Apple Hospitality REIT, Inc. — Q1 2018 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. The U.S. lodging REIT owned 241 hotels with 30,585 rooms in 34 states at quarter-end; its hotels operate under Marriott or Hilton brands. Q1 results may not indicate full-year performance, and hotel operations are seasonal.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $298.4 million | $292.9 million | +1.9% |
| Operating income | $54.3 million | $46.3 million | +17.1%; operating margin 18.2% vs. 15.8% |
| Net income | $42.2 million | $34.4 million | +22.8%; diluted EPS $0.18 vs. $0.15 |
| FFO / MFFO | $87.0 million / $87.9 million | $85.9 million / $86.9 million | FFO +1.2%; MFFO +1.2% |
| Adjusted EBITDA | $100.2 million | $99.1 million | +1.1% |
| Net cash from operations | $52.9 million | $36.2 million | Increase of $16.7 million |
| Cash used in investing | $86.5 million | $35.6 million | Included $61.6 million for hotel acquisitions and $24.7 million in capital improvements |
| Debt, carrying value | $1.327 billion | $1.222 billion at Dec. 31, 2017 | Quarter-end debt comprised $170.7 million revolving, $656.6 million term loans and $500.2 million mortgage debt |
Comparable-hotel RevPAR rose 0.9% to $100.23, as ADR increased 0.9% to $134.43 and occupancy edged up to 74.6% from 74.5%. Hotel operating expenses increased 2.3% to $172.3 million and rose to 57.8% of revenue from 57.5%; management cited labor cost growth as the primary factor.
Liquidity and distributions. The company reported $31.4 million of restricted cash and no cash and cash equivalents. Its $540 million revolving facility had $170.7 million drawn and approximately $369.3 million of unused capacity. Q1 distributions paid were $69.1 million, or $0.30 per share, exceeding operating cash flow by about $16.3 million; the company said the shortfall, which included a $5.5 million litigation settlement payment, was funded primarily by revolver borrowings. The current annualized distribution rate was $1.20 per share.
Material changes versus Q1 2017
- Revenue and comparable-hotel RevPAR grew modestly; comparable occupancy was nearly flat.
- Net income improved partly because Q1 2017 included a $7.9 million real estate impairment charge; no impairment was recorded in Q1 2018.
- Debt increased from year-end 2017, reflecting higher revolving borrowings and new mortgage financing. Interest expense rose 1.7% to $11.9 million despite lower average debt, which management attributed to higher interest rates and a higher effective rate on debt.
- The portfolio expanded with two Hampton hotel acquisitions in Atlanta and Memphis for a gross purchase price of $63.0 million. The company had 236 hotels at March 31, 2017, compared with 241 at March 31, 2018; acquisitions and dispositions affect period-to-period comparability.
Outlook, commentary, risks and unusual items
- Management and the industry forecast a low-single-digit increase in comparable-hotel revenue for full-year 2018, with continued modest improvement in comparable-hotel revenue and operating results. Management cited uneven demand and new hotel supply as constraints on rate growth.
- Management expects labor costs to continue rising, property tax assessments to increase, property insurance costs to rise slightly as a share of revenue, and interest costs to increase during the rest of 2018.
- Approximately 79% of debt was effectively fixed-rate at quarter-end; about 21%, or $273.2 million, remained variable-rate after swaps. Management estimated a 100-basis-point rate change would affect annual net income by approximately $2.7 million, all else equal. Approximately $3.2 million of hedge gains were expected to reduce interest expense over the next 12 months.
- Debt principal maturities include $204.5 million in 2019 and $453.3 million in 2020. The revolving facility matures May 2019 and may be extended one year subject to conditions and fees. The company reported compliance with applicable debt covenants at March 31, 2018.
- The company anticipated spending a further $50–$60 million on capital improvements during the remainder of 2018, including renovations at approximately 25–30 hotels. It also disclosed potential hotel purchases, including the Orlando Home2 Suites, subject to construction completion and unmet closing conditions. The Phoenix hotel was acquired May 2, 2018 for approximately $44.3 million; a Cape Canaveral development purchase contract was entered into in April.
- The company warned that distributions are not assured at the current rate and may be adjusted; seasonal cash needs may be met with revolver borrowings. Other cited risks include increased hotel supply, labor uncertainty, economic and market conditions, financing, natural disasters and litigation. The 2014 DRIP settlement was court-approved in March 2018; another previously disclosed action was dismissed without prejudice against the company and other defendants on May 1, 2018.
- The company adopted several accounting standards in 2018, including revenue recognition; management reported no material effect on financial statements from adoption.
Important facts for investors to verify
- Reconcile capital-improvement disclosures: the cash flow statement reports $24.7 million, while MD&A says approximately $18.1 million was invested in capital expenditures during the quarter.
- Assess whether operating cash flow can support the distribution, renovations, acquisitions and repurchases without continued reliance on debt or equity issuance.
- Review the 2019–2020 debt maturities, revolving-facility extension conditions, variable-rate exposure and refinancing needs.
- Track execution and funding of hotel purchase commitments, particularly the conditional Orlando and Cape Canaveral projects.
- Evaluate the sustainability of modest RevPAR growth amid labor, insurance and property-tax cost pressures, and note that management’s outlook is forward-looking rather than guaranteed.