Apple Hospitality REIT, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Apple Hospitality is a self-advised lodging REIT. At quarter-end it owned 173 hotels with 22,003 rooms in 32 states. Unless noted otherwise, financial amounts below are in millions.
Financial performance and position
- Revenue: $210.4, up from $137.1 in Q1 2014. The year-over-year comparison is materially affected by the March 2014 Apple REIT Seven and Eight mergers, which contributed only one month of results to reported Q1 2014. On the company’s comparable-hotel basis, revenue increased about 9% to $203.6.
- Comparable hotel metrics: RevPAR rose 7.6% to $93.69; average daily rate increased 4.7% to $126.56; occupancy improved to 74.0% from 72.1%.
- Profit: Operating income was $36.3, versus an operating loss of $90.5. Net income was $43.9, or $0.12 per diluted share, compared with a $94.5 net loss, or $0.38 per share, in Q1 2014. The prior-year loss included a $117.1 noncash expense tied to conversion of Series B preferred shares. Q1 2015 included a $15.6 gain on hotel sales.
- Expenses and margins: Hotel operating expenses were $122.5, or 58% of revenue, versus $78.3, or 57%. Management said comparable-hotel operating expenses as a share of revenue decreased slightly, primarily reflecting higher ADR. Depreciation was $30.7; interest and other expense was $7.7.
- Cash flow: Operating cash flow was $36.3, compared with $22.9. Investing activities provided $186.9, mainly from $201.9 net proceeds from real estate sales; capital improvements and development costs used $18.8. Financing activities used $176.2, including $63.4 of distributions and $91.6 of credit-facility repayment. Cash ended the quarter at $46.9, versus zero at year-end.
- Debt and liquidity: Total liabilities were $650.4; credit-facility debt was $100.0 and mortgage debt carrying value was $507.0. The revolving credit facility was fully repaid at quarter-end; the remaining facility balance was the $100.0 term loan, effectively fixed at about 3.13%. Mortgage principal outstanding before fair-value adjustments was $503.4. The company reported covenant compliance. Cash, operating cash flow and available credit were expected to meet anticipated needs.
- Distributions: Q1 distributions totaled $63.4, exceeding operating cash flow of $36.3; the company said the shortfall included return of capital and was partly funded by credit-facility borrowings. The then-current annualized distribution was $0.68 per share.
- Supplemental measures: FFO was $60.8 and modified FFO was $62.8; Adjusted EBITDA was $71.1. These are non-GAAP measures and are not substitutes for GAAP results or cash available for distributions.
Material changes and unusual items
- On February 26, 2015, the company sold 18 hotels for $206.4, recognizing a $15.6 gain. Proceeds partly repaid the revolving facility; remaining proceeds were intended for acquisitions and renovations. One hotel included in the planned sale was not sold and was reclassified as held and used.
- Reported results are not directly comparable year over year because the 2014 mergers added 99 continuing hotels effective March 1, 2014, and the company sold 18 hotels in February 2015. Comparable-hotel statistics include pre-acquisition results for the merger properties.
- In Q1 2015, the company discontinued hedge accounting for its $100 million term-loan swap after determining the hedged cash flows were no longer probable through maturity, in light of potential financing changes associated with a listing and share repurchases. A $0.8 loss was recorded in interest expense for the remainder of the quarter.
- The company accrued $2.2 for potential 2015 incentive compensation. It also reported $1.2 of transaction and potential listing costs.
Outlook, risks and subsequent events
- Management and the industry forecast a mid- to upper-single-digit percentage increase in comparable revenue for 2015 and expected continued improvement in revenue and operating income. This is an outlook, not formal earnings guidance. Results are subject to hotel seasonality; occupancy and revenue are generally higher in the second and third quarters.
- Management identified risks including increased hotel supply in some markets, labor and benefit costs, higher property-tax assessments, local economic weakness, government spending and policy, financing conditions, litigation, and natural disasters. Insurance may not fully offset business-interruption losses.
- Q1 capital expenditures were about $12.4; the company anticipated an additional $40–$50 in 2015. It reported $23.7 in capital reserves and no existing or planned development projects.
- In April, the company announced an intended NYSE listing on or about May 18, 2015. If listed, the authorized annual distribution rate would fall from $0.68 to $0.60 per share, effective with the June distribution. The company also approved a proposed tender offer of up to $200 and a subsequent $500 share-buyback program, subject to execution and financing. It had nonbinding commitments for up to $965 of a proposed new credit facility.
- After quarter-end, the company signed conditional contracts to acquire five hotels for a combined $145.9; closings were not assured. It also redeemed about 0.4 million shares for $4.1 in April and then terminated its limited redemption program.
- Several shareholder-related lawsuits remained pending. The company said it could not reasonably predict outcomes or estimate possible losses for the unresolved matters. One previously disclosed consolidated litigation was dismissed, with the appeal period expired.
Most important facts for investors to verify
- Whether the anticipated NYSE listing, proposed tender offer and buyback occurred, and the final terms and funding of any new credit facility.
- Whether comparable-hotel growth persists, given the significant merger and disposition effects on reported year-over-year results.
- Distribution coverage and funding: Q1 distributions exceeded operating cash flow, and the company noted that borrowings may support distributions.
- Near-term mortgage maturities, refinancing requirements and compliance with credit-facility covenants.
- Closing status and total financing needs for the five proposed hotel acquisitions, as well as developments in the unresolved litigation.