Apple Hospitality REIT, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; compared with Q1 2023 unless otherwise stated. Apple Hospitality is a U.S. lodging REIT. At quarter-end it owned 224 hotels with 29,886 rooms in 37 states and Washington, D.C.
Financial and operating performance
- Revenue: $329.5 million, up 5.8% from $311.5 million. Growth reflected hotels acquired in 2023; comparable-hotel performance was essentially flat.
- Hotel demand: Comparable-hotel occupancy was 72.1% in both periods; ADR was $154.10 versus $154.08; RevPAR was $111.09 versus $111.14. Same-store RevPAR declined 0.5% to $109.23.
- Expenses and margins: Hotel operating expenses increased 6.5% to $197.3 million and rose to 59.9% of revenue from 59.5%. Approximate Adjusted Hotel EBITDA margin was 33.3%, versus 34.3% a year earlier.
- Profit: Net income was $54.1 million, up 64.2%, and diluted EPS was $0.22 versus $0.14. Results included a $17.8 million gain on two hotel sales; without that gain, reported net income growth would have been materially lower. Operating income was $71.6 million versus $49.2 million.
- Supplemental measures: FFO was $82.3 million versus $78.1 million; MFFO was $83.2 million versus $79.0 million; Adjusted Hotel EBITDA was $109.8 million versus $106.7 million. These are non-GAAP measures and are not substitutes for cash flow or net income.
- Cash flow: Operating cash flow was $54.7 million versus $51.7 million. Investing activities used $116.9 million, including $118.3 million for hotel acquisitions and $31.3 million for capital improvements, partly offset by $33.1 million in net sale proceeds. Financing activities provided $53.3 million. Cash, cash equivalents and restricted cash ended at $34.6 million, down $9.0 million from year-end; unrestricted cash was $4.9 million.
- Debt and liquidity: Debt, net, was $1.50 billion, up from $1.37 billion at December 31, 2023. The weighted-average debt rate was 4.56%, compared with 4.26%. After swaps, 22% of debt was variable-rate. The company reported $519 million of revolving-credit availability and compliance with applicable debt covenants.
- Distributions and equity: The company paid $0.29 per share, or $70.2 million, during the quarter. Its stated monthly distribution was $0.08 per share, equivalent to $0.96 annually, subject to board approval and cash needs. Shares outstanding at April 29 were 242,346,188.
Material changes and transactions
- Acquired a 234-room AC Hotel in Washington, D.C. on March 25 for a gross purchase price of $116.8 million, funded using sale proceeds and revolving-credit borrowings.
- Sold two Arkansas hotels for a combined gross price of approximately $33.5 million, recognizing a $17.8 million gain. A portion of proceeds was used in a Section 1031 exchange; $15.1 million of taxable gains was deferred.
- Has contracts to potentially acquire hotels under development in Madison, Wisconsin, and Nashville, Tennessee, for a combined $177.5 million. Closings are conditional; if sellers satisfy the conditions, the company is obligated to complete the purchases.
- Debt increased by $129.2 million from year-end, including $131.0 million outstanding on the revolving facility. The company had $184.9 million of principal and interest due over the next 12 months, including an $85.0 million term loan and approximately $20.1 million mortgage loan maturing in Q3 2024.
Outlook, risks and unusual items
- Management expects comparable-hotel RevPAR growth and operating results for full-year 2024 to improve from Q1, which it said was affected by Super Bowl market comparisons and Easter timing. No numerical full-year RevPAR guidance was provided.
- Management anticipates 2024 capital expenditures of $75 million to $85 million, including comprehensive renovations at approximately 20 properties. Q1 capital expenditures were approximately $20.3 million; inflation and supply constraints could increase costs or delay projects.
- Management expects interest expense for the remainder of 2024 to exceed the comparable 2023 period, citing increased revolving borrowings, market rates and expiring swaps. It estimates a 100-basis-point rate change would affect annual net income by approximately $3.3 million, all else equal.
- Labor, insurance, property-tax and other inflationary pressures may weigh on margins; hotel demand is also exposed to economic conditions, consumer sentiment, seasonality, travel disruptions and weather events.
- The tenant at the company’s New York independent boutique property failed to make lease payments timely. The company terminated the lease and began legal proceedings in April 2024 to remove the tenant; timing of resolution and transition to a new manager is uncertain.
- Management said it expects monthly distributions to continue at $0.08 per share, but distributions remain subject to board approval and could be adjusted to meet other cash needs or maintain REIT status. The share repurchase program had approximately $335.4 million remaining and was scheduled to end in July 2024 unless extended or ended earlier.
- The filing reports no litigation expected by management to have a material adverse effect. Disclosure controls were assessed as effective at March 31, 2024.
Important facts for investors to verify
- How much of revenue and profit growth is attributable to acquired hotels versus underlying comparable-property performance, and how results develop after Q1’s flat comparable RevPAR.
- Whether the Madison and Nashville acquisitions close, their final costs and funding, and the effect on leverage and liquidity.
- Plans and financing for the 2024 debt maturities, and the impact as $235 million of swaps mature during the remainder of 2024.
- Progress and potential financial impact of the New York tenant dispute and management transition.
- Actual renovation spending, distribution coverage and any decision to change the monthly distribution or extend the share repurchase program.