Apple Hospitality REIT, Inc. [APLE] Filings

10-Q 1 aple-10q_20220331.htm 10-Q aple-10q_20220331.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, 2022

☐	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 2, 2022: 228,888,561

Apple Hospitality REIT, Inc.

Form 10-Q

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			Page Number
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements (Unaudited)	3

		Consolidated Balance Sheets – March 31, 2022 and December 31, 2021	3

		Consolidated Statements of Operations and Comprehensive Income (Loss) – three months ended March 31, 2022 and 2021	4

		Consolidated Statements of Shareholders’ Equity – three months ended March 31, 2022 and 2021	5

		Consolidated Statements of Cash Flows – three months ended March 31, 2022 and 2021	6

		Notes to Consolidated Financial Statements	7

	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	36

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	37

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

	Item 6.	Exhibits	38

Signatures			39

This Form 10-Q includes references to certain trademarks or service marks. The AC Hotels by Marriott®, Aloft Hotels®, Courtyard by Marriott®, Fairfield by Marriott®, Marriott® 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®, 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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Apple Hospitality REIT, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

	March 31,			December 31,
	2022			2021
	(unaudited)
Assets
Investment in real estate, net of accumulated depreciation and amortization of $1,356,580 and $1,311,262, respectively	$	4,640,018		$	4,677,185
Cash and cash equivalents		636			3,282
Restricted cash-furniture, fixtures and other escrows		40,568			36,667
Due from third party managers, net		60,560			40,052
Other assets, net		49,335			33,341
Total Assets	$	4,791,117		$	4,790,527

Liabilities
Debt, net	$	1,433,213		$	1,438,758
Finance lease liabilities		111,848			111,776
Accounts payable and other liabilities		66,949			92,672
Total Liabilities		1,612,010			1,643,206

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 228,888,561 and 228,255,642 shares, respectively		4,578,758			4,569,352
Accumulated other comprehensive income (loss)		11,711			(15,508	)
Distributions greater than net income		(1,411,362	)		(1,406,523	)
Total Shareholders' Equity		3,179,107			3,147,321

Total Liabilities and Shareholders' Equity	$	4,791,117		$	4,790,527

See notes to consolidated financial statements.

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Apple Hospitality REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share data)

	Three Months Ended
	March 31,
	2022			2021
Revenues:
Room	$	237,976		$	148,481
Food and beverage		8,464			2,783
Other		14,038			7,449
Total revenue		260,478			158,713

Expenses:
Hotel operating expense:
Operating		64,331			38,150
Hotel administrative		23,842			17,744
Sales and marketing		22,469			14,888
Utilities		10,290			10,560
Repair and maintenance		13,028			10,225
Franchise fees		11,266			6,919
Management fees		8,776			5,254
Total hotel operating expense		154,002			103,740
Property taxes, insurance and other		18,679			19,688
General and administrative		9,638			8,119
Loss on impairment of depreciable real estate assets		-			10,754
Depreciation and amortization		45,324			48,710
Total expense		227,643			191,011

Gain on sale of real estate		-			4,484

Operating income (loss)		32,835			(27,814	)

Interest and other expense, net		(14,654	)		(18,513	)

Income (loss) before income taxes		18,181			(46,327	)

Income tax expense		(179	)		(108	)

Net income (loss)	$	18,002		$	(46,435	)

Other comprehensive income:
Interest rate derivatives		27,219			16,082

Comprehensive income (loss)	$	45,221		$	(30,353	)

Basic and diluted net income (loss) per common share	$	0.08		$	(0.21	)

Weighted average common shares outstanding - basic and diluted		228,986			223,733

See notes to consolidated financial statements.

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Apple Hospitality REIT, Inc.

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2022 and 2021

(Unaudited)

(in thousands, except per share data)

	Common Stock					Accumulated Other			Distributions
	Number of Shares		Amount			Comprehensive Income (Loss)			Greater Than Net Income			Total
Balance at December 31, 2021		228,256	$	4,569,352		$	(15,508	)	$	(1,406,523	)	$	3,147,321
Share based compensation, net		633		9,592			-			-			9,592
Equity issuance costs		-		(186	)		-			-			(186	)
Interest rate derivatives		-		-			27,219			-			27,219
Net income		-		-			-			18,002			18,002
Distributions declared to shareholders ($0.10 per share)		-		-			-			(22,841	)		(22,841	)
Balance at March 31, 2022		228,889	$	4,578,758		$	11,711		$	(1,411,362	)	$	3,179,107

Balance at December 31, 2020		223,212	$	4,488,419		$	(42,802	)	$	(1,416,270	)	$	3,029,347
Share based compensation, net		444		5,004			-			-			5,004
Equity issuance costs		-		(1	)		-			-			(1	)
Interest rate derivatives		-		-			16,082			-			16,082
Net loss		-		-			-			(46,435	)		(46,435	)
Distributions declared to shareholders ($0.01 per share)		-		-			-			(2,232	)		(2,232	)
Balance at March 31, 2021		223,656	$	4,493,422		$	(26,720	)	$	(1,464,937	)	$	3,001,765

See notes to consolidated financial statements.

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Apple Hospitality REIT, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	Three Months Ended
	March 31,
	2022			2021
Cash flows from operating activities:
Net income (loss)	$	18,002		$	(46,435	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization		45,324			48,710
Loss on impairment of depreciable real estate assets		-			10,754
Gain on sale of real estate		-			(4,484	)
Other non-cash expenses, net		2,174			2,684
Changes in operating assets and liabilities:
Increase in due from third party managers, net		(20,508	)		(16,628	)
Decrease (increase) in other assets, net		(3,308	)		1,029
Increase (decrease) in accounts payable and other liabilities		(2,621	)		2,256
Net cash provided by (used in) operating activities		39,063			(2,114	)

Cash flows from investing activities:
Acquisition of hotel properties, net		-			(49,369	)
Capital improvements		(13,586	)		(2,506	)
Net proceeds from sale of real estate		-			17,587
Net cash used in investing activities		(13,586	)		(34,288	)

Cash flows from financing activities:
Repurchases of common shares to satisfy employee withholding requirements		(4,415	)		(1,650	)
Distributions paid to common shareholders		(13,701	)		-
Equity issuance costs		(23	)		(1	)
Net proceeds from revolving credit facility		500			44,100
Payments of mortgage debt and other loans		(6,556	)		(3,018	)
Principal payments on finance leases		(27	)		-
Financing costs		-			(1,472	)
Net cash provided by (used in) financing activities		(24,222	)		37,959

Net change in cash, cash equivalents and restricted cash		1,255			1,557

Cash, cash equivalents and restricted cash, beginning of period		39,949			34,368

Cash, cash equivalents and restricted cash, end of period	$	41,204		$	35,925

Supplemental cash flow information:
Interest paid	$	13,849		$	18,062

Supplemental disclosure of noncash investing and financing activities:
Accrued distribution to common shareholders	$	11,420		$	2,232

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents, beginning of period	$	3,282		$	5,556
Restricted cash-furniture, fixtures and other escrows, beginning of period		36,667			28,812
Cash, cash equivalents and restricted cash, beginning of period	$	39,949		$	34,368

Cash and cash equivalents, end of period	$	636		$	5,776
Restricted cash-furniture, fixtures and other escrows, end of period		40,568			30,149
Cash, cash equivalents and restricted cash, end of period	$	41,204		$	35,925

See notes to consolidated financial statements.

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Apple Hospitality REIT, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization and Summary of Significant Accounting Policies

Organization

Apple Hospitality REIT, Inc., formed in November 2007 as a Virginia corporation, together with its wholly-owned subsidiaries (the “Company”), is a self-advised real estate investment trust (“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, 2022, the Company owned 219 hotels with an aggregate of 28,747 rooms located in 36 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, 2021 (the “2021 Form 10-K”). Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the twelve-month period ending December 31, 2022.

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.

Coronavirus COVID-19 Pandemic

As a result of the coronavirus COVID-19 pandemic (“COVID-19”) and the impact it has had on travel and the broader economy throughout the U.S. since March 2020, the Company’s hotels have experienced significant declines in occupancy, which have had and may continue to have a negative effect on the Company’s revenue and operating results. While occupancy recovered significantly during 2021 and the first three months of 2022, there remains significant uncertainty as to when operations at the hotels will return to pre-pandemic levels.

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.

Accounting Standards Recently Adopted

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In January 2021, the FASB issued 2021-01, Reference Rate Reform (Topic 848), Scope, which further clarified the scope of the reference rate reform optional practical expedients and exceptions outlined in Topic 848. The amendments in ASU Nos. 2020-04 and 2021-01 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 Nos. 2020-04 and 2021-01 became effective upon issuance and the provisions of the ASUs have not had a material impact on the Company’s consolidated financial statements and related disclosures as of March 31, 2022. The provisions of these updates will generally affect the Company by allowing, among other things, the following:

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•

Modifications of the Company’s unsecured credit facilities (as defined below) to replace the London Interbank Offered Rate (“LIBOR”) with a substitute index to be accounted for as a non-substantial modification and not be considered a debt extinguishment.

•

Changes to the floating interest rate index used in the Company’s interest rate swaps to not be considered a change to the critical terms of the hedge and therefore not requiring a dedesignation of the hedging relationship.

The Company’s unsecured credit facilities and interest rate swap agreements have provisions in place regarding the selection of replacement reference rates upon the discontinuance of LIBOR, and the Company anticipates that it may enter into amendments to clarify the replacement reference rates in the future.

Accounting for Certain Equity Options

In May 2021, the FASB issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (Topics 260, 470, 718 and 815), which provides updated guidance to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The provisions of this update are effective for annual and interim periods beginning after December 15, 2021. The adoption of this update is not material to the Company’s consolidated financial statements.

Accounting for Funds Received as Government Assistance

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) to increase the transparency of government assistance disclosures including the disclosure of (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The provisions of this update are effective for annual periods beginning after December 15, 2021. The adoption of this update is not expected to be material to the Company’s consolidated financial statements.

2. Investment in Real Estate

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

	March 31,			December 31,
	2022			2021
Land	$	794,901		$	794,899
Building and improvements		4,588,934			4,584,829
Furniture, fixtures and equipment		492,313			488,773
Finance ground lease assets		102,084			102,084
Franchise fees		18,366			17,862
		5,996,598			5,988,447
Less accumulated depreciation and amortization		(1,356,580	)		(1,311,262	)
Investment in real estate, net	$	4,640,018		$	4,677,185

As of March 31, 2022, the Company owned 219 hotels with an aggregate of 28,747 rooms located in 36 states.

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

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Hotel Acquisitions

There were no acquisitions during the three months ended March 31, 2022. During the year ended December 31, 2021, the Company acquired eight hotels, including one hotel during the three months ended March 31, 2021. 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

Madison

Hilton Garden Inn

Raymond

2/18/2021

176

49,599

Portland

AC Hotels

Crestline

8/20/2021

178

66,750

Greenville