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 quarterlyquarterly period ended March 31, 2018
☐ | 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’sRegistrant's telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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”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 ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Shares, no par value | APLE | New York Stock Exchange |
Number of registrant’s common shares outstanding as of May 1, 2018: 230,339,578
Apple Hospitality REIT, Form 10-QInc.
Page Number | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | ||||
3 | ||||
4 | ||||
5 | ||||
Consolidated Statements of Cash Flows - Three months ended March 31, | 6 | |||
7 | ||||
Item 2. | 22 | |||
Item 3. | 37 | |||
Item 4. | 38 | |||
PART II. OTHER INFORMATION | ||||
Item 1. | 39 | |||
| Item 1A. | 39 | |||
Item 2. | 39 | |||
Item 6. | 40 | |||
41 | ||||
This Form 10-Q includes references to certain trademarks or service marks. The Courtyard by Marriott®, Fairfield Inn by Marriott®, Fairfield Inn & Suites 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 & 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
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
Investment in real estate, net of accumulated depreciation of $775,894 and $731,284, respectively | $ | 4,829,776 | $ | 4,793,159 | ||||
| Restricted cash-furniture, fixtures and other escrows | 31,438 | 29,791 | ||||||
| Due from third party managers, net | 57,240 | 31,457 | ||||||
| Other assets, net | 54,917 | 47,931 | ||||||
| Total Assets | $ | 4,973,371 | $ | 4,902,338 | ||||
| Liabilities | ||||||||
| Revolving credit facility | $ | 170,700 | $ | 106,900 | ||||
| Term loans | 656,569 | 656,279 | ||||||
| Mortgage debt | 500,189 | 459,017 | ||||||
| Accounts payable and other liabilities | 89,439 | 109,057 | ||||||
| Total Liabilities | 1,416,897 | 1,331,253 | ||||||
| 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 230,339,578 and 229,961,548 shares, respectively | 4,594,247 | 4,588,188 | ||||||
| Accumulated other comprehensive income | 16,070 | 9,778 | ||||||
| Distributions greater than net income | (1,053,843 | ) | (1,026,881 | ) | ||||
| Total Shareholders’ Equity | 3,556,474 | 3,571,085 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 4,973,371 | $ | 4,902,338 | ||||
Apple Hospitality REIT, Inc. |
(in thousands, except share data) |
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Investment in real estate, net of accumulated depreciation and amortization of $923,877 and $909,893, respectively | $ | 4,891,503 | $ | 4,816,410 | ||||
Restricted cash-furniture, fixtures and other escrows | 32,269 | 33,632 | ||||||
Due from third party managers, net | 51,358 | 29,091 | ||||||
Other assets, net | 49,257 | 49,539 | ||||||
Total Assets | $ | 5,024,387 | $ | 4,928,672 | ||||
Liabilities | ||||||||
Debt, net | $ | 1,405,616 | $ | 1,412,242 | ||||
Finance lease liabilities | 162,818 | - | ||||||
Accounts payable and other liabilities | 88,926 | 107,420 | ||||||
Total Liabilities | 1,657,360 | 1,519,662 | ||||||
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 223,868,180 and 223,997,348 shares, respectively | 4,493,362 | 4,495,073 | ||||||
Accumulated other comprehensive income | 3,962 | 10,006 | ||||||
Distributions greater than net income | (1,130,297 | ) | (1,096,069 | ) | ||||
Total Shareholders' Equity | 3,367,027 | 3,409,010 | ||||||
Total Liabilities and Shareholders' Equity | $ | 5,024,387 | $ | 4,928,672 | ||||
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
(Unaudited)
(in thousands, except per share data)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| Room | $ | 274,836 | $ | 269,393 | ||||
| Other | 23,553 | 23,532 | ||||||
| Total revenue | 298,389 | 292,925 | ||||||
| Expenses: | ||||||||
| Operating | 75,954 | 75,154 | ||||||
| Hotel administrative | 25,102 | 24,836 | ||||||
| Sales and marketing | 25,332 | 24,109 | ||||||
| Utilities | 10,283 | 9,753 | ||||||
| Repair and maintenance | 12,453 | 11,916 | ||||||
| Franchise fees | 12,733 | 12,474 | ||||||
| Management fees | 10,472 | 10,212 | ||||||
| Property taxes, insurance and other | 17,229 | 16,927 | ||||||
| Ground lease | 2,850 | 2,816 | ||||||
| General and administrative | 6,877 | 6,754 | ||||||
| Loss on impairment of depreciable real estate assets | - | 7,875 | ||||||
| Depreciation | 44,840 | 43,767 | ||||||
| Total expenses | 244,125 | 246,593 | ||||||
| Operating income | 54,264 | 46,332 | ||||||
| Interest and other expense, net | (11,919 | ) | (11,717 | ) | ||||
| Income before income taxes | 42,345 | 34,615 | ||||||
| Income tax expense | (163 | ) | (250 | ) | ||||
| Net income | $ | 42,182 | $ | 34,365 | ||||
| Other comprehensive income: | ||||||||
| Interest rate derivatives | 6,292 | 1,545 | ||||||
| Comprehensive income | $ | 48,474 | $ | 35,910 | ||||
| Basic and diluted net income per common share | $ | 0.18 | $ | 0.15 | ||||
| Weighted average common shares outstanding - basic and diluted | 230,515 | 223,047 | ||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Revenues: | ||||||||
Room | $ | 279,470 | $ | 274,836 | ||||
Food and beverage | 15,015 | 15,710 | ||||||
Other | 9,302 | 7,843 | ||||||
Total revenue | 303,787 | 298,389 | ||||||
Expenses: | ||||||||
Hotel operating expense: | ||||||||
Operating | 75,580 | 75,954 | ||||||
Hotel administrative | 25,630 | 25,102 | ||||||
Sales and marketing | 27,694 | 25,332 | ||||||
Utilities | 9,939 | 10,283 | ||||||
Repair and maintenance | 12,866 | 12,453 | ||||||
Franchise fees | 13,111 | 12,733 | ||||||
Management fees | 10,629 | 10,472 | ||||||
Total hotel operating expense | 175,449 | 172,329 | ||||||
Property taxes, insurance and other | 19,208 | 17,229 | ||||||
Operating ground lease | 405 | 2,850 | ||||||
General and administrative | 8,137 | 6,877 | ||||||
Depreciation and amortization | 47,950 | 44,840 | ||||||
Total expense | 251,149 | 244,125 | ||||||
Gain on sale of real estate | 1,213 | - | ||||||
Operating income | 53,851 | 54,264 | ||||||
Interest and other expense, net | (15,494 | ) | (11,919 | ) | ||||
Income before income taxes | 38,357 | 42,345 | ||||||
Income tax expense | (206 | ) | (163 | ) | ||||
Net income | $ | 38,151 | $ | 42,182 | ||||
Other comprehensive income (loss): | ||||||||
Interest rate derivatives | (6,044 | ) | 6,292 | |||||
Comprehensive income | $ | 32,107 | $ | 48,474 | ||||
Basic and diluted net income per common share | $ | 0.17 | $ | 0.18 | ||||
Weighted average common shares outstanding - basic and diluted | 223,932 | 230,515 | ||||||
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Shareholders' Equity
Three Months Ended March 31, 2019 and 2018
(Unaudited)
(in thousands, except per share data)
Common Stock | Accumulated Other Comprehensive Income (Loss) | Distributions Greater Than Net Income | ||||||||||||||||||
Number of Shares | Amount | Total | ||||||||||||||||||
Balance at December 31, 2018 | 223,997 | $ | 4,495,073 | $ | 10,006 | $ | (1,096,069 | ) | $ | 3,409,010 | ||||||||||
Cumulative effect of the adoption of ASU 2016-02 related to leases | - | - | - | (5,201 | ) | (5,201 | ) | |||||||||||||
Share based compensation, net | 145 | 2,385 | - | - | 2,385 | |||||||||||||||
Common shares repurchased | (274 | ) | (4,096 | ) | - | - | (4,096 | ) | ||||||||||||
Interest rate derivatives | - | - | (6,044 | ) | - | (6,044 | ) | |||||||||||||
Net income | - | - | - | 38,151 | 38,151 | |||||||||||||||
Distributions declared to shareholders ($0.30 per share) | - | - | - | (67,178 | ) | (67,178 | ) | |||||||||||||
Balance at March 31, 2019 | 223,868 | $ | 4,493,362 | $ | 3,962 | $ | (1,130,297 | ) | $ | 3,367,027 | ||||||||||
Balance at December 31, 2017 | 229,962 | $ | 4,588,188 | $ | 9,778 | $ | (1,026,881 | ) | $ | 3,571,085 | ||||||||||
Share based compensation, net | 390 | 5,684 | - | - | 5,684 | |||||||||||||||
Issuance of common shares, net | 243 | 4,679 | - | - | 4,679 | |||||||||||||||
Common shares repurchased | (255 | ) | (4,304 | ) | - | - | (4,304 | ) | ||||||||||||
Interest rate derivatives | - | - | 6,292 | - | 6,292 | |||||||||||||||
Net income | - | - | - | 42,182 | 42,182 | |||||||||||||||
Distributions declared to shareholders ($0.30 per share) | - | - | - | (69,144 | ) | (69,144 | ) | |||||||||||||
Balance at March 31, 2018 | 230,340 | $ | 4,594,247 | $ | 16,070 | $ | (1,053,843 | ) | $ | 3,556,474 | ||||||||||
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
(Unaudited)
(in thousands)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2018 | 2017 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 42,182 | $ | 34,365 | ||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
| Depreciation | 44,840 | 43,767 | ||||||
| Loss on impairment of depreciable real estate assets | - | 7,875 | ||||||
| Other non-cash expenses, net | 1,992 | 1,849 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase in due from third party managers, net | (25,920 | ) | (26,222 | ) | ||||
| Decrease (increase) in other assets, net | (2,485 | ) | 9,345 | |||||
| Decrease in accounts payable and other liabilities | (7,746 | ) | (34,814 | ) | ||||
| Net cash provided by operating activities | 52,863 | 36,165 | ||||||
| Cash flows from investing activities: | ||||||||
| Acquisition of hotel properties, net | (61,614 | ) | (18,131 | ) | ||||
| Deposits and other disbursements for potential acquisitions | (204 | ) | - | |||||
| Capital improvements | (24,672 | ) | (17,461 | ) | ||||
| Net cash used in investing activities | (86,490 | ) | (35,592 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net proceeds related to issuance of common shares | 4,731 | - | ||||||
| Repurchases of common shares | (4,304 | ) | - | |||||
| Repurchases of common shares to satisfy employee withholding requirements | (876 | ) | (432 | ) | ||||
| Distributions paid to common shareholders | (69,144 | ) | (66,908 | ) | ||||
| Net proceeds from revolving credit facility | 63,800 | 96,600 | ||||||
| Proceeds from mortgage debt | 44,000 | - | ||||||
| Payments of mortgage debt | (2,933 | ) | (31,949 | ) | ||||
| Net cash provided by (used in) financing activities | 35,274 | (2,689 | ) | |||||
| Net change in cash, cash equivalents and restricted cash | 1,647 | (2,116 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of period | 29,791 | 29,425 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 31,438 | $ | 27,309 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 11,760 | $ | 11,855 | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Accrued distribution to common shareholders | $ | 23,020 | $ | 22,301 | ||||
| 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 | 29,791 | 29,425 | ||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 29,791 | $ | 29,425 | ||||
| Cash and cash equivalents, end of period | $ | - | $ | - | ||||
| Restricted cash-furniture, fixtures and other escrows, end of period | 31,438 | 27,309 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 31,438 | $ | 27,309 | ||||
Three Months Ended | ||||||||
March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 38,151 | $ | 42,182 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation and amortization | 47,950 | 44,840 | ||||||
Gain on sale of real estate | (1,213 | ) | - | |||||
Other non-cash expenses, net | 1,186 | 1,992 | ||||||
Changes in operating assets and liabilities: | ||||||||
Increase in due from third party managers, net | (22,251 | ) | (25,920 | ) | ||||
Increase in other assets, net | (2,345 | ) | (2,485 | ) | ||||
Decrease in accounts payable and other liabilities | (5,235 | ) | (7,746 | ) | ||||
Net cash provided by operating activities | 56,243 | 52,863 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of hotel properties, net | (52,576 | ) | (61,614 | ) | ||||
Deposits and other disbursements for potential acquisitions | (360 | ) | (204 | ) | ||||
Capital improvements | (21,223 | ) | (24,672 | ) | ||||
Net proceeds from sale of real estate | 95,143 | - | ||||||
Net cash provided by (used in) investing activities | 20,984 | (86,490 | ) | |||||
Cash flows from financing activities: | ||||||||
Net proceeds related to issuance of common shares | - | 4,731 | ||||||
Repurchases of common shares | (4,096 | ) | (4,304 | ) | ||||
Repurchases of common shares to satisfy employee withholding requirements | (491 | ) | (876 | ) | ||||
Distributions paid to common shareholders | (67,188 | ) | (69,144 | ) | ||||
Net payments on existing revolving credit facility | (78,400 | ) | - | |||||
Net proceeds from extinguished revolving credit facility | - | 63,800 | ||||||
Proceeds from term loans | 75,000 | - | ||||||
Proceeds from mortgage debt | - | 44,000 | ||||||
Payments of mortgage debt | (3,415 | ) | (2,933 | ) | ||||
Net cash (used in) provided by financing activities | (78,590 | ) | 35,274 | |||||
Net change in cash, cash equivalents and restricted cash | (1,363 | ) | 1,647 | |||||
Cash, cash equivalents and restricted cash, beginning of period | 33,632 | 29,791 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 32,269 | $ | 31,438 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 15,409 | $ | 11,760 | ||||
Supplemental disclosure of noncash investing and financing activities: | ||||||||
Accrued distribution to common shareholders | $ | 22,384 | $ | 23,020 | ||||
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 | 33,632 | 29,791 | ||||||
Cash, cash equivalents and restricted cash, beginning of period | $ | 33,632 | $ | 29,791 | ||||
Cash and cash equivalents, end of period | $ | - | $ | - | ||||
Restricted cash-furniture, fixtures and other escrows, end of period | 32,269 | 31,438 | ||||||
Cash, cash equivalents and restricted cash, end of period | $ | 32,269 | $ | 31,438 | ||||
See 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.States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only one reportable segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision making process of these entities, and therefore does not consolidate the entities. As of March 31, 2018,2019, the Company owned 241234 hotels with an aggregate of 30,58530,046 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 United StatesU.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, 20172018 (the “2017“2018 Form 10-K”). Operating results for the three months ended March 31, 20182019 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2018.
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.
Net Income Per Common Share
Basic net income per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net income per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net income per common share were the same for each of the periods presented.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported net income or shareholders’ equity. With the adoption of Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), the Company recorded a cumulative-effect adjustment to distributions greater than net income, a component of shareholders’ equity, as of January 1, 2019. See “Accounting Standards Recently Adopted” below and Note 9 for more information.
Accounting StandardsRecently Adopted
In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)ASU No. 2014-09, Revenue from Contracts2016-02, Leases (Topic 842), which replaces Leases (Topic 840), and along with Customerssubsequent amendments, provides the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under this standard, lessees are required to recognize most leases on their balance sheets as right-of-use assets and lease liabilities. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less are accounted for similarly to the previous accounting guidance under Leases (Topic 606).840), for operating leases. The core principlestandard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provides entities another optional transition method, which the Company elected, to apply the standard using the modified retrospective approach at its effective date, versus restating the prior periods presented, and recognizing a cumulative-effect adjustment to the opening balance of retained earnings for the effect of initially applying Topic 842 in the period of adoption. Consequently, an entity’s reporting for periods presented prior to adoption of the new standard is that revenue should be recognized to depictlease requirements in the transfer of promised goods or services to customersconsolidated financial statements would continue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard became effective for annual and interim periods beginning after December 15, 2017. accordance with Leases (Topic 840), including disclosures.
The Company adopted this standard as ofeffective January 1, 2018 using2019, electing to recognize and measure its leases prospectively at the modified retrospective approach. Thebeginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company’s historical accounting policy. At adoption, the Company evaluated eachrecorded a cumulative-effect adjustment totaling approximately $5.2 million to distributions greater than net income, a component of its revenue streams under the new standard and concluded that the adoption of this standard did not impact the amount or timing of revenue recognitionshareholders’ equity in the Company’s consolidated financial statements.balance sheet. The Company also considered and determined thatelected to apply certain practical expedients allowed under the following disaggregated revenue reflectsstandard including (i) to use hindsight in determining the nature and timingterm as well as assessing the impairment of its significant revenue streams (in thousands).
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Revenues: | ||||||||
| Room | $ | 274,836 | $ | 269,393 | ||||
| Food and beverage | 15,710 | 16,733 | ||||||
| Other | 7,843 | 6,799 | ||||||
| Total revenue | $ | 298,389 | $ | 292,925 | ||||
At adoption of the new standard, the Company recorded right-of-use assets and lease liabilities for its ground leases and certain transactionsother operating leases measured at the estimated present value of the remaining minimum lease payments under the leases. Four of the Company’s ground leases that were previously classified as operating leases under Topic 840 are classified in the statement of cash flows. The standard wasas financing leases under Topic 842. For these finance leases, effective for annual and interim periods beginning after December 15, 2017. The Company adopted this standard as of January 1, 2018,2019, the Company recognizes depreciation and the adoption did not have a material impact on the Company’s consolidated financial statementsamortization expense and related disclosures.
2. Investment in Real Estate
The Company’s investment in real estate consisted of the following (in thousands):
| March 31, | December 31, | |||||||
| 2018 | 2017 | |||||||
| Land | $ | 730,763 | $ | 720,465 | ||||
| Building and Improvements | 4,425,158 | 4,362,929 | ||||||
| Furniture, Fixtures and Equipment | 437,084 | 428,734 | ||||||
| Franchise Fees | 12,665 | 12,315 | ||||||
| 5,605,670 | 5,524,443 | |||||||
| Less Accumulated Depreciation | (775,894 | ) | (731,284 | ) | ||||
| Investment in Real Estate, net | $ | 4,829,776 | $ | 4,793,159 | ||||
March 31, | December 31, | |||||||
2019 | 2018 | |||||||
Land | $ | 730,614 | $ | 737,822 | ||||
Building and Improvements | 4,461,084 | 4,503,728 | ||||||
Furniture, Fixtures and Equipment | 465,457 | 471,399 | ||||||
Finance ground lease assets | 144,768 | - | ||||||
Franchise Fees | 13,457 | 13,354 | ||||||
| 5,815,380 | 5,726,303 | |||||||
Less Accumulated Depreciation and Amortization | (923,877 | ) | (909,893 | ) | ||||
Investment in Real Estate, net | $ | 4,891,503 | $ | 4,816,410 | ||||
Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), as amended and, as a result, recorded finance ground lease assets for four of its ground leases, which are included in investment in real estate, net. See Note 9 for more information regarding the Company’s finance ground lease assets.
As of March 31, 2018,2019, the Company owned 241234 hotels with an aggregate of 30,58530,046 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 three months ended March 31, 2019. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.
City | State | Brand | Manager | Date Acquired | Rooms | Gross Purchase Price | ||||||||||
St. Paul | MN | Hampton | Vista Host | 3/4/2019 | 160 | $ | 31,680 | |||||||||
Orlando | FL | Home2 Suites | LBA | 3/19/2019 | 128 | 20,736 | ||||||||||
| 288 | $ | 52,416 | ||||||||||||||
During the year ended December 31, 2018, the Company acquired five hotels including two hotels in the first three months of 2018. 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 (a) | ||||||||||
| Atlanta | GA | Hampton | McKibbon | 2/5/2018 | 119 | $ | 24,000 | |||||||||
| Memphis | TN | Hampton | Crestline | 2/5/2018 | 144 | 39,000 | ||||||||||
| 263 | $ | 63,000 | ||||||||||||||
| City | State | Brand | Manager | Date Acquired | Rooms | Gross Purchase Price (a) | ||||||||||
| Fort Worth | TX | Courtyard | LBA | 2/2/2017 | 124 | $ | 18,034 | |||||||||
| Birmingham (b) | AL | Hilton Garden Inn | LBA | 9/12/2017 | 104 | 19,162 | ||||||||||
| Birmingham (b) | AL | Home2 Suites | LBA | 9/12/2017 | 106 | 19,276 | ||||||||||
| Portland | ME | Residence Inn | Pyramid | 10/13/2017 | 179 | 55,750 | ||||||||||
| Salt Lake City | UT | Residence Inn | Huntington | 10/20/2017 | 136 | 25,500 | ||||||||||
| Anchorage | AK | Home2 Suites | Stonebridge | 12/1/2017 | 135 | 24,048 | ||||||||||
| 784 | $ | 161,770 | ||||||||||||||
City | State | Brand | Manager | Date Acquired | Rooms | Gross Purchase Price | ||||||||||
Atlanta/Downtown | GA | Hampton | McKibbon | 2/5/2018 | 119 | $ | 24,000 | |||||||||
Memphis | TN | Hampton | Crestline | 2/5/2018 | 144 | 39,000 | ||||||||||
Phoenix | AZ | Hampton | North Central | 5/2/2018 | 210 | 44,300 | ||||||||||
Atlanta/Perimeter Dunwoody | GA | Hampton | LBA | 6/28/2018 | 132 | 29,500 | ||||||||||
Jacksonville | FL | Hyatt Place | LBA | 12/7/2018 | 127 | 15,400 | ||||||||||
| 732 | $ | 152,200 | ||||||||||||||
The Company used borrowings under its $540 million revolving credit facility (the “revolving credit facility”) to purchase each of these hotels. The acquisitions of these hotel properties were accounted for as an acquisition of a group of assets, with costs incurred to effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired. For the two hotels acquired during the three months ended March 31, 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2019 was approximately $0.7 million and $0.1 million, respectively. For the two hotels acquired during the three months ended March 31, 2018, the amount of revenue and operating income
As of March 31, 2018,2019, the Company had outstanding contracts for the potential purchase of two additionalfour hotels which were under construction, for a total expected purchase price of approximately $65.0 million. The Phoenix Hampton Inn & Suites was acquired on May 2, 2018, the same day the hotel opened for business. It is anticipated that the construction of the Orlando Home2 Suites will$110.0 million, which are under development and are planned to be completed and opened for business duringover the fourth quarter of 2018,next 15 to 21 months from March 31, 2019, at which time a closingclosings on this hotel isthese hotels are expected to occur. Although the Company is working towards acquiring this hotel,these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closingclosings on this hotelthese hotels will occur under the outstanding purchase contract.contracts. The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at March 31, 2018.2019. All dollar amounts are in thousands.
Location (1) | Brands | Date of Purchase Contract | Rooms | Refundable Deposits | Gross Purchase Price | |||||||||||
Cape Canaveral, FL (2) | Hampton and Home2 Suites | 4/11/2018 | 224 | $ | 3 | $ | 46,704 | |||||||||
Tempe, AZ (3) | Hyatt House and Hyatt Place | 6/13/2018 | 254 | 720 | 63,341 | |||||||||||
| 478 | $ | 723 | $ | 110,045 | ||||||||||||
| Location | Brand | Date of Purchase Contract | Rooms | Refundable Deposits | Gross Purchase Price | |||||||||||
| Phoenix, AZ (a) | Hampton | 10/25/2016 | 210 | $ | 500 | $ | 44,300 | |||||||||
| Orlando, FL (b) | Home2 Suites | 1/18/2017 | 128 | 3 | 20,736 | |||||||||||
| 338 | $ | 503 | $ | 65,036 | ||||||||||||
(1) | |||||||||||
(2) | These hotels are part of an adjoining combined 224-room, dual-branded complex that will be located on the same site. | ||||||||||
(3) | These hotels are part of an adjoining combined 254-room, dual-branded complex that will be located on the same site. | ||||||||||
The Company intends to use borrowings under its credit facilities to purchase of the Phoenix Hampton Inn & Suites was funded through the Company’s revolving credit facility and it is anticipated that the purchase of the Orlando Home2 Suites will be funded similarlyhotels under contract if a closing occurs.
3. Dispositions
In February 2019, the Company identified two propertiesterminated its purchase and sale agreement with an unrelated party for potentialthe sale of 16 of its hotels and in April 2017, the Company entered into separate contractstwo purchase and sale agreements with the same unrelated party for the sale of these properties. Due toa total of nine hotels for a total combined gross sales price of $95.0 million. On March 28, 2019, the changeCompany completed the sale of the hotels, resulting in a gain of approximately $1.8 million, which is included in the anticipated hold periodCompany’s consolidated statement of operations for eachthe three months ended March 31, 2019. The nine hotels had a total carrying value of theseapproximately $93.0 million at the time of the sale. The following table lists the nine hotels sold:
City | State | Brand | Rooms | |||||
Sarasota | FL | Homewood Suites | 100 | |||||
Tampa | FL | TownePlace Suites | 94 | |||||
Baton Rouge | LA | SpringHill Suites | 119 | |||||
Holly Springs | NC | Hampton | 124 | |||||
Duncanville | TX | Hilton Garden Inn | 142 | |||||
Texarkana | TX | Courtyard | 90 | |||||
Texarkana | TX | TownePlace Suites | 85 | |||||
Bristol | VA | Courtyard | 175 | |||||
Harrisonburg | VA | Courtyard | 125 | |||||
Total | 1,054 | |||||||
During the year ended December 31, 2018, the Company reviewedsold three hotels in two transactions with unrelated parties for a total combined gross sales price of approximately $15.8 million, resulting in a combined gain on sale of approximately $0.2 million, which is included in the estimated undiscounted cash flows generated by each propertyCompany’s consolidated statement of operations for the year ended December 31, 2018. Of the three hotels sold, two of the hotels (the Columbus, Georgia 89-room SpringHill Suites and determined that,86-room TownePlace Suites) were sold on July 13, 2018 for eacha combined gross sales price of $10.0 million, resulting in no gain or loss on the sale, and one hotel (the 72-room Springdale, Arkansas Residence Inn) was sold on November 29, 2018 for a gross sales price of approximately $5.8 million, resulting in a gain of approximately $0.2 million. During the undiscounted cash flows were less than its carrying value; thereforesecond quarter of 2018, the Company recognized an impairment losslosses of approximately $7.9$3.1 million related to these three hotels, which is included in the first quarterCompany’s consolidated statement of 2017operations for the year ended December 31, 2018, and consisted of approximately $0.5 million to adjust the bases of these propertiesthe two Columbus hotels that sold in July 2018 to their estimated fair values, which were based on the then contracted sale price,sales prices, net of estimated selling costs, and approximately $2.6 million to adjust the basis of the Springdale, Arkansas Residence Inn that sold in November 2018 to its estimated fair value, which was based on the offers received at that time, net of estimated selling costs.
The Company’s consolidated statements of operations include operating income, excluding gain on sale of real estate, of approximately $1.2 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively, relating to the results of operations of the twelve hotels sold as noted above for the period of ownership. The sale of these properties does not represent a Level 1 inputstrategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three months ended March 31, 2019 and 2018. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.
4. Debt
Summary
As of March 31, 2019 and December 31, 2018, the Company’s debt consisted of the following (in thousands):
March 31, 2019 | December 31, 2018 | |||||||
Revolving credit facility | $ | 190,400 | $ | 268,800 | ||||
Term loans, net | 728,702 | 653,382 | ||||||
Mortgage debt, net | 486,514 | 490,060 | ||||||
Debt, net | $ | 1,405,616 | $ | 1,412,242 | ||||
The aggregate amounts of principal payable under the fair value hierarchy. In May 2017, bothCompany’s total debt obligations as of March 31, 2019 (including the revolving credit facility, term loans and mortgage debt), for the five years subsequent to March 31, 2019 and thereafter are as follows (in thousands):
2019 (April - December) | $ | 30,391 | ||
2020 | 28,349 | |||
2021 | 47,586 | |||
2022 | 299,652 | |||
2023 | 295,615 | |||
Thereafter | 709,165 | |||
| 1,410,758 | ||||
Unamortized fair value adjustment of assumed debt | 3,203 | |||
Unamortized debt issuance costs related to term loans and mortgage debt | (8,345 | ) | ||
Total | $ | 1,405,616 |
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 contracts were terminated.
March 31, 2019 | Percentage | December 31, 2018 | Percentage | |||||||||||||
Fixed-rate debt (1) | $ | 1,092,858 | 77 | % | $ | 1,046,273 | 74 | % | ||||||||
Variable-rate debt (2) | 317,900 | 23 | % | 371,300 | 26 | % | ||||||||||
Total | $ | 1,410,758 | $ | 1,417,573 | ||||||||||||
Weighted-average interest rate of debt | 3.80 | % | 3.74 | % | ||||||||||||
(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. | |||||||
(2) | The Company has two forward interest rate swaps that begin in 2020 that will effectively fix the interest rate on an additional $75 million of the Company's variable-rate debt. See Note 5 for more information on the interest rate swap agreements. | |||||||
Revolving Credit Facility and Term Loans
$965850 Million Credit Facility
On July 27, 2018, the Company utilizesentered into an amendment and restatement of its then outstanding unsecured “$965$965 million credit facility, which was repaid at closing, reducing the borrowing capacity to $850 million, reducing the annual interest rate and extending the maturity dates (the “$850 million credit facility”). The $850 million credit facility is comprised of (i) a $540$425 million revolving credit facility with an initial maturity date of May 18, 2019July 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 May 18, 2020, consistingJuly 27, 2023, and a $225 million term loan with a maturity date of three term loans, allJanuary 31, 2024, both funded during 2015at closing (the “$425 million term loans”loan facility”). At closing, the Company repaid the $425 million outstanding under the term loans of the $965 million credit facility with the proceeds from the $425 million term loan facility under the $850 million credit facility and borrowed approximately $196 million under the $425 million revolving credit facility to repay the outstanding balance of the extinguished revolving credit facility and to pay closing costs. 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 $965$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 (the London Inter-Bank Offered Rate for a one-month term) plus a margin ranging from 1.50%1.35% to 2.30%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 0.30%0.25% on the unused portion of the $425 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.
$150225 Million Term Loan Facility
On April 8, 2016,August 2, 2018, the Company entered into an unsecuredamendment and restatement of its then outstanding $150 million term loan facility, which was repaid at closing, increasing the borrowing capacity to $225 million, reducing the annual interest rate and extending the maturity dates (the “$225 million term loan facility”). The $225 million term loan facility is comprised of (i) a $50 million term loan with a maturity date of August 2, 2023, which was funded at closing, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was drawn at closing and the remaining $75 million was drawn on January 29, 2019. At closing, the Company repaid the $150 million outstanding under the $150 million term loan facility with a syndicate of commercial banks (the “$150the proceeds from the $225 million term loan facility”), consisting of a $50 million term loan that will mature on April 8, 2021 (the “$50 million term loan”) and a $100 million term loan that will mature on April 8, 2023 (the “$100 million term loan,” and collectively with the $50 million term loan, the “$150 million term loans”).facility. The credit agreement contains requirements and covenants similar to the Company’s $965$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 $150$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 1.45%1.35% to 2.20% for the $50 million term loan and 1.80% to 2.60% for the $100 million term loan,2.50%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
$85 Million Term Loan
On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024 (the “$85 million term loan” and, together with the $425$850 million credit facility and the $225 million term loansloan facility, the “credit facilities”). Although no material terms were changed, the credit agreement was amended and restated in August 2018 as a result of the $150 million term loans, the “term loans”).refinancings noted above. The amended and restated credit agreement contains requirements and covenants similar to the Company’s $965$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 and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.80% to 2.60%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
As of March 31, 20182019 and December 31, 2017,2018, the details of the Company’s revolving credit facility and term loansfacilities were as set forth below. All dollar amounts are in thousands.
| As of March 31, 2018 | As of December 31, 2017 | |||||||||||||||||||||
| Maturity Date | Outstanding Balance | Interest Rate | Outstanding Balance | Interest Rate | ||||||||||||||||||
| Revolving credit facility (1) | 5/18/2019 | $ | 170,700 | 3.43 | % | (2) | $ | 106,900 | 3.11 | % | (2) | |||||||||||
| Term loans | ||||||||||||||||||||||
| $425 million term loans | 5/18/2020 | 425,000 | 3.16 | % | (3) | 425,000 | 3.09 | % | (3) | |||||||||||||
| $50 million term loan | 4/8/2021 | 50,000 | 2.54 | % | (4) | 50,000 | 2.54 | % | (4) | |||||||||||||
| $100 million term loan | 4/8/2023 | 100,000 | 3.13 | % | (4) | 100,000 | 3.13 | % | (4) | |||||||||||||
| $85 million term loan | 7/25/2024 | 85,000 | 3.76 | % | (4) | 85,000 | 3.76 | % | (4) | |||||||||||||
| Total term loans at stated value | 660,000 | 660,000 | ||||||||||||||||||||
| Unamortized debt issuance costs | (3,431 | ) | (3,721 | ) | ||||||||||||||||||
| Total term loans | 656,569 | 656,279 | ||||||||||||||||||||
| Total revolving credit facility and term loans | $ | 827,269 | $ | 763,179 | ||||||||||||||||||
Outstanding Balance | |||||||||||
Interest Rate | Maturity Date | March 31, 2019 | December 31, 2018 | ||||||||
Revolving credit facility (1) | LIBOR + 1.40% - 2.25% | 7/27/2022 | $ | 190,400 | $ | 268,800 | |||||
Term loans | |||||||||||
$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 | 100,000 | |||||||
$85 million term loan | LIBOR + 1.80% - 2.60% | 7/25/2024 | 85,000 | 85,000 | |||||||
Term loans at stated value | 735,000 | 660,000 | |||||||||
Unamortized debt issuance costs | (6,298 | ) | (6,618 | ) | |||||||
Term loans, net | 728,702 | 653,382 | |||||||||
Revolving credit facility and term loans, net (1) | $ | 919,102 | $ | 922,182 | |||||||
Weighted-average interest rate (2) | 3.45 | % | 3.37 | % | |||||||
(1) | ||||||||||
(2) | ||||||||||
The credit agreements governing the $965 million credit facility, the $150 million term loan facility and the $85 million term loanfacilities contain mandatory prepayment requirements, customary affirmative covenants, 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 limits on dividend payments and share repurchases and restrictions on certain investments. The Company was in compliance with the applicable covenants at March 31, 2018.
Mortgage Debt
As of March 31, 2018,2019, the Company had approximately $498.5$485.4 million in outstanding mortgage debt secured by 31 properties, with maturity dates ranging from June 2020 to January 2038, stated interest rates ranging from 3.55% to 6.25% and effective interest rates ranging from 3.55% to 4.97%. The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid. The following table sets forth the hotel properties securing each loan, the interest rate, loan assumption or origination date, maturity date, the principal amount assumed or originated, and the outstanding balance prior to any fair value adjustments or debt issuance costs as of March 31, 20182019 and December 31, 20172018 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.
| Location | Brand | Interest Rate (1) | Loan Assumption or Origination Date | Maturity Date | Principal Assumed or Originated | Outstanding balance as of March 31, 2018 | Outstanding balance as of December 31, 2017 | ||||||||||||||||
| San Juan Capistrano, CA | Residence Inn | 4.15 | % | 9/1/2016 | 6/1/2020 | $ | 16,210 | $ | 15,687 | $ | 15,774 | ||||||||||||
| Colorado Springs, CO | Hampton | 6.25 | % | 9/1/2016 | 7/6/2021 | 7,923 | 7,719 | 7,754 | |||||||||||||||
| Franklin, TN | Courtyard | 6.25 | % | 9/1/2016 | 8/6/2021 | 14,679 | 14,303 | 14,368 | |||||||||||||||
| Franklin, TN | Residence Inn | 6.25 | % | 9/1/2016 | 8/6/2021 | 14,679 | 14,303 | 14,368 | |||||||||||||||
| Grapevine, TX | Hilton Garden Inn | 4.89 | % | 8/29/2012 | 9/1/2022 | 11,810 | 10,334 | 10,412 | |||||||||||||||
| Collegeville/Philadelphia, PA | Courtyard | 4.89 | % | 8/30/2012 | 9/1/2022 | 12,650 | 11,069 | 11,152 | |||||||||||||||
| Hattiesburg, MS | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 5,732 | 5,173 | 5,212 | |||||||||||||||
| Rancho Bernardo/San Diego, CA | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 15,060 | 13,591 | 13,692 | |||||||||||||||
| Kirkland, WA | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 12,145 | 10,960 | 11,042 | |||||||||||||||
| Seattle, WA | Residence Inn | 4.96 | % | 3/1/2014 | 9/1/2022 | 28,269 | 25,496 | 25,687 | |||||||||||||||
| Anchorage, AK | Embassy Suites | 4.97 | % | 9/13/2012 | 10/1/2022 | 23,230 | 20,408 | 20,560 | |||||||||||||||
| Somerset, NJ | Courtyard | 4.73 | % | 3/1/2014 | 10/6/2022 | 8,750 | 7,872 | 7,932 | |||||||||||||||
| Tukwila, WA | Homewood Suites | 4.73 | % | 3/1/2014 | 10/6/2022 | 9,431 | 8,484 | 8,549 | |||||||||||||||
| Prattville, AL | Courtyard | 4.12 | % | 3/1/2014 | 2/6/2023 | 6,596 | 5,895 | 5,943 | |||||||||||||||
| Huntsville, AL | Homewood Suites | 4.12 | % | 3/1/2014 | 2/6/2023 | 8,306 | 7,424 | 7,483 | |||||||||||||||
| San Diego, CA | Residence Inn | 3.97 | % | 3/1/2014 | 3/6/2023 | 18,600 | 16,599 | 16,733 | |||||||||||||||
| Miami, FL | Homewood Suites | 4.02 | % | 3/1/2014 | 4/1/2023 | 16,677 | 14,903 | 15,022 | |||||||||||||||
| Syracuse, NY | Courtyard | 4.75 | % | 10/16/2015 | 8/1/2024 | (2) | 11,199 | 10,567 | 10,637 | ||||||||||||||
| Syracuse, NY | Residence Inn | 4.75 | % | 10/16/2015 | 8/1/2024 | (2) | 11,199 | 10,567 | 10,637 | ||||||||||||||
| New Orleans, LA | Homewood Suites | 4.36 | % | 7/17/2014 | 8/11/2024 | 27,000 | 24,747 | 24,919 | |||||||||||||||
| Westford, MA | Residence Inn | 4.28 | % | 3/18/2015 | 4/11/2025 | 10,000 | 9,324 | 9,386 | |||||||||||||||
| Denver, CO | Hilton Garden Inn | 4.46 | % | 9/1/2016 | 6/11/2025 | 34,118 | 32,833 | 33,046 | |||||||||||||||
| Oceanside, CA | Courtyard | 4.28 | % | 9/1/2016 | 10/1/2025 | 13,655 | 13,269 | 13,332 | |||||||||||||||
| Omaha, NE | Hilton Garden Inn | 4.28 | % | 9/1/2016 | 10/1/2025 | 22,682 | 22,040 | 22,145 | |||||||||||||||
| Boise, ID | Hampton | 4.37 | % | 5/26/2016 | 6/11/2026 | 24,000 | 23,319 | 23,422 | |||||||||||||||
| Burbank, CA | Courtyard | 3.55 | % | 11/3/2016 | 12/1/2026 | 25,564 | 24,752 | 24,917 | |||||||||||||||
| San Diego, CA | Courtyard | 3.55 | % | 11/3/2016 | 12/1/2026 | 25,473 | 24,664 | 24,828 | |||||||||||||||
| San Diego, CA | Hampton | 3.55 | % | 11/3/2016 | 12/1/2026 | 18,963 | 18,360 | 18,483 | |||||||||||||||
| Burbank, CA | SpringHill Suites | 3.94 | % | 3/9/2018 | 4/1/2028 | 28,470 | 28,470 | - | |||||||||||||||
| Santa Ana, CA | Courtyard | 3.94 | % | 3/9/2018 | 4/1/2028 | 15,530 | 15,530 | - | |||||||||||||||
| San Jose, CA | Homewood Suites | 4.22 | % | 12/22/2017 | 1/1/2038 | 30,000 | 29,840 | 30,000 | |||||||||||||||
| $ | 528,600 | 498,502 | 457,435 | ||||||||||||||||||||
| Unamortized fair value adjustment of assumed debt | 4,105 | 4,330 | |||||||||||||||||||||
| Unamortized debt issuance costs | (2,418 | ) | (2,748 | ) | |||||||||||||||||||
| Total | $ | 500,189 | $ | 459,017 | |||||||||||||||||||
Location | Brand | Interest Rate (1) | Loan Assumption or Origination Date | Maturity Date | Principal Assumed or Originated | Outstanding balance as of March 31, 2019 | Outstanding balance as of December 31, 2018 | |||||||||||||||||
San Juan Capistrano, CA | Residence Inn | 4.15 | % | 9/1/2016 | 6/1/2020 | $ | 16,210 | $ | 15,341 | $ | 15,431 | |||||||||||||
Colorado Springs, CO | Hampton | 6.25 | % | 9/1/2016 | 7/6/2021 | 7,923 | 7,580 | 7,617 | ||||||||||||||||
Franklin, TN | Courtyard | 6.25 | % | 9/1/2016 | 8/6/2021 | 14,679 | 14,047 | 14,115 | ||||||||||||||||
Franklin, TN | Residence Inn | 6.25 | % | 9/1/2016 | 8/6/2021 | 14,679 | 14,047 | 14,115 | ||||||||||||||||
Grapevine, TX | Hilton Garden Inn | 4.89 | % | 8/29/2012 | 9/1/2022 | 11,810 | 10,020 | 10,101 | ||||||||||||||||
Collegeville/Philadelphia, PA | Courtyard | 4.89 | % | 8/30/2012 | 9/1/2022 | 12,650 | 10,732 | 10,820 | ||||||||||||||||
Hattiesburg, MS | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 5,732 | 5,018 | 5,058 | ||||||||||||||||
Rancho Bernardo/San Diego, CA | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 15,060 | 13,183 | 13,289 | ||||||||||||||||
Kirkland, WA | Courtyard | 5.00 | % | 3/1/2014 | 9/1/2022 | 12,145 | 10,631 | 10,717 | ||||||||||||||||
Seattle, WA | Residence Inn | 4.96 | % | 3/1/2014 | 9/1/2022 | 28,269 | 24,728 | 24,928 | ||||||||||||||||
Anchorage, AK | Embassy Suites | 4.97 | % | 9/13/2012 | 10/1/2022 | 23,230 | 19,798 | 19,957 | ||||||||||||||||
Somerset, NJ | Courtyard | 4.73 | % | 3/1/2014 | 10/6/2022 | 8,750 | 7,629 | 7,692 | ||||||||||||||||
Tukwila, WA | Homewood Suites | 4.73 | % | 3/1/2014 | 10/6/2022 | 9,431 | 8,223 | 8,291 | ||||||||||||||||
Prattville, AL | Courtyard | 4.12 | % | 3/1/2014 | 2/6/2023 | 6,596 | 5,705 | 5,754 | ||||||||||||||||
Huntsville, AL | Homewood Suites | 4.12 | % | 3/1/2014 | 2/6/2023 | 8,306 | 7,184 | 7,246 | ||||||||||||||||
San Diego, CA | Residence Inn | 3.97 | % | 3/1/2014 | 3/6/2023 | 18,600 | 16,058 | 16,198 | ||||||||||||||||
Miami, FL | Homewood Suites | 4.02 | % | 3/1/2014 | 4/1/2023 | 16,677 | 14,423 | 14,547 | ||||||||||||||||
Syracuse, NY | Courtyard | 4.75 | % | 10/16/2015 | 8/1/2024 | (2) | 11,199 | 10,283 | 10,357 | |||||||||||||||
Syracuse, NY | Residence Inn | 4.75 | % | 10/16/2015 | 8/1/2024 | (2) | 11,199 | 10,283 | 10,357 | |||||||||||||||
New Orleans, LA | Homewood Suites | 4.36 | % | 7/17/2014 | 8/11/2024 | 27,000 | 24,052 | 24,232 | ||||||||||||||||
Westford, MA | Residence Inn | 4.28 | % | 3/18/2015 | 4/11/2025 | 10,000 | 9,071 | 9,137 | ||||||||||||||||
Denver, CO | Hilton Garden Inn | 4.46 | % | 9/1/2016 | 6/11/2025 | 34,118 | 31,975 | 32,198 | ||||||||||||||||
Oceanside, CA | Courtyard | 4.28 | % | 9/1/2016 | 10/1/2025 | 13,655 | 13,012 | 13,077 | ||||||||||||||||
Omaha, NE | Hilton Garden Inn | 4.28 | % | 9/1/2016 | 10/1/2025 | 22,682 | 21,613 | 21,722 | ||||||||||||||||
Boise, ID | Hampton | 4.37 | % | 5/26/2016 | 6/11/2026 | 24,000 | 22,906 | 23,015 | ||||||||||||||||
Burbank, CA | Courtyard | 3.55 | % | 11/3/2016 | 12/1/2026 | 25,564 | 24,075 | 24,247 | ||||||||||||||||
San Diego, CA | Courtyard | 3.55 | % | 11/3/2016 | 12/1/2026 | 25,473 | 23,990 | 24,161 | ||||||||||||||||
San Diego, CA | Hampton | 3.55 | % | 11/3/2016 | 12/1/2026 | 18,963 | 17,859 | 17,986 | ||||||||||||||||
Burbank, CA | SpringHill Suites | 3.94 | % | 3/9/2018 | 4/1/2028 | 28,470 | 27,846 | 28,018 | ||||||||||||||||
Santa Ana, CA | Courtyard | 3.94 | % | 3/9/2018 | 4/1/2028 | 15,530 | 15,189 | 15,283 | ||||||||||||||||
San Jose, CA | Homewood Suites | 4.22 | % | 12/22/2017 | 1/1/2038 | 30,000 | 28,857 | 29,107 | ||||||||||||||||
| $ | 528,600 | 485,358 | 488,773 | |||||||||||||||||||||
Unamortized fair value adjustment of assumed debt | 3,203 | 3,428 | ||||||||||||||||||||||
Unamortized debt issuance costs | (2,047 | ) | (2,141 | ) | ||||||||||||||||||||
Total | $ | 486,514 | $ | 490,060 | ||||||||||||||||||||
(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) | Outstanding principal balance is callable by lender or prepayable by the Company on August 1, 2019. | |||||||||
| 2018 (April - December) | $ | 9,730 | ||
| 2019 | 204,505 | |||
| 2020 | 453,349 | |||
| 2021 | 97,586 | |||
| 2022 | 109,252 | |||
| Thereafter | 454,780 | |||
| 1,329,202 | ||||
| Unamortized fair value adjustment of assumed debt | 4,105 | |||
| Unamortized debt issuance costs related to term loans and mortgage debt | (5,849 | ) | ||
| Total | $ | 1,327,458 |
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.
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of March 31, 2019 and December 31, 2018, both the carrying value and estimated fair value of the Company’s debt were approximately $1.3 billion. As of December 31, 2017, both the carrying value and estimated fair value of the Company’s debt were approximately $1.2$1.4 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 and mortgage debt for each specific year.
Derivative Instruments
Currently, the Company uses interest rate swaps to manage its interest rate risks on variable ratevariable-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 ratevariable-rate debt instruments. These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets. The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of March 31, 20182019 and December 31, 2017.2018. All dollar amounts are in thousands.
| Fair Value Asset | |||||||||||||||||||
| Notional Amount at March 31, 2018 | |||||||||||||||||||
| Hedge Type | Origination Date | Maturity Date | Swap Fixed Interest Rate | March 31, 2018 | December 31, 2017 | ||||||||||||||
| Cash flow hedge | $ | 212,500 | 5/21/2015 | 5/18/2020 | 1.58 | % | $ | 3,478 | $ | 2,033 | |||||||||
| Cash flow hedge | 110,000 | 7/2/2015 | 5/18/2020 | 1.62 | % | 1,709 | 951 | ||||||||||||
| Cash flow hedge | 50,000 | 4/7/2016 | 3/31/2021 | 1.09 | % | 2,007 | 1,544 | ||||||||||||
| Cash flow hedge | 100,000 | 4/7/2016 | 3/31/2023 | 1.33 | % | 5,819 | 4,098 | ||||||||||||
| Cash flow hedge | 75,000 | 5/31/2017 | 6/30/2024 | 1.96 | % | 2,724 | 1,043 | ||||||||||||
| Cash flow hedge | 10,000 | 8/10/2017 | 6/30/2024 | 2.01 | % | 333 | 109 | ||||||||||||
| $ | 557,500 | $ | 16,070 | $ | 9,778 | ||||||||||||||
Notional Amount at March 31, 2019 | Swap Fixed Interest Rate | Fair Value Asset (Liability) | |||||||||||||||||
Hedge Type | Origination Date | Maturity Date | March 31, 2019 | December 31, 2018 | |||||||||||||||
Cash flow hedge | $ | 212,500 | 5/21/2015 | 5/18/2020 | 1.58 | % | $ | 1,880 | $ | 2,744 | |||||||||
Cash flow hedge | 110,000 | 7/2/2015 | 5/18/2020 | 1.62 | % | 924 | 1,361 | ||||||||||||
Cash flow hedge | 50,000 | 4/7/2016 | 3/31/2021 | 1.09 | % | 1,141 | 1,519 | ||||||||||||
Cash flow hedge | 100,000 | 4/7/2016 | 3/31/2023 | 1.33 | % | 3,206 | 4,477 | ||||||||||||
Cash flow hedge | 75,000 | 5/31/2017 | 6/30/2024 | 1.96 | % | 738 | 1,905 | ||||||||||||
Cash flow hedge | 10,000 | 8/10/2017 | 6/30/2024 | 2.01 | % | 72 | 226 | ||||||||||||
Cash flow hedge (1) | 50,000 | 6/1/2018 | 6/30/2025 | 2.89 | % | (2,105 | ) | (1,276 | ) | ||||||||||
Cash flow hedge (2) | 25,000 | 12/6/2018 | 6/30/2025 | 2.75 | % | (778 | ) | (379 | ) | ||||||||||
Cash flow hedge (3) | 50,000 | 12/7/2018 | 1/31/2024 | 2.72 | % | (1,116 | ) | (571 | ) | ||||||||||
| $ | 682,500 | $ | 3,962 | $ | 10,006 | ||||||||||||||
(1) | In June 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2019 effectively fixes the interest rate on $50 million of the Company's variable-rate debt. | ||||||||||||||||||
(2) | In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2020 will effectively fix the interest rate on $25 million of the Company's variable-rate debt. | ||||||||||||||||||
(3) | In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning May 18, 2020 will effectively fix the interest rate on $50 million of the Company's variable-rate debt. | ||||||||||||||||||
The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. The Company elected to early adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018, using the modified retrospective approach for all of its hedging relationships that existed as of that date. As a result, effective January 1, 2018, the entire 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. Prior to January 1, 2018, changes in fair value on the effective portion of all designated cash flow hedges were recorded to accumulated other comprehensive income, while changes in fair value on the ineffective portion of all designated cash flow hedges were recorded to interest and other expense, net in the Company’s consolidated statements of operations. Since prior to January 1, 2018 there was no material ineffectiveness related to the Company’s outstanding designated cash flow hedges, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Net Unrealized Gain Recognized in Other Comprehensive Income | Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income to Interest and Other Expense, net | |||||||||||||||
| Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Interest rate derivatives in cash flow hedging relationships | $ | 6,348 | $ | 723 | $ | 56 | $ | (822 | ) | |||||||
The following table presents the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and comprehensive income for the three months ended March 31, 2019 and 2018 (in thousands):
Net Unrealized Gain (Loss) Recognized in Other Comprehensive Income | Net Unrealized Gain Reclassified from Accumulated Other Comprehensive Income to Interest and Other Expense, net | |||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest rate derivatives in cash flow hedging relationships | $ | (4,770 | ) | $ | 6,348 | $ | 1,274 | $ | 56 | |||||||
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 20172018 Form 10-K. Below is a summary of the significant related party relationships in effect during the three months ended March 31, 20182019 and 2017.
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 receivedallocated by the Company fromto ARG for the three months ended March 31, 20182019 and 20172018 totaled approximately $0.3 million and $0.2 million, in each period,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 March 31, 20182019 and December 31, 2017,2018, total amounts due from ARG for reimbursements under the cost sharing structure each totaled approximately $0.3 million at each date,and $0.4 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.
The Company, through a wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation and public relations purposes. The aircraft is also leased to affiliates of the Company based on third party rates. Leasingrates, which leasing activity to affiliates was not significant during the reporting periods. The Company also utilizes aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, by its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third party rates. Total costs incurred for the use of these aircraft during the three months ended March 31, 20182019 and 20172018 were approximately $0.03$0.05 million and $0.04$0.03 million, respectively, and are included in general and administrative expenses in the Company’s consolidated statements of operations.
7. Shareholders’ Equity
Distributions
The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. For the three months ended March 31, 20182019 and 2017,2018, the Company paid distributions of $0.30 per common share for a total of $69.1$67.2 million and $66.9$69.1 million, respectively. Additionally, in March 2018,2019, the Company declared a monthly distribution of $0.10 per common share, totaling $23.0$22.4 million, which was recorded as a payable as of March 31, 20182019 and paid in April 2018.2019. As of December 31, 2017,2018, a monthly distribution of $0.10 per common share, totaling $23.0$22.4 million, was recorded as a payable and paid in January 2018.2019. These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets.
8.Compensation Plans
The Company annually establishes an incentive plan for its executive management. Under the incentive plan for 20182019 (the “2018“2019 Incentive Plan”), participants are eligible to receive a bonus based on the achievement of certain 20182019 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return, over one-year, two-year and three-year periods). The components of the operational performance metrics and shareholder return metrics are equally weighted and account for 50% of the twototal target incentive compensation. The shareholder return metrics eachare weighted 75% for relative shareholder return metrics and 25% for total shareholder return metrics, and account for 50% of the total target incentive compensation. The range of potential aggregate payouts under the 20182019 Incentive Plan is $0 - $20$18 million. Based on performance through March 31, 2018,2019, the Company has accrued approximately $1.9$2.2 million as a liability for potential executive bonus payments under the 20182019 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of March 31, 20182019 and in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2018.2019. Approximately 25% of awards under the 20182019 Incentive Plan, if any, will be paid in cash, and 75% will be issued in stock under the Company’s 2014 Omnibus Incentive Plan, approximately two-thirds of which will vest at the end of 20182019 and one-third of which will vest in December 2019.2020. Under the incentive plan for 20172018 (the “2017“2018 Incentive Plan”), the Company recorded approximately $2.0$1.9 million in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2017.
During the three months ended March 31, 2018 and 2017,2019, the Company recognized approximately $0.3accrued for a one-time separation payment of $0.5 million in connection with the retirement of the Company’s Executive Vice President and $0.1 million, respectively, of share based compensation expense relatedChief Legal Officer which, pursuant to the unvested restricted share awards.
Share-Based Compensation Awards
The following table sets forth information pertaining to the share-based compensation issued under the 2018 Incentive Plan and the incentive plan for 2017 (the “2017 Incentive Plan”).
2018 Incentive Plan | 2017 Incentive Plan | |||||||||
Period common shares issued | First Quarter 2019 | First Quarter 2018 | ||||||||
Common shares earned under each incentive plan | 156,926 | 415,866 | ||||||||
Common shares surrendered on issuance date to satisfy tax withholding obligations | 24,999 | 48,533 | ||||||||
Common shares earned and issued under each incentive plan, net of common shares surrendered on issuance date to satisfy tax withholding obligations | 131,927 | 367,333 | ||||||||
Closing stock price on issuance date | $ | 16.49 | $ | 16.92 | ||||||
Total share-based compensation earned, including the surrendered shares (in millions) | $ | 2.6 | (1) | $ | 7.0 | (2) | ||||
Of the total common shares earned and issued, total common shares unrestricted at time of issuance | 105,345 | 223,421 | ||||||||
Of the total common shares earned and issued, total common shares restricted at time of issuance | 26,582 | 143,912 | ||||||||
Restricted common shares vesting date | December 13, 2019 | December 14, 2018 | ||||||||
Common shares surrendered on vesting date to satisfy tax withholding requirements resulting from vesting of restricted common shares | n/a | 41,389 | ||||||||
| (1) | Of the total 2018 share-based compensation, approximately $2.4 million was recorded as a liability as of December 31, 2018 and is included in accounts payable and other liabilities in the Company's consolidated balance sheet at December 31, 2018. The remaining $0.2 million, which is subject to vesting on December 13, 2019, will be recognized as share-based compensation expense proportionately throughout 2019. For the three months ended March 31, 2019, the Company recognized approximately $0.05 million of share-based compensation expense related to the unvested restricted share awards. |
| (2) | Of the total 2017 share-based compensation, approximately $1.2 million, which vested on December 14, 2018, was recognized as share-based compensation expense proportionately throughout 2018. For the three months ended March 31, 2018, the Company recognized approximately $0.3 million of share-based compensation expense related to the unvested restricted share awards. |
9. Leases
The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of March 31, 2019, the Company had 13 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately four to 87 years. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years.
The Company adopted ASU No. 2016-02, Leases (Topic 842), et al.
Under the new standard, the Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed schedule rent increases) and renewal options that are factored into the determination of lease payments when appropriate and the former individual directorspresent value of Apple Six, Apple Seventhe remaining lease payments is adjusted accordingly. The Company utilizes interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, to determine the present value of the lease payments. At transition to the new standard, the Company used information available at that time to determine the incremental borrowing rates on its existing leases at January 1, 2019 based on estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.
Twelve of the Company’s hotel and Apple Eight, including Mr. Glade Knight (“the Apple REIT Defendants”), on behalf of all then-existing shareholders and former shareholders of Apple Six, Apple Seven and Apple Eight, who purchased additional shares under Apple Six’s, Apple Seven’s and Apple Eight’s DRIP between July 17, 2007 and December 2012 (in the case of Apple Six shareholders) or June 30, 2013 (in the case of Apple Seven and Apple Eight shareholders). On May 1, 2018,parking lot ground leases as well as all of its hotel equipment leases and office space leases are classified as operating leases, for which the Apple REIT Defendants were dismissedCompany recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are included in other assets, net and the lease liabilities are included in accounts payable and other liabilities in the Company’s consolidated balance sheet. In addition, the Company also reclassified at adoption of the new standard, its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the complaint without prejudice byconsolidated balance sheet, respectively, as well as accrued straight-line lease liabilities related to these leases from accounts payable and other liabilities in the plaintiff.consolidated balance sheet to the beginning ROU assets. Lease expense is recognized on a straight-line basis over the term of the respective lease and the value of each lease intangible is amortized over the term of the respective lease. Costs related to operating ground leases are included in operating ground lease expense, while costs related to hotel equipment leases are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases are included in general and administrative expense in the Company’s consolidated statements of operations.
Four of the Company’s hotel ground leases are classified as finance leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are recorded as finance ground lease assets within investment in real estate, net and the lease liabilities are recorded as finance lease liabilities in the Company’s consolidated balance sheet. In addition, the Company also reclassified at adoption of the new standard, its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the consolidated balance sheet, respectively, to the beginning ROU assets. At adoption of the new standard, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million, which included the derecognition of accrued straight-line lease liabilities related to the finance leases, to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The ROU asset and value of each lease intangible is amortized over the term of the respective lease. Costs related to finance ground leases are included in depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statement of operations.
Lease Position as of March 31, 2019
The following table sets forth the lease-related assets and liabilities included in the Company’s consolidated balance sheet as of March 31, 2019. All dollar amounts are in thousands.
Consolidated Balance Sheet Classification | March 31, 2019 | ||||
Assets | |||||
Operating lease assets, net | Other assets, net | $ | 29,332 | ||
Finance ground lease assets, net (1) | Investment in real estate, net | 143,810 | |||
Total lease assets | $ | 173,142 | |||
Liabilities | |||||
Operating lease liabilities | Accounts payable and other liabilities | $ | 12,716 | ||
Finance lease liabilities | Finance lease liabilities | 162,818 | |||
Total lease liabilities | $ | 175,534 | |||
Weighted-average remaining lease term | |||||
Operating leases | 36 years | ||||
Finance leases | 33 years | ||||
Weighted-average discount rate | |||||
Operating leases | 5.42 | % | |||
Finance leases | 5.28 | % | |||
(1) | Finance ground lease assets are net of accumulated amortization of approximately $1.0 million as of March 31, 2019. | |||||
Lease Costs for the Three Months Ended March 31, 2019
The following table sets forth the lease costs related to the Company’s operating and finance ground leases included in the Company’s consolidated statement of operations for the three months ended March 31, 2019 (in thousands):
Consolidated Statement of Operations Classification | Three Months Ended March 31, 2019 | ||||
Operating lease costs (1) | Operating ground lease expense | $ | 405 | ||
Finance lease costs: | |||||
Amortization of lease assets | Depreciation and amortization expense | 1,041 | |||
Interest on lease liabilities | Interest and other expense, net | 1,826 | |||
Total lease costs | $ | 3,272 | |||
(1) | Represents costs related to ground leases, including variable lease costs. Excludes costs related to hotel equipment leases, which are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases, which are included in general and administrative expense in the Company's consolidated statement of operations. | |||||
Undiscounted Cash Flows
The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the operating lease liabilities and finance lease liabilities included in the Company’s consolidated balance sheet as of March 31, 2019 (in thousands):
Operating leases | Finance leases | |||||||
2019 (Apr- Dec) | $ | 1,075 | $ | 5,569 | ||||
2020 | 1,246 | 7,385 | ||||||
2021 | 1,021 | 7,552 | ||||||
2022 | 854 | 7,702 | ||||||
2023 | 784 | 8,051 | ||||||
Thereafter | 33,187 | 363,147 | ||||||
Total minimum lease payments | 38,167 | 399,406 | ||||||
Less: amount of lease payments representing interest | 25,451 | 236,588 | ||||||
Present value of lease liabilities | $ | 12,716 | $ | 162,818 | ||||
Other Information
The following table sets forth supplemental cash flow information related to the Company’s operating and finance leases for the three months ended March 31, 2019 (in thousands):
Three Months Ended March 31, 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows for operating leases | $ | 377 | ||
Operating cash flows for finance leases | 1,443 | |||
10. Subsequent Events
In April 2018,2019, the Company paid approximately $23.0$22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders.
In April 2018,2019, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of May 2018.2019. The distribution is payable on May 15, 2018.
In April 2018,2019, the Company through one of its indirect wholly-owned subsidiaries, entered into a purchase contract for the purchase of all of the ownership interestsa hotel to be constructed in a limited liability company which plans to construct a dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida, with a combined total of 224 guest roomsDenver, Colorado, for a gross purchase price of approximately $46.7 million.a minimum of $49.1 million, which is subject to adjustment based on the actual number of rooms. The hotel is planned to be a Courtyard by Marriott which is expected to contain a minimum of 182 guest rooms. Although the Company is working towards acquiring these hotels,this hotel, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on these hotelsthis hotel will occur.
Forward-Looking Statements
This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; 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; adverse changes in the real estate and real estate capital markets; financing risks; the outcome of current and future litigation including any legal proceedings that have been or may be instituted against the Company or others;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. 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 20172018 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 20172018 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 United States.U.S. As of March 31, 2018,2019, the Company owned 241234 hotels with an aggregate of 30,58530,046 rooms located in urban, high-end suburban and developing markets throughout 34 states. All of the Company’s hotels operate under Marriott, Hilton or HiltonHyatt brands. The hotels are operated and managed under separate management agreements with 23 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.”
New Lease Accounting Standard
On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity, without restating the presentation of periods prior to the effective date (the “new lease accounting standard”). Under the new lease accounting standard, beginning in 2019, four of the Company’s ground leases that were previously accounted for as operating leases are accounted for as finance leases. For these finance leases, effective January 1, 2019 the Company recognizes depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statements of operations, instead of operating ground lease expense. Results prior to January 1, 2019 have not been restated. As a result, the comparability of operating ground lease expense, depreciation and amortization expense, and interest and other expense, net are affected by the implementation of the new lease accounting standard. See Note 1 titled “Organization and Summary of Significant Accounting Policies” and Note 9 titled “Leases” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information on the adoption of the new lease accounting standard.
The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in select-servicerooms-focused hotels, the Company acquired two hotels for an aggregate purchase price of approximately $63.0$52.4 million during the first three months of 2018: 2019: a 119-room160-room Hampton Inn & Suites in Atlanta, GeorgiaSt. Paul, Minnesota and a 144-room Hampton Inn &128-room Home2 Suites in Memphis, Tennessee. On May 2, 2018,Orlando, Florida. Also, as of April 30, 2019, the same day the hotel opened for business, the Company acquired a 210-room Hampton Inn & Suites in Phoenix, Arizona for approximately $44.3 million. As of May 2, 2018, the Company also had outstanding contracts for the potential purchase of threefive hotels that wereare under constructiondevelopment for a total expected purchase price of approximately $67.4$159.2 million, including a 128-room Home2 Suites in Orlando, Florida which isare planned to be completed and opened for business inover the fourth quarter of 2018, and a combined 224-room dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Floridanext 15 to 27 months from March 31, 2019, at which is plannedtime closings on these hotels are expected to be completed and opened for business in 2020. occur. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize the revolvingits credit facilityfacilities for any additional acquisitions.
For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. As a result, in March 2019, the Company sold nine hotels for a total combined gross sales price of $95.0 million. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.
See Note 2 titled “Investment in Real Estate” and Note 93 titled “Subsequent Events”“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 transactions.
Hotel Operations
Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United StatesU.S. and the performance of individual managers assigned to each hotel, performance of the Company’s hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned. Over the past several years, the lodging industry and the Company have experienced modest revenue growth. Moderate improvements in the general U.S. economy have been partially offset by increased lodging supply in many markets.markets, offsetting increases in demand in the lodging sector. With modestessentially flat growth in revenue growth,per available room (“RevPAR”), the Company has produced stable operating results during the first three months of 20182019 on a comparable basis (as defined below) with expense increases generally offsetting revenue growth.. There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging industry and the Company, including but not limited to, increased hotel supply in certain markets, labor uncertainty both for the economy as a whole and the lodging industry in particular, global volatility, and government fiscal policies.policies and economic concerns in the U.S. The Company, on a comparable basis, and industry areis forecasting a low single digit percentage increase in revenueslightly negative to slightly positive RevPAR growth for the full year of 20182019 as compared to 2017. The2018, which reflects modestly lower expectations for demand growth, consistent with lower expected Gross Domestic Product growth in the U.S., relatively consistent anticipated low growth is primarily due to inconsistent demand in certain markets and increased hotel supply meeting demand growth in others, limiting the Company’s ability to increase rates.
As of March 31, 2018,2019, the Company owned 234 hotels with a total of 30,046 rooms as compared to 241 hotels with a total of 30,585 rooms as compared to 236 hotels with a total of 30,203 rooms as of March 31, 2017, however, results2018. 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 three months ended March 31, 2019, the Company acquired one existing hotel on March 4, 2019 and one newly constructed hotel on March 19, 2019, and sold nine hotels on March 28, 2019. During 2018, the Company acquired twoone newly constructed hotel on May 2, 2018 and four existing hotels (both(two on February 5, 2018). During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017,2018, one on October 20, 2017June 28, 2018 and one on December 1, 2017)7, 2018), and sold twothree hotels (one(two on April 20, 2017July 13, 2018 and one on October 5, 2017)November 29, 2018). As a result, the comparability of results for the three months ended March 31, 20182019 and 20172018 as discussed below is impacted by these 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”),RevPAR, and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.
The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company.
| Three Months Ended March 31, | ||||||||||||||||||||
| (in thousands, except statistical data) | 2018 | Percent of Revenue | 2017 | Percent of Revenue | Percent Change | |||||||||||||||
| Total revenue | $ | 298,389 | 100.0 | % | $ | 292,925 | 100.0 | % | 1.9 | % | ||||||||||
| Hotel operating expense | 172,329 | 57.8 | % | 168,454 | 57.5 | % | 2.3 | % | ||||||||||||
| Property taxes, insurance and other expense | 17,229 | 5.8 | % | 16,927 | 5.8 | % | 1.8 | % | ||||||||||||
| Ground lease expense | 2,850 | 1.0 | % | 2,816 | 1.0 | % | 1.2 | % | ||||||||||||
| General and administrative expense | 6,877 | 2.3 | % | 6,754 | 2.3 | % | 1.8 | % | ||||||||||||
| Loss on impairment of depreciable real estate assets | - | 7,875 | n/a | |||||||||||||||||
| Depreciation expense | 44,840 | 43,767 | 2.5 | % | ||||||||||||||||
| Interest and other expense, net | 11,919 | 11,717 | 1.7 | % | ||||||||||||||||
| Income tax expense | 163 | 250 | -34.8 | % | ||||||||||||||||
| Number of hotels owned at end of period | 241 | 236 | 2.1 | % | ||||||||||||||||
| ADR | $ | 134.32 | $ | 133.39 | 0.7 | % | ||||||||||||||
| Occupancy | 74.6 | % | 74.4 | % | 0.3 | % | ||||||||||||||
| RevPAR | $ | 100.18 | $ | 99.27 | 0.9 | % | ||||||||||||||
Three Months Ended March 31, | ||||||||||||||||||||
(in thousands, except statistical data) | 2019 | Percent of Revenue | 2018 | Percent of Revenue | Percent Change | |||||||||||||||
Total revenue | $ | 303,787 | 100.0 | % | $ | 298,389 | 100.0 | % | 1.8 | % | ||||||||||
Hotel operating expense | 175,449 | 57.8 | % | 172,329 | 57.8 | % | 1.8 | % | ||||||||||||
Property taxes, insurance and other expense | 19,208 | 6.3 | % | 17,229 | 5.8 | % | 11.5 | % | ||||||||||||
Operating ground lease expense | 405 | 0.1 | % | 2,850 | 1.0 | % | -85.8 | % | ||||||||||||
General and administrative expense | 8,137 | 2.7 | % | 6,877 | 2.3 | % | 18.3 | % | ||||||||||||
Depreciation and amortization expense | 47,950 | 44,840 | 6.9 | % | ||||||||||||||||
Gain on sale of real estate | 1,213 | - | n/a | |||||||||||||||||
Interest and other expense, net | 15,494 | 11,919 | 30.0 | % | ||||||||||||||||
Income tax expense | 206 | 163 | 26.4 | % | ||||||||||||||||
Number of hotels owned at end of period | 234 | 241 | -2.9 | % | ||||||||||||||||
ADR | $ | 136.36 | $ | 134.32 | 1.5 | % | ||||||||||||||
Occupancy | 73.9 | % | 74.6 | % | -0.9 | % | ||||||||||||||
RevPAR | $ | 100.71 | $ | 100.18 | 0.5 | % | ||||||||||||||
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company’s 241234 hotels owned as of March 31, 20182019 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 241234 hotels owned as of the end of the reporting period. For the hotels acquired during the current reporting period and prior year, 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.
| Three Months Ended March 31, | ||||||||||||
| 2018 | 2017 | Percent Change | ||||||||||
| ADR | $ | 134.43 | $ | 133.25 | 0.9 | % | ||||||
| Occupancy | 74.6 | % | 74.5 | % | 0.1 | % | ||||||
| RevPAR | $ | 100.23 | $ | 99.31 | 0.9 | % | ||||||
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | Percent Change | ||||||||||
ADR | $ | 137.41 | $ | 135.76 | 1.2 | % | ||||||
Occupancy | 74.1 | % | 74.9 | % | -1.1 | % | ||||||
RevPAR | $ | 101.76 | $ | 101.69 | 0.1 | % | ||||||
Same Store Operating Results
The following table reflects certain operating statistics for the Company’s 233227 hotels owned by the Company as of January 1, 20172018 and during the entirety of the reporting periods being compared (“Same Store Hotels”). This information has not been audited.
Three Months Ended March 31, | ||||||||||||
2019 | 2018 | Percent Change | ||||||||||
ADR | $ | 136.42 | $ | 135.26 | 0.9 | % | ||||||
Occupancy | 74.2 | % | 74.8 | % | -0.8 | % | ||||||
RevPAR | $ | 101.23 | $ | 101.23 | - | |||||||
| Three Months Ended March 31, | ||||||||||||
| 2018 | 2017 | Percent Change | ||||||||||
| ADR | $ | 134.26 | $ | 132.98 | 1.0 | % | ||||||
| Occupancy | 74.8 | % | 74.7 | % | 0.1 | % | ||||||
| RevPAR | $ | 100.37 | $ | 99.31 | 1.1 | % | ||||||
As discussed above, hotel performance is impacted by many factors, including the economic conditions in the United StatesU.S. as well as each individual locality. Economic indicators in the United StatesU.S. have generally been favorable, which has been partially offset by increased lodging supply in many of the Company’s markets. As a result, the Company’s revenue and operating results for its Comparable Hotels and Same Store Hotels experienced modest growthwere generally unchanged during the first quarterthree months of 20182019 as compared to 2017.2018, which is consistent with industry/brand averages. The Company expects continued modest improvement in both revenueits RevPAR growth and operating results for its Comparable Hotels in 2018 asfor the full year of 2019 to be slightly negative to slightly positive compared to 2017. The Company’s hotelsits performance in general have shown results consistent with industry and brand averages for the period of ownership. During the first quarter of 2018, revenue growth from the leisure travel sector of the industry was estimated to be stronger than from the business travel sector as a result of the shift of the Easter holiday to March and April in 2018. With a greater proportion of its revenue generated from business travel as compared to leisure travel, the Company’s growth was slightly below industry averages.
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 March 31, 20182019 and 2017,2018, the Company had total revenue of $298.4$303.8 million and $292.9$298.4 million, respectively. For the three months ended March 31, 20182019 and 2017,2018, respectively, Comparable Hotels achieved combined average occupancy of 74.6%74.1% and 74.5%74.9%, ADR of $134.43$137.41 and $133.25$135.76 and RevPAR of $100.23$101.76 and $99.31.$101.69. 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 period in 2018, during the first quarter of 2018,2019, the Company experienced a modest1.2% increase in ADR and stablea 1.1% decrease in occupancy resulting in a 0.9% increase infor Comparable Hotels, leaving RevPAR for Comparable Hotels compared to the first quarter of 2017. Marketsvirtually unchanged. Markets/areas with above average growth in the first quarter of 20182019 for the Company and industry included Fort Worth, Texas, Knoxville, Tennessee, Norfolk/Virginia Beach, VirginiaAtlanta, Georgia, Sacramento, California, Raleigh/Durham, North Carolina and South Florida.Phoenix and Tucson, Arizona. Markets that were below average for the Company and industry included Austin,Houston, Texas, Kansas City, Missouri, Omaha, NebraskaMinneapolis, Minnesota and Washington, D.C.
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. For the three months ended March 31, 20182019 and 2017,2018, respectively, hotel operating expense totaled $172.3$175.4 million and $168.5$172.3 million or 57.8% and 57.5% of total revenue for each respective period. For the Company’s Comparable Hotels, hotel operating expense as a percentage of revenue increased approximately 50 basis pointsslightly for the three months ended March 31, 20182019 as compared to the same period in 2017.2018. Increases in labor costs as a percentage of revenue during the first quarterthree months of 20182019 as compared to the same period in 2017 was the primary cause of the increased hotel operating expense.2018 were offset by decreases in utility costs. The Company anticipates continued increases in labor costs due to government regulations surrounding wages, healthcare and other benefits, other wage-related initiatives and lower unemployment rates. Although operating expenses will increase as revenue increases, theThe Company will continue to work with its management companies to reduce costs as a percentage of revenue where possible while maintaining quality and service levels at each property.
Property Taxes, Insurance and Other Expense
Property taxes, insurance, and other expense for the three months ended March 31, 2019 and 2018 totaled $19.2 million and 2017 totaled $17.2 million, and $16.9 million, respectively, or 6.3% and 5.8% of total revenue for each respective period, and forwhich is consistent with the increase in Comparable Hotels 5.8%expense as a percentage of total revenue for each respective period.the same periods. For the Company’s Comparable Hotels, real estate taxes increased slightly during the first three months of 20182019 compared to the first three months of 2017,2018, with tax increases at 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. With the economy continuing to improve, the Company anticipates continued increases in property tax assessments during the remainder of 2018.2019. The Company will continue to appeal tax assessments in certain jurisdictions to attempt to minimize tax increases as warranted. Additionally, due to increased losses in 2017 forincurred by property insurance carriers during the past few years, the Company’s property insurance costs are anticipated to increase slightlyincreased as a percentage of revenue for the full yearfirst three months of 20182019 as compared to 2017.
Operating Ground Lease Expense
Operating ground lease expense for the three months ended March 31, 2019 and 2018 was $0.4 million and 2017 was $2.9 million, and $2.8 million, respectively. GroundOperating ground lease expense in 2019 primarily represents the expense incurred by the Company to lease land for 14nine of its hotel properties. Operating ground lease expense in 2018 primarily represents the expense incurred by the Company to lease land for 13 of its hotel properties, including approximately $2.4 million of expense related to four ground leases that were previously classified as operating leases that are classified as finance leases under the new lease accounting standard effective January 1, 2019.
General and administrative expense for the three months ended March 31, 2019 and 2018 was $8.1 million and 2017 was $6.9 million, and $6.8 million, respectively, or 2.7% and 2.3% of total revenue for each respective period. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses.
Depreciation and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning this impairment loss.
Depreciation expense for the three months ended March 31, 2019 and 2018 and 2017 was $44.8$48.0 million and $43.8$44.8 million, respectively. Depreciation expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. The increase was primarily due to the increase in the number of properties owned as a result of the acquisition of two hotels in February 2018the first quarter of 2019 and sixfive hotels in 20172018 and renovations completed throughout 20182019 and 2017.
Interest and Other Expense, net
Interest and other expense, net for the three months ended March 31, 2019 and 2018 and 2017 was $11.9$15.5 million and $11.7$11.9 million, respectively, and is net of approximately $0.5 million in each respective period of interest capitalized associated with renovation projects. AlthoughAdditionally, interest and other expense, net for the three months ended March 31, 2019 includes approximately $1.8 million of interest recorded on the Company’s four finance lease liabilities in accordance with the new lease accounting standard. Interest expense related to the Company’s debt increased as a result of increased average outstanding debt was lessborrowings in the first quarter of 20182019 as compared to the first quarter of 2017, interest expense increased slightly as a result2018 resulting from acquisitions and share repurchases, partially offset by the repayment of borrowings with proceeds from dispositions, combined with an increase in the Company’s effective interest rate during the first quarter of 20182019 as compared to 2017,the first quarter of 2018, due to (a) the issuance of longer term fixed-rate debt subsequent to March 31, 2017, which was used to reduce the Company’s revolving credit facility, resulting in a higher average interest rate than the variable-rate borrowings repaid, and (b) an increase in interest rates on the Company’s variable-rate debt, with the one-month LIBOR increasing from 0.98% at March 31, 2017 to 1.88% at March 31, 2018.2018 to 2.49% at March 31, 2019. While approximately 79%77% of the Company’s outstanding debt was effectively fixed ratefixed-rate debt at March 31, 2018,2019, the Company does expect interest costs for its remaining variable-rate debt to continuebe higher in 2019 as compared to increase for the remainder ofsame period in 2018 due to increasedhigher expected average interest rates foras compared to the prior year. The impact from higher interest rates will be partially mitigated by the Company’s 2018 debt refinancing, resulting in lower spreads charged on outstanding borrowings under its remaining variable rate debt.
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 FFO (“MFFO”), Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), and Adjusted EBITDAEBITDAre (“Adjusted EBITDA”EBITDAre”). These non-GAAP financial measures should be considered along with, but not as alternatives to, net income, cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre and Adjusted EBITDAEBITDAre 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 and Adjusted EBITDA,EBITDAre, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre and Adjusted EBITDAEBITDAre 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.
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 (computed in accordance with GAAP), excluding gains orand losses from salesthe 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 partnerships and joint ventures.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 further adjusts 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 this
The following table reconciles the Company’s GAAP net income to FFO and MFFO for the three months ended March 31, 20182019 and 20172018 (in thousands).
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net income | $ | 42,182 | $ | 34,365 | ||||
| Depreciation of real estate owned | 44,610 | 43,537 | ||||||
| Loss on impairment of depreciable real estate assets | - | 7,875 | ||||||
| Amortization of favorable and unfavorable leases, net | 206 | 165 | ||||||
| Funds from operations | 86,998 | 85,942 | ||||||
| Non-cash straight-line ground lease expense | 904 | 939 | ||||||
| Modified funds from operations | $ | 87,902 | $ | 86,881 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 38,151 | $ | 42,182 | ||||
Depreciation of real estate owned | 46,666 | 44,610 | ||||||
Gain on sale of real estate | (1,213 | ) | - | |||||
Funds from operations | 83,604 | 86,792 | ||||||
Amortization of finance ground lease assets | 1,041 | - | ||||||
Amortization of favorable and unfavorable operating leases, net | 31 | 206 | ||||||
Non-cash straight-line operating ground lease expense | 48 | 904 | ||||||
Modified funds from operations | $ | 84,724 | $ | 87,902 | ||||
EBITDA, EBITDAre and Adjusted EBITDA
EBITDA is a commonly used measure of performance in many industries and is defined as net income 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 considersalso calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the exclusionsale of
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.
The following table reconciles the Company’s GAAP net income to EBITDA, EBITDAre and Adjusted EBITDAEBITDAre for the three months ended March 31, 20182019 and 20172018 (in thousands).
| Three Months Ended March 31, | ||||||||
| 2018 | 2017 | |||||||
| Net income | $ | 42,182 | $ | 34,365 | ||||
| Depreciation | 44,840 | 43,767 | ||||||
| Amortization of favorable and unfavorable leases, net | 206 | 165 | ||||||
| Interest and other expense, net | 11,919 | 11,717 | ||||||
| Income tax expense | 163 | 250 | ||||||
| EBITDA | 99,310 | 90,264 | ||||||
| Loss on impairment of depreciable real estate assets | - | 7,875 | ||||||
| Non-cash straight-line ground lease expense | 904 | 939 | ||||||
| Adjusted EBITDA | $ | 100,214 | $ | 99,078 | ||||
Three Months Ended March 31, | ||||||||
2019 | 2018 (1) | |||||||
Net income | $ | 38,151 | $ | 42,182 | ||||
Depreciation and amortization | 47,950 | 44,840 | ||||||
Amortization of favorable and unfavorable operating leases, net | 31 | 206 | ||||||
Interest and other expense, net | 15,494 | 11,919 | ||||||
Income tax expense | 206 | 163 | ||||||
EBITDA | 101,832 | 99,310 | ||||||
Gain on sale of real estate | (1,213 | ) | - | |||||
EBITDAre | 100,619 | 99,310 | ||||||
Non-cash straight-line operating ground lease expense | 48 | 904 | ||||||
Adjusted EBITDAre | $ | 100,667 | $ | 100,214 | ||||
(1) | EBITDA, EBITDAre and Adjusted EBITDAre for the three months ended March 31, 2018 include approximately $1.4 million of lease payments recorded to operating ground lease expense related to four of the Company's ground leases that were classified as operating leases during 2018. Under the new lease accounting standard, effective January 1, 2019 these four ground leases are classified as finance leases, for which the Company recognizes depreciation and amortization expense and interest and other expense, net in the Company's consolidated statements of operations (which are both excluded from EBITDA, EBITDAre and Adjusted EBITDAre calculations), instead of operating ground lease expense. | |||||||
Hotels Owned
As of March 31, 2018,2019, the Company owned 241234 hotels with an aggregate of 30,58530,046 rooms located in 34 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 | Number of | |||||||
| Brand | Hotels | Rooms | ||||||
| Hilton Garden Inn | 42 | 5,807 | ||||||
| Courtyard | 40 | 5,460 | ||||||
| Hampton | 38 | 4,685 | ||||||
| Residence Inn | 34 | 4,011 | ||||||
| Homewood Suites | 34 | 3,831 | ||||||
| SpringHill Suites | 17 | 2,248 | ||||||
| TownePlace Suites | 12 | 1,196 | ||||||
| Fairfield Inn | 11 | 1,300 | ||||||
| Home2 Suites | 8 | 910 | ||||||
| Marriott | 2 | 616 | ||||||
| Embassy Suites | 2 | 316 | ||||||
| Renaissance | 1 | 205 | ||||||
| Total | 241 | 30,585 | ||||||
Number of Hotels and Guest Rooms by Brand | ||||||||
Number of | Number of | |||||||
Brand | Hotels | Rooms | ||||||
Hilton Garden Inn | 41 | 5,665 | ||||||
Hampton | 40 | 5,065 | ||||||
Courtyard | 37 | 5,070 | ||||||
Residence Inn | 33 | 3,939 | ||||||
Homewood Suites | 33 | 3,731 | ||||||
SpringHill Suites | 15 | 2,040 | ||||||
Fairfield | 11 | 1,300 | ||||||
Home2 Suites | 9 | 1,038 | ||||||
TownePlace Suites | 9 | 931 | ||||||
Marriott | 2 | 616 | ||||||
Embassy Suites | 2 | 316 | ||||||
Renaissance | 1 | 208 | ||||||
Hyatt Place | 1 | 127 | ||||||
Total | 234 | 30,046 | ||||||
Number of Hotels and Guest Rooms by State | ||||||||
Number of | Number of | |||||||
State | Hotels | Rooms | ||||||
Alabama | 15 | 1,434 | ||||||
Alaska | 2 | 304 | ||||||
Arizona | 12 | 1,644 | ||||||
Arkansas | 3 | 336 | ||||||
California | 27 | 3,807 | ||||||
Colorado | 4 | 567 | ||||||
Florida | 23 | 2,912 | ||||||
Georgia | 6 | 672 | ||||||
Idaho | 2 | 416 | ||||||
Illinois | 8 | 1,420 | ||||||
Indiana | 4 | 479 | ||||||
Iowa | 3 | 301 | ||||||
Kansas | 4 | 422 | ||||||
Louisiana | 3 | 422 | ||||||
Maine | 1 | 179 | ||||||
Maryland | 2 | 233 | ||||||
Massachusetts | 4 | 466 | ||||||
Michigan | 1 | 148 | ||||||
Minnesota | 3 | 404 | ||||||
Mississippi | 2 | 168 | ||||||
Missouri | 4 | 544 | ||||||
Nebraska | 4 | 621 | ||||||
New Jersey | 5 | 629 | ||||||
New York | 4 | 553 | ||||||
North Carolina | 11 | 1,213 | ||||||
Ohio | 2 | 252 | ||||||
Oklahoma | 4 | 545 | ||||||
Pennsylvania | 3 | 391 | ||||||
South Carolina | 5 | 538 | ||||||
Tennessee | 13 | 1,502 | ||||||
Texas | 31 | 3,755 | ||||||
Utah | 3 | 393 | ||||||
Virginia | 12 | 1,767 | ||||||
Washington | 4 | 609 | ||||||
Total | 234 | 30,046 | ||||||
| Number of Hotels and Guest Rooms by State | ||||||||
| Number of | Number of | |||||||
| State | Hotels | Rooms | ||||||
| Alabama | 15 | 1,434 | ||||||
| Alaska | 2 | 304 | ||||||
| Arizona | 11 | 1,434 | ||||||
| Arkansas | 4 | 408 | ||||||
| California | 27 | 3,807 | ||||||
| Colorado | 4 | 567 | ||||||
| Florida | 23 | 2,851 | ||||||
| Georgia | 7 | 715 | ||||||
| Idaho | 2 | 416 | ||||||
| Illinois | 8 | 1,420 | ||||||
| Indiana | 4 | 479 | ||||||
| Iowa | 3 | 301 | ||||||
| Kansas | 4 | 422 | ||||||
| Louisiana | 4 | 541 | ||||||
| Maine | 1 | 179 | ||||||
| Maryland | 2 | 233 | ||||||
| Massachusetts | 4 | 466 | ||||||
| Michigan | 1 | 148 | ||||||
| Minnesota | 2 | 244 | ||||||
| Mississippi | 2 | 168 | ||||||
| Missouri | 4 | 544 | ||||||
| Nebraska | 4 | 621 | ||||||
| New Jersey | 5 | 629 | ||||||
| New York | 4 | 550 | ||||||
| North Carolina | 12 | 1,337 | ||||||
| Ohio | 2 | 252 | ||||||
| Oklahoma | 4 | 545 | ||||||
| Pennsylvania | 3 | 391 | ||||||
| South Carolina | 5 | 538 | ||||||
| Tennessee | 13 | 1,500 | ||||||
| Texas | 34 | 4,072 | ||||||
| Utah | 3 | 393 | ||||||
| Virginia | 14 | 2,067 | ||||||
| Washington | 4 | 609 | ||||||
| Total | 241 | 30,585 | ||||||
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 241234 hotels the Company owned as of March 31, 2018.
City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
Anchorage | AK | Embassy Suites | Stonebridge | 4/30/2010 | 169 | |||||||
Anchorage | AK | Home2 Suites | Stonebridge | 12/1/2017 | 135 | |||||||
Auburn | AL | Hilton Garden Inn | LBA | 3/1/2014 | 101 | |||||||
Birmingham | AL | Courtyard | LBA | 3/1/2014 | 84 | |||||||
Birmingham | AL | Hilton Garden Inn | LBA | 9/12/2017 | 104 | |||||||
Birmingham | AL | Home2 Suites | LBA | 9/12/2017 | 106 | |||||||
Birmingham | AL | Homewood Suites | McKibbon | 3/1/2014 | 95 | |||||||
Dothan | AL | Hilton Garden Inn | LBA | 6/1/2009 | 104 | |||||||
Dothan | AL | Residence Inn | LBA | 3/1/2014 | 84 | |||||||
Huntsville | AL | Hampton | LBA | 9/1/2016 | 98 | |||||||
Huntsville | AL | Hilton Garden Inn | LBA | 3/1/2014 | 101 | |||||||
Huntsville | AL | Home2 Suites | LBA | 9/1/2016 | 77 | |||||||
Huntsville | AL | Homewood Suites | LBA | 3/1/2014 | 107 | |||||||
Mobile | AL | Hampton | McKibbon | |||||||||
9/1/2016 | 101 | |||||||||||
Montgomery | AL | Hilton Garden Inn | LBA | 3/1/2014 | 97 | |||||||
Montgomery | AL | Homewood Suites | LBA | 3/1/2014 | 91 | |||||||
Prattville | AL | Courtyard | LBA | 3/1/2014 | 84 | |||||||
Rogers | AR | Hampton | Raymond | 8/31/2010 | 122 | |||||||
Rogers | AR | Homewood Suites | Raymond | 4/30/2010 | 126 | |||||||
Rogers | AR | Residence Inn | Raymond | 3/1/2014 | 88 | |||||||
Chandler | AZ | Courtyard | North Central | 11/2/2010 | 150 | |||||||
Chandler | AZ | Fairfield | North Central | 11/2/2010 | 110 | |||||||
Phoenix | AZ | Courtyard | North Central | 11/2/2010 | 164 | |||||||
Phoenix | AZ | Courtyard | North Central | 9/1/2016 | 127 | |||||||
Phoenix | AZ | Hampton | North Central | 9/1/2016 | 125 | |||||||
Phoenix | AZ | Hampton | North Central | 5/2/2018 | 210 | |||||||
Phoenix | AZ | Homewood Suites | North Central | 9/1/2016 | 134 | |||||||
Phoenix | AZ | Residence Inn | North Central | 11/2/2010 | 129 | |||||||
Scottsdale | AZ | Hilton Garden Inn | North Central | 9/1/2016 | 122 | |||||||
Tucson | AZ | Hilton Garden Inn | Western | 7/31/2008 | 125 | |||||||
Tucson | AZ | Residence Inn | Western | 3/1/2014 | 124 | |||||||
Tucson | AZ | TownePlace Suites | Western | 10/6/2011 | 124 | |||||||
Agoura Hills | CA | Homewood Suites | Dimension | 3/1/2014 | 125 | |||||||
Burbank | CA | Courtyard | Huntington | 8/11/2015 | 190 | |||||||
Burbank | CA | Residence Inn | Marriott | 3/1/2014 | 166 | |||||||
Burbank | CA | SpringHill Suites | Marriott | 7/13/2015 | 170 | |||||||
Clovis | CA | Hampton | Dimension | 7/31/2009 | 86 | |||||||
Clovis | CA | Homewood Suites | Dimension | 2/2/2010 | 83 | |||||||
Cypress | CA | Courtyard | Dimension | 3/1/2014 | 180 | |||||||
Cypress | CA | Hampton | Dimension | 6/29/2015 | 110 | |||||||
Oceanside | CA | Courtyard | Marriott | 9/1/2016 | 142 | |||||||
Oceanside | CA | Residence Inn | Marriott | 3/1/2014 | 125 | |||||||
Rancho Bernardo/San Diego | CA | Courtyard | InnVentures | 3/1/2014 | 210 | |||||||
Sacramento | CA | Hilton Garden Inn | Dimension | 3/1/2014 | 153 | |||||||
San Bernardino | CA | Residence Inn | InnVentures | 2/16/2011 | 95 |
City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
San Diego | CA | Courtyard | Huntington | 9/1/2015 | 245 | |||||||
San Diego | CA | Hampton | Dimension | 3/1/2014 | 177 | |||||||
San Diego | CA | Hilton Garden Inn | InnVentures | 3/1/2014 | 200 | |||||||
San Diego | CA | Residence Inn | Dimension | 3/1/2014 | 121 | |||||||
San Jose | CA | Homewood Suites | Dimension | 3/1/2014 | 140 | |||||||
San Juan Capistrano | CA | Residence Inn | Marriott | 9/1/2016 | 130 | |||||||
Santa Ana | CA | Courtyard | Dimension | 5/23/2011 | 155 | |||||||
Santa Clarita | CA | Courtyard | Dimension | 9/24/2008 | 140 | |||||||
Santa Clarita | CA | Fairfield | Dimension | 10/29/2008 | 66 | |||||||
Santa Clarita | CA | Hampton | Dimension | 10/29/2008 | 128 | |||||||
Santa Clarita | CA | Residence Inn | Dimension | 10/29/2008 | 90 | |||||||
Tulare | CA | Hampton | InnVentures | 3/1/2014 | 86 | |||||||
Tustin | CA | Fairfield | Marriott | 9/1/2016 | 145 | |||||||
Tustin | CA | Residence Inn | Marriott | 9/1/2016 | 149 | |||||||
Colorado Springs | CO | Hampton | Chartwell | 9/1/2016 | 101 | |||||||
Denver | CO | Hilton Garden Inn | Stonebridge | 9/1/2016 | 221 | |||||||
Highlands Ranch | CO | Hilton Garden Inn | Dimension | 3/1/2014 | 128 | |||||||
Highlands Ranch | CO | Residence Inn | Dimension | 3/1/2014 | 117 | |||||||
Boca Raton | FL | Hilton Garden Inn | White Lodging | 9/1/2016 | 149 | |||||||
Cape Canaveral | FL | Homewood Suites | LBA | 9/1/2016 | 153 | |||||||
Fort Lauderdale | FL | Hampton | Vista Host | 12/31/2008 | 109 | |||||||
Fort Lauderdale | FL | Hampton | LBA | 6/23/2015 | 156 | |||||||
Fort Lauderdale | FL | Residence Inn | LBA | 9/1/2016 | 156 | |||||||
Gainesville | FL | Hilton Garden Inn | McKibbon | 9/1/2016 | 104 | |||||||
Gainesville | FL | Homewood Suites | McKibbon | 9/1/2016 | 103 | |||||||
Jacksonville | FL | Homewood Suites | McKibbon | 3/1/2014 | 119 | |||||||
Jacksonville | FL | Hyatt Place | LBA | 12/7/2018 | 127 | |||||||
Lakeland | FL | Courtyard | LBA | 3/1/2014 | 78 | |||||||
Miami | FL | Courtyard | Dimension | 3/1/2014 | 118 | |||||||
Miami | FL | Hampton | White Lodging | 4/9/2010 | 121 | |||||||
Miami | FL | Homewood Suites | Dimension | 3/1/2014 | 162 | |||||||
Orlando | FL | Fairfield | Marriott | 7/1/2009 | 200 | |||||||
Orlando | FL | Home2 Suites | LBA | 3/19/2019 | 128 | |||||||
Orlando | FL | SpringHill Suites | Marriott | 7/1/2009 | 200 | |||||||
Panama City | FL | Hampton | LBA | 3/12/2009 | 95 | |||||||
Panama City | FL | TownePlace Suites | LBA | 1/19/2010 | 103 | |||||||
Pensacola | FL | TownePlace Suites | McKibbon | 9/1/2016 | 97 | |||||||
Sanford | FL | SpringHill Suites | LBA | 3/1/2014 | 105 | |||||||
Tallahassee | FL | Fairfield | LBA | 9/1/2016 | 97 | |||||||
Tallahassee | FL | Hilton Garden Inn | LBA | 3/1/2014 | 85 | |||||||
Tampa | FL | Embassy Suites | White Lodging | 11/2/2010 | 147 | |||||||
Albany | GA | Fairfield | LBA | 1/14/2010 | 87 | |||||||
Atlanta/Downtown | GA | Hampton | McKibbon | 2/5/2018 | 119 | |||||||
Atlanta/Perimeter Dunwoody | GA | Hampton | LBA | 6/28/2018 | 132 | |||||||
Atlanta | GA | Home2 Suites | McKibbon | 7/1/2016 | 128 | |||||||
Macon | GA | Hilton Garden Inn | LBA | 3/1/2014 | 101 | |||||||
Savannah | GA | Hilton Garden Inn | Newport | 3/1/2014 | 105 | |||||||
City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
Cedar Rapids | IA | Hampton | Schulte | 9/1/2016 | 103 | |||||||
Cedar Rapids | IA | Homewood Suites | Schulte | 9/1/2016 | 95 | |||||||
Davenport | IA | Hampton | Schulte | 9/1/2016 | 103 | |||||||
Boise | ID | Hampton | Raymond | 4/30/2010 | 186 | |||||||
Boise | ID | SpringHill Suites | InnVentures | 3/1/2014 | 230 | |||||||
Des Plaines | IL | Hilton Garden Inn | Raymond | 9/1/2016 | 252 | |||||||
Hoffman Estates | IL | Hilton Garden Inn | White Lodging | 9/1/2016 | 184 | |||||||
Mettawa | IL | Hilton Garden Inn | White Lodging | 11/2/2010 | 170 | |||||||
Mettawa | IL | Residence Inn | White Lodging | 11/2/2010 | 130 | |||||||
Rosemont | IL | Hampton | Raymond | 9/1/2016 | 158 | |||||||
Schaumburg | IL | Hilton Garden Inn | White Lodging | 11/2/2010 | 166 | |||||||
Skokie | IL | Hampton | Raymond | 9/1/2016 | 225 | |||||||
Warrenville | IL | Hilton Garden Inn | White Lodging | 11/2/2010 | 135 | |||||||
Indianapolis | IN | SpringHill Suites | White Lodging | 11/2/2010 | 130 | |||||||
Merrillville | IN | Hilton Garden Inn | White Lodging | 9/1/2016 | 124 | |||||||
Mishawaka | IN | Residence Inn | White Lodging | 11/2/2010 | 106 | |||||||
South Bend | IN | Fairfield | White Lodging | 9/1/2016 | 119 | |||||||
Overland Park | KS | Fairfield | True North | 3/1/2014 | 110 | |||||||
Overland Park | KS | Residence Inn | True North | 3/1/2014 | 120 | |||||||
Overland Park | KS | SpringHill Suites | True North | 3/1/2014 | 102 | |||||||
Wichita | KS | Courtyard | Aimbridge | 3/1/2014 | 90 | |||||||
Lafayette | LA | Hilton Garden Inn | LBA | 7/30/2010 | 153 | |||||||
Lafayette | LA | SpringHill Suites | LBA | 6/23/2011 | 103 | |||||||
New Orleans | LA | Homewood Suites | Dimension | 3/1/2014 | 166 | |||||||
Andover | MA | SpringHill Suites | Marriott | 11/5/2010 | 136 | |||||||
Marlborough | MA | Residence Inn | True North | 3/1/2014 | 112 | |||||||
Westford | MA | Hampton | True North | 3/1/2014 | 110 | |||||||
Westford | MA | Residence Inn | True North | 3/1/2014 | 108 | |||||||
Annapolis | MD | Hilton Garden Inn | White Lodging | 3/1/2014 | 126 | |||||||
Silver Spring | MD | Hilton Garden Inn | White Lodging | 7/30/2010 | 107 | |||||||
Portland | ME | Residence Inn | Pyramid | 10/13/2017 | 179 | |||||||
Novi | MI | Hilton Garden Inn | White Lodging | 11/2/2010 | 148 | |||||||
Maple Grove | MN | Hilton Garden Inn | North Central | 9/1/2016 | 120 | |||||||
Rochester | MN | Hampton | Raymond | 8/3/2009 | 124 | |||||||
St. Paul | MN | Hampton | Vista Host | 3/4/2019 | 160 | |||||||
Kansas City | MO | Hampton | Raymond | 8/31/2010 | 122 | |||||||
Kansas City | MO | Residence Inn | True North | 3/1/2014 | 106 | |||||||
St. Louis | MO | Hampton | Raymond | 8/31/2010 | 190 | |||||||
St. Louis | MO | Hampton | Raymond | 4/30/2010 | 126 | |||||||
Hattiesburg | MS | Courtyard | LBA | 3/1/2014 | 84 | |||||||
Hattiesburg | MS | Residence Inn | LBA | 12/11/2008 | 84 | |||||||
Carolina Beach | NC | Courtyard | Crestline | 3/1/2014 | 144 | |||||||
Charlotte | NC | Fairfield | Newport | 9/1/2016 | 94 | |||||||
Charlotte | NC | Homewood Suites | McKibbon | 9/24/2008 | 118 | |||||||
Durham | NC | Homewood Suites | McKibbon | 12/4/2008 | 122 | |||||||
Fayetteville | NC | Home2 Suites | LBA | 2/3/2011 | 118 | |||||||
Fayetteville | NC | Residence Inn | Aimbridge | 3/1/2014 | 92 | |||||||
Greensboro | NC | SpringHill Suites | Newport | 3/1/2014 | 82 | |||||||
City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
Jacksonville | NC | Home2 Suites | LBA | 9/1/2016 | 105 | |||||||
Wilmington | NC | Fairfield | Crestline | 3/1/2014 | 122 | |||||||
Winston-Salem | NC | Courtyard | McKibbon | 3/1/2014 | 122 | |||||||
Winston-Salem | NC | Hampton | McKibbon | 9/1/2016 | 94 | |||||||
Omaha | NE | Courtyard | Marriott | 3/1/2014 | 181 | |||||||
Omaha | NE | Hampton | White Lodging | 9/1/2016 | 139 | |||||||
Omaha | NE | Hilton Garden Inn | White Lodging | 9/1/2016 | 178 | |||||||
Omaha | NE | Homewood Suites | White Lodging | 9/1/2016 | 123 | |||||||
Cranford | NJ | Homewood Suites | Dimension | 3/1/2014 | 108 | |||||||
Mahwah | NJ | Homewood Suites | Dimension | 3/1/2014 | 110 | |||||||
Mount Laurel | NJ | Homewood Suites | Newport | 1/11/2011 | 118 | |||||||
Somerset | NJ | Courtyard | Newport | 3/1/2014 | 162 | |||||||
West Orange | NJ | Courtyard | Newport | 1/11/2011 | 131 | |||||||
Islip/Ronkonkoma | NY | Hilton Garden Inn | White Lodging | 3/1/2014 | 165 | |||||||
New York | NY | Renaissance | Highgate | 3/1/2014 | 208 | |||||||
Syracuse | NY | Courtyard | New Castle | 10/16/2015 | 102 | |||||||
Syracuse | NY | Residence Inn | New Castle | 10/16/2015 | 78 | |||||||
Mason | OH | Hilton Garden Inn | Schulte | 9/1/2016 | 110 | |||||||
Twinsburg | OH | Hilton Garden Inn | Interstate | 10/7/2008 | 142 | |||||||
Oklahoma City | OK | Hampton | Raymond | 5/28/2010 | 200 | |||||||
Oklahoma City | OK | Hilton Garden Inn | Raymond | 9/1/2016 | 155 | |||||||
Oklahoma City | OK | Homewood Suites | Raymond | 9/1/2016 | 100 | |||||||
Oklahoma City (West) | OK | Homewood Suites | Chartwell | 9/1/2016 | 90 | |||||||
Collegeville/Philadelphia | PA | Courtyard | White Lodging | 11/15/2010 | 132 | |||||||
Malvern/Philadelphia | PA | Courtyard | White Lodging | 11/30/2010 | 127 | |||||||
Pittsburgh | PA | Hampton | Vista Host | 12/31/2008 | 132 | |||||||
Charleston | SC | Home2 Suites | LBA | 9/1/2016 | 122 | |||||||
Columbia | SC | Hilton Garden Inn | Newport | 3/1/2014 | 143 | |||||||
Columbia | SC | TownePlace Suites | Newport | 9/1/2016 | 91 | |||||||
Greenville | SC | Residence Inn | McKibbon | 3/1/2014 | 78 | |||||||
Hilton Head | SC | Hilton Garden Inn | McKibbon | 3/1/2014 | 104 | |||||||
Chattanooga | TN | Homewood Suites | LBA | 3/1/2014 | 76 | |||||||
Franklin | TN | Courtyard | Chartwell | 9/1/2016 | 126 | |||||||
Franklin | TN | Residence Inn | Chartwell | 9/1/2016 | 124 | |||||||
Jackson | TN | Hampton | Vista Host | 12/30/2008 | 85 | |||||||
Johnson City | TN | Courtyard | LBA | 9/25/2009 | 90 | |||||||
Knoxville | TN | Homewood Suites | McKibbon | 9/1/2016 | 103 | |||||||
Knoxville | TN | SpringHill Suites | McKibbon | 9/1/2016 | 103 | |||||||
Knoxville | TN | TownePlace Suites | McKibbon | 9/1/2016 | 97 | |||||||
Memphis | TN | Hampton | Crestline | 2/5/2018 | 144 | |||||||
Memphis | TN | Homewood Suites | Hilton | 3/1/2014 | 140 | |||||||
Nashville | TN | Hilton Garden Inn | Vista Host | 9/30/2010 | 194 | |||||||
Nashville | TN | Home2 Suites | Vista Host | 5/31/2012 | 119 | |||||||
Nashville | TN | TownePlace Suites | LBA | 9/1/2016 | 101 | |||||||
Addison | TX | SpringHill Suites | Marriott | 3/1/2014 | 159 | |||||||
Allen | TX | Hampton | Interstate | 9/26/2008 | 103 | |||||||
Allen | TX | Hilton Garden Inn | Interstate | 10/31/2008 | 150 | |||||||
Arlington | TX | Hampton | Western | 12/1/2010 | 98 | |||||||
City | State | Brand | Manager | Date Acquired or Completed | Rooms | |||||||
Austin | TX | Courtyard | White Lodging | 11/2/2010 | 145 | |||||||
Austin | TX | Fairfield | White Lodging | 11/2/2010 | 150 | |||||||
Austin | TX | Hampton | Vista Host | 4/14/2009 | 124 | |||||||
Austin | TX | Hilton Garden Inn | White Lodging | 11/2/2010 | 117 | |||||||
Austin | TX | Homewood Suites | Vista Host | 4/14/2009 | 97 | |||||||
Austin/Round Rock | TX | Homewood Suites | Vista Host | 9/1/2016 | 115 | |||||||
Beaumont | TX | Residence Inn | Western | 10/29/2008 | 133 | |||||||
Burleson/Fort Worth | TX | Hampton | LBA | 10/7/2014 | 88 | |||||||
Dallas | TX | Homewood Suites | Western | 9/1/2016 | 130 | |||||||
Denton | TX | Homewood Suites | Chartwell | 9/1/2016 | 107 | |||||||
El Paso | TX | Hilton Garden Inn | Western | 12/19/2011 | 145 | |||||||
El Paso | TX | Homewood Suites | Western | 3/1/2014 | 114 | |||||||
Fort Worth | TX | Courtyard | LBA | 2/2/2017 | 124 | |||||||
Fort Worth | TX | TownePlace Suites | Western | 7/19/2010 | 140 | |||||||
Frisco | TX | Hilton Garden Inn | Western | 12/31/2008 | 102 | |||||||
Grapevine | TX | Hilton Garden Inn | Western | 9/24/2010 | 110 | |||||||
Houston | TX | Courtyard | LBA | 9/1/2016 | 124 | |||||||
Houston | TX | Marriott | Western | 1/8/2010 | 206 | |||||||
Houston | TX | Residence Inn | Western | 3/1/2014 | 129 | |||||||
Houston | TX | Residence Inn | Western | 9/1/2016 | 120 | |||||||
Irving | TX | Homewood Suites | Western | 12/29/2010 | 77 | |||||||
Lewisville | TX | Hilton Garden Inn | Interstate | 10/16/2008 | 165 | |||||||
Round Rock | TX | Hampton | Vista Host | 3/6/2009 | 94 | |||||||
San Antonio | TX | TownePlace Suites | Western | 3/1/2014 | 106 | |||||||
Shenandoah | TX | Courtyard | LBA | 9/1/2016 | 124 | |||||||
Stafford | TX | Homewood Suites | Western | 3/1/2014 | 78 | |||||||
Texarkana | TX | Hampton | Aimbridge | 1/31/2011 | 81 | |||||||
Provo | UT | Residence Inn | Dimension | 3/1/2014 | 114 | |||||||
Salt Lake City | UT | Residence Inn | Huntington | 10/20/2017 | 136 | |||||||
Salt Lake City | UT | SpringHill Suites | White Lodging | 11/2/2010 | 143 | |||||||
Alexandria | VA | Courtyard | Marriott | 3/1/2014 | 178 | |||||||
Alexandria | VA | SpringHill Suites | Marriott | 3/28/2011 | 155 | |||||||
Charlottesville | VA | Courtyard | Crestline | 3/1/2014 | 139 | |||||||
Manassas | VA | Residence Inn | Crestline | 2/16/2011 | 107 | |||||||
Richmond | VA | Courtyard | White Lodging | 12/8/2014 | 135 | |||||||
Richmond | VA | Marriott | White Lodging | 3/1/2014 | 410 | |||||||
Richmond | VA | Residence Inn | White Lodging | 12/8/2014 | 75 | |||||||
Richmond | VA | SpringHill Suites | McKibbon | 9/1/2016 | 103 | |||||||
Suffolk | VA | Courtyard | Crestline | 3/1/2014 | 92 | |||||||
Suffolk | VA | TownePlace Suites | Crestline | 3/1/2014 | 72 | |||||||
Virginia Beach | VA | Courtyard | Crestline | 3/1/2014 | 141 | |||||||
Virginia Beach | VA | Courtyard | Crestline | 3/1/2014 | 160 | |||||||
Kirkland | WA | Courtyard | InnVentures | 3/1/2014 | 150 | |||||||
Seattle | WA | Residence Inn | InnVentures | 3/1/2014 | ||||||||
Tukwila | WA | Homewood Suites | Dimension | 3/1/2014 | ||||||||
Vancouver | WA | SpringHill Suites | InnVentures | |||||||||
3/1/2014 | ||||||||||||
| 119 | ||||||||||||||||||||
Total | ||||||||||||||||||||
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 56 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 daily sources of liquidity are the operating cash flow generated from the Company’s properties and availability under its revolving credit facility. Periodically, 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.
As of March 31, 2019, the Company had $1.4 billion of total outstanding debt consisting of $485.4 million of mortgage debt and $925.4 million outstanding under its credit facilities, excluding unamortized debt issuance costs and fair value adjustments. The Company’s unused borrowing capacity under its $425 million revolving credit facility has an initial maturity of May 18, 2019 and, subject to certain conditions and fees, may be extended one year. The revolving credit facility, which as of March 31, 2018 had unused borrowing capacity of approximately $369.32019 was $234.6 million, which is available for acquisitions, hotel renovations, and development, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders. As of March 31, 2018, the Company’s revolving credit facility had an outstanding principal balance of approximately $170.7 million with an annual variable interest rate of approximately 3.43%.
The credit agreementagreements governing the revolving credit facility containsfacilities contain mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default. The credit agreement requiresagreements 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 limits on dividend payments and share repurchases and restrictions on certain investments. The Company was in compliance with the applicable covenants at March 31, 2018.
See Note 34 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 other debt instruments.
During the first quarter of 2019, the Company has sold approximately 7.2 million common shares atcompleted the sale of nine hotels for a weighted-average markettotal gross sales price of approximately $19.56 per common share and received aggregate gross proceeds of approximately $139.8$95.0 million and proceeds netcompleted the acquisition of offering costs of approximately $137.5 million. During the three months ended March 31, 2018, the Company sold approximately 0.2 million common shares under its ATM Program attwo hotels for a weighted-average market salestotal gross purchase price of approximately $19.73 per common share and aggregate gross proceeds of approximately $4.8$52.4 million. The Company used the proceeds from the sale of these shares to pay down borrowingsreduce its outstanding balance on its revolving credit facility. No shares were issuedfacility and utilized availability under the ATM Program duringrevolving credit facility to acquire the three months ended March 31, 2017. As of March 31, 2018, approximately $160.2 million remained available for issuance under the ATM program. Future sales will depend on a variety of factors to be determined bytwo hotels.
In addition, the Company including market conditions,has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing on April 25, 2019. The Company may offer an indeterminate number or amount, as the trading pricecase may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing its 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 opportunities for uses(6) unsecured senior or subordinate debt securities, all of any proceeds.
Capital Uses
The Company anticipates that cash flow from operations, availability under its revolving credit facility,facilities, additional borrowings and proceeds from hotel dispositions and equity offerings will be adequate to meet its anticipated liquidity requirements, including debt service, hotel acquisitions, hotel renovations, share repurchases, and required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes).
Distributions
To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income. Distributions paid during the three months ended March 31, 20182019 totaled approximately $69.1$67.2 million or $0.30 per common share and were paid at a monthly rate of $0.10 per common share. For the same period, the Company’s net cash generated from operations was approximately $52.9 million, which included a payment of $5.5 million to settle the 2014 DRIP litigation which is discussed in Note 8 titled “Legal Proceedings” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q. $56.2 million. This shortfall includes a return of capital and was funded primarily by borrowings on the Company’s revolving credit facility. At this time, the Company does not anticipate distributions for the full year of 20182019 to exceed net cash generated from operations.
The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. As it has done historically, due to seasonality, the Company may use its revolving credit facility to maintain the consistency of the monthly distribution rate, 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 the current annual distribution rate. The Board of Directors monitors the Company’s distribution rate relative to the performance of theits 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. 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 assurances it will be successful with this strategy and may need to reduce its distributions to required levels. 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.
Share Repurchases
During 2018, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $464 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2019 if not terminated earlier. During the first three months ended March 31, 2019, the Company purchased, under its Share Repurchase Program, approximately 0.3 million of its common shares at a weighted-average market purchase price of approximately $14.93 per common share for an aggregate purchase price, including commissions, of approximately $4.1 million. During the three months ended March 31, 2018, the Company purchased, under its $475 million share repurchase program,Share Repurchase Program, approximately 0.3 million of its common shares at a weighted-average market purchase price of approximately $16.89 per common share for an aggregate purchase price, including commissions, of approximately $4.3 million. The Company did not purchase any common shares under its Share Repurchase Program during the first three months of 2017. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its revolving credit facility.facilities. As of March 31, 2019, approximately $359.9 million remained available for purchase under the Share Repurchase Program. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. As of March 31, 2018, approximately $463.2 million remained available for repurchase under the Share Repurchase Program. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2018 if not terminated earlier.
Capital Improvements
The Company has ongoing capital commitments to fund its capital improvements. To maintain and enhance 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 March 31, 2018,2019, the Company held $28.4$28.9 million in reserve related to these properties. During the three months ended March 31, 2018,2019, the Company invested approximately $18.1$18.7 million in capital expenditures and anticipates spending an additional $50$60 million to $60$70 million during the remainder of 2018,2019, which includes various scheduled renovation projects for approximately 2520 to 3025 properties. The Company does not currently have any existing or planned projects for development.
Hotel Contract Commitments
As of a 210-room Hampton Inn & Suites in Phoenix, Arizona for approximately $44.3 million, using borrowings under its revolving credit facility. After this purchase,April 30, 2019, the Company had outstanding contracts for the potential purchase of threefive hotels that were under construction for a total expected purchase price of approximately $67.4 million, including a 128-room Home2 Suites in Orlando, Florida which is$159.2 million. All five hotels are under development and are planned to be completed and opened for business inover the fourth quarter of 2018, and a combined 224-room dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Floridanext 15 to 27 months from March 31, 2019, at which is planned to be completed and opened for business in 2020. Closingtime closings on the remainingthese hotels isare expected to occur upon completion of construction.occur. Although the Company is working towards acquiring these five hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closingclosings on these hotels will occur under the outstanding purchase contracts. The Company intends to use borrowings under its revolvingIt is anticipated that the purchase price for the five hotels will be funded through the Company’s credit facility to purchase hotels under contract if a closing occurs.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 56 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 there is 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 are greater in the second and third quarters than in the first and fourth quarters. 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.
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 the new lease accounting standards in the first three months of 2018 and the anticipated adoption of recently issued accounting standards.
Subsequent Events
In April 2018,2019, the Company paid approximately $23.0$22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders.
In April 2018,2019, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of May 2018.2019. The distribution is payable on May 15, 2018.
In April 2018,2019, the Company through one of its indirect wholly-owned subsidiaries, entered into a purchase contract for the purchase of all of the ownership interestsa hotel to be constructed in a limited liability company which plans to construct a dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida, with a combined total of 224 guest roomsDenver, Colorado, for a gross purchase price of approximately $46.7 million.a minimum of $49.1 million, which is subject to adjustment based on the actual number of rooms. The hotel is planned to be a Courtyard by Marriott which is expected to contain a minimum of 182 guest rooms. Although the Company is working towards acquiring these hotels,this hotel, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on these hotelsthis hotel will occur.
As of March 31, 2018,2019, 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 variablevariable-rate term debt that is not fixed by interest rate term loan.swaps. As of March 31, 2018,2019, after giving effect to interest rate swaps, as described below, approximately $273.2$317.9 million, or approximately 21%23% of the Company’s total debt outstanding, was subject to variable interest rates. Based on the Company’s variable ratevariable-rate debt outstanding as of March 31, 2018,2019, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $2.7$3.2 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. The Company’s cash and cash equivalents at March 31, 20182019 were $0.
As of March 31, 2018,2019, the Company’s variable ratevariable-rate debt consisted of its $540credit facilities, including borrowings outstanding under its $425 million revolving credit facility and six$735 million of term loans totaling $660 million.loans. Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable ratevariable-rate debt. As of March 31, 2018,2019, the Company had sixseven interest rate swap agreements that effectively fix the interest payments on approximately $557.5$607.5 million of the Company’s variablevariable-rate debt outstanding. In addition, in December 2018, the Company entered into two interest rate debt outstanding (consistingswap agreements which, beginning January 31, 2020 and May 18, 2020, will effectively fix the interest rate on $25 million and $50 million, respectively, of five term loans) through maturity.its variable-rate debt. 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.
In addition to its variable ratevariable-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. The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt the six term loans and borrowings outstanding under the $540 million revolvingits credit facilityfacilities at March 31, 2018.2019. All dollar amounts are in thousands.
April 1 - December 31, 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | Fair Market Value | |||||||||||||||||||||||||
| Total debt: | ||||||||||||||||||||||||||||||||
| Maturities | $ | 9,730 | $ | 204,505 | $ | 453,349 | $ | 97,586 | $ | 109,252 | $ | 454,780 | $ | 1,329,202 | $ | 1,326,386 | ||||||||||||||||
| Average interest rates | 3.7 | % | 3.7 | % | 3.8 | % | 4.0 | % | 3.9 | % | 3.8 | % | ||||||||||||||||||||
| Variable rate debt: | ||||||||||||||||||||||||||||||||
| Maturities | $ | - | $ | 170,700 | $ | 425,000 | $ | 50,000 | $ | - | $ | 185,000 | $ | 830,700 | $ | 832,515 | ||||||||||||||||
| Average interest rates (1) | 3.2 | % | 3.2 | % | 3.2 | % | 3.3 | % | 3.4 | % | 3.4 | % | ||||||||||||||||||||
| Fixed rate debt: | ||||||||||||||||||||||||||||||||
| Maturities | $ | 9,730 | $ | 33,805 | $ | 28,349 | $ | 47,586 | $ | 109,252 | $ | 269,780 | $ | 498,502 | $ | 493,871 | ||||||||||||||||
| Average interest rates | 4.5 | % | 4.4 | % | 4.4 | % | 4.4 | % | 4.2 | % | 4.1 | % | ||||||||||||||||||||
April 1 - December 31, 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | Fair Market Value | |||||||||||||||||||||||||
Total debt: | ||||||||||||||||||||||||||||||||
Maturities | $ | 30,391 | $ | 28,349 | $ | 47,586 | $ | 299,652 | $ | 295,615 | $ | 709,165 | $ | 1,410,758 | $ | 1,405,036 | ||||||||||||||||
Average interest rates (1) | 3.8 | % | 3.9 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.1 | % | ||||||||||||||||||||
Variable rate debt: | ||||||||||||||||||||||||||||||||
Maturities | $ | - | $ | - | $ | - | $ | 190,400 | $ | 250,000 | $ | 485,000 | $ | 925,400 | $ | 926,103 | ||||||||||||||||
Average interest rates (1) | 3.5 | % | 3.6 | % | 3.8 | % | 3.9 | % | 3.9 | % | 4.1 | % | ||||||||||||||||||||
Fixed rate debt: | ||||||||||||||||||||||||||||||||
Maturities | $ | 30,391 | $ | 28,349 | $ | 47,586 | $ | 109,252 | $ | 45,615 | $ | 224,165 | $ | 485,358 | $ | 478,933 | ||||||||||||||||
Average interest rates | 4.4 | % | 4.4 | % | 4.4 | % | 4.2 | % | 4.1 | % | 4.1 | % | ||||||||||||||||||||
(1) | The average interest rate gives effect to interest rate swaps, as applicable. | |||||||||||||||
Senior management, including the Chief Executive Officer and Chief Financial 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 and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018.2019. 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.
PART II. OTHER INFORMATION
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 legal proceedings previously disclosed in the 2017 Form 10-K except as described in Note 8 titled “Legal Proceedings” inCompany, have a material adverse effect on the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, which information is incorporated by reference herein.
For a discussion of the Company’s potential risks and uncertainties, see the section titled “Risk Factors” in the 20172018 Form 10-K. There have been no material changes to the risk factors previously disclosed in the 20172018 Form 10-K.
The following is a summary of all share repurchases during the first quarter of 2018.
| 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) | ||||||||||||
| January 1 - January 31, 2018 | - | - | - | $ | 467,500 | |||||||||||
| February 1 - February 28, 2018 | - | - | - | $ | 467,500 | |||||||||||
March 1 - March 31, 2018 (2) | 306,413 | $ | 16.90 | 254,653 | $ | 463,200 | ||||||||||
| Total | 306,413 | 254,653 | ||||||||||||||
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) | |||||||||||||
January 1 - January 31, 2019 | 244,800 | $ | 14.81 | 244,800 | $ | 360,400 | |||||||||||
February 1 - February 28, 2019 | 27,979 | $ | 15.95 | 27,979 | $ | 359,900 | |||||||||||
March 1 - March 31, 2019 | 31,156 | (2) | $ | 16.46 | 1,400 | $ | 359,900 | ||||||||||
Total | 303,935 | 274,179 | |||||||||||||||
(1) | Represents amount outstanding under the | ||||||||
(2) | Includes | ||||||||
Exhibit Number | Description of Documents | ||
3.1 | |||
3.2 | |||
10.1* | |||
10.2* | |||
31.1 | |||
31.2 | |||
32.1 | |||
101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, | ||
* Denotes Management Contract or Compensation Plan | |||
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.
Apple Hospitality REIT, Inc. | ||||
By: | /s/ Justin G. Knight | Date: May | ||
Justin G. Knight, | ||||
President and Chief Executive Officer (Principal Executive Officer) | ||||
By: | /s/ Bryan Peery | Date: May | ||
Bryan Peery, | ||||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) | ||||