APPLE HOSPITALITY REIT, INC. Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Forward-looking statements are typically identified by use of statements that include phrases such as "may," "believe," "expect," "anticipate," "intend," "estimate," "project," "target," "goal," "plan," "should," "will," "predict," "potential," "outlook," "strategy," and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company's forward-looking statements continues to be the adverse effect of COVID-19, including resurgences and variants, on the Company's business, financial performance and condition, operating results and cash flows, the real estate market and the hospitality industry specifically, and the global economy and financial markets generally. The significance, extent and duration of the continued impacts caused by the COVID-19 pandemic on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the extent and effectiveness of the actions taken to mitigate its impact, the acceptance and availability of vaccines, the duration of associated immunity and efficacy of the vaccines against variants of COVID-19, the potential for additional hotel closures/consolidations that may be mandated or advisable, whether based on increased COVID-19 cases, new variants or other factors, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled "Risk Factors" in the Company's 2021 Form 10-K as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Additional factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties and redeploy proceeds; the anticipated timing and frequency of shareholder distributions; the ability of the Company to fund capital obligations; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions (including the potential effects of inflation or a recessionary environment); reduced business and leisure travel due to travel-related health concerns, including the COVID-19 pandemic or an increase in COVID-19 cases or any other infectious or contagious diseases in theU.S. or abroad; adverse changes in the real estate and real estate capital markets; financing risks; changes in interest rates; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company's business, assets or classification as a REIT. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Quarterly Report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company's qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"). Readers should carefully review the risk factors described in the Company's filings with theSecurities and Exchange Commission ("SEC"), including but not limited to those discussed in the section titled "Risk Factors" in the 2021 Form 10-K. Any forward-looking statement that the Company makes speaks only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.
The following discussion and analysis should be read in conjunction with the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the 2021 Form 10-K.
Overview
The Company is aVirginia 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 theU.S. As ofSeptember 30, 2022 , the Company owned 218 hotels with an aggregate of 28,693 rooms located in urban, high-end suburban and developing markets throughout 36 states. Substantially all of the Company's hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 17 hotel management companies, none of which are affiliated with the Company. The Company's common shares are listed on the NYSE under the ticker symbol "APLE." 22
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The Impact of COVID-19 on the Company and Hospitality Industry
The COVID-19 pandemic has negatively impacted theU.S. and global economies and financial markets. The effect of COVID-19 on the hotel industry has been unprecedented and has dramatically reduced business and impacted leisure travel, which adversely impacted the Company's business, financial performance, operating results and cash flows, beginning inMarch 2020 . From the outset of the pandemic, the Company, with the support of its management companies and brands, has taken steps to minimize costs and cash outflow to operate efficiently and maximize performance in light of the impacts to business resulting from COVID-19. These activities included implementing cost elimination and efficiency initiatives at each of its hotels by adjusting operations to manage total labor costs, reducing or eliminating certain amenities and reducing rates under various service contracts; enhancing sales efforts by strategically targeting available demand; reducing capital improvement projects, particularly in 2020 and 2021; and entering into various amendments to its unsecured credit facilities to provide for the temporary waiver of financial covenant testing for the majority of its financial maintenance covenants (the Company exited this waiver period early inJuly 2021 due to improved financial performance). Cost reduction initiatives, including those discussed above have not, and are not expected to, materially offset revenue losses from COVID-19. While operations in the first nine months of 2022 have continued to improve to 2019 pre-pandemic levels, the volatility due to the impacts of COVID-19 variants continue to make it difficult to project operating results. The Company has experienced significant improvement in its business during 2021 and through the first nine months of 2022 driven by strength in leisure, small group and local negotiated business demand. While the Company has seen continued improvement in overall business demand, it anticipates that some larger corporate demand drivers may take longer to fully recover.
2022
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 rooms-focused hotels, as ofSeptember 30, 2022 , the Company had separate outstanding contracts for the potential purchase of three hotels, consisting of one hotel inMadison, Wisconsin , one hotel inLouisville, Kentucky and one hotel inPittsburgh, Pennsylvania for a total combined purchase price of approximately$163.6 million . Two of the hotels are already in operation and one is in development and scheduled to open in early 2024. Closings on the two hotels already in operation were completed onOctober 25, 2022 . See Note 9 titled "Subsequent Events" 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 two acquisitions. The remaining hotel is expected to close upon completion of development, which is currently expected in early 2024. Although the Company is working towards acquiring this hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closing on this hotel will occur under the outstanding purchase contract. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotel under contract if closing occurs. 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, during the first nine months of 2022, the Company sold one hotel for a gross sales price of approximately$8.5 million and recognized a net gain on sale of approximately$1.8 million . The Company used the net proceeds from the sale for general corporate purposes.
As ofSeptember 30, 2022 , the Company owned 218 hotels with a total of 28,693 rooms as compared to 215 hotels with a total of 28,085 rooms as ofSeptember 30, 2021 . Results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year. During the nine months endedSeptember 30, 2022 , the Company sold one hotel and did not acquire any properties. During the same period of 2021, the Company acquired four hotels and sold 23 hotels. As a result, the comparability of results for the three and nine months endedSeptember 30, 2022 and 2021, 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"), and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below. RevPAR and operating results may be impacted by regional and local economies as well as changes in lodging demand due to macroeconomic factors including inflationary pressures, higher energy prices or a recessionary environment. 23
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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 September 30, Nine Months Ended September 30,
Percent Percent Percent Percent
(in thousands, except of of Percent of of Percent
statistical data) 2022 Revenue 2021 Revenue Change 2022 Revenue 2021 Revenue Change
Total revenue $ 341,150 100.0 % $ 277,164 100.0 % 23.1 % $ 939,296 100.0 % $ 683,281 100.0 % 37.5 %
Hotel operating expense 193,067 56.6 % 153,953 55.5 % 25.4 % 529,584 56.4 % 393,103 57.5 % 34.7 %
Property taxes,
insurance and other
expense 19,052 5.6 % 17,927 6.5 % 6.3 % 56,510 6.0 % 54,936 8.0 % 2.9 %
General and
administrative expense 10,271 3.0 % 13,261 4.8 % -22.5 % 30,216 3.2 % 29,815 4.4 % 1.3 %
Loss on impairment of
depreciable real
estate assets - - n/a - 10,754 n/a
Depreciation and
amortization expense 45,135 44,217 2.1 % 135,781 139,313 -2.5 %
Gain on sale of real
estate 1,785 44 n/a 1,785 3,664 -51.3 %
Interest and other
expense, net 14,933 15,977 -6.5 % 44,785 53,108 -15.7 %
Income tax expense 1,331 114 n/a 1,712 309 454.0 %
Net income 59,146 31,759 86.2 % 142,493 5,607 n/a
Adjusted Hotel EBITDA
(1) 129,166 105,423 22.5 % 353,617 235,664 50.1 %
Number of hotels owned
at end of period 218 215 1.4 % 218 215 1.4 %
ADR $ 157.91 $ 140.02 12.8 % $ 150.02 $ 121.36 23.6 %
Occupancy 75.7 % 71.5 % 5.9 % 73.6 % 65.9 % 11.7 %
RevPAR $ 119.52 $ 100.14 19.4 % $ 110.40 $ 79.94 38.1 %
(1)
See reconciliation of
The following table highlights the Company's quarterly ADR, Occupancy, RevPAR,
net income and adjusted hotel earnings before interest, income taxes,
depreciation and amortization for real estate ("Adjusted Hotel EBITDA "), all of
which have been impacted by COVID-19, during the last five quarters (in
thousands except statistical data):
3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
2021 2021 2022 2022 2022
ADR $ 140.02 $ 131.04 $ 137.03 $ 153.35 $ 157.91
Occupancy 71.5 % 67.5 % 67.1 % 77.9 % 75.7 %
RevPAR $ 100.14 $ 88.43 $ 91.98 $ 119.41 $ 119.52
Net income $ 31,759 $ 13,221 $ 18,002 $ 65,345 $ 59,146
Adjusted Hotel EBITDA (1) $ 105,423 $ 84,609 $ 87,936 $ 136,515 $ 129,166
(1)
See reconciliation of
While the Company experienced its most significant decline in operating results (driven by the impact of COVID-19) during 2020 and the first quarter of 2021, occupancy and RevPAR have since shown improvement with a RevPAR increase of 19.4% and 38.1% for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. Although the Company expects continued recovery in rate and occupancy, it is difficult to project the pace at which the Company will experience a full recovery to pre-pandemic levels and future revenues and operating results could be negatively impacted by, among other things, historical seasonal trends, new COVID-19 variants, state and local governments and businesses reverting to tighter COVID-19 mitigation restrictions, deterioration of consumer sentiment, labor shortages, supply chain disruptions, a recessionary macroeconomic environment or inflationary pressures. 24
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Comparable Hotels Operating Results
The following tables reflect certain operating statistics for the Company's 218 hotels owned as ofSeptember 30, 2022 ("Comparable Hotels "). The Company defines metrics fromComparable Hotels as results generated by the 218 hotels owned as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership using information provided by the properties' prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions, results have been excluded for the Company's period of ownership. Three Months Ended September 30, Percent Change Percent Change 2022 2021 2021 2019 2019 ADR$ 157.90 $ 141.84 11.3 %$ 143.87 9.8 % Occupancy 75.7 % 71.4 % 6.0 % 80.1 % -5.5 % RevPAR$ 119.53 $ 101.34 17.9 %$ 115.30 3.7 % Nine Months Ended September 30, Percent Change Percent Change 2022 2021 2021 2019 2019 ADR$ 149.99 $ 123.41 21.5 %$ 143.06 4.8 % Occupancy 73.6 % 65.9 % 11.7 % 78.6 % -6.4 % RevPAR$ 110.40 $ 81.33 35.7 %$ 112.38 -1.8 % Same Store Operating Results
The following tables reflect certain operating statistics for the 204 hotels
owned by the Company as of
Three Months Ended September 30,
Percent Change Percent Change
2022 2021 2021 2019 2019
ADR $ 155.09 $ 140.04 10.7 % $ 142.25 9.0 %
Occupancy 75.5 % 71.8 % 5.2 % 80.1 % -5.7 %
RevPAR $ 117.12 $ 100.53 16.5 % $ 113.90 2.8 %
Nine Months Ended September 30,
Percent Change Percent Change
2022 2021 2021 2019 2019
ADR $ 148.17 $ 122.40 21.1 % $ 142.08 4.3 %
Occupancy 73.7 % 66.4 % 11.0 % 78.7 % -6.4 %
RevPAR $ 109.24 $ 81.32 34.3 % $ 111.82 -2.3 %
As discussed above, hotel performance is impacted by many factors, including the
economic conditions in the U.S. as well as each individual locality. COVID-19
has been negatively affecting the U.S. hotel industry since March 2020 . The
Company's Same Store Hotels revenue and operating results improved during the
three and nine months ended September 30, 2022 compared to the three and nine
months ended September 30, 2021 , which is consistent with the overall lodging
industry. While the Company's Same Store Hotels RevPAR was down approximately
2.3% for the nine months ended September 30, 2022 , compared to the same period
in 2019 (the last year prior to the COVID-19 pandemic), RevPAR was approximately
2.8% higher for the three months ended September 30, 2022 compared to the same
period in 2019. Though the Company anticipates further improvement to RevPAR
compared to 2021, the Company can give no assurances as to the amount or period
of improvement due to the uncertainty resulting from the impact of COVID-19.
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Index 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 endedSeptember 30, 2022 and 2021, the Company had total revenue of$341.2 million and$277.2 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, the Company had total revenue of$939.3 million and$683.3 million , respectively. For the three months endedSeptember 30, 2022 and 2021, respectively,Comparable Hotels achieved combined average occupancy of 75.7% and 71.4%, ADR of$157.90 and$141.84 and RevPAR of$119.53 and$101.34 . For the nine months endedSeptember 30, 2022 and 2021, respectively,Comparable Hotels achieved combined average occupancy of 73.6% and 65.9%, ADR of$149.99 and$123.41 and RevPAR of$110.40 and$81.33 . ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR. Compared to the same periods in 2021, during the three and nine months endedSeptember 30, 2022 , the Company experienced increases in ADR and occupancy, resulting in increases of 17.9% and 35.7%, respectively, in RevPAR forComparable Hotels . Compared to the same periods of 2019 (pre-COVID-19), Comparable Hotels RevPAR for the third quarter of 2022 increased by 3.7% primarily as a result of increases in ADR, offset by reductions in occupancy and for the first nine months of 2022 decreased by 1.8% primarily as a result of reductions in occupancy, offset by increases in ADR. Revenue recovery in the three and nine months endedSeptember 30, 2022 , as compared to the same periods of 2021 was led by leisure transient and small group demand, with increased demand from small corporate business. Suburban markets continued to see stronger demand than urban markets and theSun Belt generally outperformed other regions of theU.S. throughout the hospitality industry. The Company expects improvement to continue, however, future revenues could be negatively impacted by, among other things, historical seasonal trends, an increase in COVID-19 cases, new COVID-19 variants, state and local governments and businesses reverting to tighter mitigation restrictions, or deterioration of consumer sentiment, labor shortages, supply chain disruptions, a recessionary macroeconomic environment or inflationary pressures.Hotel Operating Expense Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. Hotel operating expense for the three months endedSeptember 30, 2022 and 2021 totaled$193.1 million and$154.0 million , respectively, or 56.6% and 55.5% of total revenue for the respective periods. Hotel operating expense for the nine months endedSeptember 30, 2022 and 2021 totaled$529.6 million and$393.1 million , respectively, or 56.4% and 57.5% of total revenue for the respective periods. Comparatively, prior to COVID-19, hotel operating expense was 56.6% and 56.3% of total revenue for the three and nine months endedSeptember 30, 2019 . The impact of the pandemic has varied and will continue to vary by market and hotel. With the support of its brands and third-party management companies, the Company worked to reduce costs associated with operating hotels in a lower occupancy environment than that experienced prior to COVID-19. As occupancy has increased, adding staff to meet increased demand has been challenging, and while the Company's hotels made progress in filling open positions through the first three quarters of 2022, they have often done so at higher wage rates or with more expensive contract labor as compared to 2021 and 2019. Likewise, supply chain disruptions and broader inflationary pressures throughout the overall economy and global tensions have driven shortages and cost increases for materials and supplies such as food and equipment. The Company continues to work with its management companies to realize operational efficiencies and mitigate the impact of cost pressures resulting from supply chain shortages, inflation and staffing challenges. The Company will continue to evaluate and work with its management companies to implement adjustments to the hotel operating model in response to continued changes in the operating environment and guest preferences including evaluating staffing levels at its hotels to maximize efficiency.
Property Taxes, Insurance and Other Expense
Property taxes, insurance, and other expense for the three months endedSeptember 30, 2022 and 2021 was$19.1 million and$17.9 million , respectively, or 5.6% and 6.5% of total revenue for the respective periods. For the nine months endedSeptember 30, 2022 and 2021, property taxes, insurance and other expense totaled$56.5 million and$54.9 million , respectively, or 6.0% and 8.0% of total revenue for the respective periods. The increases were primarily due to increases in property taxes in certain locations due to the reassessment of property values by localities related to the improved economy, partially offset by decreases at other locations due to successful appeals of tax assessments. The Company will continue to aggressively appeal tax assessments in certain jurisdictions in an attempt to minimize tax increases, as warranted, and will continue to monitor locality guidance as a result of COVID-19.
General and Administrative Expense
General and administrative expense for the three months endedSeptember 30, 2022 and 2021 was$10.3 million and$13.3 million , respectively, or 3.0% and 4.8% of total revenue for the respective periods. For the nine months endedSeptember 30, 2022 and 26
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2021, general and administrative expense was$30.2 million and$29.8 million , respectively, or 3.2% and 4.4% of total revenue for the respective periods. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. General and administrative expense for the three months endedSeptember 30, 2022 and 2021 included approximately$4.0 million and$7.0 million , respectively, of expense related to the accrual for executive incentive compensation. The third quarter of 2021 included an adjustment to previous estimates of the projected executive incentive compensation payout based on favorable increases to expected shareholder return and operating metrics.
Loss on Impairment of Depreciable Real Estate Assets
The Company did not recognize any loss on the impairment of depreciable real estate assets for the nine months endedSeptember 30, 2022 . Loss on impairment of depreciable real estate assets was$10.8 million for the nine months endedSeptember 30, 2021 , consisting of impairment losses of$1.3 million for theOverland Park, Kansas SpringHill Suites and$9.4 million for four hotel properties identified by the Company in the first quarter of 2021 for potential sale. See Note 3 titled "Dispositions" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning these impairment losses.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months endedSeptember 30, 2022 and 2021 was$45.1 million and$44.2 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, depreciation and amortization expense was$135.8 million and$139.3 million , respectively. Depreciation and amortization expense primarily represents expense of the Company's hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for the respective periods owned. The increase of approximately$0.9 million for the three months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to the acquisition of four hotels betweenSeptember 30, 2021 andSeptember 30, 2022 . The decrease of approximately$3.5 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021 was primarily due to the hotel dispositions completed throughout 2021, partially offset by acquisitions completed throughout 2021 and renovations completed throughout 2022.
Interest and Other Expense, net
Interest and other expense, net for the three months endedSeptember 30, 2022 and 2021 was$14.9 million and$16.0 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, interest and other expense, net was$44.8 million and$53.1 million , respectively. Interest and other expense, net for the nine months endedSeptember 30, 2022 is net of approximately$0.5 million of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the three months endedSeptember 30, 2022 and 2021 includes approximately$1.5 million and$2.1 million , respectively, of interest recorded on the Company's finance lease liabilities. For the nine months endedSeptember 30, 2022 and 2021, interest and other expense, net includes approximately$4.4 million and$7.9 million , respectively, of interest recorded on the Company's finance lease liabilities. The decrease is due to theAugust 16, 2021 purchase of the fee interest in the land at the Company'sSeattle, Washington Residence Inn that was previously under a ground lease. Interest expense related to the Company's debt instruments for the nine months endedSeptember 30, 2022 decreased compared to the nine months endedSeptember 30, 2021 as a result of lower average borrowings due to the repayment of loans maturing in 2022 and lower average interest rates as the Company paid higher rates due to its covenant waiver status during the first half of 2021. The Company anticipates interest expense for the remainder of 2022 to be similar to the interest expense for the same period of 2021 due to reduced average borrowings offset by higher interest rates. See Note 4 titled "Debt" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional discussion of the Company's amended unsecured credit facilities.
Income tax expense
Income tax expense for the three months endedSeptember 30, 2022 and 2021 was$1.3 million and$0.1 million , respectively. For the nine months endedSeptember 30, 2022 and 2021, income tax expense was$1.7 million and$0.3 million , respectively. The increase is primarily due to increases in state income taxes as a result of significant improvement in operating results in 2022 as well as limitations placed by certain states on the application of prior net operating losses. Non-GAAP Financial Measures The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations ("FFO"), Modified Funds from Operations ("MFFO"), Earnings Before Interest, 27
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Income Taxes, Depreciation and Amortization ("EBITDA"), Earnings Before
Interest, Income Taxes, Depreciation and Amortization for Real Estate
("EBITDAre"), Adjusted EBITDAre ("Adjusted EBITDAre") and Adjusted Hotel EBITDA .
These non-GAAP financial measures should be considered along with, but not as
alternatives to, net income (loss), cash flow from operations or any other
operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and
Adjusted Hotel EBITDA are not necessarily indicative of funds available to fund
the Company's cash needs, including its ability to make cash distributions.
Although FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel
EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO,
EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA , as reported by
other companies that do not define such terms exactly as the Company defines
such terms, the Company believes these supplemental measures are useful to
investors when comparing the Company's results between periods and with other
REITs.
FFO and MFFO
The Company calculates and presents FFO in accordance with standards established
by the National Association of Real Estate Investment Trusts ("Nareit"), which
defines FFO as net income (loss) (computed in accordance with GAAP), excluding
gains and losses from the sale of certain real estate assets (including gains
and losses from change in control), extraordinary items as defined by GAAP, and
the cumulative effect of changes in accounting principles, plus real estate
related depreciation, amortization and impairments, and adjustments for
unconsolidated affiliates. Historical cost accounting for real estate assets
implicitly assumes that the value of real estate assets diminishes predictably
over time. Since real estate values instead have historically risen or fallen
with market conditions, most real estate industry investors consider FFO to be
helpful in evaluating a real estate company's operations. The Company further
believes that by excluding the effects of these items, FFO is useful to
investors in comparing its operating performance between periods and between
REITs that report FFO using the Nareit definition. FFO as presented by the
Company is applicable only to its common shareholders, but does not represent an
amount that accrues directly to common shareholders.
The Company calculates MFFO by further adjusting FFO for the exclusion of
amortization of finance ground lease assets, amortization of favorable and
unfavorable operating leases, net and non-cash straight-line operating ground
lease expense, as these expenses do not reflect the underlying performance of
the related hotels. The Company presents MFFO when evaluating its performance
because it believes that it provides further useful supplemental information to
investors regarding its ongoing operating performance.
The following table reconciles the Company's GAAP net income to FFO and MFFO for
the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 59,146 $ 31,759 $ 142,493 $ 5,607
Depreciation of real estate owned 44,372 43,028 133,489 134,880
Gain on sale of real estate (1,785 ) (44 ) (1,785 ) (3,664 )
Loss on impairment of depreciable
real estate assets - - - 10,754
Funds from operations 101,733 74,743 274,197 147,577
Amortization of finance ground
lease assets 759 1,183 2,278 4,418
Amortization of favorable and
unfavorable operating
leases, net 97 98 299 294
Non-cash straight-line operating
ground lease expense 38 41 116 128
Modified funds from operations
EBITDA, EBITDAre, Adjusted EBITDAre and
EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company's indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.
In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains
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and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity's share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition. The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels (Adjusted EBITDAre). The Company further excludes actual corporate-level general and administrative expense for the Company from Adjusted EBITDAre (Adjusted Hotel EBITDA ) to isolate property-level operational performance over which the Company's hotel operators have direct control. The Company believesAdjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and is used by management to measure the performance of the Company's hotels and effectiveness of the operators of the hotels.
The following table reconciles the Company's GAAP net income to EBITDA,
EBITDAre, Adjusted EBITDAre and
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 59,146 $ 31,759 $ 142,493 $ 5,607
Depreciation and amortization 45,135 44,217 135,781 139,313
Amortization of favorable and
unfavorable operating
leases, net 97 98 299 294
Interest and other expense, net 14,933 15,977 44,785 53,108
Income tax expense 1,331 114 1,712 309
EBITDA 120,642 92,165 325,070 198,631
Gain on sale of real estate (1,785 ) (44 ) (1,785 ) (3,664 )
Loss on impairment of depreciable
real estate assets - - - 10,754
EBITDAre 118,857 92,121 323,285 205,721
Non-cash straight-line operating
ground lease expense 38 41 116 128
Adjusted EBITDAre 118,895 92,162 323,401 205,849
General and administrative
expense 10,271 13,261 30,216 29,815
Adjusted Hotel EBITDA $ 129,166 $ 105,423 $ 353,617 $ 235,664 The following table reconciles the Company's GAAP net income to EBITDA,
EBITDAre, Adjusted EBITDAre and
3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
2021 2021 2022 2022 2022
Net income $ 31,759 $ 13,221 $ 18,002 $ 65,345 $ 59,146
Depreciation and amortization 44,217 45,158 45,324 45,322 45,135
Amortization of favorable and
unfavorable
operating leases, net 98 99 99 103 97
Interest and other expense,
net 15,977 14,640 14,654 15,198 14,933
Income tax expense 114 159 179 202 1,331
EBITDA 92,165 73,277 78,258 126,170 120,642
(Gain) loss on sale of real
estate (44 ) 68 - - (1,785 )
EBITDAre 92,121 73,345 78,258 126,170 118,857
Non-cash straight-line
operating ground lease
expense 41 41 40 38 38
Adjusted EBITDAre 92,162 73,386 78,298 126,208 118,895
General and administrative
expense 13,261 11,223 9,638 10,307 10,271
Adjusted Hotel EBITDA $ 105,423 $ 84,609 $ 87,936 $ 136,515 $ 129,166
29--------------------------------------------------------------------------------
Index
Hotels Owned
As of
Number of Hotels and Guest Rooms by Brand
Number of Number of
Brand Hotels Rooms
Hilton Garden Inn 40 5,593
Hampton 37 4,953
Courtyard 33 4,653
Homewood Suites 30 3,417
Residence Inn 29 3,548
Fairfield 10 1,213
Home2 Suites 10 1,146
SpringHill Suites 9 1,245
TownePlace Suites 9 931
Hyatt Place 3 411
Marriott 2 619
Embassy Suites 2 316
Independent 1 208
AC Hotels 1 178
Aloft 1 157
Hyatt House 1 105
Total 218 28,693
30--------------------------------------------------------------------------------
Index
Number of Hotels and Guest Rooms by State
Number of Number of
State Hotels Rooms
Alabama 13 1,246
Alaska 2 304
Arizona 13 1,776
Arkansas 2 248
California 26 3,721
Colorado 4 567
Florida 22 2,844
Georgia 5 585
Idaho 1 186
Illinois 7 1,255
Indiana 4 479
Iowa 3 301
Kansas 3 320
Louisiana 3 422
Maine 3 514
Maryland 2 233
Massachusetts 3 330
Michigan 1 148
Minnesota 3 405
Mississippi 2 168
Missouri 4 544
Nebraska 4 621
New Jersey 5 629
New York 4 554
North Carolina 8 881
Ohio 2 252
Oklahoma 4 545
Oregon 1 243
Pennsylvania 3 391
South Carolina 5 590
Tennessee 11 1,337
Texas 27 3,328
Utah 3 393
Virginia 11 1,667
Washington 3 490
Wisconsin 1 176
Total 218 28,693
31--------------------------------------------------------------------------------
Index
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 218 hotels the Company owned as ofSeptember 30, 2022 : Date Acquired or City State Brand Manager Completed Rooms Anchorage AK Embassy Suites Stonebridge(1) 4/30/2010 169 Anchorage AK Home2 Suites Stonebridge(1) 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 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 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 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 Tempe AZ Hyatt House Crestline 8/13/2020 105 Tempe AZ Hyatt Place Crestline 8/13/2020 154 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 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 32
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Index
Date
Acquired or
City State Brand Manager Completed Rooms
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
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(1) 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 Dimension 9/1/2016 149
Cape Canaveral FL Hampton LBA 4/30/2020 116
Cape Canaveral FL Homewood Suites LBA 9/1/2016 153
Cape Canaveral FL Home2 Suites LBA 4/30/2020 108
Fort Lauderdale FL Hampton Dimension 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 Crestline 12/7/2018 127
Miami FL Courtyard Dimension 3/1/2014 118
Miami FL Hampton HHM 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
Tallahassee FL Fairfield LBA 9/1/2016 97
Tallahassee FL Hilton Garden Inn LBA 3/1/2014 85
Tampa FL Embassy Suites HHM 11/2/2010 147
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
Cedar Rapids IA Hampton Aimbridge 9/1/2016 103
Cedar Rapids IA Homewood Suites Aimbridge 9/1/2016 95
Davenport IA Hampton Aimbridge 9/1/2016 103
Boise ID Hampton Raymond 4/30/2010 186
Des Plaines IL Hilton Garden Inn Raymond 9/1/2016 253
Hoffman Estates IL Hilton Garden Inn HHM 9/1/2016 184
Mettawa IL Hilton Garden Inn HHM 11/2/2010 170
Mettawa IL Residence Inn HHM 11/2/2010 130
Rosemont IL Hampton Raymond 9/1/2016 158
Skokie IL Hampton Raymond 9/1/2016 225
Warrenville IL Hilton Garden Inn HHM 11/2/2010 135
33--------------------------------------------------------------------------------
Index
Date
Acquired or
City State Brand Manager Completed Rooms
Indianapolis IN SpringHill Suites HHM 11/2/2010 130
Merrillville IN Hilton Garden Inn HHM 9/1/2016 124
Mishawaka IN Residence Inn HHM 11/2/2010 106
South Bend IN Fairfield HHM 9/1/2016 119
Overland Park KS Fairfield Raymond 3/1/2014 110
Overland Park KS Residence Inn Raymond 3/1/2014 120
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
Marlborough MA Residence Inn Crestline 3/1/2014 112
Westford MA Hampton Crestline 3/1/2014 110
Westford MA Residence Inn Crestline 3/1/2014 108
Annapolis MD Hilton Garden Inn Crestline 3/1/2014 126
Silver Spring MD Hilton Garden Inn Crestline 7/30/2010 107
Portland ME AC Hotels Crestline 8/20/2021 178
Portland ME Aloft Crestline 9/10/2021 157
Portland ME Residence Inn Crestline 10/13/2017 179
Novi MI Hilton Garden Inn HHM 11/2/2010 148
Maple Grove MN Hilton Garden Inn North Central 9/1/2016 121
Rochester MN Hampton Raymond 8/3/2009 124
St. Paul MN Hampton Raymond 3/4/2019 160
Kansas City MO Hampton Raymond 8/31/2010 122
Kansas City MO Residence Inn Raymond 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
Durham NC Homewood Suites McKibbon 12/4/2008 122
Fayetteville NC Home2 Suites LBA 2/3/2011 118
Greensboro NC SpringHill Suites Newport 3/1/2014 82
Jacksonville NC Home2 Suites LBA 9/1/2016 105
Wilmington NC Fairfield Crestline 3/1/2014 122
Winston-Salem NC Hampton McKibbon 9/1/2016 94
Omaha NE Courtyard Marriott 3/1/2014 181
Omaha NE Hampton HHM 9/1/2016 139
Omaha NE Hilton Garden Inn HHM 9/1/2016 178
Omaha NE Homewood Suites HHM 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 Crestline 3/1/2014 166
New York NY Independent Highgate 3/1/2014 208
Syracuse NY Courtyard Crestline 10/16/2015 102
Syracuse NY Residence Inn Crestline 10/16/2015 78
Mason OH Hilton Garden Inn Raymond 9/1/2016 110
34--------------------------------------------------------------------------------
Index
Date
Acquired or
City State Brand Manager Completed Rooms
Twinsburg OH Hilton Garden Inn Aimbridge 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
Portland OR Hampton Raymond 11/17/2021 243
Collegeville/Philadelphia PA Courtyard Newport 11/15/2010 132
Malvern/Philadelphia PA Courtyard Newport 11/30/2010 127
Pittsburgh PA Hampton Newport 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 Hyatt Place Crestline 9/1/2021 130
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
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 Hilton Garden Inn Crestline 10/28/2021 150
Nashville TN Hilton Garden Inn Dimension 9/30/2010 194
Nashville TN Home2 Suites Dimension 5/31/2012 119
Nashville TN TownePlace Suites LBA 9/1/2016 101
Addison TX SpringHill Suites Marriott 3/1/2014 159
Arlington TX Hampton Western 12/1/2010 98
Austin TX Courtyard HHM 11/2/2010 145
Austin TX Fairfield HHM 11/2/2010 150
Austin TX Hampton Dimension 4/14/2009 124
Austin TX Hilton Garden Inn HHM 11/2/2010 117
Austin TX Homewood Suites Dimension 4/14/2009 97
Austin/Round Rock TX Hampton Dimension 3/6/2009 94
Austin/Round Rock TX Homewood Suites Dimension 9/1/2016 115
Dallas TX Homewood Suites Western 9/1/2016 130
Denton TX Homewood Suites Chartwell 9/1/2016 107
El Paso TX Homewood Suites Western 3/1/2014 114
Fort Worth TX Courtyard LBA 2/2/2017 124
Fort Worth TX Hilton Garden Inn Raymond 11/17/2021 157
Fort Worth TX Homewood Suites Raymond 11/17/2021 112
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
Lewisville TX Hilton Garden Inn Aimbridge 10/16/2008 165
San Antonio TX TownePlace Suites Western 3/1/2014 106
Shenandoah TX Courtyard LBA 9/1/2016 124
35--------------------------------------------------------------------------------
Index
Date
Acquired or
City State Brand Manager Completed Rooms
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 HHM 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 413
Richmond VA Residence Inn White Lodging 12/8/2014 75
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 234
Tukwila WA Homewood Suites Dimension 3/1/2014 106
Madison WI Hilton Garden Inn Raymond 2/18/2021 176
Total 28,693
(1)
Manager noted was as of
Related Parties
The Company has engaged in, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm's length and the results of the Company's operations may be different if these transactions were conducted with non-related parties. See Note 6 titled "Related Parties" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning the Company's related party transactions.
Liquidity and Capital Resources
Capital Resources
The Company's principal short term sources of liquidity are the operating cash flows generated from the Company's properties and availability under its Revolving Credit Facility. Over the long term, the Company may receive proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties and offerings of the Company's common shares, including pursuant to the ATM Program. Macroeconomic pressures including inflation, increases in interest rates and general market uncertainty could impact the Company's ability to raise debt or equity capital to fund long-term liquidity requirements in a cost-effective manner. As ofSeptember 30, 2022 , the Company had$1.3 billion of total outstanding debt consisting of$331.8 million of mortgage debt and$1.0 billion outstanding under its unsecured credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As ofSeptember 30, 2022 , the Company had available corporate cash on hand of approximately$25.6 million ,$100 million of available funds under the$575 million term loan facility and unused borrowing capacity under its Revolving Credit Facility of approximately$650 million . The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge 36
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Index
coverage ratios, and restrictions on certain investments. The Company was in
compliance with the applicable covenants as of
As a result of COVID-19 and the associated disruption to the Company's operating results, the Company first entered into amendments inJune 2020 that suspended the testing of the Company's financial maintenance covenants under the unsecured credit facilities and imposed certain restrictions regarding the Company's investing and financing activities. Further amendments were entered into inMarch 2021 (the "March 2021 amendments"), extending the majority of the covenant waivers until the date that the compliance certificate was required to be delivered for the fiscal quarter endedJune 30, 2022 (unless the Company elected an earlier date) (the "Extended Covenant Waiver Period"). TheMarch 2021 amendments imposed several modifications and restrictions during the Extended Covenant Waiver Period, including continued cash distribution restrictions, except for the payment of cash dividends of$0.01 per common share per quarter or to the extent required to maintain REIT status, modification of the previous operating restrictions to less restrictive levels, and changes to the calculation, of the financial maintenance covenants upon exiting the Extended Covenant Waiver Period, and an increase in the LIBOR floor and establishment of a Base Rate (as defined in the credit agreements) floor under the$425 million revolving credit facility. InJuly 2021 , the Company notified its lenders under its unsecured credit facilities that it had elected to exit the Extended Covenant Waiver Period early, effective onJuly 29, 2021 pursuant to the terms of each of its unsecured credit facilities. The unsecured credit facilities do not provide the Company the ability to re-enter the Extended Covenant Waiver Period once it has elected to exit. Upon exiting the Extended Covenant Waiver Period, the Company was no longer subject to the restrictions regarding its investing and financing activities that were applicable during the Extended Covenant Waiver Period, including, but not limited to, limitations on the acquisition of property, payment of distributions to shareholders (except for the payment of cash dividends of$0.01 per common share per quarter or to the extent required to maintain REIT status), capital expenditures and use of proceeds from the sale of property or common shares of the Company. Those restrictions, including the restriction on payment of distributions to shareholders, were still in place throughout the second quarter of 2021. OnJune 2, 2022 , the Company entered into an unsecured$75 million senior notes facility with a maturity date ofJune 2, 2029 . The Company used the net proceeds from the$75 million senior notes facility for general corporate purposes, including the repayment of borrowings under the Company's$425 million revolving credit facility and repayment of mortgage debt. InJuly 2022 , the Company entered into an amendment and restatement of its$850 million credit facility, increasing the borrowing capacity to$1.2 billion . The amendment and restatement effectively extended the maturity date of the facility and changed the reference rate of the facility from LIBOR to SOFR plus 10 basis points plus a margin ranging from 1.35% to 2.25% depending on the Company's leverage ratio. See Note 4 titled "Debt" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company's debt agreements as ofSeptember 30, 2022 and amendments to those agreements prior to that date. The Company has a universal shelf registration statement on Form S-3 (No. 333-262915) that was automatically effective upon filing onFebruary 23, 2022 . The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company's preferred shares; (4) warrants exercisable for the Company's common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. Future offerings will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company's common shares and opportunities for uses of any proceeds. The Company has entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of$300 million of its common shares under the ATM Program under the Company's prior shelf registration statement and the current shelf registration statement described above. Since inception of the ATM Program inAugust 2020 throughSeptember 30, 2022 , the Company has sold approximately 4.7 million common shares at a weighted-average market sales price of approximately$16.26 per common share and received aggregate gross proceeds of approximately$76.0 million and proceeds net of offering costs, which included$0.9 million of commissions, of approximately$75.1 million . The Company used the net proceeds from the sale of these shares primarily to pay down borrowings under its$425 million revolving credit facility and for general corporate purposes, including acquisitions of hotel properties. As ofSeptember 30, 2022 , approximately$224.0 million remained available for issuance under the ATM Program. No shares were sold under the Company's ATM Program in the first three quarters of 2022. The Company plans to use future net proceeds from the sale of shares under the ATM Program for general corporate purposes which may include, among other things, acquisitions of additional properties, the repayment of outstanding indebtedness, capital 37
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Index
expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties.
Capital Uses
The Company anticipates that cash flow from operations, availability under its unsecured credit facilities, additional borrowings and proceeds from hotel dispositions and equity offerings will be adequate to meet its anticipated liquidity requirements, including required distributions to shareholders, share repurchases, capital improvements, debt service, hotel acquisitions, lease commitments, and cash management activities.
Distributions
The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to maintain its REIT status. During the Extended Covenant Waiver Period, as a requirement under the amendments to its unsecured credit facilities, the Company was restricted in its ability to make distributions except for the payment of cash distributions of$0.01 per common share per quarter or to the extent required to maintain REIT status. The Company exited the Extended Covenant Waiver Period under its unsecured credit facilities inJuly 2021 and, as a result, is no longer subject to the above-described restriction on distributions. OnFebruary 22, 2022 , the Company announced that its Board of Directors reinstated its policy of distributions on a monthly basis, and declared a monthly cash distribution of$0.05 per common share with the first monthly cash distribution paid onMarch 15, 2022 for shareholders of record onMarch 4, 2022 . InAugust 2022 , the Board of Directors approved an increase in the monthly cash distribution from$0.05 to$0.07 per common share and declared a monthly cash distribution of$0.07 per common share payable onSeptember 15, 2022 for shareholders of record onSeptember 2, 2022 . OnSeptember 20, 2022 , the Company declared a monthly cash distribution of$0.07 per common share for the month of October, paid onOctober 17, 2022 , to shareholders of record as ofOctober 4, 2022 . For the three and nine months endedSeptember 30, 2022 , the Company paid distributions of$0.17 and$0.38 , respectively, per common share for a total of$38.8 million and$86.8 million , respectively. Subsequent to quarter end, inOctober 2022 , the Company declared a monthly cash distribution of$0.08 per common share for the month ofNovember 2022 . The Company, as it has done historically due to seasonality, may use its Revolving Credit Facility to maintain the consistency of distributions, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles. Any distribution will be subject to approval of the Company's Board of Directors and there can be no assurance of the classification or duration of distributions at any particular distribution rate. The Board of Directors monitors the Company's distribution rate relative to the performance of its hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company or to the extent required to maintain REIT status. If cash flow from operations and the Revolving Credit Facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions. Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy, and it may need to reduce its distributions to minimum levels required to maintain its qualification as a real estate investment trust. If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.
Share Repurchases
InMay 2022 , the Company's Board of Directors approved a one-year extension of its existing share repurchase program, authorizing share repurchases up to an aggregate of$345 million (the "Share Repurchase Program"). The Share Repurchase Program may be suspended or terminated at any time by the Company and will end inJuly 2023 if not terminated or extended earlier. During the nine months endedSeptember 30, 2022 , the Company purchased, under its Share Repurchase Program, 0.1 million of its common shares at a weighted-average market purchase price of approximately$14.20 per common share for an aggregate purchase price, including commissions, of approximately$1.5 million . The shares were repurchased under a written trading plan as part of the Share Repurchase Program that provides for share repurchases in open market transactions and that is intended to comply with Rule 10b5-1 under the Exchange Act. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company's unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As ofSeptember 30, 2022 , approximately$343.5 million remained available for purchase under the Share Repurchase Program. Capital Improvements Management routinely monitors the condition and operations of its hotels and plans renovations and other improvements as it deems prudent. The Company is committed to maintaining and enhancing each property's competitive position in its market. The 38
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Index
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 ofSeptember 30, 2022 , the Company held approximately$31.1 million in reserve related to these properties. During the nine months endedSeptember 30, 2022 , the Company invested approximately$32.2 million in capital expenditures. The Company anticipates spending approximately$55 million to$65 million during 2022, which includes various renovation projects for approximately 20 to 25 properties, however, inflationary pressures or supply chain shortages, among other issues, may result in increased costs and delays for anticipated projects. The Company does not currently have any existing or planned projects for new property development.
Upcoming Debt Maturities and Debt Service Payments
The Company has approximately$146.0 million of principal and interest payments due on its debt over the next 12 months. Included in this total is approximately$37.8 million of mortgage loans maturing in the first half of 2023, which the Company plans to pay off using borrowings under its Revolving Credit Facility and/or new financing. The Company has paid off$153.5 million of loans that matured in 2022, including$31.5 million paid onAugust 1, 2022 , using borrowings under its unsecured credit facilities. See Note 4 titled "Debt" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.
As ofSeptember 30, 2022 , the Company had separate outstanding contracts for the potential purchase of three hotels, consisting of one hotel inMadison, Wisconsin , one hotel inLouisville, Kentucky and one hotel inPittsburgh, Pennsylvania for a total combined purchase price of approximately$163.6 million . Two of the hotels are already in operation and one is under development and scheduled to open in early 2024. Closings on the two hotels already in operation were completed onOctober 25, 2022 . See Note 9 titled "Subsequent Events" 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 two acquisitions. The remaining hotel is expected to close upon completion of development, which is currently expected to occur in early 2024. Although the Company is working towards acquiring this hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closing on this hotel will occur under the outstanding purchase contract. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotel under contract if closing occurs.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6, titled "Related Parties" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to$1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes the Company has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company's financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations
in occupancy at the Company's hotels may cause quarterly fluctuations in its
revenues. Generally, occupancy rates and hotel revenues for the Company's hotels
are greater in the second and third quarters than in the first and fourth
quarters. However, due to the effects of COVID-19, these typical seasonal
patterns have been disrupted since the first quarter of 2020, although the
Company experienced some seasonal decrease in demand in the first and fourth
quarters of each year. To the extent that cash flow from operations is
insufficient during any quarter due to temporary or seasonal fluctuations in
revenue, the Company expects to utilize cash on hand or available financing
sources to meet cash requirements.
39--------------------------------------------------------------------------------
Index
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in accordance withU.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Company's financial statements, the reported amounts of revenues and expenses during the reporting periods and the related disclosures in the Company's Unaudited Consolidated Financial Statements and Notes thereto. The Company has discussed those policies and estimates that it believes are critical and require the use of complex judgment in their application in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onFebruary 22, 2022 . There have been no material changes to the Company's critical accounting policies or the methods or assumptions we apply.
New Accounting Standards
See Note 1 titled "Organization and Summary of Significant Accounting Policies" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for information on the adoption of recently issued accounting standards in the nine months endedSeptember 30, 2022 . Subsequent Events
On
In
OnOctober 25, 2022 , the Company completed the purchase of the existing 156-roomAC Hotel inLouisville, Kentucky and the 134-roomAC Hotel inPittsburgh, Pennsylvania for a total combined gross purchase price of approximately$85 million . The Company utilized its available cash on hand and a$50 million draw on its$575 million term loan facility to purchase the hotels. After this transaction, the$575 million term loan facility had$50 million of remaining available capacity on its delayed draw option. 40
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