aple20200630_10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2020

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

 

Commission File Number 001-37389

 

APPLE HOSPITALITY REIT, INC.

(Exact name of registrant as specified in its charter)

 

Virginia

 

26-1379210

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

814 East Main Street

Richmond, Virginia

 

23219

(Address of principal executive offices)   

 

(Zip Code)

 

(804) 344-8121

(Registrant's telephone number, including area code) 

 

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

 

 Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, no par value

APLE

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer                  ☐

 

Non-accelerated filer   ☐   

Smaller reporting company

Emerging growth company 

                    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ☐    No ☒

 

Number of registrant’s common shares outstanding as of July 31, 2020: 223,223,562

 

 

 

 

Apple Hospitality REIT, Inc.

Form 10-Q

Index

 

 

Page   

Number

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

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

3

 

 

 

 

 

 

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

4

 

 

 

 

 

 

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

5

 

 

 

 

 

 

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

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

Item 2.

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

21

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

 

 

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

40

 

 

 

 

 

Item 1A.

Risk Factors

40

 

 

 

 

 

Item 6.

Exhibits

42

 

 

 

 

Signatures

44

 

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

 

 

 

PART I. FINANCIAL INFORMATION 

           

Item 1. Financial Statements

Apple Hospitality REIT, Inc.

Consolidated Balance Sheets

(in thousands, except share data)

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 
   

(unaudited)

         

Assets

               

   Investment in real estate, net of accumulated depreciation and amortization 

of $1,146,325 and $1,054,429, respectively

  $ 4,776,032     $ 4,825,738  

   Assets held for sale

    -       12,093  

   Cash and cash equivalents

    156,461       -  

   Restricted cash-furniture, fixtures and other escrows

    27,713       34,661  

   Due from third party managers, net

    24,925       26,926  

   Other assets, net

    37,068       42,993  

      Total Assets

  $ 5,022,199     $ 4,942,411  
                 

Liabilities

               

   Debt, net

  $ 1,582,168     $ 1,320,407  

   Finance lease liabilities

    219,060       216,627  

   Accounts payable and other liabilities

    108,012       114,364  

      Total Liabilities

    1,909,240       1,651,398  
                 

Shareholders' Equity

               

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

    -       -  

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

      outstanding 223,223,562 and 223,862,913 shares, respectively

    4,488,034       4,493,763  

   Accumulated other comprehensive loss

    (51,059

)

    (4,698

)

   Distributions greater than net income

    (1,324,016

)

    (1,198,052

)

      Total Shareholders' Equity

    3,112,959       3,291,013  
                 

      Total Liabilities and Shareholders' Equity

  $ 5,022,199     $ 4,942,411  

 

See notes to consolidated financial statements.

 

3

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(in thousands, except per share data)
 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Revenues:

                               

    Room

  $ 76,828     $ 315,232     $ 294,807     $ 594,702  

    Food and beverage

    839       15,692       12,151       30,707  

    Other

    3,411       10,193       12,130       19,495  

Total revenue

    81,078       341,117       319,088       644,904  
                                 

Expenses:

                               

Hotel operating expense:

                               

    Operating

    19,707       80,166       87,736       155,746  

    Hotel administrative

    13,811       26,967       37,454       52,597  

    Sales and marketing

    9,430       30,831       33,789       58,525  

    Utilities

    6,308       9,561       15,498       19,500  

    Repair and maintenance

    6,348       13,041       18,141       25,907  

    Franchise fees

    3,656       14,752       13,913       27,863  

    Management fees

    2,557       11,872       10,552       22,501  

Total hotel operating expense

    61,817       187,190       217,083       362,639  

    Property taxes, insurance and other

    18,702       19,246       38,297       38,859  

    General and administrative

    6,025       8,308       15,548       16,445  

    Loss on impairment of depreciable real estate assets

    4,382       -       4,382       -  

    Depreciation and amortization

    49,897       48,109       99,419       96,059  

Total expense

    140,823       262,853       374,729       514,002  
                                 

    Gain (loss) on sale of real estate

    (54 )     (161 )     8,785       1,052  
                                 

Operating income (loss)

    (59,799 )     78,103       (46,856 )     131,954  
                                 

    Interest and other expense, net

    (18,386 )     (15,857 )     (33,952 )     (31,351 )
                                 

Income (loss) before income taxes

    (78,185 )     62,246       (80,808 )     100,603  
                                 

    Income tax expense

    (58 )     (156 )     (204 )     (362 )
                                 

Net income (loss)

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

Other comprehensive loss:

                               

    Interest rate derivatives

    (4,195 )     (10,120 )     (46,361 )     (16,164 )
                                 

Comprehensive income (loss)

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

Basic and diluted net income (loss) per common share

  $ (0.35 )   $ 0.28     $ (0.36 )   $ 0.45  
                                 

Weighted average common shares outstanding - basic and diluted

    223,278       223,899       223,786       223,915  

 

See notes to consolidated financial statements.

 

4

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Shareholders' Equity

 (Unaudited)

(in thousands, except per share data)

 

Three Months Ended June 30, 2020 and 2019

 
   

 

Common Stock

   

Accumulated Other Comprehensive Income (Loss)

   

Distributions Greater Than Net Income

    Total  
   

Number of Shares

   

Amount

             
                                         

Balance at March 31, 2020

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

Share based compensation, net

    207       593       -       -       593  

Interest rate derivatives

    -       -       (4,195 )     -       (4,195 )

Net loss

    -       -       -       (78,243 )     (78,243 )

Balance at June 30, 2020

    223,224     $ 4,488,034     $ (51,059 )   $ (1,324,016 )   $ 3,112,959  
                                         

Balance at March 31, 2019

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

Share based compensation, net

    1       236       -       -       236  

Interest rate derivatives

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

Net income

    -       -       -       62,090       62,090  

Distributions declared to shareholders ($0.30 per share)

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

Balance at June 30, 2019

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

 

Six Months Ended June 30, 2020 and 2019

 
   

 

Common Stock

   

Accumulated Other Comprehensive Income (Loss)

   

Distributions Greater Than Net Income 

     

Total

 
   

Number of Shares

   

Amount

             
                                         

Balance at December 31, 2019

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

Share based compensation, net

    882       8,607       -       -       8,607  

Common shares repurchased

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

Interest rate derivatives

    -       -       (46,361 )     -       (46,361 )

Net loss

    -       -       -       (81,012 )     (81,012 )

Distributions declared to shareholders ($0.20 per share)

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

Balance at June 30, 2020

    223,224     $ 4,488,034     $ (51,059 )   $ (1,324,016 )   $ 3,112,959  
                                         

Balance at December 31, 2018

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

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

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

Share based compensation, net

    146       2,621       -       -       2,621  

Common shares repurchased

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

Interest rate derivatives

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

Net income

    -       -       -       100,241       100,241  

Distributions declared to shareholders ($0.60 per share)

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

Balance at June 30, 2019

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

 

See notes to consolidated financial statements.

 

5

 

Apple Hospitality REIT, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

   

Six Months Ended

 
   

June 30,

 
   

2020

   

2019

 

Cash flows from operating activities:

               

Net income (loss)

  $ (81,012

)

  $ 100,241  

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

               

Depreciation and amortization

    99,419       96,059  

Loss on impairment of depreciable real estate assets

    4,382       -  

Gain on sale of real estate

    (8,785

)

    (1,052

)

Other non-cash expenses, net

    4,802       2,638  

Changes in operating assets and liabilities:

               

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

    2,029       (23,097

)

Increase in other assets, net

    (270

)

    (4,346

)

Decrease in accounts payable and other liabilities

    (8,016

)

    (6,371

)

Net cash provided by operating activities

    12,549       164,072  
                 

Cash flows from investing activities:

               

Acquisition of hotel properties, net

    (25,095

)

    (52,582

)

Refunds (payments) for potential acquisitions, net

    416       (946

)

Capital improvements

    (38,296

)

    (38,770

)

Net proceeds from sale of real estate

    44,382       95,029  

Net cash provided by (used in) investing activities

    (18,593

)

    2,731  
                 

Cash flows from financing activities:

               

Repurchases of common shares

    (14,336

)

    (4,096

)

Repurchases of common shares to satisfy employee withholding requirements

    (1,748

)

    (491

)

Distributions paid to common shareholders

    (67,324

)

    (134,343

)

Net proceeds from (payments on) revolving credit facility

    148,800       (76,100

)

Proceeds from term loans and senior notes

    50,000       75,000  

Proceeds from mortgage debt and other loans

    81,520       -  

Payments of mortgage debt and other loans

    (39,170

)

    (27,206 )

Financing costs

    (2,185

)

    -  

Net cash provided by (used in) financing activities

    155,557       (167,236

)

                 

Net change in cash, cash equivalents and restricted cash

    149,513       (433

)

                 

Cash, cash equivalents and restricted cash, beginning of period

    34,661       33,632  
                 

Cash, cash equivalents and restricted cash, end of period

  $ 184,174     $ 33,199  
                 

Supplemental cash flow information:

               

Interest paid

  $ 29,598     $ 30,495  
                 

Supplemental disclosure of noncash investing and financing activities:

               

Notes payable originated from acquisitions

  $ 21,704     $ -  

Accrued distribution to common shareholders

  $ -     $ 22,385  
                 

Reconciliation of cash, cash equivalents and restricted cash:

               

Cash and cash equivalents, beginning of period

  $ -     $ -  

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

    34,661       33,632  

    Cash, cash equivalents and restricted cash, beginning of period

  $ 34,661     $ 33,632  
                 

Cash and cash equivalents, end of period

  $ 156,461     $ -  

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

    27,713       33,199  

    Cash, cash equivalents and restricted cash, end of period

  $ 184,174     $ 33,199  

 

See notes to consolidated financial statements.

 

6

 

Apple Hospitality REIT, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Organization and Summary of Significant Accounting Policies

 

Organization          

  

Apple Hospitality REIT, Inc., together with its wholly-owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only one reportable segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision-making process of these entities, and therefore does not consolidate the entities. As of June 30, 2020, the Company owned 233 hotels with an aggregate of 29,759 rooms located in 34 states. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”). Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2020.

 

Use of Estimates

 

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

 

Novel Coronavirus COVID-19 Pandemic 

 

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

 

Cash and Cash Equivalents

 

Cash and cash equivalents include highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. The Company’s cash and cash equivalents are distributed among several major banks, but the balances may at times exceed federal depository insurance limits.

 

7

 

Investment in Real Estate

 

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

 

Net Income (Loss) Per Common Share

 

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

 

Reclassifications

 

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

 

Accounting Standards Recently Adopted

 

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

 

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

 

2. Investment in Real Estate

 

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

 

   

June 30,

   

December 31,

 
   

2020

   

2019

 
                 

Land

  $ 726,942     $ 724,054  

Building and Improvements

    4,487,602       4,458,383  

Furniture, Fixtures and Equipment

    496,423       486,386  

Finance Ground Lease Assets

    197,617       197,617  

Franchise Fees

    13,773       13,727  
      5,922,357       5,880,167  

Less Accumulated Depreciation and Amortization

    (1,146,325

)

    (1,054,429

)

Investment in Real Estate, net

  $ 4,776,032     $ 4,825,738  

 

8

 

As of June 30, 2020, the Company owned 233 hotels with an aggregate of 29,759 rooms located in 34 states.

 

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

 

Hotel Acquisitions

 

The Company acquired two hotels during the six months ended June 30, 2020. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.

 

City

 

State

 

Brand

 

Manager

 

Date Acquired

 

Rooms

 

 

Gross Purchase Price

 

Cape Canaveral

 

FL

 

Hampton

 

LBA

 

4/30/2020

 

 

116

 

 

$

24,102

 

Cape Canaveral

 

FL

 

Home2 Suites

 

LBA

 

4/30/2020

 

 

108

 

 

 

22,602

 

 

 

 

 

 

 

 

 

 

 

 

224

 

 

$

46,704

 

 

During the year ended December 31, 2019, the Company acquired three hotels, including two hotels during the six months ended June 30, 2019. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.

 

City

 

State

 

Brand

 

Manager

 

Date Acquired

 

Rooms

 

 

Gross Purchase Price

 

St. Paul

 

MN

 

Hampton

 

Vista Host

 

3/4/2019

 

 

160

 

 

$

31,680

 

Orlando

 

FL

 

Home2 Suites

 

LBA

 

3/19/2019

 

 

128

 

 

 

20,736

 

Richmond

 

VA

 

Independent

 

Crestline

 

10/9/2019

 

 

55

 

 

 

6,875

 

 

 

 

 

 

 

 

 

 

 

 

343

 

 

$

59,291

 

 

The Company utilized $25.0 million of its available cash and entered into a one-year note payable with the developer secured by the hotels for $21.7 million to fund the purchase price of the Cape Canaveral, Florida hotels. The note payable bears interest, which is payable monthly, at a floating annual rate equal to the London Inter-Bank Offered Rate for a one-month term (“one-month LIBOR”) plus a margin of 2.0% for the first six months of the loan term and 3.0% for the second six months of the loan term. The Company used borrowings under its revolving credit facility to purchase each of the hotels acquired in 2019. The acquisitions of these hotel properties were accounted for as an acquisition of a group of assets, with costs incurred to effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired. For the two hotels acquired during the six months ended June 30, 2020, the amount of revenue and operating loss included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2020 was approximately $0.4 million and $(0.3) million, respectively. For the two hotels acquired during the six months ended June 30, 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through June 30, 2019 was approximately $3.4 million and $0.7 million, respectively.

 

9

 

Hotel Purchase Contract Commitments

 

As of June 30, 2020, the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three hotels for a total expected purchase price of approximately $114.2 million. The three hotels are under development and are planned to be completed and opened for business over the next two to 12 months from June 30, 2020, at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under these contracts. As the properties are under development, at this time, the sellers have not met all of the conditions to closing. The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at June 30, 2020. All dollar amounts are in thousands.

 

Location

 

Brands

 

Date of Purchase Contract

 

Rooms

 

 

Refundable Deposits

 

 

Gross Purchase Price

 

Tempe, AZ (1)(2)

 

Hyatt House and Hyatt Place

 

6/13/2018

 

 

259

 

 

$

720

 

 

 $

64,588

 

Madison, WI (1)

 

Hilton Garden Inn

 

7/9/2019

 

 

176

 

 

 

283

 

 

 

49,599

 

 

 

 

 

 

 

 

435

 

 

$

1,003

 

 

$

114,187

 


(1)  These hotels are currently under development. The table shows the expected number of rooms upon hotel completion and the expected franchise brands. Assuming all conditions to closing are met, the purchases of these hotels are expected to occur over the next two to 12 months from June 30, 2020. If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the properties are under development, at this time, the seller has not met all of the conditions to closing.

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

 

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

 

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

 

3. Dispositions and Hotel Sale Contracts

 

Dispositions

 

During the six months ended June 30, 2020, the Company sold two hotels in two transactions with unrelated parties for a total combined gross sales price of approximately $45.0 million, resulting in a combined gain on sale of approximately $8.8 million, net of transaction costs, which is included in the Company’s consolidated statement of operations for the six months ended June 30, 2020. The two hotels had a total carrying value of approximately $35.7 million at the time of sale. The following table lists the two hotels sold:

 

City

 

State

 

Brand

 

Date Sold

 

Rooms

 

Sanford

 

FL

 

SpringHill Suites

 

1/16/2020

 

 

105

 

Boise

 

ID

 

SpringHill Suites

 

2/27/2020

 

 

230

 

    Total

 

 

335

 

 

10

 

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

 

City

 

State

 

Brand

 

Date Sold

 

Rooms

 

Sarasota

 

FL

 

Homewood Suites

 

3/28/2019

 

 

100

 

Tampa

 

FL

 

TownePlace Suites

 

3/28/2019

 

 

94

 

Baton Rouge

 

LA

 

SpringHill Suites

 

3/28/2019

 

 

119

 

Holly Springs

 

NC

 

Hampton

 

3/28/2019

 

 

124

 

Duncanville

 

TX

 

Hilton Garden Inn

 

3/28/2019

 

 

142

 

Texarkana

 

TX

 

Courtyard

 

3/28/2019

 

 

90

 

Texarkana

 

TX

 

TownePlace Suites

 

3/28/2019

 

 

85

 

Bristol

 

VA

 

Courtyard

 

3/28/2019

 

 

175

 

Harrisonburg

 

VA

 

Courtyard

 

3/28/2019

 

 

125

 

Winston-Salem

 

NC

 

Courtyard

 

12/19/2019

 

 

122

 

Fort Lauderdale

 

FL

 

Hampton

 

12/30/2019

 

 

109

 

    Total

 

 

1,285

 

 

Excluding gains on sale of real estate, the Company’s consolidated statements of operations include operating income of approximately $0.1 million and $3.7 million for the six months ended June 30, 2020 and 2019, respectively, relating to the results of operations of the 13 hotels noted above (the two hotels sold in the first six months of 2020 and the 11 hotels sold in 2019) for the period of ownership. The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the six months ended June 30, 2020 and 2019. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.

 

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

 

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

 

4. Debt

 

Summary

 

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

 

   

June 30,
2020

   

December 31,
2019

 

Revolving credit facility

  $ 199,700     $ 50,900  

Term loans and senior notes, net

    863,402       813,934  

Mortgage debt, net

    519,066       455,573  

Debt, net

  $ 1,582,168     $ 1,320,407  

 

11

 

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

 

2020 (July - December)

  $ 4,790  

2021

    71,799  

2022

    309,514  

2023

    296,196  

2024

    338,579  

Thereafter

    567,843  
      1,588,721  

Unamortized fair value adjustment of assumed debt

    2,075  

Unamortized debt issuance costs

    (8,628

)

Total

  $ 1,582,168  

 

The Company uses interest rate swaps to manage its interest rate risks on a portion of its variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to one-month LIBOR. The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. See Note 5 for more information on the interest rate swap agreements. The Company’s total fixed-rate and variable-rate debt, after giving effect to its interest rate swaps in effect at June 30, 2020 and December 31, 2019, is set forth below. All dollar amounts are in thousands.

 

   

June 30,
2020

   

Percentage

   

December 31,
2019

   

Percentage

 

Fixed-rate debt (1)

  $ 1,217,317       77

%

  $ 1,297,467       98

%

Variable-rate debt

    371,404       23

%

    28,400       2

%

Total

  $ 1,588,721             $ 1,325,867          

Weighted-average interest rate of debt

    3.77

%

            3.59

%

       

 


(1)

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

 

Credit Facilities

 

Credit Facilities Amendments June 5, 2020

 

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

 

 

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

 

A minimum liquidity covenant of $100 million;

 

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

 

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

 

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

 

Maximum discretionary capital expenditures of $50 million;

 

12

 

 

Limitations on additional investments; and

 

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

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

$850 Million Credit Facility

 

The Company utilizes an unsecured “$850 million credit facility” comprised of (i) a $425 million revolving credit facility with an initial maturity date of July 27, 2022 and (ii) a $425 million term loan facility consisting of two term loans: a $200 million term loan with a maturity date of July 27, 2023, and a $225 million term loan with a maturity date of January 31, 2024 (the “$425 million term loan facility”). Subject to certain conditions including covenant compliance and additional fees, the $425 million revolving credit facility maturity date may be extended up to one year. The Company may make voluntary prepayments in whole or in part, at any time. Interest payments on the $850 million credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.25%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement. In response to the disruption to the operations of the Company’s hotels and to the financial markets and broader economy caused by COVID-19, the Company drew the remaining availability under its revolving credit facility in March 2020. In June 2020, the Company repaid $225.3 million under its revolving credit facility and as of June 30, 2020, had corporate cash on hand of $156.5 million and availability of $225.3 million under the revolving credit facility. The Company is also required to pay quarterly an unused facility fee at an annual rate of 0.20% or 0.25% on the unused portion of the $425 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.

 

13

 

$225 Million Term Loan Facility

 

The Company has an unsecured $225 million term loan facility that is comprised of (i) a $50 million term loan with a maturity date of August 2, 2023, which was funded on August 2, 2018, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was funded on August 2, 2018 and the remaining $75 million was funded on January 29, 2019. The credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $225 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.50%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  

 

2017 $85 Million Term Loan Facility

 

On July 25, 2017, the Company entered into an unsecured $85 million term loan facility with a maturity date of July 25, 2024, consisting of one term loan that was funded at closing (the “2017 $85 million term loan facility”). The credit agreement, as amended and restated in August 2018, contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $85 million term loan are due monthly. In July 2019, the Company entered into an amendment of the $85 million term loan to reduce the interest rate margin from 1.80% - 2.60% to 1.30% - 2.10%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement, for the remainder of the term.

 

2019 $85 Million Term Loan Facility

 

On December 31, 2019, the Company entered into an unsecured $85 million term loan facility with a maturity date of December 31, 2029, consisting of one term loan funded at closing (the “2019 $85 million term loan facility”). Net proceeds from the 2019 $85 million term loan facility were used to pay down borrowings on the Company’s revolving credit facility. The credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, subject to certain conditions. Interest payments on the 2019 $85 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.70% to 2.55%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  

 

$50 Million Senior Notes Facility

 

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

 

14

 

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

 

           

Outstanding Balance

 
   

Interest Rate

 

Maturity Date

 

June 30,
2020

   

December 31,
2019

 

Revolving credit facility (1)

 

LIBOR + 1.40% - 2.25%

 

7/27/2022

  $ 199,700     $ 50,900  
                         

Term loans and senior notes

                       

$200 million term loan

 

LIBOR + 1.35% - 2.20%

 

7/27/2023

    200,000       200,000  

$225 million term loan

 

LIBOR + 1.35% - 2.20%

 

1/31/2024

    225,000       225,000  

$50 million term loan

 

LIBOR + 1.35% - 2.20%

 

8/2/2023

    50,000       50,000  

$175 million term loan

 

LIBOR + 1.65% - 2.50%

 

8/2/2025

    175,000       175,000  

2017 $85 million term loan

 

LIBOR + 1.30% - 2.10%

 

7/25/2024

    85,000       85,000  

2019 $85 million term loan

 

LIBOR + 1.70% - 2.55%

 

12/31/2029

    85,000       85,000  

$50 million senior notes

  3.60% - 4.35%  

3/31/2030

    50,000       -  

Term loans and senior notes at stated value

            870,000       820,000  

Unamortized debt issuance costs

            (6,598

)

    (6,066

)

Term loans and senior notes, net

            863,402       813,934  
                         

Credit facilities, net (1)

          $ 1,063,102     $ 864,834  

Weighted-average interest rate (2)

            3.55

%

    3.14

%


(1)   Excludes unamortized debt issuance costs related to the revolving credit facility totaling approximately $2.6 million each as of June 30, 2020 and December 31, 2019, respectively, which are included in other assets, net in the Company's consolidated balance sheets.

(2)   Interest rate represents the weighted-average effective annual interest rate at the balance sheet date which includes the effect of interest rate swaps in effect on $670.0 million and $842.5 million of the outstanding variable-rate debt as of June 30, 2020 and December 31, 2019, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at June 30, 2020 and December 31, 2019 was 0.16% and 1.76%, respectively.

 

Mortgage Debt

 

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

 

15

 

Location

 

Brand

 

Interest Rate (1)

 

 

Loan Assumption or Origination Date

 

Maturity Date

 

 

Principal Assumed or Originated

 

 

Outstanding balance as of June 30,
2020

 

 

Outstanding balance as of

December 31,
2019

 

San Juan Capistrano, CA

 

Residence Inn

 

 

4.15

%

 

9/1/2016

 

 

(2)

 

 

$

16,210

 

 

$

-

 

 

$

15,073

 

Cape Canaveral, FL

 

Hampton

   
 

(3)

 

4/30/2020

   

4/30/2021

     

10,852

     

10,852

     

-

 

Cape Canaveral, FL

 

Home2 Suites

   
 

(3)

 

4/30/2020

   

4/30/2021

     

10,852

     

10,852

     

-

 

Colorado Springs, CO

 

Hampton

 

 

6.25

%

 

9/1/2016

 

7/6/2021

 

 

 

7,923

 

 

 

            7,396

 

 

 

7,471

 

Franklin, TN

 

Courtyard

 

 

6.25

%

 

9/1/2016

 

8/6/2021

 

 

 

14,679

 

 

 

          13,707

 

 

 

13,847

 

Franklin, TN

 

Residence Inn

 

 

6.25

%

 

9/1/2016

 

8/6/2021

 

 

 

14,679

 

 

 

          13,707

 

 

 

13,847

 

Grapevine, TX

 

Hilton Garden Inn

 

 

4.89

%

 

8/29/2012

 

9/1/2022

 

 

 

11,810

 

 

 

           9,607

 

 

 

9,775

 

Collegeville/Philadelphia, PA

 

Courtyard

 

 

4.89

%

 

8/30/2012

 

9/1/2022

 

 

 

12,650

 

 

 

      10,290

 

 

 

10,471

 

Hattiesburg, MS

 

Courtyard

 

 

5.00

%

 

3/1/2014

 

9/1/2022

 

 

 

5,732

 

 

 

            4,814

 

 

 

4,897

 

Rancho Bernardo/San Diego, CA

 

Courtyard

 

 

5.00

%

 

3/1/2014

 

9/1/2022

 

 

 

15,060

 

 

 

    12,647

 

 

 

12,866

 

Kirkland, WA

 

Courtyard

 

 

5.00

%

 

3/1/2014

 

9/1/2022

 

 

 

12,145

 

 

 

          10,199

 

 

 

10,376

 

Seattle, WA

 

Residence Inn

 

 

4.96

%

 

3/1/2014

 

9/1/2022

 

 

 

28,269

 

 

 

          23,717

 

 

 

24,130

 

Anchorage, AK

 

Embassy Suites

 

 

4.97

%

 

9/13/2012

 

10/1/2022

 

 

 

23,230

 

 

 

          18,996

 

 

 

19,324

 

Somerset, NJ

 

Courtyard

 

 

4.73

%

 

3/1/2014

 

10/6/2022

 

 

 

8,750

 

 

 

            7,312

 

 

 

7,441

 

Tukwila, WA

 

Homewood Suites

 

 

4.73

%

 

3/1/2014

 

10/6/2022

 

 

 

9,431

 

 

 

            7,880

 

 

 

8,020

 

Prattville, AL

 

Courtyard

 

 

4.12

%

 

3/1/2014

 

2/6/2023

 

 

 

6,596

 

 

 

            5,457

 

 

 

5,558

 

Huntsville, AL

 

Homewood Suites

 

 

4.12

%

 

3/1/2014

 

2/6/2023

 

 

 

8,306

 

 

 

            6,872

 

 

 

6,999

 

San Diego, CA

 

Residence Inn

 

 

3.97

%

 

3/1/2014

 

3/6/2023

 

 

 

18,600

 

 

 

          15,353

 

 

 

15,640

 

Miami, FL

 

Homewood Suites

 

 

4.02

%

 

3/1/2014

 

4/1/2023

 

 

 

16,677

 

 

 

          13,797

 

 

 

14,051

 

New Orleans, LA

 

Homewood Suites

 

 

4.36

%

 

7/17/2014

 

8/11/2024

 

 

 

27,000

 

 

 

          23,144

 

 

 

23,513

 

Westford, MA

 

Residence Inn

 

 

4.28

%

 

3/18/2015

 

4/11/2025

 

 

 

10,000

 

 

 

            8,742

 

 

 

8,876

 

Denver, CO

 

Hilton Garden Inn

 

 

4.46

%

 

9/1/2016

 

6/11/2025

 

 

 

34,118

 

 

 

          30,854

 

 

 

31,311

 

Oceanside, CA

 

Courtyard

 

 

4.28

%

 

9/1/2016

 

10/1/2025

 

 

 

13,655

 

 

 

          12,720

 

 

 

12,812

 

Omaha, NE

 

Hilton Garden Inn

 

 

4.28

%

 

9/1/2016

 

10/1/2025

 

 

 

22,682

 

 

 

          21,128

 

 

 

21,280

 

Boise, ID

 

Hampton

 

 

4.37

%

 

5/26/2016

 

6/11/2026

 

 

 

24,000

 

 

 

          22,370

 

 

 

22,588

 

Burbank, CA

 

Courtyard

 

 

3.55

%

 

11/3/2016

 

12/1/2026

 

 

 

25,564

 

 

 

          23,315

 

 

 

23,552

 

San Diego, CA

 

Courtyard

 

 

3.55

%

 

11/3/2016

 

12/1/2026

 

 

 

25,473

 

 

 

          23,232

 

 

 

23,468

 

San Diego, CA

 

Hampton

 

 

3.55

%

 

11/3/2016

 

12/1/2026

 

 

 

18,963

 

 

 

          17,295

 

 

 

17,471

 

Burbank, CA

 

SpringHill Suites

 

 

3.94

%

 

3/9/2018

 

4/1/2028

 

 

 

28,470

 

 

 

          27,078

 

 

 

27,317

 

Santa Ana, CA

 

Courtyard

 

 

3.94

%

 

3/9/2018

 

4/1/2028

 

 

 

15,530

 

 

 

          14,770

 

 

 

14,901

 

Richmond, VA

 

Courtyard

 

 

3.40

%

 

2/12/2020

 

3/11/2030

 

 

 

14,950

 

 

 

         14,881

 

 

 

-

 

Richmond, VA

 

Residence Inn

 

 

3.40

%

 

2/12/2020

 

3/11/2030

 

 

 

14,950

 

 

 

          14,881

 

 

 

-

 

Portland, ME

 

Residence Inn

 

 

3.43

%

 

3/2/2020

 

4/1/2030

 

 

 

33,500

 

 

 

33,500

 

 

 

-

 

San Jose, CA

 

Homewood Suites

 

 

4.22

%

 

12/22/2017

 

5/1/2038

 

 

 

30,000

 

 

 

27,656

 

 

 

28,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

591,306

 

 

 

519,021

 

 

 

454,967

 

Unamortized fair value adjustment of assumed debt

 

 

 

 

 

 

 

 

 

 

 

 

 

2,075

 

 

 

2,526

 

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,030

)

 

 

(1,920

)

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

519,066

 

 

$

455,573

 


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

(2)  Loan was repaid in full in March 2020.

(3)  Interest rate is variable based on one-month LIBOR plus 2.00% until October 31, 2020 and one-month LIBOR plus 3.00% from November 1, 2020 through April 30, 2021. As of June 30, 2020, the interest rate was 2.16%.

 

16

 

During April and May 2020, the Company applied for and received approximately $18 million in loans under the CARES Act Paycheck Protection Program. Due to subsequent guidance issued by the Small Business Administration and the Department of Treasury, related to the intended participants in this program, the Company repaid all amounts received. The proceeds from these loans are included in “proceeds from mortgage debt and other loans” and the repayments of these loans are included in “payments of mortgage debt and other loans” in the Company’s consolidated statement of cash flows for the six months ended June 30, 2020. The Company will continue to evaluate relief initiatives and stimulus packages, including any accompanying restrictions on its business that would be imposed by such packages, that may be or become available to the Company under government stimulus programs.

 

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, 2020, the carrying value and estimated fair value of the Company’s debt were approximately $1.6 billion and $1.5 billion, respectively. As of December 31, 2019, both the carrying value and estimated fair value of the Company’s debt were approximately $1.3 billion. Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issuance costs related to term loans, senior notes and mortgage debt for each specific year.

 

Derivative Instruments

 

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR. The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets. The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of June 30, 2020 and December 31, 2019. All dollar amounts are in thousands.

 

Notional Amount at

June 30, 2020

                       

Fair Value Asset (Liability)

 
   

Origination Date

 

Effective Date

 

Maturity Date

 

Swap Fixed Interest Rate

   

June 30,

2020

   

December 31,
2019

 
                                         

Interest rate swaps designated as cash flow hedges at June 30, 2020:

                       
$ 50,000    

4/7/2016

 

9/30/2016

 

3/31/2021

    1.09

%

  $ (349

)

  $ 317  
  100,000    

4/7/2016

 

9/30/2016

 

3/31/2023

    1.33

%

    (3,341

)

    707  
  75,000    

5/31/2017

 

7/31/2017

 

6/30/2024

    1.96

%

    (5,438

)

    (1,286

)

  10,000    

8/10/2017

 

8/10/2017

 

6/30/2024

    2.01

%

    (746

)

    (185

)

  50,000    

6/1/2018

 

1/31/2019

 

6/30/2025

    2.89

%

    (6,746

)

    (3,407

)

  50,000    

7/2/2019

 

7/5/2019

 

7/18/2024

    1.65

%

    (3,049

)

    (193

)

  50,000    

8/21/2019

 

8/23/2019

 

8/18/2024

    1.32

%

    (2,408

)

    595  
  50,000    

8/21/2019

 

8/23/2019

 

8/30/2024

    1.32

%

    (2,422

)

    603  
  85,000    

12/31/2019

 

12/31/2019

 

12/31/2029

    1.86

%

    (11,022

)

    (842

)

  25,000    

12/6/2018

 

1/31/2020

 

6/30/2025

    2.75

%

    (3,201

)

    (1,501

)

  50,000    

12/7/2018

 

5/18/2020

 

1/31/2024

    2.72

%

    (4,673

)

    (2,139

)

  75,000    

8/21/2019

 

5/18/2020

 

5/18/2025

    1.27

%

    (3,903

)

    1,222  
  75,000    

8/21/2019

 

5/18/2021

 

5/18/2026

    1.30

%

    (3,761

)

    1,309  
  745,000                           (51,059

)

    (4,800

)

                                         

Interest rate swaps matured prior to June 30, 2020:

                       
  212,500    

5/19/2015

 

5/21/2015

 

5/18/2020

    1.58

%

    -       78  
  110,000    

7/2/2015

 

7/2/2015

 

5/18/2020

    1.62

%

    -       24  
  322,500                           -       102  
$ 1,067,500                         $ (51,059

)

  $ (4,698

)

 

17

 

The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. As of June 30, 2020, all of the 13 unmatured 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 (loss), a component of shareholders’ equity in the Company’s consolidated balance sheets. Amounts reported in accumulated other comprehensive income (loss) will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives. The Company estimates that approximately $10.8 million of net unrealized losses included in accumulated other comprehensive loss at June 30, 2020 will be reclassified as an increase to interest and other expense, net within the next 12 months.

 

The following table presents the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2020 and 2019 (in thousands): 

 

   

Net Unrealized Loss Recognized in Other Comprehensive Income (Loss)

   

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

 
   

Three Months Ended June 30,

   

Three Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest rate derivatives in cash flow hedging relationships

  $ (6,394

)

  $ (8,898

)

  $ (2,199

)

  $ 1,222  

 

   

Net Unrealized Loss Recognized in Other Comprehensive Income (Loss)

   

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

 
   

Six Months Ended June 30,

   

Six Months Ended June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Interest rate derivatives in cash flow hedging relationships

  $ (48,661

)

  $ (13,668

)

  $ (2,300

)

  $ 2,496  

 

6. Related Parties

 

The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. There have been no changes to the contracts and relationships discussed in the 2019 Form 10-K. Below is a summary of the significant related party relationships in effect during the six months ended June 30, 2020 and 2019.

 

Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receive support services from ARG.

 

The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for both the six months ended June 30, 2020 and 2019 totaled approximately $0.6 million, 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, 2020, and December 31, 2019, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million and $0.5 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.

 

18