Company Quick10K Filing
Apple Hospitality REIT
Price16.31 EPS1
Shares224 P/E25
MCap3,652 P/FCF13
Net Debt1,310 EBIT193
TEV4,962 TEV/EBIT26
TTM 2019-09-30, in MM, except price, ratios
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8-K 2020-06-05
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8-K 2018-06-01
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8-K 2018-02-27
8-K 2018-02-23
8-K 2018-02-22
8-K 2018-02-21
8-K 2018-02-06

APLE 10Q Quarterly Report

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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-3.2 ex_186357.htm
EX-10.4 ex_186381.htm
EX-10.5 ex_186382.htm
EX-10.6 ex_186383.htm
EX-31.1 ex_186384.htm
EX-31.2 ex_186385.htm
EX-31.3 ex_186386.htm
EX-32.1 ex_186388.htm

Apple Hospitality REIT Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
10.08.06.04.02.00.02012201420172020
Assets, Equity
0.40.30.20.10.0-0.12012201420172020
Rev, G Profit, Net Income
0.20.10.0-0.0-0.1-0.22012201420172020
Ops, Inv, Fin

aple20200331_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 March 31, 2020

 

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 May 15, 2020: 223,216,628

 

 

 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed by Apple Hospitality REIT, Inc. (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 6, 2020, the Company relied on the SEC’s Order Under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies, dated March 25, 2020 (Release No. 34-88465), to delay the filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Form 10-Q”) due to circumstances related to COVID-19. The need to address the immediate and evolving impacts of COVID-19 on the Company’s business and operations, including impacts on the operations at each of its hotel properties, increased the demands on the Company’s employees at a time when “stay at home” orders, including in Virginia, where the Company’s headquarters is located, impacted normal working patterns. This slowed the Company’s normal quarterly close and financial reporting processes related to its Form 10-Q. 

 

 

 

 

 

 

Apple Hospitality REIT, Inc.

Form 10-Q

Index

 

 

Page   

Number

PART I. FINANCIAL INFORMATION

 
   
 

Item 1.

Financial Statements (Unaudited)

 
       
   

Consolidated Balance Sheets – March 31, 2020 and December 31, 2019

4

       
   

Consolidated Statements of Operations and Comprehensive Income (Loss) – Three months ended March 31, 2020 and 2019

5

       
   

Consolidated Statements of Shareholders’ Equity – Three months ended March 31, 2020 and 2019

6

       
   

Consolidated Statements of Cash Flows – Three months ended March 31, 2020 and 2019

7

       
   

Notes to Consolidated Financial Statements

8

       
 

Item 2.

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

20

       
 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

       
 

Item 4.

Controls and Procedures

37

       

PART II. OTHER INFORMATION

 
   
 

Item 1.

Legal Proceedings

38

       
 

Item 1A.

Risk Factors

38
       
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

       
 

Item 6.

Exhibits

41

       

Signatures

42

 

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)

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(unaudited)

         

Assets

               

   Investment in real estate, net of accumulated depreciation and amortization 

of $1,096,718 and $1,054,429, respectively

  $ 4,776,695     $ 4,825,738  

   Assets held for sale

    -       12,093  

   Cash and cash equivalents

    437,260       -  

   Restricted cash-furniture, fixtures and other escrows

    33,335       34,661  

   Due from third party managers, net

    22,040       26,926  

   Other assets, net

    37,040       42,993  

      Total Assets

  $ 5,306,370     $ 4,942,411  
                 

Liabilities

               

   Debt, net

  $ 1,789,281     $ 1,320,407  

   Finance lease liabilities

    217,180       216,627  

   Accounts payable and other liabilities

    105,105       114,364  

      Total Liabilities

    2,111,566       1,651,398  
                 

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 223,017,081 and 223,862,913 shares, respectively

    4,487,441       4,493,763  

   Accumulated other comprehensive loss

    (46,864 )     (4,698 )

   Distributions greater than net income

    (1,245,773 )     (1,198,052 )

      Total Shareholders' Equity

    3,194,804       3,291,013  
                 

      Total Liabilities and Shareholders' Equity

  $ 5,306,370     $ 4,942,411  

 

See notes to consolidated financial statements.

 

4

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share data)

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Revenues:

               

    Room

  $ 217,979     $ 279,470  

    Food and beverage

    11,312       15,015  

    Other

    8,719       9,302  

Total revenue

    238,010       303,787  
                 

Expenses:

               

Hotel operating expense:

               

    Operating

    68,029       75,580  

    Hotel administrative

    23,643       25,630  

    Sales and marketing

    24,359       27,694  

    Utilities

    9,190       9,939  

    Repair and maintenance

    11,793       12,866  

    Franchise fees

    10,257       13,111  

    Management fees

    7,995       10,629  

Total hotel operating expense

    155,266       175,449  

    Property taxes, insurance and other

    19,595       19,613  

    General and administrative

    9,523       8,137  

    Depreciation and amortization

    49,522       47,950  

Total expense

    233,906       251,149  
                 

    Gain on sale of real estate

    8,839       1,213  
                 

Operating income

    12,943       53,851  
                 

    Interest and other expense, net

    (15,566 )     (15,494 )
                 

Income (loss) before income taxes

    (2,623 )     38,357  
                 

    Income tax expense

    (146 )     (206 )
                 

Net income (loss)

  $ (2,769 )   $ 38,151  
                 

Other comprehensive loss:

               

    Interest rate derivatives

    (42,166 )     (6,044 )
                 

Comprehensive income (loss)

  $ (44,935 )   $ 32,107  
                 

Basic and diluted net income (loss) per common share

  $ (0.01 )   $ 0.17  
                 

Weighted average common shares outstanding - basic and diluted

    224,294       223,932  

 

See notes to consolidated financial statements.

 

5

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2020 and 2019

(Unaudited)

(in thousands, except per share data)

 

   

 

Common Stock

   

Accumulated Other Comprehensive Income (Loss)  

   

Distributions Greater Than Net Income  

         
   

Number of Shares

   

Amount

           

Total

 
                                         

Balance at December 31, 2019

    223,863     $ 4,493,763     $ (4,698 )   $ (1,198,052 )   $ 3,291,013  

Share based compensation, net

    675       8,014       -       -       8,014  

Common shares repurchased

    (1,521 )     (14,336 )     -       -       (14,336 )

Interest rate derivatives

    -       -       (42,166 )     -       (42,166 )

Net loss

    -       -       -       (2,769 )     (2,769 )

Distributions declared to shareholders ($0.20 per share)

    -       -       -       (44,952 )     (44,952 )

Balance at March 31, 2020

    223,017     $ 4,487,441     $ (46,864 )   $ (1,245,773 )   $ 3,194,804  
                                         

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

    145       2,385       -       -       2,385  

Common shares repurchased

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

Interest rate derivatives

    -       -       (6,044 )     -       (6,044 )

Net income

    -       -       -       38,151       38,151  

Distributions declared to shareholders ($0.30 per share)

    -       -       -       (67,178 )     (67,178 )

Balance at March 31, 2019

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

 

See notes to consolidated financial statements.

 

6

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   

Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income (loss)

  $ (2,769 )   $ 38,151  

Adjustments to reconcile net income (loss) to cash provided by operating activities:

               

Depreciation and amortization

    49,522       47,950  

Gain on sale of real estate

    (8,839 )     (1,213 )

Other non-cash expenses, net

    1,773       1,186  

Changes in operating assets and liabilities:

               

Decrease (increase) in due from third party managers, net

    4,886       (22,251 )

Decrease (increase) in other assets, net

    439       (2,345 )

Decrease in accounts payable and other liabilities

    (11,670 )     (5,235 )

Net cash provided by operating activities

    33,342       56,243  
                 

Cash flows from investing activities:

               

Acquisition of hotel properties, net

    -       (52,576 )

Deposits and other disbursements for potential acquisitions

    -       (360 )

Capital improvements

    (27,022 )     (21,223 )

Net proceeds from sale of real estate

    44,387       95,143  

Net cash provided by investing activities

    17,365       20,984  
                 

Cash flows from financing activities:

               

Repurchases of common shares

    (14,336 )     (4,096 )

Repurchases of common shares to satisfy employee withholding requirements

    (1,748 )     (491 )

Distributions paid to common shareholders

    (67,324 )     (67,188 )

Net proceeds from (payments on) revolving credit facility

    374,100       (78,400 )

Proceeds from term loans and senior notes

    50,000       75,000  

Proceeds from mortgage debt

    63,400       -  

Payments of mortgage debt

    (18,354 )     (3,415 )

Financing costs

    (511 )     -  

Net cash provided by (used in) financing activities

    385,227       (78,590 )
                 

Net change in cash, cash equivalents and restricted cash

    435,934       (1,363 )
                 

Cash, cash equivalents and restricted cash, beginning of period

    34,661       33,632  
                 

Cash, cash equivalents and restricted cash, end of period

  $ 470,595     $ 32,269  
                 

Supplemental cash flow information:

               

Interest paid

  $ 14,696     $ 15,409  
                 

Supplemental disclosure of noncash investing and financing activities:

               

Accrued distribution to common shareholders

  $ -     $ 22,384  
                 

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

    34,661       33,632  

    Cash, cash equivalents and restricted cash, beginning of period

  $ 34,661     $ 33,632  
                 

Cash and cash equivalents, end of period

  $ 437,260     $ -  

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

    33,335       32,269  

    Cash, cash equivalents and restricted cash, end of period

  $ 470,595     $ 32,269  

 

See notes to consolidated financial statements.

 

7

 

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 March 31, 2020, the Company owned 231 hotels with an aggregate of 29,535 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, 2019 (the “2019 Form 10-K”). Operating results for the three months ended March 31, 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 May 15, 2020, each of the Company’s hotels were open and receiving reservations. The Company has intentionally consolidated operations for 38 hotels in market clusters to maximize operational efficiencies.

 

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. Due to the impact of COVID-19 on the Company’s operating results, the Company considered this event as a potential indicator of impairment and, as a result, the Company performed a recoverability analysis for each of its properties consistent with its annual process. The analysis compared each property’s net book value to its estimated operating income, based on assumptions and estimates about the property’s future revenues, expenses, capital expenditures and recovery from disruption resulting from COVID-19. 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 months ended March 31, 2020 and 2019.

 

8

 

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.

 

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 March 31, 2020.

 

2. Investment in Real Estate

 

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

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
                 

Land

  $ 721,934     $ 724,054  

Building and Improvements

    4,450,646       4,458,383  

Furniture, Fixtures and Equipment

    489,465       486,386  

Finance Ground Lease Assets

    197,617       197,617  

Franchise Fees

    13,751       13,727  
      5,873,413       5,880,167  

Less Accumulated Depreciation and Amortization

    (1,096,718 )     (1,054,429 )

Investment in Real Estate, net

  $ 4,776,695     $ 4,825,738  

 

As of March 31, 2020, the Company owned 231 hotels with an aggregate of 29,535 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.

 

9

 

Hotel Acquisitions

 

There were no acquisitions during the three months ended March 31, 2020. During the year ended December 31, 2019, the Company acquired three hotels, including two hotels during the three months ended March 31, 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  

Richmond

 

VA

 

Independent

 

Crestline

 

10/9/2019

    55       6,875  
                      343     $ 59,291  

 

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 three months ended March 31, 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2019 was approximately $0.7 million and $0.1 million, respectively.

 

Hotel Purchase Contract Commitments

 

As of March 31, 2020, the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of six hotels for a total expected purchase price of approximately $208.8 million. Two of the hotels, the newly developed Hampton Inn & Suites and Home2 Suites in Cape Canaveral, Florida, were acquired in April 2020. Also, subsequent to March 31, 2020, the Company exercised its right to terminate the contract to purchase the Courtyard hotel in Denver, Colorado and the refundable deposit of approximately $0.6 million was repaid to the Company. The three remaining hotels are under development and are planned to be completed and opened for business over the next five to 15 months from March 31, 2020, at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, 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. As the properties are under development, at this time, the sellers have not met all of the conditions to closing. 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 March 31, 2020 that have not been terminated. All dollar amounts are in thousands.

 

Location

 

Brands

 

Date of Purchase Contract

 

Rooms

   

Refundable Deposits

   

Gross Purchase Price

 

Cape Canaveral, FL (1)

 

Hampton and Home2 Suites

 

4/11/2018

    224     $ 3     $ 46,704  

Tempe, AZ (2)(3)

 

Hyatt House and Hyatt Place

 

6/13/2018

    254       720       63,341  

Madison, WI (2)

 

Hilton Garden Inn

 

7/9/2019

    176       283       49,632  
              654     $ 1,006     $ 159,677  

(1)  Newly developed hotels were acquired on April 30, 2020 and opened during April 2020. These hotels are part of a combined 224-room, dual-branded complex.

(2)  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 five to 15 months from March 31, 2020. 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.

(3)  These hotels are part of a combined 254-room, dual-branded complex.

 

10

 

The Company utilized $25.0 million of its available cash and entered into a one-year note payable with the developer secured by the hotels for $21.7 million to fund the purchase price of the Cape Canaveral, Florida hotels. The note payable bears interest, which is payable monthly, at a floating annual rate equal to the London Inter-Bank Offered Rate for a one-month term (“one-month LIBOR”) plus a margin of 2.0% for the first six months of the loan term and 3.0% for the second six months of the loan term. The Company plans to utilize its available cash at closing to purchase the remaining hotels under contract if closings occur.

 

3. Dispositions

 

During the three months ended March 31, 2020, the Company sold two hotels in two transactions with unrelated parties for a total combined gross sales price of approximately $45.0 million, resulting in a combined gain on sale of approximately $8.8 million, which is included in the Company’s consolidated statement of operations for the three months ended March 31, 2020. The two hotels had a total carrying value of approximately $35.7 million at the time of sale. The following table lists the two hotels sold:

 

City

 

State

 

Brand

 

Date Sold

 

Rooms

 

Sanford

 

FL

 

SpringHill Suites

 

1/16/2020

    105  

Boise

 

ID

 

SpringHill Suites

 

2/27/2020

    230  

    Total

    335  

 

During the year ended December 31, 2019, the Company sold 11 hotels in three transactions with unrelated parties for a total combined gross sales price of approximately $121.7 million, resulting in a combined gain on sale of approximately $5.6 million, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2019. The 11 hotels had a total carrying value of approximately $115.1 million at the time of the sale. The following table lists the 11 hotels sold:

 

City

 

State

 

Brand

 

Date Sold

 

Rooms

 

Sarasota

 

FL

 

Homewood Suites

 

3/28/2019

    100  

Tampa

 

FL

 

TownePlace Suites

 

3/28/2019

    94  

Baton Rouge

 

LA

 

SpringHill Suites

 

3/28/2019

    119  

Holly Springs

 

NC

 

Hampton

 

3/28/2019

    124  

Duncanville

 

TX

 

Hilton Garden Inn

 

3/28/2019

    142  

Texarkana

 

TX

 

Courtyard

 

3/28/2019

    90  

Texarkana

 

TX

 

TownePlace Suites

 

3/28/2019

    85  

Bristol

 

VA

 

Courtyard

 

3/28/2019

    175  

Harrisonburg

 

VA

 

Courtyard

 

3/28/2019

    125  

Winston-Salem

 

NC

 

Courtyard

 

12/19/2019

    122  

Fort Lauderdale

 

FL

 

Hampton

 

12/30/2019

    109  

    Total

    1,285  

 

Excluding gains on sale of real estate, the Company’s consolidated statements of operations include operating income of approximately $0.1 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively, relating to the results of operations of the 13 hotels noted above (the two hotels sold in the first three months of 2020 and the 11 hotels sold in 2019) 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 months ended March 31, 2020 and 2019. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.

 

11

 

4. Debt

 

Summary

 

As of March 31, 2020, and December 31, 2019, the Company’s debt consisted of the following (in thousands):

 

   

March 31,
2020

   

December 31,
2019

 

Revolving credit facility

  $ 425,000     $ 50,900  

Term loans and senior notes, net

    864,084       813,934  

Mortgage debt, net

    500,197       455,573  

Debt, net

  $ 1,789,281     $ 1,320,407  

 

The aggregate amounts of principal payable under the Company’s total debt obligations as of March 31, 2020 (including the revolving credit facility, term loans, senior notes and mortgage debt), for the five years subsequent to March 31, 2020 and thereafter are as follows (in thousands):

 

2020 (April - December)

  $ 10,431  

2021

    48,185  

2022

    534,872  

2023

    296,256  

2024

    338,643  

Thereafter

    566,626  
      1,795,013  

Unamortized fair value adjustment of assumed debt

    2,300  

Unamortized debt issuance costs

    (8,032 )

Total

  $ 1,789,281  

 

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 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 March 31, 2020 and December 31, 2019, is set forth below. All dollar amounts are in thousands.

 

   

March 31,
2020

   

Percentage

   

December 31,
2019

   

Percentage

 

Fixed-rate debt (1)

  $ 1,417,513       79 %   $ 1,297,467       98 %

Variable-rate debt

    377,500       21 %     28,400       2 %

Total

  $ 1,795,013             $ 1,325,867          

Weighted-average interest rate of debt (2)

    3.35 %             3.59 %        

(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. Due to interest rate swaps expiring in May 2020, partially offset by other interest rate swaps becoming effective on the same date, $197.5 million of fixed-rate debt as of March 31, 2020 will become variable-rate debt in May 2020. See Note 5 for more information on the interest rate swap agreements.

(2)

The Company anticipates entering into an amendment to each of its unsecured credit facilities to waive certain covenants under the agreements. The amendments are expected to require that the interest rates on each of its unsecured credit facilities increase to the highest interest rate margin under each facility (75-80 basis points above the current margin) during the covenant relief period.

 

12

 

Credit Facilities

 

$850 Million Credit Facility

 

The Company utilizes an unsecured “$850 million credit facility” 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 (the “$425 million term loan facility”). 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. In response to the disruption to the operations of the Company’s hotels and to the financial markets and broader economy caused by COVID-19, the Company borrowed its entire availability under its revolving credit facility in March 2020 and, at March 31, 2020, had an outstanding balance of $425.0 million and no remaining availability under its credit facilities.

 

$225 Million Term Loan Facility

 

The Company has an unsecured $225 million term loan facility that is comprised of (i) a $50 million term loan with a maturity date of August 2, 2023, which was funded on August 2, 2018, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was funded on August 2, 2018 and the remaining $75 million was funded on January 29, 2019. 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.  

 

2017 $85 Million Term Loan Facility

 

On July 25, 2017, the Company entered into an unsecured $85 million term loan facility with a maturity date of July 25, 2024, consisting of one term loan that was funded at closing (the “2017 $85 million term loan facility”). The credit agreement, as amended and restated in August 2018, 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. In July 2019, the Company entered into an amendment of the $85 million term loan to reduce the interest rate margin from 1.80% - 2.60% to 1.30% - 2.10%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement, for the remainder of the term.

 

2019 $85 Million Term Loan Facility

 

On December 31, 2019, the Company entered into an unsecured $85 million term loan facility with a maturity date of December 31, 2029, consisting of one term loan funded at closing (the “2019 $85 million term loan facility”). Net proceeds from the 2019 $85 million term loan facility were used to pay down borrowings on the Company’s revolving credit 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, subject to certain conditions. Interest payments on the 2019 $85 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 1.70% to 2.55%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  

 

$50 Million Senior Notes Facility

 

On March 16, 2020, the Company entered into an unsecured $50 million senior notes facility with a maturity date of March 31, 2030, consisting of senior notes totaling $50 million funded at closing (the “$50 million senior notes facility” and, collectively with the $850 million credit facility, the $225 million term loan facility, the 2017 $85 million term loan facility and the 2019 $85 million term loan facility, the “credit facilities”). Net proceeds from the $50 million senior notes facility are available to provide funding for general corporate purposes. The note 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, including make-whole provisions. Interest payments on the $50 million senior notes facility are due quarterly and the interest rate, subject to certain exceptions, ranges from an annual rate of 3.60% to 4.35% depending on the Company’s ratio of Consolidated Total Indebtedness to Consolidated EBITDA as defined in the agreement. 

 

13

 

As of March 31, 2020, and December 31, 2019, 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

 

March 31,
2020

   

December 31,
2019

 

Revolving credit facility (1)

 

LIBOR + 1.40% - 2.25%

 

7/27/2022

  $ 425,000     $ 50,900  
                         

Term loans and senior notes

                       

$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       175,000  

2017 $85 million term loan

 

LIBOR + 1.30% - 2.10%

 

7/25/2024

    85,000       85,000  

2019 $85 million term loan

 

LIBOR + 1.70% - 2.55%

 

12/31/2029

    85,000       85,000  

$50 million senior notes

  3.60% - 4.35%  

3/31/2030

    50,000       -  

Term loans and senior notes at stated value

            870,000       820,000  

Unamortized debt issuance costs

            (5,916 )     (6,066 )

Term loans and senior notes, net

            864,084       813,934  
                         

Credit facilities, net (1)

          $ 1,289,084     $ 864,834  

Weighted-average interest rate (2)

            2.97 %     3.14 %

(1)   Excludes unamortized debt issuance costs related to the revolving credit facility totaling approximately $2.3 million and $2.6 million as of March 31, 2020 and December 31, 2019, 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 $867.5 million and $842.5 million of the outstanding variable-rate debt as of March 31, 2020 and December 31, 2019, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at March 31, 2020 and December 31, 2019 was 0.99% and 1.76%, respectively. The Company anticipates entering into an amendment to each of its unsecured credit facilities to waive certain covenants under the agreements. The amendments are expected to require that the interest rates on each of its unsecured credit facilities increase to the highest interest rate margin under each facility (75-80 basis points above the current margin) during the covenant relief period.

 

The credit agreements governing the 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. The Company was in compliance with the applicable covenants at March 31, 2020. As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company anticipates that it may not be in compliance with certain of these covenants in future periods. In April 2020, the Company notified the lenders under its credit facilities of the anticipated non-compliance with certain covenants and anticipates entering into amendments to each of the credit facilities that will provide for waivers of each of the covenants for four quarters beginning with the quarter ending June 30, 2020. The terms of the amendments are expected to include minimum liquidity requirements and restrictions on the amount of the Company’s distributions, capital expenditures, share repurchases and acquisitions among other items during the covenant relief period. Additionally, the Company anticipates the amendments to require that the interest rate under its credit facilities increase, during the covenant relief period, to the highest interest rate margin under each of the credit agreements which would range from 75-80 basis points of an increase above current margins depending on the agreement. Although the Company anticipates completing these amendments, there are many conditions to closing, including but not limited to finalizing the terms of the amendments and completing the amendments themselves, and there can be no assurances that the Company will be able to complete the amendments with the noted terms or at all. If the amendments are not entered into, as currently anticipated, and the Company does not meet the covenant requirements in future periods, the Company will be in default under each credit facility, which may result in a potential acceleration of amounts due under each credit facility, which would have a material adverse effect on the Company if it is unable to obtain alternative sources of capital to repay such amounts.

 

14

 

Mortgage Debt

 

As of March 31, 2020, the Company had approximately $500.0 million in outstanding mortgage debt secured by 31 properties, with maturity dates ranging from July 2021 to January 2038, stated interest rates ranging from 3.40% to 6.25% and effective interest rates ranging from 3.40% 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 March 31, 2020 and December 31, 2019 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.

 

Location

 

Brand

 

Interest Rate (1)

   

Loan Assumption or Origination Date

 

Maturity Date

   

Principal Assumed or Originated

   

Outstanding balance as of March 31,
2020

   

Outstanding balance as of December 31,
2019

 

San Juan Capistrano, CA

 

Residence Inn

    4.15 %  

9/1/2016

 
 
  (2)   $ 16,210     $ -     $ 15,073  

Colorado Springs, CO

 

Hampton

    6.25 %  

9/1/2016

 

7/6/2021

      7,923       7,433       7,471  

Franklin, TN

 

Courtyard

    6.25 %  

9/1/2016

 

8/6/2021

      14,679       13,776       13,847  

Franklin, TN

 

Residence Inn

    6.25 %  

9/1/2016

 

8/6/2021

      14,679       13,776       13,847  

Grapevine, TX

 

Hilton Garden Inn

    4.89 %  

8/29/2012

 

9/1/2022

      11,810       9,691       9,775  

Collegeville/Philadelphia, PA

 

Courtyard

    4.89 %  

8/30/2012

 

9/1/2022

      12,650       10,381       10,471  

Hattiesburg, MS

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      5,732       4,856       4,897  

Rancho Bernardo/San Diego, CA

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      15,060       12,756       12,866  

Kirkland, WA

 

Courtyard

    5.00 %  

3/1/2014

 

9/1/2022

      12,145       10,287       10,376  

Seattle, WA

 

Residence Inn

    4.96 %  

3/1/2014

 

9/1/2022

      28,269       23,923       24,130  

Anchorage, AK

 

Embassy Suites

    4.97 %  

9/13/2012

 

10/1/2022

      23,230       19,160       19,324  

Somerset, NJ

 

Courtyard

    4.73 %  

3/1/2014

 

10/6/2022

      8,750       7,376       7,441  

Tukwila, WA

 

Homewood Suites

    4.73 %  

3/1/2014

 

10/6/2022

      9,431       7,950       8,020  

Prattville, AL

 

Courtyard

    4.12 %  

3/1/2014

 

2/6/2023

      6,596       5,507       5,558  

Huntsville, AL

 

Homewood Suites

    4.12 %  

3/1/2014

 

2/6/2023

      8,306       6,935       6,999  

San Diego, CA

 

Residence Inn

    3.97 %  

3/1/2014

 

3/6/2023

      18,600       15,496       15,640  

Miami, FL

 

Homewood Suites

    4.02 %  

3/1/2014

 

4/1/2023

      16,677       13,924       14,051  

New Orleans, LA

 

Homewood Suites

    4.36 %  

7/17/2014

 

8/11/2024

      27,000       23,328       23,513  

Westford, MA

 

Residence Inn

    4.28 %  

3/18/2015

 

4/11/2025

      10,000       8,809       8,876  

Denver, CO

 

Hilton Garden Inn

    4.46 %  

9/1/2016

 

6/11/2025

      34,118       31,082       31,311  

Oceanside, CA

 

Courtyard

    4.28 %  

9/1/2016

 

10/1/2025

      13,655       12,743       12,812  

Omaha, NE

 

Hilton Garden Inn

    4.28 %  

9/1/2016

 

10/1/2025

      22,682       21,167       21,280  

Boise, ID

 

Hampton

    4.37 %  

5/26/2016

 

6/11/2026

      24,000       22,478       22,588  

Burbank, CA

 

Courtyard

    3.55 %  

11/3/2016

 

12/1/2026

      25,564       23,375       23,552  

San Diego, CA

 

Courtyard

    3.55 %  

11/3/2016

 

12/1/2026

      25,473       23,292       23,468  

San Diego, CA

 

Hampton

    3.55 %  

11/3/2016

 

12/1/2026

      18,963       17,339       17,471  

Burbank, CA

 

SpringHill Suites

    3.94 %  

3/9/2018

 

4/1/2028

      28,470       27,138       27,317  

Santa Ana, CA

 

Courtyard

    3.94 %  

3/9/2018

 

4/1/2028

      15,530       14,803       14,901  

Richmond, VA

 

Courtyard

    3.40 %  

2/12/2020

 

3/11/2030

      14,950       14,950       -  

Richmond, VA

 

Residence Inn

    3.40 %  

2/12/2020

 

3/11/2030

      14,950       14,950       -  

Portland, ME

 

Residence Inn

    3.43 %  

3/2/2020

 

4/1/2030

      33,500       33,500       -  

San Jose, CA

 

Homewood Suites

    4.22 %  

12/22/2017

 

1/1/2038

      30,000       27,832       28,092  
                            $ 569,602       500,013       454,967  

Unamortized fair value adjustment of assumed debt

                                2,300       2,526  

Unamortized debt issuance costs

                                (2,116 )     (1,920 )

Total

                              $ 500,197     $ 455,573  

(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)  Loan was repaid in full in March 2020.

 

15

 

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 March 31, 2020, the carrying value and estimated fair value of the Company’s debt were approximately $1.8 billion and $1.6 billion, respectively. As of December 31, 2019, both the carrying value and estimated fair value of the Company’s debt were approximately $1.3 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, senior notes 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 March 31, 2020 and December 31, 2019. All dollar amounts are in thousands.

 

Notional Amount at

March 31, 2020  

                     

Fair Value Asset (Liability)

 
 

Origination Date

 

Effective Date

 

Maturity Date

 

Swap Fixed Interest Rate

   

March 31,

2020

   

December 31,
2019

 
                         

Interest rate swaps designated as cash flow hedges at March 31, 2020:

                       
$ 212,500  

5/19/2015

 

5/21/2015

 

5/18/2020

    1.58 %   $ (240 )   $ 78  
  50,000  

4/7/2016

 

9/30/2016

 

3/31/2021

    1.09 %     (370 )     317  
  100,000  

4/7/2016

 

9/30/2016

 

3/31/2023

    1.33 %     (3,077 )     707  
  75,000  

5/31/2017

 

7/31/2017

 

6/30/2024

    1.96 %     (5,085 )     (1,286 )
  10,000  

8/10/2017

 

8/10/2017

 

6/30/2024

    2.01 %     (697 )     (185 )
  50,000  

6/1/2018

 

1/31/2019

 

6/30/2025

    2.89 %     (6,506 )     (3,407 )
  50,000  

7/2/2019

 

7/5/2019

 

7/18/2024

    1.65 %     (2,777 )     (193 )
  50,000  

8/21/2019

 

8/23/2019

 

8/18/2024

    1.32 %     (2,092 )     595  
  50,000  

8/21/2019

 

8/23/2019

 

8/30/2024

    1.32 %     (2,094 )     603  
  85,000  

12/31/2019

 

12/31/2019

 

12/31/2029

    1.86 %     (10,170 )     (842 )
  25,000  

12/6/2018

 

1/31/2020

 

6/30/2025

    2.75 %     (3,072 )     (1,501 )
  50,000  

12/7/2018

 

5/18/2020

 

1/31/2024

    2.72 %     (4,481 )     (2,139 )
  75,000  

8/21/2019

 

5/18/2020

 

5/18/2025

    1.27 %     (3,242 )     1,222  
  75,000  

8/21/2019

 

5/18/2021

 

5/18/2026

    1.30 %     (2,961 )     1,309  
  957,500                         (46,864 )     (4,722 )
                         

Interest rate swaps not designated as hedges at March 31, 2020:

                       
  110,000  

7/2/2015

 

7/2/2015

 

5/18/2020

    1.62 %     (130 )     24  
$ 1,067,500                       $ (46,994 )   $ (4,698 )

 

16

 

The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. For the three months ended March 31, 2020, all of the interest rate swap agreements listed above, with the exception of the $110 million agreement, were designated as cash flow hedges. The Company discontinued hedge accounting on the $110 million interest rate swap agreement during the three months ended March 31, 2020 due to a change in the forecasted interest payments being hedged. As a result, the unrealized loss incurred during the three months ended March 31, 2020 of $0.2 million was recorded to interest and other expense, net in the Company’s statement of operations. 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 $9.5 million of net unrealized losses included in accumulated other comprehensive loss at March 31, 2020 will be reclassified as an increase 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 months ended March 31, 2020 and 2019 (in thousands):

 

   

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 March 31,

   

Three Months Ended March 31,

 
   

2020

   

2019

   

2020

   

2019

 

Interest rate derivatives in cash flow hedging relationships

  $ (42,267 )   $ (4,770 )   $ (101 )   $ 1,274  

 

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 three months ended March 31, 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 the three months ended March 31, 2020 and 2019 totaled approximately $0.3 million for each respective period, 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 March 31, 2020, and December 31, 2019, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million and $0.5 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.

 

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 aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, by its Chief Executive Officer, for acquisition, asset management, renovation and investor and public relations purposes, and reimburses these entities at third party rates. Total costs incurred for the use of these aircraft during the three months ended March 31, 2020 and 2019 were less than $0.1 million for each respective period and are included in general and administrative expenses in the Company’s consolidated statements of operations.

 

17

 

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 $1.20 per common share. For the three months ended March 31, 2020 and 2019, the Company paid distributions of $0.30 per common share for a total of $67.3 million and $67.2 million, respectively. The distributions paid during the three months ended March 31, 2020 include the distribution paid in January 2020, totaling $22.4 million, that was declared in December 2019, which was included in accounts payable and other liabilities in the Company’s consolidated balance sheet at December 31, 2019.

 

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 $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 three months 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. 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. 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 credit facilities. As of March 31, 2020, approximately $345.4 million remained available for purchase under the Share Repurchase Program. In March 2020 the Company terminated its written trading plan.

 

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). 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 March 31, 2020, the range of potential aggregate payouts under the 2020 Incentive Plan was $0 - $13.9 million. The range of payout under the 2020 Incentive Plan reflects a voluntary reduction of $0 - $5.2 million of the potential payout to the Company’s Chief Executive Officer in response to the expected decline in the Company’s operating results due to COVID-19. Based on performance through March 31, 2020, the Company has accrued approximately $1.5 million as a liability for potential executive bonus payments under the 2020 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of March 31, 2020 and in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2020. Approximately 25% of awards under the 2020 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 in December 2020 and one-third of which will vest in December 2021. Under the incentive plan for 2019 (the “2019 Incentive Plan”), the Company recorded approximately $2.2 million in general and administrative expenses in its consolidated statement of operations for the three months ended March 31, 2019.

 

During the three months ended March 31, 2020, the Company accrued expense associated with two separation agreements of approximately $1.25 million each, totaling approximately $2.5 million, in connection with the retirements of the Company’s former Executive Vice President and Chief Operating Officer and the Company’s former Executive Vice President and Chief Financial Officer which, pursuant to the separation and general release agreements executed and amended in March 2020, will be paid at a mutually agreed-upon date in 2020. The accrued expense was included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of March 31, 2020 and in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2020.

 

During the three months ended March 31, 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 three months ended March 31, 2019.

 

18

 

Share-Based Compensation Awards

 

The following table sets forth information pertaining to the share-based compensation issued under the 2019 Incentive Plan and the incentive plan for 2018 (the “2018 Incentive Plan”).

 

   

2019 Incentive Plan

     

2018 Incentive Plan

   
                     

Period common shares issued

 

First Quarter 2020

     

First Quarter 2019

   
                     

Common shares earned under each incentive plan

    665,552         156,926    

Common shares surrendered on issuance date to satisfy tax withholding obligations

    60,616         24,999    

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

    604,936