RLJ - 2014 3.31.10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-35169
RLJ LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
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Maryland | | 27-4706509 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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3 Bethesda Metro Center, Suite 1000 | | |
Bethesda, Maryland | | 20814 |
(Address of Principal Executive Offices) | | (Zip Code) |
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | | Accelerated filer | | o |
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Non-accelerated filer | | o (do not check if a smaller reporting company) | | Smaller reporting company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of May 1, 2014, 122,901,010 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
TABLE OF CONTENTS
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| Consolidated Financial Statements (unaudited) | |
| Balance Sheets as of March 31, 2014 and December 31, 2013 | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
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| March 31, 2014 | | December 31, 2013 |
| (unaudited) | | |
Assets | |
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Investment in hotels and other properties, net | $ | 3,422,662 |
| | $ | 3,241,163 |
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Cash and cash equivalents | 270,765 |
| | 332,248 |
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Restricted cash reserves | 57,193 |
| | 62,430 |
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Hotel and other receivables, net of allowance of $172 and $234, respectively | 31,758 |
| | 22,762 |
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Deferred financing costs, net | 11,977 |
| | 11,599 |
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Deferred income tax asset | 2,636 |
| | 2,529 |
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Purchase deposits | 7,246 |
| | 7,246 |
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Prepaid expense and other assets | 39,428 |
| | 37,997 |
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Total assets | $ | 3,843,665 |
| | $ | 3,717,974 |
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Liabilities and Equity | |
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Mortgage loans | $ | 536,470 |
| | $ | 559,665 |
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Term loans | 1,025,000 |
| | 850,000 |
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Accounts payable and accrued expense | 102,518 |
| | 115,011 |
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Deferred income tax liability | 3,467 |
| | 3,548 |
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Advance deposits and deferred revenue | 14,093 |
| | 9,851 |
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Accrued interest | 2,613 |
| | 2,695 |
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Distributions payable | 28,677 |
| | 30,870 |
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Total liabilities | 1,712,838 |
| | 1,571,640 |
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Commitments and Contingencies (Note 10) |
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Equity | | | |
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Shareholders’ equity: | | | |
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Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively. | — |
| | — |
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Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 122,901,341 and 122,640,042 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively. | 1,229 |
| | 1,226 |
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Additional paid-in-capital | 2,180,505 |
| | 2,178,004 |
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Accumulated other comprehensive loss | (7,302 | ) | | (5,941 | ) |
Distributions in excess of net earnings | (60,848 | ) | | (45,522 | ) |
Total shareholders’ equity | 2,113,584 |
| | 2,127,767 |
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Noncontrolling interest | |
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Noncontrolling interest in joint venture | 6,090 |
| | 7,306 |
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Noncontrolling interest in Operating Partnership | 11,153 |
| | 11,261 |
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Total noncontrolling interest | 17,243 |
| | 18,567 |
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Total equity | 2,130,827 |
| | 2,146,334 |
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Total liabilities and equity | $ | 3,843,665 |
| | $ | 3,717,974 |
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The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
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| For the three months ended March 31, |
| 2014 | | 2013 |
Revenue | |
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Operating revenue | |
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Room revenue | $ | 206,025 |
| | $ | 185,448 |
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Food and beverage revenue | 23,367 |
| | 23,212 |
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Other operating department revenue | 6,981 |
| | 6,210 |
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Total revenue | 236,373 |
| | 214,870 |
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Expense | |
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Operating expense | |
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Room expense | 47,521 |
| | 43,097 |
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Food and beverage expense | 16,873 |
| | 16,557 |
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Management fee expense | 9,113 |
| | 7,381 |
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Other operating expense | 72,076 |
| | 66,366 |
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Total property operating expense | 145,583 |
| | 133,401 |
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Depreciation and amortization | 32,876 |
| | 31,344 |
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Property tax, insurance and other | 17,252 |
| | 14,710 |
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General and administrative | 10,129 |
| | 8,798 |
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Transaction and pursuit costs | 1,484 |
| | 1,089 |
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Total operating expense | 207,324 |
| | 189,342 |
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Operating income | 29,049 |
| | 25,528 |
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Other income | 110 |
| | 79 |
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Interest income | 323 |
| | 296 |
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Interest expense | (14,646 | ) | | (16,874 | ) |
Income from continuing operations before income tax expense | 14,836 |
| | 9,029 |
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Income tax expense | (294 | ) | | (226 | ) |
Income from continuing operations | 14,542 |
| | 8,803 |
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Loss from discontinued operations | — |
| | (219 | ) |
Loss on disposal of hotel properties | (2,557 | ) | | — |
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Net income | 11,985 |
| | 8,584 |
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Net (income) loss attributable to non-controlling interests | |
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Noncontrolling interest in consolidated joint venture | 34 |
| | 48 |
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Noncontrolling interest in common units of Operating Partnership | (87 | ) | | (139 | ) |
Net income attributable to common shareholders | $ | 11,932 |
| | $ | 8,493 |
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Basic per common share data: | |
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Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties | $ | 0.10 |
| | $ | 0.08 |
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Discontinued operations | — |
| | — |
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Net income per share attributable to common shareholders | $ | 0.10 |
| | $ | 0.08 |
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Weighted-average number of common shares | 121,740,962 |
| | 106,815,375 |
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Diluted per common share data: | |
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Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties | $ | 0.10 |
| | $ | 0.08 |
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Discontinued operations | — |
| | — |
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Net income per share attributable to common shareholders | $ | 0.10 |
| | $ | 0.08 |
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Weighted-average number of common shares | 122,867,755 |
| | 107,423,195 |
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Amounts attributable to the Company’s common shareholders: | |
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Income from continuing operations | $ | 14,471 |
| | $ | 8,710 |
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Loss from discontinued operations | — |
| | (217 | ) |
Loss on disposal of hotel properties | (2,539 | ) | | — |
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Net income attributable to common shareholders | $ | 11,932 |
| | $ | 8,493 |
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Comprehensive income | |
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Net income | $ | 11,985 |
| | $ | 8,584 |
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Unrealized loss on interest rate derivatives | (1,361 | ) | | (477 | ) |
Comprehensive income | 10,624 |
| | 8,107 |
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Comprehensive loss attributable to consolidated joint venture | 34 |
| | 48 |
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Comprehensive income attributable to common units of Operating Partnership | (87 | ) | | (139 | ) |
Comprehensive income attributable to the Company | $ | 10,571 |
| | $ | 8,016 |
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The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
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| Shareholders’ Equity | | | | Noncontrolling Interests | | |
| Common Stock | | | | | | | | | | | | |
| Shares | | Par Value | | Additional Paid-in Capital | | Distributions in excess of net earnings | | Accumulated Other Comprehensive Loss | | Operating Partnership | | Consolidated Joint Venture | | Total Non-controlling Interests | | Total Equity |
Balance at December 31, 2013 | 122,640,042 |
| | $ | 1,226 |
| | $ | 2,178,004 |
| | $ | (45,522 | ) | | $ | (5,941 | ) | | $ | 11,261 |
| | $ | 7,306 |
| | $ | 18,567 |
| | $ | 2,146,334 |
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Net income (loss) | — |
| | — |
| | — |
| | 11,932 |
| | — |
| | 87 |
| | (34 | ) | | 53 |
| | 11,985 |
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Unrealized loss on interest rate derivative | — |
| | — |
| | — |
| | — |
| | (1,361 | ) | | — |
| | — |
| | — |
| | (1,361 | ) |
Distributions to JV partner | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,182 | ) | | (1,182 | ) | | (1,182 | ) |
Issuance of restricted stock | 305,053 |
| | 3 |
| | (3 | ) | | — |
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| | — |
| | — |
| | — |
| | — |
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Amortization of share based compensation | — |
| | — |
| | 3,573 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,573 |
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Share grants to trustees | 1,051 |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
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Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | (42,900 | ) | | — |
| | (1,097 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,097 | ) |
Forfeiture of restricted stock | (1,905 | ) | | — |
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| | — |
| | — |
| | — |
| | — |
| | — |
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Distributions on common shares and units | — |
| | — |
| | — |
| | (27,258 | ) | | — |
| | (195 | ) | | — |
| | (195 | ) | | (27,453 | ) |
Balance at March 31, 2014 | 122,901,341 |
| | $ | 1,229 |
| | $ | 2,180,505 |
| | $ | (60,848 | ) | | $ | (7,302 | ) | | $ | 11,153 |
| | $ | 6,090 |
| | $ | 17,243 |
| | $ | 2,130,827 |
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The accompanying notes are an integral part of these consolidated financial statements.
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| Shareholders’ Equity | | | | Noncontrolling Interests | | |
| Common Stock | | | | | | | | | | | | |
| Shares | | Par Value | | Additional Paid-in Capital | | Distributions in excess of net earnings | | Accumulated Other Comprehensive Loss | | Operating Partnership | | Consolidated Joint Venture | | Total Non-controlling Interests | | Total Equity |
Balance at December 31, 2012 | 106,565,516 |
| | $ | 1,066 |
| | $ | 1,841,449 |
| | $ | (52,681 | ) | | $ | — |
| | $ | 11,311 |
| | $ | 6,766 |
| | $ | 18,077 |
| | $ | 1,807,911 |
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Net income (loss) | — |
| | — |
| | — |
| | 8,493 |
| | — |
| | 139 |
| | (48 | ) | | 91 |
| | 8,584 |
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Unrealized loss on interest rate derivative | — |
| | — |
| | — |
| | — |
| | (477 | ) | | — |
| | — |
| | — |
| | (477 | ) |
Proceeds from sale of common stock, net | 15,870,000 |
| | 159 |
| | 327,584 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 327,743 |
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Issuance of restricted stock | 330,640 |
| | 3 |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Amortization of share based compensation | — |
| | — |
| | 3,014 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,014 |
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Share grants to trustees | 1,756 |
| | — |
| | 40 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 40 |
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Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock | (34,339 | ) | | (1 | ) | | (727 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (728 | ) |
Distributions on common shares and units | — |
| | — |
| | — |
| | (25,364 | ) | | — |
| | (184 | ) | | — |
| | (184 | ) | | (25,548 | ) |
Balance at March 31, 2013 | 122,733,573 |
| | $ | 1,227 |
| | $ | 2,171,357 |
| | $ | (69,552 | ) | | $ | (477 | ) | | $ | 11,266 |
| | $ | 6,718 |
| | $ | 17,984 |
| | $ | 2,120,539 |
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The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
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| For the three months ended March 31, |
| 2014 | | 2013 |
Cash flows from operating activities: | |
| | |
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Net income | $ | 11,985 |
| | $ | 8,584 |
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Adjustments to reconcile net income to cash flow provided by operating activities: | |
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Loss on defeasance | 804 |
| | — |
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Loss on disposal of hotel properties | 2,557 |
| | — |
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Depreciation and amortization | 32,876 |
| | 31,435 |
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Amortization of deferred financing costs | 1,187 |
| | 789 |
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Amortization of deferred management fees | 244 |
| | 250 |
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Accretion of interest income on investment in loans | (52 | ) | | — |
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Share grants to trustees | 28 |
| | 40 |
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Amortization of share based compensation | 3,573 |
| | 3,014 |
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Deferred income taxes | (188 | ) | | (98 | ) |
Changes in assets and liabilities: | |
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Hotel and other receivables, net | (8,623 | ) | | (5,475 | ) |
Prepaid expense and other assets | (1,039 | ) | | 5,226 |
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Accounts payable and accrued expense | (15,547 | ) | | (14,233 | ) |
Advance deposits and deferred revenue | 3,837 |
| | 4,374 |
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Accrued interest | (82 | ) | | 119 |
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Net cash flow provided by operating activities | 31,560 |
| | 34,025 |
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Cash flows from investing activities: | |
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Acquisition of hotel and other properties, net | (311,973 | ) | | (79,521 | ) |
Proceeds from the disposal of hotel properties, net | 111,081 |
| | — |
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Purchase deposits | — |
| | 1,974 |
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Proceeds from principal payments on investment in loans | — |
| | 40 |
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Improvements and additions to hotel and other properties | (14,898 | ) | | (11,423 | ) |
Additions to property and equipment | (1 | ) | | (46 | ) |
Releases from restricted cash reserves, net | 5,237 |
| | 779 |
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Net cash flow used in investing activities | (210,554 | ) | | (88,197 | ) |
Cash flows from financing activities: | |
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Borrowings under revolving credit facility | 170,000 |
| | 83,000 |
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Repayments under revolving credit facility | (170,000 | ) | | (99,000 | ) |
Borrowings on term loans | 175,000 |
| | — |
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Payment of mortgage principal | (23,999 | ) | | (3,578 | ) |
Repurchase of common shares | (1,097 | ) | | (728 | ) |
Distributions on common shares | (29,433 | ) | | (21,839 | ) |
Distributions on Operating Partnership units | (213 | ) | | (184 | ) |
Payment of deferred financing costs | (1,565 | ) | | (76 | ) |
Distribution to noncontrolling interest | (1,182 | ) | | — |
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Proceeds from issuance of common shares | — |
| | 327,743 |
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Net cash flow provided by financing activities | 117,511 |
| | 285,338 |
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Net change in cash and cash equivalents | (61,483 | ) | | 231,166 |
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Cash and cash equivalents, beginning of period | 332,248 |
| | 115,861 |
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Cash and cash equivalents, end of period | $ | 270,765 |
| | $ | 347,027 |
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The accompanying notes are an integral part of these consolidated financial statements.
RLJ Lodging Trust
Notes to the Consolidated Financial Statements
(unaudited)
1. Organization
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.
Substantially all of the Company’s assets 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 March 31, 2014, there were 123,795,341 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.
As of March 31, 2014, the Company owned 146 properties, comprised of 144 hotels with approximately 22,400 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel. The Company owned, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of the DoubleTree Metropolitan Hotel New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.1% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the DoubleTree Metropolitan hotel. An independent operator manages each property.
2. Summary of Significant Accounting Policies
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. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. The unaudited financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for the fair statement of the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows for the periods presented. 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, 2013, included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2014. Operating results for the three months ended March 31, 2014 are not necessarily indicative of actual operating results for the entire year.
The unaudited consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, including a consolidated joint venture. All significant intercompany balances 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, shareholders’ equity or cash flows.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue comprises hotel operating revenue, such as room revenue, food and beverage revenue and revenue from other hotel operating departments (such as telephone, parking and business centers). These revenues are recorded net of any sales and occupancy taxes collected from guests. All rebates or discounts are recorded as a reduction in revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotels. All revenues are recorded on an accrual basis as earned. Appropriate allowances are made for doubtful accounts and are recorded as bad debt expenses. The allowances are calculated as a percentage of aged accounts receivable. Cash received prior to guest arrival is recorded as an advance from the guest and recognized as revenue at the time of occupancy.
Incentive payments received pursuant to entry into management agreements are deferred and amortized into income over the life of the respective agreements. In May 2012, the Company received an incentive payment of $4.0 million related to purchasing a hotel and entering into a franchise agreement, which is being recognized over the remaining term of the franchise agreement. As of March 31, 2014, there was approximately $3.8 million remaining to be recognized.
Investment in Hotels and Other Properties
The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. The Company may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired. The Company allocates the purchase price among the assets acquired and liabilities assumed based on their respective fair values. Transaction costs are expensed for acquisitions that are considered business combinations and capitalized for asset acquisitions.
The Company’s investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangibles arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement. Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposal of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is recognized.
The Company considers each individual property to be an identifiable component of its business. In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider a property as "held for sale" until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. The Company does not depreciate properties so long as they are classified as held for sale. Upon designation of a property as being held for sale and quarterly thereafter, the Company reviews the realizability of the carrying value, less cost to sell, in accordance with the guidance. Any such adjustment in the carrying value of a property classified as held for sale is reflected as an impairment charge.
The Company assesses the carrying values of each property whenever events or changes in circumstances indicate that the carrying amounts of these properties may not be fully recoverable. Recoverability of the property is measured by comparison of the carrying amount of the property to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of the property. If the Company’s analysis indicates that the carrying value of the property is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the property. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and the Company’s expected use of the underlying properties. The assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions that occur subsequent to a current impairment analysis and the Company’s ultimate use of the property could impact these assumptions and result in future impairment charges with respect to the properties.
Noncontrolling Interest
The consolidated financial statements include all subsidiaries controlled by the Company. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests in these subsidiaries are presented separately in the consolidated financial statements. As of March 31, 2014 the Company consolidated DBT Met Hotel Venture, LP, a majority-owned partnership that has a third-party, noncontrolling 1.9% ownership interest. The third-party partnership interest is included in noncontrolling
interest in joint venture on the consolidated balance sheet. Profits and losses are allocated in proportion to each party's respective ownership interest.
Franchise Agreements
As of March 31, 2014, 128 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. The franchise agreements for these hotels allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.0% and 4.3% of room revenue. Certain full service hotels are also charged a royalty fee of between 1.5% and 3.0% of food and beverage revenues. Franchise fees are included in other hotel operating expenses in the consolidated financial statements.
Earnings Per 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. Potential shares consist of 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.
Share-based Compensation
From time to time, the Company may issue share-based awards under the 2011 Equity Incentive Plan (the "2011 Plan"), as compensation to officers, employees and non-employee trustees (see Note 11). The vesting of awards issued to officers and employees is based on either continued employment (time-based) or based on the relative total shareholder returns of the Company (performance-based) and continued employment, as determined by the board of trustees at the date of grant. The Company recognizes, for time-based awards, compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of grant, adjusted for forfeitures. The Company recognizes, for performance-based awards, compensation expense over the requisite service period for each award, based on the fair market value of the shares on the date of grant, as determined using a Monte Carlo simulation, adjusted for forfeitures.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which significantly changed the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on operations and final results should be presented as discontinued operations. The guidance also provides additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance applies to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company adopted the new guidance for the quarterly period ended March 31, 2014. Prior to January 1, 2014, properties disposed of were presented in discontinued operations for all periods presented.
3. Acquisition of Hotel and Other Properties
During the three months ended March 31, 2014, the Company acquired a 100% interest in the following properties:
|
| | | | | | | | | | | | | |
Property | | Location | | Acquisition Date | | Management Company | | Rooms | | Purchase Price (in thousands) |
Hyatt House Charlotte Center City | | Charlotte, NC | | March 12, 2014 | | Select Hotels Group, LLC | | 163 |
| | $ | 32,496 |
|
Hyatt House Cypress Anaheim | | Cypress, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 142 |
| | 14,753 |
|
Hyatt House Emeryville SF Bay Area | | Emeryville, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 234 |
| | 39,274 |
|
Hyatt House San Diego Sorrento Mesa | | San Diego, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 193 |
| | 35,985 |
|
Hyatt House San Jose Silicon Valley | | San Jose, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 164 |
| | 44,159 |
|
Hyatt House San Ramon | | San Ramon, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 142 |
| | 20,833 |
|
Hyatt House Santa Clara | | Santa Clara, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 150 |
| | 40,570 |
|
Hyatt Market Street The Woodlands | | The Woodlands, TX | | March 12, 2014 | | Hyatt Corporation | | 70 |
| | 25,817 |
|
Hyatt Place Fremont Silicon Valley | | Fremont, CA | | March 12, 2014 | | Select Hotels Group, LLC | | 151 |
| | 23,525 |
|
Hyatt Place Madison Downtown | | Madison, WI | | March 12, 2014 | | Select Hotels Group, LLC | | 151 |
| | 35,088 |
|
| | | | | | | | 1,560 |
| | $ | 312,500 |
|
During the three months ended March 31, 2013, the Company acquired a 100% interest in the following properties:
|
| | | | | | | | | | | | | |
Property | | Location | | Acquisition Date | | Management Company | | Rooms | | Purchase Price (in thousands) |
Courtyard Houston Downtown Convention Center | | Houston, TX | | March 19, 2013 | | White Lodging Services | | 191 |
| | $ | 34,308 |
|
Residence Inn Houston Downtown Convention Center | | Houston, TX | | March 19, 2013 | | White Lodging Services | | 171 |
| | 29,421 |
|
Humble Tower Apartments (1) | | Houston, TX | | March 19, 2013 | | n/a | | 82 |
| | 15,547 |
|
| | | | | | | | 444 |
| | $ | 79,276 |
|
| |
(1) | Conversion to a SpringHill Suites is in progress. |
The allocation of purchase price for the properties acquired was as follows (in thousands):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Land and land improvements | $ | 64,303 |
| | $ | 12,855 |
|
Buildings and improvements | 213,110 |
| | 66,622 |
|
Furniture, fixtures and equipment | 35,087 |
| | 3,152 |
|
Lease intangibles | — |
| | 342 |
|
Management agreement intangibles | — |
| | (3,695 | ) |
Total purchase price | $ | 312,500 |
| | $ | 79,276 |
|
For the properties acquired during the three months ended March 31, 2014 and 2013, respectively, total revenues and net income (loss) from the date of acquisition through March 31, 2014 and 2013, respectively, are included in the consolidated statements of operations as follows (in thousands):
|
| | | |
| 2014 acquisitions |
| For the three months ended March 31, 2014 |
Revenue | $ | 4,531 |
|
Net loss | $ | (453 | ) |
|
| | | |
| 2013 acquisitions |
| For the three months ended March 31, 2013 |
Revenue | $ | 693 |
|
Net loss | $ | (887 | ) |
The following unaudited condensed pro forma financial information presents the results of operations as if the 2014 acquisitions had taken place on January 1, 2013 and the 2013 acquisitions had taken place on January 1, 2012. The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2014 and 2013 acquisitions had taken place on January 1, 2013 and 2012, respectively, nor does it purport to represent the results of operations for future periods. The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Revenue | $ | 250,396 |
| | $ | 244,234 |
|
Net income attributable to common shareholders | $ | 15,833 |
| | $ | 15,379 |
|
Net income per share attributable to common shareholders - basic | $ | 0.13 |
| | $ | 0.14 |
|
Net income per share attributable to common shareholders - diluted | $ | 0.13 |
| | $ | 0.14 |
|
Weighted-average number of shares outstanding - basic | 121,740,962 |
| | 106,815,375 |
|
Weighted-average number of shares outstanding - diluted | 122,867,755 |
| | 107,423,195 |
|
4. Disposal of Hotel Properties
During the three months ended March 31, 2014, the Company disposed of 13 hotel properties in three separate transactions for a total sale price of approximately $114.5 million. In conjunction with these transactions, the Company recorded a $2.6 million loss on disposal, which is included in the consolidated statement of operations. Additionally, the Company completed a legal defeasance of the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in the consolidated statement of operations.
The following table provides a list of properties that were disposed of during three months ended March 31, 2014:
|
| | | | | | |
Property Name | | Location | | Disposal Date | | Rooms |
Courtyard Denver Southwest Lakewood | | Lakewood, CO | | February 20, 2014 | | 90 |
Residence Inn Denver Southwest Lakewood | | Lakewood, CO | | February 20, 2014 | | 102 |
Hyatt House Colorado Springs | | Colorado Springs, CO | | February 20, 2014 | | 125 |
SpringHill Suites Gainesville | | Gainesville, FL | | February 20, 2014 | | 126 |
Residence Inn Indianapolis Airport | | Indianapolis, IN | | February 20, 2014 | | 95 |
Fairfield Inn & Suites Indianapolis Airport | | Indianapolis, IN | | February 20, 2014 | | 86 |
Courtyard Grand Rapids Airport | | Kentwood, MI | | February 20, 2014 | | 84 |
Hampton Inn Suites Las Vegas Red Rock Summerlin | | Las Vegas, NV | | February 20, 2014 | | 106 |
Courtyard Austin University Area | | Austin, TX | | February 20, 2014 | | 198 |
Fairfield Inn & Suites Austin University Area | | Austin, TX | | February 20, 2014 | | 63 |
Hyatt House Dallas Richardson | | Richardson, TX | | February 20, 2014 | | 130 |
Hilton Garden Inn St George | | St. George, UT | | February 25, 2014 | | 150 |
Hilton Mystic | | Mystic, CT | | March 26, 2014 | | 182 |
| | | | Total | | 1,537 |
During 2013, the Company disposed of three properties in three separate transactions. The operating results for the three months ended March 31, 2013 for these properties is included in discontinued operations in the statement of operations.
The following table provides a list of properties that were disposed of during 2013:
|
| | | | | | |
Property Name | | Location | | Disposal Date | | Rooms |
SpringHill Suites Southfield | | Southfield, MI | | May 30, 2013 | | 84 |
Courtyard Goshen | | Goshen, IN | | August 28, 2013 | | 91 |
Fairfield Inn & Suites Memphis | | Memphis, TN | | November 18, 2013 | | 63 |
| | | | Total | | 238 |
Operating results of discontinued operations were as follows (in thousands):
|
| | | |
| For the three months ended March 31, 2013 |
Operating revenue | $ | 1,017 |
|
Operating expense | (1,076 | ) |
Operating loss | (59 | ) |
Interest expense | (160 | ) |
Net loss from discontinued operations | $ | (219 | ) |
5. Investment in Hotels and Other Properties
Investment in hotels and other properties as of March 31, 2014 and December 31, 2013 consisted of the following (in thousands): |
| | | | | | | |
| March 31, 2014 | | December 31, 2013 |
Land and land improvements | $ | 635,290 |
| | $ | 594,402 |
|
Buildings and improvements | 2,986,369 |
| | 2,866,849 |
|
Furniture, fixtures and equipment | 487,443 |
| | 485,531 |
|
Intangibles | 2,507 |
| | 2,507 |
|
| 4,111,609 |
| | 3,949,289 |
|
Accumulated depreciation and amortization | (688,947 | ) | | (708,126 | ) |
Investment in hotels and other properties, net | $ | 3,422,662 |
| | $ | 3,241,163 |
|
For the three months ended March 31, 2014 and 2013, depreciation and amortization expense related to investment in hotels and other properties was approximately $32.8 million and $31.2 million (excluding discontinued operations in 2013), respectively.
Impairment
The Company determined that there was no impairment of any assets for either the three months ended March 31, 2014 or 2013.
6. Debt
Credit Facilities
The Company entered into a credit agreement on November 20, 2012 that provided for i) an unsecured revolving credit facility of up to $300.0 million with a scheduled maturity date of November 20, 2016 with a one-year extension option (the "Revolver"), and ii) an unsecured term loan of $275.0 million with a scheduled maturity date of November 20, 2017 (the "2012 Five-Year Term Loan"). In addition, on November 20, 2012 the Company also entered into an unsecured term loan of $125.0 million with a scheduled maturity date of November 20, 2019 (the "Seven-Year Term Loan"). On August 27, 2013, the Company amended the Seven-Year Term Loan to increase the borrowings on the Seven-Year Term Loan to $225.0 million.
The Company also entered into an unsecured $350.0 million term loan on August 27, 2013 with a scheduled maturity date of August 27, 2018 (the "2013 Five-Year Term Loan", and collectively with the 2012 Five-Year Term Loan and the Seven-Year Term Loan, the "Term Loans").
On March 20, 2014, the Company amended the credit agreement to, among other things, i) extend the maturity date of the 2012 Five-Year Term Loan from November 20, 2017 to March 20, 2019, ii) expand the accordion feature of the 2012 Five-Year Term Loan and iii) reduce the applicable margin of the 2012 Five-Year Term Loan by 0.15%. Additionally, the Company exercised the accordion feature of the 2012 Five-Year Term Loan and increased the borrowings to $400.0 million. On March 20, 2014, the Company also exercised the accordion feature of the 2013 Five-Year Term Loan and increased the borrowings to $400.0 million.
The Revolver and Term Loans are subject to customary financial covenants. As of March 31, 2014, the Company was in compliance with all financial covenants.
As of and for the three months ended March 31, 2014 and 2013, details of the Revolver and Term Loans are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | | | | | | Interest expense for the |
| Outstanding borrowings at March 31, 2014 | | Maturity Date | | Interest Rate at March 31, 2014 (1) | | three months ended March 31, 2014 | | three months ended March 31, 2013 |
Revolver (2) | $ | — |
| | 11/2016 | | n/a | | $ | 323 |
| | $ | 356 |
|
2012 Five-Year Term Loan | 400,000 |
| | 03/2019 | | 1.70% | | 1,423 |
| | 1,415 |
|
Seven-Year Term Loan (3) | 225,000 |
| | 11/2019 | | 4.04% | | 2,255 |
| | 769 |
|
2013 Five-Year Term Loan (4) | 400,000 |
| | 08/2018 | | 3.07% | | 2,851 |
| | — |
|
Total | $ | 1,025,000 |
| | | | | | $ | 6,852 |
| | $ | 2,540 |
|
| |
(1) | Interest rate at March 31, 2014 gives effect to interest rate hedges and LIBOR floors, as applicable. |
| |
(2) | Includes the unused facility fee of $0.2 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. |
| |
(3) | Includes interest expense related to an interest rate hedge of $1.0 million for the three months ended March 31, 2014. |
| |
(4) | Includes interest expense related to an interest rate hedge of $1.2 million for the three months ended March 31, 2014. |
Mortgage Loans
As of March 31, 2014 and December 31, 2013, the Company was subject to the following mortgage loans (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Principal balance at, |
Lender | | Number of Assets Encumbered | | Interest Rate at March 31, 2014 (1) | | | | Maturity Date | | | | March 31, 2014 | | | | December 31, 2013 |
Wells Fargo | | 1 | | 3.75% | | (2) | | Oct 2014 | | (3) | | $ | 68,500 |
| | | | $ | 68,500 |
|
Wells Fargo | | 1 | | 3.75% | | (2) | | Oct 2014 | | (3) | | 17,500 |
| | | | 17,500 |
|
Wells Fargo | | 1 | | 3.75% | | (2) | | Oct 2014 | | (3) | | 21,000 |
| | | | 21,000 |
|
Wells Fargo | | 1 | | 3.75% | | (2) | | Oct 2014 | | (3) | | 11,000 |
| | | | 11,000 |
|
Wells Fargo | | 1 | | 3.75% | | (2) | | Oct 2014 | | (3) | | 24,000 |
| | | | 24,000 |
|
Capmark Financial Group | | 1 | | 5.55% | | | | May 2015 | | | | 10,816 |
| | | | 10,916 |
|
Capmark Financial Group | | 1 | | 5.55% | | | | June 2015 | | | | 4,692 |
| | | | 4,736 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 9,383 |
| | | | 9,470 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 8,374 |
| | | | 8,452 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 7,509 |
| | | | 7,578 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 4,917 |
| | | | 4,962 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 32,600 |
| | | | 32,901 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 5,517 |
| | | | 5,568 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 6,340 |
| | | | 6,399 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 6,336 |
| | | | 6,394 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 6,974 |
| | | | 7,038 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 6,340 |
| | | | 6,399 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 7,238 |
| | | | 7,305 |
|
Barclay's Bank | | 1 | | 5.55% | | | | June 2015 | | | | 9,083 |
| | | | 9,166 |
|
Barclay's Bank | | 1 | | 5.60% | | | | June 2015 | | | | 5,192 |
| | | | 5,255 |
|
Barclay's Bank | | 1 | | 5.60% | | | | June 2015 | | | | 8,067 |
| | | | 8,142 |
|
Barclay's Bank | | 1 | | 5.60% | | | | June 2015 | | | | 6,194 |
| | | | 6,251 |
|
Barclay's Bank | | 1 | | 5.60% | | | | June 2015 | | | | 8,081 |
| | | | 8,156 |
|
Capmark Financial Group | | 1 | | 5.50% | | | | July 2015 | | | | 6,391 |
| | | | 6,450 |
|
Barclay's Bank | | 1 | | 5.44% | | | | Sept 2015 | | | | 10,426 |
| | | | 10,521 |
|
PNC Bank (4) | | 5 | | 2.50% | | (2) | | May 2016 | | (5) | | 74,000 |
| | | | 85,000 |
|
Wells Fargo (6) | | 2 | | 4.19% | | (2) | | Sept 2016 | | (7) | | 82,000 |
| | | | 82,000 |
|
Wells Fargo | | 1 | | 4.19% | | (2) | | Sept 2016 | | (7) | | 33,000 |
| | | | 33,000 |
|
Wells Fargo | | 1 | | 4.19% | | (2) | | Sept 2016 | | (7) | | 35,000 |
| | | | 35,000 |
|
Barclay's Bank | |
| | 5.55% | |
| | June 2015 | |
| | — |
| | | | 2,475 |
|
Barclay's Bank | |
| | 5.55% | |
| | June 2015 | |
| | — |
| | | | 4,063 |
|
Capmark Financial Group | |
| | 6.12% | |
| | April 2015 | |
| | — |
| | | | 4,068 |
|
| | 34 | | | | | |
| |
| | $ | 536,470 |
| | | | $ | 559,665 |
|
| |
(1) | Interest rate at March 31, 2014 gives effect to interest rate hedges and LIBOR floors, as applicable. |
| |
(2) | Requires payments of interest only until the commencement of the extension period(s). |
| |
(3) | Maturity date may be extended for up to two additional one-year terms at the Company’s option, subject to certain lender requirements. |
| |
(4) | The five hotels encumbered by the PNC Bank loan are cross-collateralized. |
| |
(5) | Maturity date may be extended for one one-year term at the Company’s option, subject to certain lender requirements. |
| |
(6) | The two hotels encumbered by the Wells Fargo loan are cross-collateralized. |
| |
(7) | Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements. |
Some mortgage agreements are subject to customary financial covenants. The Company was in compliance with these
covenants at March 31, 2014 and December 31, 2013.
7. Derivatives and Hedging
The Company employs derivative instruments to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive income (loss), a component of shareholders’ equity. Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period. For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period. At March 31, 2014, all derivative instruments are designated as cash flow hedges.
At March 31, 2014 and December 31, 2013, the fair value of interest rate swap assets of $2.6 million and $3.2 million, respectively, was included in prepaid expense and other assets in the consolidated balance sheets. At March 31, 2014 and December 31, 2013, the aggregate fair value of interest rate swap liabilities of $9.9 million and $9.1 million, respectively, was included in accounts payable and accrued expenses in the consolidated balance sheets.
As of March 31, 2014 and December 31, 2013, the Company had entered into the following derivative instruments (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Notional value at | | | | | | Fair value at |
Hedge type | March 31, 2014 | | December 31, 2013 | | Hedge interest rate | | Maturity | | March 31, 2014 | | December 31, 2013 |
Swap-cash flow | $ | 275,000 |
| | $ | 275,000 |
| | 1.12% | | 11/20/2017 | | $ | 2,606 |
| | $ | 3,161 |
|
Swap-cash flow | 175,000 |
| | 175,000 |
| | 1.56% | | 3/6/2018 | | (1,858 | ) | | (1,866 | ) |
Swap-cash flow | 175,000 |
| | 175,000 |
| | 1.64% | | 3/6/2018 | | (2,367 | ) | | (2,406 | ) |
Swap-cash flow | 16,500 |
| | 16,500 |
| | 1.83% | | 9/15/2018 | | (257 | ) | | (238 | ) |
Swap-cash flow | 16,500 |
| | 16,500 |
| | 1.75% | | 9/15/2018 | | (202 | ) | | (181 | ) |
Swap-cash flow | 40,500 |
| | 40,500 |
| | 1.83% | | 9/15/2018 | | (630 | ) | | (585 | ) |
Swap-cash flow | 41,500 |
| | 41,500 |
| | 1.75% | | 9/15/2018 | | (509 | ) | | (456 | ) |
Swap-cash flow | 18,000 |
| | 18,000 |
| | 1.83% | | 9/15/2018 | | (280 | ) | | (260 | ) |
Swap-cash flow | 17,000 |
| | 17,000 |
| | 1.75% | | 9/15/2018 | | (209 | ) | | (187 | ) |
Swap-cash flow | 125,000 |
| | 125,000 |
| | 2.02% | | 3/6/2019 | | (2,202 | ) | | (1,838 | ) |
Swap-cash flow | 100,000 |
| | 100,000 |
| | 1.94% | | 3/6/2019 | | (1,394 | ) | | (1,085 | ) |
| $ | 1,000,000 |
| | $ | 1,000,000 |
| | | | | | $ | (7,302 | ) | | $ | (5,941 | ) |
As of March 31, 2014 and December 31, 2013, there was approximately $7.3 million and $5.9 million, respectively, in unrealized losses included in accumulated other comprehensive loss related to interest rate hedges that are effective in offsetting the variable cash flows. There was no ineffectiveness recorded on designated hedges during the three month periods ended March 31, 2014 and 2013. For the three months ended March 31, 2014 and 2013, approximately $2.9 million and zero, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense.
8. 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 estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts. The Company used the following market assumptions and/or estimation methods:
| |
• | Cash and cash equivalents, hotel and other receivables, accounts payable and other liabilities - The carrying amounts reported in the consolidated balance sheet for these financial instruments approximate fair value because of their short maturities. |
| |
• | Variable rate mortgage notes payable and borrowings under the Revolver and Term Loans - The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value. The Company estimates the fair value of its variable rate debt by using estimated market rates for similar loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its variable rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy. |
| |
• | Fixed rate mortgage notes payable - The fair value estimated at March 31, 2014 and December 31, 2013 of $175.5 million and $188.0 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy. The carrying value of fixed rate mortgage notes payable at March 31, 2014 and December 31, 2013 was $170.5 million and $182.7 million, respectively. |
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 March 31, 2014 (in thousands): |
| | | | | | | | | | | | | | | |
| Fair Value at March 31, 2014 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Interest rate swap asset | $ | — |
| | $ | 2,606 |
| | $ | — |
| | $ | 2,606 |
|
Interest rate swap liability | $ | — |
| | $ | (9,908 | ) | | $ | — |
| | $ | (9,908 | ) |
Total | $ | — |
| | $ | (7,302 | ) | | $ | — |
| | $ | (7,302 | ) |
The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of 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 March 31, 2014, 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.
9. Income Taxes
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011. 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 adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain. The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT. As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders. However, the Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes.
The Company accounts for income taxes using the asset and liability 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 tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
The Company had no accruals for tax uncertainties as of March 31, 2014 and December 31, 2013.
10. Commitments and Contingencies
Restricted Cash Reserves
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging from 2.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. Additionally, some loan agreements require the Company to reserve restricted cash for the periodic payment of real estate taxes and insurance. As of March 31, 2014 and December 31, 2013, approximately $57.2 million and $62.4 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.
Litigation
Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.
Data Breach
During the first quarter of 2014, one of the Company's third-party hotel managers notified the Company of a data breach that occurred over a nine-month period ending in December 2013 at 14 of the hotels that they manage, including seven hotels that are owned by the Company. An analysis of the data breach revealed that hackers installed memory scraping malware on food and beverage point of sale systems that was designed to capture credit card data. During the period of the breach, it appears that information from approximately 95,000 credit cards could have been collected by the malware. The third-party hotel manager is cooperating with the relevant authorities in their investigations of this criminal cyber-attack. The Company and its third-party hotel manager are also taking steps to assess and further strengthen information security systems.
The Company believes that the credit card companies impacted may seek to impose fines, fees or assessments in connection with the breach against various parties, including the Company. The Company may also incur other costs, including legal fees and other professional services fees, related to investigating the breach. Because the investigation into the matter is ongoing and certain factual and legal questions remain unanswered, the Company is unable to estimate with certainty the costs, fines, fees or assessments that may be associated with any potential claims; however, no claims have yet been made and the Company currently believes that any amounts that may be incurred as a result of this incident will not be material to the results of operations.
11. Equity Incentive Plan
The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons under the 2011 Plan. The 2011 Plan provides for a maximum of 5,000,000 common shares of beneficial interest 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 non-vested restricted shares under the 2011 Plan, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees 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 non-vested 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.
The Company may also award unrestricted shares under the 2011 Plan as compensation to non-employee trustees that would otherwise be paid in cash for their services. The shares issued to trustees 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 non-vested shares as of March 31, 2014 is as follows:
|
| | | | | | |
| 2014 |
| Number of Shares | | Weighted-Average Grant Date Fair Value |
Unvested at January 1, | 932,800 |
| | $ | 18.99 |
|
Granted (1) | 306,104 |
| | 24.13 |
|
Vested (1) | (119,679 | ) | | 18.74 |
|
Forfeited | (1,905 | ) | | 20.35 |
|
Unvested at March 31, | 1,117,320 |
| | $ | 20.42 |
|
| |
(1) | Includes 1,051 unrestricted shares issued in lieu of cash compensation to non-employee trustees at a weighted-average grant date fair value of $26.74. |
For the three months ended March 31, 2014 and 2013, the Company recognized approximately $2.5 million and $1.9 million, respectively, of share-based compensation expense related to restricted share awards. As of March 31, 2014, there was $21.6 million of total unrecognized compensation costs related to non-vested share awards and these costs were expected to be primarily recognized over a weighted-average period of 2.60 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three months ended March 31, 2014 was approximately $3.1 million.
Performance Units
The Company awarded performance units to certain employees under the 2011 Plan. The performance units vest over a four-year period, including three years of performance-based vesting ("measurement period") plus an additional one year of time-based vesting.
As of March 31, 2014, there were 1.0 million unvested performance units with a weighted-average grant date fair value of $15.36 per performance unit.
For both the three months ended March 31, 2014 and 2013, the Company recognized $1.1 million of share-based compensation expense related to the performance units. As of March 31, 2014, there was $7.8 million of total unrecognized compensation cost related to the performance units and these costs are expected to be recognized over a weighted-average period of 1.8 years.
As of March 31, 2014, there were 2,773,928 common shares available for future grant under the 2011 Plan. Any performance units that convert into restricted shares will reduce the number of common shares available for future grant under the 2011 Plan.
12. Earnings per Common Share
Basic earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties, 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 income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties, by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Potential shares consist of 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 participating shares, they would be deducted from net income attributable to common shareholders utilized in the basic and diluted earnings per share calculations.
For each of the three months ended March 31, 2014 and 2013, no earnings representing undistributed earnings were allocated to participating shares because the Company paid dividends in excess of net income.
The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three months ended March 31, 2014 and 2013, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.
The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share data):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Numerator: | |
| | |
|
Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties | $ | 11,932 |
| | $ | 8,710 |
|
Add: Loss from discontinued operations | — |
| | (217 | ) |
Net income attributable to common shareholders | 11,932 |
| | 8,493 |
|
Less: Dividends paid on unvested restricted shares | (246 | ) | | (256 | ) |
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares | $ | 11,686 |
| | $ | 8,237 |
|
Denominator: | |
| | |
|
Weighted-average number of common shares - basic | 121,740,962 |
| | 106,815,375 |
|
Unvested restricted shares | 281,721 |
| | 188,630 |
|
Unvested performance units | 845,072 |
| | 419,190 |
|
Weighted-average number of common shares - diluted | 122,867,755 |
| | 107,423,195 |
|
| | | |
Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties - basic | $ | 0.10 |
| | $ | 0.08 |
|
Discontinued operations | — |
| | — |
|
Net income attributable to common shareholders - basic | $ | 0.10 |
| | $ | 0.08 |
|
| | | |
Income from continuing operations attributable to common shareholders, including loss on disposal of hotel properties - diluted | $ | 0.10 |
| | $ | 0.08 |
|
Discontinued operations | — |
| | — |
|
Net income attributable to common shareholders - diluted | $ | 0.10 |
| | $ | 0.08 |
|
13. Related Party Transactions
RLJ Companies, LLC and its affiliates, a related party, periodically provide or receive services or pay or collect certain amounts to or from the Company. At March 31, 2014 and December 31, 2013, there was approximately $53,000 and $1,000, respectively, due from RLJ Companies, LLC which was included in other assets.
14. Supplemental Information to Statements of Cash Flows (in thousands)
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Interest paid | $ | 13,541 |
| | $ | 16,126 |
|
| | | |
Income taxes paid | $ | 37 |
| | $ | 15 |
|
| | | |
Supplemental investing and financing transactions: | | | |
In conjunction with the acquisitions, the Company recorded the following: | | | |
Purchase of real estate | $ | 312,500 |
| | $ | 82,970 |
|
Accounts receivable | 373 |
| | 177 |
|
Other assets | 1,198 |
| | 260 |
|
Advance deposits | (405 | ) | | (16 | ) |
Accounts payable and accrued expenses | (1,693 | ) | | (3,870 | ) |
Acquisition of hotel and other properties, net | $ | 311,973 |
| | $ | 79,521 |
|
| | | |
In conjunction with the disposals, the Company recorded the following: | | | |
Disposal of hotel properties | $ | 114,500 |
| | $ | — |
|
Closing costs | (2,461 | ) | | — |
|
Operating prorations | (958 | ) | | — |
|
Proceeds from the disposal of hotel properties, net | $ | 111,081 |
| | $ | — |
|
| | | |
Supplemental non-cash transactions: | | | |
Accrued capital expenditures | $ | — |
| | $ | 49 |
|
| | | |
15. Subsequent Events
On April 15, 2014, the Company paid a dividend of $0.22 per common share to shareholders of record at March 31, 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 27, 2014 (the "Annual Report"), which is accessible on the SEC’s website at www.sec.gov.
Statement Regarding Forward-Looking Information
The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," "may" or similar expressions. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates. Given these uncertainties, undue reliance should not be placed on such statements.
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Risk Factors," "Forward-Looking Statements," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.
Overview
We are a self-advised and self-administered Maryland real estate investment trust ("REIT") that acquires primarily premium-branded, focused-service and compact full-service hotels. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in markets that we believe exhibit multiple demand generators and high barriers to entry.
Our strategy is to acquire primarily premium-branded, focused-service and compact full-service hotels. Focused-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service and compact full-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve Revenue per Available Room ("RevPAR") levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.
We recognize the challenging geopolitical environment and the possibility that the current economic recovery might not be as robust as anticipated or that economic conditions could deteriorate. However, with growth in lodging supply expected to be below historical averages for the next few years and corporate profits rising, we currently do not anticipate any significant slowdown in lodging fundamentals. Accordingly, we remain cautiously optimistic that we are in the midst of a multi-year lodging recovery.
Furthermore, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our cash on hand and expected access to capital (including availability under our unsecured revolving
credit facility) along with our senior management team’s experience, extensive industry relationships and asset management expertise, will enable us to compete effectively for such acquisitions and enable us to generate additional internal and external growth.
As of March 31, 2014, we owned 146 properties, comprised of 144 hotels with approximately 22,400 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in a mortgage loan secured by a hotel. We own, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of one property in which we own a 98.1% controlling interest in a joint venture.
We elected to be taxed as a REIT, for U.S. federal income tax purposes, when we filed our U.S. federal tax return for the taxable year ended December 31, 2011. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the "Operating Partnership"). We are the sole general partner of our operating partnership. As of March 31, 2014, we owned, through a combination of direct and indirect interests, 99.3% of the units of limited partnership interest in the Operating Partnership ("OP units").
Recent Significant Activities
Our recent significant activities reflect our commitment to maximizing shareholder value through selective acquisitions in markets with high barriers to entry, value-add renovations and conservative balance sheet management. During the three months ended March 31, 2014, the following significant activities took place:
| |
• | Acquired a portfolio of ten hotels comprised of 1,560 rooms from affiliates of Hyatt Hotels Corporation for approximately $312.5 million. In conjunction with this portfolio acquisition, we increased the borrowings on our 2012 Five-Year Term Loan and 2013 Five-Year Term Loan by $125.0 million and $50.0 million, respectively. The remaining amount of the transaction was financed with cash on hand; |
| |
• | Sold 13 properties in three separate transactions for a total sale price of approximately $114.5 million. In conjunction with these transactions, we recorded a $2.6 million loss on disposal, which is included in our consolidated statement of operations. Additionally, we completed a legal defeasance of the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in our consolidated statement of operations; and |
| |
• | Declared a cash dividend of $0.22 per share for the quarter, an increase of 7.3% over our fourth quarter 2013 dividend. |
Our Customers
Substantially all of our hotels consist of premium-branded focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in business districts within major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.
Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, group business that utilizes meeting space represents a small component of our customer base.
A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.
Our Revenues and Expenses
Our revenue is primarily derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists of telephone, parking and other guest services.
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.
Key Indicators of Financial Performance
We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel's contribution to the cash flow and its potential to provide attractive long-term total returns. These key indicators include:
| |
• | Average Daily Rate (ADR) |
Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring revenue performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis, comparing the results to our budget and RevPAR for prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.
We also use FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as non-GAAP measures of the operating performance of our business. See "Non-GAAP Financial Measures."
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the consolidated financial statements included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.
Investment in Hotels and Other Properties
Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment ("FF&E"), and inventory. We may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired. We allocate the purchase price among the assets acquired and liabilities assumed based on their respective fair values.
Our investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangibles arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement. Maintenance and repairs are expensed and major renewals or improvements
are capitalized. Upon the sale or disposal of a property, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is recognized.
We consider each individual property to be an identifiable component of the business. In accordance with the guidance on impairment or disposal of long-lived assets, we do not consider a property as "held for sale" until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met. We do not depreciate properties so long as they are classified as held for sale. Upon designation of a property as being held for sale and quarterly thereafter, we review the realizability of the carrying value, less cost to sell, in accordance with the guidance. Any such adjustment in the carrying value of a property classified as held for sale is reflected as an impairment charge.
We assess the carrying values of each property whenever events or changes in circumstances indicate that the carrying amounts of these properties may not be fully recoverable. Recoverability of the property is measured by comparison of the carrying amount of the property to the estimated future undiscounted cash flows which take into account current market conditions and our intent with respect to holding or disposing of the property. If our analysis indicates that the carrying value of the property is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the property. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.
The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and our plans to manage the underlying properties. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and our ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the properties.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which significantly changed the requirements for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on operations and final results should be presented as discontinued operations. The guidance also provides additional disclosure requirements in connection with both discontinued operations and other dispositions not qualifying as discontinued operations. The guidance applies to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We adopted the new guidance for the quarterly period ended March 31, 2014. Prior to January 1, 2014, properties disposed of were presented in discontinued operations for all periods presented.
Results of Operations
At March 31, 2014, we owned 146 properties. Based on when a property is acquired, disposed or closed for renovation, operating results for certain properties are not comparable for the three months ended March 31, 2014 and 2013. The non-comparable properties include 17 acquisitions which took place between January 1, 2013 and March 31, 2014 and 13 disposals which took place in 2014. The 17 acquisitions include three properties that are closed for renovation. There were three hotels disposed of during 2013 which are included in discontinued operations for the three months ended March 31, 2013, and therefore not included in the comparisons presented.
Comparison of the three months ended March 31, 2014 to the three months ended March 31, 2013
|
| | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | |
| 2014 | | 2013 | | $ change | | % change |
| (amounts in thousands) | | |
|
Revenue | |
| | |
| | |
| | |
|
Operating revenue | |
| | |
| | |
| | |
|
Room revenue | $ | 206,025 |
| | $ | 185,448 |
| | $ | 20,577 |
| | 11.1 | % |
Food and beverage revenue | 23,367 |
| | 23,212 |
| | 155 |
| | 0.7 | % |
Other operating department revenue | 6,981 |
| | 6,210 |
| | 771 |
| | 12.4 | % |
Total revenue | 236,373 |
| | 214,870 |
| | 21,503 |
| | 10.0 | % |
Expense | |
| | |
| | |
| | |
|
Operating expense | |
| | |
| | |
| | |
|
Room | 47,521 |
| | 43,097 |
| | 4,424 |
| | 10.3 | % |
Food and beverage | 16,873 |
| | 16,557 |
| | 316 |
| | 1.9 | % |
Management fees | 9,113 |
| | 7,381 |
| | 1,732 |
| | 23.5 | % |
Other operating expenses | 72,076 |
| | 66,366 |
| | 5,710 |
| | 8.6 | % |
Total property operating expense | 145,583 |
| | 133,401 |
| | 12,182 |
| | 9.1 | % |
Depreciation and amortization | 32,876 |
| | 31,344 |
| | 1,532 |
| | 4.9 | % |
Property tax, insurance and other | 17,252 |
| | 14,710 |
| | 2,542 |
| | 17.3 | % |
General and administrative | 10,129 |
| | 8,798 |
| | 1,331 |
| | 15.1 | % |
Transaction and pursuit costs | 1,484 |
| | 1,089 |
| | 395 |
| | 36.3 | % |
Total operating expense | 207,324 |
| | 189,342 |
| | 17,982 |
| | 9.5 | % |
Operating income | 29,049 |
| | 25,528 |
| | 3,521 |
| | 13.8 | % |
Other income | 110 |
| | 79 |
| | 31 |
| | 39.2 | % |
Interest income | 323 |
| | 296 |
| | 27 |
| | 9.1 | % |
Interest expense | (14,646 | ) | | (16,874 | ) | | 2,228 |
| | (13.2 | )% |
Income from continuing operations before income taxes | 14,836 |
| | 9,029 |
| | 5,807 |
| | 64.3 | % |
Income tax expense | (294 | ) | | (226 | ) | | (68 | ) | | 30.1 | % |
Income from continuing operations | 14,542 |
| | 8,803 |
| | 5,739 |
| | 65.2 | % |
Loss from discontinued operations | — |
| | (219 | ) | | 219 |
| | — | % |
Loss on disposal of hotel properties | (2,557 | ) | | — |
| | (2,557 | ) | | — | % |
Net income | 11,985 |
| | 8,584 |
| | 3,401 |
| | 39.6 | % |
Net (income) loss attributable to non-controlling interests | |
| | |
| | |
| | |
Noncontrolling interest in joint venture | 34 |
| | 48 |
| | (14 | ) | | (29.2 | )% |
Noncontrolling interest in common units of Operating Partnership | (87 | ) | | (139 | ) | | 52 |
| | (37.4 | )% |
Net income attributable to common shareholders | $ | 11,932 |
| | $ | 8,493 |
| | $ | 3,439 |
| | 40.5 | % |
Revenue
Total revenue increased $21.5 million, or 10.0%, to $236.4 million for the three months ended March 31, 2014 from $214.9 million for the three months ended March 31, 2013. The increase was a result of $11.1 million in revenue attributable to non-comparable properties and a 6.1% increase in RevPAR at the comparable properties.
The following are the year-to-date key hotel operating statistics for hotels owned at March 31, 2014 and 2013, respectively:
|
| | | | | | | | | | |
| For the three months ended March 31, | | |
| 2014 | | 2013 | | % Change |
Number of comparable properties (at end of period) | 129 |
| | 129 |
| |
|
|
Occupancy % | 73.5 | % | | 71.2 | % | | 3.2 | % |
ADR | $ | 142.09 |
| | $ | 138.26 |
| | 2.8 | % |
RevPAR | $ | 104.46 |
| | $ | 98.47 |
| | 6.1 | % |
Room Revenue
Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales. Room revenue increased $20.6 million, or 11.1%, to $206.0 million for the three months ended March 31, 2014 from $185.4 million for the three months ended March 31, 2013. This increase was a result of $10.1 million of room revenue from non-comparable properties and a 6.1% increase in RevPAR at the comparable properties.
Food and Beverage Revenue
Food and beverage revenue increased $0.2 million, or 0.7%, to $23.4 million for the three months ended March 31, 2014 from $23.2 million for the three months ended March 31, 2013.
Other Operating Department Revenue
Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $0.8 million, or 12.4%, to $7.0 million for the three months ended March 31, 2014 from $6.2 million for the three months ended March 31, 2013. The majority of this increase was due to $0.8 million of other operating department revenue from non-comparable properties.
Property Operating Expense
Property operating expense increased $12.2 million, or 9.1%, to $145.6 million for the three months ended March 31, 2014 from $133.4 million for the three months ended March 31, 2013. This increase includes $5.9 million in property operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees at the comparable properties. Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs. Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.
Depreciation and Amortization
Depreciation and amortization expense increased $1.5 million, or 4.9%, to $32.9 million for the three months ended March 31, 2014 from $31.3 million for the three months ended March 31, 2013. The increase is a result of a $1.8 million increase in depreciation and amortization expense arising from non-comparable properties, partially offset by FF&E at hotel properties being fully depreciated during the periods.
Property Tax, Insurance and Other
Property tax, insurance and other expense increased $2.5 million, or 17.3%, to $17.3 million for the three months ended March 31, 2014 from $14.7 million for the three months ended March 31, 2013. The increase includes $1.4 million in property tax, insurance and other expense attributable to non-comparable properties. The remaining increase of $1.1 million represents the net impact of increasing property tax assessments, partially offset by favorable resolution of property tax appeals at the comparable properties.
General and Administrative
General and administrative expense increased $1.3 million, or 15.1%, to $10.1 million for the three months ended March 31, 2014 from $8.8 million for the three months ended March 31, 2013. The increase in general and administrative expense is primarily attributable to an increase in salary expense of $0.5 million and amortization of restricted share awards of $0.6 million.
Interest Expense
The components of our interest expense for the three months ended March 31, 2014 and 2013 were as follows (in thousands):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Mortgage indebtedness | $ | 5,803 |
| | $ | 13,545 |
|
Revolving credit facility and term loans | 6,852 |
| | 2,540 |
|
Loss on defeasance | 804 |
| | — |
|
Amortization of deferred financing fees | 1,187 |
| | 789 |
|
Total interest expense | $ | 14,646 |
| | $ | 16,874 |
|
Interest expense decreased $2.2 million, or 13.2%, to $14.6 million for the three months ended March 31, 2014 from $16.9 million for the three months ended March 31, 2013. The decrease in interest expense from mortgage indebtedness was due to decreases in principal balances as the result of mortgage amortization as well as $600.6 million of mortgage principal balances that were paid down. The increase in interest expense from the revolving credit facility and term loans was due to increased borrowings on the revolving credit facility, the 2012 Five-Year Term Loan and the 2013 Five-Year Term Loan. The loss on defeasance related to the disposal of certain properties. The increase in amortization of deferred financing fees was related to the accelerated amortization of deferred financing costs.
Income Taxes
As part of our structure, we own taxable REIT subsidiaries ("TRSs") that are subject to federal and state income taxes. The effective tax rates were 16.20% and 2.56% for the three months ended March 31, 2014 and 2013, respectively. Our tax expense increased $0.1 million to $0.3 million for the three months ended March 31, 2014 from $0.2 million for the three months ended March 31, 2013. The increase in both tax expense and rate is primarily due to an increase in income recorded at our TRSs.
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, and (4) 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 and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA 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 (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs. We present FFO attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares. We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units.
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction and pursuit costs, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of business. 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 is a reconciliation of our GAAP net income to FFO and Adjusted FFO for the three months ended March 31, 2014 and 2013 (in thousands):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Net income | $ | 11,985 |
| | $ | 8,584 |
|
Depreciation and amortization | 32,876 |
| | 31,344 |
|
Loss on disposal of hotel properties | 2,557 |
| | — |
|
Noncontrolling interest in joint venture | 34 |
| | 48 |
|
Adjustments related to discontinued operations (1) | — |
| | 91 |
|
Adjustments related to joint venture (2) | (46 | ) | | (121 | ) |
FFO attributable to common shareholders | 47,406 |
| | 39,946 |
|
Transaction and pursuit costs | 1,484 |
| | 1,089 |
|
Amortization of share based compensation | 3,573 |
| | 3,014 |
|
Loan related costs (3) | 1,073 |
| | — |
|
Other expenses (4) | — |
| | 13 |
|
Adjusted FFO | $ | 53,536 |
| | $ | 44,062 |
|
| |
(1) | Includes depreciation and amortization expense from discontinued operations. |
| |
(2) | Includes depreciation and amortization expense allocated to the noncontrolling interest in joint venture. |
| |
(3) | Represents loss on defeasance and accelerated amortization of deferred financing fees. |
| |
(4) | Represents legal expenses outside the normal course of operations. |
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. We present EBITDA 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 EBITDA attributable to all common shares and OP units.
We further adjust EBITDA for certain additional items such as gains or losses on disposals, hotel transaction and pursuit costs, impairment, the amortization of share-based compensation and certain other expenses that we consider outside the normal course of business. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDA, is beneficial to an investor’s understanding of our operating performance.
The following is a reconciliation of our GAAP net income to EBITDA and Adjusted EBITDA for the three months ended March 31, 2014 and 2013 (in thousands):
|
| | | | | | | |
| For the three months ended March 31, |
| 2014 | | 2013 |
Net income | $ | 11,985 |
| | $ | 8,584 |
|
Depreciation and amortization | 32,876 |
| | 31,344 |
|
Interest expense, net (1) | 14,638 |
| | 16,866 |
|
Income tax expense | 294 |
| | 226 |
|
Noncontrolling interest in joint venture | 34 |
| | 48 |
|
Adjustments related to discontinued operations (2) | — |
| | 252 |
|
Adjustments related to joint venture (3) | (46 | ) | | (121 | ) |
EBITDA | 59,781 |
| | 57,199 |
|
Transaction and pursuit costs | 1,484 |
| | 1,089 |
|
Loss on disposal of hotel properties | 2,557 |
| | — |
|
Amortization of share based compensation | 3,573 |
| | 3,014 |
|
Other expenses (4) | — |
| | 13 |
|
Adjusted EBITDA | $ | 67,395 |
| | $ | 61,315 |
|
| |
(1) | Interest expense is net of interest income, excluding amounts attributable to investment in loans for both the three months ended March 31, 2014 and 2013 of $0.3 million. |
| |
(2) | Includes depreciation, amortization and interest expense from discontinued operations. |
| |
(3) | Includes depreciation, amortization and interest expense allocated to the noncontrolling interest in joint venture. |
| |
(4) | Represents legal expenses outside the normal course of operations. |
Liquidity and Capital Resources
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:
| |
• | recurring maintenance and capital expenditures necessary to maintain our 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 |
| |
• | capital expenditures to improve our properties, including capital expenditures required by our franchisors in connection with our formation transactions and recent property acquisitions. |
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our unsecured revolving credit facility.
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our 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 unsecured revolving credit facility and future equity (including
OP units) or debt offerings, existing working capital, net cash provided by operations, long-term hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current state of overall equity and credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.
Our properties will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of properties will require significant capital outlays. We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gain. As a result, our ability to fund capital expenditures, acquisitions or property redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.
Credit Facilities
We entered into a credit agreement on November 20, 2012 that provides for i) an unsecured revolving credit facility of up to $300.0 million with a scheduled maturity date of November 20, 2016 with a one-year extension option (the "Revolver"), and ii) an unsecured term loan of $275.0 million with a scheduled maturity date of November 20, 2017 (the "2012 Five-Year Term Loan"). The credit agreement amended and restated in its entirety our prior unsecured revolving credit facility, which was originally entered into as of June 20, 2011. In addition, on November 20, 2012 we also entered into an unsecured term loan of $125.0 million with a scheduled maturity date of November 20, 2019 (the "Seven-Year Term Loan"). On August 27, 2013, the Company amended the Seven-Year Term Loan to increase the borrowings on the Seven-Year Term Loan to $225.0 million.
We also entered into an unsecured $350.0 million term loan on August 27, 2013 with a scheduled maturity date of August 27, 2018 (the "2013 Five-Year Term Loan", and collectively with the 2012 Five-Year Term Loan and the Seven-Year Term Loan, the "Term Loans").
On March 20, 2014, we amended the credit agreement to, among other things, i) extend the maturity date of the 2012 Five-Year Term Loan from November 20, 2017 to March 20, 2019, ii) expand the accordion feature of the 2012 Five-Year Term Loan and iii) reduce the applicable margin of the 2012 Five-Year Term Loan by 0.15%. Additionally, we exercised the accordion feature of the 2012 Five-Year Term Loan and increased the borrowings to $400.0 million. On March 20, 2014, we also exercised the accordion feature of the 2013 Five-Year Term Loan and increased the borrowings to $400.0 million.
The Revolver and Term Loans are subject to customary financial covenants. As of March 31, 2014, we were in compliance with all financial covenants.
As of and for the three months ended March 31, 2014, details of the Revolver and Term Loans are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | | | | | | Interest expense for the |
| Outstanding borrowings at March 31, 2014 | | Maturity Date | | Interest Rate at March 31, 2014 (1) | | three months ended March 31, 2014 | | three months ended March 31, 2013 |
Revolver (2) | $ | — |
| | 11/2016 | | n/a | | $ | 323 |
| | 356 |
|
2012 Five-Year Term Loan | 400,000 |
| | 03/2019 | | 1.70% | | 1,423 |
| | 1,415 |
|
Seven-Year Term Loan (3) | 225,000 |
| | 11/2019 | | 4.04% | | 2,255 |
| | 769 |
|
2013 Five-Year Term Loan (4) | 400,000 |
| | 08/2018 | | 3.07% | | 2,851 |
| | — |
|
Total | $ | 1,025,000 |
| | | | | | $ | 6,852 |
| | $ | 2,540 |
|
| |
(1) | Interest rate at March 31, 2014 gives effect to interest rate hedges and LIBOR floors, as applicable. |
| |
(2) | Includes the unused facility fee of $0.2 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. |
| |
(3) | Includes interest expense related to an interest rate hedge of $1.0 million for the three months ended March 31, 2014. |
| |
(4) | Includes interest expense related to an interest rate hedge of $1.2 million for the three months ended March 31, 2014. |
Sources and Uses of Cash
As of March 31, 2014, we had $270.8 million of cash and cash equivalents compared to $332.2 million at December 31, 2013.
Cash flows from Operating Activities
Net cash flow provided by operating activities totaled $31.6 million for the three months ended March 31, 2014. Net income of $12.0 million included significant non-cash expenses, including $32.9 million of depreciation and amortization, $1.2 million of amortization of deferred financing costs, $0.2 million of amortization of deferred management fees, $3.6 million of amortization of share based compensation, $0.8 million of loss on defeasance and a $2.6 million loss on disposal of hotel properties. These amounts were partially offset by $0.1 million of accretion of interest income on investment in loans and $0.2 million of deferred income taxes. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our properties resulted in net cash outflow of $21.5 million.
Net cash flow provided by operating activities totaled $34.0 million for the three months ended March 31, 2013. Net income of $8.6 million was partially offset by significant non-cash expenses, including $31.4 million of depreciation and amortization, $0.8 million of amortization of deferred financing costs, $0.3 million of amortization of deferred management fees and $3.0 million of amortization of share based compensation. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our hotels resulted in net cash outflow of $10.1 million.
Cash flows from Investing Activities
Net cash flow used in investing activities totaled $210.6 million for the three months ended March 31, 2014 primarily due to $312.0 million used for the purchase of ten properties, $14.9 million in routine capital improvements and additions to hotels and other properties. This was partially offset by $111.1 million of proceeds from the sale of 13 properties and the net releases from restricted cash reserves of $5.2 million.
Net cash flow used in investing activities totaled $88.2 million for the three months ended March 31, 2013 primarily due to $79.5 million used for the purchase of three hotels, $11.3 million for a major redevelopment project, $0.1 million in routine capital improvements and additions to hotels and other properties, partially offset by the application of a $2.0 million purchase deposit and the net release from restricted cash reserves of $0.8 million.
Cash flows from Financing Activities
Net cash flow provided by financing activities totaled $117.5 million for the three months ended March 31, 2014 primarily due to $175.0 million in borrowings on the Term Loans and $170.0 million in borrowings on the Revolver. This was offset by $170.0 million of repayments on the Revolver, $24.0 million in payments of mortgage principal, $1.1 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan, $1.6 million paid for deferred financing fees, $1.2 million distribution related to the joint venture noncontrolling interest and $29.6 million of distributions on common shares and OP units.
Net cash flow provided by financing activities totaled $285.3 million for the three months ended March 31, 2013 primarily due to $327.7 million provided from the issuance and sale of common shares and $83.0 million of borrowings under the prior credit facility. This was partially offset by $99.0 million of repayments on the Revolver, $3.6 million of mortgage loan repayments, $0.7 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan, $22.0 million of distributions on common shares and OP units and $0.1 million paid for deferred financing fees.
Capital Expenditures and Reserve Funds
We maintain each of our properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of all such routine improvements and alterations are paid out of FF&E reserves, which are funded by a portion of each property’s gross revenues. Routine capital expenditures are administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our properties.
From time to time, certain of our hotels may be undergoing 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 in our markets. In addition, upon acquisition of a hotel we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or adequate 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 2.0% and 5.0% of the respective hotel’s total gross revenue. As of March 31, 2014, approximately $53.5 million was held in FF&E reserve accounts for future capital expenditures.
Off-Balance Sheet Arrangements
As of March 31, 2014, we had no off-balance sheet arrangements.
Inflation
We rely entirely on the performance of the properties and their ability to increase revenues to keep pace with inflation. Increases in the costs of operating our hotels due to inflation would adversely affect the operating performance of our TRSs, which in turn, could inhibit the ability of our TRSs to make required rent payments to us. Hotel management companies, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.
Seasonality
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Demand is generally lower in the winter months for hotels located in non-resort markets due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Market risk includes 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 March 31, 2014, we had approximately $1.4 billion of total variable debt outstanding (or 89.1% of total indebtedness) with a weighted-average interest rate of 2.99% per annum. If market rates of interest on our variable rate debt outstanding as of March 31, 2014 were to increase by 1.00%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $5.9 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 or caps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of March 31, 2014, the following table presents principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | Thereafter | | Total |
Fixed rate debt | $ | — |
| | $ | 170,470 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 170,470 |
|
Weighted-average interest rate | — |
| | 5.55 | % | | — |
| | — |
| | — |
| | — |
| | 5.55 | % |
Variable rate debt | $ | 142,000 |
| | $ | — |
| | $ | 224,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | 625,000 |
| | $ | 1,391,000 |
|
Weighted-average interest rate (1) | 3.75 | % | | — |
| | 3.63 | % | | — |
| | 3.07 | % | | 2.54 | % | | 2.99 | % |
Total | $ | 142,000 |
| | $ | 170,470 |
| | $ | 224,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | 625,000 |
| | $ | 1,561,470 |
|
| |
(1) | The weighted-average interest rate gives effect to interest rate hedges and LIBOR floors, as applicable. |
The foregoing table reflects indebtedness outstanding as of March 31, 2014 and does not consider indebtedness, if any, incurred or repaid after that date. 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 the debt, but such changes have no impact on our consolidated financial statements. As of March 31, 2014, the estimated fair value of our fixed rate debt was $175.5 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 $1.7 million.
Item 4. Controls and Procedures.
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, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of 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 March 31, 2014.
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 March 31, 2014 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 the hotels exposes our hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. Neither the Company nor any of its subsidiaries are currently involved in any legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.
Item 1A. Risk Factors.
For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in the Annual Report which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
The Company did not sell any securities during the quarter ended March 31, 2014 that were not registered under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
During the three months ended March 31, 2014, certain of our employees surrendered common shares owned by them to satisfy their statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan.
The following table summarizes all of these repurchases during the three months ended March 31, 2014:
|
| | | | | | | | | | | | | | |
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 |
January 1, 2014 through January 31, 2014 | | — |
| | | | — |
| | N/A |
| | N/A |
February 1, 2014 through February 28, 2014 | | 33,137 |
| | (1) | | $ | 25.44 |
| | — |
| | N/A |
March 1, 2014 through March 31, 2014 | | 9,763 |
| | (1) | | $ | 26.02 |
| | — |
| | N/A |
Total | | 42,900 |
| | | | |
| | |
| | |
| |
(1) | The number of shares purchased represents common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares issued under our 2011 Plan. With respect to these common shares, the price paid per common share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal income tax. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other information.
None.
Item 6. Exhibits.
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index on page 38 of this report, which is incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| RLJ LODGING TRUST |
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Dated: May 8, 2014 | /s/ THOMAS J. BALTIMORE, JR. |
| Thomas J. Baltimore, Jr. |
| President, Chief Executive Officer and Trustee |
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Dated: May 8, 2014 | /s/ LESLIE D. HALE |
| Leslie D. Hale |
| Executive Vice President, Chief Financial Officer and Treasurer |
| (Principal Financial Officer) |
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Dated: May 8, 2014 | /s/ CHRISTOPHER A. GORMSEN |
| Christopher A. Gormsen |
| Chief Accounting Officer |
| (Principal Accounting Officer) |
Exhibit Index
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Exhibit Number | | Description of Exhibit |
| | |
2.1 | | Real Estate Purchase and Sale Agreement, dated as of February 5, 2014, by and among the Sellers listed on Schedule I attached thereto and RLJ Lodging Acquisitions, LLC (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on February 10, 2014) |
3.1 | | Articles of Amendment and Restatement of Declaration of Trust of RLJ Lodging Trust (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registrant’s Registration Statement on Form S-11 (File. No. 333-172011) filed on May 5, 2011) |
3.2 | | Amended and Restated Bylaws of RLJ Lodging Trust (incorporated by reference to Exhibit 3.2 to Amendment No. 4 to the Registrant’s Registration Statement on Form S-11 (File. No. 333-172011) filed on May 5, 2011) |
10.1 | | First Amendment to Term Loan Agreement, dated as of March 20, 2014, by and among RLJ Lodging Trust, L.P., RLJ Lodging Trust, Wells Fargo Bank, National Association, as Administrative Agent, PNC Bank, National Association, as Syndication Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 20, 2014) |
10.2 | | Additional Term Loan Lender Supplement, dated as of March 20, 2014, by and among RLJ Lodging Trust, L.P., RLJ Lodging Trust, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 20, 2014) |
10.3 | | Additional Lender Supplement, dated as of March 20, 2014, by and among RLJ Lodging Trust, L.P., RLJ Lodging Trust, Wells Fargo Bank, National Association, as Administrative Agent, and the lenders party thereto (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 20, 2014) |
31.1* | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2* | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1* | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS | | XBRL Instance Document | | Submitted electronically with this report |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Submitted electronically with this report |
101.CAL | | XBRL Taxonomy Calculation Linkbase Document | | Submitted electronically with this report |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Submitted electronically with this report |
101.LAB | | XBRL Taxonomy Label Linkbase Document | | Submitted electronically with this report |
101.PRE | | XBRL Taxonomy Presentation Linkbase Document | | Submitted electronically with this report |
*Filed herewith
EXHIBIT 31.1 3.31.2014
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Thomas J. Baltimore, Jr., certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| RLJ LODGING TRUST |
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Dated: May 8, 2014 | /s/ THOMAS J. BALTIMORE, JR. |
| Thomas J. Baltimore, Jr. |
| President, Chief Executive Officer and Trustee |
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EXHIBIT 31.2 3.31.2014
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Leslie D. Hale, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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| RLJ LODGING TRUST |
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Dated: May 8, 2014 | /s/ LESLIE D. HALE |
| Leslie D. Hale |
| Executive Vice President, Chief Financial Officer and Treasurer |
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EXHIBIT 32.1 3.31.2014
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 period ended March 31, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Baltimore, Jr., President, Chief Executive Officer and Trustee of the Company, and I, Leslie D. Hale, Chief Financial Officer and Treasurer of the Company, certify, to our knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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| RLJ LODGING TRUST |
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Dated: May 8, 2014 | /s/ THOMAS J. BALTIMORE, JR. |
| Thomas J. Baltimore, Jr. |
| President, Chief Executive Officer and Trustee |
| |
| /s/ LESLIE D. HALE |
| Leslie D. Hale |
| Executive Vice President, Chief Financial Officer and Treasurer |
|