Apple Hospitality REIT, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company is a self-advised U.S. lodging REIT. At quarter-end it owned 174 hotels with 22,177 rooms in 32 states. Its common shares began NYSE trading as APLE on May 18, 2015.
Financial and operating performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $234.4 million | $232.6 million | $444.7 million | $369.7 million |
| Operating income (loss) | $52.2 million | $51.7 million | $88.5 million | $(38.9) million |
| Net income (loss) | $44.2 million | $43.8 million | $88.1 million | $(50.7) million |
| Net income (loss) per share | $0.24 | $0.23 | $0.47 | $(0.33) |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $116.8 million | $98.0 million |
| Modified FFO | $82.2 million | $77.3 million | $145.1 million | $122.0 million |
| Adjusted EBITDA | $90.1 million | $85.4 million | $161.2 million | $134.1 million |
Q2 operating margin was approximately 22.3%, versus 22.2% a year earlier. Comparable-hotel RevPAR increased 6.2% in Q2 and 6.9% in the first half, supported by higher ADR (up 5.0% and 4.9%) and occupancy (81.9% versus 80.9% in Q2; 78.1% versus 76.6% in the first half). The company cautions that reported period comparisons are affected by acquisitions and dispositions.
Cash and cash equivalents were zero at June 30. Total liabilities were $864.0 million, including $309.8 million outstanding on the credit facility and $489.7 million of mortgage debt on the balance sheet, net of fair-value adjustments. The company reported $486.9 million of mortgage principal outstanding. Total debt carrying value was approximately $799.5 million; estimated fair value was $801.5 million. Shareholders’ equity was $2.75 billion.
Six-month investing cash flow was positive $138.0 million, primarily reflecting $203.5 million net proceeds from property sales; financing cash flow was negative $254.8 million, including $215.4 million of share repurchases and $124.2 million of distributions paid. Capital improvements and development costs used $29.2 million. The company held $20.6 million in capital reserves and anticipated a further $30–$40 million of capital spending in the second half of 2015.
Material changes and notable items
- Q2 revenue rose 0.8% and net income rose 1.0% year over year. First-half revenue rose 20.3%, but that comparison is substantially affected by the 2014 Apple REIT Seven and Eight mergers, which contributed only four months of results in the 2014 period. The 2014 first-half loss also included a $117.1 million non-cash preferred-share conversion expense. Excluding that expense and other adjustments, first-half MFFO increased to $145.1 million from $122.0 million.
- The company sold 19 hotels for approximately $208.5 million during the first half and recognized a $15.4 million gain. It acquired two hotels for $42.8 million. The dispositions were described as portfolio management, not a strategic shift.
- In connection with its NYSE listing, the company amended and expanded its credit facility from $345 million to $965 million. At June 30, outstanding borrowings were $309.8 million; the facility includes a $540 million revolver and term-loan capacity. The company reported compliance with applicable covenants.
- The company completed a $200 million Dutch-auction tender offer, repurchasing approximately 10.5 million shares at $19 per share, primarily with credit-facility borrowings. It also redeemed approximately 0.8 million shares for $14.9 million under a program later terminated. A separate authorization permits up to $500 million of repurchases; post-quarter purchases began in July.
Outlook, risks and contingencies
- Management said the company and the lodging industry forecast a mid- to upper-single-digit percentage increase in comparable revenue for full-year 2015 versus 2014, and expected continued improvement in comparable-hotel revenue and operating income. This is management commentary, not detailed earnings guidance.
- The company’s current annualized distribution rate is $1.20 per share, paid monthly. First-half distributions of $124.2 million exceeded operating cash flow of $116.8 million; the filing says the shortfall included return of capital and was funded in part by credit-facility borrowings. Management notes distributions are discretionary, may be adjusted, and could require use of financing; the company is not required to maintain the current rate to meet REIT distribution requirements.
- Risks identified include hotel seasonality, increased supply in certain markets, labor and wage pressures, rising property-tax assessments, economic and market volatility, interest-rate exposure, and possible adverse effects from natural disasters. A 100-basis-point change in rates was estimated to affect annual net income by about $1.0 million, based on the revolver balance at quarter-end. Swaps hedge certain variable-rate borrowings.
- The company had contracts for two additional hotels totaling $84.6 million at quarter-end; closing conditions remained outstanding for the Atlanta property. Subsequent to quarter-end it closed on the $60 million Burbank SpringHill Suites and signed contracts for four more hotels totaling $152 million, subject to conditions.
- A shareholder lawsuit concerning historic dividend reinvestment plan purchases remained pending; the company said it could not reasonably estimate any possible loss. Other reported litigation claims had been dismissed or were expected not to affect the company’s financial position. Related-party arrangements continue; the filing notes they are not necessarily arm’s length.
Most important facts for investors to verify
- Whether comparable-hotel RevPAR growth and the mid- to upper-single-digit full-year revenue outlook were achieved, and how much growth reflects pricing versus occupancy.
- Distribution coverage from recurring operating cash flow and the extent of borrowing used to support distributions, acquisitions, and repurchases.
- Debt levels, available facility capacity, upcoming mortgage maturities, covenant headroom, and the interest-rate effect after swaps.
- Results of the post-quarter hotel acquisitions and purchase contracts, including required financing and closing conditions.
- Share repurchase activity and its funding, alongside the effect of the listing, reverse split, and tender offer on per-share comparisons.
- Developments in the remaining shareholder litigation and any material change in potential exposure.