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, 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 August 2, 2022: 228,878,373
Apple Hospitality REIT, Inc.
Form 10-Q
Index
Page
Number
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Consolidated Balance Sheets – June 30, 2022 and December 31, 2021
Consolidated Statements of Operations and Comprehensive Income (Loss) – three and six months ended June 30, 2022 and 2021
4
Consolidated Statements of Shareholders’ Equity – three and six months ended June 30, 2022 and 2021
5
Consolidated Statements of Cash Flows – six months ended June 30, 2022 and 2021
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
PART II. OTHER INFORMATION
Legal Proceedings
40
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
41
Signatures
42
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.
Item 1. Financial Statements
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
December 31,
2022
2021
(unaudited)
Assets
Investment in real estate, net of accumulated depreciation and amortization of
$1,401,817 and $1,311,262, respectively
$
4,603,244
4,677,185
Cash and cash equivalents
1,598
3,282
Restricted cash-furniture, fixtures and other escrows
45,650
36,667
Due from third party managers, net
66,429
40,052
Other assets, net
59,931
33,341
Total Assets
4,776,852
4,790,527
Liabilities
Debt, net
1,372,638
1,438,758
Finance lease liabilities
111,920
111,776
Accounts payable and other liabilities
70,668
92,672
Total Liabilities
1,555,226
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
228,886,273 and 228,255,642 shares, respectively
4,579,590
4,569,352
Accumulated other comprehensive income (loss)
22,330
(15,508
)
Distributions greater than net income
(1,380,294
(1,406,523
Total Shareholders' Equity
3,221,626
3,147,321
Total Liabilities and Shareholders' Equity
See notes to consolidated financial statements.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share data)
Three Months Ended
Six Months Ended
Revenues:
Room
312,370
231,166
550,346
379,647
Food and beverage
12,019
5,088
20,483
7,871
Other
13,279
11,150
27,317
18,599
Total revenue
337,668
247,404
598,146
406,117
Expenses:
Hotel operating expense:
Operating
76,064
53,186
140,395
91,336
Hotel administrative
27,353
21,538
51,195
39,282
Sales and marketing
27,492
20,380
49,961
35,268
Utilities
10,553
9,352
20,843
19,912
Repair and maintenance
14,808
11,886
27,836
22,111
Franchise fees
14,800
10,865
26,066
17,784
Management fees
11,445
8,203
20,221
13,457
Total hotel operating expense
182,515
135,410
336,517
239,150
Property taxes, insurance and other
18,779
17,321
37,458
37,009
General and administrative
10,307
8,435
19,945
16,554
Loss on impairment of depreciable real estate assets
10,754
Depreciation and amortization
45,322
46,386
90,646
95,096
Total expense
256,923
207,552
484,566
398,563
Gain (loss) on sale of real estate
(864
3,620
Operating income
80,745
38,988
113,580
11,174
Interest and other expense, net
(15,198
(18,618
(29,852
(37,131
Income (loss) before income taxes
65,547
20,370
83,728
(25,957
Income tax expense
(202
(87
(381
(195
Net income (loss)
65,345
20,283
83,347
(26,152
Other comprehensive income (loss):
Interest rate derivatives
10,619
(1,356
37,838
14,726
Comprehensive income (loss)
75,964
18,927
121,185
(11,426
Basic and diluted net income (loss) per common share
0.29
0.09
0.36
(0.12
Weighted average common shares outstanding - basic and diluted
228,998
224,772
228,992
224,255
Consolidated Statements of Shareholders' Equity
Three Months Ended June 30, 2022 and 2021
Common Stock
Accumulated
Distributions
of Shares
Amount
Comprehensive
Income (Loss)
Greater Than
Net Income
Total
Balance at March 31, 2022
228,889
4,578,758
11,711
(1,411,362
3,179,107
Share based compensation, net
997
Equity issuance costs
(20
Common shares repurchased
(10
(145
Net income
Distributions declared to shareholders ($0.15 per share)
(34,277
Balance at June 30, 2022
228,886
Balance at March 31, 2021
223,656
4,493,422
(26,720
(1,464,937
3,001,765
8
843
Issuance of common shares, net
4,677
75,067
Distributions declared to shareholders ($0.01 per share)
(2,279
Balance at June 30, 2021
228,341
4,569,332
(28,076
(1,446,933
3,094,323
Six Months Ended June 30, 2022 and 2021
Balance at December 31, 2021
228,256
640
10,589
(206
Distributions declared to shareholders ($0.25 per share)
(57,118
Balance at December 31, 2020
223,212
4,488,419
(42,802
(1,416,270
3,029,347
452
5,847
75,066
Net loss
Distributions declared to shareholders ($0.02 per share)
(4,511
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Gain on sale of real estate
(3,620
Other non-cash expenses, net
4,328
5,493
Changes in operating assets and liabilities:
Increase in due from third party managers, net
(26,377
(32,157
Decrease (increase) in other assets, net
(5,371
145
Increase in accounts payable and other liabilities
5,636
214
Net cash provided by operating activities
152,209
49,773
Cash flows from investing activities:
Acquisition of hotel properties, net
(49,345
Disbursements for potential acquisitions, net
(2,375
Capital improvements
(25,019
(4,906
Net proceeds from sale of real estate
22,765
Net cash used in investing activities
(33,861
Cash flows from financing activities:
Net proceeds (disbursements) related to issuance of common shares
(185
Repurchases of common shares
Repurchases of common shares to satisfy employee withholding requirements
(4,415
(1,650
Distributions paid to common shareholders
(47,962
(2,232
Net proceeds from (payments on) revolving credit facility
(10,000
(23,800
Proceeds from term loans and senior notes
75,000
Payments of mortgage debt and other loans
(132,060
(62,049
Principal payments on finance leases
(55
Financing costs
(69
(1,501
Net cash used in financing activities
(119,891
(16,166
Net change in cash, cash equivalents and restricted cash
7,299
(254
Cash, cash equivalents and restricted cash, beginning of period
39,949
34,368
Cash, cash equivalents and restricted cash, end of period
47,248
34,114
Supplemental cash flow information:
Interest paid
28,527
35,336
Supplemental disclosure of noncash investing and financing activities:
Accrued distribution to common shareholders
11,420
2,279
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents, beginning of period
5,556
Restricted cash-furniture, fixtures and other escrows, beginning of period
28,812
Cash and cash equivalents, end of period
2,899
Restricted cash-furniture, fixtures and other escrows, end of period
31,215
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 June 30, 2022, the Company owned 219 hotels with an aggregate of 28,748 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 and six months ended June 30, 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 subsequent variants and the impact it has had on travel and the broader economy throughout the U.S. since March 2020, the Company’s hotels experienced significant declines in occupancy. While occupancy recovered significantly during 2021 and the first half of 2022, due to the continued impacts from the COVID-19 variants on the hotel industry and the general economy, there remains uncertainty as to when operations at the hotels will fully 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 June 30, 2022. The provisions of these updates will generally affect the Company by allowing, among other things, the following:
•
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 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.
In July 2022, the Company amended each of its unsecured credit facilities and interest rate swap agreements to replace LIBOR with the Secured Overnight Financing Rate (“SOFR”) as the reference rate. In accordance with ASU 2020-04, as amended, these amendments will be accounted for as non-substantial modifications. See Note 4 for more information regarding amendments made to the Company’s unsecured credit facilities and interest rate swap agreements.
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 have a material impact on the Company’s consolidated financial statements.
2. Investment in Real Estate
The Company’s investment in real estate consisted of the following (in thousands):
Land
794,901
794,899
Building and improvements
4,591,518
4,584,829
Furniture, fixtures and equipment
498,192
488,773
Finance ground lease assets
102,084
18,366
17,862
6,005,061
5,988,447
Less accumulated depreciation and amortization
(1,401,817
(1,311,262
Investment in real estate, net
As of June 30, 2022, the Company owned 219 hotels with an aggregate of 28,748 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.
Hotel Acquisitions
There were no acquisitions during the six months ended June 30, 2022. During the year ended December 31, 2021, the Company acquired eight hotels, including one hotel during the six months ended June 30, 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
WI
Hilton Garden Inn
Raymond
2/18/2021
176
49,599
Portland
ME
AC Hotels
Crestline
8/20/2021
178
66,750
Greenville
SC
Hyatt Place
9/1/2021
130
30,000
Aloft
9/10/2021
157
51,150
Memphis
TN
10/28/2021
150
38,000
Fort Worth
TX
11/17/2021
29,500
Homewood Suites
112
21,500
OR
Hampton
243
1,303
361,499
In 2021, the Company used borrowings under its Revolving Credit Facility (as defined below) to purchase the Madison, Wisconsin and Memphis, Tennessee hotels, used available cash to purchase the Portland, Maine and Greenville, South Carolina hotels and used a mix of available cash and borrowings under its Revolving Credit Facility to purchase the Fort Worth, Texas and Portland, Oregon hotels. The acquisitions of these hotel properties were accounted for as acquisitions of asset groups, whereby costs incurred to effect the acquisitions (which were not significant) were capitalized as part of the cost of the assets acquired. For the one hotel acquired during the six months ended June 30, 2021, the amount of revenue and operating loss included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2021 was approximately $0.7 million and $(1.0) million, respectively.
Seattle Land Acquisition
On August 16, 2021, the Company purchased the fee interest in the land at the Seattle, Washington Residence Inn, previously held under a finance ground lease. The Company utilized $24.0 million of its available cash and entered into a one-year note payable to the seller for $56.0 million to fund the purchase price of $80.0 million. The note payable bore interest, which was payable monthly, at a fixed annual rate of 4.0%. On June 16, 2022, the note was repaid in full. The land purchase was accounted for as a retirement of the finance lease, with the difference of $16.6 million between the carrying amount of the net right-of-use asset of $94.5 million and the finance lease liability of $111.1 million applied as an adjustment to the carrying amount of the acquired land.
Hotel Purchase Contract Commitments
As of June 30, 2022, the Company had one outstanding contract, which was entered into during 2021, for the potential purchase of a hotel in Madison, Wisconsin for an expected purchase price of approximately $78.6 million. The hotel is currently under development and is expected to be completed and opened for business in early 2024, as a 260-room Embassy Suites. As of June 30, 2022, a $0.9 million contract deposit (refundable if the seller does not meet its obligations under the contract) had been paid. Although the Company is working towards acquiring this hotel, there are a number of conditions to closing that have not yet been satisfied and there can be no assurances that closing on this hotel will occur under the outstanding purchase contract. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the hotel under contract if closing occurs.
9
3. Dispositions
There were no dispositions during the six months ended June 30, 2022. During the year ended December 31, 2021, the Company sold 23 hotels in four separate transactions with unrelated parties for a total combined gross sales price of approximately $234.6 million, resulting in a combined net gain on sale, after giving effect to impairment charges discussed below, of approximately $3.6 million, net of transaction costs, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2021. The 23 hotels had a total carrying value of approximately $227.2 million at the time of sale. The following table lists the 23 hotels sold:
Date Sold
Charlotte
NC
2/25/2021
118
3/16/2021
140
Overland Park
KS
SpringHill Suites
4/30/2021
102
Montgomery
AL
7/22/2021
97
91
Rogers
AR
Residence Inn
88
Phoenix
AZ
Courtyard
127
Lakeland
FL
78
Albany
GA
Fairfield
87
Schaumburg
IL
166
Andover
MA
136
Fayetteville
92
Jackson
85
Johnson City
90
Allen
103
Beaumont
133
Burleson/Fort Worth
El Paso
Irving
77
Richmond
VA
Vancouver
WA
119
2,493
Excluding gains on sale of real estate, the Company’s consolidated statements of operations include an operating loss of approximately $(8.1) million for the six months ended June 30, 2021, relating to the results of operations of the 23 hotels sold in 2021 (as described above) for the period of ownership. The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the six months ended June 30, 2021. The net proceeds from the sales were used to pay down borrowings under the Company’s Revolving Credit Facility and for general corporate purposes, including acquisitions of hotel properties.
Loss on Impairment of Depreciable Real Estate Assets
During the first quarter of 2021, the Company identified 20 hotels for potential sale and, in April 2021, entered into a purchase contract with an unrelated party for the sale of the hotels for a gross sales price of $211.0 million. As a result, the Company recognized impairment losses totaling approximately $9.4 million in the first quarter of 2021, to adjust the carrying values of four of these hotels to their estimated fair values. The fair values of these properties were based on broker opinions of value using multiple methods to determine their value, including but not limited to replacement value, discounted cash flows and the income approach based on historical and forecasted operating results of the specific properties. These valuations are Level 3 inputs under the fair value hierarchy. The Company completed the sale of the hotels in July 2021.
Additionally, during the first quarter of 2021, the Company identified the Overland Park, Kansas SpringHill Suites for potential sale and, in February 2021, entered into a purchase contract with an unrelated party for the sale of the hotel for a gross sales price of $5.3 million. As a result, the Company recognized an impairment loss totaling approximately $1.3 million in the first quarter of 2021, to adjust the carrying value of the hotel to its estimated fair value less cost to sell, which was based on the contracted sales price, a Level 1 input under the fair value hierarchy. The Company completed the sale of the hotel in April 2021.
10
4. Debt
Summary
As of June 30, 2022 and December 31, 2021, the Company’s debt consisted of the following (in thousands):
Revolving credit facility
66,000
76,000
Term loans and senior notes, net
941,088
865,189
Mortgage debt, net
365,550
497,569
The aggregate amounts of principal payable under the Company’s total debt obligations as of June 30, 2022 (including the Revolving Credit Facility, term loans, senior notes and mortgage debt), for each of the next five fiscal years and thereafter are as follows (in thousands):
2022 (July - December)
102,770
2023
296,214
2024
338,597
2025
245,140
2026
74,649
Thereafter
319,616
1,376,986
Unamortized fair value adjustment of assumed debt
867
Unamortized debt issuance costs
(5,215
The Company uses interest rate swaps to manage its interest rate risk on a portion of its variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the London Inter-Bank Offered Rate for a one-month term (“one-month LIBOR”). The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. See Note 5 for more information on the interest rate swap agreements. The Company’s total fixed-rate and variable-rate debt, after giving effect to its interest rate swaps in effect at June 30, 2022 and December 31, 2021, is set forth below. All dollar amounts are in thousands.
Percentage
Fixed-rate debt (1)
1,260,986
%
1,318,046
Variable-rate debt
116,000
126,000
1,444,046
Weighted-average interest rate of debt
3.56
3.38
(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
$850 Million Credit Facility
Prior to the Company’s debt refinancing in July 2022 (as discussed below), the Company utilized an unsecured credit facility comprised of (i) a $425 million revolving credit facility with an initial maturity date of July 27, 2022 (the “Revolving Credit Facility”) and (ii) a $425 million term loan facility consisting of two term loans: a $200 million term loan with a maturity date of July 27, 2023, and a $225 million term loan with a maturity date of January 31, 2024, both funded in July 2018 (the “$850 million credit facility”). Interest payments on the $850 million credit facility were due monthly and the interest rate, subject to certain exceptions, was 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. As of June 30, 2022, the Company had availability of $359 million under the Revolving Credit Facility. The Company was 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 Revolving Credit Facility, based on the amount of borrowings outstanding during the quarter.
11
$225 Million Term Loan Facility
The Company also has an unsecured 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 “$225 million term loan facility”). The credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $225 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the 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 term loan facility with a maturity date of July 25, 2024, consisting of one term loan (the “2017 $85 million term loan facility”), that was funded at closing. 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 2017 $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 1.30% to 2.10%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
2019 $85 Million Term Loan Facility
On December 31, 2019, the Company entered into an unsecured 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 under 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 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”). Net proceeds from the $50 million senior notes facility were 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 note agreement.
$75 Million Senior Notes Facility
On June 2, 2022, the Company entered into an unsecured senior notes facility with a maturity date of June 2, 2029, consisting of senior notes totaling $75 million funded at closing (the “$75 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, the 2019 $85 million term loan facility and the $50 million senior notes facility, the “unsecured credit facilities”). Net proceeds from the $75 million senior notes facility were available to provide funding for general corporate purposes, including the repayment of borrowings under the Company’s Revolving Credit Facility and repayment of mortgage debt. 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 $75 million senior notes facility are due quarterly and the interest rate, subject to certain exceptions, ranges from an annual rate of 4.88% to 5.63% depending on the Company’s leverage ratio, as calculated under the terms of the note agreement.
12
As of June 30, 2022 and December 31, 2021, the details of the Company’s unsecured credit facilities were as set forth in the table below, which does not give effect to the debt refinancing in July 2022. All dollar amounts are in thousands.
Outstanding Balance
Interest Rate (1)
Maturity
Revolving credit facility (2)
LIBOR + 1.40% - 2.25%
7/27/2022 (4)
Term loans and senior notes
$200 million term loan
LIBOR + 1.35% - 2.20%
7/27/2023 (4)
200,000
$225 million term loan
1/31/2024 (4)
225,000
$50 million term loan
8/2/2023
50,000
$175 million term loan
LIBOR + 1.65% - 2.50%
8/2/2025
175,000
2017 $85 million term loan
LIBOR + 1.30% - 2.10%
7/25/2024
85,000
2019 $85 million term loan
LIBOR + 1.70% - 2.55%
12/31/2029
$50 million senior notes
3.60% - 4.35%
3/31/2030
$75 million senior notes
4.88% - 5.63%
6/2/2029
Term loans and senior notes at stated value
945,000
870,000
(3,912
(4,811
Credit facilities, net (2)
1,007,088
941,189
Weighted-average interest rate (3)
3.39
2.97
Interest rates on all of the unsecured credit facilities increased to 0.15% above the highest rate shown for each loan during the Extended Covenant Waiver Period (as defined below) from March 1, 2021 through July 28, 2021.
(2)
Excludes unamortized debt issuance costs related to the Revolving Credit Facility totaling approximately $0.1 million and $1.0 million as of June 30, 2022 and December 31, 2021, respectively, which are included in other assets, net in the Company’s consolidated balance sheets.
(3)
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 $770.0 million of the outstanding variable-rate debt as of June 30, 2022 and December 31, 2021. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at June 30, 2022 and December 31, 2021 was 1.79% and 0.10%, respectively.
(4)
On July 25, 2022, the Company entered into an amendment and restatement of its $850 million credit facility, which extended the maturities of the existing Revolving Credit Facility, $200 million term loan and $225 million term loan to July 25, 2026, July 25, 2027 and January 31, 2028, respectively. See the "2022 Debt Refinancing" section below for details.
Credit Facilities Covenants and Amendments
The credit agreements governing the unsecured credit facilities (collectively, the “credit agreements”), contain mandatory prepayment requirements, customary affirmative and negative covenants, restrictions on certain investments and events of default. The credit agreements, not giving effect to the debt refinancing in July 2022, contained the following financial and restrictive covenants (capitalized terms not defined below are defined in the credit agreements):
●
A ratio of Consolidated Total Indebtedness to Consolidated EBITDA (“Maximum Consolidated Leverage Ratio”) 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 (“Maximum Secured Leverage Ratio”) 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, July 27, 2018, subject to adjustment;
A ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges ("Minimum Fixed Charge Coverage Ratio") 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 ("Minimum Unsecured Interest Coverage Ratio") of not less than 2.00 to 1.00 for the trailing four full quarters;
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A ratio of Consolidated Unsecured Indebtedness to Unencumbered Asset Value (“Maximum Unsecured Leverage Ratio”) 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 (“Maximum Secured Recourse Indebtedness”) of not more than 10%.
As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company entered into amendments in June 2020 that suspended the testing of the Company’s existing financial maintenance covenants under the unsecured credit facilities. These amendments imposed certain restrictions regarding the Company’s investing and financing activities that were applicable during a specified waiver period. On March 1, 2021, as a result of the continued disruption from COVID-19 and the related uncertainty with respect to the Company’s future operating results, the Company entered into further amendments to each of the unsecured credit facilities (the “March 2021 amendments”) to extend the covenant waiver period for all but two of the Company’s existing financial maintenance covenants until the date that the compliance certificate was required to be delivered for the fiscal quarter ended June 30, 2022, and extending to March 31, 2022 for the remaining two covenants (unless, in each case, the Company elected an earlier date) (the “Extended Covenant Waiver Period”). The March 2021 amendments provided for continued restrictions on the Company’s ability to make cash distributions, except for the payment of cash dividends of $0.01 per common share per quarter or to the extent required to maintain REIT status.
In addition to the modifications and restrictions imposed during the Extended Covenant Waiver Period, the March 2021 amendments modified the calculation of the existing financial covenants for the first three quarterly calculations subsequent to the end of the Extended Covenant Waiver Period to annualize calculated amounts based on the period beginning with the first fiscal quarter upon exiting the Extended Covenant Waiver Period through the most recently ended fiscal quarter, and provided for an increase in the LIBOR floor under the Revolving Credit Facility from 0 to 25 basis points for Eurodollar Rate Loans (as defined in the credit agreements) and established a Base Rate (as defined in the credit agreements) floor of 1.25% on the Revolving Credit Facility.
The March 2021 amendments also modified certain of the existing financial maintenance covenants to less restrictive levels upon exiting the Extended Covenant Waiver Period as follows:
Maximum Consolidated Leverage Ratio of 8.50 to 1.00 for the first two fiscal quarters, 8.00 to 1.00 for two fiscal quarters, 7.50 to 1.00 for one fiscal quarter and then a ratio of 6.50 to 1.00 thereafter;
Minimum Fixed Charge Coverage Ratio of 1.05 to 1.00 for the first fiscal quarter, 1.25 to 1.00 for one fiscal quarter and then a ratio of 1.50 to 1.00 thereafter;
Minimum Unsecured Interest Coverage Ratio of no less than 1.25 to 1.00 for one fiscal quarter, 1.50 to 1.00 for one fiscal quarter, 1.75 to 1.00 for one fiscal quarter and a ratio of 2.00 to 1.00 thereafter; and
Maximum Unsecured Leverage Ratio of 65% for two fiscal quarters and 60% thereafter.
Except as otherwise set forth in the amendments described above, the terms of the credit agreements remained in effect.
In July 2021, the Company notified its lenders under its unsecured credit facilities that it had elected to exit the Extended Covenant Waiver Period effective on July 29, 2021 pursuant to the terms of each of its unsecured credit facilities. Upon exiting the Extended Covenant Waiver Period, the Company is no longer subject to the restrictions regarding its investing and financing activities that were applicable during the Extended Covenant Waiver Period, including, but not limited to, limitations on the acquisition of property, payment of distributions to shareholders (except to the extent required to maintain REIT status), capital expenditures and use of proceeds from the sale of property or common shares of the Company. Those restrictions, including the restriction on payment of distributions to shareholders, were still in place throughout the second quarter of 2021.
As of June 30, 2022, the Company met the applicable financial maintenance covenants based on the results of the twelve months ended June 30, 2022 at the levels required for the fifth fiscal quarter tested upon exiting the Extended Covenant Waiver Period. The unsecured credit facilities do not provide the Company the ability to re-enter the Extended Covenant Waiver Period once it has elected to exit.
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2022 Debt Refinancing
On July 25, 2022, the Company entered into an amendment and restatement of its $850 million credit facility, increasing the borrowing capacity to $1.2 billion and extending the maturity dates (the “$1.2 billion credit facility”). The $1.2 billion credit facility is comprised of (i) a $650 million revolving credit facility with an initial maturity date of July 25, 2026, (ii) a $275 million term loan with a maturity date of July 25, 2027, funded at closing, and (iii) a $300 million term loan with a maturity date of January 31, 2028, of which $200 million was funded at closing and the remaining $100 million will be available to the Company in the form of a delayed draw term loan which allows up to four remaining draws within 180 days of closing. At closing, the Company repaid the outstanding $425 million term loans and $50 million outstanding under the Revolving Credit Facility under the $850 million credit facility with proceeds from the $1.2 billion credit facility. Subject to certain conditions, including covenant compliance and additional fees, the $650 million revolving credit facility maturity date may be extended up to one year. The credit agreement for the $1.2 billion credit facility contains mandatory prepayment requirements, customary affirmative and negative covenants (as described below), restrictions on certain investments and events of default, which are similar to the terms of the previous credit agreement for the $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time. Interest payments on the $1.2 billion credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual SOFR rate for the selected interest period plus a 0.10% SOFR spread adjustment 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 $650 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.
The credit agreement for the $1.2 billion credit facility requires the Company and its subsidiaries to comply with various financial maintenance covenants, which include:
Maximum Consolidated Leverage Ratio of not more than 7.25 to 1.00;
Maximum Secured Leverage Ratio of not more than 45%;
A minimum Consolidated Tangible Net Worth of approximately $3.4 billion plus an amount equal to 75% of the Net Cash Proceeds from issuances and sales of Equity Interests occurring after the Closing Date, July 25, 2022, subject to adjustment;
Minimum Fixed Charge Coverage Ratio of not less than 1.50 to 1.00 for the trailing four full quarters;
Minimum Unsecured Interest Coverage Ratio of not less than 2.00 to 1.00 for the trailing four full quarters;
Maximum Unsecured Leverage Ratio of not more than 60% (subject to a higher level in certain circumstances); and
Maximum Secured Recourse Indebtedness of not more than 10%.
In addition, in July 2022, the Company amended all of the other unsecured credit facilities to align the financial covenants with the amended $1.2 billion credit facility and to replace the reference rate used (LIBOR) with SOFR plus 0.10% as applicable. No changes were made to margin rates.
A summary of the 2022 debt refinancing is set forth below. All dollar amounts are in thousands.
2022 Refinancing
Prior to Refinancing
Capacity
Maturity Date
Interest Rate
650,000
7/25/2026
SOFR + 0.10% + 1.40% - 2.25%
425,000
7/27/2022
Term loan
275,000
7/25/2027
SOFR + 0.10% + 1.35% - 2.20%
7/27/2023
300,000
1/31/2028
1/31/2024
1,225,000
850,000
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Mortgage Debt
As of June 30, 2022, the Company had approximately $366.0 million in outstanding mortgage debt secured by 22 properties with maturity dates ranging from October 2022 to May 2038 and both stated 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 June 30, 2022 and December 31, 2021 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.
Location
Interest
Rate (1)
Loan
Assumption
or
Origination
Principal
Assumed
Originated
Outstanding
balance
as of
Seattle, WA
4.00
8/16/2021
56,000
Grapevine, TX
4.89
8/29/2012
(5)
11,810
9,075
Collegeville/Philadelphia, PA
8/30/2012
12,650
9,720
Hattiesburg, MS
5.00
3/1/2014
5,732
4,550
Kirkland, WA
12,145
9,640
Rancho Bernardo/San Diego, CA
15,060
11,954
4.96
28,269
22,412
Anchorage, AK
Embassy Suites
4.97
9/13/2012
(6)
23,230
17,595
17,959
Somerset, NJ
4.73
8,750
6,759
6,903
Tukwila, WA
9,431
7,285
7,440
Huntsville, AL
4.12
2/6/2023
8,306
6,334
6,473
Prattville, AL
6,596
5,030
5,141
San Diego, CA
3.97
3/6/2023
18,600
14,144
14,456
Miami, FL
4.02
4/1/2023
16,677
12,722
13,000
New Orleans, LA
4.36
7/17/2014
8/11/2024
27,000
21,574
21,981
Westford, MA
4.28
3/18/2015
4/11/2025
10,000
8,173
8,320
Denver, CO
4.46
9/1/2016
6/11/2025
34,118
28,912
29,415
Oceanside, CA
10/1/2025
13,655
12,170
12,318
Omaha, NE
22,681
20,214
20,460
Boise, ID
4.37
5/26/2016
6/11/2026
24,000
21,438
21,680
Burbank, CA
3.55
11/3/2016
12/1/2026
25,564
21,715
22,098
25,473
21,638
22,019
18,963
16,108
16,392
3.94
3/9/2018
4/1/2028
28,470
25,455
25,845
Santa Ana, CA
15,530
13,885
14,098
Richmond, VA
3.40
2/12/2020
3/11/2030
14,950
14,297
14,447
Portland, ME (3)
3.43
3/2/2020
3/1/2032
33,500
30,500
San Jose, CA
4.22
12/22/2017
5/1/2038
25,741
26,303
572,110
365,986
498,046
Unamortized fair value adjustment of
assumed debt
1,010
(1,303
(1,487
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.
On August 16, 2021, the Company acquired the fee interest in the land at the Seattle, Washington Residence Inn, previously held under a finance ground lease, for a purchase price of $80.0 million, consisting of a $24.0 million cash payment and a one-year note payable to the seller for $56.0 million.
Loan was amended effective March 1, 2022, in conjunction with a $3.0 million prepayment of loan principal. In addition, the maturity date of the loan was extended by two years to March 1, 2032.
Loan was repaid in full on June 16, 2022.
Loans were repaid in full on June 30, 2022.
Loans were repaid in full on August 1, 2022.
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5. Fair Value of Financial Instruments
Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.
Debt
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of June 30, 2022, the carrying value and estimated fair value of the Company’s debt were approximately $1.4 billion and $1.3 billion, respectively. As of December 31, 2021, both the carrying value and estimated fair value of the Company’s debt were approximately $1.4 billion. Both the carrying value and estimated fair value of the Company’s debt (as discussed above) are 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 risk 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. As discussed in Note 1, the Company entered into amendments of its swap agreements during July 2022, to replace LIBOR with SOFR. These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets. The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of June 30, 2022 and December 31, 2021. All dollar amounts are in thousands.
Fair Value Asset (Liability)
Notional Amount at
June 30, 2022
Effective
Swap Fixed
Rate
Active interest rate swaps designated as cash flow hedges at June 30, 2022:
100,000
4/7/2016
9/30/2016
3/31/2023
1.33%
1,213
(955
5/31/2017
7/31/2017
6/30/2024
1.96%
1,616
(1,902
8/10/2017
2.01%
211
(268
6/1/2018
1/31/2019
6/30/2025
2.89%
36
(3,123
7/2/2019
7/5/2019
7/18/2024
1.65%
1,399
(894
8/21/2019
8/23/2019
8/18/2024
1.32%
1,780
(457
8/30/2024
1,798
(455
12/31/2019
1.86%
5,856
(3,277
25,000
12/6/2018
1/31/2020
2.75%
117
(1,442
12/7/2018
5/18/2020
2.72%
294
(1,965
5/18/2025
1.27%
3,478
(458
7/31/2020
8/18/2020
8/18/2022
0.13%
169
79
5/18/2021
5/18/2026
1.30%
4,363
(391
770,000
The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. As of June 30, 2022, all of the 13 active interest rate swap agreements listed above were designated as cash flow hedges. The change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholders’ equity in the Company’s consolidated balance sheets.
Amounts reported in accumulated other comprehensive income 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 $8.7 million of net unrealized gains included in accumulated other comprehensive income at June 30, 2022 will be reclassified as a decrease to interest and other expense, net within the next 12 months.
17
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 (loss) for the three and six months ended June 30, 2022 and 2021 (in thousands):
Net Unrealized Gain (Loss)
Recognized in Other
Comprehensive Income (Loss)
Net Unrealized Loss Reclassified
from Accumulated Other Comprehensive
Income (Loss) to Interest and Other
Expense, net
Three Months Ended June 30,
Interest rate derivatives in cash flow
hedging relationships
9,055
(4,131
(1,564
(2,775
Net Unrealized Gain
Six Months Ended June 30,
33,519
9,236
(4,319
(5,490
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 2021 Form 10-K. Below is a summary of the significant related party relationships in effect during the six months ended June 30, 2022 and 2021.
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 receives 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. Under this cost sharing structure, amounts reimbursed to the Company include both compensation for personnel and office related costs (including office rent, utilities, office supplies, etc.) used by ARG. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for the six months ended June 30, 2022 and 2021 totaled approximately $0.4 million and $0.3 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations.
As part of the cost sharing arrangement, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under this cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies. As of June 30, 2022 and December 31, 2021, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.2 million and $0.3 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.
The Company, through its 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. Lease activity was not significant during the reporting periods.
From time to time, the Company utilizes aircraft, owned by an entity which is owned by the Company’s Executive Chairman, for acquisition, asset management, renovation and investor and public relations purposes, and reimburses this entity at third party rates. Total costs incurred for the use of these aircraft during the six months ended June 30, 2022 and 2021 were less than $0.1 million and are included in general and administrative expenses in the Company’s consolidated statements of operations.
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7. Shareholders’ Equity
For the three and six months ended June 30, 2022, the Company paid distributions of $0.15 and $0.21, respectively, per common share for a total of $34.3 million and $48.0 million, respectively. During the three and six months ended June 30, 2021, the Company paid distributions of $0.01 per common share for a total of $2.2 million. Additionally, in June 2022, the Company declared a monthly cash distribution of $0.05 per common share, totaling $11.4 million, which was recorded as a payable as of June 30, 2022 and paid on July 15, 2022. As of December 31, 2021, a quarterly distribution of $0.01 per common share declared in December 2021 totaled $2.3 million and was paid on January 18, 2022. These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively.
Issuance of Shares
The Company has entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under an at-the-market offering program (the “ATM Program”). Since inception of the ATM Program in August 2020 through June 30, 2022, the Company has sold approximately 4.7 million common shares at a weighted-average market sales price of approximately $16.26 per common share and received aggregate gross proceeds of approximately $76.0 million and proceeds net of offering costs, which included $0.9 million of commissions, of approximately $75.1 million. The Company used the net proceeds from the sale of these shares to pay down borrowings under its Revolving Credit Facility and for general corporate purposes, including acquisitions of hotel properties. As of June 30, 2022, approximately $224.0 million remained available for issuance under the ATM Program. No shares were sold under the Company’s ATM Program in the six months ended June 30, 2022. The Company plans to use future net proceeds from the sale of shares under the ATM Program to continue to pay down borrowings under its Revolving Credit Facility (if any). The Company plans to use the corresponding increased availability under the Revolving Credit Facility for general corporate purposes which may include, among other things, acquisitions of additional properties, the repayment of other outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties.
Share Repurchases
In May 2022, the Company’s Board of Directors approved a one-year extension of its existing share repurchase program, authorizing share repurchases up to an aggregate of $345 million (the “Share Repurchase Program”). The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2023 if not terminated or extended earlier. During the six months ended June 30, 2022, the Company purchased, under its Share Repurchase Program, less than 0.1 million of its common shares at a weighted-average market purchase price of approximately $14.42 per common share for an aggregate purchase price, including commissions, of approximately $0.1 million. The shares were repurchased under a written trading plan as part of the Share Repurchase Program that provided for share repurchases in open market transactions and that was intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon the prevailing market conditions, regulatory requirements and other factors. As of June 30, 2022, approximately $344.9 million remained available for purchase under the Share Repurchase Program.
8. Compensation Plans
The Company annually establishes an incentive plan for its executive management team. Under the incentive plan for 2022 (the “2022 Incentive Plan”), participants are eligible to receive incentive compensation based on the achievement of certain 2022 performance measures, with one-half (50%) of incentive compensation based on operational performance goals and metrics and one-half (50%) of incentive compensation based on shareholder return metrics. With respect to the shareholder return metrics, 75% of the target will be based on shareholder return relative to a peer group and 25% will be based on total shareholder return metrics over one-year, two-year, and three-year periods. With respect to the operational performance goals and metrics, 25% of the target will be based on modified funds from operations per share (as defined within this Quarterly Report on Form 10-Q) and 75% of the target will be based on operational performance goals including: management of capital structure; environmental, social and governance goals; evaluation and pursuit of accretive transactions; effective execution of capital renovation plans; and management of operating expenses to maximize Adjusted Hotel EBITDA (as defined within this Quarterly Report on Form 10-Q). At June 30, 2022, the range of potential aggregate payouts under the 2022 Incentive Plan was $0 - $25.0 million. Based on performance through June 30, 2022, the Company has accrued approximately $8.0 million as a liability for potential executive incentive compensation payments under the 2022 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of June 30, 2022. Compensation expense recognized by the Company under the 2022 Incentive Plan is included in general and administrative expenses in the Company’s consolidated statement of operations and totaled approximately $4.3 million and $8.0
19
million for the three and six months ended June 30, 2022. Approximately 25% of target awards under the 2022 Incentive Plan, if any, will be paid in cash, and 75% will be issued in common shares under the Company’s 2014 Omnibus Incentive Plan, approximately two-thirds of which will be unrestricted and one-third of which will vest in December 2023.
Under the incentive plan for 2021 (the “2021 Incentive Plan”), the Company recorded approximately $3.1 million and $6.0 million in general and administrative expenses in its consolidated statement of operations for the three and six months ended June 30, 2021.
Share-Based Compensation Awards
The following table sets forth information pertaining to the share-based compensation issued under the 2021 Incentive Plan and the incentive plan for 2020 (the “2020 Incentive Plan”).
2021 Incentive
Plan
2020 Incentive
Period common shares issued
First Quarter 2022
First Quarter 2021
Common shares earned under each incentive plan
868,079
555,726
Common shares surrendered on issuance date to satisfy
tax withholding obligations
245,597
117,647
Common shares earned and issued under each
incentive plan, net of common shares surrendered on
issuance date to satisfy tax withholding obligations
622,482
438,079
Closing stock price on issuance date
17.79
14.03
Total share-based compensation earned, including the
surrendered shares (in millions)
15.4
7.8
Of the total common shares earned and issued, total
common shares unrestricted at time of issuance
338,032
160,216
common shares restricted at time of issuance
284,450
277,863
Restricted common shares vesting date
December 9, 2022
December 10, 2021
Common shares surrendered on vesting date to satisfy
tax withholding requirements resulting from vesting
of restricted common shares
n/a
108,292
Of the total 2021 share-based compensation, approximately $12.9 million was recorded as a liability as of December 31, 2021 and is included in accounts payable and other liabilities in the Company’s consolidated balance sheet at December 31, 2021. The remaining $2.5 million, which is subject to vesting on December 9, 2022 and excludes any restricted shares forfeited or vested prior to that date, will be recognized as share-based compensation expense proportionately throughout 2022. For the three and six months ended June 30, 2022, the Company recognized approximately $0.7 million and $1.3 million respectively, of share-based compensation expense related to restricted share awards.
Of the total 2020 share-based compensation, approximately $1.9 million, which vested on December 10, 2021, was recognized as share-based compensation expense proportionately throughout 2021. For the three and six months ended June 30, 2021, the Company recognized approximately $0.5 million and $1.0 million, respectively, of share-based compensation expense related to restricted share awards.
9. Subsequent Events
On July 15, 2022, the Company paid approximately $11.4 million, or $0.05 per common share, in distributions to shareholders of record as of July 5, 2022.
In July 2022, the Company declared a monthly cash distribution of $0.05 per common share for the month of August 2022. The distribution is payable on August 15, 2022, to shareholders of record as of August 2, 2022.
In July 2022, the Company refinanced its $850 million credit facility and amended all other unsecured credit facilities to align the financial covenants with the amended $1.2 billion credit facility and to replace the reference rate used (LIBOR) with SOFR plus 0.10% as applicable. See Note 4 for additional information on the Company’s debt refinancing.
On August 1, 2022, the Company repaid in full three secured mortgage loans for a total of $31.7 million. See Note 4 for additional information concerning these transactions.
20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. Forward-looking statements are typically identified by use of statements that include phrases such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “outlook,” “strategy,” and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company’s forward-looking statements continues to be the adverse effect of COVID-19, including resurgences and variants, on the Company’s business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets generally. The significance, extent and duration of the continued impacts caused by the COVID-19 pandemic on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the efficacy, acceptance and availability of vaccines, the duration of associated immunity and efficacy of the vaccines against variants of COVID-19, the potential for additional hotel closures/consolidations that may be mandated or advisable, whether based on increased COVID-19 cases, new variants or other factors, the slowing or potential rollback of “reopenings” in certain states, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in the Company’s 2021 Form 10-K as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties and redeploy proceeds; the anticipated timing and frequency of shareholder distributions; the ability of the Company to fund capital obligations; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; reduced business and leisure travel due to travel-related health concerns, including the COVID-19 pandemic or an increase in COVID-19 cases or any other infectious or contagious diseases in the U.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; changes in interest rates; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a REIT. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the “Code”). Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled “Risk Factors” in the 2021 Form 10-K. Any forward-looking statement that the Company makes speaks only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.
The following discussion and analysis should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the 2021 Form 10-K.
Overview
The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the U.S. As of June 30, 2022, the Company owned 219 hotels with an aggregate of 28,748 rooms located in urban, high-end suburban and developing markets throughout 36 states. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 17 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.”
The Impact of COVID-19 on the Company and Hospitality Industry
The COVID-19 pandemic has negatively impacted the U.S. and global economies and financial markets. The effect of COVID-19 on the hotel industry has been unprecedented and has dramatically reduced business and impacted leisure travel, which adversely impacted the Company’s business, financial performance, operating results and cash flows, beginning in March 2020.
Since the beginning of the pandemic and through the first six months of 2022, the Company, with the support of its management companies and brands, has taken steps to minimize costs and cash outflow to operate efficiently and maximize performance. The Company has implemented cost elimination and efficiency initiatives at each of its hotels by adjusting operations to manage total labor costs, reducing or eliminating certain amenities and reducing rates under various service contracts; enhanced its sales efforts by strategically targeting available demand; reduced capital improvement projects in 2020 and 2021; and entered into amendments to its unsecured credit facilities that provided for the temporary waiver of financial covenant testing for the majority of its financial maintenance covenants until June 30, 2022 (the Company exited the waiver period in July 2021 due to improved financial performance). Cost reduction initiatives, including those discussed above have not, and are not expected to, materially offset revenue losses from COVID-19.
The extent and duration of the COVID-19 effects remain unknown, and these uncertainties continue to make it difficult to project operating results. The Company has experienced significant improvement in its business during the twelve months ended December 31, 2021 and through the first six months of 2022 driven by strength in leisure, small group and local negotiated business demand. While the Company has seen continued improvement in overall business demand, it anticipates that some larger corporate demand drivers may take longer to fully recover.
Hotel Operations
As of June 30, 2022, the Company owned 219 hotels with a total of 28,748 rooms as compared to 232 hotels with a total of 29,753 rooms as of June 30, 2021. Results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year. During the six months ended June 30, 2022, the Company did not acquire or dispose of any properties. During the same period of 2021, the Company acquired one newly constructed hotel on February 18, 2021 and sold three properties in three separate transactions.
In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”), and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below. RevPAR and operating results may be impacted by regional and local economies as well as changes in lodging demands due to macroeconomic factors including inflationary pressures, higher energy prices or a recessionary environment.
The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company:
(in thousands, except statistical data)
Percent
of
Revenue
Change
100.0
36.5
47.3
Hotel operating expense
54.1
54.7
34.8
56.3
58.9
40.7
Property taxes, insurance and other expense
5.6
7.0
8.4
6.3
9.1
1.2
General and administrative expense
3.1
3.4
22.2
3.3
4.1
20.5
Depreciation and amortization expense
-2.3
-4.7
15,198
18,618
-18.4
29,852
37,131
-19.6
202
132.2
381
195
95.4
222.2
Adjusted Hotel EBITDA (1)
136,515
94,814
44.0
224,451
130,241
72.3
Number of hotels owned at end of period
219
232
-5.6
ADR
153.35
120.56
27.2
145.84
111.19
31.2
Occupancy
77.9
70.7
10.2
72.5
63.2
14.7
RevPAR
119.41
85.28
40.0
105.77
70.23
50.6
22
See reconciliation of Adjusted Hotel EBITDA to net income (loss) in “Non-GAAP Financial Measures” below.
The following table highlights the Company’s quarterly ADR, Occupancy, RevPAR, net income and adjusted hotel earnings before interest, income taxes, depreciation and amortization for real estate (“Adjusted Hotel EBITDA”), all of which have been impacted by COVID-19, during the last five quarters (in thousands except statistical data):
2nd Quarter
3rd Quarter
4th Quarter
1st Quarter
140.02
131.04
137.03
71.5
67.5
67.1
100.14
88.43
91.98
31,759
13,221
18,002
105,423
84,609
87,936
While the Company experienced its most significant decline in operating results (driven by the impact of COVID-19) during 2020 and the first quarter of 2021, occupancy and RevPAR have since shown improvement with a RevPAR increase of 40.0% and 50.6% for the three and six months ended June 30, 2022, compared to the same periods in 2021. Although the Company expects continued recovery in rate and occupancy, it is difficult to project the pace at which the Company will experience a full recovery to pre-pandemic levels and future revenues and operating results could be negatively impacted by, among other things, historical seasonal trends, new COVID-19 variants, state and local governments and businesses reverting to tighter COVID-19 mitigation restrictions, deterioration of consumer sentiment, labor shortages, supply chain disruptions, a recessionary macroeconomic environment or inflationary pressures.
Comparable Hotels Operating Results
The following tables reflect certain operating statistics for the Company’s 219 hotels owned as of June 30, 2022 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 219 hotels owned as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions, results have been excluded for the Company’s period of ownership.
Percent Change 2021
2019
Percent Change 2019
122.69
25.0
145.14
5.7
81.6
-4.5
86.71
37.7
118.41
0.8
112.79
29.3
142.64
2.2
63.1
14.9
77.7
-6.7
71.14
48.7
110.90
-4.6
23
Same Store Operating Results
The following tables reflect certain operating statistics for the 204 hotels owned by the Company as of January 1, 2019 and during the entirety of the reporting periods being compared (“Same Store Hotels”). Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations. This information has not been audited.
152.07
121.99
24.7
144.35
5.3
78.0
71.4
9.2
81.8
118.64
87.07
36.3
118.07
0.5
144.52
112.29
28.7
141.99
1.8
72.8
63.7
14.3
105.23
71.56
47.1
110.76
-5.0
As discussed above, hotel performance is impacted by many factors, including the economic conditions in the U.S. as well as each individual locality. COVID-19 has been negatively affecting the U.S. hotel industry since March 2020. The Company’s Same Store Hotels revenue and operating results improved during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021, which is consistent with the overall lodging industry. While the Company’s Same Store Hotels RevPAR was down approximately 5.0% for the six months ended June 30, 2022, compared to the same period in 2019 (the last year prior to the COVID-19 pandemic), RevPAR was approximately 0.5% higher for the three months ended June 30, 2022 compared to the same period in 2019. Though the Company anticipates further improvement to RevPAR compared to 2021, the Company can give no assurances as to the amount or period of improvement due to the uncertainty regarding the duration and long-term impact of COVID-19.
Revenues
The Company’s principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For the three months ended June 30, 2022 and 2021, the Company had total revenue of $337.7 million and $247.4 million, respectively. For the six months ended June 30, 2022 and 2021, the Company had total revenue of $598.1 million and $406.1 million, respectively. For the three months ended June 30, 2022 and 2021, respectively, Comparable Hotels achieved combined average occupancy of 77.9% and 70.7%, ADR of $153.35 and $122.69 and RevPAR of $119.41 and $86.71. For the six months ended June 30, 2022 and 2021, respectively, Comparable Hotels achieved combined average occupancy of 72.5% and 63.1%, ADR of $145.84 and $112.79 and RevPAR of $105.77 and $71.14. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.
Compared to the same periods in 2021, during the three and six months ended June 30, 2022, the Company experienced increases in ADR and occupancy, resulting in increases of 37.7% and 48.7%, respectively, in RevPAR for Comparable Hotels. Compared to the same periods of 2019 (pre-COVID-19), Comparable Hotels RevPAR for the second quarter of 2022 increased by 0.8% and for the first half of 2022 decreased by 4.6% primarily as a result of increases in ADR, offset by reductions in occupancy. Revenue recovery in the three and six months ended June 30, 2022, as compared to the same periods of 2021 was led by leisure transient and small group demand, with increased demand from small corporate business. Suburban markets continued to see stronger demand than urban markets and the Sun Belt generally outperformed other regions of the U.S. throughout the hospitality industry. The Company expects improvement to continue, however, future revenues could be negatively impacted by, among other things, historical seasonal trends, an increase in COVID-19 cases, new COVID-19 variants, state and local governments and businesses reverting to tighter mitigation restrictions, or deterioration of consumer sentiment.
Hotel Operating Expense
Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. Hotel operating expense for the three months ended June 30, 2022 and 2021 totaled $182.5 million and $135.4 million, respectively, or 54.1% and 54.7% of total revenue for the respective periods. Hotel operating expense for the six months ended June 30, 2022 and 2021 totaled $336.5 million and $239.2 million, respectively, or 56.3% and 58.9% of total revenue for the respective periods. Comparatively, prior to COVID-19, hotel operating expense was 54.9% and 56.2% of total revenue for the three and six months ended June 30, 2019.
24
The impact of the pandemic has varied and will continue to vary by market and hotel. With the support of its brands and third-party management companies, the Company worked to reduce costs associated with operating hotels in a lower occupancy environment than that experienced prior to COVID-19. As occupancy has increased, adding staff to meet increased demand has been challenging, and while the Company’s hotels made progress in filling open positions through the first two quarters of 2022, they have often done so at higher wage rates as compared to 2021 or with more expensive contract labor. Likewise, supply chain disruptions and broader inflationary pressures throughout the overall economy and global tensions have driven shortages and cost increases for materials and supplies such as food and equipment. The Company continues to work with its management companies to realize operational efficiencies and mitigate the impact of cost pressures resulting from supply chain shortages, inflation and staffing challenges. The Company will continue to evaluate and work with its management companies to implement adjustments to the hotel operating model in response to continued changes in the operating environment and guest preferences including evaluating staffing levels at its hotels to maximize efficiency.
Property Taxes, Insurance and Other Expense
Property taxes, insurance, and other expense for the three months ended June 30, 2022 and 2021 was $18.8 million and $17.3 million, respectively, or 5.6% and 7.0% of total revenue for the respective periods. The increase was primarily due to increases in property taxes in certain locations due to the reassessment of property values by localities related to the improved economy, partially offset by decreases at other locations due to successful appeals of tax assessments. For the six months ended June 30, 2022 and 2021, property taxes, insurance and other expense totaled $37.5 million and $37.0 million, or 6.3% and 9.1% of total revenue for the respective periods. The Company will continue to aggressively appeal tax assessments in certain jurisdictions in an attempt to minimize tax increases, as warranted, and will continue to monitor locality guidance as a result of COVID-19.
General and Administrative Expense
General and administrative expense for the three months ended June 30, 2022 and 2021 was $10.3 million and $8.4 million, respectively, or 3.1% and 3.4% of total revenue for the respective periods. For the six months ended June 30, 2022 and 2021, general and administrative expense was $19.9 million and $16.6 million, respectively, or 3.3% and 4.1% of total revenue for the respective periods. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. The increase in general and administrative expense for the three and six months ended June 30, 2022 compared to the same periods in 2021, was primarily due to increased accruals of $1.2 million and $2.0 million, respectively, related to executive incentive compensation, based on operational and shareholder return performance through June 30, 2022 and estimated for the remainder of the year.
The Company did not recognize any loss on the impairment of depreciable real estate assets for the six months ended June 30, 2022. Loss on impairment of depreciable real estate assets was $10.8 million for the six months ended June 30, 2021, consisting of impairment losses of $1.3 million for the Overland Park, Kansas SpringHill Suites and $9.4 million for four hotel properties identified by the Company in the first quarter of 2021 for potential sale. See Note 3 titled “Dispositions” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning these impairment losses.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2022 and 2021 was $45.3 million and $46.4 million, respectively. For the six months ended June 30, 2022 and 2021, depreciation and amortization expense was $90.6 million and $95.1 million, respectively. Depreciation and amortization expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for the respective periods owned. The decreases of approximately $1.1 million and $4.5 million, respectively, for the three and six months ended June 30, 2022 were primarily due to the hotel dispositions completed throughout 2021, partially offset by acquisitions completed throughout 2021 and renovations completed throughout 2022.
Interest and Other Expense, net
Interest and other expense, net for the three months ended June 30, 2022 and 2021 was
25
$15.2 million and $18.6 million, respectively. For the six months ended June 30, 2022 and 2021, interest and other expense, net was $29.9 million and $37.1 million, respectively. Interest and other expense, net for the six months ended June 30, 2022 is net of approximately $0.3 million of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the three months ended June 30, 2022 and 2021 includes approximately $1.5 million and $2.9 million, respectively, of interest recorded on the Company’s finance lease liabilities. For the six months ended June 30, 2022 and 2021, interest and other expense, net includes approximately $2.9 million and $5.8 million, respectively, of interest recorded on the Company’s finance lease liabilities.
Interest expense related to the Company’s debt instruments for the six months ended June 30, 2022 decreased compared to the six months ended June 30, 2021 as a result of both lower average borrowings and lower average interest rates as the Company paid higher rates due to its covenant waiver status during the first six months of 2021. The Company anticipates interest expense for the second half of 2022 to be similar to the second half of 2021 due to reduced average borrowings offset by higher interest rates. See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional discussion of the Company’s amended unsecured credit facilities. In addition, interest on the Company’s finance leases decreased $2.9 million for the six months ended June 30, 2022 compared to the same period in 2021, due to the August 16, 2021 purchase of the fee interest in the land at the Company’s Seattle, Washington Residence Inn that was previously under a ground lease.
Non-GAAP Financial Measures
The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations (“FFO”), Modified Funds from Operations (“MFFO”), Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), Adjusted EBITDAre (“Adjusted EBITDAre”) and Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss), cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA are not necessarily indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. Although FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA, as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company’s results between periods and with other REITs.
FFO and MFFO
The Company calculates and presents FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), which defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.
The Company calculates MFFO by further adjusting FFO for the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.
The following table reconciles the Company’s GAAP net income (loss) to FFO and MFFO for the three and six months ended June 30, 2022 and 2021 (in thousands):
Depreciation of real estate owned
44,557
44,764
89,117
91,852
(Gain) loss on sale of real estate
864
Funds from operations
109,902
65,911
172,464
72,834
Amortization of finance ground lease assets
760
1,618
1,519
3,235
Amortization of favorable and unfavorable operating leases, net
98
196
Non-cash straight-line operating ground lease expense
38
43
Modified funds from operations
110,803
67,670
174,263
76,352
26
EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA
EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.
In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition.
The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels (Adjusted EBITDAre).
The Company further excludes actual corporate-level general and administrative expense for the Company from Adjusted EBITDAre (Adjusted Hotel EBITDA) to isolate property-level operational performance over which the Company’s hotel operators have direct control. The Company believes Adjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and is used by management to measure the performance of the Company’s hotels and effectiveness of the operators of the hotels.
The following table reconciles the Company’s GAAP net income (loss) to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA for the three and six months ended June 30, 2022 and 2021 (in thousands):
EBITDA
126,170
85,472
204,428
106,466
EBITDAre
86,336
113,600
Adjusted EBITDAre
126,208
86,379
204,506
113,687
Adjusted Hotel EBITDA
27
The following table reconciles the Company’s GAAP net income to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA by quarter for the last five quarters (in thousands):
44,217
45,158
45,324
Amortization of favorable and unfavorable
operating leases, net
99
15,977
14,640
14,654
114
159
179
92,165
73,277
78,258
(44
68
92,121
73,345
Non-cash straight-line operating ground lease
expense
92,162
73,386
78,298
13,261
11,223
9,638
Hotels Owned
As of June 30, 2022, the Company owned 219 hotels with an aggregate of 28,748 rooms located in 36 states. The following tables summarize the number of hotels and rooms by brand and by state:
Number of Hotels and Guest Rooms by Brand
Number of
Hotels
5,593
37
4,953
33
4,653
30
3,417
29
3,548
Home2 Suites
1,146
1,245
TownePlace Suites
931
411
Marriott
2
619
316
Independent
263
1
Hyatt House
105
28,748
28
Number of Hotels and Guest Rooms by State
Alabama
1,246
Alaska
304
Arizona
1,776
Arkansas
248
California
3,721
Colorado
567
Florida
2,844
Georgia
585
Idaho
186
Illinois
1,255
Indiana
479
Iowa
301
Kansas
320
Louisiana
422
Maine
514
Maryland
233
Massachusetts
330
Michigan
148
Minnesota
405
Mississippi
168
Missouri
544
Nebraska
621
New Jersey
629
New York
554
North Carolina
881
Ohio
252
Oklahoma
545
Oregon
Pennsylvania
391
South Carolina
590
Tennessee
1,337
Texas
3,328
Utah
393
1,722
Washington
490
Wisconsin
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 219 hotels the Company owned as of June 30, 2022:
Acquired or
Completed
Anchorage
AK
Stonebridge
4/30/2010
12/1/2017
135
Auburn
LBA
101
Birmingham
84
9/12/2017
104
106
McKibbon
95
Dothan
6/1/2009
Huntsville
107
Mobile
Prattville
8/31/2010
122
126
Chandler
North Central
11/2/2010
110
164
125
5/2/2018
210
134
129
Scottsdale
Tempe
8/13/2020
154
Tucson
Western
7/31/2008
124
10/6/2011
Agoura Hills
CA
Dimension
Burbank
Huntington
8/11/2015
190
7/13/2015
170
Clovis
7/31/2009
86
2/2/2010
83
Cypress
180
6/29/2015
Oceanside
142
Rancho Bernardo/San Diego
InnVentures
Sacramento
153
San Bernardino
2/16/2011
San Diego
9/1/2015
245
177
200
121
San Jose
San Juan Capistrano
Santa Ana
5/23/2011
155
Santa Clarita
9/24/2008
10/29/2008
66
128
Tustin
149
Colorado Springs
CO
Chartwell
Denver
221
Highlands Ranch
Boca Raton
Cape Canaveral
4/30/2020
116
108
Fort Lauderdale
6/23/2015
156
Gainesville
Jacksonville
Miami
HHM
4/9/2010
162
Orlando
7/1/2009
3/19/2019
Panama City
3/12/2009
1/19/2010
Pensacola
Tallahassee
Tampa
147
Atlanta/Downtown
2/5/2018
Atlanta/Perimeter Dunwoody
6/28/2018
132
Atlanta
7/1/2016
Macon
Savannah
Newport
Cedar Rapids
IA
Aimbridge
Davenport
Boise
ID
Des Plaines
253
Hoffman Estates
184
Mettawa
Rosemont
158
Skokie
225
Warrenville
31
Indianapolis
IN
Merrillville
Mishawaka
South Bend
120
Wichita
Lafayette
LA
7/30/2010
6/23/2011
New Orleans
Marlborough
Westford
Annapolis
MD
Silver Spring
10/13/2017
Novi
MI
Maple Grove
MN
Rochester
8/3/2009
St. Paul
3/4/2019
160
Kansas City
MO
St. Louis
Hattiesburg
MS
12/11/2008
Carolina Beach
144
94
Durham
12/4/2008
2/3/2011
Greensboro
82
Wilmington
Winston-Salem
Omaha
NE
181
139
123
Cranford
NJ
Mahwah
Mount Laurel
1/11/2011
Somerset
West Orange
131
Islip/Ronkonkoma
NY
Highgate
208
Syracuse
10/16/2015
Mason
OH
32
Twinsburg
10/7/2008
Oklahoma City
OK
5/28/2010
100
Oklahoma City (West)
Collegeville/Philadelphia
PA
11/15/2010
Malvern/Philadelphia
11/30/2010
Pittsburgh
12/31/2008
Charleston
Columbia
143
Hilton Head
Chattanooga
76
Franklin
Knoxville
Nashville
9/30/2010
194
5/31/2012
Addison
Arlington
12/1/2010
Austin
4/14/2009
Austin/Round Rock
3/6/2009
115
Dallas
Denton
2/2/2017
7/19/2010
Frisco
Grapevine
9/24/2010
Houston
1/8/2010
206
Lewisville
10/16/2008
165
San Antonio
Shenandoah
Stafford
Texarkana
1/31/2011
81
Provo
UT
Salt Lake City
10/20/2017
Alexandria
3/28/2011
Charlottesville
Manassas
10/9/2019
55
White Lodging
12/8/2014
413
75
Suffolk
72
Virginia Beach
141
Kirkland
Seattle
234
Tukwila
Related Parties
The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. See Note 6 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning the Company’s related party transactions.
Liquidity and Capital Resources
Capital Resources
The Company’s principal short term sources of liquidity are the operating cash flows generated from the Company’s properties and availability under its Revolving Credit Facility. Over the long term, the Company may receive proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties and offerings of the Company’s common shares, including pursuant to the ATM Program. Macroeconomic pressures including inflation, increases in interest rates and general market uncertainty could impact the Company’s ability to raise debt or equity capital to fund long-term liquidity requirements in a cost-effective manner.
As of June 30, 2022, the Company had $1.4 billion of total outstanding debt consisting of $366.0 million of mortgage debt and $1.0 billion outstanding under its unsecured credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As of June 30, 2022, the Company had available corporate cash on hand of approximately $1.6 million as well as unused borrowing capacity under its Revolving Credit Facility of approximately $359 million.
The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, and restrictions on certain investments. The Company was in compliance with the applicable covenants as of June 30, 2022.
As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company entered into amendments in June 2020 that suspended the testing of the Company’s existing financial maintenance covenants under the unsecured credit facilities. These amendments imposed certain restrictions regarding the Company’s investing and financing activities that were applicable during a specified waiver period. On March 1, 2021, as a result of the continued disruption from COVID-19 and the related uncertainty with respect to the Company’s future operating results, the Company entered into the March 2021 amendments to extend
34
the covenant waiver period for all but two of the Company’s existing financial maintenance covenants until the date that the compliance certificate was required to be delivered for the fiscal quarter ended June 30, 2022, and extending to March 31, 2022 for the remaining two covenants (unless, in each case, the Company elected an earlier date) (the “Extended Covenant Waiver Period”). The March 2021 amendments provided for continued restrictions on the Company’s ability to make cash distributions, except for the payment of cash dividends of $0.01 per common share per quarter or to the extent required to maintain REIT status.
The March 2021 amendments also modified certain of the existing financial maintenance covenants to less restrictive levels upon exiting the Extended Covenant Waiver Period as follows (capitalized terms are defined in the amended credit agreements):
Except as otherwise set forth in the amendments described above, the terms of the credit agreements remain in effect.
In July 2021, the Company notified its lenders under its unsecured credit facilities that it had elected to exit the Extended Covenant Waiver Period effective on July 29, 2021. Upon exiting the Extended Covenant Waiver Period, the Company is no longer subject to the restrictions described above regarding its investing and financing activities that were applicable during the Extended Covenant Waiver Period, including, but not limited to, limitations on the acquisition of property, payment of distributions to shareholders (except to the extent required to maintain REIT status), capital expenditures and use of proceeds from the sale of property or common shares of the Company. Those restrictions, including the restriction on payment of distributions to shareholders, were still in place throughout the second quarter of 2021.
On June 2, 2022, the Company entered into an unsecured $75 million senior notes facility with a maturity date of June 2, 2029. The Company used the net proceeds from the $75 million senior notes facility for general corporate purposes, including the repayment of borrowings under the Company’s Revolving Credit Facility and repayment of mortgage debt.
In July 2022, the Company entered into an amendment and restatement of its $850 million credit facility, increasing the borrowing capacity to $1.2 billion. The amendment and restatement effectively extended the maturity date of the facility and changed the reference rate of the facility from LIBOR to SOFR plus 10 basis points plus a margin ranging from 1.35% to 2.25% depending on the Company’s leverage ratio.
See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company’s debt agreements as of June 30, 2022 and amendments to those agreements subsequent to that date.
The Company has a universal shelf registration statement on Form S-3 (No. 333-262915) that was automatically effective upon filing on February 23, 2022. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. Future offerings will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company’s common shares and opportunities for uses of any proceeds.
The Company has entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under the ATM Program under the Company’s prior shelf registration statement and the current shelf registration statement described above. Since inception of the ATM Program in August 2020 through June 30, 2022, the Company has sold approximately 4.7 million common shares at a weighted-average market sales price of approximately $16.26 per common share and received aggregate gross proceeds of approximately $76.0 million and proceeds net of offering costs, which included $0.9 million of commissions, of approximately $75.1 million. The Company used the net proceeds from the sale of these shares primarily to pay down borrowings under its Revolving Credit Facility and for general corporate purposes, including acquisitions of hotel properties. As of June 30, 2022, approximately $224.0 million remained available for issuance under the ATM Program. No shares were sold under the Company’s ATM Program in the first two quarters of 2022. The Company plans to use future net proceeds from the sale of shares under the ATM Program to continue to pay down borrowings under its Revolving Credit Facility (if any). The Company plans to use the corresponding increased availability under the Revolving Credit Facility for general corporate
35
purposes which may include, among other things, acquisitions of additional properties, the repayment of other outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties.
Capital Uses
The Company anticipates that cash flow from operations, availability under its credit facilities, additional borrowings and proceeds from hotel dispositions and equity offerings will be adequate to meet its anticipated liquidity requirements, including required distributions to shareholders, share repurchases, capital improvements, debt service, hotel acquisitions, lease commitments, and cash management activities.
The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to maintain its REIT status. During the Extended Covenant Waiver Period, as a requirement under the amendments to its unsecured credit facilities, the Company was restricted in its ability to make distributions except for the payment of cash distributions of $0.01 per common share per quarter or to the extent required to maintain REIT status. As discussed above, in July 2021, the Company notified its lenders under its unsecured credit facilities that it had elected to exit the Extended Covenant Waiver Period effective on July 29, 2021. As a result, upon exiting the Extended Covenant Waiver Period, the Company is no longer subject to the restrictions on distributions that were applicable during the Extended Covenant Waiver Period. On February 22, 2022, the Company announced that its Board of Directors reinstated its policy of distributions on a monthly basis, with the first monthly cash distribution paid on March 15, 2022. On June 20, 2022, the Company declared a monthly cash distribution of $0.05 per common share for the month of July, paid on July 15, 2022, to shareholders of record as of July 5, 2022. For the three and six months ended June 30, 2022, the Company paid distributions of $0.15 and $0.21, respectively, per common share for a total of $34.3 million and $48.0 million, respectively.
The Company, as it has done historically due to seasonality, may use its Revolving Credit Facility to maintain the consistency of distributions, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles. Any distribution will be subject to approval of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at any particular distribution rate. The Board of Directors monitors the Company’s distribution rate relative to the performance of its hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company or to the extent required to maintain REIT status. If cash flow from operations and the Revolving Credit Facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions. Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy, and it may need to reduce its distributions to minimum levels required to maintain its qualification as a real estate investment trust. If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.
In May 2022, the Company’s Board of Directors approved a one-year extension of its existing share repurchase program, authorizing share repurchases up to an aggregate of $345 million (the “Share Repurchase Program”). The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2023 if not terminated or extended earlier. During the six months ended June 30, 2022, the Company purchased, under its Share Repurchase Program, less than 0.1 million of its common shares at a weighted-average market purchase price of approximately $14.42 per common share for an aggregate purchase price, including commissions, of approximately $0.1 million. The shares were repurchased under a written trading plan as part of the Share Repurchase Program that provided for share repurchases in open market transactions and that was intended to comply with Rule 10b5-1 under the Exchange Act. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As of June 30, 2022, approximately $344.9 million remained available for purchase under the Share Repurchase Program.
Capital Improvements
Management routinely monitors the condition and operations of its hotels and plans renovations and other improvements as it deems prudent. The Company is committed to maintaining and enhancing each property’s competitive position in its market. The Company has invested in and plans to continue to reinvest in its hotels. Under certain loan and management agreements, the Company is required to place in escrow funds for the repair, replacement and refurbishing of furniture, fixtures, and equipment, based on a percentage of gross revenues, provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of June 30, 2022, the Company held approximately $34.1 million in reserve related to these properties. During the six months ended June 30, 2022, the Company invested approximately $16.6 million in capital expenditures. The Company anticipates spending approximately $55 to $65 million during 2022, which includes various renovation projects for approximately 20 to 25 properties, however, inflationary pressures or supply chain shortages, among other issues, may result in increased costs and delays for anticipated projects. The Company does not currently have any existing or planned projects for new property development.
Upcoming Debt Maturities and Debt Service Payments
The Company has approximately $191.5 million of principal and interest payments due on its debt over the next 12 months. Included in this total is $66.0 million due under the Company’s Revolving Credit Facility, which was scheduled to mature on July 27, 2022, but was amended and restated on July 25, 2022, extending the initial maturity date to July 25, 2026. Also included in the total above is approximately $69.9 million of mortgage loans maturing in the second half of 2022 and first half of 2023, of which the Company paid off $31.7 million on August 1, 2022 using borrowings under its unsecured credit facilities, and the remainder of which the Company plans to pay off using borrowings under its Revolving Credit Facility and/or new financing. See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.
As of June 30, 2022, the Company had one outstanding contract, which was entered into during 2021, for the potential purchase of a hotel in Madison, Wisconsin for an expected purchase price of approximately $78.6 million. The hotel is currently under development and is expected to be completed and opened for business in early 2024, as a 260-room Embassy Suites. Although the Company is working towards acquiring this hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closing on this hotel will occur under the outstanding purchase contract. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the hotel.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6, titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes the Company has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues for the Company’s hotels are greater in the second and third quarters than in the first and fourth quarters. However, due to the effects of COVID-19, these typical seasonal patterns have been disrupted since the first quarter of 2020, although the Company experienced some seasonal decrease in demand in the first and fourth quarters of each year. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements in accordance with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Company’s financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the Company’s Unaudited Consolidated Financial Statements and Notes thereto. The Company has discussed those policies and estimates that it believes are critical and require the use of complex judgment in their application in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 22, 2022. There have been no material changes to the Company’s critical accounting policies or the methods or assumptions we apply.
New Accounting Standards
See Note 1 titled “Organization and Summary of Significant Accounting Policies” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for information on the adoption of recently issued accounting standards in the six months ended June 30, 2022.
Subsequent Events
In July 2022, the Company refinanced its $850 million credit facility and amended all other unsecured credit facilities to align the financial covenants with the amended $1.2 billion credit facility and to replace the reference rate used (LIBOR) with SOFR plus 0.10% as applicable. See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10Q, for additional information on the Company’s debt refinancing.
On August 1, 2022, the Company repaid in full three secured mortgage loans for a total of $31.7 million. See Note 4 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning these transactions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2022, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. However, the Company is exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its Revolving Credit Facility and due to the portion of its variable-rate term debt that is not fixed by interest rate swaps. As of June 30, 2022, after giving effect to interest rate swaps, as described below, approximately $116.0 million, or approximately 8% of the Company’s total debt outstanding, was subject to variable interest rates. Based on the Company’s variable-rate debt outstanding as of June 30, 2022, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $1.2 million, all other factors remaining the same. With the exception of interest rate swap transactions, the Company has not engaged in transactions in derivative financial instruments or derivative commodity instruments.
As of June 30, 2022, the Company’s variable-rate debt consisted of its unsecured credit facilities, including borrowings outstanding under its Revolving Credit Facility and $820 million of term loans. Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable-rate debt. As of June 30, 2022, the Company had 13 interest rate swap agreements that effectively fix the interest payments on approximately $770.0 million of the Company’s variable-rate debt outstanding with swap maturity dates ranging from August 2022 to December 2029. Under the terms of all of the Company’s interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR. See Note 5 titled “Fair Value of Financial Instruments” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company’s interest rate swaps as of June 30, 2022.
In addition to its variable-rate debt and interest rate swaps discussed above, the Company has assumed or originated fixed interest rate mortgages payable to lenders under permanent financing arrangements as well as two fixed-rate senior notes facilities totaling $125 million. The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt and borrowings outstanding under its unsecured credit facilities at June 30, 2022, and does not give effect to the debt refinancing in July 2022. All dollar amounts are in thousands.
July 1 - December 31, 2022
Fair
Market
Value
Total debt:
Maturities
1,338,908
Average interest rates (1)
3.6
3.7
3.8
3.9
4.0
Variable-rate debt:
250,000
310,000
886,000
888,650
3.5
Fixed-rate debt:
36,770
46,214
28,597
70,140
234,616
490,986
450,258
Average interest rates
The average interest rate gives effect to interest rate swaps, as applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Senior management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
During the second quarter of 2022, the Company completed the implementation of a new accounting system which replaced its prior accounting system. The new system enhances the flow of financial information and improves certain accounting processes and procedures. Management has taken the necessary steps to ensure that appropriate controls were designed and implemented where necessary as the new accounting system was implemented.
Except as described above, there have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
The Company is or may be a party to various legal proceedings that arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to management’s knowledge, is any litigation threatened against the Company where the outcome would, in management’s judgment based on information currently available to the Company, have a material adverse effect on the Company’s consolidated financial position or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following is a summary of all share repurchases during the second quarter of 2022.
Issuer Purchases of Equity Securities
(a)
(b)
(c)
(d)
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1)
April 1 - April 30, 2022
345,000
May 1 - May 31, 2022
June 1 - June 30, 2022
10,033
14.42
344,855
Represents amount outstanding under the Company's authorized $345 million Share Repurchase Program. This program, which was announced in 2015 and most recently extended in May 2022, may be suspended or terminated at any time by the Company and will end in July 2023 if not terminated earlier or further extended.
Item 6. Exhibits
Exhibit
Description of Documents
Amended and Restated Articles of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q (SEC File No. 001-37389) filed August 6, 2018)
3.2
Third Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s quarterly report on Form 10-Q (SEC File No. 001-37389) filed May 18, 2020)
10.1
Third Amended and Restated Credit Agreement dated as of July 25, 2022, among the Company, as borrower, certain subsidiaries of the Company, as guarantors, Bank of America, N.A., as Administrative Agent, KeyBank National Association and Wells Fargo Bank, National Association, as Co-Syndication Agents, U.S. Bank National Association, as Documentation Agent, Regions Bank as Managing Agent, the Lenders and Letter of Credit Issuers party thereto, and BofA Securities, Inc., KeyBanc Capital Markets, Wells Fargo Securities, LLC and U.S. Bank National Association, as Joint Lead Arrangers and Joint Bookrunners (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (SEC File No. 001-37389) filed July 27, 2022)
31.1
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
31.3
Certification of the Company’s Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
32.1
Certification of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FURNISHED HEREWITH)
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH)
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted as Inline XBRL and contained in Exhibit 101.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
By:
/s/ Justin G. Knight
Date: August 4, 2022
Justin G. Knight,
Chief Executive Officer
(Principal Executive Officer)
/s/ Elizabeth S. Perkins
Elizabeth S. Perkins,
Chief Financial Officer
(Principal Financial Officer)
/s/ Rachel S. Labrecque
Rachel S. Labrecque,
Chief Accounting Officer
(Principal Accounting Officer)