RLJ Lodging Trust Preferred: Consistency Even In Troubled Times (NYSE:RLJ.PA)

Due to the covid-19 pandemic, the hotel industry faced a recession for almost 2 years, and has only just started recovering. Luckily, cash generated from disinvestments just prior to the pandemic enabled RLJ Lodging Trust (RLJ) to cover its operating losses, pay its debt obligations as well as dividends to its preferred shareholders. RLJ’s preferred shares, RLJ Lodging Trust CUM CONV PFD A (NYSE:NYSE:RLJ.PA) have consistently generated a yield in excess of 7 percent. These preferred shares are convertible, but not callable. These preferred shares are also perpetual, meaning that the investors are quite secured in their annual income, provided that the REIT generates enough funds.

RLJ Lodging Trust

RLJ Lodging Trust is a self-advised, publicly traded real estate investment trust (REIT) that owns primarily focused-service and compact full-service hotels. Its portfolio consists of premium-branded, high-margin hotels like Marriott, Hilton, and Hyatt brand names. These hotels are concentrated in urban areas, dense suburban markets, and business districts within various metropolitan areas in various parts of the United States. RLJ expects to generate almost $25 million through brand equity and amendments in management agreement, resulting in revenue enhancements.

It generates its revenue mainly from hotel operations, which is composed of the sale of rooms, food, and beverages. The Company’s portfolio consists of 103 hotels with approximately 22,570 rooms, and an ownership interest in one unconsolidated hotel with 171 rooms. RLJ’s operating performance is mainly driven by business travel, citywide attendance and leisure demand, particularly in the urban markets. Urban hotels represent two-thirds of RLJ’s ‘earnings before interest taxes depreciation and amortization’ (EBITDA).

RLJ Sailed Through the Pandemic and Continued Paying Preferred Dividends

This REIT sailed through the pandemic by reducing staffing cost, and despite starting re-staffing this year, they are not going to spend at the same level as they used to do prior to the pandemic. Luckily, RLJ went for a series of non-core hotel divestments after it merged with FelCor Lodging Trust, in 2017. Those disinvestments boosted RLJ’s cash balance by almost $1 billion prior to the covid-19 pandemic related market crash during March 2020. RLJ’s management also tried to enhance its revenue by converting some common areas and meeting rooms into guest rooms.

Due to disinvestments, smart revenue generation, and reduced staffing cost, RLJ Lodging Trust was able to generate enough Funds from operations (FFO) to pay the preferred dividends. RLJ’s preferred shares have consistently generated a yield in excess of 7 percent and recorded a 4 year average yield of 7.62 percent. The current yield stands at 7.34 percent. RLJ inherited the preferred shares from the FelCor merger. The preferreds are currently RLJ’s highest cost of capital, but they cannot retire them, as these are perpetual preferred shares. Thus, as long as this REIT generates enough distributable funds, investors are assured of getting an annual income.

RLJ’s Operating Performance in Q2, 2022 Shows Strong Signs of Recovery

RLJ’s lodging demand benefited from summer travel, ramping business demand, stronger citywide attendance and re-opening of urban markets. RLJ also went for a share buy-back and acquired a high quality boutique lifestyle hotel in the high growth market of Nashville. Against an overall positive industry backdrop, RLJ’s revenue almost touched (94 percent to be precise) the 2019 levels. Accelerating demand across all major markets led to better room rates, and its Q2, 2022 average daily rate (ADR) surpassed 2019 levels.

RLJ’s urban hotel portfolio had the strongest growth this quarter, achieving a new high of 95 percent of 2019 Revenue per available room (RevPAR) and 106 percent of 2019 ADR in the month of June. This robust momentum carried into July, which improved to 107 percent. While the business revenue is slowly picking up, the leisure revenues have already exceeded 2019 levels, recording an ADR of 120 percent of 2019. ADR in key leisure markets of Key West, Charleston and Miami exceeded 2019 levels by an average of 40 percent. An improved demand throughout the second quarter enabled RLJ to achieve 91 percent of 2019 hotel EBITDA.

Management’s Expectations and Guidance

RLJ’s management believes that rentals will remain strong during the second half of 2022, which will primarily be driven by the recovery of urban markets. Management expects demand in urban markets to continue to grow, benefiting from further improvements in business travels and group demand. Despite the uncertainty in macroeconomic conditions, the company believes that leisure travel will remain healthy, especially since urban markets are fully open.

As pointed out in the Q2, 2022 earnings call by the President and CEO, Leslie Hale, “We expect corporate travel to continue to strengthen throughout the remainder of the year. Our third quarter group booking pace is currently tracking at 90% of 2019 levels, with the recent in the quarter, for the quarter booking trends providing us with confidence that their recovery in groups should continue to improve for the remainder of the year. And, finally, we believe that the recent uptick in international demand could provide further upside in urban markets.”

She also showed optimism regarding RLJ’s ability to grow during the time of record inflation. According to her “overall, our portfolio remains extremely well positioned with several unique catalysts to drive incremental growth, including the post-conversion ramp of our conversion hotels. They continue to ramp up our recent acquisitions, or urban centric footprint, which is ideally positioned to benefit during this current phase of the recovery as growth shifts to urban markets. Our portfolio’s efficient footprint with fewer FTE is well positioned in this inflationary environment.”

Investment Thesis

Due to disinvestments, smart revenue generation, and reduced staffing cost, RLJ Lodging Trust was able to sail through the covid-19 pandemic. Although leisure travel has come back to the normal level, business travel is still less than normal. However, RLJ’s RevPAR and ADR have almost touched the 2019 level. On the back of increasing demand for business revenues and huge growth in leisure revenues, management is confident it will achieve an above average growth rate in the coming years.

During the covid-19 pandemic, RLJ Lodging Trust paid all its debt obligations, as well as dividend to its preferred shareholders. However, it failed to pay dividends to its equity holders at the pre-pandemic level. RLJ’s occupancy numbers are a little above average but follow a seasonal pattern. As occupancy and room rates are still below pre-pandemic level, and going forward the growth of business travel is doubtful due to an uncertain macroeconomic environment, income seeking investors may want to opt for preferred shares over the common or garden variety ones.