Company Quick10K Filing
Quick10K
Apple Hospitality REIT
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$15.69 224 $3,512
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-10 Other Events, Exhibits
8-K 2019-08-05 Earnings, Exhibits
8-K 2019-06-24 Officers, Other Events, Exhibits
8-K 2019-05-16 Shareholder Vote, Other Events
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-15 Other Events, Exhibits
8-K 2019-04-12 Other Events
8-K 2019-04-01 Other Events, Exhibits
8-K 2019-03-22 Officers, Other Events, Exhibits
8-K 2019-03-20 Other Events, Exhibits
8-K 2019-03-05 Other Events, Exhibits
8-K 2019-02-25 Earnings, Exhibits
8-K 2019-01-23 Officers, Other Events, Exhibits
8-K 2019-01-23 Officers, Other Events, Exhibits
8-K 2018-12-10 Other Events, Exhibits
8-K 2018-11-05 Earnings, Exhibits
8-K 2018-10-24 Other Events, Exhibits
8-K 2018-09-19 Other Events, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-27 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-06-29 Other Events, Exhibits
8-K 2018-06-01 Regulation FD, Exhibits
8-K 2018-05-17 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-05-03 Other Events, Exhibits
8-K 2018-03-29 Other Events, Exhibits
8-K 2018-03-16 Regulation FD, Exhibits
8-K 2018-02-27 Regulation FD, Exhibits
8-K 2018-02-23 Other Events, Exhibits
8-K 2018-02-06 Other Events, Exhibits
BXP Boston Properties 19,629
HST Host Hotels & Resorts 11,839
CPT Camden Property Trust 10,470
STOR Store Capital 8,390
CONE Cyrusone 7,967
CIM Chimera Investment 3,691
CLNY Colony Capital 2,141
TRTX TPG Real Estate Finance Trust 1,397
ARR Armour Residential REIT 982
TRMT Tremont Mortgage Trust 14
APLE 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex_152371.htm
EX-31.2 ex_152372.htm
EX-31.3 ex_152373.htm
EX-32.1 ex_152374.htm

Apple Hospitality REIT Earnings 2019-06-30

APLE 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

aple20190630_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2019

 

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 001-37389

 

APPLE HOSPITALITY REIT, INC.

(Exact name of registrant as specified in its charter)

 

Virginia

26-1379210

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

814 East Main Street

Richmond, Virginia

23219

(Address of principal executive offices)

(Zip Code)

 

(804) 344-8121

(Registrant's telephone number, including area code)

 


 

Securities registered pursuant to Section 12(b) of the Act:

 

 Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, no par value

APLE

New York Stock Exchange

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

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 ☐    No ☒

 

Number of registrant’s common shares outstanding as of August 1, 2019: 223,869,190

 

 

 

 

Apple Hospitality REIT, Inc.

Form 10-Q

Index

 

 

 

Page

Number

PART I.  FINANCIAL INFORMATION

 
       
 

Item 1.

Financial Statements (Unaudited)

 
       
   

Consolidated Balance Sheets – June 30, 2019 and December 31, 2018 

3

       
   

Consolidated Statements of Operations and Comprehensive Income – Three and six months ended June 30, 2019 and 2018

4

       
   

Consolidated Statements of Shareholders’ Equity – Three and six months ended June 30, 2019 and 2018

5

       
   

Consolidated Statements of Cash Flows – Six months ended June 30, 2019 and 2018

6

       
   

Notes to Consolidated Financial Statements

7

       
 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

       
 

Item 4.

Controls and Procedures

38

   

PART II.  OTHER INFORMATION

 
       
 

Item 1.

Legal Proceedings

39
       
 

Item 1A.

Risk Factors 

39
       
 

Item 6.

Exhibits

39

   

Signatures

40

 

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 & 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.

 

 

Index

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

Apple Hospitality REIT, Inc.

Consolidated Balance Sheets

(in thousands, except share data) 

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
   

(unaudited)

         

Assets

               

Investment in real estate, net of accumulated depreciation and amortization

      of $971,738 and $909,893, respectively

  $ 4,858,103     $ 4,816,410  

   Restricted cash-furniture, fixtures and other escrows

    33,199       33,632  

   Due from third party managers, net

    52,214       29,091  

   Other assets, net

    45,323       49,539  

      Total Assets

  $ 4,988,839     $ 4,928,672  
                 

Liabilities

               

   Debt, net

  $ 1,384,314     $ 1,412,242  

   Finance lease liabilities

    163,508       -  

   Accounts payable and other liabilities

    88,949       107,420  

      Total Liabilities

    1,636,771       1,519,662  
                 

Shareholders' Equity

               

   Preferred stock, authorized 30,000,000 shares; none issued and outstanding

    -       -  

   Common stock, no par value, authorized 800,000,000 shares; issued and

      outstanding 223,869,190 and 223,997,348 shares, respectively

    4,493,598       4,495,073  

   Accumulated other comprehensive income (loss)

    (6,158 )     10,006  

   Distributions greater than net income

    (1,135,372 )     (1,096,069 )

      Total Shareholders' Equity

    3,352,068       3,409,010  
                 

      Total Liabilities and Shareholders' Equity

  $ 4,988,839     $ 4,928,672  

 

See notes to consolidated financial statements.

 

3

Index

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income

(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Revenues:

                               

    Room

  $ 315,232     $ 319,022     $ 594,702     $ 593,858  

    Food and beverage

    15,692       16,518       30,707       32,228  

    Other

    10,193       9,174       19,495       17,017  

Total revenue

    341,117       344,714       644,904       643,103  
                                 

Expenses:

                               

Hotel operating expense:

                               

    Operating

    80,166       81,242       155,746       157,196  

    Hotel administrative

    26,967       26,558       52,597       51,660  

    Sales and marketing

    30,831       28,168       58,525       53,500  

    Utilities

    9,561       10,247       19,500       20,530  

    Repair and maintenance

    13,041       13,476       25,907       25,929  

    Franchise fees

    14,752       14,781       27,863       27,514  

    Management fees

    11,872       12,059       22,501       22,531  

Total hotel operating expense

    187,190       186,531       362,639       358,860  

    Property taxes, insurance and other

    18,823       18,681       38,031       35,910  

    Operating ground lease

    423       2,912       828       5,762  

    General and administrative

    8,308       6,721       16,445       13,598  

    Loss on impairment of depreciable real estate assets

    -       3,135       -       3,135  

    Depreciation and amortization

    48,109       45,743       96,059       90,583  

Total expense

    262,853       263,723       514,002       507,848  
                                 

    Gain (loss) on sale of real estate

    (161 )     -       1,052       -  
                                 

Operating income

    78,103       80,991       131,954       135,255  
                                 

    Interest and other expense, net

    (15,857 )     (13,210 )     (31,351 )     (25,129 )
                                 

Income before income taxes

    62,246       67,781       100,603       110,126  
                                 

    Income tax expense

    (156 )     (151 )     (362 )     (314 )
                                 

Net income

  $ 62,090     $ 67,630     $ 100,241     $ 109,812  
                                 

Other comprehensive income (loss):

                               

    Interest rate derivatives

    (10,120 )     1,740       (16,164 )     8,032  
                                 

Comprehensive income

  $ 51,970     $ 69,370     $ 84,077     $ 117,844  
                                 

Basic and diluted net income per common share

  $ 0.28     $ 0.29     $ 0.45     $ 0.48  
                                 

Weighted average common shares outstanding - basic and diluted

    223,899       230,342       223,915       230,428  

 

See notes to consolidated financial statements.

 

4

Index

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Shareholders' Equity

(Unaudited)

(in thousands, except per share data)

 

Three Months Ended June 30, 2019 and 2018

   

 

Common Stock

   

Accumulated Other

Comprehensive

Income (Loss)

   

Distributions

Greater Than Net

Income

         
   

Number of Shares

   

Amount

           

Total

 
                                         

Balance at March 31, 2019

    223,868     $ 4,493,362     $ 3,962     $ (1,130,297 )   $ 3,367,027  

Share based compensation, net

    1       236       -       -       236  

Interest rate derivatives

    -       -       (10,120 )     -       (10,120 )

Net income

    -       -       -       62,090       62,090  

Distributions declared to shareholders ($0.30 per share)

    -       -       -       (67,165 )     (67,165 )

Balance at June 30, 2019

    223,869     $ 4,493,598     $ (6,158 )   $ (1,135,372 )   $ 3,352,068  
                                         

Balance at March 31, 2018

    230,340     $ 4,594,247     $ 16,070     $ (1,053,843 )   $ 3,556,474  

Share based compensation, net

    7       455       -       -       455  

Issuance of common shares, net

    -       (2 )     -       -       (2 )

Interest rate derivatives

    -       -       1,740       -       1,740  

Net income

    -       -       -       67,630       67,630  

Distributions declared to shareholders ($0.30 per share)

    -       -       -       (69,060 )     (69,060 )

Balance at June 30, 2018

    230,347     $ 4,594,700     $ 17,810     $ (1,055,273 )   $ 3,557,237  

 

Six Months Ended June 30, 2019 and 2018

   

 

Common Stock

   

Accumulated Other

Comprehensive

Income (Loss)

   

Distributions

Greater Than Net

Income

         
   

Number of Shares

   

Amount

           

Total

 
                                         

Balance at December 31, 2018

    223,997     $ 4,495,073     $ 10,006     $ (1,096,069 )   $ 3,409,010  

Cumulative effect of the adoption of ASU 2016-02 related to leases

    -       -       -       (5,201 )     (5,201 )

Share based compensation, net

    146       2,621       -       -       2,621  

Common shares repurchased

    (274 )     (4,096 )     -       -       (4,096 )

Interest rate derivatives

    -       -       (16,164 )     -       (16,164 )

Net income

    -       -       -       100,241       100,241  

Distributions declared to shareholders ($0.60 per share)

    -       -       -       (134,343 )     (134,343 )

Balance at June 30, 2019

    223,869     $ 4,493,598     $ (6,158 )   $ (1,135,372 )   $ 3,352,068  
                                         

Balance at December 31, 2017

    229,962     $ 4,588,188     $ 9,778     $ (1,026,881 )   $ 3,571,085  

Share based compensation, net

    397       6,139       -       -       6,139  

Issuance of common shares, net

    243       4,677       -       -       4,677  

Common shares repurchased

    (255 )     (4,304 )     -       -       (4,304 )

Interest rate derivatives

    -       -       8,032       -       8,032  

Net income

    -       -       -       109,812       109,812  

Distributions declared to shareholders ($0.60 per share)

    -       -       -       (138,204 )     (138,204 )

Balance at June 30, 2018

    230,347     $ 4,594,700     $ 17,810     $ (1,055,273 )   $ 3,557,237  

 

See notes to consolidated financial statements.

 

5

Index

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   

Six Months Ended

 
   

June 30,

 
   

2019

   

2018

 

Cash flows from operating activities:

               

Net income

  $ 100,241     $ 109,812  

Adjustments to reconcile net income to cash provided by operating activities:

               

Depreciation and amortization

    96,059       90,583  

Loss on impairment of depreciable real estate assets

    -       3,135  

Gain on sale of real estate

    (1,052 )     -  

Other non-cash expenses, net

    2,638       3,993  

Changes in operating assets and liabilities:

               

Increase in due from third party managers, net

    (23,097 )     (30,542 )

Increase in other assets, net

    (4,346 )     (3,703 )

Decrease in accounts payable and other liabilities

    (6,371 )     (6,910 )

Net cash provided by operating activities

    164,072       166,368  
                 

Cash flows from investing activities:

               

Acquisition of hotel properties, net

    (52,582 )     (135,164 )

Deposits and other disbursements for potential acquisitions

    (946 )     (362 )

Capital improvements

    (38,770 )     (39,079 )

Net proceeds from sale of real estate

    95,029       -  

Net cash provided by (used in) investing activities

    2,731       (174,605 )
                 

Cash flows from financing activities:

               

Net proceeds related to issuance of common shares

    -       4,677  

Repurchases of common shares

    (4,096 )     (4,304 )

Repurchases of common shares to satisfy employee withholding requirements

    (491 )     (876 )

Distributions paid to common shareholders

    (134,343 )     (138,204 )

Net payments on existing revolving credit facility

    (76,100 )     -  

Net proceeds from extinguished revolving credit facility

    -       111,500  

Proceeds from term loans

    75,000       -  

Proceeds from mortgage debt

    -       44,000  

Payments of mortgage debt

    (27,206 )     (6,068 )

Net cash (used in) provided by financing activities

    (167,236 )     10,725  
                 

Net change in cash, cash equivalents and restricted cash

    (433 )     2,488  
                 

Cash, cash equivalents and restricted cash, beginning of period

    33,632       29,791  
                 

Cash, cash equivalents and restricted cash, end of period

  $ 33,199     $ 32,279  
                 

Supplemental cash flow information:

               

Interest paid

  $ 30,495     $ 24,448  
                 

Supplemental disclosure of noncash investing and financing activities:

               

Accrued distribution to common shareholders

  $ 22,385     $ 23,020  
                 

Reconciliation of cash, cash equivalents and restricted cash:

               

Cash and cash equivalents, beginning of period

  $ -     $ -  

Restricted cash-furniture, fixtures and other escrows, beginning of period

    33,632       29,791  

    Cash, cash equivalents and restricted cash, beginning of period

  $ 33,632     $ 29,791  
                 

Cash and cash equivalents, end of period

  $ -     $ -  

Restricted cash-furniture, fixtures and other escrows, end of period

    33,199       32,279  

    Cash, cash equivalents and restricted cash, end of period

  $ 33,199     $ 32,279  

 

See notes to consolidated financial statements.

 

6

Index

 

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 one reportable segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision making process of these entities, and therefore does not consolidate the entities. As of June 30, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”

 

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, 2018 (the “2018 Form 10-K”). Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2019.

 

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.

 

Net Income Per Common Share

 

Basic net income per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net income 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 per common share were the same for each of the periods presented.

 

Accounting Standards Recently Adopted

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which replaces Leases (Topic 840), and along with subsequent amendments, provides the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under the new standard, lessees are required to recognize most leases on their balance sheets as right-of-use assets and lease liabilities. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less are accounted for similarly to the previous accounting guidance under Leases (Topic 840), for operating leases. Topic 842 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides entities another optional transition method, which the Company elected, to apply the new standard using the modified retrospective approach at its effective date, versus restating the prior periods presented, and recognizing a cumulative-effect adjustment to the opening balance of retained earnings for the effect of initially applying Topic 842 in the period of adoption. Consequently, an entity’s reporting for periods presented prior to adoption of the new lease requirements in the consolidated financial statements would continue in accordance with Leases (Topic 840), including disclosures.

 

7

Index

 

The Company adopted Topic 842 effective January 1, 2019, electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company’s historical accounting policy. At adoption, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The Company elected to apply certain practical expedients allowed under the new standard including (i) to use hindsight in determining the term as well as assessing the impairment of its existing leases, (ii) to not assess whether existing land easements not previously accounted for as leases are or contain leases, and (iii) to not evaluate short-term leases with terms of 12 months or less. The Company elected not to apply the package of practical expedients under the new standard which would have allowed the Company to not reassess at the date of adoption: (i) whether any existing contracts meet the definition of a lease, (ii) the lease classification for any existing leases, and (iii) the accounting for initial direct costs of any existing leases.

 

At adoption of the new standard, the Company recorded right-of-use assets and lease liabilities for its ground leases and certain other operating leases (including hotel equipment leases and office space leases) measured at the estimated present value of the remaining minimum lease payments under the leases. Four of the Company’s ground leases that were previously classified as operating leases under Topic 840 are classified as financing leases under Topic 842. For these finance leases, effective January 1, 2019, the Company recognizes amortization expense, included in depreciation and amortization expense, and interest expense, included in interest and other expense, net, instead of operating ground lease expense, in the Company’s consolidated statements of operations. While the total expense recognized over the life of a lease is unchanged, the timing of expense recognition for these finance leases results in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. In addition to recording operating and financing right-of-use assets and lease liabilities, the Company also reclassified at adoption of the new standard its intangible assets for below market leases and intangible liabilities for above market leases, as well as its accrued straight-line lease liabilities for its operating leases, to the beginning right-of-use assets. The Company derecognized its accrued straight-line lease liabilities related to its finance leases, which are included in the cumulative-effect adjustment noted above. The Company is also a lessor in certain retail lease agreements related to its real estate, however, there was no material change to the accounting for these leasing arrangements. See Note 9 for additional disclosures pertaining to the Company’s adoption of the new leasing standard.

 

2.  Investment in Real Estate

 

The Company’s investment in real estate consisted of the following (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Land

  $ 730,614     $ 737,822  

Building and Improvements

    4,469,348       4,503,728  

Furniture, Fixtures and Equipment

    471,324       471,399  

Finance Ground Lease Assets

    144,768       -  

Franchise Fees

    13,787       13,354  
      5,829,841       5,726,303  

Less Accumulated Depreciation and Amortization

    (971,738 )     (909,893 )

Investment in Real Estate, net

  $ 4,858,103     $ 4,816,410  

 

Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), as amended and, as a result, recorded finance ground lease assets for four of its ground leases, which are included in investment in real estate, net. See Note 9 for more information regarding the Company’s finance ground lease assets.

 

As of June 30, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states.

 

The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.

 

8

Index

 

Hotel Acquisitions

 

The Company acquired two hotels during the six months ended June 30, 2019. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.

 

City

 

State

 

Brand

 

Manager

 

Date Acquired

 

Rooms

   

Gross Purchase Price

 

St. Paul

 

MN

 

Hampton

 

Vista Host

 

3/4/2019

    160     $ 31,680  

Orlando

 

FL

 

Home2 Suites

 

LBA

 

3/19/2019

    128       20,736  
                      288     $ 52,416  

 

 

During the year ended December 31, 2018, the Company acquired five hotels including four hotels in the first six months of 2018. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.

 

City

 

State

 

Brand

 

Manager

 

Date Acquired

 

Rooms

   

Gross Purchase Price

 

Atlanta/Downtown

 

GA

 

Hampton

 

McKibbon

 

2/5/2018

    119     $ 24,000  

Memphis

 

TN

 

Hampton

 

Crestline

 

2/5/2018

    144       39,000  

Phoenix

 

AZ

 

Hampton

 

North Central

 

5/2/2018

    210       44,300  

Atlanta/Perimeter Dunwoody

 

GA

 

Hampton

 

LBA

 

6/28/2018

    132       29,500  

Jacksonville

 

FL

 

Hyatt Place

 

LBA

 

12/7/2018

    127       15,400  
                      732     $ 152,200  

 

The Company used borrowings under its revolving credit facility to purchase each of these hotels.  The acquisitions of these hotel properties were accounted for as an acquisition of a group of assets, with costs incurred to effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired. For the two hotels acquired during the six months ended June 30, 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2019 was approximately $3.4 million and $0.7 million, respectively. For the four hotels acquired during the six months ended June 30, 2018, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2018 was approximately $7.1 million and $2.1 million, respectively.

 

Hotel Purchase Contract Commitments

 

As of June 30, 2019, the Company had outstanding contracts for the potential purchase of five hotels for a total expected purchase price of approximately $159.2 million, which are under development and are planned to be completed and opened for business over the next 12 to 24 months from June 30, 2019, 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. The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at June 30, 2019. All dollar amounts are in thousands.

 

9

Index

 

Location (1)

 

Brands

 

Date of Purchase Contract

 

Rooms

   

Refundable Deposits

   

Gross Purchase Price

 

Cape Canaveral, FL (2)

 

Hampton and Home2 Suites

 

4/11/2018

    224     $ 3     $ 46,704  

Tempe, AZ (3)

 

Hyatt House and Hyatt Place

 

6/13/2018

    254       720       63,341  

Denver, CO

 

Courtyard

 

4/5/2019

    182       586       49,140  
              660     $ 1,309     $ 159,185  

(1)

These hotels are currently under development. The table shows the expected number of rooms upon hotel completion and the expected franchise brands. Assuming all conditions to closing are met, the purchases of these hotels are expected to occur over the next 12 to 24 months from June 30, 2019. If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the properties are under development, at this time, the seller has not met all of the conditions to closing.

(2)

These hotels are part of an adjoining combined 224-room, dual-branded complex that will be located on the same site.

(3)

These hotels are part of an adjoining combined 254-room, dual-branded complex that will be located on the same site.

 

The Company intends to use borrowings under its credit facilities available at closing to purchase the hotels under contract if a closing occurs.

 

3.  Hotel Dispositions

 

In February 2019, the Company terminated its purchase and sale agreement with an unrelated party for the sale of 16 of its hotels and entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine hotels for a total combined gross sales price of $95.0 million.  On March 28, 2019, the Company completed the sale of the hotels, resulting in a gain of approximately $1.7 million, which is included in the Company’s consolidated statement of operations for the six months ended June 30, 2019. The nine hotels had a total carrying value of approximately $92.9 million at the time of the sale. The following table lists the nine hotels sold:

 

City

 

State

 

Brand

 

Rooms

 

Sarasota

 

FL

 

Homewood Suites

    100  

Tampa

 

FL

 

TownePlace Suites

    94  

Baton Rouge

 

LA

 

SpringHill Suites

    119  

Holly Springs

 

NC

 

Hampton

    124  

Duncanville

 

TX

 

Hilton Garden Inn

    142  

Texarkana

 

TX

 

Courtyard

    90  

Texarkana

 

TX

 

TownePlace Suites

    85  

Bristol

 

VA

 

Courtyard

    175  

Harrisonburg

 

VA

 

Courtyard

    125  

Total

    1,054  

 

During the year ended December 31, 2018, the Company sold three hotels in two transactions with unrelated parties for a total combined gross sales price of approximately $15.8 million, resulting in a combined gain on sale of approximately $0.2 million, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2018. Of the three hotels sold, two of the hotels, the Columbus, Georgia 89-room SpringHill Suites and 86-room TownePlace Suites (the “two Columbus hotels”), were sold on July 13, 2018 for a combined gross sales price of $10.0 million, resulting in no gain or loss on the sale, and one hotel, the 72-room Springdale, Arkansas Residence Inn, was sold on November 29, 2018 for a gross sales price of approximately $5.8 million, resulting in a gain of approximately $0.2 million. During the second quarter of 2018, the Company recognized impairment losses of approximately $3.1 million related to these three hotels, which is included in the Company’s consolidated statement of operations for the six months ended June 30, 2018, and consisted of approximately $0.5 million to adjust the bases of the two Columbus hotels that sold in July 2018 to their estimated fair values, which were based on the contracted sales prices, net of estimated selling costs, and approximately $2.6 million to adjust the basis of the Springdale, Arkansas Residence Inn that sold in November 2018 to its estimated fair value, which was based on the offers received at that time, net of estimated selling costs.

 

10

Index

 

Excluding gain on sale of real estate, the Company’s consolidated statements of operations include operating income of approximately $1.1 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively, relating to the results of operations of the twelve hotels sold as noted above for the period of ownership. The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three and six months ended June 30, 2019 and 2018. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.

 

4.  Debt

 

Summary

 

As of June 30, 2019 and December 31, 2018, the Company’s debt consisted of the following (in thousands):

 

   

June 30, 2019

   

December 31, 2018

 

Revolving credit facility

  $ 192,700     $ 268,800  

Term loans, net

    729,022       653,382  

Mortgage debt, net

    462,592       490,060  

Debt, net

  $ 1,384,314     $ 1,412,242  

 

 

The aggregate amounts of principal payable under the Company’s total debt obligations as of June 30, 2019 (including the revolving credit facility, term loans and mortgage debt), for the five years subsequent to June 30, 2019 and thereafter are as follows (in thousands):

 

2019 (July - December)

  $ 6,600  

2020

    28,349  

2021

    47,586  

2022

    301,952  

2023

    295,615  

Thereafter

    709,165  
      1,389,267  

Unamortized fair value adjustment of assumed debt

    2,977  

Unamortized debt issuance costs related to term loans and mortgage debt

    (7,930 )

Total

  $ 1,384,314  

 

The Company uses interest rate swaps to manage its interest rate risks on a portion of its variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the London Inter-Bank Offered Rate for a one-month term (“one-month LIBOR”).  The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. See Note 5 for more information on the interest rate swap agreements. The Company’s total fixed-rate and variable-rate debt, after giving effect to its interest rate swaps in effect at June 30, 2019 and December 31, 2018, is set forth below. All dollar amounts are in thousands.

 

     

June 30, 2019

   

Percentage

   

December 31, 2018

   

Percentage

 

Fixed-rate debt (1)

  $ 1,069,067       77 %   $ 1,046,273       74 %

Variable-rate debt (2)

    320,200       23 %     371,300       26 %

Total

  $ 1,389,267             $ 1,417,573          

Weighted-average interest rate of debt

    3.76 %             3.74 %        

(1)

Fixed-rate debt includes the portion of variable-rate debt where the interest payments have been effectively fixed by interest rate swaps as of the respective balance sheet date. See Note 5 for more information on the interest rate swap agreements.

(2)

The Company has two forward interest rate swaps that begin in 2020 that will effectively fix the interest rate on $75 million of the Company's variable-rate debt. See Note 5 for more information on the interest rate swap agreements.

 

11

Index

 

Credit Facilities

 

$850 Million Credit Facility

 

On July 27, 2018, the Company entered into an amendment and restatement of its then outstanding unsecured $965 million credit facility, which was repaid at closing, reducing the borrowing capacity to $850 million, reducing the annual interest rate and extending the maturity dates (the “$850 million credit facility”). The $850 million credit facility is comprised of (i) a $425 million revolving credit facility with an initial maturity date of July 27, 2022 and (ii) a $425 million term loan facility consisting of two term loans: a $200 million term loan with a maturity date of July 27, 2023, and a $225 million term loan with a maturity date of January 31, 2024, both funded at closing (the “$425 million term loan facility”).  At closing, the Company repaid the $425 million outstanding under the term loans of the $965 million credit facility with the proceeds from the $425 million term loan facility under the $850 million credit facility and borrowed approximately $196 million under the $425 million revolving credit facility to repay the outstanding balance of the extinguished revolving credit facility and to pay closing costs. Subject to certain conditions including covenant compliance and additional fees, the $425 million revolving credit facility maturity date may be extended up to one year. The Company may make voluntary prepayments in whole or in part, at any time.  Interest payments on the $850 million credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.25%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  The Company is also required to pay quarterly an unused facility fee at an annual rate of 0.20% or 0.25% on the unused portion of the $425 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.

 

$225 Million Term Loan Facility

 

On August 2, 2018, the Company entered into an amendment and restatement of its then outstanding $150 million term loan facility, which was repaid at closing, increasing the borrowing capacity to $225 million, reducing the annual interest rate and extending the maturity dates (the “$225 million term loan facility”). The $225 million term loan facility is comprised of (i) a $50 million term loan with a maturity date of August 2, 2023, which was funded at closing, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was funded at closing and the remaining $75 million was funded on January 29, 2019. At closing, the Company repaid the $150 million outstanding under the $150 million term loan facility with the proceeds from the $225 million term loan facility. The credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $225 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.50%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  

 

$85 Million Term Loan

 

On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024 (the “$85 million term loan” and, together with the $850 million credit facility and the $225 million term loan facility, the “credit facilities”). Although no material terms were changed, the credit agreement was amended and restated in August 2018 as a result of the refinancings noted above. The amended and restated credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $85 million term loan are due monthly and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.80% to 2.60%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement. In July 2019, the Company entered into an amendment of the $85 million term loan to reduce the interest rate margin to 1.30% to 2.10% for the remainder of the term.

 

12

Index

 

As of June 30, 2019 and December 31, 2018, the details of the Company’s credit facilities were as set forth below.  All dollar amounts are in thousands.

 

           

Outstanding Balance

 
   

Interest Rate

 

Maturity Date

 

June 30,
2019

   

December 31,

2018

 

Revolving credit facility (1)

 

LIBOR + 1.40% - 2.25%

 

7/27/2022

  $ 192,700     $ 268,800  
                         

Term loans

                       

$200 million term loan

 

LIBOR + 1.35% - 2.20%

 

7/27/2023

    200,000       200,000  

$225 million term loan

 

LIBOR + 1.35% - 2.20%

 

1/31/2024

    225,000       225,000  

$50 million term loan

 

LIBOR + 1.35% - 2.20%

 

8/2/2023

    50,000       50,000  

$175 million term loan

 

LIBOR + 1.65% - 2.50%

 

8/2/2025

    175,000       100,000  

$85 million term loan

 

LIBOR + 1.80% - 2.60%

 

7/25/2024

    85,000       85,000  

Term loans at stated value

    735,000       660,000  

Unamortized debt issuance costs

    (5,978 )     (6,618 )

Term loans, net

    729,022       653,382  
                         

Revolving credit facility and term loans, net (1)

  $ 921,722     $ 922,182  

Weighted-average interest rate (2)

    3.42 %     3.37 %

(1)

Excludes unamortized debt issuance costs related to the revolving credit facility totaling approximately $3.1 million and $3.6 million as of June 30, 2019 and December 31, 2018, respectively, which are included in other assets, net in the Company's consolidated balance sheets.

(2)

Interest rate represents the weighted-average effective annual interest rate at the balance sheet date which includes the effect of interest rate swaps in effect on $607.5 million and $557.5 million of the outstanding variable-rate debt as of June 30, 2019 and December 31, 2018, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at June 30, 2019 and December 31, 2018 was 2.40% and 2.50%, respectively.

 

The credit agreements governing the credit facilities contain mandatory prepayment requirements, customary affirmative covenants, 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.  The Company was in compliance with the applicable covenants at June 30, 2019.

 

Mortgage Debt

 

As of June 30, 2019, the Company had approximately $461.6 million in outstanding mortgage debt secured by 29 properties, with maturity dates ranging from June 2020 to January 2038, stated interest rates ranging from 3.55% to 6.25% and effective interest rates ranging from 3.55% to 4.97%. The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid. The following table sets forth the hotel properties securing each loan, the interest rate, loan assumption or origination date, maturity date, the principal amount assumed or originated, and the outstanding balance prior to any fair value adjustments or debt issuance costs as of June 30, 2019 and December 31, 2018 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.

 

13

Index

 

Location

 

Brand

 

Interest Rate (1)

   

Loan

Assumption or

Origination Date

 

Maturity Date

   

Principal

Assumed or

Originated

   

Outstanding

balance as of

June 30, 

 2019

   

Outstanding

balance as of

December 31,

2018

 

Syracuse, NY

 

Courtyard

    4.75 %  

10/16/2015

   
 (2)
  $ 11,199     $ -     $ 10,357  

Syracuse, NY

 

Residence Inn

    4.75 %  

10/16/2015

   
 (2)
    11,199       -       10,357  

San Juan Capistrano, CA

 

Residence Inn

    4.15 %  

9/1/2016

 

6/1/2020

      16,210       15,253       15,431  

Colorado Springs, CO

 

Hampton

    6.25 %  

9/1/2016

 

7/6/2021

      7,923       7,545       7,617  

Franklin, TN

 

Courtyard

    6.25 %  

9/1/2016

 

8/6/2021

      14,679       13,982       14,115  

Franklin, TN

 

Residence Inn

    6.25 %  

9/1/2016

 

8/6/2021

      14,679       13,982       14,115  

Grapevine, TX

 

Hilton Garden Inn

    4.89 %  

8/29/2012

 

9/1/2022

      11,810       9,940       10,101  

Collegeville/Philadelphia, PA

 

Courtyard

    4.89 %  

8/30/2012

 

9/1/2022

      12,650       10,647       10,820  

Hattiesburg, MS

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      5,732       4,978       5,058  

Rancho Bernardo/San Diego, CA

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      15,060       13,079       13,289  

Kirkland, WA

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      12,145       10,548       10,717  

Seattle, WA

 

Residence Inn

    4.96 %  

3/1/2014

 

9/1/2022

      28,269       24,532       24,928  

Anchorage, AK

 

Embassy Suites

    4.97 %  

9/13/2012

 

10/1/2022

      23,230       19,643       19,957  

Somerset, NJ

 

Courtyard

    4.73 %  

3/1/2014

 

10/6/2022

      8,750       7,568       7,692  

Tukwila, WA

 

Homewood Suites

    4.73 %  

3/1/2014

 

10/6/2022

      9,431       8,156       8,291  

Prattville, AL

 

Courtyard

    4.12 %  

3/1/2014

 

2/6/2023

      6,596       5,657       5,754  

Huntsville, AL

 

Homewood Suites

    4.12 %  

3/1/2014

 

2/6/2023

      8,306       7,123       7,246  

San Diego, CA

 

Residence Inn

    3.97 %  

3/1/2014

 

3/6/2023

      18,600       15,921       16,198  

Miami, FL

 

Homewood Suites

    4.02 %  

3/1/2014

 

4/1/2023

      16,677       14,301       14,547  

New Orleans, LA

 

Homewood Suites

    4.36 %  

7/17/2014

 

8/11/2024

      27,000       23,875       24,232  

Westford, MA

 

Residence Inn

    4.28 %  

3/18/2015

 

4/11/2025

      10,000       9,007       9,137  

Denver, CO

 

Hilton Garden Inn

    4.46 %  

9/1/2016

 

6/11/2025

      34,118       31,757       32,198  

Oceanside, CA

 

Courtyard

    4.28 %  

9/1/2016

 

10/1/2025

      13,655       12,946       13,077  

Omaha, NE

 

Hilton Garden Inn

    4.28 %  

9/1/2016

 

10/1/2025

      22,682       21,503       21,722  

Boise, ID

 

Hampton

    4.37 %  

5/26/2016

 

6/11/2026

      24,000       22,803       23,015  

Burbank, CA

 

Courtyard

    3.55 %  

11/3/2016

 

12/1/2026

      25,564       23,903       24,247  

San Diego, CA

 

Courtyard

    3.55 %  

11/3/2016

 

12/1/2026

      25,473       23,818       24,161  

San Diego, CA

 

Hampton

    3.55 %  

11/3/2016

 

12/1/2026

      18,963       17,730       17,986  

Burbank, CA

 

SpringHill Suites

    3.94 %  

3/9/2018

 

4/1/2028

      28,470       27,671       28,018  

Santa Ana, CA

 

Courtyard

    3.94 %  

3/9/2018

 

4/1/2028

      15,530       15,094       15,283  

San Jose, CA

 

Homewood Suites

    4.22 %  

12/22/2017

 

1/1/2038

      30,000       28,605       29,107  
                          $ 528,600       461,567       488,773  

Unamortized fair value adjustment of assumed debt

                        2,977       3,428  

Unamortized debt issuance costs

                        (1,952 )     (2,141 )

Total

                      $ 462,592     $ 490,060  

(1)

Interest rates are the rates per the loan agreement. For loans assumed, the Company adjusted the interest rates per the loan agreement to market rates and is amortizing the adjustments to interest expense over the life of the loan.

(2)

Loans were repaid in full in May 2019.

 

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Index

 

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, 2019 and December 31, 2018, both the carrying value and estimated fair value of the Company’s debt were approximately $1.4 billion. Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issuance costs related to term loans and mortgage debt for each specific year.

 

Derivative Instruments

 

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable-rate debt.  Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR.  The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets.  The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of June 30, 2019 and December 31, 2018. All dollar amounts are in thousands.

 

   

Notional

                 

Fair Value Asset (Liability)

 

Hedge Type

 

Amount at

June 30, 2019

 

Origination Date

 

Maturity Date

 

Swap Fixed

Interest Rate

   

June 30,
2019

   

December 31,

2018

 

Cash flow hedge

  $ 212,500  

5/21/2015

 

5/18/2020

    1.58 %   $ 565     $ 2,744  

Cash flow hedge

    110,000  

7/2/2015

 

5/18/2020

    1.62 %     255       1,361  

Cash flow hedge

    50,000  

4/7/2016

 

3/31/2021

    1.09 %     519       1,519  

Cash flow hedge

    100,000  

4/7/2016

 

3/31/2023

    1.33 %     1,010       4,477  

Cash flow hedge

    75,000  

5/31/2017

 

6/30/2024

    1.96 %     (1,200 )     1,905  

Cash flow hedge

    10,000  

8/10/2017

 

6/30/2024

    2.01 %     (180 )     226  

Cash flow hedge (1)

    50,000  

6/1/2018

 

6/30/2025

    2.89 %     (3,551 )     (1,276 )

Cash flow hedge (2)

    25,000  

12/6/2018

 

6/30/2025

    2.75 %     (1,466 )     (379 )

Cash flow hedge (3)

    50,000  

12/7/2018

 

1/31/2024

    2.72 %     (2,110 )     (571 )
    $ 682,500                   $ (6,158 )   $ 10,006  

(1)

In June 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2019 effectively fixes the interest rate on $50 million of the Company's variable-rate debt.

(2)

In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2020 will effectively fix the interest rate on $25 million of the Company's variable-rate debt.

(3)

In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning May 18, 2020 will effectively fix the interest rate on $50 million of the Company's variable-rate debt.

 

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Index

 

The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. The change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income (loss), a component of shareholders’ equity in the Company’s consolidated balance sheets. Amounts reported in accumulated other comprehensive income (loss) will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives. The Company estimates that approximately $1.0 million of net unrealized gains included in accumulated other comprehensive income (loss) at June 30, 2019 will be reclassified as a decrease to interest and other expense, net within the next 12 months.

 

The following table presents the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2019 and 2018 (in thousands):

 

   

Net Unrealized Gain (Loss) Recognized

in Other Comprehensive Income (Loss)

   

Net Unrealized Gain Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net

 
   

Three Months Ended June 30,

   

Three Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Interest rate derivatives in cash flow hedging relationships

  $ (8,898 )   $ 2,252     $ 1,222     $ 512  

 

   

Net Unrealized Gain (Loss) Recognized

in Other Comprehensive Income (Loss)

   

Net Unrealized Gain Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net

 
   

Six Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Interest rate derivatives in cash flow hedging relationships

  $ (13,668 )   $ 8,600     $ 2,496     $ 568  

 

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 2018 Form 10-K. Below is a summary of the significant related party relationships in effect during the six months ended June 30, 2019 and 2018.

 

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 the six months ended June 30, 2019 and 2018 totaled approximately $0.6 million and $0.5 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations. 

 

As part of the cost sharing arrangement, 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 this 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. As of June 30, 2019 and December 31, 2018, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million and $0.4 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.

 

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Index

 

The Company, through a wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation 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 aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, by its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third party rates. Total costs incurred for the use of these aircraft during the six months ended June 30, 2019 and 2018 were approximately $0.05 million for each respective period, and are included in general and administrative expenses in the Company’s consolidated statements of operations.

 

7.  Shareholders Equity

 

Distributions 

 

The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. For the three months ended June 30, 2019 and 2018, the Company paid distributions of $0.30 per common share for a total of $67.2 million and $69.1 million, respectively. For the six months ended June 30, 2019 and 2018, the Company paid distributions of $0.60 per common share for a total of $134.3 and $138.2 million, respectively. Additionally, in June 2019, the Company declared a monthly distribution of $0.10 per common share, totaling $22.4 million, which was recorded as a payable as of June 30, 2019 and paid in July 2019. As of December 31, 2018, a monthly distribution of $0.10 per common share, totaling $22.4 million, was recorded as a payable and paid in January 2019. These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets.

 

Share Repurchases

 

In May 2019, 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 $360 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2020 if not terminated earlier. The Company has a written trading plan as part of the Share Repurchase Program that provides for share repurchases in open market transactions that is intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the first quarter of 2019 and 2018, the Company purchased, under its Share Repurchase Program, approximately 0.3 million of its common shares in each respective period, at a weighted-average market purchase price of approximately $14.93 and $16.89 per common share for an aggregate purchase price, including commissions, of approximately $4.1 million and $4.3 million, respectively. No shares were repurchased during the second quarter of 2019 and 2018. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities.

 

8.  Compensation Plans

 

The Company annually establishes an incentive plan for its executive management.  Under the incentive plan for 2019 (the “2019 Incentive Plan”), participants are eligible to receive a bonus based on the achievement of certain 2019 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).  The operational performance metrics are equally weighted and account for 50% of the total target incentive compensation. The shareholder return metrics are weighted 75% for relative shareholder return metrics and 25% for total shareholder return metrics, and account for 50% of the total target incentive compensation.  At June 30, 2019, the range of potential aggregate payouts under the 2019 Incentive Plan was $0 - $18 million.  Based on performance through June 30, 2019, the Company has accrued approximately $4.7 million as a liability for potential executive bonus payments under the 2019 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of June 30, 2019. Compensation expense recognized by the Company under the 2019 Incentive Plan is included in general and administrative expenses in the Company’s consolidated statements of operations and totaled approximately $2.5 million and $4.7 million for the three and six months ended June 30, 2019, respectively. Approximately 25% of awards under the 2019 Incentive Plan, if any, will be paid in cash, and 75% will be issued in stock under the Company’s 2014 Omnibus Incentive Plan, approximately two-thirds of which will vest at the end of 2019 and one-third of which will vest in December 2020. Under the incentive plan for 2018 (the “2018 Incentive Plan”), the Company recorded approximately $1.8 million and $3.7 million in general and administrative expenses in the Company’s consolidated statements of operations for the three and six months ended June 30, 2018, respectively. 

 

17

Index

 

During the six months ended June 30, 2019, the Company incurred a one-time separation payment of $0.5 million in connection with the retirement of the Company’s Executive Vice President and Chief Legal Officer which, pursuant to the separation and general release agreement executed in March 2019, was paid in April 2019 and was included in general and administrative expenses in the Company’s consolidated statement of operations for the six months ended June 30, 2019.

 

Share-Based Compensation Awards

 

The following table sets forth information pertaining to the share-based compensation issued under the 2018 Incentive Plan and the incentive plan for 2017 (the “2017 Incentive Plan”).

 

   

2018 Incentive Plan

   

2017 Incentive Plan

 
                 

Period common shares issued

 

First Quarter 2019

   

First Quarter 2018

 
                 

Common shares earned under each incentive plan

    156,926       415,866  

Common shares surrendered on issuance date to satisfy tax withholding obligations

    24,999       48,533  

Common shares earned and issued under each incentive plan, net of common shares surrendered on issuance date to satisfy tax withholding obligations

    131,927       367,333  

Closing stock price on issuance date

  $ 16.49     $ 16.92  

Total share-based compensation earned, including the surrendered shares (in millions)

  $ 2.6  (1)   $ 7.0  (2)

Of the total common shares earned and issued, total common shares unrestricted at time of issuance

    105,345       223,421  

Of the total common shares earned and issued, total common shares restricted at time of issuance

    26,582       143,912  
                 

Restricted common shares vesting date

 

December 13, 2019

   

December 14, 2018

 

Common shares surrendered on vesting date to satisfy tax withholding requirements resulting from vesting of restricted common shares

   
n/a
      41,389  

(1)

Of the total 2018 share-based compensation, approximately $2.4 million was recorded as a liability as of December 31, 2018 and is included in accounts payable and other liabilities in the Company's consolidated balance sheet at December 31, 2018. The remaining $0.2 million, which is subject to vesting on December 13, 2019 and excludes any restricted shares forfeited or vested prior to that date, will be recognized as share-based compensation expense proportionately throughout 2019. For the three and six months ended June 30, 2019, the Company recognized approximately $0.04 million and $0.1 million, respectively, of share-based compensation expense related to restricted share awards.

(2)

Of the total 2017 share-based compensation, approximately $1.2 million, which vested on December 14, 2018, was recognized as share-based compensation expense proportionately throughout 2018. For the three and six months ended June 30, 2018, the Company recognized approximately $0.3 million and $0.6 million, respectively, of share-based compensation expense related to restricted share awards.

 

9.  Leases           

 

The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of June 30, 2019, the Company had 13 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately four to 86 years. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years.

 

The Company adopted ASU No. 2016-02, Leases (Topic 842), as discussed further in Note 1 in the section titled “Accounting Standards Recently Adopted”, effective January 1, 2019, which requires leases with durations greater than twelve months to be recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities. Prior year financial statements were not restated under the new standard and, therefore, those amounts are not presented below.

 

18

Index

 

Under the new standard, the Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed schedule rent increases) and renewal options that are factored into the determination of lease payments when appropriate and the present value of the remaining lease payments is adjusted accordingly. The Company utilizes interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, to determine the present value of the lease payments. At transition to the new standard, the Company used information available at that time to determine the incremental borrowing rates on its existing leases at January 1, 2019 based on estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.

 

Twelve of the Company’s hotel and parking lot ground leases as well as all of its hotel equipment leases and office space leases are classified as operating leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are included in other assets, net and the lease liabilities are included in accounts payable and other liabilities in the Company’s consolidated balance sheet. In addition, at adoption of the new standard, the Company reclassified its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the Company’s consolidated balance sheet, respectively, as well as accrued straight-line lease liabilities related to these leases from accounts payable and other liabilities in the Company’s consolidated balance sheet to the beginning ROU assets. Lease expense is recognized on a straight-line basis over the term of the respective lease and the value of each lease intangible is amortized over the term of the respective lease. Costs related to operating ground leases are included in operating ground lease expense, while costs related to hotel equipment leases are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases are included in general and administrative expense in the Company’s consolidated statements of operations.

 

Four of the Company’s hotel ground leases are classified as finance leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are recorded as finance ground lease assets within investment in real estate, net and the lease liabilities are recorded as finance lease liabilities in the Company’s consolidated balance sheet. In addition, at adoption of the new standard, the Company reclassified its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the Company’s consolidated balance sheet, respectively, to the beginning ROU assets. At adoption of the new standard, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million, which included the derecognition of accrued straight-line lease liabilities related to the finance leases, to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The ROU asset and value of each lease intangible is amortized over the term of the respective lease. Costs related to finance ground leases are included in depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statement of operations.

 

Lease Position as of June 30, 2019

 

The following table sets forth the lease-related assets and liabilities included in the Company’s consolidated balance sheet as of June 30, 2019. All dollar amounts are in thousands.

 

 

Consolidated Balance Sheet Classification

 

June 30, 2019

 

Assets

         

Operating lease assets, net

Other assets, net

  $ 28,941  

Finance ground lease assets, net (1)

Investment in real estate, net

    142,661  

Total lease assets

  $ 171,602  
           

Liabilities

         

Operating lease liabilities

Accounts payable and other liabilities

  $ 12,470  

Finance lease liabilities

Finance lease liabilities

    163,508  

Total lease liabilities

  $ 175,978  
           

Weighted-average remaining lease term

         

     Operating leases

   

36 years

 

     Finance leases

   

32 years

 
           

Weighted-average discount rate

         

     Operating leases

    5.43 %

     Finance leases

    5.28 %

(1)

Finance ground lease assets are net of accumulated amortization of approximately $2.1 million as of June 30, 2019.

 

19

Index

 

Lease Costs for the Three and Six Months Ended June 30, 2019

 

The following table sets forth the lease costs related to the Company’s operating and finance ground leases included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2019 (in thousands):

 

 

Consolidated Statements of Operations Classification

 

Three Months Ended

June 30, 2019

   

Six Months Ended

June 30, 2019

 

Operating lease costs (1)

Operating ground lease expense

  $ 423     $ 828  

Finance lease costs:

                 

     Amortization of lease assets

Depreciation and amortization expense

    1,149       2,190  

     Interest on lease liabilities

Interest and other expense, net

    2,133       3,959  

Total lease costs

  $ 3,705     $ 6,977  

(1)

Represents costs related to ground leases, including variable lease costs. Excludes costs related to hotel equipment leases, which are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases, which are included in general and administrative expense in the Company's consolidated statements of operations.

 

Undiscounted Cash Flows

 

The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the operating lease liabilities and finance lease liabilities included in the Company’s consolidated balance sheet as of June 30, 2019 (in thousands):

 

   

Operating leases

   

Finance leases

 

2019 (July - December)

  $ 697     $ 4,126  

2020

    1,231       7,385  

2021

    1,015       7,552  

2022

    851       7,702  

2023

    777       8,051  

Thereafter

    33,187       363,171  

Total minimum lease payments

    37,758       397,987  

Less: amount of lease payments representing interest

    25,288       234,479  

Present value of lease liabilities

  $ 12,470     $ 163,508  

 

Other Information

 

The following table sets forth supplemental cash flow information related to the Company’s operating and finance leases for the six months ended June 30, 2019 (in thousands):

 

           

Six Months Ended

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

       

     Operating cash flows for operating leases

  $ 727  

     Operating cash flows for finance leases

    2,885  

 

20

Index

 

10.  Subsequent Events           

 

In July 2019, the Company paid approximately $22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders.

 

In July 2019, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of August 2019. The distribution is payable on August 15, 2019.

 

In July 2019, the Company entered into two unrelated purchase contracts for the purchase of two hotels. The first purchase contract is for a hotel that will be constructed in Madison, Wisconsin, for an anticipated gross purchase price of approximately $49.6 million. This hotel is planned to be a Hilton Garden Inn which is expected to contain 176 guest rooms.  The second purchase contract is for an existing hotel located in Richmond, Virginia, for an anticipated gross purchase price of approximately $7.3 million. This is an independent boutique hotel containing 55 guest rooms. 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.

 

21