Apple Hospitality REIT Reports Results of Operations for Fourth Quarter and Full Year 2020

Apple Hospitality REIT, Inc. (NYSE: APLE) announced results of operations for the fourth quarter and full year ended December 31, 2020.

Justin Knight, Chief Executive Officer of Apple Hospitality, commented, “The challenges brought by the COVID-19 pandemic significantly altered the trajectory of 2020 and meaningfully impacted travel and the hotel industry beginning in March of last year. With the efficient operations, broad consumer appeal and market diversification of our portfolio of rooms-focused hotels and the tireless efforts of our corporate and property management teams, we were able to keep our hotels open, adjust our operating model, reduce property-level expenses and enhance our sales efforts to capture existing demand and maximize performance during the most difficult year on record for the hotel industry. We were first among publicly traded lodging REITs to return to positive cash flow in 2020 and are pleased to report Adjusted EBITDAre of approximately $93 million and MFFO of approximately $20 million for the full year. The pandemic’s impact on travel has forced us to rethink every aspect of our business, concentrating on the services and amenities that our guests value most, and we are focused on enhancing our stabilized operating model to become even more efficient over time.”

Mr. Knight continued, “As we transition from the traditionally slower travel months at year end, we are encouraged by the improving occupancy trends we have seen across our portfolio in January and February. While we have limited visibility, we anticipate domestic leisure travel will drive performance early in the year and business travel, led initially by local and regional business demand, will improve over the course of 2021. Our outperformance during these unprecedented times is a testament to the strength of our underlying strategy and low-levered balance sheet and has preserved our capacity to pursue accretive opportunities in the early stages of a recovery. We remain intently focused on maximizing long-term value for our shareholders and are confident we are well positioned as travel continues to recover.”

Operations Update

• All hotels open: All of the Company’s hotels are open with enhanced health and sanitation measures in place. The Company continues to intentionally consolidate operations at five hotels, down from 38 hotels as of May 2020, in market clusters to maximize 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, resulting in positive Adjusted Hotel EBITDA for each month in 2020 except for April.
• Enhanced sales efforts: Together with its third-party management companies, the Company has enhanced its sales efforts by focusing on COVID-19-specific opportunities in certain markets and strategically targeting available demand to maximize performance.
• Seasonal fluctuations: Occupancy and RevPAR for the Company’s portfolio sequentially improved from the lowest levels of approximately 18% and $18 in April 2020 to approximately 54% and $55 in October 2020, driven by a wide variety of demand generators including leisure, government, health care, construction, disaster recovery, insurance, athletics, education, and local and regional business-related travel. Demand during the months of November and December declined in line with typical seasonal travel trends.
• Reduced property-level expenses: Since March 2020, the Company, its brands and its third-party management companies have implemented cost elimination and efficiency initiatives at each of the Company’s hotels by effectively managing labor costs, reducing or eliminating certain services and amenities, and renegotiating rates under various service contracts. Hotel operating expenses were lowered by approximately 48% during the fourth quarter of 2020 and 44% during the year ended December 31, 2020, as compared to the same periods of 2019.
• Reduced corporate-level expenses: General and administrative expenses were reduced by approximately 34% during the fourth quarter of 2020 and 19% during the year ended December 31, 2020, as compared to the same periods of 2019, primarily due to decreases in compensation and other overhead expenses.
• Cash flow positive: The Company produced sufficient cash from hotel operations to cover property-level and corporate-level costs, including debt service, for six months during 2020. The Company achieved positive Adjusted Hotel EBITDA of approximately $23 million and $122 million and MFFO of approximately negative $2.5 million and positive $20 million for the fourth quarter and full year ended December 31, 2020, respectively. Performance during the fourth quarter was impacted by seasonal travel trends that typically occur during November and December relative to third quarter performance.

The following table highlights the Company’s performance during the fourth quarter of 2020, amid the COVID-19 pandemic, as compared to the fourth quarter of 2019 (in thousands, except statistical data):

The Company, its third-party management companies and the brands the Company’s hotels are franchised with have aggressively worked to mitigate costs and uses of cash associated with operating the Company’s hotels in a low-occupancy environment and are thoughtfully working to position the hotels to adapt to changes in guest preferences that may occur in the future. The operational impact of the COVID-19 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 will continue to rethink brand standards, refine its operating model at various occupancy levels, and allocate capital to maximize long-term profitability.

Portfolio Activity

Acquisitions

In 2020, as previously announced, Apple Hospitality acquired four newly developed hotels with an aggregate of 483 guest rooms, all of which were contracted for in 2018, for a total purchase price of approximately $111 million.

In February 2021, the Company closed on the purchase of the newly developed 176-room Hilton Garden Inn in Madison, Wisconsin, which was contracted for in 2019, for a total purchase price of approximately $50 million.

Dispositions and Contract for Potential Disposition

In 2020, Apple Hospitality sold three hotels with an aggregate of 421 guest rooms for a combined gross sales price of approximately $55 million, including the 86-room Hampton Inn by Hilton in Tulare, California, which was sold during the fourth quarter for a gross sales price of approximately $10 million. The Company’s 2020 dispositions resulted in a combined gain on sale of approximately $11 million.

In October 2020, the Company entered into a contract for the sale of its 118-room Homewood Suites by Hilton in Charlotte, North Carolina, for a gross sales price of approximately $10 million. Although the Company is working towards the sale of this hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur. If the closing occurs, the sale is expected to be completed in the first quarter of 2021, and the Company expects to recognize a gain upon completion of the sale.

Capital Improvements

During the year ended December 31, 2020, the Company invested approximately $38 million in capital expenditures, which was approximately $50 million less than originally planned as the Company postponed all planned non-essential capital improvements after March 2020 in order to maintain a sound liquidity position as a result of COVID-19. The Company anticipates investing approximately $25 million to $30 million in capital improvements during 2021, depending in part on the pace of economic recovery.

Balance Sheet and Liquidity

Summary

As of December 31, 2020, Apple Hospitality had approximately $1.5 billion of total outstanding debt with a current combined weighted-average interest rate of approximately 3.9%, cash on hand of approximately $6 million and availability under its revolving credit facility of approximately $319 million. Excluding unamortized debt issuance costs and fair value adjustments, the Company’s total outstanding debt is comprised of approximately $513 million in property-level debt secured by 33 hotels and approximately $976 million outstanding on its unsecured credit facilities. The Company’s total debt to total capitalization, net of cash and cash equivalents at December 31, 2020, was approximately 34%. As of December 31, 2020, the Company’s weighted-average debt maturities are 4 years, with approximately $51 million, net of reserves, maturing in 2021.

Unsecured Credit Facilities Amendments

As a result of COVID-19 and the associated disruption to the Company’s operating results, the Company anticipated that it may not be able to maintain compliance with certain covenants under its unsecured credit facilities in future periods. As a result, on June 5, 2020, the Company entered into amendments to each of its unsecured credit facilities to temporarily waive the financial covenant testing under each of its unsecured credit facilities until the date the compliance certificate is required to be delivered for the fiscal quarter ending June 30, 2021 (the “Covenant Waiver Period”), unless the Company elects an earlier date. As of December 31, 2020, the Company was in compliance with the applicable covenants of the credit agreements as amended. However, as a result of the continued disruption from COVID-19 and the related uncertainty on the Company’s operating results, the Company anticipates that it could potentially not be in compliance with certain of the covenants as amended in future periods if the existing Covenant Waiver Period is not further extended. In January 2021, the Company notified lenders under its credit facilities of the anticipated potential non-compliance with certain covenants and anticipates entering into amendments to each of the credit facilities to extend the waiver period for the testing of all but two of its financial maintenance covenants through March 31, 2022. The waiver period for the testing of the ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges and the ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness is anticipated to be extended through December 31, 2021. The Company anticipates that the conditions to obtaining the waivers that currently apply during the Covenant Waiver Period, as implemented in the June 2020 amendments, will generally continue to apply during the extended covenant waiver period described above, including restrictions on the amount of the Company’s distributions, capital expenditures, share repurchases and acquisitions, but the Company anticipates that the amendments will provide additional flexibility regarding certain of the conditions relative to the current restrictions, including an increased allowance for acquiring unencumbered assets through either proceeds from unencumbered asset sales or equity issuances. The Company also anticipates that the anticipated amendments will provide for less restrictive thresholds for certain financial covenant ratios once covenant testing recommences at the end of the extended covenant waiver period for a transitional period. As part of the amendments, the interest rate under each of its credit facilities is expected to increase 15 basis points during the extended covenant waiver period. Although the Company is close to finalizing these amendments and anticipates completing them in the near future, the amendments have not yet been finalized and the final terms could change. Thus, no assurances can be given as to the final terms of the amendments or that the Company will be able to complete the amendments.

Capital Markets

Apple Hospitality terminated its written trading plan under its Share Repurchase Program in March 2020 and did not engage in additional repurchases under the Share Repurchase Program during the balance of 2020. Prior to the Company’s termination of its written trading plan under its Share Repurchase Program, the Company repurchased approximately 1.5 million of its common shares for an aggregate purchase price of approximately $14.3 million during the first quarter of 2020. As of December 31, 2020, the Company had approximately $345 million remaining under its share repurchase authorization. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2021 if not terminated earlier. Share repurchases are subject to certain restrictions during the Covenant Waiver Period, and the Company does not anticipate utilizing the Share Repurchase Program during the Covenant Waiver Period.

In August 2020, the Company entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under an at-the-market offering program (the “ATM Program”). As of December 31, 2020, the Company had not sold any common shares under the ATM Program.

Shareholder Distributions

In March 2020, as a result of COVID-19 and the impact on the Company’s business, the Company suspended its monthly distributions, with the last distribution paid March 16, 2020. The Company paid distributions of approximately $0.30 per common share for the full year ended December 31, 2020. The Company’s Board of Directors, in consultation with management, will continue to monitor hotel operations and intends to resume distributions at a time and level determined to be prudent in relation to the Company’s other cash requirements or in order to maintain its REIT status for federal income tax purposes, subject to the distribution restrictions as a condition to the amendments to the Company’s unsecured credit facilities during the Covenant Waiver Period.

2021 Outlook

In light of uncertainties related to the ongoing COVID-19 pandemic, the Company does not expect to issue 2021 operational guidance until it has greater visibility into more predictable operating fundamentals and trends. The Company is providing the following guidance on certain corporate expenses, which is based on management’s current view and does not take into account any unanticipated developments in its business or changes in its operating environment:

• General and administrative expenses are projected to be approximately $28 million to $32 million.
• Interest expense is projected to be approximately $75 million to $80 million.
• Capital expenditures are projected to be approximately $25 million to $30 million.

About Apple Hospitality REIT, Inc.

Apple Hospitality REIT, Inc. (NYSE: APLE) is a publicly traded real estate investment trust (“REIT”) that owns one of the largest and most diverse portfolios of upscale, rooms-focused hotels in the United States. Apple Hospitality’s portfolio consists of 235 hotels with more than 30,100 guest rooms located in 88 markets throughout 35 states. Concentrated with industry-leading brands, the Company’s portfolio consists of 104 Marriott-branded hotels, 126 Hilton-branded hotels, three Hyatt-branded hotels and two independent hotels.

Apple Hospitality REIT, Inc.

Reconciliation of Net Income (Loss) to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA

(Unaudited)

(in thousands)

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 the National Association of Real Estate Investment Trusts (“Nareit”), which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition.

The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels (Adjusted EBITDAre).

The Company further excludes actual corporate-level general and administrative expense for the Company from Adjusted EBITDAre (Adjusted Hotel EBITDA) to isolate property-level operational performance over which the Company’s hotel operators have direct control. The Company believes Adjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and is used by management to measure the performance of the Company’s hotels and effectiveness of the operators of the hotels.

The following table reconciles the Company’s GAAP net income (loss) to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA on a quarterly basis from March 31, 2019 through December 31, 2020:

Apple Hospitality REIT, Inc.

Reconciliation of Net Income (Loss) to FFO and MFFO

(Unaudited)

(in thousands)

The Company calculates and presents FFO in accordance with standards established by Nareit, which defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.

The Company calculates MFFO by further adjusting FFO for the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.

The following table reconciles the Company’s GAAP net income (loss) to FFO and MFFO for the three months and year ended December 31, 2020 and 2019: