Apple Hospitality REIT, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 235 hotels with 29,978 rooms across 33 states. Unless otherwise noted, financial amounts below are in millions.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $331.7 | $257.6 | $624.6 | $482.1 |
| Operating income | $83.6 | $64.6 | $129.9 | $108.4 |
| Net income | $87.6 | $54.7 | $122.0 | $89.4 |
| Net income per diluted share | $0.39 | $0.31 | $0.55 | $0.51 |
| FFO | $115.3 | $88.4 | $201.2 | $156.6 |
| Modified FFO | $113.7 | $90.4 | $200.5 | $159.7 |
| Adjusted EBITDA | $126.0 | $100.5 | $225.1 | $179.1 |
Reported revenue rose 28.7% in Q2 and 29.6% in the first half, largely reflecting the Apple REIT Ten merger completed in September 2016 and other portfolio changes. For a more comparable view, merger pro forma revenue was $331.7 million versus $333.9 million in Q2 2016, and $624.6 million versus $623.8 million for the first half. Pro forma net income was $85.0 million versus $72.2 million in Q2 and $119.4 million versus $117.0 million in the first half.
The Q2 2017 net income includes a $16.1 million gain on the sale of a Dallas hotel. The first half also includes a $7.9 million impairment charge on two Columbus, Georgia properties. Hotel operating expenses were 54.3% of revenue in Q2 (53.3% in 2016) and 55.8% in the first half (54.9% in 2016); management attributed pressure primarily to labor costs.
Comparable-hotel Q2 RevPAR declined 0.2% to $112.08, with occupancy of 81.5% and ADR of $137.53. First-half comparable RevPAR increased 0.6% to $105.59, with occupancy of 78.0% and ADR of $135.42. Comparable metrics include prior-owner results for acquired hotels and are not audited for those periods.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $156.3 million, versus $136.7 million in 2016. Investing activities used $18.7 million, including $28.9 million in capital improvements, partly offset by $28.5 million of net real-estate sale proceeds. Financing activities used $137.7 million, including $133.8 million in distributions.
- At June 30, total assets were $4.90 billion and shareholders’ equity was $3.51 billion. Cash and cash equivalents were zero.
- Debt was approximately $1.31 billion: $301.3 million outstanding on the revolving facility, $571.5 million in term loans (net of issuance costs), and $435.6 million in mortgage debt. The revolver had $238.7 million of unused capacity; the company reported covenant compliance.
- About 31% of debt was exposed to variable rates after swaps. Management estimated that a 100-basis-point rate change would affect annual net income by approximately $4.0 million, all else equal.
- The current distribution rate was $0.10 per share monthly ($1.20 annualized). The company paid $133.8 million in distributions in the first half and accrued $22.3 million for a June distribution paid in July. It also had a $300 million at-the-market share program, with no shares sold through June 30.
- Management reported $24.4 million of capital expenditures in the first half and expects another $35–$45 million in the remainder of 2017, including renovations at approximately 15–20 properties.
Changes, outlook and notable items
- The portfolio expanded to 235 hotels from 179 at June 30, 2016, primarily following the Apple Ten merger. The enlarged portfolio makes year-over-year reported results less comparable.
- The company sold a 224-room Dallas Hilton in April for approximately $56.1 million, recording a $16.1 million gain; proceeds were used to reduce revolver borrowings. A sale agreement for a Fairfax, Virginia Marriott at $42.0 million was pending at quarter-end and remained subject to closing conditions.
- Four hotel purchase contracts totaling approximately $103.3 million were outstanding for properties under construction. Closings were expected over the following three to 15 months, subject to conditions; the company expected to use revolver borrowings.
- Management forecast low-single-digit comparable revenue growth for full-year 2017 and expected remaining-year comparable RevPAR growth to approximate industry averages. It cited uneven market demand, increasing supply, labor costs and property-tax assessments as constraints. No quantified earnings or FFO guidance was provided.
- On July 25, 2017, after quarter-end, the company entered an $85 million unsecured term loan maturing in 2024; net proceeds paid down the revolver. A swap was expected to fix the rate on $75 million beginning July 31.
- The Quinn merger-related derivative suit was settled and the company received an additional $2.6 million of insurance proceeds in May; management did not anticipate further costs or reimbursements from that case. A proposed $5.5 million settlement in the Moses litigation still required court approval; the company warned actual loss could exceed the accrual. In a separate Wilchfort case, outcome and possible loss could not be estimated.
Key risks discussed include hotel-supply growth, economic and market volatility, labor availability and expense, interest rates, seasonality, natural disasters and litigation. Management said previously disclosed risk factors had not materially changed. The filing also says the company’s liquidity sources are expected to cover anticipated needs, but distributions may be adjusted if cash flow and financing are insufficient.
Important facts for investors to verify
- How comparable-hotel RevPAR, occupancy and ADR trend against the stated low-single-digit full-year revenue outlook, given Q2 comparable RevPAR declined.
- Whether labor and property-tax increases continue to outpace revenue growth and pressure hotel operating margins.
- Debt maturities and refinancing needs, variable-rate exposure, and the effect of the post-quarter $85 million loan on revolver usage.
- Whether the Fairfax sale and four contracted hotel acquisitions close, and their effects on leverage, liquidity and operating results.
- Distribution coverage and sustainability: first-half cash from operations was $156.3 million against $133.8 million paid, with seasonality and capital needs also relevant.
- Final court approval and ultimate exposure in the Moses settlement, and developments in the Wilchfort litigation.