Apple Hospitality REIT, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company is a self-advised U.S. hotel REIT. Results include Apple REIT Seven and Apple REIT Eight only from their March 1, 2014 merger date, making reported year-over-year comparisons substantially affected by the enlarged portfolio.
Business context and material changes
- The mergers added 99 hotels; at quarter-end the company owned 188 hotels with 23,489 rooms in 33 states, compared with 89 hotels at September 30, 2013.
- The company became self-advised when the mergers closed, ending its former advisory agreements. Common shares outstanding were 373.8 million at September 30, versus 182.8 million at December 31, 2013.
- The company recorded a $117.1 million noncash expense in Q1 when its Series B preferred shares converted to common shares. This was a principal reason for the nine-month GAAP net loss.
Financial and operating performance
| Metric | Q3 2014 | Nine months 2014 |
|---|---|---|
| Revenue | $231.9 million | $601.6 million |
| Operating income | $42.1 million | $3.2 million |
| Net income (loss) | $35.2 million | $(15.5) million |
| Basic and diluted EPS | $0.09 | $(0.05) |
| Operating cash flow | Not presented for the quarter | $184.1 million |
| Adjusted FFO (non-GAAP) | $76.5 million | $198.5 million |
| Adjusted EBITDA (non-GAAP) | $83.6 million | $217.7 million |
- Reported revenue rose from $100.2 million in Q3 2013 and $297.2 million in the first nine months of 2013; these comparisons are not like-for-like because of the mergers. Pro forma nine-month revenue was $662.4 million in 2014 versus $622.0 million in 2013, and pro forma net income was $107.2 million versus $106.9 million.
- For comparable hotels, Q3 ADR increased 4%, occupancy rose to 79% from 77%, and RevPAR increased 8% to $95. For the full portfolio on a pro forma basis, Q3 ADR rose 5%, occupancy increased to 79% from 78%, and RevPAR increased 8% to $99.
- Hotel operating expenses were 56% of revenue in both nine-month periods. Q3 included an $8.6 million impairment charge for certain properties identified for potential sale. Interest expense rose, largely due to debt assumed in the mergers and borrowings under the new credit facility.
- Nine-month cash from operations was $184.1 million; investing activities used $40.2 million and financing activities used $162.0 million. Cash and cash equivalents were zero at September 30; restricted cash for furniture, fixtures and other escrows was $37.1 million.
- Total liabilities were $750.5 million and shareholders’ equity was $3.06 billion. Credit-facility borrowings were $175.0 million and mortgage debt was $521.9 million, for total debt carrying value of approximately $696.9 million. The company reported covenant compliance.
Liquidity, outlook, risks and unusual items
- The $345 million unsecured facility comprises a $245 million revolver and a $100 million term loan; $175 million was outstanding, including the term loan. The revolver rate was approximately 1.76%; the term loan’s effective fixed rate was approximately 3.13% after a swap. The filing identifies $93.9 million of principal maturities in 2015 and $135.7 million in 2016.
- Cash from operations and available credit were management’s expected sources for debt service, capital spending and distributions. Nine-month distributions were $169.9 million. The annualized distribution rate was reduced to $0.66 per share in March and increased to $0.68 beginning with the September distribution. Management noted the company was not required to maintain the current rate for REIT purposes and distributions could be reduced.
- Management forecast mid- to upper-single-digit revenue growth for full-year 2014 compared with 2013, with the trend expected to continue into 2015; this is an operating outlook, not specific earnings guidance. The company expected $45–$55 million of hotel capital expenditures in the next 12 months and completion of its Richmond Courtyard and Residence Inn development by year-end 2014.
- The company began marketing 22 potential-sale properties in October and may redeploy sale proceeds into hotel acquisitions. Sales were not considered probable at quarter-end; the $8.6 million impairment used significant estimates and could change with operating performance or market conditions.
- Risks cited include economic and lodging-market conditions, new hotel supply, labor and benefit costs, property-tax increases, weather and other natural disasters, financing and refinancing, seasonality, REIT qualification, and the execution of acquisitions and property sales.
- Several shareholder and merger-related lawsuits remained pending. The company said it could not reasonably predict their outcomes or estimate possible losses. It also disclosed significant related-party relationships, while noting that such transactions may not be at arm’s length.
- In October, the company paid approximately $21.2 million in distributions, acquired an 88-room Texas hotel through foreclosure, and approved a limited share-redemption program for death or disability. The next scheduled redemption date was January 2015 at $9.20 per share; the filing cautions this price is not intended to represent fair market value.
Important facts for investors to verify
- How much of reported growth reflects the mergers versus underlying comparable-hotel performance; review pro forma and comparable operating statistics alongside GAAP results.
- Whether operating cash flow and borrowing availability support distributions, planned renovations and development, and upcoming debt maturities; note cash was zero at quarter-end.
- Progress and realized proceeds from the 22 potential property sales, and whether further impairment charges arise.
- Developments in the pending litigation and the potential effects of related-party arrangements.
- Whether the stated 2014–2015 revenue outlook and distribution policy remain achievable as costs, market conditions and financing needs evolve.