Apple Hospitality REIT, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015, compared with the same periods in 2014. Dollar figures below are in millions unless stated otherwise. Apple Hospitality is a self-advised lodging REIT; at quarter-end it owned 177 hotels with 22,782 rooms in 32 states.
Financial results and operating metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $240.6 | $231.9 | $685.3 | $601.6 |
| Operating income | $56.4 | $42.1 | $144.9 | $3.2 |
| Net income (loss) | $47.0 | $35.2 | $135.1 | $(15.5) |
| Net income (loss) per diluted share | $0.27 | $0.19 | $0.74 | $(0.09) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $205.2 | $184.1 |
| FFO / MFFO | $79.2 / $80.9 | $74.9 / $76.5 | $215.5 / $225.9 | $74.7 / $198.5 |
Q3 revenue rose 3.7%; nine-month revenue rose 13.9%. Comparable-hotel RevPAR increased 6.4% in Q3 and 6.7% for nine months, supported by higher ADR and occupancy. Comparable Q3 occupancy was 80.6% versus 79.9%; ADR was $133.57 versus $126.60. Q3 operating margin was approximately 23.4%, compared with 18.1% a year earlier.
Nine-month 2015 operating results are not directly comparable with 2014: the 2014 period included the Apple REIT Seven and Eight merger hotels only from March 1, while 2015 included them for the full period; acquisitions and dispositions also changed the portfolio. The 2014 nine-month loss included $117.1 million of noncash Series B preferred-share conversion expense and $8.6 million of impairment charges. FFO and MFFO are company-defined non-GAAP measures, not substitutes for GAAP earnings or cash available for distributions.
Balance sheet, cash flow and capital allocation
- At September 30, 2015, total assets were $3,758.5 million, total liabilities $1,044.8 million and shareholders’ equity $2,713.7 million. Cash and cash equivalents were only $0.1 million; restricted cash for furniture, fixtures and other escrows was $25.7 million.
- Debt carrying value was approximately $964.2 million, versus $709.6 million at December 31, 2014: $500.5 million under the credit facility and $463.7 million of mortgage debt. The $540 million revolver had $75.5 million drawn, leaving approximately $464.5 million undrawn, subject to facility terms and covenants.
- Nine-month cash flow: operating activities provided $205.2 million; investing activities used $41.9 million; financing activities used $163.2 million. Financing included $236.7 million of share repurchases and $176.8 million of distributions paid. Ending cash was $0.1 million.
- The company paid approximately $200 million in a June Dutch auction tender offer and repurchased a further 1.2 million shares for $21.2 million under its $500 million repurchase authorization through September 30. The current annual distribution rate is $1.20 per share, payable monthly.
Material changes, outlook and risks
- Shares began trading on the NYSE as APLE on May 18, 2015, alongside a 50% reverse share split. The company also increased its unsecured credit facility from $345 million to $965 million, with maturities extending to 2019 for the revolver and 2020 for term loans.
- The company acquired five hotels for $212.8 million and sold 19 properties for approximately $208.5 million during the first nine months. The sales generated a reported $15.4 million gain. Two additional Syracuse hotels were purchased after quarter-end for $42 million, including assumption of $22.4 million mortgage debt. Four other contracted hotels remained under construction; their $81.1 million expected purchase price was subject to closing conditions.
- Management and the industry forecast mid- to upper-single-digit full-year 2015 revenue growth on a comparable basis, with the trend expected to continue into 2016. Management cautioned that planned renovations at about 20 hotels would reduce Q4 revenue growth relative to the first three quarters. This is management’s outlook, not a guarantee.
- Management expected operating cash flow and credit availability to meet anticipated needs, including debt service, acquisitions, renovations, repurchases and distributions. The company stated that it is not required to maintain its current distribution rate for REIT qualification; distributions remain subject to board approval and may be reduced.
- Interest-rate exposure remains: a 100-basis-point rate change was estimated to affect annual net income by about $1.8 million, all else equal. $322.5 million of term loans was swapped to fixed rates; $75.5 million of revolver borrowings and a $102.5 million variable-rate term loan were unhedged. The company was in compliance with applicable credit covenants at quarter-end.
- Key operating risks cited include hotel supply growth, labor and benefit cost increases, local economic conditions, seasonality, renovations and potential property-tax increases. The company received $1.8 million of Deepwater Horizon settlement proceeds in Q3, reducing property taxes, insurance and other expense.
- Legal matters included a shareholder action with an amended breach-of-contract complaint pending and an appeal related to an approved settlement. The company said it could not reasonably estimate any possible loss for the pending proceedings. Other described cases had been dismissed.
Important facts for investors to verify
- Comparable-hotel trends and the precise portfolio basis used in reported growth, given merger timing, acquisitions and 19 dispositions.
- Progress and costs of Q4 renovations, and whether management’s revenue-growth outlook is achieved.
- Debt balances, unused revolver availability, covenant headroom, maturities and sensitivity to interest rates.
- Whether operating cash flow supports distributions and planned repurchases; the $1.20 annual distribution is not assured.
- Closing conditions and funding for the four remaining contracted hotel purchases, plus any developments in pending litigation.