Apple Hospitality REIT, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2020, Apple Hospitality REIT owned 231 hotels with 29,535 rooms across 34 states. The company is a U.S. lodging-focused REIT. COVID-19 began materially affecting results during March; quarter-wide figures therefore do not capture the full subsequent downturn. The filing was submitted May 18, 2020, after a COVID-19-related reporting delay.
Financial and operating metrics
Dollar amounts are in millions, except per-share data and hotel statistics.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $238.0 | $303.8 |
| Operating income | $12.9 | $53.9 |
| Net income (loss) | $(2.8) | $38.2 |
| Net income (loss) per diluted share | $(0.01) | $0.17 |
| Operating cash flow | $33.3 | $56.2 |
| Capital improvements | $27.0 cash-flow statement; approximately $23.9 described in MD&A | $21.2 |
| FFO | $36.1 | $83.6 |
| Modified FFO | $37.8 | $84.7 |
| Adjusted EBITDAre | $53.8 | $100.7 |
Comparable-hotel RevPAR fell 20.7% to $80.70, as occupancy declined to 60.8% from 74.0% and ADR decreased 3.5% to $132.66. In March, comparable occupancy was 41.0%; by April it was below 20%, and April ADR was about 30% below the prior year.
Hotel operating expense decreased 11.5% to $155.3, but rose to 65.2% of revenue from 57.8%. General and administrative expense increased 17.0% to $9.5, including about $2.5 million of executive separation costs. Depreciation and amortization was $49.5; interest and other expense was $15.6. Two hotel sales generated an $8.8 million gain.
At March 31, cash and cash equivalents were $437.3 million, plus $33.3 million in restricted cash. Debt, net, was $1.789 billion, up from $1.320 billion at year-end 2019; finance lease liabilities were $217.2 million. The company had drawn its full $425 million revolving facility, with no remaining availability. Approximately 79% of debt was fixed-rate after swaps; the weighted-average debt rate was 3.35%. Operating cash flow did not cover Q1 distributions paid of $67.3 million.
Material changes versus the prior period
- Revenue declined 21.7%; net results shifted from $38.2 million of income to a $2.8 million loss. Adjusted EBITDAre declined to $53.8 million from $100.7 million.
- Comparable-hotel RevPAR was down 20.7%. The first two months were relatively stable, but March occupancy fell sharply as travel restrictions and cancellations took effect.
- Debt increased by about $468.9 million, primarily reflecting the full revolving-credit draw and new financing. Cash rose from zero reported cash and cash equivalents at year-end to $437.3 million.
- The company sold two hotels for approximately $45.0 million and recognized an $8.8 million gain; proceeds were used to reduce revolving-credit borrowings.
- Quarterly distributions declared were $0.20 per share versus $0.30 a year earlier. The company subsequently suspended monthly distributions.
Outlook, commentary, and risks
- Management expected revenue and operating results to remain below 2019 levels through the rest of 2020, with the largest decline in Q2 and moderation in Q3 and Q4. It cautioned that the timing and extent of recovery could not be predicted.
- As of May 15, all hotels were open and accepting reservations; operations at 38 hotels had been consolidated in market clusters. Cost actions included labor and amenity reductions, deferring nonessential capital work, and pursuing demand from construction, manufacturing, government, and maintenance sectors. Management said these steps could not materially offset the revenue loss.
- Management anticipated seeking covenant waivers for four quarters beginning Q2 2020. Expected terms included minimum liquidity requirements, limits on distributions, capital spending, repurchases and acquisitions, and interest-margin increases of 75–80 basis points. The amendments were not assured; failure to obtain waivers and comply with covenants could trigger default and acceleration of debt.
- Management considered $437.3 million of March-end cash adequate for near-term anticipated needs, but warned that prolonged disruption, reduced cash flow, limited financing access, or accelerated debt could require asset sales or additional capital.
- Nonessential 2020 capital improvements were postponed; management estimated approximately $50 million less spending than originally planned and expected another $10–15 million of capital spending for the year. It anticipated no material property-tax reduction.
- In April, the company bought a 224-room Cape Canaveral dual-branded complex for $46.7 million, funded with $25.0 million cash and a one-year $21.7 million developer note. Three other development acquisitions remained under contract, with an expected total price of approximately $113 million. The Denver contract was terminated.
- In April and May, the company received about $18 million in Paycheck Protection Program loans and repaid all amounts after subsequent government guidance. The company also reported a $42.2 million Q1 unrealized loss on interest-rate derivatives in other comprehensive loss; about $9.5 million of net unrealized losses were expected to be reclassified to interest expense within 12 months.
- Management reported no impairment losses in Q1 following property recoverability analyses, but warned that prolonged weak performance could result in impairment charges. Disclosed risks include further travel weakness, recession, higher operating and sanitation costs, refinancing constraints, and possible hotel closures.
Important facts for investors to verify
- Whether the anticipated credit-facility amendments were executed, and their final covenant, liquidity, distribution, and pricing terms.
- Subsequent cash burn, hotel occupancy and ADR trends, and the company’s ability to meet debt service and near-term liquidity needs.
- Whether distributions remain suspended and whether lender restrictions permit their resumption.
- Progress and funding for the three remaining hotel purchase contracts, and any changes to planned capital expenditures.
- Actual debt maturities and refinancing requirements, including the substantial scheduled principal amount in 2022, and the effects of swap expirations on floating-rate exposure.
- The capital-improvement figure differs between the cash-flow statement ($27.0 million) and MD&A (approximately $23.9 million); investors should consult the filing’s underlying detail for reconciliation.