Apple Hospitality REIT, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended March 31, 2018 unless stated otherwise. The company is a U.S. lodging REIT operating 234 hotels with 30,046 rooms across 34 states at quarter-end.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $303.8 million | $298.4 million; up 1.8% |
| Operating income | $53.9 million | $54.3 million |
| Net income / diluted EPS | $38.2 million / $0.17 | $42.2 million / $0.18 |
| Operating cash flow | $56.2 million | $52.9 million |
| Cash from investing activities | $21.0 million provided | $86.5 million used |
| Cash from financing activities | $78.6 million used | $35.3 million provided |
| Total assets | $5.024 billion | $4.929 billion at Dec. 31, 2018 |
| Debt, net | $1.406 billion | $1.412 billion at Dec. 31, 2018 |
| Cash and restricted cash | $32.3 million, all restricted | $33.6 million at Dec. 31, 2018 |
Net income declined about 9.6%, while total expenses rose 2.9% to $251.1 million. Operating margin was approximately 17.7%, versus 18.2% in Q1 2018; net margin was approximately 12.6%, versus 14.1%. Interest and other expense increased 30.0% to $15.5 million. The filing attributes higher interest expense to higher average borrowings and rates, and includes $1.8 million of interest on finance leases. FFO was $83.6 million and modified FFO was $84.7 million, compared with $86.8 million and $87.9 million, respectively, in Q1 2018.
Comparable-hotel RevPAR was nearly flat at $101.76, up 0.1%; ADR increased 1.2% to $137.41 while occupancy declined to 74.1% from 74.9%. The company reported $0.30 per share of distributions declared and $67.2 million paid during the quarter, exceeding operating cash flow by about $10.9 million. Management says the shortfall included a return of capital and was funded primarily with revolver borrowings.
At March 31, debt included $190.4 million drawn on a $425 million revolving facility, $735.0 million of term loans at stated value, and approximately $485.4 million of mortgage principal. Unused revolver capacity was $234.6 million. Approximately 77% of debt was effectively fixed-rate, and the weighted-average debt rate was 3.80%. A 100-basis-point rate change was estimated to affect annual net income by approximately $3.2 million. The company reported covenant compliance.
Material changes and unusual items
- Acquired two hotels for approximately $52.4 million and sold nine hotels for gross proceeds of $95.0 million; sale proceeds were used to reduce revolver borrowings. The reported income statement records a $1.213 million gain on sale.
- Adopted lease accounting standard Topic 842 on January 1, 2019 without restating prior periods. Adoption reduced opening shareholders’ equity by approximately $5.2 million and brought lease assets and liabilities onto the balance sheet. Four ground leases are now finance leases; this changed the classification of lease costs and affects period comparisons.
- Q1 capital expenditures were approximately $18.7 million. The company anticipated an additional $60–$70 million of capital spending during the remainder of 2019, including renovations at approximately 20–25 hotels.
- Share repurchases totaled approximately $4.1 million in Q1. About $359.9 million remained available under the program, which was scheduled to end in July 2019 unless terminated earlier.
- General and administrative expense rose 18.3%, reflecting higher incentive-plan accruals and a $0.5 million separation payment associated with the Chief Legal Officer’s retirement.
Outlook, commentary, and risks
Management forecast full-year 2019 comparable-hotel RevPAR growth ranging from slightly negative to slightly positive versus 2018, citing modest demand expectations, hotel supply growth, and somewhat favorable comparisons related to natural disasters. It anticipated continued pressure from labor costs, property taxes, and property insurance. Management stated that operating cash flow, borrowing capacity, additional financing, dispositions, and equity offerings were expected to meet anticipated needs, but noted distributions may be adjusted and are not assured at the current rate.
As of April 30, 2019, the company had contracts for five hotels under development with an expected aggregate purchase price of approximately $159.2 million; closings were conditional and expected over the following 15–27 months. A separate April contract covered a planned Denver hotel for a minimum $49.1 million, also subject to closing conditions. Risks cited include lodging supply and local economic conditions, labor costs, interest rates, financing and refinancing, natural disasters and insurance, and REIT qualification. Management reported no material changes to previously disclosed risk factors, no litigation expected to have a material adverse effect, and effective disclosure controls.
Important facts for investors to verify
- How recurring operating cash flow supports the $1.20 annualized distribution rate, given Q1 distributions paid exceeded operating cash flow.
- Debt maturities and refinancing needs, revolver availability, rate exposure, and the company’s capacity to fund acquisitions and renovations.
- Comparable-hotel performance and the assumptions behind the slightly negative-to-slightly positive full-year RevPAR outlook.
- The lease-accounting impact on expense comparability and the scale of long-dated finance lease obligations.
- The disposition note describes an approximately $1.8 million gain, while the income statement reports a $1.213 million gain; verify the reconciliation and related transaction costs.
- Whether the development-property purchase contracts close as planned and whether their funding affects leverage, distributions, or liquidity.