Business context and reporting period
Apple Hospitality REIT, Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The self-advised REIT owns U.S. lodging properties leased to taxable REIT subsidiaries and operated by third-party managers. At year-end it owned 179 hotels with 22,961 rooms in 32 states; all operated under Marriott or Hilton brands.
Comparability with 2014 is affected by the March 2014 mergers with Apple REIT Seven and Apple REIT Eight, which added 99 continuing hotels, and by 2015 acquisitions and dispositions. The shares began trading on the NYSE in May 2015, alongside a 50% reverse share split; reported per-share amounts reflect the split.
Financial and operating highlights
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $898.3 million | $803.9 million |
| Operating income | $136.0 million | $32.3 million |
| Net income | $117.3 million | $6.8 million |
| Net income per share | $0.65 | $0.04 |
| Cash provided by operating activities | $281.1 million | $252.2 million |
| Cash used in investing activities | $82.3 million | $58.4 million |
| Cash used in financing activities | $198.8 million | $211.9 million |
- Comparable hotel performance: ADR was $130.33, up 5.0%; occupancy was 77.2%, versus 76.1%; and RevPAR was $100.59, up 6.5%.
- Expenses and margins: Hotel operating expense was $507.1 million, or 56% of revenue, compared with $455.9 million, or 57%, in 2014. GAAP operating income was $136.0 million, approximately 15.1% of revenue; comparisons are substantially affected by merger-related and property-specific items.
- Debt and liquidity: Year-end debt carrying value was $998.1 million; principal debt outstanding was approximately $1.002 billion. This included approximately $539.8 million under the credit facility and $462.5 million of property-level debt. The $965 million facility comprised a $540 million revolver and $425 million in term loans; approximately $425.2 million of total facility capacity remained available. Cash was zero. Debt to adjusted EBITDA was 3.1 times, and the company reported compliance with credit covenants.
- Distributions: The company paid $229.1 million, or $1.27 per share, in 2015, against operating cash flow of $281.1 million. Its year-end annualized distribution rate was $1.20 per share, payable monthly. The filing also reports $1.37 per share declared for 2015, including a $0.10 distribution declared in December and paid in January 2016.
Material changes versus the prior comparable period
- Revenue increased 12%, but the year-over-year change reflects the merger contribution and portfolio turnover as well as underlying hotel performance; 2014 included only ten months of results from the merged hotels.
- Net income rose to $117.3 million from $6.8 million. The 2014 result included a $117.1 million non-cash expense for conversion of Series B preferred shares. In 2015, a $45.0 million impairment charge and a $15.3 million gain on property sales also affected results.
- The company acquired seven hotels for $254.8 million and sold 19 properties for approximately $208.5 million in 2015. Year-end hotel count declined to 179 from 191.
- Debt carrying value increased to $998.1 million from $706.6 million, primarily reflecting increased credit-facility borrowing, including financing for the tender offer and share repurchases.
Outlook, commentary, risks and unusual items
- Management forecast low- to mid-single-digit comparable revenue growth for 2016, while noting that expected growth was slightly below the rates achieved in 2014 and 2015. It anticipated continued improvement in comparable revenue and operating income.
- Planned 2016 capital improvements were approximately $50–$60 million, including renovations at about 25 properties. Four hotel purchase contracts totaling $81.1 million were outstanding; completion and closing were conditional and not assured.
- Management identified rising labor costs, local hotel supply, property taxes, seasonal revenue fluctuations, competition (including alternative lodging), and reliance on third-party managers and the Marriott and Hilton brand families as risks. The company also faces interest-rate, refinancing, REIT-qualification, environmental, insurance and litigation risks.
- The $45.0 million impairment related to the New York Renaissance hotel, whose carrying value was reduced from approximately $86 million to $41 million. Management cited weaker market conditions, anticipated new supply, lost retail tenants, reletting delays, management transition costs, property taxes and the ground lease.
- Two shareholder-related lawsuits remained unresolved or subject to appeal; the company said it could not reasonably estimate potential loss. The approved settlement in one matter was stated not to affect the company’s financial position.
- Effective January 2016, management fees were revised for about 70% of hotels, generally to 2.5%–3.5% of revenue; management did not expect a significant change in total fees. The share-repurchase trading plan was terminated in January 2016, although the company retained authorization to consider further repurchases.
Important facts for investors to verify
- Review the audited statements and non-GAAP reconciliations, particularly the impact of the 2014 preferred-share conversion expense and the 2015 impairment and sale gain on reported earnings.
- Confirm debt principal, revolver availability, upcoming maturities, covenant headroom and the sensitivity of unhedged variable-rate debt to interest-rate changes.
- Assess whether operating cash flow can support distributions, capital spending, acquisitions and debt service; distinguish distributions paid from amounts declared.
- Track the 2016 comparable revenue outlook, labor and property-tax costs, renovation disruption and the performance of the New York Renaissance hotel.
- Monitor the four conditional hotel purchases, remaining litigation and the company’s compliance with REIT requirements.