Apple Hospitality REIT, Inc. — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017; fourth-quarter data are noted separately. Apple Hospitality is a self-advised U.S. lodging REIT with one reportable segment. At year-end it owned 239 Marriott- or Hilton-branded hotels with 30,322 rooms in 34 states, operated by 23 unaffiliated management companies.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $1.239 billion | $1.041 billion |
| Operating income | $214.4 million | $185.3 million |
| Net income | $182.5 million | $144.7 million |
| Diluted net income per share | $0.82 | $0.76 |
| Operating cash flow | $384.7 million | $332.0 million |
| Investing cash flow | $(159.3) million | $(169.8) million |
| Financing cash flow | $(225.4) million | $(162.2) million |
- Revenue increased 19.0% and net income increased about 26%; growth in reported results was significantly affected by acquisitions, including the Apple Ten merger completed September 2016. Comparable-hotel RevPAR rose 1.6% to $104.40, with ADR up 1.0% to $134.75 and occupancy up 0.6% to 77.5%. Same-store RevPAR increased 1.3%.
- Hotel operating expense was 56.3% of revenue versus 56.0% in 2016. Management cited labor-cost increases as the main pressure on comparable-hotel expense ratios. Depreciation was $176.5 million and interest and other expense was $47.3 million.
- Funds from operations (FFO) were $388.3 million, up from $298.2 million; modified FFO (MFFO) was $389.4 million versus $336.6 million. These are non-GAAP supplemental measures, not substitutes for cash flow or GAAP earnings.
- Total assets were $4.902 billion and shareholders’ equity was $3.571 billion. Year-end cash was zero. Debt was $1.222 billion on the balance sheet; the company reported a 21% debt-to-total-capitalization ratio. Mortgage debt was approximately $457.4 million and unsecured credit-facility debt approximately $766.9 million.
- The $540 million revolving facility had $106.9 million drawn and approximately $433.1 million available. About 83% of debt was effectively fixed-rate after swaps. A 100-basis-point rate change on variable-rate debt was estimated to affect annual net income by about $2.1 million. The company was compliant with debt covenants at year-end.
- Distributions paid were $1.20 per share, or approximately $267.9 million, versus operating cash flow of $384.7 million. The annualized distribution rate remained $1.20 per share, paid monthly; distributions are discretionary and may be funded partly through borrowing.
Material changes and unusual items
- Acquired six hotels during 2017 for approximately $161.8 million and sold two hotels for gross proceeds of $97.6 million; sale proceeds were used to repay revolving borrowings. Two additional hotels were acquired in February 2018 for $63.0 million.
- Recorded $45.9 million of real-estate impairment charges, including $38.0 million for the New York Renaissance hotel and $7.9 million for two Columbus, Georgia hotels identified for potential sale. The Columbus sale contracts were later terminated.
- Reported a $16.3 million gain on real-estate sales, principally related to the Dallas hotel sale. Fourth-quarter net loss was $2.3 million, compared with net income of $41.6 million in fourth-quarter 2016; the 2017 quarter included the $38.0 million New York impairment. Fourth-quarter comparable RevPAR grew 3.5%.
- Issued approximately 6.9 million shares through its at-the-market program in fourth-quarter 2017 at a weighted-average $19.55 per share, generating $135.1 million gross proceeds used to reduce revolving borrowings. No share repurchases were made under the repurchase program in 2017.
- The 2017 operating cash flow included a net payment of approximately $19.4 million for the Apple Ten merger litigation settlement. The company also received $2.6 million of additional insurance reimbursement related to that matter.
Outlook, commentary, and risks
Management forecast low-single-digit comparable revenue growth for 2018, citing uneven market demand and new hotel supply that limits rate growth. It expected approximately $70–$80 million of 2018 capital improvements across 30–35 hotels, compared with $69.1 million in 2017. The company had contracts for two further hotels under construction, with a combined purchase price of approximately $64.8 million, subject to closing conditions.
Key risks include economic and local lodging-market weakness, new room supply and alternative lodging competition, rising labor and property-tax costs, dependence on third-party managers and the Marriott and Hilton brand families, renovation requirements, interest-rate and refinancing exposure, and natural disasters or uninsured losses. REIT qualification and distribution requirements also constrain flexibility. The filing identifies related-party arrangements involving Executive Chairman Glade M. Knight and his affiliates; management states such dealings are not at arm’s length.
Litigation remains relevant: the Apple Ten merger case was settled, with no further related costs anticipated; the proposed $5.5 million DRIP settlement remained subject to court approval; and the company could not estimate potential exposure in the Wilchfort DRIP class action. Management and Ernst & Young reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Assess underlying growth using comparable and same-store hotel metrics separately from acquisition-driven reported revenue growth; note that comparable-hotel historical data include unaudited prior-owner information for acquired properties.
- Review the New York Renaissance impairment assumptions and whether property performance or retail-space leasing improves.
- Track labor costs, property-tax reassessments, new supply, and the company’s 2018 low-single-digit revenue outlook against subsequent results.
- Confirm refinancing and covenant capacity around debt maturities, particularly the 2020 maturity concentration, and monitor floating-rate exposure.
- Evaluate distribution sustainability, capital spending, acquisition commitments, and potential dilution from further ATM share issuance.
- Monitor court approval and any outcomes or exposure changes in the DRIP litigation, and review related-party disclosures and REIT compliance.