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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ |
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
Smaller reporting company
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Emerging growth company
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of registrant’s common shares outstanding as of July 31, 2020:
Apple Hospitality REIT, Inc.
Form 10-Q
Index
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Balance Sheets – June 30, 2020 and December 31, 2019 |
3 |
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4 |
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Consolidated Statements of Shareholders’ Equity – Three and six months ended June 30, 2020 and 2019 |
5 |
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Consolidated Statements of Cash Flows – Six months ended June 30, 2020 and 2019 |
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7 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
21 |
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Item 3. |
39 | |
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Item 4. |
39 | |
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PART II. OTHER INFORMATION |
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Item 1. |
40 | |
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Item 1A. |
40 | |
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Item 6. |
42 | |
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| 44 | |||
This Form 10-Q includes references to certain trademarks or service marks. The Courtyard by Marriott®, Fairfield by Marriott®, Marriott® Hotels, Renaissance® Hotels, Residence Inn by Marriott®, SpringHill Suites by Marriott® and TownePlace Suites by Marriott® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Embassy Suites by Hilton®, Hampton by Hilton®, Hampton Inn by Hilton®, Hampton Inn & Suites by Hilton®, Hilton Garden Inn®, Home2 Suites by Hilton® and Homewood Suites by Hilton® trademarks are the property of Hilton Worldwide Holdings Inc. or one or more of its affiliates. The Hyatt®, Hyatt House® and Hyatt Place® trademarks are the property of Hyatt Hotels Corporation or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Apple Hospitality REIT, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
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June 30, |
December 31, |
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2020 |
2019 |
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(unaudited) |
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Assets |
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Investment in real estate, net of accumulated depreciation and amortization
of $
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$ |
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$ |
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Assets held for sale |
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Cash and cash equivalents |
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Restricted cash-furniture, fixtures and other escrows |
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Due from third party managers, net |
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Other assets, net |
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Total Assets |
$ |
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$ |
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Liabilities |
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Debt, net |
$ |
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$ |
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Finance lease liabilities |
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Accounts payable and other liabilities |
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Total Liabilities |
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Shareholders' Equity |
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Preferred stock, authorized
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Common stock, no par value, authorized
outstanding
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Accumulated other comprehensive loss |
(
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(
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Distributions greater than net income |
(
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(
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Total Shareholders' Equity |
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Total Liabilities and Shareholders' Equity |
$ |
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$ |
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See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share data)
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Three Months Ended |
Six Months Ended |
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June 30, |
June 30, |
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2020 |
2019 |
2020 |
2019 |
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Revenues: |
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Room |
$ |
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$ |
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$ |
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$ |
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Food and beverage |
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Other |
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Total revenue |
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Expenses: |
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Hotel operating expense: |
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Operating |
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Hotel administrative |
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Sales and marketing |
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Utilities |
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Repair and maintenance |
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Franchise fees |
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Management fees |
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Total hotel operating expense |
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Property taxes, insurance and other |
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General and administrative |
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Loss on impairment of depreciable real estate assets |
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Depreciation and amortization |
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Total expense |
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Gain (loss) on sale of real estate |
(
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(
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Operating income (loss) |
(
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(
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Interest and other expense, net |
(
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(
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(
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(
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Income (loss) before income taxes |
(
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(
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Income tax expense |
(
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(
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(
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(
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Net income (loss) |
$ |
(
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) | $ |
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$ |
(
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) | $ |
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Other comprehensive loss: |
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Interest rate derivatives |
(
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(
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(
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(
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Comprehensive income (loss) |
$ |
(
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) | $ |
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$ |
(
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) | $ |
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Basic and diluted net income (loss) per common share |
$ |
(
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) | $ |
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$ |
(
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) | $ |
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Weighted average common shares outstanding - basic and diluted |
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See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Shareholders' Equity
(Unaudited)
(in thousands, except per share data)
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Three Months Ended June 30, 2020 and 2019 |
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Common Stock |
Accumulated Other Comprehensive Income (Loss) |
Distributions Greater Than Net Income |
Total | |||||||||||||||||
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Number of Shares |
Amount |
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Balance at March 31, 2020 |
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$ |
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$ |
(
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(
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Share based compensation, net |
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- | - |
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Interest rate derivatives |
- | - |
(
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) | - |
(
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Net loss |
- | - | - |
(
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(
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Balance at June 30, 2020 |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
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Balance at March 31, 2019 |
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$ |
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$ |
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$ |
(
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) | $ |
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Share based compensation, net |
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- | - |
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Interest rate derivatives |
- | - |
(
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(
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Net income |
- | - | - |
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Distributions declared to shareholders ($
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- | - | - |
(
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(
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Balance at June 30, 2019 |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
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Six Months Ended June 30, 2020 and 2019 |
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Common Stock |
Accumulated Other Comprehensive Income (Loss) |
Distributions Greater Than Net Income |
Total |
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Number of Shares |
Amount |
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Balance at December 31, 2019 |
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$ |
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$ |
(
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) | $ |
(
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) | $ |
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Share based compensation, net |
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- | - |
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Common shares repurchased |
(
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) |
(
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) | - | - |
(
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) | ||||||||||||
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Interest rate derivatives |
- | - |
(
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) | - |
(
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) | |||||||||||||
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Net loss |
- | - | - |
(
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) |
(
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) | |||||||||||||
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Distributions declared to shareholders ($
|
- | - | - |
(
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) |
(
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) | |||||||||||||
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Balance at June 30, 2020 |
|
$ |
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$ |
(
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) | $ |
(
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) | $ |
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Balance at December 31, 2018 |
|
$ |
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$ |
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$ |
(
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) | $ |
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||||||||||
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Cumulative effect of the adoption of ASU 2016-02 related to leases |
- | - | - |
(
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) |
(
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) | |||||||||||||
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Share based compensation, net |
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- | - |
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|||||||||||||||
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Common shares repurchased |
(
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) |
(
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) | - | - |
(
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) | ||||||||||||
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Interest rate derivatives |
- | - |
(
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) | - |
(
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) | |||||||||||||
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Net income |
- | - | - |
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|||||||||||||||
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Distributions declared to shareholders ($
|
- | - | - |
(
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) |
(
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) | |||||||||||||
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Balance at June 30, 2019 |
|
$ |
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$ |
(
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) | $ |
(
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) | $ |
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|||||||||
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
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Six Months Ended |
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June 30, |
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2020 |
2019 |
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Cash flows from operating activities: |
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Net income (loss) |
$ |
(
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) |
$ |
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Adjustments to reconcile net income (loss) to cash provided by operating activities: |
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Depreciation and amortization |
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Loss on impairment of depreciable real estate assets |
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Gain on sale of real estate |
(
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) |
(
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) |
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Other non-cash expenses, net |
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Changes in operating assets and liabilities: |
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Decrease (increase) in due from third party managers, net |
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(
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) |
|||||
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Increase in other assets, net |
(
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) |
(
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) |
||||
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Decrease in accounts payable and other liabilities |
(
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) |
(
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) |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Acquisition of hotel properties, net |
(
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) |
(
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) |
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Refunds (payments) for potential acquisitions, net |
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(
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) |
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Capital improvements |
(
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) |
(
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) |
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Net proceeds from sale of real estate |
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Net cash provided by (used in) investing activities |
(
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) |
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Cash flows from financing activities: |
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Repurchases of common shares |
(
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) |
(
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) |
||||
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Repurchases of common shares to satisfy employee withholding requirements |
(
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) |
(
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) |
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Distributions paid to common shareholders |
(
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) |
(
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) |
||||
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Net proceeds from (payments on) revolving credit facility |
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(
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) |
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Proceeds from term loans and senior notes |
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Proceeds from mortgage debt and other loans |
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Payments of mortgage debt and other loans |
(
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) |
(
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) | ||||
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Financing costs |
(
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) |
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Net cash provided by (used in) financing activities |
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(
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) |
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Net change in cash, cash equivalents and restricted cash |
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(
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) |
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Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
$ |
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$ |
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Supplemental cash flow information: |
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Interest paid |
$ |
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$ |
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Supplemental disclosure of noncash investing and financing activities: |
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Notes payable originated from acquisitions |
$ |
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$ |
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Accrued distribution to common shareholders |
$ |
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$ |
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Reconciliation of cash, cash equivalents and restricted cash: |
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Cash and cash equivalents, beginning of period |
$ |
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$ |
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Restricted cash-furniture, fixtures and other escrows, beginning of period |
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Cash, cash equivalents and restricted cash, beginning of period |
$ |
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$ |
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Cash and cash equivalents, end of period |
$ |
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$ |
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Restricted cash-furniture, fixtures and other escrows, end of period |
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Cash, cash equivalents and restricted cash, end of period |
$ |
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$ |
|
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See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Organization and Summary of Significant Accounting Policies
Organization
Apple Hospitality REIT, Inc., together with its wholly-owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2020.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Novel Coronavirus COVID-19 Pandemic
As a result of the current novel coronavirus COVID-19 pandemic (“COVID-19”) and the impact it has had on travel and the broader economy throughout the U.S., the Company’s hotels have experienced significant declines in occupancy, which has had and is expected to continue to have a significant negative effect on the Company’s revenue and operating results. There remains significant uncertainty as to when operations at the hotels will return to normalized levels. As of June 30, 2020, although each of the Company’s hotels were open and receiving reservations, the Company intentionally consolidated operations for
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. The Company’s cash and cash equivalents are distributed among several major banks, but the balances may at times exceed federal depository insurance limits.
Investment in Real Estate
The Company monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. The Company considered COVID-19 as a potential indicator of impairment and as a result of the impact on the Company’s operating results for the three and six months ended June 30, 2020, the Company performed recoverability analyses for each of its properties consistent with its annual process. The analyses compared each property’s net book value to its estimated operating income based on assumptions and estimates about the property’s future revenues, expenses and capital expenditures after recovery from disruption resulting from COVID-19 and other disruptive events such as renovations or newly opened hotels. If events or circumstances change, such as the Company’s intended hold period for a property or if the operating performance of a property remains at current levels or declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. The Company’s recoverability analyses did not identify any impairment losses for the three and six months ended June 30, 2020 and 2019. However, the Company recorded a loss on impairment of
Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net income (loss) per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net income (loss) per common share were the same for each of the periods presented.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported net income or shareholders’ equity.
Accounting Standards Recently Adopted
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement , which removes, modifies and adds fair value disclosure requirements, including a new requirement to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. Certain disclosures are required to be applied retrospectively and others applied prospectively. The Company adopted this standard as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) , which provides optional guidance through December 31, 2022 to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in ASU No. 2020-04 apply to contract modifications that replace a reference rate affected by reference rate reform, providing optional expedients regarding the measurement of hedge effectiveness in hedging relationships that have been modified to replace a reference rate. The guidance in ASU No. 2020-04 became effective upon issuance and the provisions of the ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures as of June 30, 2020.
2. Investment in Real Estate
|
June 30, |
December 31, |
|||||||
|
2020 |
2019 |
|||||||
|
Land |
$ |
|
$ |
|
||||
|
Building and Improvements |
|
|
||||||
|
Furniture, Fixtures and Equipment |
|
|
||||||
|
Finance Ground Lease Assets |
|
|
||||||
|
Franchise Fees |
|
|
||||||
|
|
|
|||||||
|
Less Accumulated Depreciation and Amortization |
(
|
) |
(
|
) |
||||
|
Investment in Real Estate, net |
$ |
|
$ |
|
||||
As of June 30, 2020, the Company owned
The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.
Hotel Acquisitions
|
City |
|
State |
|
Brand |
|
Manager |
|
Date Acquired |
|
Rooms |
|
|
Gross Purchase Price |
|
||
|
Cape Canaveral |
|
FL |
|
Hampton |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Cape Canaveral |
|
FL |
|
Home2 Suites |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
City |
|
State |
|
Brand |
|
Manager |
|
Date Acquired |
|
Rooms |
|
|
Gross Purchase Price |
|
||
|
St. Paul |
|
MN |
|
Hampton |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
Orlando |
|
FL |
|
Home2 Suites |
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond |
|
VA |
|
Independent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
The Company utilized $
Hotel Purchase Contract Commitments
|
Location |
|
Brands |
|
Date of Purchase Contract |
|
Rooms |
|
|
Refundable Deposits |
|
|
Gross Purchase Price |
|
|||
|
Tempe, AZ (1)(2) |
|
Hyatt House and Hyatt Place |
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Madison, WI (1) |
|
Hilton Garden Inn |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(1)
|
|
(2)
|
The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotels under contract if closings occur.
Additionally, as of December 31, 2019, the Company had an outstanding contract to purchase a Courtyard hotel in Denver, Colorado, which it terminated in May 2020. The refundable deposit of approximately $
3. Dispositions and Hotel Sale Contracts
Dispositions
|
City |
|
State |
|
Brand |
|
Date Sold |
|
Rooms |
|
|
|
Sanford |
|
FL |
|
SpringHill Suites |
|
|
|
|
|
|
|
Boise |
|
ID |
|
SpringHill Suites |
|
|
|
|
|
|
|
Total |
|
|
|
|
||||||
|
City |
|
State |
|
Brand |
|
Date Sold |
|
Rooms |
|
|
|
Sarasota |
|
FL |
|
Homewood Suites |
|
|
|
|
|
|
|
Tampa |
|
FL |
|
TownePlace Suites |
|
|
|
|
|
|
|
Baton Rouge |
|
LA |
|
SpringHill Suites |
|
|
|
|
|
|
|
Holly Springs |
|
NC |
|
Hampton |
|
|
|
|
|
|
|
Duncanville |
|
TX |
|
Hilton Garden Inn |
|
|
|
|
|
|
|
Texarkana |
|
TX |
|
Courtyard |
|
|
|
|
|
|
|
Texarkana |
|
TX |
|
TownePlace Suites |
|
|
|
|
|
|
|
Bristol |
|
VA |
|
Courtyard |
|
|
|
|
|
|
|
Harrisonburg |
|
VA |
|
Courtyard |
|
|
|
|
|
|
|
Winston-Salem |
|
NC |
|
Courtyard |
|
|
|
|
|
|
|
Fort Lauderdale |
|
FL |
|
Hampton |
|
|
|
|
|
|
|
Total |
|
|
|
|
||||||
Excluding gains on sale of real estate, the Company’s consolidated statements of operations include operating income of approximately $
Hotel Sale Contracts and Loss on Impairment of Depreciable Real Estate Assets
In June 2020, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its
4. Debt
Summary
|
June 30,
|
December 31,
|
|||||||
|
Revolving credit facility |
$ |
|
$ |
|
||||
|
Term loans and senior notes, net |
|
|
||||||
|
Mortgage debt, net |
|
|
||||||
|
Debt, net |
$ |
|
$ |
|
||||
|
2020 (July - December) |
$ |
|
||
|
2021 |
|
|||
|
2022 |
|
|||
|
2023 |
|
|||
|
2024 |
|
|||
|
Thereafter |
|
|||
|
|
||||
|
Unamortized fair value adjustment of assumed debt |
|
|||
|
Unamortized debt issuance costs |
(
|
) |
||
|
Total |
$ |
|
|
June 30,
|
Percentage |
December 31,
|
Percentage |
|||||||||||||
|
Fixed-rate debt (1) |
$ |
|
|
% |
$ |
|
|
% |
||||||||
|
Variable-rate debt |
|
|
% |
|
|
% |
||||||||||
|
Total |
$ |
|
$ |
|
||||||||||||
|
Weighted-average interest rate of debt |
|
% |
|
% |
||||||||||||
|
|
|
(1) |
|
|||||||||||||||||
Credit Facilities
Credit Facilities Amendments June 5, 2020
As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company anticipated that it may not be able to maintain compliance with certain covenants under its unsecured credit facilities in future periods. As a result, on June 5, 2020, the Company entered into amendments to each of the unsecured credit facilities.
|
● |
Mandatory prepayments of amounts outstanding under the Company’s unsecured credit facilities of net cash proceeds from certain debt and equity issuances and asset dispositions, subject to various exceptions. A portion of the mandatory prepayments will be available for future borrowing under the revolving credit facility; |
|
● |
A minimum liquidity covenant of $100 million; |
|
● |
A requirement to pledge the equity interests of each direct or indirect owner of certain unencumbered property in favor of the administrative agents if average liquidity for any month is less than $275 million or the total amount outstanding under the revolving credit facility exceeds $275 million; |
|
● |
Restrictions on the Company’s and its subsidiaries’ ability to incur additional indebtedness or prepay certain existing indebtedness; |
|
● |
Restrictions on the Company’s ability to make cash distributions (except to the extent required to maintain REIT status) and share repurchases; |
|
● |
Maximum discretionary capital expenditures of $50 million; |
|
● |
Limitations on additional investments; and |
|
● |
An increase in the applicable interest rate under the unsecured credit facilities until the end of the Covenant Waiver Period to a rate that corresponds to the highest leverage-based applicable interest rate margin with respect to the unsecured credit facilities. |
The amendments also modify the calculation of the existing financial covenants for the four quarters subsequent to the end of the Covenant Waiver Period to annualize calculated amounts to the extent the most recently ended fiscal quarter is not at least four fiscal quarters from the end of the Covenant Waiver Period, and provide for an increase in the LIBOR floor under the credit agreements from 0 to 25 basis points for Eurodollar Rate Loans and establish a Base Rate floor of 1.25% on the revolving credit facility, and any term loans under the credit agreements that are not hedged. Except as otherwise set forth in the amendments, the terms of the credit agreements remain in effect.
The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants, restrictions on certain investments and events of default. The credit agreements contain the following financial and restrictive covenants, each of which are suspended during the Covenant Waiver Period (capitalized terms are defined in the credit agreements).
|
● |
A ratio of Consolidated Total Indebtedness to Consolidated EBITDA of not more than 6.50 to 1.00 (subject to a higher amount in certain circumstances); |
|
● |
A ratio of Consolidated Secured Indebtedness to Consolidated Total Assets of not more than 45%; |
|
● |
A minimum Consolidated Tangible Net Worth of approximately $3.2 billion (plus an amount equal to 75% of the Net Cash Proceeds from issuances and sales of Equity Interests occurring after the Closing Date, subject to adjustment); |
|
● |
A ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges of not less than 1.50 to 1.00 for the trailing four full quarters; |
|
● |
A ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness of not less than 2.00 to 1.00 for the trailing four full quarters; |
|
● |
A ratio of Consolidated Unsecured Indebtedness to Unencumbered Asset Value of not more than 60% (subject to a higher level in certain circumstances); and |
|
● |
A ratio of Consolidated Secured Recourse Indebtedness to Consolidated Total Assets of not more than 10%. |
As of June 30, 2020, the Company was in compliance with the applicable covenants of the credit agreements.
$850 Million Credit Facility
The Company utilizes an unsecured “$
$225 Million Term Loan Facility
The Company has an unsecured $
2017 $85 Million Term Loan Facility
On July 25, 2017, the Company entered into an unsecured $
2019 $85 Million Term Loan Facility
On December 31, 2019, the Company entered into an unsecured $
$50 Million Senior Notes Facility
On March 16, 2020, the Company entered into an unsecured $
|
Outstanding Balance |
||||||||||||
|
Interest Rate |
Maturity Date |
June 30,
|
December 31,
|
|||||||||
|
Revolving credit facility (1) |
|
|
$ |
|
$ |
|
||||||
|
Term loans and senior notes |
||||||||||||
|
$200 million term loan |
|
|
|
|
||||||||
|
$225 million term loan |
|
|
|
|
||||||||
|
$50 million term loan |
|
|
|
|
||||||||
|
$175 million term loan |
|
|
|
|
||||||||
|
2017 $85 million term loan |
|
|
|
|
||||||||
|
2019 $85 million term loan |
|
|
|
|
||||||||
|
$50 million senior notes |
|
|
|
|
||||||||
|
Term loans and senior notes at stated value |
|
|
||||||||||
|
Unamortized debt issuance costs |
(
|
) |
(
|
) |
||||||||
|
Term loans and senior notes, net |
|
|
||||||||||
|
Credit facilities, net (1) |
$ |
|
$ |
|
||||||||
|
Weighted-average interest rate (2) |
|
% |
|
% |
||||||||
|
(1)
|
|
(2)
|
Mortgage Debt
|
Location |
|
Brand |
|
Interest Rate (1) |
|
|
Loan Assumption or Origination Date |
|
Maturity Date |
|
|
Principal Assumed or Originated |
|
|
Outstanding balance as of June 30,
|
|
|
Outstanding balance as of
December 31,
|
|
|||||
|
San Juan Capistrano, CA |
|
Residence Inn |
|
|
|
% |
|
|
|
|
(2) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Cape Canaveral, FL |
Hampton |
|
(3) |
|
|
|
|
|
||||||||||||||||
|
Cape Canaveral, FL |
Home2 Suites |
|
(3) |
|
|
|
|
|
||||||||||||||||
|
Colorado Springs, CO |
|
Hampton |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin, TN |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franklin, TN |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grapevine, TX |
|
Hilton Garden Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collegeville/Philadelphia, PA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hattiesburg, MS |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rancho Bernardo/San Diego, CA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kirkland, WA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seattle, WA |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anchorage, AK |
|
Embassy Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Somerset, NJ |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tukwila, WA |
|
Homewood Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prattville, AL |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Huntsville, AL |
|
Homewood Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego, CA |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Miami, FL |
|
Homewood Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Orleans, LA |
|
Homewood Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Westford, MA |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver, CO |
|
Hilton Garden Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oceanside, CA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Omaha, NE |
|
Hilton Garden Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boise, ID |
|
Hampton |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burbank, CA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego, CA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Diego, CA |
|
Hampton |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burbank, CA |
|
SpringHill Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santa Ana, CA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond, VA |
|
Courtyard |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richmond, VA |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portland, ME |
|
Residence Inn |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Jose, CA |
|
Homewood Suites |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Unamortized fair value adjustment of assumed debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
|
) |
|
|
(
|
) |
||
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
||
|
(1)
|
|
(2)
(3)
|
During April and May 2020, the Company applied for and received approximately $
5. Fair Value of Financial Instruments
Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.
Debt
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of June 30, 2020, the carrying value and estimated fair value of the Company’s debt were approximately $
Derivative Instruments
|
Notional Amount at June 30, 2020 |
Fair Value Asset (Liability) |
|||||||||||||||||||
|
Origination Date |
Effective Date |
Maturity Date |
Swap Fixed Interest Rate |
June 30, 2020 |
December 31,
|
|||||||||||||||
|
Interest rate swaps designated as cash flow hedges at June 30, 2020: |
||||||||||||||||||||
| $ |
|
|
|
|
|
% |
$ |
(
|
) |
$ |
|
|||||||||
|
|
|
|
|
|
% |
(
|
) |
|
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Interest rate swaps matured prior to June 30, 2020: |
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The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. As of June 30, 2020, all of the
|
Net Unrealized Loss Recognized in Other Comprehensive Income (Loss) |
Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net |
|||||||||||||||
|
Three Months Ended June 30, |
Three Months Ended June 30, |
|||||||||||||||
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2020 |
2019 |
2020 |
2019 |
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Interest rate derivatives in cash flow hedging relationships |
$ |
(
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) |
$ |
(
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$ |
(
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$ |
|
|||||
|
Net Unrealized Loss Recognized in Other Comprehensive Income (Loss) |
Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net |
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|
Six Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
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2020 |
2019 |
2020 |
2019 |
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Interest rate derivatives in cash flow hedging relationships |
$ |
(
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$ |
(
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$ |
(
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$ |
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|||||
6. Related Parties
The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. There have been no changes to the contracts and relationships discussed in the 2019 Form 10-K. Below is a summary of the significant related party relationships in effect during the six months ended June 30, 2020 and 2019.
Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receive support services from ARG.
The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for both the six months ended June 30, 2020 and 2019 totaled approximately $
As part of the cost sharing arrangement, certain day-to-day transactions may result in amounts due to or from the Company and ARG.
The Company, through a wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation and investor and public relations purposes. The aircraft is also leased to affiliates of the Company based on third party rates, which leasing activity was not significant during the reporting periods. The Company also utilizes one aircraft, owned through one entity, which is owned by the Company’s Executive Chairman, for acquisition, asset management, renovation and investor and public relations purposes, and reimburses the entity at third party rates. Total costs incurred for the use of the aircraft during the six months ended June 30, 2020 and 2019 were less than $
7. Shareholders’ Equity
Distributions
Subsequent to the distribution paid in March 2020, the Company announced the suspension of its monthly distributions due to the impact of COVID-19 on its operating cash flows. Prior to the suspension of its distributions, the Company’s annual distribution rate, payable monthly, was $
Share Repurchases
In May 2020, the Company’s Board of Directors approved an extension of its existing share repurchase program (the “Share Repurchase Program”), authorizing share repurchases up to an aggregate of $
8. Compensation Plans
The Company annually establishes an incentive plan for its executive management. Under the incentive plan for 2020 (the “2020 Incentive Plan”), participants are eligible to receive a bonus based on the achievement of certain 2020 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return, over one-year, two-year and three-year periods).
During the six months ended June 30, 2020, the Company accrued expense associated with
During the six months ended June 30, 2019, the Company incurred a one-time separation payment of $
Share-Based Compensation Awards
|
2019 Incentive Plan |
2018 Incentive Plan |
|||||||||
|
Period common shares issued |
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Common shares earned under each incentive plan |
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Common shares surrendered on issuance date to satisfy tax withholding obligations |
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Common shares earned and issued under each incentive plan, net of common shares surrendered on issuance date to satisfy tax withholding obligations |
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|
Closing stock price on issuance date |
$ |
|
$ |
|
||||||
|
Total share-based compensation earned, including the surrendered shares (in millions) |
$ |
|
(1) | $ |
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(2) | ||||
|
Of the total common shares earned and issued, total common shares unrestricted at time of issuance |
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Of the total common shares earned and issued, total common shares restricted at time of issuance |
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Restricted common shares vesting date |
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Common shares surrendered on vesting date to satisfy tax withholding requirements resulting from vesting of restricted common shares |
n/a
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(1)
|
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(2)
|
Additionally, in conjunction with the appointment of
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by use of statements that include phrases such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “outlook,” “strategy,” and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements is the adverse effect of COVID-19, including possible resurgences, on the Company’s business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets generally. The significance, extent and duration of the impacts caused by the COVID-19 outbreak on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the potential for additional hotel closures/consolidations that may be mandated or advisable, whether based on increased COVID-19 cases or other factors, the slowing or potential rollback of “reopenings” in certain states, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Such additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; reduced business and leisure travel due to travel-related health concerns, including the widespread outbreak of COVID-19 or an increase in COVID-19 cases or any other infectious or contagious diseases in the U.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a REIT. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled “Risk Factors” in the 2019 Form 10-K and in Part II, Item 1A of this Form 10-Q. Any forward-looking statement that the Company makes speaks only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.
The following discussion and analysis should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the 2019 Form 10-K.
Overview
The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the U.S. As of June 30, 2020, the Company owned 233 hotels with an aggregate of 29,759 rooms located in urban, high-end suburban and developing markets throughout 34 states. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 20 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.”
COVID-19 and the Company’s Actions to Mitigate its Impact
Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. declared a national emergency with respect to COVID-19.
The outbreak of COVID-19 has not only specifically reduced travel, but also has had a detrimental impact on regional and global economies and financial markets. The global, national and local impact of the outbreak has rapidly evolved and many countries, including the U.S., as well as state and local governments, have reacted by instituting a wide variety of measures intended to control its spread, including states of emergency, mandatory quarantines, implementation of “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings, which resulted in cancellation of events, including sporting events, conferences and meetings. The pandemic triggered a period of material global economic slowdown and the National Bureau of Economic Research declared that the U.S. has been in a recession since February 2020. While the Company’s operating results and the overall economy in the U.S. have shown signs of partial recovery, the Company cannot presently determine the extent or duration of the overall operational and financial effects that COVID-19 will have on the Company, its business, the hospitality industry and the economy.
The effects of the pandemic on the hotel industry are unprecedented. COVID-19 has disrupted the industry and its consequences have dramatically reduced business and leisure travel, which has had a significant adverse impact on, and will continue to significantly adversely impact and disrupt, the Company’s business, financial performance and condition, operating results and cash flows. Average occupancy for the Company’s Comparable Hotels (as defined below) declined from approximately 76% in February to below 20% by the end of March and for the entire month of April, which was accompanied by a decline in average daily rate (“ADR”) of approximately 29% for the month of April compared to 2019. While the economy has shown signs of recovery as restrictions eased, occupancy and ADR are still significantly below 2019 levels. The Company expects this significant decline in revenue associated with COVID-19 and the overall decline in the U.S. economy to negatively impact the Company’s revenue and operating results for an extended period of time. The Company does not expect a material improvement in results until business travel and general consumer confidence related to risks associated with COVID-19 and the economy improve and government restrictions on travel, business operations and “stay at home” orders are broadly lifted.
The following is a brief summary of certain measures the Company, its management companies and its brands have taken to minimize costs and cash outflow to maintain a sound liquidity position:
|
|
● |
Beginning March 2020, the Company’s brands and third-party management companies implemented cost elimination and efficiency initiatives at each of the Company’s hotels by reducing labor costs, reducing or eliminating certain amenities and reducing rates under various service contracts. As of June 30, 2020, the Company intentionally consolidated operations at 18 hotels, down from 38 hotels as of May 2020, in market clusters to maximize operational efficiencies. The cost structure of the Company’s primarily rooms-focused hotels allows them to operate cost effectively even at very low occupancy levels. |
|
|
● |
Together with its third-party management companies, the Company has enhanced its sales efforts by focusing on COVID-19-specific demand opportunities in certain markets and strategically targeting and maximizing performance based on available demand, such as leisure, government, construction, manufacturing and maintenance focused business. |
|
|
● |
The Company has postponed all non-essential capital improvement projects planned for 2020 and anticipates a reduction of approximately $50 million in originally planned capital improvements for the year. |
|
|
● |
The Company suspended its monthly distributions, with the last distribution being paid March 16, 2020. The Company’s Board of Directors, in consultation with management, will continue to monitor hotel operations and intends to resume monthly distributions at a time and level determined to be prudent in relation to the Company’s other cash requirements and as allowed under the Company’s amended unsecured credit facilities, as discussed below. |
|
|
● |
The Company terminated its written trading plan under its Share Repurchase Program in March 2020. |
|
|
● |
The Company’s Executive Chairman voluntarily agreed to forego six months of salary, the Chief Executive Officer volunteered to reduce his target compensation by 60 percent and the non-employee directors on the Board of Directors volunteered as a group to reduce their annual director fees by more than 15 percent. |
|
|
● |
The Company entered into amendments to its unsecured credit facilities to temporarily waive the financial covenant testing until June 30, 2021, under its unsecured credit facilities. See further discussion in Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. |
Despite the cost reduction initiatives discussed above, the Company does not expect to be able to fully, or even materially, offset revenue losses from COVID-19. The significance, extent and duration of COVID-19 effects are not currently known and these uncertainties make it difficult to predict operating results for the Company’s hotels for the remainder of 2020. Therefore, there can be no assurances that the Company will not experience further declines in hotel revenues or earnings at its hotels.
2020 Hotel Portfolio Activities
The following discussion regarding the Company’s approach to acquisitions and dispositions reflects the Company’s historical strategy. While the Company anticipates it will continue to approach the acquisition and disposition of hotels similarly over the long term, the detrimental impact of COVID-19 to the Company and overall lodging industry may limit the Company’s ability to effectively acquire or dispose of hotels until the industry recovers.
The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, in 2018 the Company entered into a contract to purchase a combined 224-room dual-branded Hampton Inn & Suites and Home2 Suites complex to be constructed in Cape Canaveral, Florida. Construction of the hotels was completed in April 2020 and the Company acquired the hotels. The purchase price was approximately $46.7 million, funded by $25.0 million of cash on hand and a one-year secured note with the developer for $21.7 million payable in April 2021. Also, as of June 30, 2020, the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three hotels under development for a total expected purchase price of approximately $114.2 million, which are planned to be completed and opened for business over the next two to 12 months from June 30, 2020, at which time closings on these hotels are expected to occur. In each case, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under these contracts. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing for these additional acquisitions.
For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. As a result, during the first quarter of 2020, the Company sold two hotels for a total combined gross sales price of $45.0 million and recognized a gain on sale of approximately $8.8 million in the first quarter of 2020. Additionally, as of June 30, 2020, the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately $9.0 million. Although the Company is working towards the sale of this hotel, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding purchase and sale agreement. If the closing occurs, this sale is expected to be completed in the fourth quarter of 2020. The Company expects the net proceeds from the sale to be used to pay down borrowings on the Company’s revolving credit facility.
See Note 2 titled “Investment in Real Estate” and Note 3 titled “Dispositions and Hotel Sale Contracts” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning these transactions.
Effective January 20, 2020, the Company converted its New York, New York Renaissance hotel to an independent boutique hotel. As anticipated, the operating results of the hotel declined in the first quarter of 2020 (prior to COVID-19) as compared to the first quarter of 2019 as the management team worked to replace revenue that was historically generated from the Renaissance brand system and have experienced further declines due to COVID-19.
Hotel Operations
As of June 30, 2020, the Company owned 233 hotels with a total of 29,759 rooms as compared to 234 hotels with a total of 30,046 rooms as of June 30, 2019. Results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year. During the six months ended June 30, 2020, the Company acquired two newly constructed hotels on April 30, 2020 and sold one hotel on January 16, 2020 and one hotel on February 28, 2020. During 2019, the Company acquired one newly developed hotel on March 19, 2019 and two existing hotels (one on March 4, 2019 and one on October 9, 2019), and sold 11 hotels (nine on March 28, 2019, one on December 19, 2019 and one on December 30, 2019). As a result, the comparability of results for the three and six months ended June 30, 2020 and 2019 as discussed below is impacted by these transactions in addition to the impact of COVID-19 beginning in March 2020.
In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and revenue per available room (“RevPAR”), and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.
The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||||||||||||||||||
|
(in thousands, except statistical data) |
2020 |
Percent of Revenue |
2019 |
Percent of Revenue |
Percent Change |
2020 |
Percent of Revenue |
2019 |
Percent of Revenue |
Percent Change |
||||||||||||||||||||||||||||||
|
Total revenue |
$ | 81,078 | 100.0 | % | $ | 341,117 | 100.0 | % | -76.2 | % | $ | 319,088 | 100.0 | % | $ | 644,904 | 100.0 | % | -50.5 | % | ||||||||||||||||||||
|
Hotel operating expense |
61,817 | 76.2 | % | 187,190 | 54.9 | % | -67.0 | % | 217,083 | 68.0 | % | 362,639 | 56.2 | % | -40.1 | % | ||||||||||||||||||||||||
|
Property taxes, insurance and other expense |
18,702 | 23.1 | % | 19,246 | 5.6 | % | -2.8 | % | 38,297 | 12.0 | % | 38,859 | 6.0 | % | -1.4 | % | ||||||||||||||||||||||||
|
General and administrative expense |
6,025 | 7.4 | % | 8,308 | 2.4 | % | -27.5 | % | 15,548 | 4.9 | % | 16,445 | 2.5 | % | -5.5 | % | ||||||||||||||||||||||||
|
Loss on impairment of depreciable real estate assets |
4,382 | - | n/a | 4,382 | - | n/a | ||||||||||||||||||||||||||||||||||
|
Depreciation and amortization expense |
49,897 | 48,109 | 3.7 | % | 99,419 | 96,059 | 3.5 | % | ||||||||||||||||||||||||||||||||
|
Gain (loss) on sale of real estate |
(54 | ) | (161 | ) | -66.5 | % | 8,785 | 1,052 | n/a | |||||||||||||||||||||||||||||||
|
Interest and other expense, net |
18,386 | 15,857 | 15.9 | % | 33,952 | 31,351 | 8.3 | % | ||||||||||||||||||||||||||||||||
|
Income tax expense |
58 | 156 | -62.8 | % | 204 | 362 | -43.6 | % | ||||||||||||||||||||||||||||||||
|
Net income (loss) |
(78,243 | ) | 62,090 | -226.0 | % | (81,012 | ) | 100,241 | -180.8 | % | ||||||||||||||||||||||||||||||
|
Adjusted hotel EBITDA (1) |
704 | 134,759 | -99.5 | % | 64,001 | 243,563 | -73.7 | % | ||||||||||||||||||||||||||||||||
|
Number of hotels owned at end of period |
233 | 234 | -0.4 | % | 233 | 234 | -0.4 | % | ||||||||||||||||||||||||||||||||
|
ADR |
$ | 100.76 | $ | 141.60 | -28.8 | % | $ | 122.48 | $ | 139.09 | -11.9 | % | ||||||||||||||||||||||||||||
|
Occupancy |
28.2 | % | 81.4 | % | -65.4 | % | 44.5 | % | 77.6 | % | -42.7 | % | ||||||||||||||||||||||||||||
|
RevPAR |
$ | 28.44 | $ | 115.30 | -75.3 | % | $ | 54.55 | $ | 107.95 | -49.5 | % | ||||||||||||||||||||||||||||
|
(1) See reconciliation of Adjusted Hotel EBITDA to net income (loss) in "Non-GAAP Financial Measures" below. |
||||||||||||||||||||||||||||||||||||||||
The following table highlights the monthly impact of COVID-19 on the Company’s ADR, Occupancy, RevPAR and adjusted hotel earnings before interest, income taxes, depreciation and amortization for real estate (“Adjusted Hotel EBITDA”) during the three months ended 2020 as compared to the three months ended 2019 (in thousands except statistical data):
|
Three |
Three |
|||||||||||||||||||||||||||||||
|
April 2020 |
May 2020 |
June 2020 |
Months Ended June 30, 2020 |
April 2019 |
May 2019 |
June 2019 |
Months Ended June 30, 2019 |
|||||||||||||||||||||||||
|
ADR |
$ | 99.92 | $ | 95.67 | $ | 105.09 | $ | 100.76 | $ | 139.83 | $ | 139.72 | $ | 145.14 | $ | 141.60 | ||||||||||||||||
|
Occupancy |
17.7 | % | 28.6 | % | 38.2 | % | 28.2 | % | 80.6 | % | 80.1 | % | 83.7 | % | 81.4 | % | ||||||||||||||||
|
RevPAR |
$ | 17.70 | $ | 27.39 | $ | 40.17 | $ | 28.44 | $ | 112.64 | $ | 111.94 | $ | 121.41 | $ | 115.30 | ||||||||||||||||
|
Adjusted Hotel EBITDA (1) |
$ | (7,931 | ) | $ | 575 | $ | 8,060 | $ | 704 | $ | 42,014 | $ | 43,542 | $ | 49,203 | $ | 134,759 | |||||||||||||||
|
(1) See reconciliation of Adjusted Hotel EBITDA to net income (loss) in “Non-GAAP Financial Measures” below |
||||||||||||||||||||||||||||||||
Beginning in March 2020, COVID-19 caused widespread cancellations of both business and leisure travel throughout the U.S., resulting in significant decreases in RevPAR throughout the Company’s hotel portfolio and the hospitality industry as a whole. With the overall uncertainty of the longevity of COVID-19 in the U.S. and the resulting economic decline, it is difficult to project the duration of revenue declines for the industry and Company; however, the Company currently expects the decline in revenue and operating results as compared to 2019 to continue throughout the remainder of 2020 and into 2021. While the Company experienced its most significant decline in operating results during April 2020 as compared to April 2019, occupancy and RevPar showed sequential improvement in May and June 2020, resulting in positive Adjusted Hotel EBITDA for the months of May and June 2020, as well as for the three months ended June 30, 2020, and near-breakeven modified funds from operations (“MFFO”) for the month of June 2020. Although the Company expects this trend to gradually continue, future revenues and operating results could be negatively impacted if COVID-19 cases continue to increase and state and local governments and businesses revert back to tighter mitigation restrictions or consumer sentiment deteriorates.
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company’s 233 hotels owned as of June 30, 2020 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 233 hotels owned as of the end of the reporting period. For the hotels acquired during the current reporting period and prior year, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions, results have been excluded for the Company’s period of ownership.
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
|
2020 |
2019 |
Percent Change |
2020 |
2019 |
Percent Change |
|||||||||||||||||||
|
ADR |
$ | 100.76 | $ | 142.01 | -29.0 | % | $ | 122.52 | $ | 139.88 | -12.4 | % | ||||||||||||
|
Occupancy |
28.2 | % | 81.5 | % | -65.4 | % | 44.5 | % | 77.8 | % | -42.8 | % | ||||||||||||
|
RevPAR |
$ | 28.44 | $ | 115.73 | -75.4 | % | $ | 54.50 | $ | 108.82 | -49.9 | % | ||||||||||||
Same Store Operating Results
The following table reflects certain operating statistics for the 228 hotels owned by the Company as of January 1, 2019 and during the entirety of the reporting periods being compared (“Same Store Hotels”). This information has not been audited.
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
|
2020 |
2019 |
Percent Change |
2020 |
2019 |
Percent Change |
|||||||||||||||||||
|
ADR |
$ | 100.83 | $ | 142.08 | -29.0 | % | $ | 122.49 | $ | 139.89 | -12.4 | % | ||||||||||||
|
Occupancy |
28.4 | % | 81.6 | % | -65.2 | % | 44.6 | % | 77.8 | % | -42.7 | % | ||||||||||||
|
RevPAR |
$ | 28.59 | $ | 115.90 | -75.3 | % | $ | 54.58 | $ | 108.89 | -49.9 | % | ||||||||||||
As discussed above, hotel performance is impacted by many factors, including the economic conditions in the U.S. as well as each individual locality. COVID-19 negatively affected the U.S. hotel industry beginning in March 2020. As a result of COVID-19, the Company’s revenue and operating results declined during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, which is consistent with the overall lodging industry. Compared to 2019, the Company expects the declines in revenue and operating results to continue throughout the remainder of 2020, but the Company can give no assurances of the amount or period of decline due to the uncertainty regarding the duration and long-term impact of and governmental and consumer response to COVID-19.
Revenues
The Company’s principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For the three months ended June 30, 2020 and 2019, the Company had total revenue of $81.1 million and $341.1 million, respectively. For the six months ended June 30, 2020 and 2019, the Company had total revenue of $319.1 million and $644.9 million, respectively. For the three months ended June 30, 2020 and 2019, respectively, Comparable Hotels achieved combined average occupancy of 28.2% and 81.5%, ADR of $100.76 and $142.01 and RevPAR of $28.44 and $115.73. For the six months ended June 30, 2020 and 2019, respectively, Comparable Hotels achieved combined average occupancy of 44.5% and 77.8%, ADR of $122.52 and $139.88 and RevPAR of $54.50 and $108.82. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.
Compared to the same periods in 2019, during the second quarter and first half of 2020, the Company experienced decreases in ADR and occupancy, resulting in decreases of 75.4% and 49.9% in RevPAR, respectively, for Comparable Hotels. During March 2020, the hotel industry and the Company began to see a significant decrease in occupancy as both mandated and voluntary restrictions on travel were implemented throughout the U.S. For Comparable Hotels, occupancy declined to approximately 41.0% in March and 17.7% in April before improving to 28.6% in May, 38.2% in June and approximately 45% in July as COVID-19 mitigation restrictions were partially lifted across much of the U.S. and consumer confidence in travel improved slightly driven by predominately increased leisure demand. The Company expects this trend to gradually continue, however, future revenues could be negatively impacted if COVID-19 cases continue to increase and state and local governments tighten or implement new mitigation restrictions or consumer sentiment deteriorates.
Hotel Operating Expense
The Company, its management companies and the brands the Company’s hotels are franchised with have all aggressively worked to mitigate the costs and uses of cash associated with operating the hotels in a low-occupancy environment and are thoughtfully working to position the hotels to adapt to the changes that may occur to guest preferences in the future. The impact of the situation has varied and will vary by market and hotel. With the support of its brands and third-party management companies, the Company will continue to evaluate and implement additional measures as the situation evolves.
Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. Hotel operating expense for the three months ended June 30, 2020 and 2019 totaled $61.8 million and $187.2 million, respectively, or 76.2% and 54.9% of total revenue for the respective periods, and for the six months ended June 30, 2020 and 2019 totaled $217.1 million and $362.6 million, respectively, or 68.0% and 56.2% of total revenue for the respective periods. Included in hotel operating expense for the three and six months ended June 30, 2020 were approximately $0.3 million and $1.9 million, respectively, in separation and furlough costs for hotel employees as a result of the occupancy declines discussed above. The Company has worked and will continue to work with its management companies to optimize staffing models, consolidate operations in markets with multiple properties, and adjust food and beverage offerings and other amenities, among other efficiency initiatives to mitigate the impact of revenue declines on its results of operations. For example, in some markets the Company is “clustering” hotels, whereby multiple properties in a market have consolidated their operations to increase efficiency; certain brand standards have been reduced; and the Company has also successfully reduced rates under various service contracts. Although certain operating costs of a hotel are more fixed in nature, such as base utility and maintenance costs, the Company has worked and will continue to work to reduce all non-essential costs including service contracts, utilities in areas not utilized and certain maintenance costs. However, as the Company modifies operations as a result of and to address concerns related to COVID-19, the Company expects to incur increased operating costs related to the supplying of personal protective equipment for employees and guests as well as increased sanitation, social distancing and other measures.
Property Taxes, Insurance and Other Expense
Property taxes, insurance, and other expense for the three months ended June 30, 2020 and 2019 totaled $18.7 million and $19.2 million, respectively, or 23.1% and 5.6% of total revenue for the respective periods, and for the six months ended June 30, 2020 and 2019 totaled $38.3 million and $38.9 million, respectively, or 12.0% and 6.0% of total revenue for the respective periods. Although the Company will continue to aggressively appeal assessments and monitor locality guidance as a result of COVID-19, it does not currently anticipate significant decreases in property taxes in 2020 as compared to 2019, as many assessments are made at the beginning of each calendar year.
General and Administrative Expense
General and administrative expense for the three months ended June 30, 2020 and 2019 was $6.0 million and $8.3 million, respectively, or 7.4% and 2.4% of total revenue for the respective periods. For the six months ended June 30, 2020 and 2019, general and administrative expense was $15.5 million and $16.4 million, respectively, or 4.9% and 2.5% of total revenue for the respective periods. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. The decrease in expense for the three months ended June 30, 2020 as compared to the same period in 2019 is primarily due to decreased accruals for potential incentive plan payments associated with the decline in operating results as compared to 2019. For the six months ended June 30, 2020, these decreases were partially offset by the accrual of approximately $2.5 million in separation benefits awarded in connection with the previously announced retirements of the Company’s former Chief Operating Officer and former Chief Financial Officer on March 31, 2020. General and administrative expense for the six months ended June 30, 2019 included approximately $0.5 million for the separation payment in connection with the retirement of the Company’s former Chief Legal Officer.
As discussed above, in order to minimize costs in 2020, the Company’s Executive Chairman voluntarily agreed to forego six months of salary, the Chief Executive Officer volunteered to reduce his target compensation by 60 percent and the non-employee directors on the Board of Directors volunteered as a group to reduce their annual director fees by more than 15 percent. Additionally, in light of the decline in revenue and operating results due to COVID-19 and the associated impact on the current operational and shareholder return metrics in the 2020 Incentive Plan (see Note 8 titled “Compensation Plans” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional details), the Company anticipates a reduced payout for executive management compared to target compensation based on the originally established performance metrics.
Loss on Impairment of Depreciable Real Estate Assets
Loss on impairment of depreciable real estate assets was $4.4 million for both the three and six months ended June 30, 2020, consisting of an impairment charge for the Memphis, Tennessee Homewood Suites in 2020. The Company did not recognize any impairment charges for the three and six months ended June 30, 2019. See Note 3 titled “Dispositions and Hotel Sale Contracts” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning this impairment loss.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 was $49.9 million and $48.1 million, respectively. For the six months ended June 30, 2020 and 2019, depreciation and amortization expense was $99.4 million and $96.1 million, respectively. Depreciation and amortization expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. Depreciation and amortization expense for the three months ended June 30, 2020 and 2019 also includes $1.6 million and $1.1 million, respectively, of amortization of the Company’s four finance ground lease assets. For the six months ended June 30, 2020 and 2019, depreciation and amortization also includes $3.2 million and $2.2 million, respectively, of amortization of the Company’s four finance ground lease assets. The remaining increases of approximately $1.3 million and $2.3 million, respectively, for the three and six months ended June 30, 2020 and 2019, were primarily due to the hotel acquisitions and renovations completed throughout 2019 and the first half of 2020.
Interest and Other Expense, net
Interest and other expense, net for the three months ended June 30, 2020 and 2019 was $18.4 million and $15.9 million, respectively. For the six months ended June 30, 2020 and 2019, interest and other expense, net was $34.0 million and $31.4 million, respectively, and is net of approximately $0.8 million and $0.7 million, respectively, of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the three months ended June 30, 2020 and 2019 includes approximately $2.8 million and $2.1 million, respectively, of interest recorded on the Company’s four finance lease liabilities. For the six months ended June 30, 2020 and 2019, interest and other expense, net includes approximately $5.7 million and $4.0 million, respectively, of interest recorded on the Company’s four finance lease liabilities.
Interest expense related to the Company’s debt instruments increased as a result of increased average borrowings in the first half of 2020 as compared to the first half of 2019 partially offset by a decrease in the Company’s effective interest rate during the first half of 2020 as compared to the same period in 2019, due to lower average interest rates. However, the Company anticipates interest expense to be higher for the remainder of 2020 compared to the same period of 2019 due to increased average interest rates and increased borrowings under its revolving credit facility as compared to the same periods in 2019. In March 2020, the Company drew the remaining availability under its revolving credit facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the financial markets resulting from COVID-19. As of June 30, 2020, the Company had repaid approximately $225.3 million in connection with the amendments of its unsecured credit facilities (discussed below) and in July 2020 repaid an additional approximately $100 million as a result of improved operating cash flow as compared to April and May 2020. See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional discussion of the Company’s amended unsecured credit facilities. In addition to increases in interest due to the Company’s unsecured credit facilities, interest on the Company’s finance leases increased approximately $1.7 million during the first half of 2020 as compared to the first half of 2019 due to a required increase under one of its leases.
Non-GAAP Financial Measures
The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations (“FFO”), MFFO, Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), Adjusted EBITDAre and Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss), cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA are not necessarily indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. Although FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre, and Adjusted Hotel EBITDA as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company’s results between periods and with other REITs.
FFO and MFFO
The Company calculates and presents FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), which defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.
The Company calculates MFFO by further adjusting FFO for the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.
The following table reconciles the Company’s GAAP net income (loss) to FFO and MFFO for the three and six months ended June 30, 2020 and 2019 (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net income (loss) |
$ | (78,243 | ) | $ | 62,090 | $ | (81,012 | ) | $ | 100,241 | ||||||
|
Depreciation of real estate owned |
48,044 | 46,712 | 95,712 | 93,378 | ||||||||||||
|
(Gain) loss on sale of real estate |
54 | 161 | (8,785 | ) | (1,052 | ) | ||||||||||
|
Loss on impairment of depreciable real estate assets |
4,382 | - | 4,382 | - | ||||||||||||
|
Funds from operations |
(25,763 | ) | 108,963 | 10,297 | 192,567 | |||||||||||
|
Amortization of finance ground lease assets |
1,602 | 1,149 | 3,204 | 2,190 | ||||||||||||
|
Amortization of favorable and unfavorable operating leases, net |
101 | 31 | 202 | 62 | ||||||||||||
|
Non-cash straight-line operating ground lease expense |
44 | 47 | 91 | 95 | ||||||||||||
|
Modified funds from operations |
$ | (24,016 | ) | $ | 110,190 | $ | 13,794 | $ | 194,914 | |||||||
EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA
EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.
In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition.
The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels.
The Company further excludes actual corporate-level general and administrative expense for the Company from Adjusted EBITDAre (Adjusted Hotel EBITDA) to isolate property-level operational performance over which the Company’s hotel operators have direct control. The Company believes Adjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and is used by management to measure the performance of the Company’s hotels and effectiveness of the operators of the hotels.
The following table reconciles the Company’s GAAP net income (loss) to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA for three and six months ended 2020 and 2019 (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2020 |
2019 |
2020 |
2019 |
|||||||||||||
|
Net income (loss) |
$ | (78,243 | ) | $ | 62,090 | $ | (81,012 | ) | $ | 100,241 | ||||||
|
Depreciation and amortization |
49,897 | 48,109 | 99,419 | 96,059 | ||||||||||||
|
Amortization of favorable and unfavorable operating leases, net |
101 | 31 | 202 | 62 | ||||||||||||
|
Interest and other expense, net |
18,386 | 15,857 | 33,952 | 31,351 | ||||||||||||
|
Income tax expense |
58 | 156 | 204 | 362 | ||||||||||||
|
EBITDA |
(9,801 | ) | 126,243 | 52,765 | 228,075 | |||||||||||
|
(Gain) loss on sale of real estate |
54 | 161 | (8,785 | ) | (1,052 | ) | ||||||||||
|
Loss on impairment of depreciable real estate assets |
4,382 | - | 4,382 | - | ||||||||||||
|
EBITDAre |
(5,365 | ) | 126,404 | 48,362 | 227,023 | |||||||||||
|
Non-cash straight-line operating ground lease expense |
44 | 47 | 91 | 95 | ||||||||||||
|
Adjusted EBITDAre |
(5,321 | ) | 126,451 | 48,453 | 227,118 | |||||||||||
|
General and administrative expense |
6,025 | 8,308 | 15,548 | 16,445 | ||||||||||||
|
Adjusted Hotel EBITDA |
$ | 704 | $ | 134,759 | $ | 64,001 | $ | 243,563 | ||||||||
Hotels Owned
As of June 30, 2020, the Company owned 233 hotels with an aggregate of 29,759 rooms located in 34 states. The following tables summarize the number of hotels and rooms by brand and by state:
|
Number of Hotels and Guest Rooms by Brand |
||||||||
|
Number of |
Number of |
|||||||
|
Brand |
Hotels |
Rooms |
||||||
|
Hilton Garden Inn |
41 | 5,665 | ||||||
|
Hampton |
40 | 5,072 | ||||||
|
Courtyard |
36 | 4,948 | ||||||
|
Residence Inn |
33 | 3,939 | ||||||
|
Homewood Suites |
33 | 3,731 | ||||||
|
SpringHill Suites |
13 | 1,705 | ||||||
|
Fairfield |
11 | 1,300 | ||||||
|
Home2 Suites |
10 | 1,146 | ||||||
|
TownePlace Suites |
9 | 931 | ||||||
|
Marriott |
2 | 616 | ||||||
|
Embassy Suites |
2 | 316 | ||||||
|
Independent |
2 | 263 | ||||||
|
Hyatt Place |
1 | 127 | ||||||
|
Total |
233 | 29,759 | ||||||
|
Number of Hotels and Guest Rooms by State |
||||||||
|
Number of |
Number of |
|||||||
|
State |
Hotels |
Rooms |
||||||
|
Alabama |
15 | 1,434 | ||||||
|
Alaska |
2 | 304 | ||||||
|
Arizona |
12 | 1,644 | ||||||
|
Arkansas |
3 | 336 | ||||||
|
California |
27 | 3,807 | ||||||
|
Colorado |
4 | 567 | ||||||
|
Florida |
23 | 2,922 | ||||||
|
Georgia |
6 | 672 | ||||||
|
Idaho |
1 | 186 | ||||||
|
Illinois |
8 | 1,420 | ||||||
|
Indiana |
4 | 479 | ||||||
|
Iowa |
3 | 301 | ||||||
|
Kansas |
4 | 422 | ||||||
|
Louisiana |
3 | 422 | ||||||
|
Maine |
1 | 179 | ||||||
|
Maryland |
2 | 233 | ||||||
|
Massachusetts |
4 | 466 | ||||||
|
Michigan |
1 | 148 | ||||||
|
Minnesota |
3 | 404 | ||||||
|
Mississippi |
2 | 168 | ||||||
|
Missouri |
4 | 544 | ||||||
|
Nebraska |
4 | 621 | ||||||
|
New Jersey |
5 | 629 | ||||||
|
New York |
4 | 553 | ||||||
|
North Carolina |
10 | 1,091 | ||||||
|
Ohio |
2 | 252 | ||||||
|
Oklahoma |
4 | 545 | ||||||
|
Pennsylvania |
3 | 391 | ||||||
|
South Carolina |
5 | 538 | ||||||
|
Tennessee |
13 | 1,502 | ||||||
|
Texas |
31 | 3,755 | ||||||
|
Utah |
3 | 393 | ||||||
|
Virginia |
13 | 1,822 | ||||||
|
Washington |
4 | 609 | ||||||
|
Total |
233 | 29,759 | ||||||
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 233 hotels the Company owned as of June 30, 2020.
|
City |
|
State |
|
Brand |
|
Manager |
|
Date Acquired or Completed |
|
Rooms |
|
|
|
Anchorage |
|
AK |
|
Embassy Suites |
|
Stonebridge |
|
4/30/2010 |
|
|
169 |
|
|
Anchorage |
|
AK |
|
Home2 Suites |
|
Stonebridge |
|
12/1/2017 |
|
|
135 |
|
|
Auburn |
|
AL |
|
Hilton Garden Inn |
|
LBA |
|
3/1/2014 |
|
|
101 |
|
|
Birmingham |
|
AL |
|
Courtyard |
|
LBA |
|
3/1/2014 |
|
|
84 |
|
|
Birmingham |
|
AL |
|
Hilton Garden Inn |
|
LBA |
|
9/12/2017 |
|
|
104 |
|
|
Birmingham |
|
AL |
|
Home2 Suites |
|
LBA |
|
9/12/2017 |
|
|
106 |
|
|
Birmingham |
|
AL |
|
Homewood Suites |
|
McKibbon |
|
3/1/2014 |
|
|
95 |
|
|
Dothan |
|
AL |
|
Hilton Garden Inn |
|
LBA |
|
6/1/2009 |
|
|
104 |
|
|
Dothan |
|
AL |
|
Residence Inn |
|
LBA |
|
3/1/2014 |
|
|
84 |
|
|
Huntsville |
|
AL |
|
Hampton |
|
LBA |
|
9/1/2016 |
|
|
98 |
|
|
Huntsville |
|
AL |
|
Hilton Garden Inn |
|
LBA |
|
3/1/2014 |
|
|
101 |
|
|
Huntsville |
|
AL |
|
Home2 Suites |
|
LBA |
|
9/1/2016 |
|
|
77 |
|
|
Huntsville |
|
AL |
|
Homewood Suites |
|
LBA |
|
3/1/2014 |
|
|
107 |
|
|
Mobile |
|
AL |
|
Hampton |
|
McKibbon |
|
9/1/2016 |
|
|
101 |
|
|
Montgomery |
|
AL |
|
Hilton Garden Inn |
|
LBA |
|
3/1/2014 |
|
|
97 |
|
|
Montgomery |
|
AL |
|
Homewood Suites |
|
LBA |
|
3/1/2014 |
|
|
91 |
|
|
Prattville |
|
AL |
|
Courtyard |
|
LBA |
|
3/1/2014 |
|
|
84 |
|
|
Rogers |
|
AR |
|
Hampton |
|
Raymond |
|
8/31/2010 |
|
|
122 |
|
|
Rogers |
|
AR |
|
Homewood Suites |
|
Raymond |
|
4/30/2010 |
|
|
126 |
|
|
Rogers |
|
AR |
|
Residence Inn |
|
Raymond |
|
3/1/2014 |
|
|
88 |
|
|
Chandler |
|
AZ |
|
Courtyard |
|
North Central |
|
11/2/2010 |
|
|
150 |
|
|
Chandler |
|
AZ |
|
Fairfield |
|
North Central |
|
11/2/2010 |
|
|
110 |
|
|
Phoenix |
|
AZ |
|
Courtyard |
|
North Central |
|
11/2/2010 |
|
|
164 |
|
|
Phoenix |
|
AZ |
|
Courtyard |
|
North Central |
|
9/1/2016 |
|
|
127 |
|
|
Phoenix |
|
AZ |
|
Hampton |
|
North Central |
|
9/1/2016 |
|
|
125 |
|
|
Phoenix |
|
AZ |
|
Hampton |
|
North Central |
|
5/2/2018 |
|
|
210 |
|
|
Phoenix |
|
AZ |
|
Homewood Suites |
|
North Central |
|
9/1/2016 |
|
|
134 |
|
|
Phoenix |
|
AZ |
|
Residence Inn |
|
North Central |
|
11/2/2010 |
|
|
129 |
|
|
Scottsdale |
|
AZ |
|
Hilton Garden Inn |
|
North Central |
|
9/1/2016 |
|
|
122 |
|
|
Tucson |
|
AZ |
|
Hilton Garden Inn |
|
Western |
|
7/31/2008 |
|
|
125 |
|
|
Tucson |
|
AZ |
|
Residence Inn |
|
Western |
|
3/1/2014 |
|
|
124 |
|
|
Tucson |
|
AZ |
|
TownePlace Suites |
|
Western |
|
10/6/2011 |
|
|
124 |
|
|
Agoura Hills |
|
CA |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
125 |
|
|
Burbank |
|
CA |
|
Courtyard |
|
Huntington |
|
8/11/2015 |
|
|
190 |
|
|
Burbank |
|
CA |
|
Residence Inn |
|
Marriott |
|
3/1/2014 |
|
|
166 |
|
|
Burbank |
|
CA |
|
SpringHill Suites |
|
Marriott |
|
7/13/2015 |
|
|
170 |
|
|
Clovis |
|
CA |
|
Hampton |
|
Dimension |
|
7/31/2009 |
|
|
86 |
|
|
Clovis |
|
CA |
|
Homewood Suites |
|
Dimension |
|
2/2/2010 |
|
|
83 |
|
|
Cypress |
|
CA |
|
Courtyard |
|
Dimension |
|
3/1/2014 |
|
|
180 |
|
|
Cypress |
|
CA |
|
Hampton |
|
Dimension |
|
6/29/2015 |
|
|
110 |
|
|
Oceanside |
|
CA |
|
Courtyard |
|
Marriott |
|
9/1/2016 |
|
|
142 |
|
|
Oceanside |
|
CA |
|
Residence Inn |
|
Marriott |
|
3/1/2014 |
|
|
125 |
|
|
Rancho Bernardo/San Diego |
|
CA |
|
Courtyard |
|
InnVentures |
|
3/1/2014 |
|
|
210 |
|
|
Sacramento |
|
CA |
|
Hilton Garden Inn |
|
Dimension |
|
3/1/2014 |
|
|
153 |
|
|
San Bernardino |
|
CA |
|
Residence Inn |
|
InnVentures |
|
2/16/2011 |
|
|
95 |
|
|
San Diego |
|
CA |
|
Courtyard |
|
Huntington |
|
9/1/2015 |
|
|
245 |
|
|
San Diego |
|
CA |
|
Hampton |
|
Dimension |
|
3/1/2014 |
|
|
177 |
|
|
San Diego |
|
CA |
|
Hilton Garden Inn |
|
InnVentures |
|
3/1/2014 |
|
|
200 |
|
| City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
|
San Diego |
|
CA |
|
Residence Inn |
|
Dimension |
|
3/1/2014 |
|
|
121 |
|
|
San Jose |
|
CA |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
140 |
|
|
San Juan Capistrano |
|
CA |
|
Residence Inn |
|
Marriott |
|
9/1/2016 |
|
|
130 |
|
|
Santa Ana |
|
CA |
|
Courtyard |
|
Dimension |
|
5/23/2011 |
|
|
155 |
|
|
Santa Clarita |
|
CA |
|
Courtyard |
|
Dimension |
|
9/24/2008 |
|
|
140 |
|
|
Santa Clarita |
|
CA |
|
Fairfield |
|
Dimension |
|
10/29/2008 |
|
|
66 |
|
|
Santa Clarita |
|
CA |
|
Hampton |
|
Dimension |
|
10/29/2008 |
|
|
128 |
|
|
Santa Clarita |
|
CA |
|
Residence Inn |
|
Dimension |
|
10/29/2008 |
|
|
90 |
|
|
Tulare |
|
CA |
|
Hampton |
|
InnVentures |
|
3/1/2014 |
|
|
86 |
|
|
Tustin |
|
CA |
|
Fairfield |
|
Marriott |
|
9/1/2016 |
|
|
145 |
|
|
Tustin |
|
CA |
|
Residence Inn |
|
Marriott |
|
9/1/2016 |
|
|
149 |
|
|
Colorado Springs |
|
CO |
|
Hampton |
|
Chartwell |
|
9/1/2016 |
|
|
101 |
|
|
Denver |
|
CO |
|
Hilton Garden Inn |
|
Stonebridge |
|
9/1/2016 |
|
|
221 |
|
|
Highlands Ranch |
|
CO |
|
Hilton Garden Inn |
|
Dimension |
|
3/1/2014 |
|
|
128 |
|
|
Highlands Ranch |
|
CO |
|
Residence Inn |
|
Dimension |
|
3/1/2014 |
|
|
117 |
|
|
Boca Raton |
|
FL |
|
Hilton Garden Inn |
|
White Lodging |
|
9/1/2016 |
|
|
149 |
|
|
Cape Canaveral |
FL |
Hampton |
LBA |
4/30/2020 |
116 |
|||||||
|
Cape Canaveral |
|
FL |
|
Homewood Suites |
|
LBA |
|
9/1/2016 |
|
|
153 |
|
|
Cape Canaveral |
FL |
Home2 Suites |
LBA |
4/30/2020 |
108 |
|||||||
|
Fort Lauderdale |
|
FL |
|
Hampton |
|
LBA |
|
6/23/2015 |
|
|
156 |
|
|
Fort Lauderdale |
|
FL |
|
Residence Inn |
|
LBA |
|
9/1/2016 |
|
|
156 |
|
|
Gainesville |
|
FL |
|
Hilton Garden Inn |
|
McKibbon |
|
9/1/2016 |
|
|
104 |
|
|
Gainesville |
|
FL |
|
Homewood Suites |
|
McKibbon |
|
9/1/2016 |
|
|
103 |
|
|
Jacksonville |
|
FL |
|
Homewood Suites |
|
McKibbon |
|
3/1/2014 |
|
|
119 |
|
|
Jacksonville |
|
FL |
|
Hyatt Place |
|
Crestline |
|
12/7/2018 |
|
|
127 |
|
|
Lakeland |
|
FL |
|
Courtyard |
|
LBA |
|
3/1/2014 |
|
|
78 |
|
|
Miami |
|
FL |
|
Courtyard |
|
Dimension |
|
3/1/2014 |
|
|
118 |
|
|
Miami |
|
FL |
|
Hampton |
|
White Lodging |
|
4/9/2010 |
|
|
121 |
|
|
Miami |
|
FL |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
162 |
|
|
Orlando |
|
FL |
|
Fairfield |
|
Marriott |
|
7/1/2009 |
|
|
200 |
|
|
Orlando |
|
FL |
|
Home2 Suites |
|
LBA |
|
3/19/2019 |
|
|
128 |
|
|
Orlando |
|
FL |
|
SpringHill Suites |
|
Marriott |
|
7/1/2009 |
|
|
200 |
|
|
Panama City |
|
FL |
|
Hampton |
|
LBA |
|
3/12/2009 |
|
|
95 |
|
|
Panama City |
|
FL |
|
TownePlace Suites |
|
LBA |
|
1/19/2010 |
|
|
103 |
|
|
Pensacola |
|
FL |
|
TownePlace Suites |
|
McKibbon |
|
9/1/2016 |
|
|
97 |
|
|
Tallahassee |
|
FL |
|
Fairfield |
|
LBA |
|
9/1/2016 |
|
|
97 |
|
|
Tallahassee |
|
FL |
|
Hilton Garden Inn |
|
LBA |
|
3/1/2014 |
|
|
85 |
|
|
Tampa |
|
FL |
|
Embassy Suites |
|
White Lodging |
|
11/2/2010 |
|
|
147 |
|
|
Albany |
|
GA |
|
Fairfield |
|
LBA |
|
1/14/2010 |
|
|
87 |
|
|
Atlanta/Downtown |
|
GA |
|
Hampton |
|
McKibbon |
|
2/5/2018 |
|
|
119 |
|
|
Atlanta/Perimeter Dunwoody |
|
GA |
|
Hampton |
|
LBA |
|
6/28/2018 |
|
|
132 |
|
|
Atlanta |
|
GA |
|
Home2 Suites |
|
McKibbon |
|
7/1/2016 |
|
|
128 |
|
|
Macon |
|
GA |
|
Hilton Garden Inn |
|
LBA |
|
3/1/2014 |
|
|
101 |
|
|
Savannah |
|
GA |
|
Hilton Garden Inn |
|
Newport |
|
3/1/2014 |
|
|
105 |
|
|
Cedar Rapids |
|
IA |
|
Hampton |
|
Aimbridge |
|
9/1/2016 |
|
|
103 |
|
|
Cedar Rapids |
|
IA |
|
Homewood Suites |
|
Aimbridge |
|
9/1/2016 |
|
|
95 |
|
|
Davenport |
|
IA |
|
Hampton |
|
Aimbridge |
|
9/1/2016 |
|
|
103 |
|
|
Boise |
|
ID |
|
Hampton |
|
Raymond |
|
4/30/2010 |
|
|
186 |
|
|
Des Plaines |
|
IL |
|
Hilton Garden Inn |
|
Raymond |
|
9/1/2016 |
|
|
252 |
|
|
Hoffman Estates |
|
IL |
|
Hilton Garden Inn |
|
White Lodging |
|
9/1/2016 |
|
|
184 |
|
|
Mettawa |
|
IL |
|
Hilton Garden Inn |
|
White Lodging |
|
11/2/2010 |
|
|
170 |
|
|
Mettawa |
|
IL |
|
Residence Inn |
|
White Lodging |
|
11/2/2010 |
|
|
130 |
|
| City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
|
Rosemont |
|
IL |
|
Hampton |
|
Raymond |
|
9/1/2016 |
|
|
158 |
|
|
Schaumburg |
|
IL |
|
Hilton Garden Inn |
|
White Lodging |
|
11/2/2010 |
|
|
166 |
|
|
Skokie |
|
IL |
|
Hampton |
|
Raymond |
|
9/1/2016 |
|
|
225 |
|
|
Warrenville |
|
IL |
|
Hilton Garden Inn |
|
White Lodging |
|
11/2/2010 |
|
|
135 |
|
|
Indianapolis |
|
IN |
|
SpringHill Suites |
|
White Lodging |
|
11/2/2010 |
|
|
130 |
|
|
Merrillville |
|
IN |
|
Hilton Garden Inn |
|
White Lodging |
|
9/1/2016 |
|
|
124 |
|
|
Mishawaka |
|
IN |
|
Residence Inn |
|
White Lodging |
|
11/2/2010 |
|
|
106 |
|
|
South Bend |
|
IN |
|
Fairfield |
|
White Lodging |
|
9/1/2016 |
|
|
119 |
|
|
Overland Park |
|
KS |
|
Fairfield |
|
True North |
|
3/1/2014 |
|
|
110 |
|
|
Overland Park |
|
KS |
|
Residence Inn |
|
True North |
|
3/1/2014 |
|
|
120 |
|
|
Overland Park |
|
KS |
|
SpringHill Suites |
|
True North |
|
3/1/2014 |
|
|
102 |
|
|
Wichita |
|
KS |
|
Courtyard |
|
Aimbridge |
|
3/1/2014 |
|
|
90 |
|
|
Lafayette |
|
LA |
|
Hilton Garden Inn |
|
LBA |
|
7/30/2010 |
|
|
153 |
|
|
Lafayette |
|
LA |
|
SpringHill Suites |
|
LBA |
|
6/23/2011 |
|
|
103 |
|
|
New Orleans |
|
LA |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
166 |
|
|
Andover |
|
MA |
|
SpringHill Suites |
|
Marriott |
|
11/5/2010 |
|
|
136 |
|
|
Marlborough |
|
MA |
|
Residence Inn |
|
True North |
|
3/1/2014 |
|
|
112 |
|
|
Westford |
|
MA |
|
Hampton |
|
True North |
|
3/1/2014 |
|
|
110 |
|
|
Westford |
|
MA |
|
Residence Inn |
|
True North |
|
3/1/2014 |
|
|
108 |
|
|
Annapolis |
|
MD |
|
Hilton Garden Inn |
|
Crestline |
|
3/1/2014 |
|
|
126 |
|
|
Silver Spring |
|
MD |
|
Hilton Garden Inn |
|
White Lodging |
|
7/30/2010 |
|
|
107 |
|
|
Portland |
|
ME |
|
Residence Inn |
|
Crestline |
|
10/13/2017 |
|
|
179 |
|
|
Novi |
|
MI |
|
Hilton Garden Inn |
|
White Lodging |
|
11/2/2010 |
|
|
148 |
|
|
Maple Grove |
|
MN |
|
Hilton Garden Inn |
|
North Central |
|
9/1/2016 |
|
|
120 |
|
|
Rochester |
|
MN |
|
Hampton |
|
Raymond |
|
8/3/2009 |
|
|
124 |
|
|
St. Paul |
|
MN |
|
Hampton |
|
Vista Host |
|
3/4/2019 |
|
|
160 |
|
|
Kansas City |
|
MO |
|
Hampton |
|
Raymond |
|
8/31/2010 |
|
|
122 |
|
|
Kansas City |
|
MO |
|
Residence Inn |
|
True North |
|
3/1/2014 |
|
|
106 |
|
|
St. Louis |
|
MO |
|
Hampton |
|
Raymond |
|
8/31/2010 |
|
|
190 |
|
|
St. Louis |
|
MO |
|
Hampton |
|
Raymond |
|
4/30/2010 |
|
|
126 |
|
|
Hattiesburg |
|
MS |
|
Courtyard |
|
LBA |
|
3/1/2014 |
|
|
84 |
|
|
Hattiesburg |
|
MS |
|
Residence Inn |
|
LBA |
|
12/11/2008 |
|
|
84 |
|
|
Carolina Beach |
|
NC |
|
Courtyard |
|
Crestline |
|
3/1/2014 |
|
|
144 |
|
|
Charlotte |
|
NC |
|
Fairfield |
|
Newport |
|
9/1/2016 |
|
|
94 |
|
|
Charlotte |
|
NC |
|
Homewood Suites |
|
McKibbon |
|
9/24/2008 |
|
|
118 |
|
|
Durham |
|
NC |
|
Homewood Suites |
|
McKibbon |
|
12/4/2008 |
|
|
122 |
|
|
Fayetteville |
|
NC |
|
Home2 Suites |
|
LBA |
|
2/3/2011 |
|
|
118 |
|
|
Fayetteville |
|
NC |
|
Residence Inn |
|
LBA |
|
3/1/2014 |
|
|
92 |
|
|
Greensboro |
|
NC |
|
SpringHill Suites |
|
Newport |
|
3/1/2014 |
|
|
82 |
|
|
Jacksonville |
|
NC |
|
Home2 Suites |
|
LBA |
|
9/1/2016 |
|
|
105 |
|
|
Wilmington |
|
NC |
|
Fairfield |
|
Crestline |
|
3/1/2014 |
|
|
122 |
|
|
Winston-Salem |
|
NC |
|
Hampton |
|
McKibbon |
|
9/1/2016 |
|
|
94 |
|
|
Omaha |
|
NE |
|
Courtyard |
|
Marriott |
|
3/1/2014 |
|
|
181 |
|
|
Omaha |
|
NE |
|
Hampton |
|
White Lodging |
|
9/1/2016 |
|
|
139 |
|
|
Omaha |
|
NE |
|
Hilton Garden Inn |
|
White Lodging |
|
9/1/2016 |
|
|
178 |
|
|
Omaha |
|
NE |
|
Homewood Suites |
|
White Lodging |
|
9/1/2016 |
|
|
123 |
|
|
Cranford |
|
NJ |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
108 |
|
|
Mahwah |
|
NJ |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
110 |
|
|
Mount Laurel |
|
NJ |
|
Homewood Suites |
|
Newport |
|
1/11/2011 |
|
|
118 |
|
|
Somerset |
|
NJ |
|
Courtyard |
|
Newport |
|
3/1/2014 |
|
|
162 |
|
|
West Orange |
|
NJ |
|
Courtyard |
|
Newport |
|
1/11/2011 |
|
|
131 |
|
|
Islip/Ronkonkoma |
|
NY |
|
Hilton Garden Inn |
|
Crestline |
|
3/1/2014 |
|
|
165 |
|
|
New York |
|
NY |
|
Independent |
|
Highgate |
|
3/1/2014 |
|
|
208 |
|
| City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
|
Syracuse |
|
NY |
|
Courtyard |
|
Crestline |
|
10/16/2015 |
|
|
102 |
|
|
Syracuse |
|
NY |
|
Residence Inn |
|
Crestline |
|
10/16/2015 |
|
|
78 |
|
|
Mason |
|
OH |
|
Hilton Garden Inn |
|
Raymond |
|
9/1/2016 |
|
|
110 |
|
|
Twinsburg |
|
OH |
|
Hilton Garden Inn |
|
Interstate |
|
10/7/2008 |
|
|
142 |
|
|
Oklahoma City |
|
OK |
|
Hampton |
|
Raymond |
|
5/28/2010 |
|
|
200 |
|
|
Oklahoma City |
|
OK |
|
Hilton Garden Inn |
|
Raymond |
|
9/1/2016 |
|
|
155 |
|
|
Oklahoma City |
|
OK |
|
Homewood Suites |
|
Raymond |
|
9/1/2016 |
|
|
100 |
|
|
Oklahoma City (West) |
|
OK |
|
Homewood Suites |
|
Chartwell |
|
9/1/2016 |
|
|
90 |
|
|
Collegeville/Philadelphia |
|
PA |
|
Courtyard |
|
White Lodging |
|
11/15/2010 |
|
|
132 |
|
|
Malvern/Philadelphia |
|
PA |
|
Courtyard |
|
White Lodging |
|
11/30/2010 |
|
|
127 |
|
|
Pittsburgh |
|
PA |
|
Hampton |
|
Newport |
|
12/31/2008 |
|
|
132 |
|
|
Charleston |
|
SC |
|
Home2 Suites |
|
LBA |
|
9/1/2016 |
|
|
122 |
|
|
Columbia |
|
SC |
|
Hilton Garden Inn |
|
Newport |
|
3/1/2014 |
|
|
143 |
|
|
Columbia |
|
SC |
|
TownePlace Suites |
|
Newport |
|
9/1/2016 |
|
|
91 |
|
|
Greenville |
|
SC |
|
Residence Inn |
|
McKibbon |
|
3/1/2014 |
|
|
78 |
|
|
Hilton Head |
|
SC |
|
Hilton Garden Inn |
|
McKibbon |
|
3/1/2014 |
|
|
104 |
|
|
Chattanooga |
|
TN |
|
Homewood Suites |
|
LBA |
|
3/1/2014 |
|
|
76 |
|
|
Franklin |
|
TN |
|
Courtyard |
|
Chartwell |
|
9/1/2016 |
|
|
126 |
|
|
Franklin |
|
TN |
|
Residence Inn |
|
Chartwell |
|
9/1/2016 |
|
|
124 |
|
|
Jackson |
|
TN |
|
Hampton |
|
Vista Host |
|
12/30/2008 |
|
|
85 |
|
|
Johnson City |
|
TN |
|
Courtyard |
|
LBA |
|
9/25/2009 |
|
|
90 |
|
|
Knoxville |
|
TN |
|
Homewood Suites |
|
McKibbon |
|
9/1/2016 |
|
|
103 |
|
|
Knoxville |
|
TN |
|
SpringHill Suites |
|
McKibbon |
|
9/1/2016 |
|
|
103 |
|
|
Knoxville |
|
TN |
|
TownePlace Suites |
|
McKibbon |
|
9/1/2016 |
|
|
97 |
|
|
Memphis |
|
TN |
|
Hampton |
|
Crestline |
|
2/5/2018 |
|
|
144 |
|
|
Memphis |
|
TN |
|
Homewood Suites |
|
Hilton |
|
3/1/2014 |
|
|
140 |
|
|
Nashville |
|
TN |
|
Hilton Garden Inn |
|
Vista Host |
|
9/30/2010 |
|
|
194 |
|
|
Nashville |
|
TN |
|
Home2 Suites |
|
Vista Host |
|
5/31/2012 |
|
|
119 |
|
|
Nashville |
|
TN |
|
TownePlace Suites |
|
LBA |
|
9/1/2016 |
|
|
101 |
|
|
Addison |
|
TX |
|
SpringHill Suites |
|
Marriott |
|
3/1/2014 |
|
|
159 |
|
|
Allen |
|
TX |
|
Hampton |
|
Interstate |
|
9/26/2008 |
|
|
103 |
|
|
Allen |
|
TX |
|
Hilton Garden Inn |
|
Interstate |
|
10/31/2008 |
|
|
150 |
|
|
Arlington |
|
TX |
|
Hampton |
|
Western |
|
12/1/2010 |
|
|
98 |
|
|
Austin |
|
TX |
|
Courtyard |
|
White Lodging |
|
11/2/2010 |
|
|
145 |
|
|
Austin |
|
TX |
|
Fairfield |
|
White Lodging |
|
11/2/2010 |
|
|
150 |
|
|
Austin |
|
TX |
|
Hampton |
|
Vista Host |
|
4/14/2009 |
|
|
124 |
|
|
Austin |
|
TX |
|
Hilton Garden Inn |
|
White Lodging |
|
11/2/2010 |
|
|
117 |
|
|
Austin |
|
TX |
|
Homewood Suites |
|
Vista Host |
|
4/14/2009 |
|
|
97 |
|
|
Austin/Round Rock |
|
TX |
|
Homewood Suites |
|
Vista Host |
|
9/1/2016 |
|
|
115 |
|
|
Beaumont |
|
TX |
|
Residence Inn |
|
Western |
|
10/29/2008 |
|
|
133 |
|
|
Burleson/Fort Worth |
|
TX |
|
Hampton |
|
LBA |
|
10/7/2014 |
|
|
88 |
|
|
Dallas |
|
TX |
|
Homewood Suites |
|
Western |
|
9/1/2016 |
|
|
130 |
|
|
Denton |
|
TX |
|
Homewood Suites |
|
Chartwell |
|
9/1/2016 |
|
|
107 |
|
|
El Paso |
|
TX |
|
Hilton Garden Inn |
|
Western |
|
12/19/2011 |
|
|
145 |
|
|
El Paso |
|
TX |
|
Homewood Suites |
|
Western |
|
3/1/2014 |
|
|
114 |
|
|
Fort Worth |
|
TX |
|
Courtyard |
|
LBA |
|
2/2/2017 |
|
|
124 |
|
|
Fort Worth |
|
TX |
|
TownePlace Suites |
|
Western |
|
7/19/2010 |
|
|
140 |
|
|
Frisco |
|
TX |
|
Hilton Garden Inn |
|
Western |
|
12/31/2008 |
|
|
102 |
|
|
Grapevine |
|
TX |
|
Hilton Garden Inn |
|
Western |
|
9/24/2010 |
|
|
110 |
|
|
Houston |
|
TX |
|
Courtyard |
|
LBA |
|
9/1/2016 |
|
|
124 |
|
|
Houston |
|
TX |
|
Marriott |
|
Western |
|
1/8/2010 |
|
|
206 |
|
|
Houston |
|
TX |
|
Residence Inn |
|
Western |
|
3/1/2014 |
|
|
129 |
|
|
Houston |
|
TX |
|
Residence Inn |
|
Western |
|
9/1/2016 |
|
|
120 |
|
|
Irving |
|
TX |
|
Homewood Suites |
|
Western |
|
12/29/2010 |
|
|
77 |
|
| City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
|
Lewisville |
|
TX |
|
Hilton Garden Inn |
|
Interstate |
|
10/16/2008 |
|
|
165 |
|
|
Round Rock |
|
TX |
|
Hampton |
|
Vista Host |
|
3/6/2009 |
|
|
94 |
|
|
San Antonio |
|
TX |
|
TownePlace Suites |
|
Western |
|
3/1/2014 |
|
|
106 |
|
|
Shenandoah |
|
TX |
|
Courtyard |
|
LBA |
|
9/1/2016 |
|
|
124 |
|
|
Stafford |
|
TX |
|
Homewood Suites |
|
Western |
|
3/1/2014 |
|
|
78 |
|
|
Texarkana |
|
TX |
|
Hampton |
|
Aimbridge |
|
1/31/2011 |
|
|
81 |
|
|
Provo |
|
UT |
|
Residence Inn |
|
Dimension |
|
3/1/2014 |
|
|
114 |
|
|
Salt Lake City |
|
UT |
|
Residence Inn |
|
Huntington |
|
10/20/2017 |
|
|
136 |
|
|
Salt Lake City |
|
UT |
|
SpringHill Suites |
|
White Lodging |
|
11/2/2010 |
|
|
143 |
|
|
Alexandria |
|
VA |
|
Courtyard |
|
Marriott |
|
3/1/2014 |
|
|
178 |
|
|
Alexandria |
|
VA |
|
SpringHill Suites |
|
Marriott |
|
3/28/2011 |
|
|
155 |
|
|
Charlottesville |
|
VA |
|
Courtyard |
|
Crestline |
|
3/1/2014 |
|
|
139 |
|
|
Manassas |
|
VA |
|
Residence Inn |
|
Crestline |
|
2/16/2011 |
|
|
107 |
|
|
Richmond |
|
VA |
|
Independent |
|
Crestline |
|
10/9/2019 |
|
|
55 |
|
|
Richmond |
|
VA |
|
Courtyard |
|
White Lodging |
|
12/8/2014 |
|
|
135 |
|
|
Richmond |
|
VA |
|
Marriott |
|
White Lodging |
|
3/1/2014 |
|
|
410 |
|
|
Richmond |
|
VA |
|
Residence Inn |
|
White Lodging |
|
12/8/2014 |
|
|
75 |
|
|
Richmond |
|
VA |
|
SpringHill Suites |
|
McKibbon |
|
9/1/2016 |
|
|
103 |
|
|
Suffolk |
|
VA |
|
Courtyard |
|
Crestline |
|
3/1/2014 |
|
|
92 |
|
|
Suffolk |
|
VA |
|
TownePlace Suites |
|
Crestline |
|
3/1/2014 |
|
|
72 |
|
|
Virginia Beach |
|
VA |
|
Courtyard |
|
Crestline |
|
3/1/2014 |
|
|
141 |
|
|
Virginia Beach |
|
VA |
|
Courtyard |
|
Crestline |
|
3/1/2014 |
|
|
160 |
|
|
Kirkland |
|
WA |
|
Courtyard |
|
InnVentures |
|
3/1/2014 |
|
|
150 |
|
|
Seattle |
|
WA |
|
Residence Inn |
|
InnVentures |
|
3/1/2014 |
|
|
234 |
|
|
Tukwila |
|
WA |
|
Homewood Suites |
|
Dimension |
|
3/1/2014 |
|
|
106 |
|
|
Vancouver |
|
WA |
|
SpringHill Suites |
|
InnVentures |
|
3/1/2014 |
|
|
119 |
|
|
Total |
|
|
29,759 |
|
||||||||
Related Parties
The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. See Note 6 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning the Company’s related party transactions.
Liquidity and Capital Resources
Capital Resources
Prior to the impact of COVID-19, the Company’s principal short term sources of liquidity were the operating cash flows generated from the Company’s properties and availability under its revolving credit facility. Periodically, the Company may have received proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties (such as the sale of two hotels in the first quarter of 2020 for proceeds of approximately $45 million discussed above in “2020 Hotel Portfolio Activities”) and offerings of the Company’s common shares. As a result of the deterioration of the Company’s operating cash flows from declines in occupancy caused by COVID-19, the Company anticipates significantly reduced cash from operations until travel increases in the U.S. To increase readily available liquidity, in March 2020, the Company drew the remaining availability under its $425 million revolving credit facility. In connection with entering into amendments for each of its unsecured credit facilities (discussed below) and as a result of improved operating cash flows compared to April and May 2020, the Company repaid approximately $225.3 million in June and an additional approximately $100 million in July 2020 of borrowings under its revolving credit facility. The Company has taken additional steps to preserve capital and increase liquidity, including postponing approximately $50 million of non-essential capital improvements, suspending its monthly distributions and entering into contracts for the disposition of two hotels. Additionally, as a result of the effects of COVID-19 on the economic environment, for certain hotels, the lenders for the associated mortgage loans have granted the Company’s request for temporary deferrals of principal and interest payments. The Company anticipates funding its near-term cash needs with cash on hand and availability under its revolving credit facility.
As of June 30, 2020, the Company had $1.6 billion of total outstanding debt consisting of $519.1 million of mortgage debt and $1.1 billion outstanding under its unsecured credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As of June 30, 2020, the Company had available corporate cash on hand of approximately $156.5 million as well as unused borrowing capacity under its revolving credit facility of approximately $225.3 million. In the near term, the impact of COVID-19 on the global economy, including any sustained decline in the Company’s performance, may make it more difficult or costly for the Company to raise debt or equity capital to fund long-term liquidity requirements.
The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company anticipated that it may not be able to maintain compliance with certain of these covenants in future periods. As a result, on June 5, 2020, the Company entered into amendments to each of the unsecured credit facilities. The amendments suspend the testing of the Company’s existing financial maintenance covenants under the unsecured credit facilities until the date the compliance certificate is required to be delivered for the fiscal quarter ending June 30, 2021 (unless the Company elects an earlier date) (the “Covenant Waiver Period”), and provide for, among other restrictions, the following during the Covenant Waiver Period:
|
● |
Mandatory prepayments of amounts outstanding under the Company’s unsecured credit facilities, of net cash proceeds from certain debt and equity issuances, and asset dispositions, subject to various exceptions. A portion of the mandatory prepayments will be available for future borrowing under the revolving credit facility; |
|
● |
A minimum liquidity covenant of $100 million; |
|
● |
A requirement to pledge the equity interests of each direct or indirect owner of certain unencumbered property in favor of the administrative agents if average liquidity for any month is less than $275 million or the total amount outstanding under the revolving credit facility exceeds $275 million; |
|
● |
Restrictions on the Company’s and its subsidiaries’ ability to incur additional indebtedness or prepay certain existing indebtedness; |
|
● |
Restrictions on the Company’s ability to make cash distributions (except to the extent required to maintain REIT status) and share repurchases; |
|
● |
Maximum discretionary capital expenditures of $50 million; |
|
● |
Limitations on additional investments; and |
|
● |
An increase in the applicable interest rate under the unsecured credit facilities until the end of the Covenant Waiver Period to a rate that corresponds to the highest leverage-based applicable interest rate margin with respect to the unsecured credit facilities. |
The amendments also modify the calculation of the existing financial covenants for the four quarters subsequent to the end of the Covenant Waiver Period to annualize calculated amounts to the extent the most recently ended fiscal quarter is not at least four fiscal quarters from the end of the Covenant Waiver Period, and provide for an increase in the LIBOR floor under the credit agreements from 0 to 25 basis points for Eurodollar Rate Loans and establish a Base Rate floor of 1.25% on the revolving credit facility, and any term loans under the credit agreements that are not hedged. Except as otherwise set forth in the amendments, the terms of the credit agreements remain in effect.
The Company anticipates meeting the applicable covenants after the conclusion of the Covenant Waiver Period, although there can be no assurances.
See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company’s debt instruments as of June 30, 2020.
The Company has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing on April 25, 2019. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended. Future offerings will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company’s common shares and opportunities for uses of any proceeds.
During April and May 2020, the Company applied for and received approximately $18 million in loans under the CARES Act Paycheck Protection Program. Due to subsequent guidance issued by the Small Business Administration and the Department of Treasury, related to the intended participants in this program, the Company repaid all amounts received. The Company will continue to evaluate relief initiatives and stimulus packages, including any accompanying restrictions on its business that would be imposed by such packages, that may be or become available to the Company under government stimulus programs.
Capital Uses
Although there can be no assurances, the Company anticipates that available cash and availability under its revolving credit facility as of June 30, 2020, will be adequate to meet its near-term potential operating cash flow deficits that may result from the effect of COVID-19, debt service, hotel acquisitions and capital expenditures. Though not expected, if the Company is unable to meet its near-term anticipated capital uses as currently planned, it may raise capital through disposition of assets, issuance of equity or issuance of debt, which may be more costly to the Company in the current environment.
Distributions
To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income. Distributions paid during the six months ended June 30, 2020 totaled approximately $67.3 million or $0.30 per common share. For the same period, the Company’s net cash generated from operations was approximately $12.5 million. This shortfall includes a return of capital and was funded primarily by borrowings on the Company’s revolving credit facility. In March 2020, the Company suspended its monthly distributions as a result of COVID-19 and the impact on its business. Subject to the distribution restrictions discussed above as a condition to the June 5, 2020 amendments to the Company’s unsecured credit facilities during the Covenant Waiver Period, the Company’s Board of Directors, in consultation with management, will continue to monitor hotel operations and intends to resume monthly distributions at a time and level determined to be prudent in relation to the Company’s other cash requirements.
Share Repurchases
In May 2020, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $345 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2021 if not terminated earlier. During the first quarter of 2020 and 2019, the Company purchased, under its Share Repurchase Program, approximately 1.5 million and 0.3 million of its common shares, respectively, at a weighted-average market purchase price of approximately $9.42 and $14.93 per common share, respectively, for an aggregate purchase price, including commissions, of approximately $14.3 million and $4.1 million, respectively. No shares were repurchased during the second quarter of 2020 and 2019. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities. The shares were repurchased under a written trading plan that provided for share repurchases in open market transactions, and was intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. In March 2020 the Company terminated its written trading plan under the Share Repurchase Program. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. As of June 30, 2020, approximately $345 million remained available for purchase under the Share Repurchase Program. As discussed above, share repurchases are subject to certain restrictions during the Covenant Waiver Period as a condition to the June 5, 2020 amendments to the Company’s unsecured credit facilities.
Capital Improvements
The Company has ongoing capital commitments to fund its capital improvements. To maintain and enhance each property’s competitive position in its market, the Company has invested in and, subject to improved operating results, plans to continue to reinvest in its hotels. Under certain loan and management agreements, the Company is required to place in escrow funds for the repair, replacement and refurbishing of furniture, fixtures, and equipment, based on a percentage of gross revenues, provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of June 30, 2020, the Company held $25.3 million in reserve related to these properties. During the six months ended June 30, 2020, the Company invested approximately $30.5 million in capital expenditures, and anticipates spending an additional $5 million to $10 million during the remainder of 2020. This estimate is approximately $50 million less than originally planned for the entire year of 2020 as the Company has postponed all planned non-essential capital improvements in order to maintain a sound liquidity position as a result of COVID-19. The Company does not currently have any existing or planned projects for new property development.
Hotel Contract Commitments
As of June 30, 2020, the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three newly developed hotels for a total expected purchase price of approximately $114.2 million. The three hotels are under development and are planned to be completed and opened for business over the next two to 12 months from June 30, 2020, at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under these contracts. As the properties are under development, at this time, the sellers have not met all of the conditions to closing. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotels under contract if closings occur.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters, however, due to the effects of COVID-19, these typical seasonal patterns have not and may not occur in the remainder of 2020. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
New Accounting Standards
See Note 1 titled “Organization and Summary of Significant Accounting Policies” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for information on the adoption of the new fair value measurement accounting standard on January 1, 2020 and the guidance in the reference rate reform accounting standard effective in March 2020.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2020, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. However, the Company is exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its revolving credit facility and due to the portion of its variable-rate debt that is not fixed by interest rate swaps. As of June 30, 2020, after giving effect to interest rate swaps, as described below, approximately $371.4 million, or approximately 23% of the Company’s total debt outstanding, was subject to variable interest rates. Based on the Company’s variable-rate debt outstanding as of June 30, 2020, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $3.7 million (subject to the LIBOR floor as discussed in Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q), all other factors remaining the same. With the exception of interest rate swap transactions, the Company has not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of June 30, 2020, the Company’s variable-rate debt consisted of its unsecured credit facilities, including borrowings outstanding under its $425 million revolving credit facility and $820 million of term loans, and a $21.7 million loan secured by two of its properties. Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable-rate debt. As of June 30, 2020, the Company had 12 interest rate swap agreements that effectively fix the interest payments on approximately $670.0 million of the Company’s variable-rate debt outstanding with swap maturity dates ranging from March 2021 to December 2029. In addition, the Company has entered into an interest rate swap agreement which, beginning May 18, 2021, will effectively fix the interest rate on an additional $75 million of its variable-rate debt. Under the terms of all of the Company’s interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR. See Note 5 titled “Fair Value of Financial Instruments” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company’s interest rate swaps as of June 30, 2020.
In addition to its variable-rate debt and interest rate swaps discussed above, the Company has assumed or originated fixed interest rate mortgages payable to lenders under permanent financing arrangements as well as one $50 million fixed-rate senior notes facility. The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt and borrowings outstanding under its unsecured credit facilities at June 30, 2020. All dollar amounts are in thousands.
|
July 1 - December 31, 2020 |
2021 |
2022 |
2023 |
2024 |
Thereafter |
Total |
Fair Market Value |
|||||||||||||||||||||||||
|
Total debt: |
||||||||||||||||||||||||||||||||
|
Maturities |
$ | 4,790 | $ | 71,799 | $ | 309,514 | $ | 296,196 | $ | 338,579 | $ | 567,843 | $ | 1,588,721 | $ | 1,538,428 | ||||||||||||||||
|
Average interest rates (1) |
3.8 |
% |
3.8 |
% |
3.8 |
% |
4.0 |
% |
4.2 |
% |
4.3 |
% |
||||||||||||||||||||
|
Variable-rate debt: |
||||||||||||||||||||||||||||||||
|
Maturities |
$ | - | $ | 21,704 | $ | 199,700 | $ | 250,000 | $ | 310,000 | $ | 260,000 | $ | 1,041,404 | $ | 990,248 | ||||||||||||||||
|
Average interest rates (1) |
3.5 |
% |
3.5 |
% |
3.7 |
% |
4.0 |
% |
4.4 |
% |
4.7 |
% |
||||||||||||||||||||
|
Fixed-rate debt: |
||||||||||||||||||||||||||||||||
|
Maturities |
$ | 4,790 | $ | 50,095 | $ | 109,814 | $ | 46,196 | $ | 28,579 | $ | 307,843 | $ | 547,317 | $ | 548,180 | ||||||||||||||||
|
Average interest rates |
4.3 |
% |
4.3 |
% |
4.1 |
% |
4.0 |
% |
4.0 |
% |
4.0 |
% |
||||||||||||||||||||
|
(1) The average interest rate gives effect to interest rate swaps, as applicable. |
Item 4. Controls and Procedures
Senior management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2020. There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is or may be a party to various legal proceedings that arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to management’s knowledge, is any litigation threatened against the Company where the outcome would, in management’s judgment based on information currently available to the Company, have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 1A. Risk Factors
“Item 1A. Risk Factors” of the Company’s 2019 Form 10-K includes a discussion of the Company’s potential risks and uncertainties. The information below updates, and should be read in conjunction with, the risk factors and information disclosed in the Company’s 2019 Form 10-K. Except as presented below, there have been no material changes from the risk factors described in the Company’s 2019 Form 10-K.
The current widespread outbreak of COVID-19 has significantly adversely impacted and disrupted, and is expected to continue to significantly adversely impact and disrupt, the Company’s business, financial performance and condition, operating results and cash flows, as could any future outbreak of another highly infectious or contagious disease.
Since first being reported in December 2019, COVID-19 has spread globally, including to every state in the U.S. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the U.S. declared a national emergency with respect to COVID-19.
The outbreak of COVID-19 has had a detrimental impact on, and another pandemic in the future could similarly impact, regional and global economies and financial markets. The global, national and local impact of the outbreak has been rapidly evolving and many countries, including the U.S., and state and local governments have reacted by instituting a wide variety of measures intended to control its spread, including any increase in number of COVID-19 cases, including states of emergency, mandatory quarantines, implementing “stay at home” orders, business closures, border closings, and restricting travel and large gatherings, which has resulted in cancellation of events, including sporting events, conferences and meetings. The pandemic has triggered a period of material global economic slowdown and the National Bureau of Economic Research declared that the U.S. has been in a recession since February 2020.
The effects of the pandemic on the hotel industry are unprecedented. COVID-19 has disrupted the industry and its consequences have dramatically reduced travel, which has had a significant adverse impact, and will continue to significantly adversely impact and disrupt the Company’s business, financial performance and condition, operating results and cash flows. Since March 2020, the Company has experienced a significant decline in revenue throughout its portfolio which the Company expects to continue for an extended period of time. Substantially all of the Company’s properties are currently operating at significantly reduced levels and the Company has reduced certain services and amenities. Although currently all of the Company’s hotels are open, the Company may need or elect to temporarily suspend operations at properties in the future depending on the length and severity of COVID-19 and related effects, including any increase in number of COVID-19 cases. If operations at the Company’s hotel properties are suspended, the Company cannot give any assurance as to when they will resume operations at a full or reduced level.
Additional factors that would negatively impact the Company’s ability to successfully operate during or following COVID-19 or another pandemic, or that could otherwise significantly adversely impact and disrupt its business, financial performance and condition, operating results and cash flows, include:
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sustained negative consumer, or business sentiment or continued corporate travel policy restrictions, including beyond the end of COVID-19, which could further adversely impact demand for lodging; |
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an expansion of the number of postponed and cancelled events, including sporting events, conferences and meetings; |
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the Company’s ability to reopen hotels that are temporarily closed in a timely manner, and its ability to attract customers to its hotels when they are able to reopen; |
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a severe disruption or instability in the global financial markets or deterioration in credit and financing conditions; |
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increased costs and potential difficulty accessing supplies to maintain hotels, including hotels that are no longer in operation and increased sanitation, social distancing and other mitigation measures, such as personal protective equipment at hotels; |
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increased labor costs to attract employees due to perceived risk of exposure to COVID-19, as well as potential for increased workers’ compensation claims if hotel employees are exposed to COVID-19 through the workplace; and |
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increased susceptibility to litigation related to, among other things, the financial impacts of COVID-19 on the Company’s business or litigation related to individuals contracting COVID-19 as a result of alleged exposures on the Company’s premises. |
The results of these factors could include:
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decreased demand resulting in hotel properties not generating revenue sufficient to meet operating expenses, which may adversely affect the value of the Company’s hotel properties, potentially requiring the Company to recognize significant non-cash impairment charges or other significant unanticipated cash or non-cash costs; |
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the scaling back or delay of a significant amount of planned capital expenditures, including planned renovation projects, which could adversely affect the value of the Company’s properties; |
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a material adverse effect on the Company’s ability to consummate acquisitions and dispositions of hotel properties; |
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continued suspension of the Company’s monthly distributions or a change in the amount or frequency of distributions when the Company resumes paying distributions; |
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increased indebtedness and decreased operating results, which could increase the Company’s risk of default under its loan agreements or other long-term contracts; |
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increased volatility of the Company’s stock price; |
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disruptions in the Company’s supply chains, which may increase costs for essential capital improvements or may impact hotels that are under development and that the Company expects to acquire following completion; |
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declines in regional and local economies, reducing travel to and from the localities; |
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increased risk that the Company could be required to close on the purchase under its existing contracts for newly developed hotels, where the hotel is not legally allowed to open due to temporary regulations resulting from COVID-19 mitigation; |
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increased risk in the Company’s ability to retain and the continued service and availability of personnel, including the Company’s senior leadership team and key field personnel, such as general managers, and the Company’s ability to recruit, attract and retain skilled personnel to the extent its management or personnel are impacted by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work; |
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disruptions as a result of corporate employees working remotely, including risk of cybersecurity incidents and disruptions to internal control procedures; and |
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difficulty accessing debt and equity capital on attractive terms, or at all, under the Company’s secured and unsecured indebtedness, or capital necessary to fund business operations or address maturing liabilities. |
Moreover, many risk factors set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the ongoing and numerous adverse impacts of COVID-19.
The significance, extent and duration of the impacts caused by COVID-19 on the Company’s business, including financial condition, operating results and cash flows, remains largely uncertain and dependent on future developments that are highly uncertain and cannot be accurately predicted at this time, such as the continued severity, duration, transmission rate and geographic spread of COVID-19 in the U.S., the extent and effectiveness of actions taken to contain the pandemic or mitigate its impact, the timing of and manner in which containment efforts are reduced or lifted, and the response of the overall economy, the financial markets and the population, particularly in areas in which the Company operates, as containment measures are reduced or lifted. As a result, the Company cannot provide an estimate of the overall impact of COVID-19 on its business or when, or if, the Company will be able to resume pre-COVID-19 levels of operations. COVID-19 presents material uncertainty and risk with respect to the Company’s business, financial performance and condition, operating results and cash flows.
The spread of the COVID-19 outbreak has caused severe disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
COVID-19 has caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. The Company cannot predict whether conditions in the bank lending, capital and other financial markets continue to deteriorate as a result of the pandemic, or whether the Company’s access to capital and other sources of funding will become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.
Additionally, a prolonged economic recession, including lower GDP growth, corporate earnings, consumer confidence, employment rates, income levels and personal wealth, could result in significantly below-average lodging demand by both group and transient travelers that continues beyond the lifting of travel and other government restrictions and after COVID-19 has largely subsided. There can also be no guarantee that the demand for lodging, and consumer confidence in travel generally, will recover as quickly as other industries. All of the above factors could materially negatively impact the Company’s business, financial performance and condition, operating results and cash flows.
Item 6. Exhibits
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Exhibit Number |
Description of Documents |
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3.1 |
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3.2 |
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10.1* |
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10.2* |
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10.3* |
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10.4* |
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10.5* |
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10.6 |
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10.7 |
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31.1 |
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31.2 |
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Exhibit Number |
Description of Documents |
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31.3 |
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32.1 |
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101 |
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH) |
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104 |
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted as Inline XBRL and contained in Exhibit 101. |
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* Denotes Management Contract or Compensation Plan |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Apple Hospitality REIT, Inc. |
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By: |
/s/ Justin G. Knight |
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Date: August 6, 2020 |
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Justin G. Knight, |
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Chief Executive Officer (Principal Executive Officer) |
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By: |
/s/ Elizabeth S. Perkins |
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Date: August 6, 2020 |
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Elizabeth S. Perkins, |
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Chief Financial Officer (Principal Financial Officer) |
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By: |
/s/ Rachel S. Labrecque |
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Date: August 6, 2020 |
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Rachel S. Labrecque, |
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Chief Accounting Officer (Principal Accounting Officer) |
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No information found
* THE VALUE IS THE MARKET VALUE AS OF THE LAST DAY OF THE QUARTER FOR WHICH THE 13F WAS FILED.
| FUND | NUMBER OF SHARES | VALUE ($) | PUT OR CALL |
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| DIRECTORS | AGE | BIO | OTHER DIRECTOR MEMBERSHIPS |
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No information found
No Customers Found
No Suppliers Found
Price
Yield
| Owner | Position | Direct Shares | Indirect Shares |
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