Apple Hospitality REIT, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Apple Hospitality is a self-advised U.S. lodging REIT; at quarter-end it owned 220 hotels with 28,929 rooms in 37 states, plus a New York property leased to a third-party operator. Unless stated otherwise, financial amounts below are in millions.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $358.3 | $341.2 | $1,031.3 | $939.3 |
| Operating income | $76.3 | $75.4 | $208.6 | $189.0 |
| Net income | $58.5 | $59.1 | $156.7 | $142.5 |
| Diluted net income per share | $0.26 | $0.26 | $0.68 | $0.62 |
| Adjusted Hotel EBITDA | $132.2 | $129.2 | $380.2 | $353.6 |
| Interest and other expense, net | $17.5 | $14.9 | $51.0 | $44.8 |
Q3 operating margin was approximately 21.3% versus 22.1% a year earlier; net margin was approximately 16.3% versus 17.3%. Hotel operating expenses were 56.9% of revenue in Q3, compared with 56.6% in Q3 2022. For the first nine months, those expenses were 57.1% of revenue versus 56.4%.
- Hotel demand: Comparable-hotel Q3 RevPAR rose 3.0% to $122.91, with occupancy of 77.1% and ADR of $159.36. For the nine months, RevPAR rose 8.3% to $119.34; occupancy was 75.8% and ADR was $157.54.
- Cash flow: Nine-month operating cash flow was $302.2, compared with $273.2 in 2022. Investing activities used $86.1, including $49.3 of capital improvements and $31.0 for a hotel acquisition. Financing activities used $190.5, including $183.1 of distributions paid. Cash and cash equivalents were $35.4 at September 30; cash plus restricted cash was $69.1.
- Debt and liquidity: Debt, net, was $1,373.3 at September 30, versus $1,366.2 at year-end 2022. The weighted-average debt rate, after swaps, was 4.34%, up from 3.93%. The company had $650 million available on its revolving credit facility and reported compliance with applicable debt covenants. Approximately 80% of debt was fixed-rate or effectively fixed through swaps.
- Equity and distributions: The company declared distributions of $0.72 per share for the first nine months and reported $0.80 per share paid during that period. It repurchased approximately 0.5 million shares for $6.9 and had $335.4 remaining under its repurchase authorization.
Material changes and management commentary
- Nine-month revenue increased 9.8%, while net income increased 10.0% and Adjusted Hotel EBITDA increased 7.5%. Q3 revenue rose 5.0%, but net income declined 1.1%; operating income edged higher as higher operating costs, depreciation and interest offset revenue gains.
- Management attributed improved hotel revenue to leisure transient and small-group demand, with corporate demand also improving. Suburban markets remained strong, while urban markets recovered more meaningfully year over year. The first-quarter 2022 comparison was affected by the Omicron variant.
- Management expects future year-over-year revenue growth to moderate as the favorable comparison with early 2022 fades. It also cited seasonality, weaker consumer sentiment, recessionary conditions and inflation as potential drags on revenue.
- Labor, repairs and maintenance, utilities, insurance and certain property taxes pressured costs. Management cited staffing challenges, higher wages and contract labor, and inflation in materials and supplies; it is working with hotel managers on operating efficiencies and tax-assessment appeals.
- Management anticipated higher interest expense for the remainder of 2023 and over the following 12 months, reflecting higher market rates and variable-rate borrowings. A 100-basis-point rate change was estimated to affect annual net income by approximately $2.8 million, all else equal.
Outlook, commitments and risks
- Management estimated 2023 capital spending of $70–$80 million, including renovations at approximately 20–25 properties; it had invested approximately $42 million in capital expenditures during the first nine months. Inflation or supply-chain shortages could increase costs or delay projects.
- At quarter-end, purchase contracts covered six hotels and a parking garage for approximately $359 million. Four existing properties were acquired after quarter-end: two Salt Lake City hotels and a garage for approximately $91.5 million on October 11, and a Renton hotel for $55.5 million on October 18. One existing-property acquisition remained planned for Q4; two development-property acquisitions were expected in mid-2024 and 2025, subject to closing conditions.
- Approximately $175.4 million of principal and interest payments were due over the next 12 months, including an $85 million term loan and an approximately $20.5 million mortgage maturing in Q3 2024. Management expected to use operating cash flow, revolver borrowings, refinancing or loan extensions to meet maturities.
- Management currently expected monthly distributions to continue at $0.08 per share, subject to board approval and cash needs; it cautioned that distributions may be adjusted. The company generally must distribute at least 90% of REIT taxable income to maintain REIT status.
- Key stated risks include lodging-demand and macroeconomic weakness, inflation and interest rates, financing and refinancing availability, travel disruptions, severe weather, acquisition conditions, and maintaining REIT qualification. The filing reported no litigation expected by management to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether hotel demand and RevPAR growth persist as the Omicron-affected prior-year comparison passes, and whether management’s expectation of slower future revenue growth materializes.
- How labor, insurance, property taxes and other inflation-sensitive costs affect hotel margins and cash generation.
- Interest-rate exposure, upcoming 2024 maturities, refinancing terms, and the company’s ability to fund acquisitions and capital spending while maintaining distributions.
- Completion, timing and final costs of the remaining contracted acquisitions, including development projects subject to unsatisfied closing conditions.
- Distribution coverage from operating cash flow and the effect of distributions, repurchases and acquisition spending on liquidity.
Adjusted Hotel EBITDA and other non-GAAP measures are supplemental and are not substitutes for GAAP income or operating cash flow; the filing cautions that they may not indicate cash available for distributions.