Apple Hospitality REIT Reports Results of Operations for Second Quarter 2022

Apple Hospitality REIT, Inc. (NYSE: APLE) yesterday announced results of operations for the second quarter ended June 30, 2022.

(1) Explanations of and reconciliations to net income (loss) determined in accordance with generally accepted accounting principles (“GAAP”) of non-GAAP financial measures, Adjusted EBITDAre, Comparable Hotels Adjusted Hotel EBITDA and MFFO, are included below.

(2) Total debt outstanding, net of cash and cash equivalents ("net total debt outstanding"), divided by net total debt outstanding plus equity market capitalization based on the Company’s closing share price of $14.67 on June 30, 2022.

Comparable Hotels is defined as the 219 hotels owned by the Company as of June 30, 2022. For hotels acquired during the periods noted, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership, and for dispositions, results have been excluded for the Company's period of ownership. Results for periods prior to the Company's ownership have not been included in the Company's actual Consolidated Financial Statements and are included only for comparison purposes. Results included for periods prior to the Company's ownership are based on information from the prior owner of each hotel and have not been audited or adjusted.

Justin Knight, Chief Executive Officer of Apple Hospitality, commented, “Portfolio performance continued to strengthen during the second quarter, exceeding our expectations and surpassing 2019 results. Leisure demand has remained robust while business demand, both transient and group, has continued to steadily improve. We are pleased to report occupancy of 78%, ADR of $153 and RevPAR of $119 for our portfolio for the second quarter of 2022. Driven primarily by rate growth and aided by continued operating efficiencies, we achieved Adjusted EBITDAre of $126 million, Comparable Hotels Adjusted Hotel EBITDA Margin of approximately 40% and MFFO of approximately $111 million, or $0.48 per share, for the quarter. These outstanding results further validate our proven strategy of investing in a diversified portfolio of high-quality, branded, rooms-focused hotels with low leverage and highlight the strength of our corporate and on-site management teams.”

Mr. Knight continued, “We are pleased to have refinanced our primary unsecured credit facility in July, further enhancing the strength and financial flexibility of our balance sheet and bolstering our already strong liquidity position. In addition to extended maturities and improved pricing, the refinancing upsized our revolving credit facility and term loans, providing the Company with greater access to liquidity for strategic growth. We greatly appreciate the support of our lenders, their conviction in our core strategy and their continued confidence in the underlying fundamentals of our business. With second quarter RevPAR and Adjusted Hotel EBITDA now exceeding pre-pandemic levels and additional upside remaining as we continue to build midweek occupancy, we are incredibly optimistic about our future. Our strategy is designed to mitigate downside risk while maintaining meaningful upside potential. Having tested and refined that strategy through multiple economic cycles, we are well positioned to maximize shareholder value in any macroeconomic environment.”

Hotel Portfolio Overview

As of June 30, 2022, Apple Hospitality owned 219 hotels with an aggregate of 28,748 guest rooms located in 86 markets throughout 36 states.

Operations Update

• Strong operating performance: For the Company’s portfolio, second quarter 2022 RevPAR surpassed second quarter 2019 by approximately 4%, driven by an improvement in ADR of approximately 8% as compared to second quarter 2019. Occupancy, ADR and RevPAR for the Company’s portfolio for the second quarter 2022 exceeded industry averages as reported by STR. Portfolio occupancy outperformance continued into July 2022, with occupancy of approximately 77% for the month, down 6% as compared to July 2019 and up 2% as compared to July 2021, and continued growth in ADR.

• Strong bottom-line performance: The Company achieved Comparable Hotels Adjusted Hotel EBITDA of approximately $137 million and Comparable Hotels Adjusted Hotel EBITDA Margin of approximately 40% for the second quarter 2022, improvements of approximately 4% and 10 bps, respectively, as compared to 2019.

• Balance sheet: In July 2022, the Company amended and restated its existing unsecured $850 million credit facility, increasing the total credit facility to approximately $1.2 billion and extending the maturity dates while achieving improved pricing terms across the total credit facility.

The following tables highlight the Company’s monthly performance during the second quarter of 2022, as compared to the second quarters of 2021 and 2019 (in thousands, except statistical data):

Note: Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations.

(1) See explanation and reconciliation of Adjusted Hotel EBITDA to net income (loss) included below.

Portfolio Activity

Contract for Potential Acquisition

As previously announced, the Company has an outstanding contract for the purchase of an Embassy Suites by Hilton in Madison, Wisconsin, for an anticipated total purchase price of approximately $79 million. The hotel is currently under development and expected to include 260 rooms. 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 under the outstanding purchase contract. Assuming all conditions to closing are met, the Company anticipates acquiring the hotel following completion of construction, which is expected to occur in early 2024.

Capital Improvements

Apple Hospitality consistently reinvests in its hotels to maintain and enhance each property’s relevance and competitive position within its respective market. During the six months ended June 30, 2022, the Company invested approximately $17 million in capital expenditures. The Company anticipates investing approximately $55 million to $65 million in capital improvements during 2022, which includes various renovation projects for approximately 20 to 25 hotels; however, inflationary pressures or supply chain shortages, among other issues, may result in increased costs and delays for anticipated projects.

Balance Sheet and Liquidity

Summary

As of June 30, 2022, Apple Hospitality had approximately $1.4 billion of total outstanding debt with a current combined weighted-average interest rate of approximately 3.6%, cash on hand of approximately $2 million and availability under its revolving credit facility of approximately $359 million. Excluding unamortized debt issuance costs and fair value adjustments, the Company’s total outstanding debt was comprised of approximately $366 million in property-level debt secured by 22 hotels and approximately $1 billion outstanding under its unsecured credit facilities, including a seven-year $75 million unsecured senior notes facility that the Company entered into in June 2022 and used the net proceeds for general corporate purposes, including the repayment of borrowings under the Company’s revolving credit facility and the repayment of mortgage debt. During the second quarter, the Company repaid in full the $56 million note payable related to the purchase of the fee interest in the land at its Residence Inn by Marriott Seattle Downtown Lake Union, previously held under a finance ground lease. In addition, during the second quarter, the Company repaid in full six secured mortgage loans for a total of $67 million, increasing the number of unencumbered hotels in the Company’s portfolio as of June 30, 2022, to 197. The Company’s total debt to total capitalization, net of cash and cash equivalents at June 30, 2022, was approximately 29%. As of June 30, 2022, the Company’s weighted-average debt maturities were 3 years, with approximately $96 million, net of reserves, maturing in 2022, including $66 million outstanding on its revolving credit facility.

Amended and Restated Primary Unsecured Credit Facility

On July 25, 2022, the Company amended and restated its existing $850 million credit facility, increasing the borrowing capacity to approximately $1.2 billion, extending maturity dates and achieving improved pricing across the credit facility. Through the amended credit agreement, the Company has greater access to liquidity for strategic growth and the opportunity to reduce its already conservative secured debt exposure. The $1.2 billion credit facility is comprised of a term loan of $275 million with a maturity date of July 25, 2027; a term loan of up to $300 million with a maturity date of January 31, 2028 (including $150 million available via a delayed draw option until 180 days from closing); and a revolving credit facility of $650 million with an initial maturity date of July 25, 2026, which may be extended up to one year subject to certain conditions. The amendments under the total $1.2 billion credit facility provide for additional capacity of $150 million under the term loans and additional capacity of $225 million under the revolving credit facility. The credit agreement also includes an accordion feature through which the amount of the total credit facility may be increased from approximately $1.2 billion to $1.5 billion. The terms of the amended and restated credit agreement are generally similar to the Company’s previous $850 million credit agreement. The facilities will bear interest pursuant to a leverage-based pricing grid ranging from 1.35% to 2.25% over an adjusted SOFR rate. At closing, the Company borrowed $475 million under the term loans and used the proceeds to repay the $425 million outstanding under the term loans of the previous credit facility and $50 million outstanding under the current revolving credit facility.

Capital Markets

The Company has in place both a Share Repurchase Program and an at-the-market offering program (the “ATM Program”). During the second quarter 2022, repurchases under the Share Repurchase Program were minimal and no shares were sold under the ATM Program. As of June 30, 2022, the Company had approximately $345 million remaining under its Share Repurchase Program for the repurchase of shares and approximately $224 million remaining under its ATM Program for the issuance of shares.

Shareholder Distributions

During the three months ended June 30, 2022, the Company paid distributions totaling $0.15 per common share. Based on the Company’s common stock closing price of $16.27 on August 2, 2022, the annualized distribution of $0.60 per common share represents an annual yield of approximately 3.7%. While the Company expects monthly distributions to continue, each distribution is subject to approval by the Company’s Board of Directors. The Company’s Board of Directors, in consultation with management, will continue to monitor the Company’s distribution rate and timing relative to the performance of its hotels, capital improvement needs, varying economic cycles, acquisitions, dispositions, other cash requirements and the Company’s REIT status for federal income tax purposes, and may make adjustments as it deems appropriate.

2022 Outlook

The Company is providing the following full year 2022 outlook regarding 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 $34 million to $40 million.
• Interest expense is projected to be approximately $58 million to $63 million.
• Capital expenditures are projected to be approximately $55 million to $65 million.

As compared to previously provided 2022 corporate expense guidance, the Company is adjusting general and administrative expenses by increasing both the low and high ends of the range by $2 million related to executive incentive compensation, based on operational and shareholder return performance through June 30, 2022. The Company does not expect to issue operational guidance or provide additional outlook updates until it has more certainty on trends within the industry or otherwise deems appropriate.

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 219 hotels with more than 28,700 guest rooms located in 86 markets throughout 36 states. Concentrated with industry-leading brands, the Company’s portfolio consists of 94 Marriott-branded hotels, 119 Hilton-branded hotels, four Hyatt-branded hotels and two independent hotels.

Note: The Consolidated Balance Sheets and corresponding footnotes can be found in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

Note: The Consolidated Statements of Operations and Comprehensive Income (Loss) and corresponding footnotes can be found in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

Note: Comparable Hotels is defined as the 219 hotels owned by the Company as of June 30, 2022. For hotels acquired during the periods noted, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership, and for dispositions, results have been excluded for the Company's period of ownership. Results for periods prior to the Company's ownership have not been included in the Company's actual Consolidated Financial Statements and are included only for comparison purposes. Results included for periods prior to the Company's ownership are based on information from the prior owner of each hotel and have not been audited or adjusted.

Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations.

Reconciliation of net income (loss) to non-GAAP financial measures is included in the following pages.

Note: Comparable Hotels is defined as the 219 hotels owned by the Company as of June 30, 2022. For hotels acquired during the periods noted, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership, and for dispositions, results have been excluded for the Company's period of ownership. Results for periods prior to the Company's ownership have not been included in the Company's actual Consolidated Financial Statements and are included only for comparison purposes. Results included for periods prior to the Company's ownership are based on information from the prior owner of each hotel and have not been audited or adjusted.

Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations.

Reconciliation of net income (loss) to non-GAAP financial measures is included in the following pages.

Note: Same Store Hotels is defined as the 204 hotels owned by the Company as of January 1, 2019 and during the entirety of the periods being compared. This information has not been audited.

Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations.

Reconciliation of net income (loss) to non-GAAP financial measures is included in the following pages.

Note: Same Store Hotels is defined as the 204 hotels owned by the Company as of January 1, 2019 and during the entirety of the periods being compared. This information has not been audited.

Comparisons to 2019 operating results are included to provide a better understanding of the Company’s recovery from the impact of COVID-19 on hotel operations.

Reconciliation of net income (loss) to non-GAAP financial measures is included in the following pages.

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 for 2019, 2021 and 2022:

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 and six months ended June 30, 2022 and 2021:

(1) The average interest rate gives effect to interest rate swaps, as applicable.

Note: See further information on the Company’s indebtedness in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.