Apple Hospitality REIT Reports Results of Operations for Third Quarter 2020

Apple Hospitality REIT, Inc. (NYSE: APLE) (the “Company” or “Apple Hospitality”) today announced results of operations for the third quarter ended September 30, 2020.

Comparable Hotels is defined as the 235 hotels owned by the Company as of September 30, 2020. 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, “While the current environment has created more significant operating challenges than we experienced in prior cycles, it has highlighted the merits of our underlying strategy and highly diversified portfolio of rooms-focused hotels. With meaningfully lower leverage, greater market diversification and more efficient asset-level operations, we were first among publicly traded lodging REITs to generate positive cash flow. Our ability to keep our hotels open and operate efficiently at low occupancy levels combined with our discipline in maintaining low leverage late cycle enabled us to preserve our balance sheet, protecting the value of our equity and uniquely positioning us to pursue opportunities in the early stages of a recovery. Our rooms-focused hotels do not rely on large group business and have proven appeal with the broadest group of potential customers. Since April, occupancy and RevPAR have steadily improved for our portfolio, with occupancy increasing from 28% in the second quarter to nearly 50% in the third quarter, and we are pleased to report positive cash flow at the corporate level for the third quarter. Our outperformance during these unprecedented times would not be possible without the remarkable associates at our hotels, and we are incredibly grateful for their strength, dedication and unwavering hospitality. We remain intently focused on safeguarding long-term value for our shareholders. While there may be challenges ahead, I am confident we are well positioned to continue to outperform as travel improves.”

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.
• 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 and maximizing performance based on available demand.
• Sequential improvement: Occupancy and RevPAR for the Company’s portfolio have sequentially improved since April 2020, with average occupancy reaching approximately 52% for the month of September 2020 and approximately 53% for the month of 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.
• 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 50% during the third quarter of 2020 as compared to the same period last year.
• Reduced corporate-level expenses: General and administrative expenses were reduced by approximately 26% during the third quarter of 2020 as compared to the same period last year primarily due to anticipated decreases in compensation and other overhead expenses.
• Cash flow positive: By July 2020, the Company produced sufficient cash from hotel operations to cover property-level and corporate-level costs, including debt service. The Company achieved positive Adjusted Hotel EBITDA of approximately $35 million and positive MFFO of approximately $9 million during the third quarter of 2020.

The following table highlights the Company’s performance during the third quarter of 2020, amid the COVID-19 pandemic, as compared to the third 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 the 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 vary by market and hotel. With the support of its brands and third-party management companies, the Company will continue to rethink brand standards, redefine its operating model at various occupancy levels, and allocate capital to maximize long-term profitability.

Portfolio Activity

Acquisitions and Contract for Potential Acquisition

Since the beginning of 2020, Apple Hospitality has acquired four hotels, all of which were contracted for in 2018. In April 2020, the Company closed on the purchase of the newly developed Hampton Inn & Suites by Hilton and Home2 Suites by Hilton in Cape Canaveral, Florida, a combined 224-room, dual-branded complex, for a total purchase price of approximately $47 million. In August 2020, Apple Hospitality closed on the purchase of the newly developed Hyatt House and Hyatt Place in Tempe, Arizona, a combined 259-room, dual-branded complex, for a total purchase price of approximately $65 million.

The Company has an outstanding contract, which was entered into prior to 2020, for the purchase of a 176-room Hilton Garden Inn in Madison, Wisconsin, for a total expected purchase price of approximately $50 million. The hotel is currently under development, and the Company anticipates acquiring the hotel within the next six months from September 30, 2020. There are many conditions to closing under the contract that have not yet been satisfied, including completion of construction, and there can be no assurance that a closing on the hotel will occur. If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract.

Dispositions and Contract for Potential Disposition

Since the beginning of 2020, Apple Hospitality has sold two hotels, both of which were sold during the first quarter of 2020, for a combined gross sales price of approximately $45 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 within three to six months of September 30, 2020, and the Company expects to recognize a gain upon completion of the sale.

The contract the Company entered into during the second quarter of 2020 for the sale of its 140-room Homewood Suites by Hilton in Memphis, Tennessee, was terminated in October 2020.

Capital Improvements

During the nine months ended September 30, 2020, the Company invested approximately $35 million in capital expenditures. The Company anticipates spending an additional $5 million in capital expenditures 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 previously planned, non-essential capital improvements in order to maintain a sound liquidity position as a result of COVID-19.

Balance Sheet and Liquidity

Summary

As of September 30, 2020, Apple Hospitality had approximately $1.5 billion of total outstanding debt with a current combined weighted-average interest rate of approximately 3.8%, cash on hand of approximately $27 million and availability under its revolving credit facility of approximately $295 million. Excluding unamortized debt issuance costs and fair value adjustments, the Company’s total outstanding debt is comprised of approximately $516 million in property-level debt secured by 33 hotels and approximately $1.0 billion outstanding on its unsecured credit facilities. The Company’s total debt to total capitalization, net of cash and cash equivalents at September 30, 2020, was approximately 41%. As of September 30, 2020, the Company’s weighted-average debt maturities are 5 years, with no maturities for the remainder of 2020 and 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. The amendments 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 $275 million or the total amount 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;
• An increase in the applicable interest rate under the unsecured credit facilities until the end of the Covenant Waiver Period to a rate that corresponds to the highest leverage-based applicable interest rate margin with respect to the unsecured credit facilities;
• 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; and
• Modifications to 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.

As of September 30, 2020, the Company was in compliance with the applicable covenants of the credit agreements as amended.

Capital Markets

Apple Hospitality terminated its written trading plan under its Share Repurchase Program in March 2020, and no shares were repurchased by the Company during the second and third quarters of 2020. Year to date, 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. As of September 30, 2020, the Company had approximately $345 million remaining under its share repurchase authorization; however, 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 remainder of 2020.

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 September 30, 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 being paid March 16, 2020. The Company paid distributions of approximately $67 million, or $0.30 per common share, during the three months ended March 31, 2020. The Company anticipates it will not pay additional shareholder distributions for the remainder of 2020 unless it is determined that an additional distribution is required in order for the Company 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, 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.

2020 Outlook

Given the ongoing uncertainties related to the depth and duration of the COVID-19 pandemic and its impact on the travel industry and hotel operations, the Company does not expect to issue guidance until operating fundamentals and trends are more predictable.

Third Quarter 2020 Earnings Conference Call

The Company will host a quarterly conference call for investors and interested parties at 10 a.m. Eastern Time on Friday, November 6, 2020. The conference call will be accessible by telephone and the internet. To access the call, participants from within the U.S. should dial 877-407-9039, and participants from outside the U.S. should dial 201-689-8470. Participants may also access the call via live webcast by visiting the Investor Information section of the Company's website at ir.applehospitalityreit.com. A replay of the call will be available from approximately 1:00 p.m. Eastern Time on November 6, 2020, through 11:59 p.m. Eastern Time on November 27, 2020. To access the replay, the domestic dial-in number is 844-512-2921, the international dial-in number is 412-317-6671, and the passcode is 13710814. The archive of the webcast will be available on the Company's website for a limited time.

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 30,000 guest rooms located in 87 markets throughout 34 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. For more information, please visit www.applehospitalityreit.com.

Apple Hospitality REIT Non-GAAP Financial Measures

The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations (“FFO”); Modified FFO (“MFFO”); Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”); Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”); Adjusted EBITDAre (“Adjusted EBITDAre”); and Adjusted Hotel EBITDA (“Adjusted Hotel EBITDA”). These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss), cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA are not necessarily indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. Although FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA, as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company’s results between periods and with other REITs. Reconciliations of these non-GAAP financial measures to net income (loss) are provided in the following pages.

Forward-Looking Statements Disclaimer

This press release 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 ended December 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 the U.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 press release will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission, including but not limited to those discussed in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended September 30, 2020. Any forward-looking statement that the Company makes speaks only as of the date of this press release. 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.

For additional information or to receive press releases by email, visit www.applehospitalityreit.com.

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 December 31, 2018 through September 30, 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 and nine months ended September 30, 2020 and 2019: