Apple Hospitality REIT, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company is a U.S. lodging REIT; at quarter-end it owned 234 hotels with 30,046 rooms in 34 states, including one hotel held for sale. Common shares trade as APLE on the NYSE.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $331.7 million | $332.2 million | $976.6 million | $975.3 million |
| Operating income | $61.1 million | $75.4 million | $193.1 million | $210.6 million |
| Net income | $46.2 million | $62.1 million | $146.5 million | $171.9 million |
| Diluted net income per share | $0.21 | $0.27 | $0.65 | $0.75 |
| FFO | $99.6 million | $108.0 million | $292.2 million | $311.1 million |
| Modified FFO | $100.4 million | $109.1 million | $295.3 million | $314.3 million |
| Adjusted EBITDAre | $115.6 million | $122.6 million | $342.7 million | $353.7 million |
Q3 revenue was essentially flat year over year, while net income fell about 26%. For the first nine months, revenue was up about 0.1%, while net income fell about 15%. Management cited higher hotel operating costs, general and administrative expense, depreciation, and interest; Q3 also included a $6.5 million impairment charge. FFO, MFFO and Adjusted EBITDAre are non-GAAP measures and are not substitutes for net income or operating cash flow.
Comparable-hotel RevPAR rose 1.1% in Q3 and 0.4% for the first nine months. Q3 comparable occupancy was 79.9% and ADR was $139.32; nine-month occupancy was 78.6% and ADR was $139.58. Hotel operating expense increased to 56.6% of revenue in Q3 and 56.3% for the nine-month period, primarily reflecting labor-cost pressure.
Cash, debt and capital
- Operating cash flow: $291.5 million for the first nine months, versus $296.9 million in 2018. Investing activities used $10.5 million; financing activities used $279.3 million.
- Cash and liquidity: Cash and cash equivalents were zero; restricted cash for furniture, fixtures and other escrows was $35.3 million. The company reported $273.5 million of unused capacity on its $425 million revolving credit facility.
- Debt: Debt, net, was $1.340 billion at September 30, down from $1.412 billion at December 31, 2018. Before unamortized costs and fair-value adjustments, total debt principal was $1.345 billion. After swaps, 90% of debt was fixed-rate; weighted-average debt interest rate was 3.58%. The company was in compliance with debt covenants.
- Distributions and repurchases: The current distribution rate was $0.10 monthly, or $1.20 annualized per share. $201.5 million was paid during the first nine months. The company repurchased approximately 0.3 million shares for $4.3 million; $359.8 million remained under its authorized repurchase program.
- Capital spending: Approximately $47 million was spent on capital improvements in the first nine months; management expected another $30–$40 million in the balance of 2019.
Material changes and unusual items
- In March, the company sold nine hotels for $95.0 million gross proceeds, using net proceeds to repay revolving-credit borrowings. It acquired two hotels for $52.4 million during the first nine months.
- A Winston-Salem hotel was classified as held for sale; the company recorded a $6.5 million impairment based on an approximately $6.7 million contracted sale price. The sale was expected in Q4 2019.
- Adoption of lease accounting Topic 842 on January 1, 2019 resulted in a $5.2 million reduction to opening equity and recognition of lease assets and liabilities. Four ground leases previously treated as operating leases are now finance leases, affecting comparability of operating ground lease, depreciation and interest expenses.
- The company estimated an approximately $53 million increase in a finance-ground-lease right-of-use asset and liability following an updated estimate of future rent under a lease reset provision. The increase and effective date remained subject to agreement with the lessor.
- General and administrative expense rose to $9.0 million in Q3 from $3.4 million, mainly due to management changes and increased incentive compensation accruals. Potential 2019 incentive-plan payouts ranged from zero to $19 million; $7.8 million had been accrued at quarter-end.
Outlook, risks and contingencies
Management forecast full-year 2019 comparable RevPAR growth between slightly negative and slightly positive, and expected a Q4 RevPAR decline versus Q4 2018. The company attributed the Q4 comparison in part to weaker demand expectations and unusually strong 2018 demand related to disaster-recovery activity. It also reported that recovery-related demand had supported certain markets in 2019.
Six hotels under development remained under purchase contracts at quarter-end, with expected aggregate purchase prices of approximately $208.8 million after the Richmond hotel acquisition in October. Closings depended on unsatisfied conditions; the company planned to use available credit facilities if acquisitions close. October sale agreements for two additional hotels totaled $33.0 million; closings were conditional and proceeds were expected to reduce revolving debt. Management also planned a Q1 2020 conversion of its New York Renaissance hotel to an independent boutique property, anticipating about $1 million in conversion costs and operational disruption.
Risks highlighted include hotel supply growth, labor and wage costs, property taxes and insurance, seasonal demand, economic and lodging-market conditions, natural disasters and financing needs. A 100-basis-point rate change was estimated to affect annual net income by approximately $1.3 million, all else equal. The filing reported no material change to previously disclosed risk factors and no material litigation known to management. Management stated disclosure controls were effective at September 30, 2019.
Important facts for investors to verify
- Whether Q4 demand weakness and full-year RevPAR performance tracked management’s stated outlook, particularly as disaster-recovery demand faded.
- Whether the estimated $53 million lease-payment reset was agreed with the lessor and how resulting lease costs affect future results and obligations.
- Whether the six development acquisitions and announced hotel dispositions closed, and their effects on debt and operating results.
- Whether operating cash flow supports the distribution and planned capital spending; management cautioned that the current distribution rate is not assured and may be adjusted.
- How labor, insurance, property-tax and incentive-compensation costs affect hotel margins and earnings.