APPLE HOSPITALITY REIT, INC. 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. Currently, one of the most significant factors that could cause actual outcomes to differ materially from the Company's forward-looking statements is the adverse effect of COVID-19, including possible resurgences, 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 impacts caused by the COVID-19 outbreak on the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, including the scope, severity and duration of the pandemic, the extent and effectiveness of the actions taken to contain the pandemic or mitigate its impact, the potential for additional hotel closures/consolidations that may be mandated or advisable, whether based on increased COVID-19 cases or other factors, the slowing or potential rollback of "reopenings" in certain states, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19. Such additional 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; reduced business and leisure travel due to travel-related health concerns, including the widespread outbreak of COVID-19 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; 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. 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 2019 Form 10-K and in Part II, Item 1A of this Form 10-Q. 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 2019 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 ofJune 30, 2020 , the Company owned 233 hotels with an aggregate of 29,759 rooms located in urban, high-end suburban and developing markets throughout 34 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 20 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." 21
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COVID-19 and the Company's Actions to Mitigate its Impact
Since first being reported in
The outbreak of COVID-19 has not only specifically reduced travel, but also has had a detrimental impact on regional and global economies and financial markets. The global, national and local impact of the outbreak has rapidly evolved and many countries, including theU.S. , as well as state and local governments, have reacted by instituting a wide variety of measures intended to control its spread, including states of emergency, mandatory quarantines, implementation of "stay at home" orders, business closures, border closings, and restrictions on travel and large gatherings, which resulted in cancellation of events, including sporting events, conferences and meetings. The pandemic triggered a period of material global economic slowdown and theNational Bureau of Economic Research declared that theU.S. has been in a recession sinceFebruary 2020 . While the Company's operating results and the overall economy in theU.S. have shown signs of partial recovery, the Company cannot presently determine the extent or duration of the overall operational and financial effects that COVID-19 will have on the Company, its business, the hospitality industry and the economy. The effects of the pandemic on the hotel industry are unprecedented. COVID-19 has disrupted the industry and its consequences have dramatically reduced business and leisure travel, which has had a significant adverse impact on, and will continue to significantly adversely impact and disrupt, the Company's business, financial performance and condition, operating results and cash flows. Average occupancy for theCompany's Comparable Hotels (as defined below) declined from approximately 76% in February to below 20% by the end of March and for the entire month of April, which was accompanied by a decline in average daily rate ("ADR") of approximately 29% for the month of April compared to 2019. While the economy has shown signs of recovery as restrictions eased, occupancy and ADR are still significantly below 2019 levels. The Company expects this significant decline in revenue associated with COVID-19 and the overall decline in theU.S. economy to negatively impact the Company's revenue and operating results for an extended period of time. The Company does not expect a material improvement in results until business travel and general consumer confidence related to risks associated with COVID-19 and the economy improve and government restrictions on travel, business operations and "stay at home" orders are broadly lifted.
The following is a brief summary of certain measures the Company, its management companies and its brands have taken to minimize costs and cash outflow to maintain a sound liquidity position:
? BeginningMarch 2020 , the Company's brands and third-party management companies implemented cost elimination and efficiency initiatives at each
of the Company's hotels by reducing labor costs, reducing or eliminating
certain amenities and reducing rates under various service contracts. As
of June 30, 2020 , the Company intentionally consolidated operations at
18 hotels, down from 38 hotels as of May 2020 , in market clusters tomaximize operational efficiencies. The cost structure of the Company's
primarily rooms-focused hotels allows them to operate cost effectively
even at very low occupancy levels.
? Together with its third-party management companies, the Company has
enhanced its sales efforts by focusing on COVID-19-specific demand
opportunities in certain markets and strategically targeting and
maximizing performance based on available demand, such as leisure,government, construction, manufacturing and maintenance focused business.
? The Company has postponed all non-essential capital improvement projects
planned for 2020 and anticipates a reduction of approximately
in originally planned capital improvements for the year.
? The Company suspended its monthly distributions, with the last
distribution being paid
in consultation with management, will continue to monitor hotel operations
and intends to resume monthly distributions at a time and level determined
to be prudent in relation to the Company's other cash requirements and as
allowed under the Company's amended unsecured credit facilities, as
discussed below.
? The Company terminated its written trading plan under its Share Repurchase
Program in March 2020 .
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? The Company's Executive Chairman voluntarily agreed to forego six months
of salary, the Chief Executive Officer volunteered to reduce his target
compensation by 60 percent and the non-employee directors on the Board of
Directors volunteered as a group to reduce their annual director fees by
more than 15 percent.
? The Company entered into amendments to its unsecured credit facilities to
temporarily waive the financial covenant testing until
under its unsecured credit facilities. See further discussion in 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.
Despite the cost reduction initiatives discussed above, the Company does not
expect to be able to fully, or even materially, offset revenue losses from
COVID-19. The significance, extent and duration of COVID-19 effects are not
currently known and these uncertainties make it difficult to predict operating
results for the Company's hotels for the remainder of 2020. Therefore, there can
be no assurances that the Company will not experience further declines in hotel
revenues or earnings at its hotels.
2020
The following discussion regarding the Company's approach to acquisitions and dispositions reflects the Company's historical strategy. While the Company anticipates it will continue to approach the acquisition and disposition of hotels similarly over the long term, the detrimental impact of COVID-19 to the Company and overall lodging industry may limit the Company's ability to effectively acquire or dispose of hotels until the industry recovers. 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, in 2018 the Company entered into a contract to purchase a combined 224-room dual-brandedHampton Inn & Suites and Home2 Suites complex to be constructed inCape Canaveral, Florida . Construction of the hotels was completed inApril 2020 and the Company acquired the hotels. The purchase price was approximately$46.7 million , funded by$25.0 million of cash on hand and a one-year secured note with the developer for$21.7 million payable inApril 2021 . Also, as ofJune 30, 2020 , the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three hotels under development for a total expected purchase price of approximately$114.2 million , which are planned to be completed and opened for business over the next two to 12 months fromJune 30, 2020 , at which time closings on these hotels are expected to occur. In each case, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under these contracts. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing for these 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, during the first quarter of 2020, the Company sold two hotels for a total combined gross sales price of$45.0 million and recognized a gain on sale of approximately$8.8 million in the first quarter of 2020. Additionally, as ofJune 30, 2020 , the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately$9.0 million . Although the Company is working towards the sale of this hotel, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding purchase and sale agreement. If the closing occurs, this sale is expected to be completed in the fourth quarter of 2020. The Company expects the net proceeds from the sale to be used to pay down borrowings on the Company's revolving credit facility. See Note 2 titled "Investment in Real Estate" and Note 3 titled "Dispositions andHotel Sale Contracts " 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. EffectiveJanuary 20, 2020 , the Company converted itsNew York, New York Renaissance hotel to an independent boutique hotel. As anticipated, the operating results of the hotel declined in the first quarter of 2020 (prior to COVID-19) as compared to the first quarter of 2019 as the management team worked to replace revenue that was historically generated from the Renaissance brand system and have experienced further declines due to COVID-19. 23
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IndexHotel Operations As ofJune 30, 2020 , the Company owned 233 hotels with a total of 29,759 rooms as compared to 234 hotels with a total of 30,046 rooms as ofJune 30, 2019 . Results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year. During the six months endedJune 30, 2020 , the Company acquired two newly constructed hotels onApril 30, 2020 and sold one hotel onJanuary 16, 2020 and one hotel onFebruary 28, 2020 . During 2019, the Company acquired one newly developed hotel onMarch 19, 2019 and two existing hotels (one onMarch 4, 2019 and one onOctober 9, 2019 ), and sold 11 hotels (nine onMarch 28, 2019 , one onDecember 19, 2019 and one onDecember 30, 2019 ). As a result, the comparability of results for the three and six months endedJune 30, 2020 and 2019 as discussed below is impacted by these transactions in addition to the impact of COVID-19 beginning inMarch 2020 . In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and revenue per available room ("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 June 30, Six Months Ended June 30,
Percent Percent Percent Percent
(in thousands, except of of Percent of of Percent
statistical data) 2020 Revenue 2019 Revenue
Change 2020 Revenue 2019 Revenue Change
Total revenue $ 81,078 100.0 % $ 341,117 100.0 % -76.2 % $ 319,088 100.0 % $ 644,904 100.0 % -50.5 %
Hotel operating
expense 61,817 76.2 % 187,190 54.9 % -67.0 % 217,083 68.0 % 362,639 56.2 % -40.1 %
Property taxes,
insurance and other
expense 18,702 23.1 % 19,246 5.6 % -2.8 % 38,297 12.0 % 38,859 6.0 % -1.4 %
General and
administrative
expense 6,025 7.4 % 8,308 2.4 % -27.5 % 15,548 4.9 % 16,445 2.5 % -5.5 %
Loss on impairment of
depreciable real
estate assets 4,382 - n/a 4,382 - n/a
Depreciation and
amortization expense 49,897 48,109 3.7 % 99,419 96,059 3.5 %
Gain (loss) on sale
of real estate (54 ) (161 ) -66.5 % 8,785 1,052 n/a
Interest and other
expense, net 18,386 15,857 15.9 % 33,952 31,351 8.3 %
Income tax expense 58 156 -62.8 % 204 362 -43.6 %
Net income (loss) (78,243 ) 62,090 -226.0 % (81,012 ) 100,241 -180.8 %
Adjusted hotel EBITDA
(1) 704 134,759 -99.5 % 64,001 243,563 -73.7 %
Number of hotels
owned at end of
period 233 234 -0.4 % 233 234 -0.4 %
ADR $ 100.76 $ 141.60 -28.8 % $ 122.48 $ 139.09 -11.9 %
Occupancy 28.2 % 81.4 % -65.4 % 44.5 % 77.6 % -42.7 %
RevPAR $ 28.44 $ 115.30 -75.3 % $ 54.55 $ 107.95 -49.5 %
(1) See reconciliation of
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The following table highlights the monthly impact of COVID-19 on the Company's
ADR, Occupancy, RevPAR and adjusted hotel earnings before interest, income
taxes, depreciation and amortization for real estate ("Adjusted Hotel EBITDA ")
during the three months ended 2020 as compared to the three months ended 2019
(in thousands except statistical data):
Three Three
Months
Ended
April May June June 30, April May June Months Ended
2020 2020 2020 2020 2019 2019 2019 June 30, 2019
ADR $ 99.92 $ 95.67 $ 105.09 $ 100.76 $ 139.83 $ 139.72 $ 145.14 $ 141.60
Occupancy 17.7 % 28.6 % 38.2 % 28.2 % 80.6 % 80.1 % 83.7 % 81.4 %
RevPAR $ 17.70 $ 27.39 $ 40.17 $ 28.44 $
112.64
(1) See reconciliation of
Beginning inMarch 2020 , COVID-19 caused widespread cancellations of both business and leisure travel throughout theU.S. , resulting in significant decreases in RevPAR throughout the Company's hotel portfolio and the hospitality industry as a whole. With the overall uncertainty of the longevity of COVID-19 in theU.S. and the resulting economic decline, it is difficult to project the duration of revenue declines for the industry and Company; however, the Company currently expects the decline in revenue and operating results as compared to 2019 to continue throughout the remainder of 2020 and into 2021. While the Company experienced its most significant decline in operating results duringApril 2020 as compared toApril 2019 , occupancy and RevPar showed sequential improvement in May andJune 2020 , resulting in positiveAdjusted Hotel EBITDA for the months of May andJune 2020 , as well as for the three months endedJune 30, 2020 , and near-breakeven modified funds from operations ("MFFO") for the month ofJune 2020 . Although the Company expects this trend to gradually continue, future revenues and operating results could be negatively impacted if COVID-19 cases continue to increase and state and local governments and businesses revert back to tighter mitigation restrictions or consumer sentiment deteriorates.
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company's 233 hotels owned as ofJune 30, 2020 ("Comparable Hotels "). The Company defines metrics fromComparable Hotels as results generated by the 233 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 June 30, Six Months Ended June 30, 2020 2019 Percent Change 2020 2019 Percent Change ADR$ 100.76 $ 142.01 -29.0 %$ 122.52 $ 139.88 -12.4 % Occupancy 28.2 % 81.5 % -65.4 % 44.5 % 77.8 % -42.8 % RevPAR$ 28.44 $ 115.73 -75.4 %$ 54.50 $ 108.82 -49.9 % Same Store Operating Results The following table reflects certain operating statistics for the 228 hotels owned by the Company as ofJanuary 1, 2019 and during the entirety of the reporting periods being compared ("Same Store Hotels "). This information has not been audited. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Percent Change 2020 2019 Percent Change ADR$ 100.83 $ 142.08 -29.0 %$ 122.49 $ 139.89 -12.4 % Occupancy 28.4 % 81.6 % -65.2 % 44.6 % 77.8 % -42.7 % RevPAR$ 28.59 $ 115.90 -75.3 %$ 54.58 $ 108.89 -49.9 % 25
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As discussed above, hotel performance is impacted by many factors, including the economic conditions in theU.S. as well as each individual locality. COVID-19 negatively affected theU.S. hotel industry beginning inMarch 2020 . As a result of COVID-19, the Company's revenue and operating results declined during the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 , which is consistent with the overall lodging industry. Compared to 2019, the Company expects the declines in revenue and operating results to continue throughout the remainder of 2020, but the Company can give no assurances of the amount or period of decline due to the uncertainty regarding the duration and long-term impact of and governmental and consumer response to COVID-19. Revenues The Company's principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For the three months endedJune 30, 2020 and 2019, the Company had total revenue of$81.1 million and$341.1 million , respectively. For the six months endedJune 30, 2020 and 2019, the Company had total revenue of$319.1 million and$644.9 million , respectively. For the three months endedJune 30, 2020 and 2019, respectively,Comparable Hotels achieved combined average occupancy of 28.2% and 81.5%, ADR of$100.76 and$142.01 and RevPAR of$28.44 and$115.73 . For the six months endedJune 30, 2020 and 2019, respectively,Comparable Hotels achieved combined average occupancy of 44.5% and 77.8%, ADR of$122.52 and$139.88 and RevPAR of$54.50 and$108.82 . 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 2019, during the second quarter and first half of 2020, the Company experienced decreases in ADR and occupancy, resulting in decreases of 75.4% and 49.9% in RevPAR, respectively, forComparable Hotels . DuringMarch 2020 , the hotel industry and the Company began to see a significant decrease in occupancy as both mandated and voluntary restrictions on travel were implemented throughout theU.S. For Comparable Hotels , occupancy declined to approximately 41.0% in March and 17.7% in April before improving to 28.6% in May, 38.2% in June and approximately 45% in July as COVID-19 mitigation restrictions were partially lifted across much of theU.S. and consumer confidence in travel improved slightly driven by predominately increased leisure demand. The Company expects this trend to gradually continue, however, future revenues could be negatively impacted if COVID-19 cases continue to increase and state and local governments tighten or implement new mitigation restrictions or consumer sentiment deteriorates.Hotel Operating Expense The Company, its management companies and the brands the Company's hotels are franchised with have all aggressively worked to mitigate the costs and uses of cash associated with operating the hotels in a low-occupancy environment and are thoughtfully working to position the hotels to adapt to the changes that may occur to guest preferences in the future. The impact of the situation has varied and will vary by market and hotel. With the support of its brands and third-party management companies, the Company will continue to evaluate and implement additional measures as the situation evolves. 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 endedJune 30, 2020 and 2019 totaled$61.8 million and$187.2 million , respectively, or 76.2% and 54.9% of total revenue for the respective periods, and for the six months endedJune 30, 2020 and 2019 totaled$217.1 million and$362.6 million , respectively, or 68.0% and 56.2% of total revenue for the respective periods. Included in hotel operating expense for the three and six months endedJune 30, 2020 were approximately$0.3 million and$1.9 million , respectively, in separation and furlough costs for hotel employees as a result of the occupancy declines discussed above. The Company has worked and will continue to work with its management companies to optimize staffing models, consolidate operations in markets with multiple properties, and adjust food and beverage offerings and other amenities, among other efficiency initiatives to mitigate the impact of revenue declines on its results of operations. For example, in some markets the Company is "clustering" hotels, whereby multiple properties in a market have consolidated their operations to increase efficiency; certain brand standards have been reduced; and the Company has also successfully reduced rates under various service contracts. Although certain operating costs of a hotel are more fixed in nature, such as base utility and maintenance costs, the Company has worked and will continue to work to reduce all non-essential costs including service contracts, utilities in areas not utilized and certain maintenance costs. However, as the Company modifies operations as a result of and to address concerns related to COVID-19, the Company expects to incur increased operating costs related to the supplying of personal protective equipment for employees and guests as well as increased sanitation, social distancing and other measures. 26
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Property Taxes, Insurance and Other Expense
Property taxes, insurance, and other expense for the three months endedJune 30, 2020 and 2019 totaled$18.7 million and$19.2 million , respectively, or 23.1% and 5.6% of total revenue for the respective periods, and for the six months endedJune 30, 2020 and 2019 totaled$38.3 million and$38.9 million , respectively, or 12.0% and 6.0% of total revenue for the respective periods. Although the Company will continue to aggressively appeal assessments and monitor locality guidance as a result of COVID-19, it does not currently anticipate significant decreases in property taxes in 2020 as compared to 2019, as many assessments are made at the beginning of each calendar year.
General and Administrative Expense
General and administrative expense for the three months endedJune 30, 2020 and 2019 was$6.0 million and$8.3 million , respectively, or 7.4% and 2.4% of total revenue for the respective periods. For the six months endedJune 30, 2020 and 2019, general and administrative expense was$15.5 million and$16.4 million , respectively, or 4.9% and 2.5% of total revenue for the respective periods. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. The decrease in expense for the three months endedJune 30, 2020 as compared to the same period in 2019 is primarily due to decreased accruals for potential incentive plan payments associated with the decline in operating results as compared to 2019. For the six months endedJune 30, 2020 , these decreases were partially offset by the accrual of approximately$2.5 million in separation benefits awarded in connection with the previously announced retirements of the Company's former Chief Operating Officer and former Chief Financial Officer onMarch 31, 2020 . General and administrative expense for the six months endedJune 30, 2019 included approximately$0.5 million for the separation payment in connection with the retirement of the Company's former Chief Legal Officer. As discussed above, in order to minimize costs in 2020, the Company's Executive Chairman voluntarily agreed to forego six months of salary, the Chief Executive Officer volunteered to reduce his target compensation by 60 percent and the non-employee directors on the Board of Directors volunteered as a group to reduce their annual director fees by more than 15 percent. Additionally, in light of the decline in revenue and operating results due to COVID-19 and the associated impact on the current operational and shareholder return metrics in the 2020 Incentive Plan (see Note 8 titled "Compensation Plans" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional details), the Company anticipates a reduced payout for executive management compared to target compensation based on the originally established performance metrics.
Loss on Impairment of Depreciable Real Estate Assets
Loss on impairment of depreciable real estate assets was$4.4 million for both the three and six months endedJune 30, 2020 , consisting of an impairment charge for theMemphis, Tennessee Homewood Suites in 2020. The Company did not recognize any impairment charges for the three and six months endedJune 30, 2019 . See Note 3 titled "Dispositions andHotel Sale Contracts " 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 this impairment loss.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months endedJune 30, 2020 and 2019 was$49.9 million and$48.1 million , respectively. For the six months endedJune 30, 2020 and 2019, depreciation and amortization expense was$99.4 million and$96.1 million , respectively. Depreciation and amortization expense primarily represents expense of the Company's hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. Depreciation and amortization expense for the three months endedJune 30, 2020 and 2019 also includes$1.6 million and$1.1 million , respectively, of amortization of the Company's four finance ground lease assets. For the six months endedJune 30, 2020 and 2019, depreciation and amortization also includes$3.2 million and$2.2 million , respectively, of amortization of the Company's four finance ground lease assets. The remaining increases of approximately$1.3 million and$2.3 million , respectively, for the three and six months endedJune 30, 2020 and 2019, were primarily due to the hotel acquisitions and renovations completed throughout 2019 and the first half of 2020. 27
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Interest and Other Expense, net
Interest and other expense, net for the three months endedJune 30, 2020 and 2019 was$18.4 million and$15.9 million , respectively. For the six months endedJune 30, 2020 and 2019, interest and other expense, net was$34.0 million and$31.4 million , respectively, and is net of approximately$0.8 million and$0.7 million , respectively, of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the three months endedJune 30, 2020 and 2019 includes approximately$2.8 million and$2.1 million , respectively, of interest recorded on the Company's four finance lease liabilities. For the six months endedJune 30, 2020 and 2019, interest and other expense, net includes approximately$5.7 million and$4.0 million , respectively, of interest recorded on the Company's four finance lease liabilities. Interest expense related to the Company's debt instruments increased as a result of increased average borrowings in the first half of 2020 as compared to the first half of 2019 partially offset by a decrease in the Company's effective interest rate during the first half of 2020 as compared to the same period in 2019, due to lower average interest rates. However, the Company anticipates interest expense to be higher for the remainder of 2020 compared to the same period of 2019 due to increased average interest rates and increased borrowings under its revolving credit facility as compared to the same periods in 2019. InMarch 2020 , the Company drew the remaining availability under its revolving credit facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of uncertainty in the financial markets resulting from COVID-19. As ofJune 30, 2020 , the Company had repaid approximately$225.3 million in connection with the amendments of its unsecured credit facilities (discussed below) and inJuly 2020 repaid an additional approximately$100 million as a result of improved operating cash flow as compared to April andMay 2020 . See Note 4 titled "Debt" in the Company's Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional discussion of the Company's amended unsecured credit facilities. In addition to increases in interest due to the Company's unsecured credit facilities, interest on the Company's finance leases increased approximately$1.7 million during the first half of 2020 as compared to the first half of 2019 due to a required increase under one of its leases. 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"), MFFO, Earnings before Interest, Income Taxes, Depreciation and Amortization ("EBITDA"), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate ("EBITDAre"), Adjusted EBITDAre andAdjusted 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 andAdjusted 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, andAdjusted Hotel EBITDA as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted 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 theNational 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. 28
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The following table reconciles the Company's GAAP net income (loss) to FFO and MFFO for the three and six months endedJune 30, 2020 and 2019 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income (loss)$ (78,243 ) $ 62,090 $ (81,012 ) $ 100,241 Depreciation of real estate owned 48,044 46,712 95,712 93,378 (Gain) loss on sale of real estate 54 161 (8,785 ) (1,052 ) Loss on impairment of depreciable real estate assets 4,382 - 4,382 - Funds from operations (25,763 ) 108,963 10,297 192,567 Amortization of finance ground lease assets 1,602 1,149 3,204 2,190 Amortization of favorable and unfavorable operating leases, net 101 31 202 62 Non-cash straight-line operating ground lease expense 44 47 91 95
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 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. 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 (loss) to EBITDA, EBITDAre, Adjusted EBITDAre andAdjusted Hotel EBITDA for three and six months ended 2020 and 2019 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net income (loss)$ (78,243 ) $ 62,090 $ (81,012 ) $ 100,241 Depreciation and amortization 49,897 48,109 99,419 96,059 Amortization of favorable and unfavorable operating leases, net 101 31 202 62 Interest and other expense, net 18,386 15,857 33,952 31,351 Income tax expense 58 156 204 362 EBITDA (9,801 ) 126,243 52,765 228,075 (Gain) loss on sale of real estate 54 161 (8,785 ) (1,052 ) Loss on impairment of depreciable real estate assets 4,382 - 4,382 - EBITDAre (5,365 ) 126,404 48,362 227,023 Non-cash straight-line operating ground lease expense 44 47 91 95 Adjusted EBITDAre (5,321 ) 126,451 48,453 227,118 General and administrative expense 6,025 8,308 15,548 16,445 Adjusted Hotel EBITDA $ 704$ 134,759 $ 64,001 $ 243,563 29
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Index Hotels Owned As ofJune 30, 2020 , the Company owned 233 hotels with an aggregate of 29,759 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 41 5,665 Hampton 40 5,072 Courtyard 36 4,948 Residence Inn 33 3,939 Homewood Suites 33 3,731 SpringHill Suites 13 1,705 Fairfield 11 1,300 Home2 Suites 10 1,146 TownePlace Suites 9 931 Marriott 2 616 Embassy Suites 2 316 Independent 2 263 Hyatt Place 1 127 Total 233 29,759 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 2,922 Georgia 6 672 Idaho 1 186 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 10 1,091 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 13 1,822 Washington 4 609 Total 233 29,759 30
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Index
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 233 hotels the Company owned as ofJune 30, 2020 . Date Acquired or City State Brand Manager 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 CA Courtyard InnVentures 3/1/2014 210 Bernardo/San Diego 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 31
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Index
Date
Acquired
or
City State Brand Manager Completed Rooms
San Diego CA Residence Inn Dimension 3/1/2014 121
San Jose CA Homewood Suites Dimension 3/1/2014 140
San Juan CA Residence Inn Marriott 9/1/2016 130
Capistrano
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 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 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 Crestline 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
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 GA Hampton LBA 6/28/2018 132
Dunwoody
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 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
32--------------------------------------------------------------------------------
Index
Date
Acquired
or
City State Brand Manager Completed Rooms
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 Crestline 3/1/2014 126
Silver Spring MD Hilton Garden Inn White Lodging 7/30/2010 107
Portland ME Residence Inn Crestline 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 LBA 3/1/2014 92
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 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 Crestline 3/1/2014 165
New York NY Independent Highgate 3/1/2014 208
33--------------------------------------------------------------------------------
Index
Date
Acquired
or
City State Brand Manager Completed Rooms
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
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 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 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
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
34--------------------------------------------------------------------------------
Index
Date
Acquired
or
City State Brand Manager Completed Rooms
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 Independent Crestline 10/9/2019 55
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 234
Tukwila WA Homewood Suites Dimension 3/1/2014 106
Vancouver WA SpringHill Suites InnVentures 3/1/2014 119
Total 29,759
Related Parties
The Company has, and is expected to continue to engage in, transactions with
related parties. These transactions cannot be construed to be at arm's length
and the results of the Company's operations may be different if these
transactions were conducted with non-related parties. See Note 6 titled "Related
Parties" in the Company's Unaudited Consolidated Financial Statements and Notes
thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for
additional information concerning the Company's related party transactions.
Liquidity and Capital Resources
Capital Resources Prior to the impact of COVID-19, the Company's principal short term sources of liquidity were the operating cash flows generated from the Company's properties and availability under its revolving credit facility. Periodically, the Company may have received proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties (such as the sale of two hotels in the first quarter of 2020 for proceeds of approximately$45 million discussed above in "2020Hotel Portfolio Activities ") and offerings of the Company's common shares. As a result of the deterioration of the Company's operating cash flows from declines in occupancy caused by COVID-19, the Company anticipates significantly reduced cash from operations until travel increases in theU.S. To increase readily available liquidity, inMarch 2020 , the Company drew the remaining availability under its$425 million revolving credit facility. In connection with entering into amendments for each of its unsecured credit facilities (discussed below) and as a result of improved operating cash flows compared to April andMay 2020 , the Company repaid approximately$225.3 million in June and an additional approximately$100 million inJuly 2020 of borrowings under its revolving credit facility. The Company has taken additional steps to preserve capital and increase liquidity, including postponing approximately$50 million of non-essential capital improvements, suspending its monthly distributions and entering into contracts for the disposition of two hotels. Additionally, as a result of the effects of COVID-19 on the economic environment, for certain hotels, the lenders for the associated mortgage loans have granted the Company's request for temporary deferrals of principal and interest payments. The Company anticipates funding its near-term cash needs with cash on hand and availability under its revolving credit facility. 35
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Index
As ofJune 30, 2020 , the Company had$1.6 billion of total outstanding debt consisting of$519.1 million of mortgage debt and$1.1 billion outstanding under its unsecured credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As ofJune 30, 2020 , the Company had available corporate cash on hand of approximately$156.5 million as well as unused borrowing capacity under its revolving credit facility of approximately$225.3 million . In the near term, the impact of COVID-19 on the global economy, including any sustained decline in the Company's performance, may make it more difficult or costly for the Company to raise debt or equity capital to fund long-term liquidity requirements. The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. As a result of COVID-19 and the associated disruption to the Company's operating results, the Company anticipated that it may not be able to maintain compliance with certain of these covenants in future periods. As a result, onJune 5, 2020 , the Company entered into amendments to each of the unsecured credit facilities. The amendments suspend the testing of the Company's existing financial maintenance covenants under the unsecured credit facilities until the date the compliance certificate is required to be delivered for the fiscal quarter endingJune 30, 2021 (unless the Company elects an earlier date) (the "Covenant Waiver Period"), and provide for, among other restrictions, the following during the Covenant Waiver Period:
? Mandatory prepayments of amounts outstanding under the Company's unsecured
credit facilities, of net cash proceeds from certain debt and equity
issuances, and asset dispositions, subject to various exceptions. A portion of
the mandatory prepayments will be available for future borrowing under the
revolving credit facility;
? A minimum liquidity covenant of $100 million ;
? A requirement to pledge the equity interests of each direct or indirect owner
of certain unencumbered property in favor of the administrative agents if
average liquidity for any month is less than
outstanding under the revolving credit facility exceeds $275 million ;
? Restrictions on the Company's and its subsidiaries' ability to incur
additional indebtedness or prepay certain existing indebtedness;
? Restrictions on the Company's ability to make cash distributions (except to
the extent required to maintain REIT status) and share repurchases;
? Maximum discretionary capital expenditures of $50 million ;
? Limitations on additional investments; and
? An increase in the applicable interest rate under the unsecured credit
facilities until the end of the Covenant Waiver Period to a rate thatcorresponds to the highest leverage-based applicable interest rate margin with
respect to the unsecured credit facilities.
The amendments also modify the calculation of the existing financial covenants
for the four quarters subsequent to the end of the Covenant Waiver Period to
annualize calculated amounts to the extent the most recently ended fiscal
quarter is not at least four fiscal quarters from the end of the Covenant Waiver
Period, and provide for an increase in the LIBOR floor under the credit
agreements from 0 to 25 basis points for Eurodollar Rate Loans and establish a
Base Rate floor of 1.25% on the revolving credit facility, and any term loans
under the credit agreements that are not hedged. Except as otherwise set forth
in the amendments, the terms of the credit agreements remain in effect.
The Company anticipates meeting the applicable covenants after the conclusion of the Covenant Waiver Period, although there can be no assurances.
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 instruments as ofJune 30, 2020 . The Company has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing onApril 25, 2019 . 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 of 1933, as amended. 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. 36
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Index
During April andMay 2020 , the Company applied for and received approximately$18 million in loans under the CARES Act Paycheck Protection Program. Due to subsequent guidance issued by theSmall Business Administration and theDepartment of Treasury , related to the intended participants in this program, the Company repaid all amounts received. The Company will continue to evaluate relief initiatives and stimulus packages, including any accompanying restrictions on its business that would be imposed by such packages, that may be or become available to the Company under government stimulus programs. Capital Uses Although there can be no assurances, the Company anticipates that available cash and availability under its revolving credit facility as ofJune 30, 2020 , will be adequate to meet its near-term potential operating cash flow deficits that may result from the effect of COVID-19, debt service, hotel acquisitions and capital expenditures. Though not expected, if the Company is unable to meet its near-term anticipated capital uses as currently planned, it may raise capital through disposition of assets, issuance of equity or issuance of debt, which may be more costly to the Company in the current environment. Distributions To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income. Distributions paid during the six months endedJune 30, 2020 totaled approximately$67.3 million or$0.30 per common share. For the same period, the Company's net cash generated from operations was approximately$12.5 million . This shortfall includes a return of capital and was funded primarily by borrowings on the Company's revolving credit facility. InMarch 2020 , the Company suspended its monthly distributions as a result of COVID-19 and the impact on its business. Subject to the distribution restrictions discussed above as a condition to theJune 5, 2020 amendments to the Company's unsecured credit facilities during the Covenant Waiver Period, the Company's Board of Directors, in consultation with management, will continue to monitor hotel operations and intends to resume monthly distributions at a time and level determined to be prudent in relation to the Company's other cash requirements. Share Repurchases InMay 2020 , the Company's Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of$345 million . The Share Repurchase Program may be suspended or terminated at any time by the Company and will end inJuly 2021 if not terminated earlier. During the first quarter of 2020 and 2019, the Company purchased, under its Share Repurchase Program, approximately 1.5 million and 0.3 million of its common shares, respectively, at a weighted-average market purchase price of approximately$9.42 and$14.93 per common share, respectively, for an aggregate purchase price, including commissions, of approximately$14.3 million and$4.1 million , respectively. No shares were repurchased during the second quarter of 2020 and 2019. 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. The shares were repurchased under a written trading plan that provided for share repurchases in open market transactions, and was intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. InMarch 2020 the Company terminated its written trading plan 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 ofJune 30, 2020 , approximately$345 million remained available for purchase under the Share Repurchase Program. As discussed above, share repurchases are subject to certain restrictions during the Covenant Waiver Period as a condition to theJune 5, 2020 amendments to the Company's unsecured credit facilities. 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, subject to improved operating results, 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 ofJune 30, 2020 , the Company held$25.3 million in reserve related to these properties. During the six months endedJune 30, 2020 , the Company invested approximately$30.5 million in capital expenditures, and anticipates spending an additional$5 million to$10 million during the remainder of 2020. This estimate is approximately$50 million less than originally planned for the entire year of 2020 as the Company has postponed all planned non-essential capital improvements in order to maintain a sound liquidity position as a result of COVID-19. The Company does not currently have any existing or planned projects for new property development. 37
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IndexHotel Contract Commitments As ofJune 30, 2020 , the Company had outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three newly developed hotels for a total expected purchase price of approximately$114.2 million . The three hotels are under development and are planned to be completed and opened for business over the next two to 12 months fromJune 30, 2020 , at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under these contracts. As the properties are under development, at this time, the sellers have not met all of the conditions to closing. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the remaining hotels under contract if closings occur. 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 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, however, due to the effects of COVID-19, these typical seasonal patterns have not and may not occur in the remainder of 2020. 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 fair value measurement accounting standard onJanuary 1, 2020 and the guidance in the reference rate reform accounting standard effective inMarch 2020 . 38
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