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EX-31.2 - EXHIBIT 31.2 - RLJ Lodging Trustexhibit3123312017.htm
EX-32.1 - EXHIBIT 32.1 - RLJ Lodging Trustexhibit3213312017.htm
EX-31.1 - EXHIBIT 31.1 - RLJ Lodging Trustexhibit3113312017.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2017

OR
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)

 
Maryland
 
27-4706509
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o (do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  ý No 




Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
As of May 1, 2017, 124,668,134 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii


PART I. FINANCIAL INFORMATION
 
Item 1.         Financial Statements.
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
March 31,
2017
 
December 31, 2016
 
(unaudited)
 
 
Assets
 

 
 

Investment in hotel properties, net
$
3,341,219

 
$
3,368,674

Cash and cash equivalents
451,010

 
456,672

Restricted cash reserves
61,538

 
67,206

Hotel and other receivables, net of allowance of $157 and $182, respectively
34,668

 
26,018

Deferred income tax asset
43,676

 
44,614

Prepaid expense and other assets
60,653

 
60,209

Total assets
$
3,992,764

 
$
4,023,393

Liabilities and Equity
 

 
 

Debt, net
$
1,582,432

 
$
1,582,715

Accounts payable and other liabilities
116,273

 
137,066

Deferred income tax liability
11,430

 
11,430

Advance deposits and deferred revenue
14,263

 
11,975

Accrued interest
3,697

 
3,444

Distributions payable
41,699

 
41,486

Total liabilities
1,769,794

 
1,788,116

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Equity
 
 
 

Shareholders’ equity:
 
 
 

Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

 

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 124,607,489 and 124,364,178 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
1,246

 
1,244

Additional paid-in capital
2,189,179

 
2,187,333

Accumulated other comprehensive income (loss)
646

 
(4,902
)
Retained earnings
18,711

 
38,249

Total shareholders’ equity
2,209,782

 
2,221,924

Noncontrolling interest:
 

 
 

Noncontrolling interest in consolidated joint venture
5,907

 
5,973

Noncontrolling interest in the Operating Partnership
7,281

 
7,380

Total noncontrolling interest
13,188

 
13,353

Total equity
2,222,970

 
2,235,277

Total liabilities and equity
$
3,992,764

 
$
4,023,393

 
The accompanying notes are an integral part of these consolidated financial statements.

1


RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
 
For the three months ended March 31,
 
2017
 
2016
Revenue
 
 
 
Operating revenue
 
 
 
Room revenue
$
224,965

 
$
239,512

Food and beverage revenue
26,691

 
26,555

Other operating department revenue
8,576

 
9,104

Total revenue
$
260,232

 
$
275,171

Expense
 
 
 
Operating expense
 
 
 
Room expense
$
51,922

 
$
55,028

Food and beverage expense
19,297

 
19,817

Management and franchise fee expense
26,913

 
28,501

Other operating expense
57,823

 
60,021

Total property operating expense
155,955

 
163,367

Depreciation and amortization
38,665

 
40,730

Property tax, insurance and other
19,158

 
20,155

General and administrative
9,123

 
9,649

Transaction and pursuit costs
625

 
79

Total operating expense
223,526

 
233,980

Operating income
36,706

 
41,191

Other income
140

 
302

Interest income
485

 
397

Interest expense
(14,328
)
 
(14,892
)
Income before income tax expense
23,003

 
26,998

Income tax expense
(1,166
)
 
(1,476
)
Income from operations
21,837

 
25,522

Loss on sale of hotel properties
(60
)
 
(172
)
Net income
21,777

 
25,350

Net loss (income) attributable to noncontrolling interests
 
 
 
Noncontrolling interest in consolidated joint venture
66

 
62

Noncontrolling interest in the Operating Partnership
(85
)
 
(114
)
Net income attributable to common shareholders
$
21,758

 
$
25,298

 
 
 
 
Basic per common share data:
 
 
 
Net income per share attributable to common shareholders
$
0.17

 
$
0.20

Weighted-average number of common shares
123,734,173

 
123,739,823

 
 
 
 

2


Diluted per common share data:
 
 
 
Net income per share attributable to common shareholders
$
0.17

 
$
0.20

Weighted-average number of common shares
123,841,400

 
124,141,824

 
 
 
 
Amounts attributable to the Company’s common shareholders:
 
 
 
Income from operations
$
21,818

 
$
25,470

Loss on sale of hotel properties
(60
)
 
(172
)
Net income attributable to common shareholders
$
21,758

 
$
25,298

 
 
 
 
Comprehensive income:
 
 
 
Net income
$
21,777

 
$
25,350

Unrealized gain (loss) on interest rate derivatives
5,548

 
(20,248
)
Comprehensive income
27,325

 
5,102

Comprehensive loss attributable to the noncontrolling interest in consolidated joint venture
66

 
62

Comprehensive income attributable to the noncontrolling interest in the Operating Partnership
(85
)
 
(114
)
Comprehensive income attributable to the Company
$
27,306

 
$
5,050

 

The accompanying notes are an integral part of these consolidated financial statements.

3


RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
 
 
Shareholders’ Equity
 
Noncontrolling Interest
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive
Income (Loss)
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interest
 
Total Equity
Balance at December 31, 2016
124,364,178

 
$
1,244

 
$
2,187,333

 
$
38,249

 
$
(4,902
)
 
$
7,380

 
$
5,973

 
$
13,353

 
$
2,235,277

Net income (loss)

 

 

 
21,758

 

 
85

 
(66
)
 
19

 
21,777

Unrealized gain on interest rate derivatives

 

 

 

 
5,548

 

 

 

 
5,548

Issuance of restricted stock
264,303

 
2

 
(2
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
2,334

 

 

 

 

 

 
2,334

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(20,861
)
 

 
(486
)
 

 

 

 

 

 
(486
)
Forfeiture of restricted stock
(131
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(41,296
)
 

 
(184
)
 

 
(184
)
 
(41,480
)
Balance at March 31, 2017
124,607,489

 
$
1,246

 
$
2,189,179

 
$
18,711

 
$
646

 
$
7,281

 
$
5,907

 
$
13,188

 
$
2,222,970

 

The accompanying notes are an integral part of these consolidated financial statements.


















4


RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)

 
Shareholders’ Equity
 
Noncontrolling Interest
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Retain Earnings (Distributions in excess of
net earnings)
 
Accumulated Other Comprehensive Loss
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interest
 
Total Equity
Balance at December 31, 2015
124,635,675

 
$
1,246

 
$
2,195,732

 
$
2,439

 
$
(16,602
)
 
$
11,532

 
$
6,177

 
$
17,709

 
$
2,200,524

Net income (loss)

 

 

 
25,298

 

 
114

 
(62
)
 
52

 
25,350

Unrealized loss on interest rate derivatives

 

 

 

 
(20,248
)
 

 

 

 
(20,248
)
Distributions to joint venture partner

 

 

 

 

 

 
(259
)
 
(259
)
 
(259
)
Redemption of Operating Partnership units
335,250

 
3

 
4,322

 

 

 
(4,325
)
 

 
(4,325
)
 

Issuance of restricted stock
378,567

 
4

 
(4
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
2,591

 

 

 

 

 

 
2,591

Share grants to trustees
1,447

 

 
33

 

 

 

 

 

 
33

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(32,398
)
 

 
(653
)
 

 

 

 

 

 
(653
)
Shares acquired as part of a share repurchase program
(510,498
)
 
(5
)
 
(11,284
)
 

 

 

 

 

 
(11,289
)
Forfeiture of restricted stock
(263
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(41,185
)
 

 
(182
)
 

 
(182
)
 
(41,367
)
Balance at March 31, 2016
124,807,780

 
$
1,248

 
$
2,190,737

 
$
(13,448
)
 
$
(36,850
)
 
$
7,139

 
$
5,856

 
$
12,995

 
$
2,154,682



The accompanying notes are an integral part of these consolidated financial statements.

5


RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
 
For the three months ended March 31,
 
2017
 
2016
Cash flows from operating activities
 

 
 

Net income
$
21,777

 
$
25,350

Adjustments to reconcile net income to cash flow provided by operating activities:
 

 
 

Loss on sale of hotel properties
60

 
172

Depreciation and amortization
38,665

 
40,730

Amortization of deferred financing costs
843

 
1,013

Amortization of deferred management fees
188

 
188

Accretion of interest income on investment in loan
(210
)
 
(127
)
Share grants to trustees

 
33

Amortization of share-based compensation
2,334

 
2,591

Deferred income taxes
938

 
1,131

Changes in assets and liabilities:
 
 
 

Hotel and other receivables, net
(8,650
)
 
(5,252
)
Prepaid expense and other assets
637

 
(4,874
)
Accounts payable and other liabilities
(9,202
)
 
(7,606
)
Advance deposits and deferred revenue
2,288

 
1,813

Accrued interest
253

 
(11
)
Net cash flow provided by operating activities
49,921

 
55,151

Cash flows from investing activities
 

 
 

Proceeds from the sale of hotel properties, net
(60
)
 
2,647

Improvements and additions to hotel properties
(18,533
)
 
(22,315
)
Additions to property and equipment
(3
)
 
(142
)
Decrease in restricted cash reserves, net
5,668

 
908

Net cash flow used in investing activities
(12,928
)
 
(18,902
)
Cash flows from financing activities
 

 
 

Borrowings under Revolver

 
30,000

Repayments under Revolver

 
(30,000
)
Proceeds from mortgage loans

 
11,000

Payments of mortgage loans principal
(902
)
 
(936
)
Repurchase of common shares under a share repurchase program

 
(11,289
)
Repurchase of common shares to satisfy employee withholding requirements
(486
)
 
(653
)
Distributions on common shares
(41,040
)
 
(41,130
)
Distributions on Operating Partnership units
(227
)
 
(288
)
Payments of deferred financing costs

 
(882
)
Distribution to joint venture partner

 
(259
)
Net cash flow used in financing activities
(42,655
)
 
(44,437
)
Net change in cash and cash equivalents
(5,662
)
 
(8,188
)
Cash and cash equivalents, beginning of period
456,672

 
134,192

Cash and cash equivalents, end of period
$
451,010

 
$
126,004

 
The accompanying notes are an integral part of these consolidated financial statements.

6


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 elected to be taxed as a REIT, for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2011.
 
Substantially all of the Company’s assets and liabilities are held by, and all of its operations are conducted through RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of March 31, 2017, there were 125,166,239 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.6% of the outstanding OP units.
 
As of March 31, 2017, the Company owned 122 hotel properties with approximately 20,100 rooms, located in 21 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel.  The Company, through wholly-owned subsidiaries, owned a 100% interest in all of its hotel properties, with the exception of the DoubleTree Metropolitan Hotel New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.3% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in the hotel operations related to this hotel. An independent operator manages the operations of each hotel property.
 
2.              Summary of Significant Accounting Policies
 
The Company's Annual Report on Form 10-K for the year ended December 31, 2016 contains a discussion of the significant accounting policies. Other than noted below, there have been no other significant changes to the Company's significant accounting policies since December 31, 2016.

Basis of Presentation and Principles of Consolidation
 
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. The unaudited financial statements include all adjustments that are necessary, in the opinion of management, to fairly state the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows.

The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K filed with the SEC on February 23, 2017.

The consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, and a joint venture in which the Company has a majority voting interest and control. For the controlled subsidiaries that are not wholly-owned, the third-party ownership interest represents a noncontrolling interest, which is presented separately in the consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation.
 
Reclassifications
 
Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, 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.

7


 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The new guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods, with early adoption permitted. The Company expects to adopt this new standard on January 1, 2018 using the modified retrospective transition method. Based on the Company's assessment, the adoption of this standard will not have a material impact on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new guidance will require lessees to recognize a right-of-use asset and a lease liability for most of their leases on the balance sheet, and an entity will need to classify its leases as either an operating or finance lease in order to determine the income statement presentation. Leases with a term of 12 months or less will be accounted for similar to the existing guidance today for operating leases. Lessors will classify their leases using an approach that is substantially equivalent to the existing guidance today for operating, direct financing, or sales-type leases. Lessors may only capitalize the incremental direct costs of leasing, so any indirect costs of leasing will be expensed as incurred. The new guidance requires an entity to separate the lease components from the non-lease components in a contract, with the lease components being accounted for in accordance with ASC 842 and the non-lease components being accounted for in accordance with other applicable accounting guidance. The guidance is effective for annual reporting periods beginning after December 15, 2018, and the interim periods within those annual periods, with early adoption permitted. The Company expects to adopt this new standard on January 1, 2019. The Company has not yet completed its analysis on this new standard, but it believes the application of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet for each of its ground leases and equipment leases, which represent the majority of the Company's current operating lease payments. The Company does not expect the adoption of this standard will materially affect its consolidated statements of operations.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. This new guidance is intended to reduce the diversity in practice in how certain transactions are classified in the statement of cash flows. In addition, in November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. This new guidance provides additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. Both of these ASUs will be effective for the annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period, and the guidance requires application using a retrospective transition method. The Company expects to adopt the new guidance on January 1, 2018. The adoption of ASU 2016-15 and ASU 2016-18 will modify the Company's current disclosures and reclassifications within the consolidated statement of cash flows, but they are not expected to have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions across all industries. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. The Company expects to adopt this new guidance on January 1, 2018. The Company is currently evaluating whether this ASU will have a material impact on the Company's consolidated financial statements.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The new guidance clarifies that ASC 610-20 applies to the derecognition of nonfinancial assets, including real estate, and in substance nonfinancial assets, which are defined as assets or a group of assets for which substantially all of the fair value consists of nonfinancial assets and the group or subsidiary is not a business. As a result of the new guidance, sales and partial sales of real estate assets will be accounted for similar to all other sales of nonfinancial and in substance nonfinancial assets. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods, with early adoption permitted. The Company expects to adopt this new

8


guidance on January 1, 2018. Based on the Company's assessment, the adoption of this guidance will not have a material impact on the Company's consolidated financial statements.

3.              Investment in Hotel Properties
 
Investment in hotel properties consisted of the following (in thousands):
 
March 31, 2017
 
December 31, 2016
Land and improvements
$
676,103

 
$
675,889

Buildings and improvements
3,055,137

 
3,050,043

Furniture, fixtures and equipment
596,907

 
595,816

Intangible assets
2,309

 
2,309

 
4,330,456

 
4,324,057

Accumulated depreciation and amortization
(989,237
)
 
(955,383
)
Investment in hotel properties, net
$
3,341,219

 
$
3,368,674

 
For the three months ended March 31, 2017 and 2016, the Company recognized depreciation and amortization expense related to its investment in hotel properties of approximately $38.6 million and $40.7 million, respectively.
 
Impairment
 
The Company determined that there was no impairment of any assets for either the three months ended March 31, 2017 or 2016.

4.            Sale of Hotel Properties
 
During the three months ended March 31, 2017, the Company did not sell any hotel properties.

During the three months ended March 31, 2016, the Company sold one hotel property for a sale price of approximately $2.9 million. In conjunction with this transaction, the Company recorded a $0.2 million loss on sale which is included in the accompanying consolidated statement of operations.

The following table discloses the hotel property that was sold during the three months ended March 31, 2016:

Property Name
 
Location
 
Sale Date
 
Rooms
Holiday Inn Express Merrillville
 
Merrillville, IN
 
February 22, 2016
 
62

 
 
 
 
Total
 
62


5.              Debt
 
Debt consisted of the following (in thousands):
 
March 31, 2017
 
December 31, 2016
Revolver and Term Loans, net
$
1,169,733

 
$
1,169,308

Mortgage loans, net
412,699

 
413,407

Debt, net
$
1,582,432

 
$
1,582,715


Revolver and Term Loans
 
The Company has the following unsecured credit agreements in place:

$400.0 million revolving credit facility with a scheduled maturity date of April 22, 2020 with a one-year extension option if certain conditions are satisfied (the "Revolver");
$400.0 million term loan with a scheduled maturity date of March 20, 2019 (the "$400 Million Term Loan Maturing 2019");

9


$225.0 million term loan with a scheduled maturity date of November 20, 2019 (the "$225 Million Term Loan Maturing 2019");
$400.0 million term loan with a scheduled maturity date of April 22, 2021 (the "$400 Million Term Loan Maturing 2021"); and
$150.0 million term loan with a scheduled maturity date of January 22, 2022 (the "$150 Million Term Loan Maturing 2022").

The $400 Million Term Loan Maturing 2019, the $225 Million Term Loan Maturing 2019, the $400 Million Term Loan Maturing 2021, and the $150 Million Term Loan Maturing 2022 are collectively the "Term Loans". The Revolver and Term Loans are subject to customary financial covenants. As of March 31, 2017 and December 31, 2016, the Company was in compliance with all financial covenants.
 
As of March 31, 2017 and December 31, 2016, the details of the unsecured credit agreements were as follows (in thousands):

 
 
 
 
 
 
Outstanding Borrowings at
 
 
Interest Rate at March 31, 2017 (1)
 
Maturity Date
 
March 31, 2017
 
December 31, 2016
Revolver (2)
 
2.48%
 
April 2020
 
$

 
$

$400 Million Term Loan Maturing 2019
 
2.72%
 
March 2019
 
400,000

 
400,000

$225 Million Term Loan Maturing 2019
 
4.04%
 
November 2019
 
225,000

 
225,000

$400 Million Term Loan Maturing 2021
 
2.97%
 
April 2021
 
400,000

 
400,000

$150 Million Term Loan Maturing 2022
 
3.43%
 
January 2022
 
150,000

 
150,000

 
 
 
 
 
 
1,175,000

 
1,175,000

Deferred financing costs, net (3)
 
 
 
 
 
(5,267
)
 
(5,692
)
Total Revolver and Term Loans, net
 
 
 
 
 
$
1,169,733

 
$
1,169,308

 
(1)
Interest rate at March 31, 2017 gives effect to interest rate hedges.
(2)
At March 31, 2017 and December 31, 2016, there was $400.0 million of borrowing capacity on the Revolver.
(3)
Excludes $2.1 million and $2.3 million as of March 31, 2017 and December 31, 2016, respectively, related to deferred financing costs on the Revolver, which are included in prepaid expense and other assets in the accompanying consolidated balance sheets.


10


Mortgage Loans
 
As of March 31, 2017 and December 31, 2016, the Company had the following mortgage loans (in thousands):

 
 
 
 
 
 
 
 
 
 
 
 
Principal balance at
Lender
 
Number of Assets Encumbered
 
Interest Rate at March 31, 2017 (1)
 
 
 
Maturity Date
 
 
 
March 31, 2017
 
December 31, 2016
Wells Fargo
 
4
 
4.02%
 
(2)
 
October 2017
 
(3)
 
$
150,000

 
$
150,000

Wells Fargo (4)
 
4
 
4.04%
 

 
March 2018
 
(3)
 
145,500

 
146,250

PNC Bank (5)
 
5
 
3.08%
 
(2)
 
March 2021
 
(6)
 
85,000

 
85,000

Wells Fargo (7)
 
1
 
5.25%
 
 
 
June 2022
 
 
 
33,467

 
33,666

 
 
14
 
 
 
 
 
 
 
 
 
413,967

 
414,916

Deferred financing costs, net
 
 
 
 
 
 
 
 
 
 
 
(1,268
)
 
(1,509
)
Total mortgage loans, net
 
 
 
 
 
 
 
 
 
 
 
$
412,699

 
$
413,407


(1)
Interest rate at March 31, 2017 gives effect to interest rate hedges.
(2)
Requires payments of interest only through maturity.
(3)
Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements.
(4)
Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized.
(5)
The five hotels encumbered by the PNC Bank loan are cross-collateralized.
(6)
Maturity date may be extended for two one-year terms at the Company’s option, subject to certain lender requirements.
(7)
Includes $1.0 million and $1.0 million at March 31, 2017 and December 31, 2016, respectively, related to a fair value adjustment on mortgage debt assumed in conjunction with an acquisition.
 
Certain mortgage agreements are subject to customary financial covenants. The Company was in compliance with all financial covenants at March 31, 2017 and December 31, 2016.

Interest Expense

For the three months ended March 31, 2017 and 2016, the components of interest expense were as follows (in thousands):

 
 
For the three months ended March 31,
 
 
2017
 
2016
Revolver and Term Loans
 
$
9,517

 
$
9,859

Mortgage loans
 
3,968

 
4,020

Amortization of deferred financing costs
 
843

 
1,013

Total interest expense
 
$
14,328

 
$
14,892

  

11


6.              Derivatives and Hedging
 
As of March 31, 2017 and December 31, 2016, the Company had entered into the following interest rate swaps (in thousands): 
 
 
 
 
 
 
Notional value at
 
Fair value at
Hedge type
 
Interest rate
 
Maturity
 
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Swap-cash flow
 
1.12%
 
November 2017
 
$
275,000

 
$
275,000

 
$
(30
)
 
$
(558
)
Swap-cash flow
 
1.56%
 
March 2018
 
175,000

 
175,000

 
(672
)
 
(1,251
)
Swap-cash flow
 
1.64%
 
March 2018
 
175,000

 
175,000

 
(802
)
 
(1,413
)
Swap-cash flow
 
1.83%
 
September 2018
 
16,005

 
16,088

 
(126
)
 
(193
)
Swap-cash flow
 
1.75%
 
September 2018
 
16,005

 
16,088

 
(108
)
 
(172
)
Swap-cash flow
 
1.83%
 
September 2018
 
39,285

 
39,488

 
(309
)
 
(474
)
Swap-cash flow
 
1.75%
 
September 2018
 
40,255

 
40,462

 
(271
)
 
(433
)
Swap-cash flow
 
1.83%
 
September 2018
 
17,460

 
17,550

 
(137
)
 
(211
)
Swap-cash flow
 
1.75%
 
September 2018
 
16,490

 
16,575

 
(111
)
 
(177
)
Swap-cash flow
 
2.02%
 
March 2019
 
125,000

 
125,000

 
(1,481
)
 
(2,090
)
Swap-cash flow
 
1.94%
 
March 2019
 
100,000

 
100,000

 
(1,036
)
 
(1,505
)
Swap-cash flow
 
1.27%
 
March 2019
 
125,000

 
125,000

 
432

 
54

Swap-cash flow (1)
 
1.96%
 
March 2019
 
100,000

 
100,000

 
(444
)
 
(516
)
Swap-cash flow (1)
 
1.85%
 
March 2019
 
50,000

 
50,000

 
(148
)
 
(184
)
Swap-cash flow (1)
 
1.81%
 
March 2019
 
50,000

 
50,000

 
(123
)
 
(159
)
Swap-cash flow (1)
 
1.74%
 
March 2019
 
25,000

 
25,000

 
(39
)
 
(57
)
Swap-cash flow (2)
 
1.80%
 
September 2020
 
33,000

 
33,000

 
124

 
111

Swap-cash flow (2)
 
1.80%
 
September 2020
 
82,000

 
82,000

 
309

 
277

Swap-cash flow (2)
 
1.80%
 
September 2020
 
35,000

 
35,000

 
132

 
118

Swap-cash flow
 
1.81%
 
October 2020
 
143,000

 
143,000

 
(461
)
 
(1,113
)
Swap-cash flow (3)
 
1.15%
 
April 2021
 
100,000

 
100,000

 
2,560

 
2,513

Swap-cash flow (3)
 
1.20%
 
April 2021
 
100,000

 
100,000

 
2,407

 
2,360

Swap-cash flow (3)
 
2.15%
 
April 2021
 
75,000

 
75,000

 
(372
)
 
(410
)
Swap-cash flow (3)
 
1.91%
 
April 2021
 
75,000

 

 
184

 

Swap-cash flow
 
1.61%
 
June 2021
 
50,000

 
50,000

 
418

 
224

Swap-cash flow
 
1.56%
 
June 2021
 
50,000

 
50,000

 
539

 
352

Swap-cash flow
 
1.71%
 
June 2021
 
50,000

 
50,000

 
211

 
5

 
 
 
 
 
 
$
2,138,500

 
$
2,064,251

 
$
646

 
$
(4,902
)
     
(1)
Effective between the maturity of the existing swap in November 2017 and the maturity of the debt in March 2019.
(2)
Effective between the maturity of the existing swaps in September 2018 and September 2020.
(3)
Effective between the maturity of the existing swaps in March 2018 and the maturity of the debt in April 2021.

 As of March 31, 2017 and December 31, 2016, the aggregate fair value of the interest rate swap assets of $7.3 million and $6.0 million, respectively, was included in prepaid expense and other assets in the accompanying consolidated balance sheets. As of March 31, 2017 and December 31, 2016, the aggregate fair value of the interest rate swap liabilities of $6.7 million and $10.9 million, respectively, was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.

As of March 31, 2017, there was approximately $0.6 million of unrealized gains included in accumulated other comprehensive income related to interest rate hedges that are effective in offsetting the variable cash flows. As of December 31, 2016, there was approximately $4.9 million of 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 the designated hedges during the three month periods ended March 31, 2017 and 2016. For the three months ended March

12


31, 2017 and 2016, approximately $2.8 million and $4.2 million, respectively, of amounts included in accumulated other comprehensive income (loss) were reclassified into interest expense. Approximately $6.2 million of the net unrealized losses included in accumulated other comprehensive income (loss) at March 31, 2017 is expected to be reclassified into interest expense within the next 12 months.
 
7.              Fair Value
 
Fair Value Measurement
 
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:
 
Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities.
 
Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

Level 3 — Inputs are unobservable and corroborated by little or no market data.
 
Fair Value of Financial Instruments
 
The Company used the following market assumptions and/or estimation methods:
 
Cash and cash equivalents, restricted cash reserves, hotel and other receivables, accounts payable and other liabilities — The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value because of their short term maturities.
 
Debt — The carrying amounts, net of deferred financing costs, reported in the consolidated balance sheets for these financial instruments approximate fair value because the interest rates are at, or approximate, market interest rates.  The Company determined that its debt is classified in Level 3 of the fair value hierarchy.
 
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, 2017 (in thousands):

 
Fair Value at March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap asset
$

 
$
7,316

 
$

 
$
7,316

Interest rate swap liability

 
(6,670
)
 

 
(6,670
)
Total
$

 
$
646

 
$

 
$
646

 
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 (in thousands):
 
Fair Value at December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap asset
$

 
$
6,014

 
$

 
$
6,014

Interest rate swap liability

 
(10,916
)
 

 
(10,916
)
Total
$

 
$
(4,902
)
 
$

 
$
(4,902
)

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including a discounted cash flow analysis on the expected cash flows for each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value

13


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, 2017, 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.

8.              Income Taxes
 
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, as amended, commencing with its 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 REIT taxable income, subject to certain adjustments and excluding any net capital gain, to shareholders.  The Company’s intention is to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.  As a REIT, the Company is generally not subject to federal corporate income tax on the portion of taxable income that is distributed to shareholders.  If the Company fails to qualify for taxation as a REIT in any taxable year, the Company will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and it may not be able to qualify as a REIT for four subsequent taxable years. As a REIT, the Company may be subject to certain state and local taxes on its income and property, and to federal income and excise taxes on undistributed taxable income. The Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes at the applicable rates.
 
The Company accounts for income taxes using the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards.  The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled.  The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
The Company had no accruals for tax uncertainties as of March 31, 2017 and December 31, 2016.
 
9.       Commitments and Contingencies
 
Restricted Cash Reserves
 
The Company is obligated to maintain cash reserve funds for future capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment ("FF&E")) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of March 31, 2017 and December 31, 2016, approximately $61.5 million and $67.2 million, respectively, was available in the restricted cash reserves for future capital expenditures, real estate taxes and insurance.
 
Litigation
 
Neither the Company nor any of its subsidiaries is currently involved in any regulatory or legal proceedings that management believes will have a material and adverse effect on the Company's financial position, results of operations or cash flows.


14


Management Agreements

As of March 31, 2017, 122 of the Company's hotel properties were operated pursuant to long-term management agreements with initial terms ranging from 3 to 25 years. This number includes four and ten hotels that receive the benefits of a franchise agreement pursuant to management agreements with Marriott and Hyatt, respectively. Each management company receives a base management fee generally between 3.0% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally equal to 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel. Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three months ended March 31, 2017 and 2016, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $10.4 million and $11.1 million, respectively.

Franchise Agreements
 
As of March 31, 2017, 108 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes four and ten hotels that receive the benefits of a franchise agreement pursuant to management agreements with Marriott and Hyatt, respectively. Franchise agreements allow the hotel properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs generally between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee generally between 1.5% and 3.0% of food and beverage revenues.  Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three months ended March 31, 2017 and 2016, the Company incurred franchise fee expense of approximately $16.5 million and $17.4 million, respectively.

10.       Equity
 
In 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $400.0 million of the Company's common shares through December 31, 2016. On February 17, 2017, the Company's board of trustees extended the duration of the share repurchase program to February 28, 2018 and increased the authorized amount that may be repurchased by $40.0 million to a total of $440.0 million. During the three months ended March 31, 2017, the Company did not repurchase and retire any of its common shares. As of March 31, 2017, the share repurchase program had a remaining capacity of $201.5 million. During the three months ended March 31, 2016, the Company repurchased and retired 510,498 of its common shares for approximately $11.3 million.

The Company consolidates the Operating Partnership, which is a majority-owned limited partnership that has a noncontrolling interest. The outstanding OP units held by the limited partners are redeemable for cash, or at the option of the Company, for a like number of common shares of beneficial interest of the Company. During the three months ended March 31, 2016, the Company issued 335,250 common shares of beneficial interest in exchange for redeemed units. After the redemption, 558,750 outstanding OP units are held by the limited partners. The noncontrolling interest is included in the noncontrolling interest in the Operating Partnership on the consolidated balance sheets.

11.       Equity Incentive Plan
 
The Company may issue share-based awards to officers, employees, non-employee trustees and other eligible persons under the RLJ Lodging Trust 2015 Equity Incentive Plan (the "2015 Plan"). The 2015 Plan provides for a maximum of 7,500,000 common shares 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 unvested restricted shares under the 2015 Plan as compensation to officers, employees and non-employee trustees. The issued shares vest over a period of time as determined by the board of trustees at the date of grant. The Company recognizes compensation expense for time-based unvested restricted shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.


15


Non-employee trustees may also elect to receive unrestricted shares under the 2015 Plan as compensation that would otherwise be paid in cash for their services. The shares issued to non-employee trustees in lieu of cash compensation are unrestricted and include no vesting conditions. The Company recognizes compensation expense for the unrestricted shares issued in lieu of cash compensation on the date of issuance based upon the fair market value of the shares on that date.
 
A summary of the unvested restricted shares as of March 31, 2017 is as follows:
 
2017
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1,
649,447

 
$
23.00

Granted
264,303

 
23.76

Vested
(59,404
)
 
23.61

Forfeited
(131
)
 
21.66

Unvested at March 31,
854,215

 
$
23.20

 
For the three months ended March 31, 2017 and 2016, the Company recognized approximately $2.0 million and $2.1 million, respectively, of share-based compensation expense related to restricted share awards. As of March 31, 2017, there was $17.8 million of total unrecognized compensation costs related to unvested restricted share awards and these costs are expected to be recognized over a weighted-average period of 2.8 years. The total fair value of the shares vested (calculated as the number of shares multiplied by the vesting date share price) during the three months ended March 31, 2017 and 2016 was approximately $1.4 million and $1.8 million, respectively.
 
Performance Units
 
In July 2012, the Company awarded performance units to certain employees.  The performance units vested over a four-year period, including three years of performance-based vesting (the "2012 performance units measurement period") plus an additional one year of time-based vesting. In July 2015, following the end of the 2012 performance units measurement period, the Company issued 838,934 restricted shares upon conversion of the performance units. Half of the restricted shares vested immediately and the remaining half vested in July 2016.

In May 2016, the Company awarded 280,000 performance units with a grant date fair value of $10.31 per unit to certain employees. The performance units vest over a four-year period, including three years of performance-based vesting plus an additional one year of time-based vesting.

In February 2017, the Company awarded 259,000 performance units with a grant date fair value of $14.93 per unit to certain employees. The performance units vest over a four-year period, including three years of performance-based vesting (the “2017 performance units measurement period”) plus an additional one year of time-based vesting. These performance units may convert into restricted shares at a range of 25% to 150% of the number of performance units granted contingent upon the Company achieving an absolute total shareholder return and a relative total shareholder return over the measurement period at specified percentiles of the peer group, as defined by the award. If at the end of the 2017 performance units measurement period the target criterion is met, then 50% of the restricted shares will vest immediately. The remaining 50% will vest one year later. The award recipients will not be entitled to receive any dividends prior to the date of conversion. For any restricted shares issued upon conversion, the award recipient will be entitled to receive payment of an amount equal to all dividends that would have been paid if such restricted shares had been issued at the beginning of the 2017 performance units measurement period. The fair value of the performance units is determined using a Monte Carlo simulation with the following assumptions: a risk-free interest rate of 1.57%, volatility of 25.73%, and an expected term equal to the requisite service period for the awards. The Company estimated the compensation expense for the performance units on a straight line basis using a calculation that recognizes 50% of the grant date fair value over three years and 50% of the grant date fair value over four years.

For the three months ended March 31, 2017 and 2016, the Company recognized approximately $0.3 million and $0.5 million, respectively, of share-based compensation expense related to the performance unit awards. As of March 31, 2017, there was $5.9 million of total unrecognized compensation cost related to the performance unit awards and these costs are expected to be recognized over a weighted-average period of 3.1 years.
 
As of March 31, 2017, there were 3,610,370 common shares available for future grant under the 2015 Plan. 

16



12.       Earnings per Common Share
 
Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period excluding the weighted-average number of unvested restricted shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. The potential shares consist of the unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to the participating shares, they would be deducted from net income attributable to common shareholders used in the basic and diluted earnings per share calculations.
 
The limited partners’ outstanding 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, 2017 and 2016, 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,
 
2017
 
2016
Numerator:
 
 
 
Net income attributable to common shareholders
$
21,758

 
$
25,298

Less: Dividends paid on unvested restricted shares
(282
)
 
(413
)
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
21,476

 
$
24,885

 
 
 
 
Denominator:
 
 
 
Weighted-average number of common shares - basic
123,734,173

 
123,739,823

Unvested restricted shares
107,227

 
402,001

Weighted-average number of common shares - diluted
123,841,400

 
124,141,824

 
 
 
 
Net income per share attributable to common shareholders - basic
$
0.17

 
$
0.20

 
 
 
 
Net income per share attributable to common shareholders - diluted
$
0.17

 
$
0.20


17


13.       Supplemental Information to Statements of Cash Flows (in thousands)
 
 
For the three months ended March 31,
 
2017
 
2016
Interest paid
$
13,280

 
$
13,890

 
 
 
 
Income taxes paid
$
212

 
$
271

 
 
 
 
Supplemental investing and financing transactions
 
 
 
In conjunction with the sale of hotel properties, the Company recorded the following:
 
 
 
Sale of hotel properties
$

 
$
2,850

Transaction costs
(60
)
 
(104
)
Operating prorations

 
(99
)
Proceeds from the sale of hotel properties, net
$
(60
)
 
$
2,647

 
 
 
 
Supplemental non-cash transactions
 
 
 
Accrued capital expenditures
$

 
$
785

 
 
 
 
Redemption of Operating Partnership units
$

 
$
4,325

 
14.       Subsequent Events

On April 23, 2017, the Company and FelCor Lodging Trust Incorporated (“FelCor”) entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) under which FelCor will merge with and into an indirect subsidiary of the Company in a stock-for-stock merger transaction.  Under the terms of the Merger Agreement, each share of FelCor common stock will be converted into 0.362 common shares of the Company.  In addition, each share of FelCor’s Series A cumulative convertible preferred stock will be converted into a Series A cumulative convertible preferred share of the Company. A joint proxy statement/prospectus will be filed with the Securities and Exchange Commission and, following its effectiveness, will be mailed to the shareholders of both companies.  The transaction is expected to close by the end of 2017.  The transaction is subject to customary closing conditions, including the approval of certain aspects of the transaction by both the Company’s and FelCor’s shareholders. 

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, 2016, filed with the SEC on February 23, 2017 (the "Annual Report"), which is accessible on the SEC’s website at www.sec.gov.
 
Statement Regarding Forward-Looking Information
 
The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," or similar expressions.  Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent

18


financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates.  Given these uncertainties, undue reliance should not be placed on such statements.
 
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Forward-Looking Statements," "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as the risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.
 
Overview
 
We are a self-advised and self-administered Maryland real estate investment trust ("REIT") that 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. We believe premium-branded, focused-service and compact full-service hotels with these characteristics generate high levels of Revenue per Available Room ("RevPAR"), strong operating margins and attractive returns.
 
Our strategy is to acquire primarily premium-branded, focused-service and compact full-service hotels. Focused-service and compact full-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space, and require fewer employees than traditional full-service hotels. We believe these types of hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

As we look at factors that could impact our business, we find that the consumer is generally in good health, job creation remains positive and wages are increasing at a moderate pace. While geopolitical and global economic uncertainty still exists, we remain hopeful that positive employment trends and an improving consumer balance sheet will continue to drive economic expansion in the U.S.

We are cautiously optimistic that continued expansion of the U.S. economy will generate positive lodging demand growth for the industry and another year of RevPAR growth. However, in light of accelerating supply, RevPAR growth is likely to be moderate.

We continue to follow a prudent and disciplined capital allocation strategy. We will continue to look for and weigh all possible investment decisions against the highest and best returns for our shareholders over the long term. We believe that our cash on hand and expected access to capital (including availability under our Revolver) along with our senior management team's experience, extensive industry relationships and asset management expertise, will enable us to pursue investment opportunities that generate additional internal and external growth.

As of March 31, 2017, we owned 122 hotels with approximately 20,100 rooms, 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 hotel properties, with the exception of one hotel property in which we own a 98.3% controlling interest in a joint venture.

For U.S. federal income tax purposes, we elected to be taxed as a REIT commencing with our taxable year ended December 31, 2011. Substantially all of our assets and liabilities are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the "Operating Partnership"). We are the sole general partner of the Operating Partnership. As of March 31, 2017, we owned, through a combination of direct and indirect interests, 99.6% of the units of limited partnership interest in the Operating Partnership ("OP units").
 

19


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.

Our Revenues and Expenses
 
Our revenue is primarily derived from the operation of hotels, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists of parking fees, gift shop sales and other guest service fees.
 
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management and franchise fees and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other operating expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance and utility costs. Our hotels that are subject to franchise agreements are charged a royalty fee, plus additional fees for marketing, central reservation systems and other franchisor costs, in order for the properties to operate under the respective brands. Franchise fees are based on a percentage of room revenue and for certain hotels additional franchise fees are charged for food and beverage revenue. Our hotels are managed by independent, third-party management companies under long-term agreements pursuant to which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

Key Indicators of Financial Performance
 
We use a variety of operating, financial and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisition opportunities to determine each hotel's contribution to cash flow and its potential to provide attractive long-term total returns. The key indicators include:

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

We also use non-GAAP measures such as FFO, Adjusted FFO, EBITDA and Adjusted EBITDA to evaluate the operating performance of our business. For a more in depth discussion of the non-GAAP measures, please refer to the "Non-GAAP Financial Measures" section.


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Critical Accounting Policies
 
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. It is possible that the actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is available to us, our business and industry experience, and various other matters that we believe are reasonable and appropriate for consideration under the circumstances. Our Annual Report on Form 10-K for the year ended December 31, 2016 contains a discussion of our critical accounting policies. There have been no significant changes to our critical accounting policies since December 31, 2016.

Results of Operations
 
At March 31, 2017 and 2016, we owned 122 and 125 hotel properties, respectively.  Based on when a hotel property is acquired, sold or closed for renovation, the operating results for certain hotel properties are not comparable for the three months ended March 31, 2017 and 2016.  The non-comparable hotel properties include four dispositions that were completed between January 1, 2016 and March 31, 2017.


21


Comparison of the three months ended March 31, 2017 to the three months ended March 31, 2016
 
For the three months ended March 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(amounts in thousands)
 
 

Revenue
 

 
 

 
 

 
 

Operating revenue
 

 
 

 
 

 
 

Room revenue
$
224,965

 
$
239,512

 
$
(14,547
)
 
(6.1
)%
Food and beverage revenue
26,691

 
26,555

 
136

 
0.5
 %
Other operating department revenue
8,576

 
9,104

 
(528
)
 
(5.8
)%
Total revenue
$
260,232

 
$
275,171

 
$
(14,939
)
 
(5.4
)%
Expense
 

 
 

 
 

 
 

Operating expense
 

 
 

 
 

 
 

Room expense
$
51,922

 
$
55,028

 
$
(3,106
)
 
(5.6
)%
Food and beverage expense
19,297

 
19,817

 
(520
)
 
(2.6
)%
Management and franchise fee expense
26,913

 
28,501

 
(1,588
)
 
(5.6
)%
Other operating expense
57,823

 
60,021

 
(2,198
)
 
(3.7
)%
Total property operating expense
155,955

 
163,367

 
(7,412
)
 
(4.5
)%
Depreciation and amortization
38,665

 
40,730

 
(2,065
)
 
(5.1
)%
Property tax, insurance and other
19,158

 
20,155

 
(997
)
 
(4.9
)%
General and administrative
9,123

 
9,649

 
(526
)
 
(5.5
)%
Transaction and pursuit costs
625

 
79

 
546

 
 %
Total operating expense
223,526

 
233,980

 
(10,454
)
 
(4.5
)%
Operating income
36,706

 
41,191

 
(4,485
)
 
(10.9
)%
Other income
140

 
302

 
(162
)
 
(53.6
)%
Interest income
485

 
397

 
88

 
22.2
 %
Interest expense
(14,328
)
 
(14,892
)
 
564

 
(3.8
)%
Income before income tax expense
23,003

 
26,998

 
(3,995
)
 
(14.8
)%
Income tax expense
(1,166
)
 
(1,476
)
 
310

 
(21.0
)
Income from operations
21,837

 
25,522

 
(3,685
)
 
(14.4
)%
Loss on sale of hotel properties
(60
)
 
(172
)
 
112

 
(65.1
)%
Net income
21,777

 
25,350

 
(3,573
)
 
(14.1
)%
Net loss (income) attributable to noncontrolling interests
 

 
 

 
 

 
 
Noncontrolling interest in consolidated joint venture
66

 
62

 
4

 
6.5
 %
Noncontrolling interest in the Operating Partnership
(85
)
 
(114
)
 
29

 
(25.4
)%
Net income attributable to common shareholders
$
21,758

 
$
25,298

 
$
(3,540
)
 
(14.0
)%
 

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Revenue
 
Total revenue decreased $14.9 million, or 5.4%, to $260.2 million for the three months ended March 31, 2017 from $275.2 million for the three months ended March 31, 2016. The decrease was a result of a $14.5 million decrease in room revenue and a $0.5 million decrease in other operating department revenue, partially offset by a $0.1 million increase in food and beverage revenue.

Room Revenue
 
Room revenue decreased $14.5 million, or 6.1%, to $225.0 million for the three months ended March 31, 2017 from $239.5 million for the three months ended March 31, 2016.  The decrease was a result of a $10.6 million decrease in room revenue attributable to the non-comparable properties and a $3.9 million decrease in room revenue attributable to the comparable properties. The decrease in room revenue from the comparable properties was attributable to a 0.6% decrease in RevPAR, led by RevPAR decreases in our Louisville and Northern California markets of 19.8% and 8.9%, respectively, which were partially offset by RevPAR increases in our Washington, D.C. and Southern California markets of 14.3% and 7.4%, respectively.

The following are the year-to-date key hotel operating statistics for the comparable properties owned at March 31, 2017 and 2016, respectively:
 
For the three months ended March 31,
 
 
 
2017
 
2016
 
% Change
Number of comparable properties (at end of period)
122

 
122

 

Occupancy
74.4
%
 
75.0
%
 
(0.8
)%
ADR
$
166.82

 
$
166.60

 
0.1
 %
RevPAR
$
124.12

 
$
124.91

 
(0.6
)%
 
Food and Beverage Revenue
 
Food and beverage revenue increased $0.1 million, or 0.5%, to $26.7 million for the three months ended March 31, 2017 from $26.6 million for the three months ended March 31, 2016. The increase was a result of a $0.2 million increase in food and beverage revenue attributable to the comparable properties, partially offset by a $0.1 million decrease in food and beverage revenue attributable to the non-comparable properties.
 
Other Operating Department Revenue
 
Other operating department revenue, which includes revenue derived from ancillary sources such as parking fees, gift shop sales and other guest service fees, decreased $0.5 million, or 5.8%, to $8.6 million for the three months ended March 31, 2017 from $9.1 million for the three months ended March 31, 2016.  The decrease was due to a $0.3 million decrease in other operating department revenue attributable to the comparable properties and a $0.2 million decrease in other operating department revenue attributable to the non-comparable properties.

Property Operating Expense
 
Property operating expense decreased $7.4 million, or 4.5%, to $156.0 million for the three months ended March 31, 2017 from $163.4 million for the three months ended March 31, 2016. The decrease was due to a $7.7 million decrease in property operating expense attributable to the non-comparable properties, partially offset by a $0.3 million increase in property operating expense attributable to the comparable properties. The increase in property operating expense attributable to the comparable properties was a result of higher room expense and other operating department costs, partially offset by lower food and beverage expense and management and franchise fees.  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, decreased as a result of lower revenues.
 
Depreciation and Amortization
 
Depreciation and amortization expense decreased $2.1 million, or 5.1%, to $38.7 million for the three months ended March 31, 2017 from $40.7 million for the three months ended March 31, 2016. The decrease was a result of a $1.4 million

23


decrease in depreciation and amortization expense attributable to the non-comparable properties and a $0.7 million decrease in depreciation and amortization expense attributable to the comparable properties.

Property Tax, Insurance and Other
 
Property tax, insurance and other expense decreased $1.0 million, or 4.9%, to $19.2 million for the three months ended March 31, 2017 from $20.2 million for the three months ended March 31, 2016.  The decrease was attributable to a $1.5 million decrease in property tax, insurance and other expense attributable to the non-comparable properties, partially offset by a $0.5 million increase in property tax, insurance and other expense attributable to the comparable properties

General and Administrative
 
General and administrative expense decreased $0.5 million, or 5.5%, to $9.1 million for the three months ended March 31, 2017 from $9.6 million for the three months ended March 31, 2016.  The decrease in general and administrative expense was primarily attributable to a $0.2 million decrease in compensation expense and a net decrease in other general and administrative costs, including legal fees and other professional fees and costs of $0.3 million.
 
Interest Expense
 
The components of our interest expense for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
 
For the three months ended March 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
Revolver and Term Loans
$
9,517

 
$
9,859

 
$
(342
)
 
(3.5
)%
Mortgage loans
3,968

 
4,020

 
(52
)
 
(1.3
)%
Amortization of deferred financing costs
843

 
1,013

 
(170
)
 
(16.8
)%
Total interest expense
$
14,328

 
$
14,892

 
$
(564
)
 
(3.8
)%

Interest expense decreased $0.6 million, or 3.8%, to $14.3 million for the three months ended March 31, 2017 from $14.9 million for the three months ended March 31, 2016.  The decrease in interest expense from the Revolver and Term Loans was attributable to lower interest rates as a result of debt refinancing transactions in 2016. The decrease in interest expense from the mortgage loans was due to decreases in the balances outstanding as a result of principal payments. The decrease in amortization of the deferred financing costs was attributable to the accelerated amortization of the deferred financing costs associated with the debt refinancing transactions in 2016, partially offset by the additional amortization of the costs capitalized in conjunction with the debt refinancing transactions in 2016.
 
Income Taxes
 
The effective tax rates were 5.1% and 5.5% for the three months ended March 31, 2017 and 2016, respectively. Our income tax expense decreased $0.3 million to $1.2 million for the three months ended March 31, 2017 from $1.5 million for the three months ended March 31, 2016. The decrease in income tax expense was primarily due to lower state taxes during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

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, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting

24


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, non-cash income tax expense or benefit, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of operations. We believe that Adjusted FFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor’s understanding of our operating performance.
 
The following is a reconciliation of our GAAP net income to FFO attributable to common shareholders and unitholders and Adjusted FFO attributable to common shareholders and unitholders for the three months ended March 31, 2017 and 2016 (in thousands):
 
For the three months ended March 31,
 
2017
 
2016
Net income
$
21,777

 
$
25,350

Depreciation and amortization
38,665

 
40,730

Loss on sale of hotel properties
60

 
172

Noncontrolling interest in consolidated joint venture
66

 
62

Adjustments related to consolidated joint venture (1)
(33
)
 
(39
)
FFO
60,535

 
66,275

Transaction and pursuit costs
625

 
79

Amortization of share-based compensation
2,334

 
2,591

Non-cash income tax expense
938

 
1,131

Loan related costs (2)

 
341

Other expenses (3)

 
356

Adjusted FFO
$
64,432

 
$
70,773

 
(1)
Includes depreciation and amortization expense allocated to the noncontrolling interest in the joint venture.
(2)
Represents debt modification costs.
(3)