Apple Hospitality REIT, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2022. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 219 hotels with 28,748 rooms across 36 states. It reports one operating segment. Amounts below are in U.S. dollars; financial totals are rounded to millions.
Financial and operating results
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $337.7m | $247.4m | $598.1m | $406.1m |
| Operating income | $80.7m | $39.0m | $113.6m | $11.2m |
| Net income (loss) | $65.3m | $20.3m | $83.3m | $(26.2)m |
| Basic and diluted EPS | $0.29 | $0.09 | $0.36 | $(0.12) |
| Adjusted Hotel EBITDA (non-GAAP) | $136.5m | $94.8m | $224.5m | $130.2m |
- Q2 revenue rose 36.5%; first-half revenue rose 47.3%. Room revenue was the principal revenue source.
- Comparable-hotel Q2 ADR was $153.35, occupancy 77.9%, and RevPAR $119.41, up 25.0%, 10.2% and 37.7%, respectively, from 2021. First-half comparable RevPAR increased 48.7% year over year.
- Recovery was uneven versus 2019: comparable-hotel RevPAR was up 0.8% in Q2 but down 4.6% for the first half. First-half occupancy remained below 2019 despite higher ADR.
- Hotel operating expenses were 54.1% of revenue in Q2 and 56.3% for the first half, versus 54.7% and 58.9% in 2021. Inflation, higher wages and contract labor, and supply-chain costs remained pressures.
- Six-month operating cash flow was $152.2m, compared with $49.8m in 2021. Investing activities used $25.0m, primarily for capital improvements; financing activities used $119.9m.
- At June 30, total assets were $4.78bn, shareholders’ equity $3.22bn, and debt net of issuance costs and fair-value adjustments $1.37bn. Debt principal outstanding was approximately $1.38bn; 92% was fixed-rate or effectively fixed by swaps, with a 3.56% weighted-average interest rate. Debt was approximately $1.44bn at December 31, 2021.
- Cash and cash equivalents were $1.6m; restricted cash was $45.7m. The company reported $359m of available capacity under its revolving credit facility and compliance with applicable debt covenants.
Material changes and significant transactions
- Performance improved substantially from the pandemic-affected 2021 comparison period; the first half moved from a net loss to net income. Lower interest expense, no 2022 impairment charge, and improved hotel demand also affected the comparison.
- No hotel acquisitions or dispositions occurred in the first half of 2022. The portfolio had 219 hotels at June 30, versus 232 a year earlier.
- In June, the company issued $75m of senior notes, with proceeds available for general corporate purposes, including debt repayment. It repaid the $56m note used to finance the 2021 Seattle land purchase and repaid several mortgages during the first half.
- After quarter-end, on July 25, the company refinanced and expanded its former $850m credit facility to $1.2bn of stated capacity (including a delayed-draw term loan), extending key maturities to 2026–2028 and replacing LIBOR with SOFR-based pricing. On August 1, it repaid three mortgage loans totaling $31.7m.
- The company paid $0.21 per share in distributions during the first half and declared a monthly $0.05-per-share distribution for July, paid July 15. It repurchased approximately 10,000 shares in the first half for about $0.1m.
Outlook, risks and unusual items
- Management reported continued recovery, led by leisure, small-group and local negotiated demand; suburban markets and the Sun Belt generally performed better. It expected improvement to continue but said larger corporate demand may take longer to recover. The filing gives no quantified revenue or earnings forecast.
- The company anticipated $55–$65m of 2022 capital spending, including renovations at approximately 20–25 hotels. Inflation and supply shortages could increase costs or delay work.
- Management expected second-half 2022 interest expense to be similar to second-half 2021, as lower average borrowings would be offset by higher interest rates.
- Key uncertainties include COVID-19 variants and travel demand, recession and consumer sentiment, inflation, labor availability and costs, supply-chain disruptions, interest-rate and refinancing risks, seasonality, and natural disasters. Management cautioned that results may not return to pre-pandemic levels on a predictable schedule.
- One potential acquisition remained conditional: a development-stage, 260-room Embassy Suites in Madison, Wisconsin, for an expected purchase price of approximately $78.6m, with opening anticipated in early 2024. Closing was not assured.
- No material adverse legal proceeding was identified. Management concluded disclosure controls were effective as of June 30, 2022; implementation of a replacement accounting system was completed during Q2.
Important facts for investors to verify
- Whether hotel demand and comparable RevPAR sustain recovery, particularly against 2019 levels and if corporate travel improves.
- Whether operating-cost inflation, wage pressure and staffing constraints erode hotel-level margins as occupancy increases.
- Current debt balances, post-refinancing borrowing availability, covenant headroom, upcoming mortgage maturities and the effect of higher SOFR rates.
- Whether operating cash flow can support distributions, capital spending and debt service; distributions remain subject to board approval and may change.
- Whether the Madison hotel purchase conditions are satisfied and the project is completed on the expected schedule and price.
- Non-GAAP measures such as Adjusted Hotel EBITDA are supplemental and are not equivalent to cash available for distributions or debt repayment.