Apple Hospitality REIT Earnings 2020-06-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

aple20200630_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, 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 July 31, 2020: 223,223,562

Apple Hospitality REIT, Inc.

Form 10-Q

Index

			Page Number
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)

		Consolidated Balance Sheets – June 30, 2020 and December 31, 2019	3

		Consolidated Statements of Operations and Comprehensive Income (Loss) – Three and six months ended June 30, 2020 and 2019	4

		Consolidated Statements of Shareholders’ Equity – Three and six months ended June 30, 2020 and 2019	5

		Consolidated Statements of Cash Flows – Six months ended June 30, 2020 and 2019	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39

	Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	40

	Item 1A.	Risk Factors	40

	Item 6.	Exhibits	42

Signatures			44

This Form 10-Q includes references to certain trademarks or service marks. The Courtyard by Marriott®, Fairfield by Marriott®, Marriott® Hotels, Renaissance® Hotels, Residence Inn by Marriott®, SpringHill Suites by Marriott® and TownePlace Suites by Marriott® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Embassy Suites by Hilton®, Hampton by Hilton®, Hampton Inn by Hilton®, Hampton Inn & Suites by Hilton®, Hilton Garden Inn®, Home2 Suites by Hilton® and Homewood Suites by Hilton® trademarks are the property of Hilton Worldwide Holdings Inc. or one or more of its affiliates. The Hyatt®, Hyatt House® and Hyatt Place® trademarks are the property of Hyatt Hotels Corporation or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.

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,
	2020			2019
	(unaudited)
Assets
Investment in real estate, net of accumulated depreciation and amortization of $1,146,325 and $1,054,429, respectively	$	4,776,032		$	4,825,738
Assets held for sale		-			12,093
Cash and cash equivalents		156,461			-
Restricted cash-furniture, fixtures and other escrows		27,713			34,661
Due from third party managers, net		24,925			26,926
Other assets, net		37,068			42,993
Total Assets	$	5,022,199		$	4,942,411

Liabilities
Debt, net	$	1,582,168		$	1,320,407
Finance lease liabilities		219,060			216,627
Accounts payable and other liabilities		108,012			114,364
Total Liabilities		1,909,240			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 223,223,562 and 223,862,913 shares, respectively		4,488,034			4,493,763
Accumulated other comprehensive loss		(51,059	)		(4,698	)
Distributions greater than net income		(1,324,016	)		(1,198,052	)
Total Shareholders' Equity		3,112,959			3,291,013

Total Liabilities and Shareholders' Equity	$	5,022,199		$	4,942,411

See notes to consolidated financial statements.

Index

Apple Hospitality REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Revenues:
Room	$	76,828		$	315,232		$	294,807		$	594,702
Food and beverage		839			15,692			12,151			30,707
Other		3,411			10,193			12,130			19,495
Total revenue		81,078			341,117			319,088			644,904

Expenses:
Hotel operating expense:
Operating		19,707			80,166			87,736			155,746
Hotel administrative		13,811			26,967			37,454			52,597
Sales and marketing		9,430			30,831			33,789			58,525
Utilities		6,308			9,561			15,498			19,500
Repair and maintenance		6,348			13,041			18,141			25,907
Franchise fees		3,656			14,752			13,913			27,863
Management fees		2,557			11,872			10,552			22,501
Total hotel operating expense		61,817			187,190			217,083			362,639
Property taxes, insurance and other		18,702			19,246			38,297			38,859
General and administrative		6,025			8,308			15,548			16,445
Loss on impairment of depreciable real estate assets		4,382			-			4,382			-
Depreciation and amortization		49,897			48,109			99,419			96,059
Total expense		140,823			262,853			374,729			514,002

Gain (loss) on sale of real estate		(54	)		(161	)		8,785			1,052

Operating income (loss)		(59,799	)		78,103			(46,856	)		131,954

Interest and other expense, net		(18,386	)		(15,857	)		(33,952	)		(31,351	)

Income (loss) before income taxes		(78,185	)		62,246			(80,808	)		100,603

Income tax expense		(58	)		(156	)		(204	)		(362	)

Net income (loss)	$	(78,243	)	$	62,090		$	(81,012	)	$	100,241

Other comprehensive loss:
Interest rate derivatives		(4,195	)		(10,120	)		(46,361	)		(16,164	)

Comprehensive income (loss)	$	(82,438	)	$	51,970		$	(127,373	)	$	84,077

Basic and diluted net income (loss) per common share	$	(0.35	)	$	0.28		$	(0.36	)	$	0.45

Weighted average common shares outstanding - basic and diluted		223,278			223,899			223,786			223,915

See notes to consolidated financial statements.

Index

Apple Hospitality REIT, Inc.

Consolidated Statements of Shareholders' Equity

(Unaudited)

(in thousands, except per share data)

Three Months Ended June 30, 2020 and 2019
	Common Stock				Accumulated Other Comprehensive Income (Loss)			Distributions Greater Than Net Income			Total
	Number of Shares		Amount		Accumulated Other Comprehensive Income (Loss)			Distributions Greater Than Net Income			Total

Balance at March 31, 2020		223,017	$	4,487,441	$	(46,864	)	$	(1,245,773	)	$	3,194,804
Share based compensation, net		207		593		-			-			593
Interest rate derivatives		-		-		(4,195	)		-			(4,195	)
Net loss		-		-		-			(78,243	)		(78,243	)
Balance at June 30, 2020		223,224	$	4,488,034	$	(51,059	)	$	(1,324,016	)	$	3,112,959

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

Six Months Ended June 30, 2020 and 2019
	Common Stock						Accumulated Other Comprehensive Income (Loss)			Distributions Greater Than Net Income			Total
	Number of Shares			Amount			Accumulated Other Comprehensive Income (Loss)			Distributions Greater Than Net Income			Total

Balance at December 31, 2019		223,863		$	4,493,763		$	(4,698	)	$	(1,198,052	)	$	3,291,013
Share based compensation, net		882			8,607			-			-			8,607
Common shares repurchased		(1,521	)		(14,336	)		-			-			(14,336	)
Interest rate derivatives		-			-			(46,361	)		-			(46,361	)
Net loss		-			-			-			(81,012	)		(81,012	)
Distributions declared to shareholders ($0.20 per share)		-			-			-			(44,952	)		(44,952	)
Balance at June 30, 2020		223,224		$	4,488,034		$	(51,059	)	$	(1,324,016	)	$	3,112,959

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

See notes to consolidated financial statements.

Index

Apple Hospitality REIT, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Six Months Ended
	June 30,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	(81,012	)	$	100,241
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		99,419			96,059
Loss on impairment of depreciable real estate assets		4,382			-
Gain on sale of real estate		(8,785	)		(1,052	)
Other non-cash expenses, net		4,802			2,638
Changes in operating assets and liabilities:
Decrease (increase) in due from third party managers, net		2,029			(23,097	)
Increase in other assets, net		(270	)		(4,346	)
Decrease in accounts payable and other liabilities		(8,016	)		(6,371	)
Net cash provided by operating activities		12,549			164,072

Cash flows from investing activities:
Acquisition of hotel properties, net		(25,095	)		(52,582	)
Refunds (payments) for potential acquisitions, net		416			(946	)
Capital improvements		(38,296	)		(38,770	)
Net proceeds from sale of real estate		44,382			95,029
Net cash provided by (used in) investing activities		(18,593	)		2,731

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	)		(134,343	)
Net proceeds from (payments on) revolving credit facility		148,800			(76,100	)
Proceeds from term loans and senior notes		50,000			75,000
Proceeds from mortgage debt and other loans		81,520			-
Payments of mortgage debt and other loans		(39,170	)		(27,206	)
Financing costs		(2,185	)		-
Net cash provided by (used in) financing activities		155,557			(167,236	)

Net change in cash, cash equivalents and restricted cash		149,513			(433	)

Cash, cash equivalents and restricted cash, beginning of period		34,661			33,632

Cash, cash equivalents and restricted cash, end of period	$	184,174		$	33,199

Supplemental cash flow information:
Interest paid	$	29,598		$	30,495

Supplemental disclosure of noncash investing and financing activities:
Notes payable originated from acquisitions	$	21,704		$	-
Accrued distribution to common shareholders	$	-		$	22,385

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	$	156,461		$	-
Restricted cash-furniture, fixtures and other escrows, end of period		27,713			33,199
Cash, cash equivalents and restricted cash, end of period	$	184,174		$	33,199

See notes to consolidated financial statements.

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, 2020, the Company owned 233 hotels with an aggregate of 29,759 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 and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2020.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Novel Coronavirus COVID-19 Pandemic

As a result of the current novel coronavirus COVID-19 pandemic (“COVID-19”) and the impact it has had on travel and the broader economy throughout the U.S., the Company’s hotels have experienced significant declines in occupancy, which has had and is expected to continue to have a significant negative effect on the Company’s revenue and operating results. There remains significant uncertainty as to when operations at the hotels will return to normalized levels. As of June 30, 2020, although each of the Company’s hotels were open and receiving reservations, the Company intentionally consolidated operations for 18 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.

Index

Investment in Real Estate

The Company monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. The Company considered COVID-19 as a potential indicator of impairment and as a result of the impact on the Company’s operating results for the three and six months ended June 30, 2020, the Company performed recoverability analyses for each of its properties consistent with its annual process. The analyses compared each property’s net book value to its estimated operating income based on assumptions and estimates about the property’s future revenues, expenses and capital expenditures after recovery from disruption resulting from COVID-19 and other disruptive events such as renovations or newly opened hotels. If events or circumstances change, such as the Company’s intended hold period for a property or if the operating performance of a property remains at current levels or declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. The Company’s recoverability analyses did not identify any impairment losses for the three and six months ended June 30, 2020 and 2019. However, the Company recorded a loss on impairment of one property during the three and six months ended June 30, 2020 totaling approximately $4.4 million, as discussed in Note 3.

Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net income (loss) per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net income (loss) per common share were the same for each of the periods presented.

Reclassifications

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported net income or shareholders’ equity.

Accounting Standards Recently Adopted

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds fair value disclosure requirements, including a new requirement to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. Certain disclosures are required to be applied retrospectively and others applied prospectively. The Company adopted this standard as of January 1, 2020, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional guidance through December 31, 2022 to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The amendments in ASU No. 2020-04 apply to contract modifications that replace a reference rate affected by reference rate reform, providing optional expedients regarding the measurement of hedge effectiveness in hedging relationships that have been modified to replace a reference rate. The guidance in ASU No. 2020-04 became effective upon issuance and the provisions of the ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures as of June 30, 2020.

2. Investment in Real Estate

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

	June 30,			December 31,
	2020			2019

Land	$	726,942		$	724,054
Building and Improvements		4,487,602			4,458,383
Furniture, Fixtures and Equipment		496,423			486,386
Finance Ground Lease Assets		197,617			197,617
Franchise Fees		13,773			13,727
		5,922,357			5,880,167
Less Accumulated Depreciation and Amortization		(1,146,325	)		(1,054,429	)
Investment in Real Estate, net	$	4,776,032		$	4,825,738

Index

As of June 30, 2020, the Company owned 233 hotels with an aggregate of 29,759 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.

Hotel Acquisitions

The Company acquired two hotels during the six months ended June 30, 2020. 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

Cape Canaveral

Hampton

LBA

4/30/2020

116

24,102

Cape Canaveral

Home2 Suites

LBA

4/30/2020

108

22,602

224

46,704

During the year ended December 31, 2019, the Company acquired three hotels, including 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

Hampton

Vista Host

3/4/2019

160

31,680

Orlando

Home2 Suites

LBA

3/19/2019

128

20,736

Richmond

Independent

Crestline

10/9/2019

6,875

343

59,291

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 used borrowings under its revolving credit facility to purchase each of the hotels acquired in 2019. 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, 2020, the amount of revenue and operating loss included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2020 was approximately $0.4 million and $(0.3) million, respectively. 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.

Index

Hotel Purchase Contract Commitments

As of June 30, 2020, the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three hotels for a total expected purchase price of approximately $114.2 million. The three hotels are under development and are planned to be completed and opened for business over the next two to 12 months from June 30, 2020, at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, 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 June 30, 2020. All dollar amounts are in thousands.

Location	Brands	Date of Purchase Contract	Rooms		Refundable Deposits		Gross Purchase Price
Tempe, AZ (1)(2)	Hyatt House and Hyatt Place	6/13/2018		259	$	720	$	64,588
Madison, WI (1)	Hilton Garden Inn	7/9/2019		176		283		49,599
				435	$	1,003	$	114,187

(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 two to 12 months from June 30, 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.

(2) These hotels are part of a combined 259-room, dual-branded complex.

The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotels under contract if closings occur.

Additionally, as of December 31, 2019, the Company had an outstanding contract to purchase a Courtyard hotel in Denver, Colorado, which it terminated in May 2020. The refundable deposit of approximately $0.6 million associated with the contract was repaid to the Company.

3. Dispositions and Hotel Sale Contracts

Dispositions

During the six months ended June 30, 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, net of transaction costs, which is included in the Company’s consolidated statement of operations for the six months ended June 30, 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

Index

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 $3.7 million for the six months ended June 30, 2020 and 2019, respectively, relating to the results of operations of the 13 hotels noted above (the two hotels sold in the first six 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 six months ended June 30, 2020 and 2019. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.

Hotel Sale Contracts and Loss on Impairment of Depreciable Real Estate Assets

In June 2020, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its 140-room Memphis, Tennessee Homewood Suites for a gross sales price of approximately $9.0 million. As a result, the Company recognized an impairment loss of approximately $4.4 million in the second quarter of 2020, representing the difference between the carrying value of the hotel and the contracted sales price, net of estimated selling costs, which is a Level 1 input under the fair value hierarchy. Although the Company is working towards the sale of this hotel, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding purchase and sale agreement. If the closing occurs, this sale is expected to be completed in the fourth quarter of 2020. The Company expects the net proceeds from the sale to be used to pay down borrowings on the Company’s revolving credit facility.

4. Debt

Summary

As of June 30, 2020, and December 31, 2019, the Company’s debt consisted of the following (in thousands):

	June 30, 2020		December 31, 2019
Revolving credit facility	$	199,700	$	50,900
Term loans and senior notes, net		863,402		813,934
Mortgage debt, net		519,066		455,573
Debt, net	$	1,582,168	$	1,320,407

Index

The aggregate amounts of principal payable under the Company’s total debt obligations as of June 30, 2020 (including the revolving credit facility, term loans, senior notes and mortgage debt), for the five years subsequent to June 30, 2020 and thereafter are as follows (in thousands):

2020 (July - December)	$	4,790
2021		71,799
2022		309,514
2023		296,196
2024		338,579
Thereafter		567,843
		1,588,721
Unamortized fair value adjustment of assumed debt		2,075
Unamortized debt issuance costs		(8,628	)
Total	$	1,582,168

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 June 30, 2020 and December 31, 2019, is set forth below. All dollar amounts are in thousands.

	June 30, 2020			Percentage			December 31, 2019			Percentage
Fixed-rate debt (1)	$	1,217,317			77	%	$	1,297,467			98	%
Variable-rate debt		371,404			23	%		28,400			2	%
Total	$	1,588,721					$	1,325,867
Weighted-average interest rate of debt		3.77	%					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. See Note 5 for more information on the interest rate swap agreements.

Credit Facilities

Credit Facilities Amendments June 5, 2020

As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company anticipated that it may not be able to maintain compliance with certain covenants under its unsecured credit facilities in future periods. As a result, on June 5, 2020, the Company entered into amendments to each of the unsecured credit facilities. The amendments suspend the testing of the Company’s existing financial maintenance covenants under the unsecured credit facilities until the date the compliance certificate is required to be delivered for the fiscal quarter ending June 30, 2021 (unless the Company elects an earlier date) (the “Covenant Waiver Period”), and provide for, among other restrictions, the following during the Covenant Waiver Period:

●

Mandatory prepayments of amounts outstanding under the Company’s unsecured credit facilities of net cash proceeds from certain debt and equity issuances and asset dispositions, subject to various exceptions. A portion of the mandatory prepayments will be available for future borrowing under the revolving credit facility;

●

A minimum liquidity covenant of $100 million;

●

A requirement to pledge the equity interests of each direct or indirect owner of certain unencumbered property in favor of the administrative agents if average liquidity for any month is less than $275 million or the total amount outstanding under the revolving credit facility exceeds $275 million;

●

Restrictions on the Company’s and its subsidiaries’ ability to incur additional indebtedness or prepay certain existing indebtedness;

●

Restrictions on the Company’s ability to make cash distributions (except to the extent required to maintain REIT status) and share repurchases;

●

Maximum discretionary capital expenditures of $50 million;

Index

●

Limitations on additional investments; and

●

An increase in the applicable interest rate under the unsecured credit facilities until the end of the Covenant Waiver Period to a rate that corresponds to the highest leverage-based applicable interest rate margin with respect to the unsecured credit facilities.

The amendments also modify the calculation of the existing financial covenants for the four quarters subsequent to the end of the Covenant Waiver Period to annualize calculated amounts to the extent the most recently ended fiscal quarter is not at least four fiscal quarters from the end of the Covenant Waiver Period, and provide for an increase in the LIBOR floor under the credit agreements from 0 to 25 basis points for Eurodollar Rate Loans and establish a Base Rate floor of 1.25% on the revolving credit facility, and any term loans under the credit agreements that are not hedged. Except as otherwise set forth in the amendments, the terms of the credit agreements remain in effect.

The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants, restrictions on certain investments and events of default. The credit agreements contain the following financial and restrictive covenants, each of which are suspended during the Covenant Waiver Period (capitalized terms are defined in the credit agreements).

●

A ratio of Consolidated Total Indebtedness to Consolidated EBITDA of not more than 6.50 to 1.00 (subject to a higher amount in certain circumstances);

●

A ratio of Consolidated Secured Indebtedness to Consolidated Total Assets of not more than 45%;

●

A minimum Consolidated Tangible Net Worth of approximately $3.2 billion (plus an amount equal to 75% of the Net Cash Proceeds from issuances and sales of Equity Interests occurring after the Closing Date, subject to adjustment);

●

A ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges of not less than 1.50 to 1.00 for the trailing four full quarters;

●

A ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness of not less than 2.00 to 1.00 for the trailing four full quarters;

●

A ratio of Consolidated Unsecured Indebtedness to Unencumbered Asset Value of not more than 60% (subject to a higher level in certain circumstances); and

●

A ratio of Consolidated Secured Recourse Indebtedness to Consolidated Total Assets of not more than 10%.

As of June 30, 2020, the Company was in compliance with the applicable covenants of the credit agreements.

$850 Million Credit Facility

The Company utilizes an unsecured “$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. 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 drew the remaining availability under its revolving credit facility in March 2020. In June 2020, the Company repaid $225.3 million under its revolving credit facility and as of June 30, 2020, had corporate cash on hand of $156.5 million and availability of $225.3 million under the revolving credit facility. 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.

Index

$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 “unsecured 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 leverage ratio, as calculated under the terms of the facility.

Index

As of June 30, 2020 and December 31, 2019, the details of the Company’s unsecured credit facilities were as set forth below. All dollar amounts are in thousands.

			Outstanding Balance
	Interest Rate	Maturity Date	June 30, 2020			December 31, 2019
Revolving credit facility (1)	LIBOR + 1.40% - 2.25%	7/27/2022	$	199,700		$	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				(6,598	)		(6,066	)
Term loans and senior notes, net				863,402			813,934

Credit facilities, net (1)			$	1,063,102		$	864,834
Weighted-average interest rate (2)				3.55	%		3.14	%

(1) Excludes unamortized debt issuance costs related to the revolving credit facility totaling approximately $2.6 million each as of June 30, 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 $670.0 million and $842.5 million of the outstanding variable-rate debt as of June 30, 2020 and December 31, 2019, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at June 30, 2020 and December 31, 2019 was 0.16% and 1.76%, respectively.

Mortgage Debt

As of June 30, 2020, the Company had approximately $519 million in outstanding mortgage debt secured by 33 properties with maturity dates ranging from April 2021 to May 2038. Mortgages secured by 31 of the properties carry fixed stated interest rates ranging from 3.40% to 6.25% and effective interest rates ranging from 3.40% to 4.97%. Additionally, one loan secured by the two newly acquired Cape Canaveral properties carries a variable interest rate of one-month LIBOR plus 2.00% through October 31, 2020 and one-month LIBOR plus 3.00% from November 1, 2020 through April 30, 2021. The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid. As a result of the effects of the COVID-19 pandemic on certain hotels, the associated lenders granted temporary deferrals of principal and interest payments. 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, 2020 and December 31, 2019 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.

Index

Location	Brand	Interest Rate (1)			Loan Assumption or Origination Date	Maturity Date		Principal Assumed or Originated		Outstanding balance as of June 30, 2020		Outstanding balance as of December 31, 2019
San Juan Capistrano, CA	Residence Inn		4.15	%	9/1/2016		(2)	$	16,210	$	-	$	15,073
Cape Canaveral, FL	Hampton			(3)	4/30/2020		4/30/2021		10,852		10,852		-
Cape Canaveral, FL	Home2 Suites			(3)	4/30/2020		4/30/2021		10,852		10,852		-
Colorado Springs, CO	Hampton		6.25	%	9/1/2016	7/6/2021			7,923		7,396		7,471
Franklin, TN	Courtyard		6.25	%	9/1/2016	8/6/2021			14,679		13,707		13,847
Franklin, TN	Residence Inn		6.25	%	9/1/2016	8/6/2021			14,679		13,707		13,847
Grapevine, TX	Hilton Garden Inn		4.89	%	8/29/2012	9/1/2022			11,810		9,607		9,775
Collegeville/Philadelphia, PA	Courtyard		4.89	%	8/30/2012	9/1/2022			12,650		10,290		10,471
Hattiesburg, MS	Courtyard		5.00	%	3/1/2014	9/1/2022			5,732		4,814		4,897
Rancho Bernardo/San Diego, CA	Courtyard		5.00	%	3/1/2014	9/1/2022			15,060		12,647		12,866
Kirkland, WA	Courtyard		5.00	%	3/1/2014	9/1/2022			12,145		10,199		10,376
Seattle, WA	Residence Inn		4.96	%	3/1/2014	9/1/2022			28,269		23,717		24,130
Anchorage, AK	Embassy Suites		4.97	%	9/13/2012	10/1/2022			23,230		18,996		19,324
Somerset, NJ	Courtyard		4.73	%	3/1/2014	10/6/2022			8,750		7,312		7,441
Tukwila, WA	Homewood Suites		4.73	%	3/1/2014	10/6/2022			9,431		7,880		8,020
Prattville, AL	Courtyard		4.12	%	3/1/2014	2/6/2023			6,596		5,457		5,558
Huntsville, AL	Homewood Suites		4.12	%	3/1/2014	2/6/2023			8,306		6,872		6,999
San Diego, CA	Residence Inn		3.97	%	3/1/2014	3/6/2023			18,600		15,353		15,640
Miami, FL	Homewood Suites		4.02	%	3/1/2014	4/1/2023			16,677		13,797		14,051
New Orleans, LA	Homewood Suites		4.36	%	7/17/2014	8/11/2024			27,000		23,144		23,513
Westford, MA	Residence Inn		4.28	%	3/18/2015	4/11/2025			10,000		8,742		8,876
Denver, CO	Hilton Garden Inn		4.46	%	9/1/2016	6/11/2025			34,118		30,854		31,311
Oceanside, CA	Courtyard		4.28	%	9/1/2016	10/1/2025			13,655		12,720		12,812
Omaha, NE	Hilton Garden Inn		4.28	%	9/1/2016	10/1/2025			22,682		21,128		21,280
Boise, ID	Hampton		4.37	%	5/26/2016	6/11/2026			24,000		22,370		22,588
Burbank, CA	Courtyard		3.55	%	11/3/2016	12/1/2026			25,564		23,315		23,552
San Diego, CA	Courtyard		3.55	%	11/3/2016	12/1/2026			25,473		23,232		23,468
San Diego, CA	Hampton		3.55	%	11/3/2016	12/1/2026			18,963		17,295		17,471
Burbank, CA	SpringHill Suites		3.94	%	3/9/2018	4/1/2028			28,470		27,078		27,317
Santa Ana, CA	Courtyard		3.94	%	3/9/2018	4/1/2028			15,530		14,770		14,901
Richmond, VA	Courtyard		3.40	%	2/12/2020	3/11/2030			14,950

Price	16.31	EPS	1
Shares	224	P/E	25
MCap	3,652	P/FCF	13
Net Debt	1,310	EBIT	193
TEV	4,962	TEV/EBIT	26
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-06-30	Filed 2020-08-06
10-Q	2020-03-31	Filed 2020-05-18
10-K	2019-12-31	Filed 2020-02-24
10-Q	2019-09-30	Filed 2019-11-04
10-Q	2019-06-30	Filed 2019-08-05
10-Q	2019-03-31	Filed 2019-05-08
10-K	2018-12-31	Filed 2019-02-25
10-Q	2018-09-30	Filed 2018-11-05
10-Q	2018-06-30	Filed 2018-08-06
10-Q	2018-03-31	Filed 2018-05-07
10-K	2017-12-31	Filed 2018-02-22
10-Q	2017-09-30	Filed 2017-11-06
10-Q	2017-06-30	Filed 2017-08-07
10-Q	2017-03-31	Filed 2017-05-04
10-K	2016-12-31	Filed 2017-02-27
10-Q	2016-09-30	Filed 2016-11-07
10-Q	2016-06-30	Filed 2016-08-08
10-Q	2016-03-31	Filed 2016-05-05
10-K	2015-12-31	Filed 2016-02-25
10-Q	2015-09-30	Filed 2015-11-05
10-Q	2015-06-30	Filed 2015-08-06
10-Q	2015-03-31	Filed 2015-05-07
10-K	2014-12-31	Filed 2015-03-06
10-Q	2014-09-30	Filed 2014-11-05
10-Q	2014-06-30	Filed 2014-08-06
10-Q	2014-03-31	Filed 2014-05-14
10-K	2013-12-31	Filed 2014-03-11
10-Q	2013-09-30	Filed 2013-11-06
10-Q	2013-06-30	Filed 2013-08-08
10-Q	2013-03-31	Filed 2013-05-06
10-K	2012-12-31	Filed 2013-03-07
10-Q	2012-09-30	Filed 2012-11-06
10-Q	2012-06-30	Filed 2012-08-13
10-Q	2012-03-31	Filed 2012-05-07
10-K	2011-12-31	Filed 2012-03-12
10-Q	2011-09-30	Filed 2011-11-09
10-Q	2011-06-30	Filed 2011-08-12
10-Q	2011-03-31	Filed 2011-05-06
10-K	2010-12-31	Filed 2011-03-11
10-Q	2010-09-30	Filed 2010-11-05
10-Q	2010-06-30	Filed 2010-08-04
10-Q	2010-03-31	Filed 2010-05-05
10-K	2009-12-31	Filed 2010-03-05

8-K	2020-08-14	Other Events, Exhibits
8-K	2020-08-12	Exhibits
8-K	2020-08-11	Other Events, Exhibits
8-K	2020-08-06	Earnings, Exhibits
8-K	2020-07-08	Earnings, Regulation FD, Exhibits
8-K	2020-06-05
8-K	2020-06-02
8-K	2020-05-18
8-K	2020-05-14
8-K	2020-05-06
8-K	2020-03-20
8-K	2020-03-19
8-K	2020-03-13
8-K	2020-03-02
8-K	2020-02-24
8-K	2019-12-06
8-K	2019-12-05
8-K	2019-11-04
8-K	2019-10-10
8-K	2019-08-05
8-K	2019-06-24
8-K	2019-05-16
8-K	2019-05-08
8-K	2019-04-15
8-K	2019-04-12
8-K	2019-04-01
8-K	2019-03-22
8-K	2019-03-20
8-K	2019-03-05
8-K	2019-02-25
8-K	2019-01-23
8-K	2018-12-10
8-K	2018-11-05
8-K	2018-10-24
8-K	2018-09-19
8-K	2018-08-06
8-K	2018-07-27
8-K	2018-06-29
8-K	2018-06-01
8-K	2018-05-17
8-K	2018-05-07
8-K	2018-05-03
8-K	2018-03-29
8-K	2018-03-16
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

EX-31.1	ex_196511.htm
EX-31.2	ex_196512.htm
EX-31.3	ex_196513.htm
EX-32.1	ex_196514.htm

APLE 10Q Quarterly Report

Apple Hospitality REIT Earnings 2020-06-30