Apple Hospitality REIT, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods unless noted. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Apple Hospitality is a self-advised lodging REIT. At quarter-end it owned 218 hotels with 28,693 rooms in 36 states, operated by third-party managers. Substantially all hotels operate under Marriott or Hilton brands.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $341.2 | $277.2 | $939.3 | $683.3 |
| Operating income | $75.4 | $47.9 | $189.0 | $59.0 |
| Net income | $59.1 | $31.8 | $142.5 | $5.6 |
| Diluted EPS | $0.26 | $0.14 | $0.62 | $0.02 |
| Adjusted Hotel EBITDA (non-GAAP) | $129.2 | $105.4 | $353.6 | $235.7 |
Revenue increased 23.1% in Q3 and 37.5% year to date. Hotel operating expenses were 56.6% of revenue in Q3 (55.5% in 2021) and 56.4% year to date (57.5% in 2021). Results reflect recovery in hotel demand and are affected by portfolio changes: 2022 included one hotel sale and no acquisitions through September, while 2021 included four acquisitions and 23 dispositions in the nine-month period.
Comparable-hotel Q3 occupancy was 75.7%, ADR was $157.90, and RevPAR was $119.53; RevPAR rose 17.9% year over year and 3.7% versus Q3 2019. For the first nine months, comparable RevPAR rose 35.7% year over year but remained 1.8% below 2019. Management reported recovery led by leisure, small-group and local negotiated demand, with larger corporate demand recovering more slowly.
Cash flow, debt and liquidity
- Cash provided by operating activities was $273.2 million for the first nine months, versus $146.4 million in 2021. Investing activities used $28.2 million; financing activities used $220.5 million. Capital improvements were $34.9 million in the cash flow statement.
- At September 30, cash and cash equivalents were $25.6 million and restricted cash was $38.8 million. Total assets were $4.78 billion and shareholders’ equity was $3.25 billion.
- Debt, net of issuance costs and adjustments, was $1.318 billion, down from $1.439 billion at December 31, 2021. Weighted-average debt interest rate was 3.72%, compared with 3.38% at year-end. Approximately 87% of debt was fixed-rate or effectively fixed by swaps; 13% was variable-rate.
- The July refinancing expanded the unsecured credit facility capacity to $1.2 billion and extended key maturities: a $650 million revolver initially matures in July 2026, with term loans maturing in 2027 and 2028. At quarter-end the revolver was undrawn, with approximately $650 million available; the company also reported $100 million available under the term-loan facility. The company was in compliance with its debt covenants.
- Management reported approximately $146 million of debt principal and interest due over the next 12 months, including $37.8 million of mortgage loans maturing in the first half of 2023, planned to be repaid using the revolver and/or new financing. A 100-basis-point interest-rate change was estimated to affect annual net income by approximately $1.8 million, all else equal.
Outlook, distributions and notable items
- Management expected continued recovery but provided no specific revenue or earnings guidance. It noted uncertainty around the pace of recovery, COVID-19 developments, seasonality and macroeconomic conditions.
- Management anticipated $55–$65 million of 2022 capital spending, including renovations at approximately 20–25 hotels; inflation and supply-chain constraints could raise costs or delay projects.
- The monthly distribution was increased from $0.05 to $0.07 per share in August. After quarter-end, the company declared $0.08 per share for November. Distributions paid in the first nine months totaled $86.8 million. The board may adjust distributions, and management noted that seasonal cash needs may be supported by the revolver.
- At September 30, the company had contracts to purchase three hotels for approximately $163.6 million. In October it completed purchases of Louisville and Pittsburgh hotels for a combined approximately $85 million, funded with cash and a $50 million term-loan draw. The remaining development hotel, expected to open in early 2024, is subject to unsatisfied closing conditions; if those conditions are met, the company is obligated to purchase it.
- Key risks cited include COVID-19 and travel demand, inflation, higher interest rates, labor shortages and wage pressure, supply-chain disruption, recession risk, financing access, property-sale and acquisition execution, and possible changes in REIT-related rules. Management stated there was no litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Whether hotel demand and RevPAR continue to recover, particularly corporate demand and occupancy relative to pre-pandemic levels.
- Whether operating costs, especially labor, utilities, supplies, taxes and insurance, erode hotel-level profitability.
- Debt maturities, interest-rate exposure, covenant headroom and the company’s ability to refinance or repay upcoming obligations.
- Whether operating cash flow supports distributions, planned capital improvements, acquisitions and any share repurchases without materially increasing borrowing.
- Closing conditions, final funding and expected returns for the remaining development-hotel purchase commitment.