Apple Hospitality REIT, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The company is a U.S. lodging REIT; at quarter-end it owned 243 hotels with 30,929 rooms across 34 states. The financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $344.7 million | $331.7 million | $643.1 million | $624.6 million |
| Operating income | $81.0 million | $83.6 million | $135.3 million | $129.9 million |
| Net income | $67.6 million | $87.6 million | $109.8 million | $122.0 million |
| Basic and diluted EPS | $0.29 | $0.39 | $0.48 | $0.55 |
| FFO | $116.4 million | $115.3 million | $203.4 million | $201.2 million |
| Modified FFO | $117.3 million | $113.7 million | $205.2 million | $200.5 million |
Q2 revenue rose 3.9%, while net income fell 22.8%; six-month revenue rose 3.0%, while net income fell 10.0%. Prior-year net income benefited from a $16.1 million gain on a hotel sale. Q2 2018 also included $3.1 million of impairment charges. Interest and other expense increased 11.5% in Q2 and 6.6% for the first half. Operating margin was approximately 23.5% in Q2 2018 versus 25.2% in Q2 2017, and 21.0% for the first half versus 20.8%.
Comparable-hotel RevPAR increased 1.3% in Q2 and 1.1% for the first half. Q2 comparable ADR was $139.83 and occupancy 81.8%; first-half ADR was $137.39 and occupancy 78.3%.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $166.4 million, compared with $154.9 million a year earlier. Investing used $174.6 million, including $135.2 million for hotel acquisitions and $39.1 million for capital improvements. Financing provided $10.7 million; distributions paid were $138.2 million.
- At June 30, total assets were $5.019 billion, total liabilities $1.462 billion and shareholders’ equity $3.557 billion. Debt was approximately $1.372 billion: $218.4 million on the revolving facility, $656.9 million in term loans and $496.9 million in mortgage debt.
- The existing $540 million revolving facility had $218.4 million outstanding and $321.6 million of unused capacity. Cash and cash equivalents were zero; the reported $32.3 million of cash and restricted cash consisted of restricted furniture, fixture and other escrows.
- The company reported compliance with debt covenants. Approximately 23% of debt was exposed to variable rates after swaps; a 100-basis-point rate change was estimated to affect annual net income by about $3.2 million.
- The monthly distribution rate was $0.10 per share, or $1.20 annualized. The company paid $138.2 million in distributions during the first half, versus $166.4 million of operating cash flow.
Material changes, outlook and risks
- The company acquired four hotels in the first half for an aggregate gross purchase price of $136.8 million. It had contracts for five hotels under development with an aggregate purchase price of approximately $130.8 million; closings were conditional and expected over the following nine to 30 months.
- Two Columbus, Georgia hotels were sold in July 2018 for a combined gross price of $10.0 million. The company also recorded a $2.6 million impairment on a Springdale, Arkansas hotel it was pursuing a sale of.
- After quarter-end, the company refinanced its credit facilities: the $965 million facility was replaced with an $850 million facility, and the $150 million term-loan facility was replaced with a $225 million facility. The refinancings extended maturities and reduced spreads, while total facility capacity declined by $40 million to $1.075 billion. The additional $75 million term-loan capacity was available to draw through January 31, 2019.
- Management expected low-single-digit comparable-hotel revenue growth for full-year 2018, and flat to modest improvement in comparable revenue and operating results in the second half against hurricane-related demand in the prior-year period. It cited uneven demand and new hotel supply as constraints on rate growth.
- Management anticipated continued pressure from labor costs, property taxes, insurance and interest expense. It expected to spend a further $35–45 million on capital improvements in the second half of 2018. Hotel seasonality, increased supply, economic and market conditions, natural disasters, financing risks and the company’s ability to close planned acquisitions were identified as risks. Distributions are subject to board approval and may change.
Important facts for investors to verify
- Whether the modest RevPAR trends and management’s 2018 outlook were achieved, particularly against hurricane-related comparisons.
- Progress and final economics of the post-quarter debt refinancing, including borrowing levels, variable-rate exposure and covenant headroom.
- Whether the five contracted hotel acquisitions closed, and the funding and returns associated with them.
- Cash available after distributions, acquisitions and planned renovation spending; the filing’s cash-flow statement reports $39.1 million of first-half capital improvements, while MD&A describes approximately $30.6 million invested in capital expenditures.
- Disposition outcomes and valuation assumptions for the Springdale hotel, and whether labor, tax, insurance or interest-cost increases pressured margins.