Apple Hospitality REIT, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Apple Hospitality is a U.S. lodging REIT. At quarter-end it owned 236 hotels with 30,203 rooms across 33 states; all hotels operated under Marriott or Hilton brands. Unless noted, financial amounts below are in U.S. dollars.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $292.9 million | $224.5 million | +30.5% |
| Operating income | $46.3 million | $43.8 million | +5.9% |
| Net income | $34.4 million | $34.7 million | -0.9% |
| Diluted net income per share | $0.15 | $0.20 | Down |
| Cash provided by operating activities | $37.2 million | $50.8 million | Down $13.6 million |
| Capital improvements | $17.5 million cash outflow | $22.3 million cash outflow |
Reported revenue growth largely reflects the larger portfolio following the September 2016 Apple REIT Ten merger and subsequent acquisitions, rather than comparable-property growth. Comparable hotels’ RevPAR rose 1.4% to $99.02, with occupancy of 74.4% versus 73.6% and ADR of $133.09 versus $132.66. The filing’s unaudited merger pro forma comparison shows Q1 2016 revenue of $290.0 million and net income of $44.8 million, compared with actual Q1 2017 revenue of $292.9 million and net income of $34.4 million.
Operating income was approximately 15.8% of revenue, compared with 19.5% in Q1 2016; reported hotel operating expenses rose to 57.5% of revenue from 56.7%. The company reported $85.9 million of FFO, $86.9 million of Modified FFO, $90.3 million of EBITDA and $99.1 million of Adjusted EBITDA. These are non-GAAP measures and should not be treated as cash available for distributions.
Debt, liquidity and distributions
- Total debt was approximately $1.403 billion at March 31, 2017, versus approximately $1.343 billion at December 31, 2016. This includes $366.6 million drawn on the revolving facility, $571.2 million of term loans (net of issuance costs), and $465.0 million of mortgage debt (net of adjustments and issuance costs).
- The $540 million revolver had $173.4 million of unused capacity and a 2.53% variable rate at quarter-end. Cash and cash equivalents were zero. The company said it was compliant with its debt covenants.
- Approximately $469.1 million, or 33% of debt, was exposed to variable interest rates after swaps. Management estimated a 100-basis-point rate change would affect annual net income by approximately $4.7 million, all else equal.
- Operating cash flow was below the $66.9 million of distributions paid in the quarter. The filing attributes a portion of the cash-flow pressure to a $22 million net payment to settle the Apple Ten merger litigation; the shortfall was funded primarily with revolver borrowings. The stated annual distribution rate was $1.20 per share, payable monthly at $0.10.
Material changes, outlook and notable items
- The company acquired a newly opened 124-room Courtyard in Fort Worth for approximately $18.0 million, funded with revolver borrowings. Four additional hotel purchase contracts totaled $103.3 million; closings were conditional and expected over the following 6–18 months.
- Two Columbus, Georgia hotels were identified for potential sale. A $7.9 million impairment was recorded in Q1; contracts to sell them for a combined $10.0 million were signed in April and remained subject to closing conditions.
- The 224-room Dallas Hilton was sold on April 20, 2017 for approximately $56.1 million. The buyer assumed approximately $27.1 million of mortgage debt; the company used sale proceeds to reduce revolver borrowings. An estimated $16 million gain was expected to be recognized in Q2 2017.
- Management expected low-single-digit comparable revenue growth for full-year 2017, with comparable RevPAR growth approximately in line with industry averages. It cautioned that growth could be lower than in 2016 because of inconsistent demand and new hotel supply. This is outlook commentary, not a quantified earnings forecast.
- Management cited rising labor costs, wage and benefit regulations, lower labor availability, higher property-tax assessments, market-level supply growth, economic and political uncertainty, and seasonality as operating risks. It anticipated $50–$60 million of additional capital spending during the remainder of 2017, including renovations at approximately 20–25 properties.
- The company accrued $5.5 million for a proposed shareholder litigation settlement, which remained subject to court approval; actual loss could exceed the accrual. A separate shareholder class action filed in February 2017 had an outcome and potential loss that the company said it could not reasonably estimate. The Quinn settlement was court-approved in March; its net $22 million cost had been recorded in 2016.
- The company launched a $300 million at-the-market share offering program in February but made no sales under it in Q1. It terminated its existing written trading plan; the authorized share repurchase program had $467.5 million remaining and was due to end in July 2017 unless terminated earlier.
Key investor verification points
- Assess underlying performance using comparable RevPAR and the pro forma merger comparison, not reported revenue growth alone; confirm the effect of portfolio changes and prior-owner operating data included in comparable metrics.
- Review whether cash generation can support distributions, renovations, acquisitions and debt service, particularly given zero cash, Q1 distributions above operating cash flow and reliance on revolver capacity.
- Verify debt maturities and refinancing exposure: scheduled principal includes approximately $398.9 million in 2019 and $451.8 million in 2020.
- Track the expected Q2 Dallas sale gain and debt paydown, and whether the two Columbus sales and four contracted hotel purchases close on the stated terms.
- Monitor the litigation matters, labor and property-tax cost trends, interest-rate sensitivity, and any future ATM share issuance or distribution-rate changes.