Apple Hospitality REIT, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Apple Hospitality is a U.S. lodging REIT; at quarter-end it owned 241 hotels with 30,754 rooms in 34 states. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $332.2 million | $324.9 million | $975.3 million | $949.6 million |
| Operating income | $75.4 million | $75.1 million | $210.6 million | $221.1 million |
| Net income | $62.1 million | $62.8 million | $171.9 million | $184.8 million |
| Net income per share, basic and diluted | $0.27 | $0.28 | $0.75 | $0.83 |
| Operating cash flow | Not separately provided for the quarter | $296.9 million | $280.0 million |
- For the first nine months, total revenue increased 2.7%, but net income declined 7.0%; results include property acquisitions and dispositions and are not directly comparable on a same-property basis.
- Comparable-hotel RevPAR was down 2.2% in Q3, as occupancy fell to 78.9% from 80.4% and ADR eased to $137.79 from $138.27. For the nine-month period, comparable RevPAR was essentially flat at $107.93.
- Hotel operating expense rose 3.0% for both periods; as a share of revenue it increased to 55.8% for the nine months from 55.6%, with labor costs a principal factor. Nine-month interest and other expense increased to $38.3 million from $35.6 million.
- FFO was $311.6 million and Modified FFO was $314.3 million for the first nine months, versus $308.3 million and $308.5 million, respectively, in 2017. These are non-GAAP measures and are not substitutes for cash flow or net income.
- At September 30, total assets were $4.97 billion, debt net was $1.32 billion, and shareholders’ equity was $3.55 billion. Debt increased from $1.22 billion at year-end 2017. The weighted-average debt rate was 3.68%; approximately 79% of debt was effectively fixed after swaps.
- Cash and cash equivalents were zero; the reported $34.5 million of cash and restricted cash consisted of restricted cash for furniture, fixtures and other escrows. Available capacity under credit facilities was $326.6 million, including $75 million drawable by January 31, 2019.
- Operating cash flow of $296.9 million funded, among other uses, $135.2 million of hotel acquisitions, $52.7 million of capital improvements and $207.3 million of distributions paid. The current distribution rate was $0.10 monthly, or $1.20 annualized per share.
Material changes and transactions
- Acquired four hotels with 605 rooms for a combined gross purchase price of $136.8 million in the first nine months of 2018; sold two Columbus, Georgia hotels for $10.0 million in July.
- Refinanced credit facilities in July and August, extending maturities, lowering borrowing spreads and improving certain covenants, while reducing aggregate borrowing capacity by $40 million. Outstanding debt under the facilities and mortgages was approximately $1.33 billion before debt issuance costs and fair-value adjustments.
- Entered contracts to sell 17 hotels for a combined gross price of approximately $180.8 million, expected to close within three to six months after September 30 if conditions are met. The company planned to use net proceeds to reduce revolving-credit borrowings; closings were not assured.
- Recorded $3.1 million of impairment charges during the first nine months, including approximately $2.6 million for the Springdale, Arkansas Residence Inn and $0.5 million for the Columbus hotels. By quarter-end, the Springdale hotel was under contract for sale.
Outlook, risks and contingencies
- Management forecast flat to negative comparable RevPAR growth for full-year 2018 versus 2017, citing inconsistent demand, new hotel supply and the unusually strong hurricane-recovery demand in parts of Texas and Florida in the second half of 2017. It also expected flat-to-negative comparable RevPAR and operating results in Q4.
- Hurricane Florence caused approximately $0.6 million of uninsured losses in Q3. Hurricane Michael closed two Panama City hotels in October; they were not expected to be fully operational until December. Management anticipated approximately $1 million of uninsured losses and lower Q4 operating income; business-interruption proceeds might not be recognized until 2019.
- Management expected continued pressure from labor costs, property-tax assessments and insurance costs, as well as higher interest costs on variable-rate debt. A 100-basis-point rate change was estimated to affect annual net income by approximately $2.8 million, all else equal.
- Planned capital expenditures were an additional $25 million to $30 million during the remainder of 2018, including renovations at approximately 20 to 25 hotels. Five potential hotel acquisitions totaling approximately $130.8 million remained under contract and subject to conditions.
- The company stated that operating cash flow, credit availability, additional financing and potential asset-sale or equity proceeds were expected to meet anticipated needs. Distributions remain subject to board approval and could be reduced; the company also noted seasonal cash-flow variability and REIT distribution requirements.
- After quarter-end, the company reported October repurchases of approximately 1.6 million shares for $25.8 million and a contract to buy a 127-room Jacksonville hotel for $15.5 million, both subject to the details and conditions described in the filing.
Important facts for investors to verify
- Comparable-hotel RevPAR and expense trends, especially labor costs and the Q4 outlook.
- Completion, timing and net proceeds of the 17 contracted hotel sales, and whether proceeds reduce revolving debt as planned.
- Debt maturities, refinancing terms, covenant compliance and the availability and cost of remaining credit capacity.
- Hurricane-related closures, uninsured losses, business-interruption recovery and insurance coverage.
- Cash available after restricted escrows, distributions, share repurchases, acquisitions and planned capital improvements.
- Progress and closing conditions for the five development-property purchases and the subsequent Jacksonville acquisition contract.