Apple Hospitality REIT, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This filing reports full-year results, not standalone fourth-quarter results. Apple Hospitality is a U.S. lodging REIT with one reportable segment. At year-end it owned 220 hotels with 28,983 rooms across 37 states; substantially all operated under Marriott or Hilton brands and were managed by third parties.
Financial and operating highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $1,238.4 million | $933.9 million |
| Net income | $144.8 million; $0.63 per share | $18.8 million; $0.08 per share |
| Operating income | $206.5 million | $87.0 million |
| Operating cash flow | $368.4 million | $217.6 million |
| Adjusted Hotel EBITDA | $455.6 million | $320.3 million |
| Debt, net of issuance costs and adjustments | $1,366.2 million | $1,438.8 million |
- Revenue increased 32.6%; net income rose substantially as hotel demand recovered from pandemic disruption. Adjusted Hotel EBITDA is a non-GAAP measure and excludes corporate general and administrative expense; it is not a measure of cash available for distributions.
- Hotel operating expense was $710.5 million, or 57.4% of revenue, versus 58.1% in 2021. Net income was about 11.7% of revenue.
- For hotels owned during each respective period, ADR rose 20.7% to $149.36, occupancy increased to 72.6% from 66.3%, and RevPAR rose 32.2% to $108.45. On a comparable-hotel basis, 2022 RevPAR was 0.3% below 2019, as higher rates were offset by lower occupancy.
- FFO was $347.8 million and modified FFO was $351.4 million, both non-GAAP measures. They should not be treated as substitutes for GAAP results or cash available to fund distributions.
- Capital improvements were approximately $61.7 million in 2022. Operating cash flow less reported cash capital improvements was approximately $309 million; this simple comparison is not a company-defined free-cash-flow measure.
Material changes and capital position
- Hotel recovery was driven mainly by leisure, small-group and local negotiated demand. Management said some larger corporate demand drivers could take longer to recover; suburban markets generally outperformed urban markets, and Sun Belt markets were relatively strong.
- The company acquired two AC Hotels for a combined $85.0 million and sold one hotel for gross proceeds of about $8.5 million, recognizing a $1.8 million gain. In 2021, it acquired eight hotels and sold 23, affecting year-over-year comparability.
- Year-end debt was approximately $1.4 billion, with a weighted-average interest rate of 3.93%, compared with 3.38% in 2021. After swaps, 84% of debt was fixed-rate and $225 million, or 16%, was variable-rate. Management estimated that a 100-basis-point rate change would affect annual net income by about $2.3 million, all else equal.
- The 2022 refinancing expanded credit-facility capacity to about $1.2 billion, including a $650 million revolving facility maturing initially in 2026, and moved facility reference rates from LIBOR to SOFR. The company reported $650 million of unused revolving capacity and $4.1 million of unrestricted cash at year-end. Its reported net-debt-to-total-capitalization ratio was 27.5%.
- Cash distributions paid in 2022 totaled $139.5 million, or $0.61 per share. The monthly distribution was increased to $0.08 per share during the year; a special $0.08 distribution was also declared for a combined $0.16 per share, paid in January 2023. Future distributions remain subject to board approval and cash needs.
Outlook, risks and notable items
- Management anticipated continued improvement in hotel rates and occupancy but said the pace of sustained recovery was uncertain. It planned approximately $70–$80 million of 2023 capital improvements, including comprehensive renovations at about 20–25 properties.
- Interest expense was expected to rise in 2023 as market rates increase on variable-rate debt. The company reported $150.5 million of principal and interest payments due over the following 12 months; it repaid $23.5 million of mortgage loans in January and February 2023.
- A contract remained outstanding for a potential $78.6 million purchase of a 260-room Embassy Suites under development in Madison, Wisconsin, expected to open in early 2024. Closing conditions had not been satisfied, and completion was not assured.
- Two hotels were impaired in the fourth quarter, producing $26.2 million of 2022 impairment expense, versus $10.8 million in 2021. The filing attributes the 2022 charges to weaker current and forecast cash flows and shortened hold periods.
- Key risks include a recession or weaker travel demand, persistent labor and supply-chain costs, inflation, competition, dependence on third-party managers and major hotel brands, renovation needs, interest-rate and refinancing exposure, and pandemic-related disruption. The company also identifies climate, cyber, insurance, environmental and REIT qualification risks.
- The company reported compliance with debt covenants at year-end and no litigation that management believed would have a material adverse effect. Its independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether occupancy and corporate/group demand continue recovering, and how 2023 RevPAR compares with both 2022 and pre-pandemic levels.
- Whether labor, insurance, property taxes, utilities and renovation costs erode hotel margins despite higher room rates.
- Debt maturity and refinancing plans, variable-rate exposure, covenant headroom and the effect of SOFR and higher rates on interest expense.
- Whether operating cash flow supports the current monthly distribution and planned capital spending without increased borrowing.
- Whether the Madison hotel purchase closes on the stated terms, and whether further impairments or asset sales occur.
- Comparable-hotel results incorporate some unaudited prior-owner data, as disclosed; assess that limitation when comparing performance.