Apple Hospitality REIT, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Apple Hospitality is a U.S. lodging REIT. At quarter-end, it owned 220 hotels with 28,929 rooms in 37 states; one New York property had transitioned to a third-party operating lease and was classified as non-hotel.
Key financial results
Amounts in millions, except per-share and operating statistics.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $361.6 | $337.7 | $673.1 | $598.1 |
| Operating income | $83.0 | $80.7 | $132.3 | $113.6 |
| Net income | $65.3 | $65.3 | $98.2 | $83.3 |
| Diluted EPS | $0.29 | $0.29 | $0.43 | $0.36 |
| Operating margin | 22.9% | 23.9% | 19.7% | 19.0% |
| Net margin | 18.1% | 19.4% | 14.6% | 13.9% |
| Comparable-hotel RevPAR | $125.64 (+5.3%) | $119.28 | $117.52 (+11.3%) | $105.61 |
Q2 revenue rose 7.1%, while net income was essentially flat year over year. For the first half, revenue increased 12.5% and net income increased 17.8%. Comparable-hotel occupancy was 78.2% in Q2 and 75.1% for the half; average daily rate was $160.75 and $156.59, respectively. Six-month adjusted Hotel EBITDA was $248.0 million, up 10.5%; six-month FFO was $188.6 million and MFFO was $190.4 million. These are non-GAAP measures and are not substitutes for cash flow or net income.
Cash, debt and capital
- Six-month operating cash flow was $170.6 million, compared with $152.2 million a year earlier. Investing used $67.1 million, including $30.9 million for a Cleveland hotel acquisition and $35.1 million of capital improvements. Financing used $108.8 million, including $128.3 million of distributions paid.
- At June 30, cash and cash equivalents were $6.4 million; restricted cash was $31.8 million. Net debt was $1.399 billion, versus $1.366 billion at December 31, 2022. Debt included $287.1 million of net mortgage debt and $24 million drawn on the $650 million revolver. Revolver availability was $626 million.
- Weighted-average debt interest rate was 4.35%, up from 3.93% at year-end 2022. After swaps, 21% of debt was variable-rate; management estimated a 100-basis-point rate change would affect annual net income by approximately $3.0 million.
- Distributions paid were $0.56 per share in the first half, totaling $128.3 million. The regular monthly distribution was $0.08 per share; continuation is subject to board approval and available resources. The company repurchased approximately 0.5 million shares for $6.8 million in the half.
Material changes and management commentary
- Hotel demand improved versus 2022, when Omicron weighed on first-quarter occupancy. Management cited leisure transient and small-group strength, with corporate demand increasing and urban markets recovering. It expects year-over-year revenue growth to moderate as the comparison with 2022 becomes less favorable.
- Hotel operating expense rose 9.9% in Q2 and 14.6% for the half, outpacing revenue growth; expense as a share of revenue increased to 55.4% in Q2 and 57.3% for the half. Management attributed pressure to labor, repairs, utilities, inflation and staffing constraints.
- Interest and other expense increased 15.1% in Q2 and 12.2% for the half, driven by higher borrowing and rates. Management expects interest expense for the remainder of 2023 to exceed the comparable 2022 period.
- The company acquired a 154-room Courtyard in Cleveland for $31.0 million on June 30. It has purchase contracts for two developing hotels in Madison and Nashville totaling approximately $175.3 million, expected to close in 2024 and 2025 if conditions are met; closings are not assured, and the contracts may require purchase if seller conditions are satisfied.
- A New York independent boutique hotel entered a 15-year operating lease in May. Lease revenue is reported in other revenue; the property is excluded from hotel and room counts while under lease.
- Planned 2023 capital spending is approximately $70–$80 million, including renovations at 20–25 hotels. Inflation and supply constraints could increase costs or delay projects. No new property development projects are planned.
Outlook, risks and contingencies
Management said operating cash flow, borrowing capacity and other potential financing sources are expected to cover anticipated needs, including distributions, capital improvements, debt service and acquisitions. This is not a guarantee. Key risks cited include inflation, recession or weaker consumer sentiment, interest-rate increases, changes in travel demand, labor availability and costs, natural disasters, financing conditions, and REIT qualification requirements. The company was in compliance with applicable debt covenants at June 30, 2023. No litigation was identified as likely to have a material adverse effect, based on management’s assessment.
Subsequent to quarter-end, the company extended a $50 million term loan maturity from August 2023 to August 2025. It paid the declared $0.08-per-share distribution on July 17 and declared another $0.08-per-share distribution payable August 15.
Important facts for investors to verify
- Whether RevPAR and revenue growth persist as the Omicron-related comparison benefit fades, and how labor and other cost inflation affect margins.
- Variable-rate debt exposure, swap coverage and upcoming maturities; confirm the effect of rates on interest expense and liquidity.
- Funding capacity and closing conditions for the approximately $175.3 million hotel purchase commitments alongside planned capital spending and distributions.
- Whether operating cash generation supports the monthly distribution and share repurchases without increased borrowing.
- Actual renovation spending and any project delays or cost increases; the filing estimates $70–$80 million of 2023 capital expenditures.