Apple Hospitality REIT, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 234 hotels with 30,046 rooms in 34 states.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $341.1 million | $344.7 million | $644.9 million | $643.1 million |
| Operating income | $78.1 million | $81.0 million | $132.0 million | $135.3 million |
| Net income | $62.1 million | $67.6 million | $100.2 million | $109.8 million |
| Diluted net income per share | $0.28 | $0.29 | $0.45 | $0.48 |
| Cash provided by operating activities | Not presented for quarter | Not presented for quarter | $164.1 million | $166.4 million |
| FFO / Modified FFO | $109.0 / $110.2 million | $116.3 / $117.3 million | $192.6 / $194.9 million | $203.1 / $205.2 million |
Q2 revenue fell 1.0% year over year and net income fell 8.2%; first-half revenue rose 0.3%, while net income declined 8.7%. Operating margin was approximately 22.9% in Q2 versus 23.5% a year earlier, and 20.5% for the first half versus 21.0%. Comparable-hotel RevPAR was essentially flat: down 0.1% in Q2 and effectively unchanged for the first half. For comparable hotels, first-half ADR rose 0.8% while occupancy declined 0.8%.
First-half operating cash flow slightly exceeded the $134.3 million of distributions paid. Capital improvements were $33.2 million; the company expected another $45–55 million of capital spending during the remainder of 2019.
Debt, liquidity and capital
- June 30 total debt, net, was $1.384 billion, down from $1.412 billion at December 31, 2018. The weighted-average debt rate was 3.76%, versus 3.74% at year-end.
- Approximately 23% of debt, or $320.2 million, remained variable-rate after swaps. Management estimated that a 100-basis-point rate change would affect annual net income by about $3.2 million.
- Unused capacity on the $425 million revolving facility was $232.3 million. The company reported covenant compliance. Cash and cash equivalents were zero; $33.2 million of restricted cash was primarily held for furniture, fixtures and other escrows.
- Current annual distributions were $1.20 per share, paid monthly. The company cautioned that distributions are board-approved, not assured at the current rate, and may be funded with revolver borrowings when needed.
Material changes, outlook and risks
- Portfolio activity: two hotels were acquired for $52.4 million and nine hotels were sold for $95.0 million in gross proceeds; sale proceeds were used to reduce revolver borrowings. The sales generated a reported $1.7 million gain in the notes. At July 31, the company reported seven potential hotel purchases totaling approximately $216.1 million, subject to unmet closing conditions.
- Management forecast full-year comparable-hotel RevPAR growth of slightly negative to slightly positive versus 2018, citing modest demand expectations, relatively consistent supply growth and somewhat favorable comparisons from natural disasters. Hotel results had been stable, with essentially flat RevPAR.
- Management cited labor-cost pressure as the primary reason hotel operating expenses rose as a share of revenue. It also anticipated higher property taxes and insurance costs. Interest expense rose 20.0% in Q2 and 24.8% for the first half, reflecting borrowing levels, rates and finance-lease interest; management expected second-half interest expense to be higher year over year.
- Lease accounting adoption on January 1, 2019 added finance lease assets and liabilities and a $5.2 million cumulative-effect adjustment to equity. Four ground leases shifted from operating expense to depreciation and interest, limiting comparability with prior periods. The company also recorded $0.5 million of one-time executive separation expense and $4.7 million of potential 2019 incentive-plan compensation through June 30.
- Key risks include lodging supply and demand, labor and other operating-cost inflation, interest-rate exposure, seasonality, natural disasters and insurance coverage, financing and acquisition execution, and maintaining REIT status. The filing reported no material litigation and no material changes to previously disclosed risk factors. Related-party transactions continue and are not necessarily arm’s length.
Important facts for investors to verify
- Whether flat comparable RevPAR and the slightly negative-to-positive full-year outlook hold as labor, tax and insurance costs rise.
- Distribution coverage, given $134.3 million of first-half distributions, $164.1 million of operating cash flow and expected capital spending.
- Variable-rate exposure, debt maturities and borrowing capacity, especially as acquisition commitments and potential share repurchases use credit facilities.
- Closing conditions, funding and returns for the potential hotel purchases; the contracts are not guaranteed to close.
- Comparability of reported expenses and supplemental FFO measures following lease-accounting adoption; FFO and MFFO are non-GAAP measures and are not cash available for distributions.