Apple Hospitality REIT, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. Apple Hospitality is a U.S. lodging REIT; at year-end it owned 234 hotels with 29,937 rooms across 34 states, including one hotel classified as held for sale. Substantially all hotels operate under Marriott or Hilton brands and are managed by third parties.
Financial and operating performance
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Total revenue | $601.9 million | $1,266.6 million |
| Net income (loss) | $(173.2) million | $171.9 million |
| Net income (loss) per share | $(0.77) | $0.77 |
| Cash from operating activities | $26.7 million | $381.7 million |
| Adjusted Hotel EBITDA | $122.0 million | $465.0 million |
| FFO / MFFO | $13.4 million / $20.4 million | $361.1 million / $365.9 million |
Revenue fell 52.5% year over year. Comparable-hotel RevPAR declined 51.8% to $51.33, reflecting occupancy of 46.0% versus 77.1% and ADR of $111.62 versus $138.09. Hotel operating expenses were 66.8% of revenue, up from 57.2%, as revenue contracted faster than costs. Interest and other expense rose to $70.8 million from $61.2 million.
Fourth quarter: Revenue was $134.0 million versus $290.0 million in Q4 2019; net loss was $51.2 million versus net income of $25.5 million. Adjusted Hotel EBITDA was $23.3 million versus $96.8 million. Occupancy was 46.5%, ADR $97.87 and RevPAR $45.46.
Cash, debt and liquidity: Year-end cash and cash equivalents were $5.6 million, excluding $28.8 million of restricted cash. Net debt on the balance sheet was $1.483 billion; this excludes $220.0 million of finance lease liabilities. The company reported $319.2 million of unused capacity on its $425 million revolver and a 3.86% weighted-average debt interest rate, including swaps. About 14% of debt was variable-rate after swaps. Debt-to-total-capitalization was 34.0%. Investing activities used $82.3 million and financing activities provided $55.2 million in 2020.
Material changes and notable items
- COVID-19 drove a steep deterioration in hotel demand and results. RevPAR declined 51.4% for the owned portfolio; the company reported its sharpest year-over-year operating decline in Q2, followed by partial improvement in Q3 and Q4, led mainly by leisure demand.
- To preserve liquidity, the company suspended monthly distributions after the March 2020 payment, postponed about $50 million of planned nonessential capital work, curtailed share repurchases after Q1, and implemented hotel cost reductions and operating consolidations.
- Distributions paid in 2020 were $0.30 per share, compared with $1.20 in 2019. The filing says 2020 distributions were characterized for tax purposes as 100% return of capital. The company reported a roughly $67 million federal tax net operating loss carryforward.
- In June 2020, amendments to unsecured credit facilities suspended financial covenant testing through the compliance certificate for Q2 2021, subject to restrictions including a $100 million minimum-liquidity covenant, limits on distributions, repurchases, capital spending and investments, and higher applicable interest margins. The company was in compliance with applicable amended covenants at year-end.
- Management anticipated further covenant-waiver amendments, generally extending testing relief for most covenants through March 2022 and for two specified ratios through December 2021. Those amendments were not finalized as of the filing date; their terms and completion were uncertain.
- The company acquired four newly built hotels in 2020 for about $111.3 million and sold three hotels for gross proceeds of about $55.3 million, recognizing a $10.9 million gain. A $5.1 million impairment was recorded on a Memphis hotel. The company completed a $49.6 million Madison hotel acquisition in February 2021 using revolver borrowings.
- Cash flow from operations was below distributions paid; the filing states the 2020 shortfall, which included a return of capital, was funded primarily with revolver borrowings. In April and May 2020 the company received about $18 million in PPP loans, then repaid all amounts following subsequent program guidance.
Outlook, risks and other disclosures
Management expected results to improve gradually during 2021 if vaccination and other mitigation efforts succeeded, but anticipated revenue and operating-result declines versus 2019 to continue through 2021 and potentially into 2022. It could not estimate the duration of the recovery or when, if ever, pre-pandemic operations would return. Risks include renewed restrictions or reduced travel demand, covenant amendments not being completed, liquidity and refinancing needs, increased financing costs, and pressure on hotel values and cash flows. Planned 2021 capital improvements were approximately $25–$30 million, subject to operating results and debt-facility restrictions.
The company reported no litigation expected by management to have a material adverse effect. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at year-end.
Key facts for investors to verify
- Whether the anticipated credit-facility amendments were completed and their final terms, covenant testing dates, liquidity requirements and restrictions.
- Current unrestricted cash, revolver availability and compliance with liquidity and debt covenants, including the treatment of restricted cash.
- Hotel demand recovery, particularly occupancy, ADR and RevPAR trends, and the relative contribution of leisure versus business travel.
- Timing and amount of any resumed distributions, and whether operating cash flow can support distributions, debt service and capital improvements.
- Progress and proceeds from the hotel held for sale, the Memphis hotel sale process, and the company’s use of sale proceeds and subsequent acquisition financing.