Apple Hospitality REIT, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2021. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 215 hotels with 28,085 rooms in 35 states. Results reflect the continuing COVID-19 recovery and portfolio changes, including four hotel acquisitions and 23 hotel sales during the first nine months.
Financial and operating results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $277.2 million | $148.8 million | $683.3 million | $467.9 million |
| Net income (loss) | $31.8 million | $(40.9) million | $5.6 million | $(122.0) million |
| Operating income (loss) | $47.9 million | $(22.4) million | $59.0 million | $(69.2) million |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $146.4 million | $26.2 million |
| Adjusted Hotel EBITDA | $105.4 million | $34.7 million | $235.7 million | $98.7 million |
Q3 hotel operating expense was 55.5% of revenue, compared with 63.0% a year earlier; for the nine-month periods, it was 57.5% versus 66.4%. Comparable-hotel Q3 occupancy was 71.6%, ADR was $141.56, and RevPAR was $101.32, increases of 47.0%, 33.4%, and 96.2%, respectively, year over year. Comparable-hotel RevPAR remained 11.4% below Q3 2019.
At September 30, total assets were $4.705 billion, debt net of issuance costs was $1.367 billion, finance lease liabilities were $111.7 million, and shareholders’ equity was $3.128 billion. Debt was down from $1.483 billion at year-end 2020. The weighted-average interest rate was 3.47%; 96% of debt was fixed-rate or effectively fixed by swaps. Cash and cash equivalents were $39.4 million, with a further $34.4 million restricted for reserves and escrows. The revolving credit facility had $425 million available.
Nine-month capital spending was $9.7 million; management anticipated a further $15–20 million for the remainder of 2021. FFO was $147.6 million and MFFO was $152.4 million for the first nine months; these are non-GAAP measures and are not substitutes for operating cash flow or distributable cash.
Material changes versus prior comparable periods
- Revenue and earnings improved substantially from pandemic-affected 2020. Q3 recovery was driven mainly by higher leisure demand, with improvement also from group, government, and small corporate business.
- Portfolio operations remained below pre-pandemic levels: occupancy and ADR were generally below 2019, and management said recovery depends in part on business travel and broader removal of travel and operating restrictions.
- The company sold 23 hotels for gross proceeds of approximately $234.6 million and a net gain of approximately $3.7 million after impairment charges. Four acquired hotels cost approximately $197.5 million in total.
- In the second quarter, the company issued about 4.7 million shares through its ATM program, receiving approximately $75.1 million net. Common shares outstanding rose to 228.4 million from 223.2 million at year-end 2020.
- Distributions were $0.02 per share for the first nine months of 2021, versus $0.30 for the comparable 2020 period. A further $0.01 per share declared in September was paid October 18, 2021.
Outlook, risks, contingencies, and unusual items
Management reported continued recovery and expected further improvement, but provided no numerical earnings or revenue guidance. It expected results to remain below 2019 levels through the remainder of 2021 and said a fuller recovery depends on business travel. COVID-19 resurgence and variants, renewed restrictions, consumer sentiment, seasonality, labor shortages and wage pressure, inflation, and supply-chain constraints could impede recovery.
The company exited its extended covenant-waiver period effective July 29, 2021 and reported meeting applicable financial maintenance covenants based on annualized results through September 30. It cannot re-enter the waiver period. The company had $1.372 billion of aggregate debt principal; scheduled maturities include $165.8 million in 2022, $296.2 million in 2023, and $338.6 million in 2024. A 100-basis-point interest-rate change was estimated to affect annual net income by approximately $0.5 million.
Five hotel purchase contracts totaling approximately $242.6 million remained outstanding at quarter-end, subject to closing conditions. Four operating hotels were expected to close in Q4 2021; one development hotel was expected to close upon completion, planned for 2023. Subsequent to quarter-end, the company acquired the 150-room Memphis Hilton Garden Inn for $38.0 million. The Seattle land purchase included a $56.0 million one-year seller note at 4.0% and retired the related finance ground lease.
Other notable items include $10.8 million of nine-month impairment charges related to properties identified for sale and a $13.0 million accrued liability for potential 2021 executive incentive compensation. Management disclosed related-party transactions and cautioned that these may not be at arm’s length. It reported no litigation expected to have a material adverse effect and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether operating recovery continues, particularly in business travel, and how occupancy, ADR, and RevPAR compare with 2019.
- Debt maturities, covenant compliance after exiting the waiver period, and availability of the revolving credit facility.
- Whether the five remaining hotel purchases close, their financing, and the returns expected from acquisitions versus dispositions.
- Cash available for distributions after capital needs and debt service; distributions remain subject to board approval and may change.
- The impact of labor and supply-cost inflation, COVID-19 developments, and the accrued executive incentive compensation on future margins and cash flow.