Apple Hospitality REIT, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Apple Hospitality is a self-advised U.S. lodging REIT. At quarter-end it owned 179 hotels with 22,961 rooms across 32 states, operating under Marriott and Hilton brands.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Total revenue | $224.5 million | $210.4 million | +6.7% |
| Operating income | $43.8 million | $36.3 million | +20.6%; operating margin 19.5% vs. 17.2% |
| Net income | $34.7 million | $43.9 million | -20.9%; prior-year results included a $15.6 million real-estate sale gain |
| Diluted EPS | $0.20 | $0.24 | Weighted-average shares were 174.7 million vs. 186.4 million |
| Net cash from operations | $50.8 million | $36.3 million | Higher year over year |
| FFO / MFFO | $68.2 million / $69.3 million | $60.8 million / $62.8 million | Non-GAAP supplemental measures |
| Adjusted EBITDA | $78.6 million | $71.1 million | Non-GAAP supplemental measure |
Comparable-hotel ADR was $133.16 (+4.3%), occupancy 74.1% (down 0.2 percentage points), and RevPAR $98.66 (+4.0%). Hotel operating expenses were $127.2 million, or 56.7% of revenue, compared with $122.5 million, or 58.2%, a reported improvement in expense ratio. Depreciation was $33.5 million and net interest and other expense was $8.8 million. Net margin was approximately 15.4%, versus 20.9% in Q1 2015, reflecting the prior-year disposition gain among other period differences.
Operating cash flow exceeded reported distributions paid of $52.4 million by about $1.6 million; management says the distribution shortfall included return of capital and was funded primarily through revolver borrowings. Capital improvements and development spending in the cash flow statement was $22.3 million. The company reported no cash and cash equivalents at quarter-end.
Balance sheet, debt and liquidity
- Total assets were $3.72 billion and shareholders’ equity was $2.63 billion at March 31, 2016.
- Debt carrying amounts were approximately $1.02 billion: $171.9 million drawn on the revolving facility, $421.6 million net term loans and $427.5 million net mortgage debt. Total liabilities were $1.09 billion.
- The $540 million revolving facility had approximately $368.1 million of unused capacity and a 1.99% variable rate at quarter-end. The company reported covenant compliance.
- Contractual principal maturities include $90.7 million in April–December 2016, $96.2 million in 2017, $199.2 million in 2019 and $431.9 million in 2020.
- Two cash-flow hedges covering $322.5 million of term loans effectively fixed rates at approximately 3.10% at quarter-end. A 100-basis-point interest-rate move was estimated to affect annual net income by approximately $2.7 million, all else equal.
Changes, outlook and material events
- Year-over-year reported comparisons are affected by portfolio changes: the company owned 179 hotels at March 31, 2016 versus 173 a year earlier; it acquired seven hotels during 2015 and sold 19 hotels during 2015. No hotels were acquired or sold in Q1 2016.
- Management and the industry forecast low- to mid-single-digit comparable revenue growth for full-year 2016, while noting that expected growth was below 2015’s rate. Management expected continued improvement in comparable revenue and operating income.
- Approximately 20 properties were under renovation in Q1, with about 44,000 room nights out of service. The company expected another $30–$40 million of capital spending during the rest of 2016 and had no planned development projects.
- Management identified possible pressure from hotel supply growth, labor availability and wage/benefit costs, property-tax reassessments, economic and market volatility, seasonality, and natural disasters. The company noted that insurance may not eliminate adverse effects.
- The current annual distribution rate was $1.20 per share, paid monthly. The board may adjust distributions; the filing cautions that the current rate is not assured. Share repurchases under the $500 million authorization were being considered opportunistically after the Rule 10b5-1 plan ended in January 2016.
- Subsequent events: In April, the company borrowed $50 million under new unsecured term-loan facilities of up to $150 million, intending to reduce revolver borrowings and improve capacity for near-term maturities. It also agreed to acquire Apple REIT Ten in a merger, subject to shareholder approval and other conditions. Apple Ten had 56 hotels, 7,209 rooms and approximately $239 million of debt at March 31; the transaction would include cash consideration and share issuance. Completion was not assured, and existing Apple Hospitality shareholders were expected to own approximately 78% of the combined company if completed.
- Four hotels under construction were subject to purchase contracts totaling approximately $81.1 million; closings depended on conditions being met. The filing reports no material change in previously disclosed legal proceedings. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether both companies’ shareholders approve the Apple Ten merger, whether closing conditions are met, and the resulting dilution, financing needs and integration risks.
- Whether operating cash flow supports distributions and planned capital spending, particularly given zero reported cash and management’s stated potential reliance on borrowing for distributions.
- The company’s ability to refinance or repay near-term debt maturities, and the effects of variable interest rates despite hedges.
- Whether forecast comparable revenue growth is achieved and whether labor, property taxes, renovation downtime and local hotel-market conditions pressure margins.
- Whether the four contracted hotel purchases close, and how related-party arrangements and non-GAAP performance measures should be evaluated alongside GAAP results.