense decreased $13.8 million, or 13.2%, to $90.6 million for the nine months ended September 30, 2019 from $104.4 million for the nine months ended September 30, 2018. The decrease was attributable to a $13.0 million decrease in property tax, insurance and other expense attributable to the non-comparable properties and a $0.8 million decrease in property tax, insurance and other expense attributable to the comparable properties.
General and Administrative
General and administrative expense decreased $3.9 million, or 10.2%, to $34.2 million for the nine months ended September 30, 2019 from $38.1 million for the nine months ended September 30, 2018. The decrease was attributable to increased costs related to activity by an activist shareholder during the nine months ended September 30, 2018 and the accelerated vesting of restricted share awards during the nine months ended September 30, 2018 as a result of the Company's former President and Chief Executive Officer retiring in August 2018, partially offset by employee tax credits received during the nine months ended September 30, 2018 that were not received during nine months ended September 30, 2019.
Transaction Costs
Transaction costs decreased $1.4 million, or 64.6%, to $0.8 million for the nine months ended September 30, 2019 from $2.2 million for the nine months ended September 30, 2018. The decrease in transaction costs was primarily attributable to transaction and integration costs during the nine months ended September 30, 2018 related to the merger with FelCor. There were no such costs incurred during the nine months ended September 30, 2019.
Interest Expense
The components of our interest expense for the nine months ended September 30, 2019 and 2018 were as follows (in thousands):
39
For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | $ Change | % Change | |||||||||||
Senior Notes | $ | 17,842 | $ | 22,485 | $ | (4,643 | ) | (20.6 | )% | |||||
Revolver and Term Loans | 31,795 | 33,428 | (1,633 | ) | (4.9 | )% | ||||||||
Mortgage loans | 15,575 | 20,171 | (4,596 | ) | (22.8 | )% | ||||||||
Amortization of deferred financing costs | 3,018 | 2,688 | 330 | 12.3 | % | |||||||||
Undesignated interest rate swaps | 402 | — | 402 | 100.0 | % | |||||||||
Total interest expense | $ | 68,632 | $ | 78,772 | $ | (10,140 | ) | (12.9 | )% | |||||
Interest expense decreased $10.1 million to $68.6 million for the nine months ended September 30, 2019 from $78.8 million for the nine months ended September 30, 2018. The decrease in interest expense was primarily due to the redemption of the 5.625% Senior Secured Notes due 2023 (the "senior secured notes") in March 2018, the repayment of an $85.0 million mortgage loan in November 2018, the lower average outstanding borrowings under the Revolver and the impact of three refinancing transactions during the nine months ended September 30, 2019.
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 (loss) gain on sale of hotel properties, net, 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 encumbered a hotel property that was sold during the nine months ended September 30, 2018. There was no gain or loss on extinguishment of indebtedness during the nine months ended September 30, 2019.
Equity in (Loss) Income from Unconsolidated Joint Ventures
Equity in (loss) income from unconsolidated joint ventures decreased $3.6 million to a loss of $2.9 million for the nine months ended September 30, 2019 from income of $0.6 million for the nine months ended September 30, 2018. The decrease is primarily attributable to a loss of $2.9 million related to the sale of certain assets by unconsolidated joint ventures associated with two resort hotel properties owned by the Company in Myrtle Beach, SC.
Income Taxes
As part of our structure, we own TRSs that are subject to federal and state income taxes. The Company's effective tax rates were 4.5% and 4.6% for the nine months ended September 30, 2019 and 2018, respectively. Income tax expense decreased $3.4 million, or 43.0%, to $4.5 million for the nine months ended September 30, 2019 from $7.9 million for the nine months ended September 30, 2018.
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
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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, 2019 and 2018 (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 32,455 | $ | 74,657 | $ | 94,468 | $ | 162,943 | |||||||
Preferred dividends | (6,279 | ) | (6,279 | ) | (18,836 | ) | (18,836 | ) | |||||||
Preferred distributions - consolidated joint venture | — | (374 | ) | (186 | ) | (1,109 | ) | ||||||||
Redemption of preferred equity - consolidated joint venture | — | — | (1,153 | ) | — | ||||||||||
Depreciation and amortization | 49,295 | 60,373 | 162,654 | 183,429 | |||||||||||
Loss (gain) on sale of hotel properties, net | 1,037 | (35,895 | ) | 25,872 | (32,957 | ) | |||||||||
Noncontrolling interest in consolidated joint ventures | 104 | (9 | ) | 360 | 170 | ||||||||||
Adjustments related to consolidated joint ventures (1) | (75 | ) | (78 | ) | (224 | ) | (233 | ) | |||||||
Adjustments related to unconsolidated joint ventures (2) | 504 | 661 | 4,733 | 1,998 | |||||||||||
FFO | 77,041 | 93,056 | 267,688 | 295,405 | |||||||||||
Transaction costs | (211 | ) | 261 | 773 | 2,181 | ||||||||||
Loss (gain) on extinguishment of indebtedness, net | — | 1,656 | — | (6,010 | ) | ||||||||||
Amortization of share-based compensation | 2,948 | 4,036 | 8,708 | 9,722 | |||||||||||
Non-cash income tax (benefit) expense | (1,102 | ) | 3,217 | 2,950 | 6,171 | ||||||||||
Other expenses (income) (3) | 508 | (839 | ) | 896 | 3,330 | ||||||||||
Adjusted FFO | $ | 79,184 | $ | 101,387 | $ | 281,015 | $ | 310,799 | |||||||
(1) | Includes depreciation and amortization expense allocated to the noncontrolling interest in the consolidated joint ventures. |
(2) | Includes our ownership interest in the depreciation and amortization expense and loss on sale 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, activist shareholder costs and unrealized gains and losses on certain discontinued cash flow hedges. |
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.
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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.
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, 2019 and 2018 (in thousands):
For the three months ended September 30, | For the nine months ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income | $ | 32,455 | $ | 74,657 | $ | 94,468 | $ | 162,943 | |||||||
Depreciation and amortization | 49,295 | 60,373 | 162,654 | 183,429 | |||||||||||
Interest expense, net of interest income | 20,642 | 23,479 | 63,697 | 75,433 | |||||||||||
Income tax (benefit) expense | (529 | ) | 4,156 | 4,475 | 7,852 | ||||||||||
Adjustments related to unconsolidated joint ventures (1) | 628 | 788 | 2,182 | 2,379 | |||||||||||
EBITDA | 102,491 | 163,453 | 327,476 | 432,036 | |||||||||||
Loss (gain) on sale of hotel properties, net | 1,037 | (35,895 | ) | 25,872 | (32,957 | ) | |||||||||
Loss on sale of unconsolidated joint ventures (2) | — | — | 2,923 | — | |||||||||||
EBITDAre | 103,528 | 127,558 | 356,271 | 399,079 | |||||||||||
Transaction costs | (211 | ) | 261 | 773 | 2,181 | ||||||||||
Loss (gain) on extinguishment of indebtedness, net | — | 1,656 | — | (6,010 | ) | ||||||||||
Amortization of share-based compensation | 2,948 | 4,036 | 8,708 | 9,722 | |||||||||||
Other expenses (income) (3) | 40 | (839 | ) | 484 | 3,330 | ||||||||||
Adjusted EBITDA | $ | 106,305 | $ | 132,672 | $ | 366,236 | $ | 408,302 | |||||||
(1) | Includes our ownership interest in the interest, depreciation, and amortization expense of the unconsolidated joint ventures. |
(2) | Includes our ownership interest in the loss on sale of the unconsolidated joint ventures associated with two resort hotel properties owned by the Company in Myrtle Beach, SC. |
(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 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; |
• | distributions necessary to qualify for taxation as a REIT; and |
• | corporate and other general and administrative expenses. |
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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, which was undrawn at September 30, 2019, and proceeds from the sale of hotel properties.
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, 2019, we had $894.5 million of cash, cash equivalents and restricted cash reserves as compared to $384.8 million at December 31, 2018.
Cash flows from Operating Activities
The net cash flow provided by operating activities totaled $305.6 million and $313.5 million for the nine months ended September 30, 2019 and 2018, 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, 2019 and 2018.
Cash flows from Investing Activities
The net cash flow provided by investing activities totaled $507.5 million for the nine months ended September 30, 2019 primarily due to $623.6 million of net cash proceeds from the sale of 42 hotel properties, partially offset by $117.9 million in routine capital improvements and additions to our hotel properties.
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 $144.3 million in routine capital improvements and additions to our hotel properties.
Cash flows from Financing Activities
The net cash flow used in financing activities totaled $303.4 million for the nine months ended September 30, 2019 primarily due to a payment of $374.5 million to repay a mortgage loan, $191.7 million in distributions to shareholders and unitholders, a payment of $45.6 million to redeem the preferred equity in a consolidated joint venture, $65.6 million paid to repurchase common shares under a share repurchase program, $4.7 million in deferred financing cost payments and $3.2 million in scheduled mortgage loan principal payments. The net cash flow used in financing activities was partially offset by $381.0 million in proceeds from the mortgage loans.
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, $28.1 million to repay a mortgage loan, $4.8 million in scheduled mortgage loan principal payments, $3.6 million in deferred financing cost payments and $2.9 million paid to repurchase common shares.
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 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 may be 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
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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, 2019, approximately $41.6 million was held in FF&E reserve accounts for future capital expenditures.
Off-Balance Sheet Arrangements
As of September 30, 2019, 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. 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 $20.6 million of non-recourse mortgage debt, of which our pro rata portion was $10.3 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 and 2094.
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, 2019, we had approximately $1.6 billion of total variable rate debt outstanding (or 71.4% of total indebtedness) with a weighted-average interest rate of 3.37% per annum. After taking into consideration the effect of interest rate swaps, $1.0 million (or 0.05% of total indebtedness) was subject to variable rates. As of September 30, 2019, 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 $1.5 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.
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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, 2019, the following table presents the principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):
2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | |||||||||||||||||||||
Fixed rate debt (1) | $ | 544 | $ | 3,361 | $ | 3,558 | $ | 140,386 | $ | — | $ | 475,000 | $ | 622,849 | |||||||||||||
Weighted-average interest rate | 5.01 | % | 5.01 | % | 5.01 | % | 5.01 | % | — | % | 6.00 | % | 5.77 | % | |||||||||||||
Variable rate debt (1) | $ | — | $ | — | $ | 400,000 | $ | 350,000 | $ | 625,000 | $ | 181,000 | $ | 1,556,000 | |||||||||||||
Weighted-average interest rate (2) | — | % | — | % | 2.97 | % | 3.22 | % | 3.78 | % | 3.11 | % | 3.37 | % | |||||||||||||
Total (3) | $ | 544 | $ | 3,361 | $ | 403,558 | $ | 490,386 | $ | 625,000 | $ | 656,000 | $ | 2,178,849 | |||||||||||||
(1) | Excludes $4.6 million and $4.2 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 $29.2 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, 2019, the estimated fair value of our fixed rate debt was $695.7 million, 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 $30.2 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, 2019.
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, 2019 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.
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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, 2019 that were not registered under the Securities Act of 1933, as amended (the "Securities Act").
Issuer Purchases of Equity Securities
On February 15, 2019, the Company's board of trustees approved the 2019 Share Repurchase Program, authorizing the repurchase of up to $250.0 million of our common shares from March 1, 2019 to February 28, 2020. During the nine months ended September 30, 2019, the Company repurchased and retired 3,836,582 common shares for approximately $65.6 million, of which $10.3 million was repurchased under the 2015 Share Repurchase Program and $55.3 million was repurchased under the 2019 Share Repurchase Program. As of September 30, 2019, the 2019 Share Repurchase Program had a remaining capacity of $194.7 million.
During the nine months ended September 30, 2019, 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, 2019:
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, 2019 through January 31, 2019 | 591,151 | $ | 17.54 | 588,150 | 8,992,158 | |||||||||
February 1, 2019 through February 28, 2019 | 16,273 | $ | 19.12 | — | 8,982,473 | |||||||||
March 1, 2019 through March 31, 2019 | 14,159 | $ | 17.45 | 14,159 | 14,214,737 | |||||||||
April 1, 2019 through April 30, 2019 | 12,279 | $ | 17.57 | 11,000 | 13,555,712 | |||||||||
May 1, 2019 through May 31, 2019 | 70,882 | $ | 17.88 | 56,555 | 14,476,418 | |||||||||
June 1, 2019 through June 30, 2019 | 379,351 | $ | 17.55 | 379,351 | 13,636,028 | |||||||||
July 1, 2019 through July 31, 2019 | 1,270,117 | $ | 17.43 | 1,269,206 | 12,719,080 | |||||||||
August 1, 2019 through August 31, 2019 | 1,549,522 | $ | 16.54 | 1,516,661 | 12,011,297 | |||||||||
September 1, 2019 through September 30, 2019 | 5,894 | $ | 16.87 | 1,500 | 11,458,452 | |||||||||
Total | 3,909,628 | 3,836,582 | ||||||||||||
(1) | The maximum number of shares that may yet be repurchased under the 2019 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.
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Item 6. Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are noted below:
Exhibit Index
Exhibit Number | Description of Exhibit | |||
3.1 | ||||
3.2 | ||||
3.3 | ||||
3.4 | ||||
3.5 | ||||
3.6 | ||||
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 | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101) | Submitted electronically with this report | ||
*Filed herewith
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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.
RLJ LODGING TRUST | |
Dated: 11/8/2019 | /s/ LESLIE D. HALE |
Leslie D. Hale | |
President and Chief Executive Officer | |
Dated: 11/8/2019 | /s/ SEAN M. MAHONEY |
Sean M. Mahoney | |
Executive Vice President and Chief Financial Officer | |
(Principal Financial Officer) | |
Dated: 11/8/2019 | /s/ CHRISTOPHER A. GORMSEN |
Christopher A. Gormsen | |
Senior Vice President and Chief Accounting Officer | |
(Principal Accounting Officer) | |
48
EXHIBIT 31.1
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.
RLJ LODGING TRUST | |
Dated: 11/8/2019 | /s/ LESLIE D. HALE |
Leslie D. Hale | |
President and Chief Executive Officer | |
EXHIBIT 31.2
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.
RLJ LODGING TRUST | |
Dated: 11/8/2019 | /s/ SEAN M. MAHONEY |
Sean M. Mahoney | |
Executive Vice President and Chief Financial Officer | |
EXHIBIT 32.1
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, 2019 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 and Chief Financial Officer 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.
RLJ LODGING TRUST | |
Dated: 11/8/2019 | /s/ LESLIE D. HALE |
Leslie D. Hale | |
President and Chief Executive Officer | |
/s/ SEAN M. MAHONEY | |
Sean M. Mahoney | |
Executive Vice President and Chief Financial Officer | |