Apple Hospitality REIT, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is a U.S. lodging REIT; at quarter-end it owned 235 hotels with 30,023 rooms across 34 states. Results were severely affected by the COVID-19 pandemic.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Revenue | $148.8 million | $331.7 million | $467.9 million | $976.6 million |
| Net income (loss) | $(40.9) million | $46.2 million | $(122.0) million | $146.5 million |
| Diluted earnings (loss) per share | $(0.18) | $0.21 | $(0.55) | $0.65 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $26.2 million | $291.5 million |
| Adjusted Hotel EBITDA | $34.7 million | $124.6 million | $98.7 million | $368.2 million |
Comparable-hotel RevPAR fell 54.4% in Q3 and 51.4% for the first nine months year over year. Q3 occupancy was 48.6% versus 79.9%, while average daily rate was $104.78 versus $139.78. Hotel operating expenses declined, but less sharply than revenue, rising to 63.0% of Q3 revenue from 56.6% a year earlier. Adjusted Hotel EBITDA was down 72.2% in Q3 and 73.2% year to date.
At September 30, total assets were $4.92 billion, total liabilities $1.84 billion, and shareholders’ equity $3.08 billion. Debt, net, was $1.51 billion, up from $1.32 billion at December 31, 2019; finance lease liabilities were $218.9 million. Cash and cash equivalents were $27.4 million, with $28.2 million of restricted cash. The company reported $295.3 million of unused revolving-credit capacity, in addition to corporate cash.
For the first nine months, investing activities used $88.1 million and financing activities provided $82.9 million. Capital expenditures were $44.4 million in cash-flow reporting. The weighted-average interest rate on debt was 3.82%, and 15% of debt was variable-rate after swaps. Management estimated a 100-basis-point rate change would affect annual net income by about $2.3 million, all else equal.
Changes versus the prior comparable period
- Revenue and hotel operating performance contracted sharply amid pandemic-driven declines in travel. Management reported sequential recovery from April lows: comparable occupancy increased from 17.7% in April to 51.7% in September; monthly Adjusted Hotel EBITDA was positive from June and modified funds from operations was positive from July.
- Year-to-date net income swung to a loss from profit, and operating cash flow declined to $26.2 million from $291.5 million. Interest and other expense increased to $52.5 million from $46.1 million, partly reflecting increased average borrowings.
- Debt increased by approximately $188.5 million from year-end 2019. Fixed-rate debt represented 85% of total debt after swaps, compared with 98% at year-end.
- The company acquired four newly developed hotels for a combined gross price of $111.3 million and sold two hotels for $45.0 million gross proceeds, recognizing an $8.8 million gain. A $4.4 million impairment was recorded for a Memphis hotel proposed for sale; that sale agreement was terminated in October.
Outlook, liquidity, and risks
- Management expected COVID-19-related revenue and operating declines to continue through the remainder of 2020 and into 2021, and did not expect material improvement until business travel, consumer confidence, and government restrictions improve. It provided no specific financial guidance.
- All hotels were open at September 30, though operations at eight hotels were intentionally consolidated. Cost actions included labor and service reductions, clustered operations, postponement of non-essential capital work, and an expected reduction of about $50 million in originally planned 2020 capital improvements. The company expected approximately $5 million of additional capital spending during the remainder of 2020.
- In June, amendments to unsecured credit facilities suspended financial maintenance covenant testing through the compliance certificate for the quarter ending June 30, 2021, subject to lender terms. Those terms include a $100 million minimum-liquidity covenant, restrictions on distributions and share repurchases, a $50 million cap on discretionary capital expenditures, limits on new debt and investments, and higher applicable interest margins. The company stated it was compliant with applicable amended covenants at quarter-end.
- Monthly distributions were suspended after the March 2020 payment. Management anticipated no further 2020 distributions unless needed to maintain REIT status; amended credit terms also restrict distributions except as required for REIT compliance. A $300 million at-the-market share offering was authorized, but no shares had been sold by quarter-end.
- Management said near-term cash needs were expected to be met by operating cash flow, cash on hand, and revolving-credit availability, while cautioning that access to capital could become more difficult or costly. COVID-19 duration and effects remain uncertain, including possible renewed restrictions, weaker travel demand, hotel operating costs, asset impairment, and refinancing or covenant risks.
- A potential $49.6 million hotel acquisition remained subject to unsatisfied closing conditions. After quarter-end, the company agreed to sell a Charlotte hotel for $10.3 million, subject to closing conditions; proceeds were expected to reduce revolving borrowings. Approximately $18 million received under the Paycheck Protection Program was repaid.
Investor verification points
- Track occupancy, ADR, RevPAR, operating cash flow, and the pace and durability of recovery against 2019 levels.
- Verify liquidity against the amended $100 million minimum and monitor revolver balances, debt maturities, interest costs, and covenant terms.
- Confirm whether distributions resume, and at what level, given cash needs, REIT requirements, and lender restrictions.
- Check the status and final economics of the proposed Charlotte sale and Madison-area acquisition, and whether the Memphis impairment or terminated sale leads to further valuation changes.
- Review the use and potential dilution from the $300 million ATM program, and monitor the company’s ability to meet covenants after the waiver period ends.