Apple Hospitality REIT, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited quarterly results. Apple Hospitality is a self-advised U.S. lodging REIT. At year-end it owned 241 hotels with 30,812 rooms across 34 states, all operating under Marriott, Hilton or Hyatt brands and managed by third parties.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1,270.6 million | $1,238.6 million |
| Net income | $206.1 million | $182.5 million |
| Diluted net income per share | $0.90 | $0.82 |
| Cash from operating activities | $404.8 million | $384.1 million |
| FFO (non-GAAP) | $391.6 million | $387.7 million |
| Modified FFO (non-GAAP) | $395.8 million | $389.4 million |
| Adjusted EBITDAre (non-GAAP) | $448.5 million | $438.5 million |
Revenue increased 2.6% and net income rose 12.9%. Operating income was $257.9 million, or about 20.3% of revenue; net margin was about 16.2%. Hotel operating expenses were 56.3% of revenue, unchanged as a share of total revenue year over year. Property taxes, insurance and other costs increased to 5.9% of revenue from 5.6%.
For comparable hotels, ADR rose 0.7% to $136.11, occupancy fell to 77.0% from 77.7%, and RevPAR declined 0.2% to $104.80. Full-year results included portfolio additions and dispositions; on the broader owned-property operating statistics, RevPAR increased 0.5%. Fourth-quarter revenue was $295.3 million versus $289.1 million; net income was $34.2 million versus a $2.3 million loss in Q4 2017, which included a large impairment charge.
Investing cash outflow was $210.2 million and financing cash outflow was $190.8 million. The company reported $33.6 million of restricted cash and no cash and cash equivalents at year-end. It paid $275.9 million in distributions during 2018, at an annualized rate of $1.20 per share.
Debt, liquidity and capital allocation
Year-end debt was approximately $1.4 billion, up from $1.2 billion in 2017, with a weighted-average rate of 3.74%. About 74% was effectively fixed-rate after swaps; the company estimated that a 100-basis-point rate change would affect annual net income by about $3.7 million. Debt-to-total-capitalization was 31%. Reported unused credit-facility capacity was $231.2 million, including $75 million under a term facility that was drawn in January 2019 and used to repay revolver borrowings. The company reported compliance with debt covenants.
The company refinanced major credit facilities in July and August 2018, extending maturities, reducing borrowing spreads and improving certain covenants, while reducing aggregate facility capacity by $40 million. It repurchased about 6.6 million shares for $104.3 million at a weighted-average price of $15.87. The board-authorized repurchase program had $364 million remaining at year-end and was scheduled to end in July 2019 unless terminated earlier.
Material changes, outlook and risks
- Five hotels were acquired for approximately $152.2 million and three hotels were sold for approximately $15.8 million. Hotel count increased from 239 to 241.
- Comparable RevPAR was essentially flat as higher room rates were offset by lower occupancy. Management forecast slightly negative to slightly positive comparable RevPAR growth in 2019.
- Management anticipated $80–$90 million of 2019 hotel capital improvements, including renovations at approximately 30–35 properties. It also cited continued pressure from labor costs and expected property-tax increases; interest costs on variable-rate debt were expected to rise.
- Hurricanes Florence and Michael damaged or disrupted certain hotels. Two Panama City hotels were affected, with one not returning to full operation until February 2019. Business-interruption insurance proceeds were subject to claims processing and had not yet been recognized.
- A proposed sale of 16 hotels for $175 million was terminated in February 2019; replacement agreements covered nine properties for a combined $95 million, supported by a $7 million non-refundable deposit. Closings were expected in the first half of 2019, but remained conditional.
- As of January 31, 2019, the company had contracts for six potential hotel purchases totaling approximately $162.5 million, subject to closing conditions. Proceeds from expected dispositions were intended to reduce revolver borrowings.
- Four ground leases were expected to be treated as finance leases under the lease accounting standard adopted January 1, 2019. The company estimated a new right-of-use asset of $110–$125 million; the reclassification changes expense timing, not total expense over lease lives.
Key risks include hotel-sector cyclicality, new room supply and competition, reliance on third-party managers and three brand families, labor and operating-cost inflation, renovation requirements, natural disasters and insurance limitations, interest-rate and refinancing exposure, and maintaining REIT qualification and distributions. Management said no current litigation was expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; management and the auditor found internal control over financial reporting effective at year-end.
Important facts for investors to verify
- Whether the nine-hotel sale agreements closed as expected, and the final proceeds and debt reduction.
- Comparable RevPAR, occupancy, labor expense and hotel-level performance trends against the company’s 2019 outlook.
- Actual capital spending and renovation disruption compared with the $80–$90 million plan.
- Debt maturities, variable-rate exposure, swap coverage, covenant headroom and liquidity after acquisitions, repurchases and distributions.
- Whether the monthly $0.10 distribution remains supported by operating cash flow and the board’s capital priorities.
- Non-GAAP FFO, MFFO and Adjusted EBITDAre reconciliations: the company cautions these measures are supplemental and do not necessarily represent cash available for distributions.