Apple Hospitality REIT, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 233 hotels with 29,759 rooms across 34 states.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $81.1 million | $341.1 million | $319.1 million | $644.9 million |
| Net income (loss) | $(78.2) million | $62.1 million | $(81.0) million | $100.2 million |
| Adjusted Hotel EBITDA | $0.7 million | $134.8 million | $64.0 million | $243.6 million |
| Net income (loss) per share | $(0.35) | $0.28 | $(0.36) | $0.45 |
| Net cash from operating activities | Not separately provided for the quarter | $12.5 million | $164.1 million |
Q2 revenue fell 76.2% year over year; first-half revenue fell 50.5%. Comparable-hotel RevPAR decreased 75.4% in Q2 and 49.9% in the first half. Q2 occupancy was 28.2% versus 81.5%, and ADR was $100.76 versus $142.01. Hotel operating expenses were 76.2% of Q2 revenue, compared with 54.9% a year earlier, as costs could not decline as quickly as revenue.
At June 30, cash and cash equivalents were $156.5 million, with a further $27.7 million of restricted cash, and $225.3 million of revolver availability. Debt, net, was $1.582 billion, versus $1.320 billion at year-end 2019; finance lease liabilities were $219.1 million. Total liabilities were $1.909 billion and shareholders’ equity was $3.113 billion. Operating cash flow was substantially below distributions paid in the first half: $12.5 million generated versus $67.3 million paid.
Material changes and notable items
- COVID-19 sharply reduced hotel demand. Comparable-hotel occupancy declined from about 76% in February to below 20% by late March and remained 17.7% in April. It improved to 28.6% in May and 38.2% in June; July occupancy was approximately 45% as restrictions eased and leisure demand improved.
- Monthly Adjusted Hotel EBITDA improved from a $7.9 million loss in April to $0.6 million in May and $8.1 million in June. Management reported near-breakeven modified funds from operations for June.
- The company recorded a $4.4 million impairment on its Memphis Homewood Suites after agreeing to sell it for approximately $9.0 million. Closing was subject to conditions and was expected in Q4 2020; proceeds were intended for revolver repayment.
- Two hotels were acquired in Cape Canaveral for $46.7 million, funded with $25.0 million cash and a $21.7 million secured, one-year note. Two hotels were sold for gross proceeds of approximately $45.0 million, producing an $8.8 million gain.
- Interest and other expense increased to $18.4 million in Q2 from $15.9 million, and to $34.0 million for the first half from $31.4 million, largely reflecting higher average borrowings. First-half comprehensive loss also included $46.4 million of other comprehensive loss on interest-rate derivatives.
Liquidity, outlook and risks
- On June 5, the company amended its unsecured credit facilities, suspending financial maintenance covenant testing through the compliance certificate for Q2 2021, unless ended earlier. The company reported compliance with applicable covenants at June 30.
- During the waiver period, terms include a $100 million minimum liquidity covenant, restrictions on distributions and repurchases (except distributions required to maintain REIT status), a $50 million cap on discretionary capital expenditures, limits on additional debt and investments, and higher applicable interest margins. Asset-sale and certain financing proceeds may require mandatory debt prepayments.
- The company drew its remaining revolver availability in March, repaid approximately $225.3 million in June and a further approximately $100 million in July. Management expected cash and revolver availability to cover near-term needs, while cautioning that sustained operating weakness could make capital more difficult or costly to obtain.
- Monthly distributions were suspended after the March payment. Management said resumption would depend on operations, cash needs and credit-agreement restrictions. The company postponed non-essential capital work, estimating roughly $50 million less in 2020 improvements than originally planned; it anticipated a further $5–$10 million of capital expenditures in the remainder of 2020.
- Management expected revenue and operating results to remain below 2019 levels through the rest of 2020 and into 2021, but could not estimate the pandemic’s overall impact or when pre-pandemic operations might return. Further outbreaks, renewed travel restrictions, weak business and leisure demand, hotel operating costs, impairment risk, refinancing and covenant risks were highlighted.
- Three additional hotel purchase contracts totaled approximately $114.2 million, with closings dependent on development completion and other conditions. The company had no assurance these transactions would close.
- The company received and repaid approximately $18 million of Paycheck Protection Program loans after subsequent government guidance. No material litigation was reported. Disclosure controls were assessed as effective.
Investor verification priorities
- Track monthly occupancy, ADR, RevPAR and hotel-level cash generation against the reported recovery trend.
- Verify liquidity against the $100 million minimum covenant, revolver capacity, post-quarter debt repayment and upcoming debt maturities.
- Monitor the credit amendments’ restrictions, covenant-waiver end date and the company’s ability to meet covenants afterward.
- Confirm whether the Memphis sale and the three hotel acquisitions close, and whether proceeds are used as described.
- Assess how long distributions remain suspended and whether operating cash flow can support debt service, capital needs and any future distributions.