N
otes
to
Consolidated
F
inancial
S
tatements
(Unaudited)
1.
Organization and
Summary of Significant Accounting Policies
Organization
Apple Hospitality REIT, Inc., together with its wholly-owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only one reportable segment. The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision making process of these entities, and therefore does not consolidate the entities. As of March 31, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not include all of the information required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”). Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2019.
Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Net Income
Per Common Share
Basic net income per common share is computed based upon the weighted average number of shares outstanding during the period. Diluted net income per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period. Basic and diluted net income per common share were the same for each of the periods presented.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported net income or shareholders’ equity. With the adoption of Accounting Standards Update (“ASU”) No. 2016-02,
Leases (Topic 842)
, the Company recorded a cumulative-effect adjustment to distributions greater than net income, a component of shareholders’ equity, as of January 1, 2019. See “Accounting Standards Recently Adopted” below and Note 9 for more information.
Accounting Standards
Recently Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02,
Leases (Topic 842)
, which replaces
Leases (Topic 840)
, and along with subsequent amendments, provides the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under this standard, lessees are required to recognize most leases on their balance sheets as right-of-use assets and lease liabilities. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less are accounted for similarly to the previous accounting guidance under
Leases (Topic 840)
, for operating leases. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 842), Targeted Improvements,
which provides entities another optional transition method, which the Company elected, to apply the standard using the modified retrospective approach at its effective date, versus restating the prior periods presented, and recognizing a cumulative-effect adjustment to the opening balance of retained earnings for the effect of initially applying Topic 842 in the period of adoption. Consequently, an entity’s reporting for periods presented prior to adoption of the new lease requirements in the consolidated financial statements would continue in accordance with
Leases (Topic 840)
, including disclosures.
The Company adopted this standard effective January 1, 2019, electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity, without restating the presentation of periods prior to the effective date, which continue to be reported in accordance with the Company’s historical accounting policy. At adoption, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The Company elected to apply certain practical expedients allowed under the standard including (i) to use hindsight in determining the term as well as assessing the impairment of its existing leases, (ii) to not assess whether existing land easements not previously accounted for as leases are or contain leases, and (iii) to not evaluate short-term leases. The Company has elected not to apply the package of practical expedients under the standard which would have allowed the Company to not reassess at the date of adoption: (i) whether any existing contracts meet the definition of a lease, (ii) the lease classification for any existing leases, and (iii) the accounting for initial direct costs of any existing leases.
At adoption of the new standard, the Company recorded right-of-use assets and lease liabilities for its ground leases and certain other operating leases measured at the estimated present value of the remaining minimum lease payments under the leases. Four of the Company’s ground leases that were previously classified as operating leases under Topic 840 are classified as financing leases under Topic 842. For these finance leases, effective January 1, 2019, the Company recognizes depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statements of operations, instead of operating ground lease expense. While the total expense recognized over the life of a lease is unchanged, the timing of expense recognition for these finance leases results in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. In addition to recording operating and financing right-of-use assets and lease liabilities, the Company also reclassified at adoption its intangible assets for below market leases and intangible liabilities for above market leases, as well as its accrued straight-line lease liabilities for its operating leases, to the beginning right-of-use assets. The Company derecognized its accrued straight-line lease liabilities related to its finance leases, which are included in the cumulative-effect adjustment noted above. The Company is also a lessor in certain retail lease agreements related to its real estate, however, there was no material change to the accounting for these leasing arrangements. See Note 9 for more information regarding the Company’s lease assets and liabilities.
2
.
Investment in Real Estate
The Company’s investment in real estate consisted of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
730,614
|
|
|
$
|
737,822
|
|
Building and Improvements
|
|
|
4,461,084
|
|
|
|
4,503,728
|
|
Furniture, Fixtures and Equipment
|
|
|
465,457
|
|
|
|
471,399
|
|
Finance ground lease assets
|
|
|
144,768
|
|
|
|
-
|
|
Franchise Fees
|
|
|
13,457
|
|
|
|
13,354
|
|
|
|
|
5,815,380
|
|
|
|
5,726,303
|
|
Less Accumulated Depreciation and Amortization
|
|
|
(923,877
|
)
|
|
|
(909,893
|
)
|
Investment in Real Estate, net
|
|
$
|
4,891,503
|
|
|
$
|
4,816,410
|
|
Effective January 1, 2019, the Company adopted ASU No. 2016-02,
Leases (Topic 842
),
as amended and, as a result, recorded finance ground lease assets for four of its ground leases, which are included in investment in real estate, net. See Note 9 for more information regarding the Company’s finance ground lease assets.
As of March 31, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states.
The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.
Hotel Acquisitions
The Company acquired two hotels during the three months ended March 31, 2019. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.
City
|
|
State
|
|
Brand
|
|
Manager
|
|
Date Acquired
|
|
Rooms
|
|
|
Gross Purchase Price
|
|
St. Paul
|
|
MN
|
|
Hampton
|
|
Vista Host
|
|
3/4/2019
|
|
|
160
|
|
|
$
|
31,680
|
|
Orlando
|
|
FL
|
|
Home2 Suites
|
|
LBA
|
|
3/19/2019
|
|
|
128
|
|
|
|
20,736
|
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
|
$
|
52,416
|
|
During the year ended December 31, 2018, the Company acquired five hotels including two hotels in the first three months of 2018. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.
City
|
|
State
|
|
Brand
|
|
Manager
|
|
Date Acquired
|
|
Rooms
|
|
|
Gross Purchase Price
|
|
Atlanta/Downtown
|
|
GA
|
|
Hampton
|
|
McKibbon
|
|
2/5/2018
|
|
|
119
|
|
|
$
|
24,000
|
|
Memphis
|
|
TN
|
|
Hampton
|
|
Crestline
|
|
2/5/2018
|
|
|
144
|
|
|
|
39,000
|
|
Phoenix
|
|
AZ
|
|
Hampton
|
|
North Central
|
|
5/2/2018
|
|
|
210
|
|
|
|
44,300
|
|
Atlanta/Perimeter Dunwoody
|
|
GA
|
|
Hampton
|
|
LBA
|
|
6/28/2018
|
|
|
132
|
|
|
|
29,500
|
|
Jacksonville
|
|
FL
|
|
Hyatt Place
|
|
LBA
|
|
12/7/2018
|
|
|
127
|
|
|
|
15,400
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
$
|
152,200
|
|
The Company used borrowings under its revolving credit facility to purchase each of these hotels. The acquisitions of these hotel properties were accounted for as an acquisition of a group of assets, with costs incurred to effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired. For the two hotels acquired during the three months ended March 31, 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2019 was approximately $0.7 million and $0.1 million, respectively. For the two hotels acquired during the three months ended March 31, 2018, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2018 was approximately $2.4 million and $0.8 million, respectively.
Hotel
Purchase
Contract Commitments
As of March 31, 2019, the Company had outstanding contracts for the potential purchase of four hotels for a total expected purchase price of approximately $110.0 million, which are under development and are planned to be completed and opened for business over the next 15 to 21 months from March 31, 2019, 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. The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at March 31, 2019. All dollar amounts are in thousands.
Location (1)
|
|
Brands
|
|
Date of Purchase Contract
|
|
Rooms
|
|
|
Refundable Deposits
|
|
|
Gross Purchase Price
|
|
Cape Canaveral, FL (2)
|
|
Hampton and Home2 Suites
|
|
4/11/2018
|
|
|
224
|
|
|
$
|
3
|
|
|
$
|
46,704
|
|
Tempe, AZ (3)
|
|
Hyatt House and Hyatt Place
|
|
6/13/2018
|
|
|
254
|
|
|
|
720
|
|
|
|
63,341
|
|
|
|
|
|
|
|
|
478
|
|
|
$
|
723
|
|
|
$
|
110,045
|
|
(1)
|
These hotels are currently under development. The table shows the expected number of rooms upon hotel completion and the expected franchise brands. Assuming all conditions to closing are met, the purchases of these hotels are expected to occur over the next 15 to 21 months from March 31, 2019. If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the properties are under development, at this time, the seller has not met all of the conditions to closing.
|
(2)
|
These hotels are part of an adjoining combined 224-room, dual-branded complex that will be located on the same site.
|
(3)
|
These hotels are part of an adjoining combined 254-room, dual-branded complex that will be located on the same site.
|
The Company intends to use borrowings under its credit facilities to purchase the hotels under contract if a closing occurs.
3
.
Dispositions
In February 2019, the Company terminated its purchase and sale agreement with an unrelated party for the sale of 16 of its hotels and entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine hotels for a total combined gross sales price of $95.0 million. On March 28, 2019, the Company completed the sale of the hotels, resulting in a gain of approximately $1.8 million, which is included in the Company’s consolidated statement of operations for the three months ended March 31, 2019. The nine hotels had a total carrying value of approximately $93.0 million at the time of the sale. The following table lists the nine hotels sold:
City
|
|
State
|
|
Brand
|
|
Rooms
|
|
Sarasota
|
|
FL
|
|
Homewood Suites
|
|
|
100
|
|
Tampa
|
|
FL
|
|
TownePlace Suites
|
|
|
94
|
|
Baton Rouge
|
|
LA
|
|
SpringHill Suites
|
|
|
119
|
|
Holly Springs
|
|
NC
|
|
Hampton
|
|
|
124
|
|
Duncanville
|
|
TX
|
|
Hilton Garden Inn
|
|
|
142
|
|
Texarkana
|
|
TX
|
|
Courtyard
|
|
|
90
|
|
Texarkana
|
|
TX
|
|
TownePlace Suites
|
|
|
85
|
|
Bristol
|
|
VA
|
|
Courtyard
|
|
|
175
|
|
Harrisonburg
|
|
VA
|
|
Courtyard
|
|
|
125
|
|
Total
|
|
|
1,054
|
|
During the year ended December 31, 2018, the Company sold three hotels in two transactions with unrelated parties for a total combined gross sales price of approximately $15.8 million, resulting in a combined gain on sale of approximately $0.2 million, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2018. Of the three hotels sold, two of the hotels (the Columbus, Georgia 89-room SpringHill Suites and 86-room TownePlace Suites) were sold on July 13, 2018 for a combined gross sales price of $10.0 million, resulting in no gain or loss on the sale, and one hotel (the 72-room Springdale, Arkansas Residence Inn) was sold on November 29, 2018 for a gross sales price of approximately $5.8 million, resulting in a gain of approximately $0.2 million. During the second quarter of 2018, the Company recognized impairment losses of approximately $3.1 million related to these three hotels, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2018, and consisted of approximately $0.5 million to adjust the bases of the two Columbus hotels that sold in July 2018 to their estimated fair values, which were based on the contracted sales prices, net of estimated selling costs, and approximately $2.6 million to adjust the basis of the Springdale, Arkansas Residence Inn that sold in November 2018 to its estimated fair value, which was based on the offers received at that time, net of estimated selling costs.
The Company’s consolidated statements of operations include operating income, excluding gain on sale of real estate, of approximately $1.2 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively, relating to the results of operations of the twelve hotels sold as noted above for the period of ownership. The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three months ended March 31, 2019 and 2018. The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.
4. Debt
Summary
As of March 31, 2019 and December 31, 2018, the Company’s debt consisted of the following (in thousands):
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Revolving credit facility
|
|
$
|
190,400
|
|
|
$
|
268,800
|
|
Term loans, net
|
|
|
728,702
|
|
|
|
653,382
|
|
Mortgage debt, net
|
|
|
486,514
|
|
|
|
490,060
|
|
Debt, net
|
|
$
|
1,405,616
|
|
|
$
|
1,412,242
|
|
The aggregate amounts of principal payable under the Company’s total debt obligations as of March 31, 2019 (including the revolving credit facility, term loans and mortgage debt), for the five years subsequent to March 31, 2019 and thereafter are as follows (in thousands):
2019 (April - December)
|
|
$
|
30,391
|
|
2020
|
|
|
28,349
|
|
2021
|
|
|
47,586
|
|
2022
|
|
|
299,652
|
|
2023
|
|
|
295,615
|
|
Thereafter
|
|
|
709,165
|
|
|
|
|
1,410,758
|
|
Unamortized fair value adjustment of assumed debt
|
|
|
3,203
|
|
Unamortized debt issuance costs related to term loans and mortgage debt
|
|
|
(8,345
|
)
|
Total
|
|
$
|
1,405,616
|
|
The Company uses interest rate swaps to manage its interest rate risks on a portion of its variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the London Inter-Bank Offered Rate for a one-month term (“one-month LIBOR”). The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. See Note 5 for more information on the interest rate swap agreements. The Company’s total fixed-rate and variable-rate debt, after giving effect to its interest rate swaps, is set forth below. All dollar amounts are in thousands.
|
|
March 31, 2019
|
|
|
Percentage
|
|
|
December 31, 2018
|
|
|
Percentage
|
|
Fixed-rate debt
(1)
|
|
$
|
1,092,858
|
|
|
|
77
|
%
|
|
$
|
1,046,273
|
|
|
|
74
|
%
|
Variable-rate debt
(2)
|
|
|
317,900
|
|
|
|
23
|
%
|
|
|
371,300
|
|
|
|
26
|
%
|
Total
|
|
$
|
1,410,758
|
|
|
|
|
|
|
$
|
1,417,573
|
|
|
|
|
|
Weighted-average interest rate of debt
|
|
|
3.80
|
%
|
|
|
|
|
|
|
3.74
|
%
|
|
|
|
|
(1)
|
Fixed-rate debt includes the portion of variable-rate debt where the interest payments have been effectively fixed by interest rate swaps as of the respective balance sheet date. See Note 5 for more information on the interest rate swap agreements.
|
(2)
|
The Company has two forward interest rate swaps that begin in 2020 that will effectively fix the interest rate on an additional $75 million of the Company's variable-rate debt. See Note 5 for more information on the interest rate swap agreements.
|
Revolving Credit Facility and Term Loans
$850 Million Credit Facility
On July 27, 2018, the Company entered into an amendment and restatement of its then outstanding unsecured $965 million credit facility, which was repaid at closing, reducing the borrowing capacity to $850 million, reducing the annual interest rate and extending the maturity dates (the “$850 million credit facility”). The $850 million credit facility is comprised of (i) a $425 million revolving credit facility with an initial maturity date of July 27, 2022 and (ii) a $425 million term loan facility consisting of two term loans: a $200 million term loan with a maturity date of July 27, 2023, and a $225 million term loan with a maturity date of January 31, 2024, both funded at closing (the “$425 million term loan facility”). At closing, the Company repaid the $425 million outstanding under the term loans of the $965 million credit facility with the proceeds from the $425 million term loan facility under the $850 million credit facility and borrowed approximately $196 million under the $425 million revolving credit facility to repay the outstanding balance of the extinguished revolving credit facility and to pay closing costs. Subject to certain conditions including covenant compliance and additional fees, the $425 million revolving credit facility maturity date may be extended up to one year. The Company may make voluntary prepayments in whole or in part, at any time. Interest payments on the $850 million credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.25%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement. The Company is also required to pay quarterly an unused facility fee at an annual rate of 0.20% or 0.25% on the unused portion of the $425 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.
$225 Million Term Loan Facility
On August 2, 2018, the Company entered into an amendment and restatement of its then outstanding $150 million term loan facility, which was repaid at closing, increasing the borrowing capacity to $225 million, reducing the annual interest rate and extending the maturity dates (the “$225 million term loan facility”). The $225 million term loan facility is comprised of (i) a $50 million term loan with a maturity date of August 2, 2023, which was funded at closing, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was drawn at closing and the remaining $75 million was drawn on January 29, 2019. At closing, the Company repaid the $150 million outstanding under the $150 million term loan facility with the proceeds from the $225 million term loan facility. The credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $225 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.35% to 2.50%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
$85 Million Term Loan
On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024 (the “$85 million term loan” and, together with the $850 million credit facility and the $225 million term loan facility, the “credit facilities”). Although no material terms were changed, the credit agreement was amended and restated in August 2018 as a result of the refinancings noted above. The amended and restated credit agreement contains requirements and covenants similar to the Company’s $850 million credit facility. The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions. Interest payments on the $85 million term loan are due monthly and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.80% to 2.60%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
As of March 31, 2019 and December 31, 2018, the details of the Company’s credit facilities were as set forth below. All dollar amounts are in thousands.
|
|
|
|
|
Outstanding Balance
|
|
|
Interest Rate
|
|
Maturity Date
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Revolving credit facility
(1)
|
LIBOR + 1.40% - 2.25%
|
|
7/27/2022
|
|
$
|
190,400
|
|
|
$
|
268,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
|
|
|
|
|
|
|
|
|
|
$200 million term loan
|
LIBOR + 1.35% - 2.20%
|
|
7/27/2023
|
|
|
200,000
|
|
|
|
200,000
|
|
$225 million term loan
|
LIBOR + 1.35% - 2.20%
|
|
1/31/2024
|
|
|
225,000
|
|
|
|
225,000
|
|
$50 million term loan
|
LIBOR + 1.35% - 2.20%
|
|
8/2/2023
|
|
|
50,000
|
|
|
|
50,000
|
|
$175 million term loan
|
LIBOR + 1.65% - 2.50%
|
|
8/2/2025
|
|
|
175,000
|
|
|
|
100,000
|
|
$85 million term loan
|
LIBOR + 1.80% - 2.60%
|
|
7/25/2024
|
|
|
85,000
|
|
|
|
85,000
|
|
Term loans at stated value
|
|
|
735,000
|
|
|
|
660,000
|
|
Unamortized debt issuance costs
|
|
|
(6,298
|
)
|
|
|
(6,618
|
)
|
Term loans, net
|
|
|
728,702
|
|
|
|
653,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility and term loans, net
(1)
|
|
$
|
919,102
|
|
|
$
|
922,182
|
|
Weighted-average interest rate
(2)
|
|
|
3.45
|
%
|
|
|
3.37
|
%
|
(1)
|
Excludes unamortized debt issuance costs related to the revolving credit facility totaling approximately $3.3 million and $3.6 million as of March 31, 2019 and December 31, 2018, respectively, which are included in other assets, net in the Company's consolidated balance sheets.
|
(2)
|
Interest rate represents the weighted-average effective annual interest rate at the balance sheet date which includes the effect of interest rate swaps in effect on $607.5 million and $557.5 million of the outstanding variable-rate debt as of March 31, 2019 and December 31, 2018, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month LIBOR at March 31, 2019 and December 31, 2018 was 2.49% and 2.50%, respectively.
|
The credit agreements governing the credit facilities contain mandatory prepayment requirements, customary affirmative covenants, 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. The Company was in compliance with the applicable covenants at March 31, 2019.
Mortgage
Debt
As of March 31, 2019, the Company had approximately $485.4 million in outstanding mortgage debt secured by 31 properties, with maturity dates ranging from June 2020 to January 2038, stated interest rates ranging from 3.55% to 6.25% and effective interest rates ranging from 3.55% to 4.97%. The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid. The following table sets forth the hotel properties securing each loan, the interest rate, loan assumption or origination date, maturity date, the principal amount assumed or originated, and the outstanding balance prior to any fair value adjustments or debt issuance costs as of March 31, 2019 and December 31, 2018 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.
Location
|
|
Brand
|
|
Interest Rate (1)
|
|
|
Loan Assumption or Origination Date
|
|
Maturity Date
|
|
|
|
Principal Assumed or Originated
|
|
|
Outstanding balance as of March 31, 2019
|
|
|
Outstanding balance as of December 31, 2018
|
|
San Juan Capistrano, CA
|
|
Residence Inn
|
|
|
4.15
|
%
|
|
9/1/2016
|
|
6/1/2020
|
|
|
|
$
|
16,210
|
|
|
$
|
15,341
|
|
|
$
|
15,431
|
|
Colorado Springs, CO
|
|
Hampton
|
|
|
6.25
|
%
|
|
9/1/2016
|
|
7/6/2021
|
|
|
|
|
7,923
|
|
|
|
7,580
|
|
|
|
7,617
|
|
Franklin, TN
|
|
Courtyard
|
|
|
6.25
|
%
|
|
9/1/2016
|
|
8/6/2021
|
|
|
|
|
14,679
|
|
|
|
14,047
|
|
|
|
14,115
|
|
Franklin, TN
|
|
Residence Inn
|
|
|
6.25
|
%
|
|
9/1/2016
|
|
8/6/2021
|
|
|
|
|
14,679
|
|
|
|
14,047
|
|
|
|
14,115
|
|
Grapevine, TX
|
|
Hilton Garden Inn
|
|
|
4.89
|
%
|
|
8/29/2012
|
|
9/1/2022
|
|
|
|
|
11,810
|
|
|
|
10,020
|
|
|
|
10,101
|
|
Collegeville/Philadelphia, PA
|
|
Courtyard
|
|
|
4.89
|
%
|
|
8/30/2012
|
|
9/1/2022
|
|
|
|
|
12,650
|
|
|
|
10,732
|
|
|
|
10,820
|
|
Hattiesburg, MS
|
|
Courtyard
|
|
|
5.00
|
%
|
|
3/1/2014
|
|
9/1/2022
|
|
|
|
|
5,732
|
|
|
|
5,018
|
|
|
|
5,058
|
|
Rancho Bernardo/San Diego, CA
|
|
Courtyard
|
|
|
5.00
|
%
|
|
3/1/2014
|
|
9/1/2022
|
|
|
|
|
15,060
|
|
|
|
13,183
|
|
|
|
13,289
|
|
Kirkland, WA
|
|
Courtyard
|
|
|
5.00
|
%
|
|
3/1/2014
|
|
9/1/2022
|
|
|
|
|
12,145
|
|
|
|
10,631
|
|
|
|
10,717
|
|
Seattle, WA
|
|
Residence Inn
|
|
|
4.96
|
%
|
|
3/1/2014
|
|
9/1/2022
|
|
|
|
|
28,269
|
|
|
|
24,728
|
|
|
|
24,928
|
|
Anchorage, AK
|
|
Embassy Suites
|
|
|
4.97
|
%
|
|
9/13/2012
|
|
10/1/2022
|
|
|
|
|
23,230
|
|
|
|
19,798
|
|
|
|
19,957
|
|
Somerset, NJ
|
|
Courtyard
|
|
|
4.73
|
%
|
|
3/1/2014
|
|
10/6/2022
|
|
|
|
|
8,750
|
|
|
|
7,629
|
|
|
|
7,692
|
|
Tukwila, WA
|
|
Homewood Suites
|
|
|
4.73
|
%
|
|
3/1/2014
|
|
10/6/2022
|
|
|
|
|
9,431
|
|
|
|
8,223
|
|
|
|
8,291
|
|
Prattville, AL
|
|
Courtyard
|
|
|
4.12
|
%
|
|
3/1/2014
|
|
2/6/2023
|
|
|
|
|
6,596
|
|
|
|
5,705
|
|
|
|
5,754
|
|
Huntsville, AL
|
|
Homewood Suites
|
|
|
4.12
|
%
|
|
3/1/2014
|
|
2/6/2023
|
|
|
|
|
8,306
|
|
|
|
7,184
|
|
|
|
7,246
|
|
San Diego, CA
|
|
Residence Inn
|
|
|
3.97
|
%
|
|
3/1/2014
|
|
3/6/2023
|
|
|
|
|
18,600
|
|
|
|
16,058
|
|
|
|
16,198
|
|
Miami, FL
|
|
Homewood Suites
|
|
|
4.02
|
%
|
|
3/1/2014
|
|
4/1/2023
|
|
|
|
|
16,677
|
|
|
|
14,423
|
|
|
|
14,547
|
|
Syracuse, NY
|
|
Courtyard
|
|
|
4.75
|
%
|
|
10/16/2015
|
|
8/1/2024
|
|
(2)
|
|
|
11,199
|
|
|
|
10,283
|
|
|
|
10,357
|
|
Syracuse, NY
|
|
Residence Inn
|
|
|
4.75
|
%
|
|
10/16/2015
|
|
8/1/2024
|
|
(2)
|
|
|
11,199
|
|
|
|
10,283
|
|
|
|
10,357
|
|
New Orleans, LA
|
|
Homewood Suites
|
|
|
4.36
|
%
|
|
7/17/2014
|
|
8/11/2024
|
|
|
|
|
27,000
|
|
|
|
24,052
|
|
|
|
24,232
|
|
Westford, MA
|
|
Residence Inn
|
|
|
4.28
|
%
|
|
3/18/2015
|
|
4/11/2025
|
|
|
|
|
10,000
|
|
|
|
9,071
|
|
|
|
9,137
|
|
Denver, CO
|
|
Hilton Garden Inn
|
|
|
4.46
|
%
|
|
9/1/2016
|
|
6/11/2025
|
|
|
|
|
34,118
|
|
|
|
31,975
|
|
|
|
32,198
|
|
Oceanside, CA
|
|
Courtyard
|
|
|
4.28
|
%
|
|
9/1/2016
|
|
10/1/2025
|
|
|
|
|
13,655
|
|
|
|
13,012
|
|
|
|
13,077
|
|
Omaha, NE
|
|
Hilton Garden Inn
|
|
|
4.28
|
%
|
|
9/1/2016
|
|
10/1/2025
|
|
|
|
|
22,682
|
|
|
|
21,613
|
|
|
|
21,722
|
|
Boise, ID
|
|
Hampton
|
|
|
4.37
|
%
|
|
5/26/2016
|
|
6/11/2026
|
|
|
|
|
24,000
|
|
|
|
22,906
|
|
|
|
23,015
|
|
Burbank, CA
|
|
Courtyard
|
|
|
3.55
|
%
|
|
11/3/2016
|
|
12/1/2026
|
|
|
|
|
25,564
|
|
|
|
24,075
|
|
|
|
24,247
|
|
San Diego, CA
|
|
Courtyard
|
|
|
3.55
|
%
|
|
11/3/2016
|
|
12/1/2026
|
|
|
|
|
25,473
|
|
|
|
23,990
|
|
|
|
24,161
|
|
San Diego, CA
|
|
Hampton
|
|
|
3.55
|
%
|
|
11/3/2016
|
|
12/1/2026
|
|
|
|
|
18,963
|
|
|
|
17,859
|
|
|
|
17,986
|
|
Burbank, CA
|
|
SpringHill Suites
|
|
|
3.94
|
%
|
|
3/9/2018
|
|
4/1/2028
|
|
|
|
|
28,470
|
|
|
|
27,846
|
|
|
|
28,018
|
|
Santa Ana, CA
|
|
Courtyard
|
|
|
3.94
|
%
|
|
3/9/2018
|
|
4/1/2028
|
|
|
|
|
15,530
|
|
|
|
15,189
|
|
|
|
15,283
|
|
San Jose, CA
|
|
Homewood Suites
|
|
|
4.22
|
%
|
|
12/22/2017
|
|
1/1/2038
|
|
|
|
|
30,000
|
|
|
|
28,857
|
|
|
|
29,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
528,600
|
|
|
|
485,358
|
|
|
|
488,773
|
|
Unamortized fair value adjustment of assumed debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,203
|
|
|
|
3,428
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,047
|
)
|
|
|
(2,141
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
486,514
|
|
|
$
|
490,060
|
|
(1)
|
Interest rates are the rates per the loan agreement. For loans assumed, the Company adjusted the interest rates per the loan agreement to market rates and is amortizing the adjustments to interest expense over the life of the loan.
|
(2)
|
Outstanding principal balance is callable by lender or prepayable by the Company on August 1, 2019.
|
5
.
Fair Value of Financial Instruments
Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.
Debt
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of March 31, 2019 and December 31, 2018, both the carrying value and estimated fair value of the Company’s debt were approximately $1.4 billion. Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issuance costs related to term loans and mortgage debt for each specific year.
Derivative Instruments
Currently, the Company uses interest rate swaps to manage its interest rate risks on variable-rate debt. Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR. The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets. The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of March 31, 2019 and December 31, 2018. All dollar amounts are in thousands.
|
|
Notional Amount at March 31, 2019
|
|
|
|
|
|
Swap Fixed Interest Rate
|
|
|
Fair Value Asset (Liability)
|
|
Hedge Type
|
|
|
Origination Date
|
|
Maturity Date
|
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Cash flow hedge
|
|
$
|
212,500
|
|
5/21/2015
|
|
5/18/2020
|
|
|
1.58
|
%
|
|
$
|
1,880
|
|
|
$
|
2,744
|
|
Cash flow hedge
|
|
|
110,000
|
|
7/2/2015
|
|
5/18/2020
|
|
|
1.62
|
%
|
|
|
924
|
|
|
|
1,361
|
|
Cash flow hedge
|
|
|
50,000
|
|
4/7/2016
|
|
3/31/2021
|
|
|
1.09
|
%
|
|
|
1,141
|
|
|
|
1,519
|
|
Cash flow hedge
|
|
|
100,000
|
|
4/7/2016
|
|
3/31/2023
|
|
|
1.33
|
%
|
|
|
3,206
|
|
|
|
4,477
|
|
Cash flow hedge
|
|
|
75,000
|
|
5/31/2017
|
|
6/30/2024
|
|
|
1.96
|
%
|
|
|
738
|
|
|
|
1,905
|
|
Cash flow hedge
|
|
|
10,000
|
|
8/10/2017
|
|
6/30/2024
|
|
|
2.01
|
%
|
|
|
72
|
|
|
|
226
|
|
Cash flow hedge
(1)
|
|
|
50,000
|
|
6/1/2018
|
|
6/30/2025
|
|
|
2.89
|
%
|
|
|
(2,105
|
)
|
|
|
(1,276
|
)
|
Cash flow hedge
(2)
|
|
|
25,000
|
|
12/6/2018
|
|
6/30/2025
|
|
|
2.75
|
%
|
|
|
(778
|
)
|
|
|
(379
|
)
|
Cash flow hedge
(3)
|
|
|
50,000
|
|
12/7/2018
|
|
1/31/2024
|
|
|
2.72
|
%
|
|
|
(1,116
|
)
|
|
|
(571
|
)
|
|
|
$
|
682,500
|
|
|
|
|
|
|
|
|
|
$
|
3,962
|
|
|
$
|
10,006
|
|
(1)
|
In June 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2019 effectively fixes the interest rate on $50 million of the Company's variable-rate debt.
|
(2)
|
In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning January 31, 2020 will effectively fix the interest rate on $25 million of the Company's variable-rate debt.
|
(3)
|
In December 2018 the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning May 18, 2020 will effectively fix the interest rate on $50 million of the Company's variable-rate debt.
|
The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. The change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholders’ equity in the Company’s consolidated balance sheets. Amounts reported in accumulated other comprehensive income will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives. The Company estimates that approximately $4.4 million of net unrealized gains included in accumulated other comprehensive income at March 31, 2019 will be reclassified as a decrease to interest and other expense, net within the next 12 months.
The following table presents the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and comprehensive income for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
Net Unrealized Gain (Loss) Recognized in Other Comprehensive Income
|
|
|
Net Unrealized Gain Reclassified from Accumulated Other Comprehensive Income to Interest and Other Expense, net
|
|
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Interest rate derivatives in cash flow hedging relationships
|
|
$
|
(4,770
|
)
|
|
$
|
6,348
|
|
|
$
|
1,274
|
|
|
$
|
56
|
|
6
. 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. There have been no changes to the contracts and relationships discussed in the 2018 Form 10-K. Below is a summary of the significant related party relationships in effect during the three months ended March 31, 2019 and 2018.
Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receive support services from ARG.
The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for the three months ended March 31, 2019 and 2018 totaled approximately $0.3 million and $0.2 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations.
As part of the cost sharing arrangement, 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 this 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. As of March 31, 2019 and December 31, 2018, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million and $0.4 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.
The Company, through a wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation and public relations purposes. The aircraft is also leased to affiliates of the Company based on third party rates, which leasing activity was not significant during the reporting periods. The Company also utilizes aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, by its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third party rates. Total costs incurred for the use of these aircraft during the three months ended March 31, 2019 and 2018 were approximately $0.05 million and $0.03 million, respectively, and are included in general and administrative expenses in the Company’s consolidated statements of operations.
7
. Shareholders
’
Equity
Distributions
The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. For the three months ended March 31, 2019 and 2018, the Company paid distributions of $0.30 per common share for a total of $67.2 million and $69.1 million, respectively. Additionally, in March 2019, the Company declared a monthly distribution of $0.10 per common share, totaling $22.4 million, which was recorded as a payable as of March 31, 2019 and paid in April 2019. As of December 31, 2018, a monthly distribution of $0.10 per common share, totaling $22.4 million, was recorded as a payable and paid in January 2019. These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets.
Share Repurchase
s
In May 2018, the Company’s Board of Directors approved an extension of its existing share repurchase program (the “Share Repurchase Program”), authorizing share repurchases up to an aggregate of $464 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2019 if not terminated earlier. In March 2018, the Company established a written trading plan as part of the Share Repurchase Program that provides for share repurchases in open market transactions that is intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During the three months ended March 31, 2019, the Company purchased, under its Share Repurchase Program, approximately 0.3 million of its common shares at a weighted-average market purchase price of approximately $14.93 per common share for an aggregate purchase price, including commissions, of approximately $4.1 million. During the three months ended March 31, 2018, the Company purchased, under its Share Repurchase Program, approximately 0.3 million of its common shares at a weighted-average market purchase price of approximately $16.89 per common share for an aggregate purchase price, including commissions, of approximately $4.3 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. As of March 31, 2019, approximately $359.9 million remained available for purchase under the Share Repurchase Program.
8
.
Compensation Plan
s
The Company annually establishes an incentive plan for its executive management. Under the incentive plan for 2019 (the “2019 Incentive Plan”), participants are eligible to receive a bonus based on the achievement of certain 2019 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return, over one-year, two-year and three-year periods). The operational performance metrics are equally weighted and account for 50% of the total target incentive compensation. The shareholder return metrics are weighted 75% for relative shareholder return metrics and 25% for total shareholder return metrics, and account for 50% of the total target incentive compensation. The range of potential aggregate payouts under the 2019 Incentive Plan is $0 - $18 million. Based on performance through March 31, 2019, the Company has accrued approximately $2.2 million as a liability for potential executive bonus payments under the 2019 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of March 31, 2019 and in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2019. Approximately 25% of awards under the 2019 Incentive Plan, if any, will be paid in cash, and 75% will be issued in stock under the Company’s 2014 Omnibus Incentive Plan, approximately two-thirds of which will vest at the end of 2019 and one-third of which will vest in December 2020. Under the incentive plan for 2018 (the “2018 Incentive Plan”), the Company recorded approximately $1.9 million in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2018.
During the three months ended March 31, 2019, the Company accrued for a one-time separation payment of $0.5 million in connection with the retirement of the Company’s Executive Vice President and Chief Legal Officer which, pursuant to the separation and general release agreement executed in March 2019, was paid in April 2019 and is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of March 31, 2019 and in general and administrative expenses in the Company’s consolidated statement of operations for the three months ended March 31, 2019.
Share-
Based Compensation
Awards
The following table sets forth information pertaining to the share-based compensation issued under the 2018 Incentive Plan and the incentive plan for 2017 (the “2017 Incentive Plan”).
|
|
2018 Incentive Plan
|
|
|
|
2017 Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period common shares issued
|
|
First Quarter 2019
|
|
|
|
First Quarter 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares earned under each incentive plan
|
|
|
156,926
|
|
|
|
|
415,866
|
|
|
Common shares surrendered on issuance date to satisfy tax withholding obligations
|
|
|
24,999
|
|
|
|
|
48,533
|
|
|
Common shares earned and issued under each incentive plan, net of common shares surrendered on issuance date to satisfy tax withholding obligations
|
|
|
131,927
|
|
|
|
|
367,333
|
|
|
Closing stock price on issuance date
|
|
$
|
16.49
|
|
|
|
$
|
16.92
|
|
|
Total share-based compensation earned, including the surrendered shares (in millions)
|
|
$
|
2.6
|
|
(1)
|
|
$
|
7.0
|
|
(2)
|
Of the total common shares earned and issued, total common shares unrestricted at time of issuance
|
|
|
105,345
|
|
|
|
|
223,421
|
|
|
Of the total common shares earned and issued, total common shares restricted at time of issuance
|
|
|
26,582
|
|
|
|
|
143,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted common shares vesting date
|
|
December 13, 2019
|
|
|
|
December 14, 2018
|
|
|
Common shares surrendered on vesting date to satisfy tax withholding requirements resulting from vesting of restricted common shares
|
|
|
n/a
|
|
|
|
|
41,389
|
|
|
(1)
|
Of the total 2018 share-based compensation, approximately $2.4 million was recorded as a liability as of December 31, 2018 and is included in accounts payable and other liabilities in the Company's consolidated balance sheet at December 31, 2018. The remaining $0.2 million, which is subject to vesting on December 13, 2019, will be recognized as share-based compensation expense proportionately throughout 2019. For the three months ended March 31, 2019, the Company recognized approximately $0.05 million of share-based compensation expense related to the unvested restricted share awards.
|
(2)
|
Of the total 2017 share-based compensation, approximately $1.2 million, which vested on December 14, 2018, was recognized as share-based compensation expense proportionately throughout 2018. For the three months ended March 31, 2018, the Company recognized approximately $0.3 million of share-based compensation expense related to the unvested restricted share awards.
|
9
.
Leases
The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of March 31, 2019, the Company had 13 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately four to 87 years. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years.
The Company adopted ASU No. 2016-02,
Leases (Topic 842)
, as discussed further in Note 1 in the section titled “Accounting Standards Recently Adopted”, effective January 1, 2019, which requires leases with durations greater than twelve months to be recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities. Prior year financial statements were not restated under the new standard and, therefore, those amounts are not presented below.
Under the new standard, the Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed schedule rent increases) and renewal options that are factored into the determination of lease payments when appropriate and the present value of the remaining lease payments is adjusted accordingly. The Company utilizes interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, to determine the present value of the lease payments. At transition to the new standard, the Company used information available at that time to determine the incremental borrowing rates on its existing leases at January 1, 2019 based on estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.
Twelve of the Company’s hotel and parking lot ground leases as well as all of its hotel equipment leases and office space leases are classified as operating leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are included in other assets, net and the lease liabilities are included in accounts payable and other liabilities in the Company’s consolidated balance sheet. In addition, the Company also reclassified at adoption of the new standard, its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the consolidated balance sheet, respectively, as well as accrued straight-line lease liabilities related to these leases from accounts payable and other liabilities in the consolidated balance sheet to the beginning ROU assets. Lease expense is recognized on a straight-line basis over the term of the respective lease and the value of each lease intangible is amortized over the term of the respective lease. Costs related to operating ground leases are included in operating ground lease expense, while costs related to hotel equipment leases are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases are included in general and administrative expense in the Company’s consolidated statements of operations.
Four of the Company’s hotel ground leases are classified as finance leases, for which the Company recorded ROU assets and lease liabilities at adoption of the new standard. The ROU assets are recorded as finance ground lease assets within investment in real estate, net and the lease liabilities are recorded as finance lease liabilities in the Company’s consolidated balance sheet. In addition, the Company also reclassified at adoption of the new standard, its intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these leases from other assets, net and accounts payable and other liabilities in the consolidated balance sheet, respectively, to the beginning ROU assets. At adoption of the new standard, the Company recorded a cumulative-effect adjustment totaling approximately $5.2 million, which included the derecognition of accrued straight-line lease liabilities related to the finance leases, to distributions greater than net income, a component of shareholders’ equity in the Company’s consolidated balance sheet. The ROU asset and value of each lease intangible is amortized over the term of the respective lease. Costs related to finance ground leases are included in depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statement of operations.
Lease Position as of March 31, 2019
The following table sets forth the lease-related assets and liabilities included in the Company’s consolidated balance sheet as of March 31, 2019. All dollar amounts are in thousands.
|
Consolidated Balance Sheet Classification
|
|
March 31, 2019
|
|
Assets
|
|
|
|
|
|
Operating lease assets, net
|
Other assets, net
|
|
$
|
29,332
|
|
Finance ground lease assets, net
(1)
|
Investment in real estate, net
|
|
|
143,810
|
|
Total lease assets
|
|
$
|
173,142
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Operating lease liabilities
|
Accounts payable and other liabilities
|
|
$
|
12,716
|
|
Finance lease liabilities
|
Finance lease liabilities
|
|
|
162,818
|
|
Total lease liabilities
|
|
$
|
175,534
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
|
Operating leases
|
|
|
36 years
|
|
Finance leases
|
|
|
33 years
|
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
|
Operating leases
|
|
|
5.42
|
%
|
Finance leases
|
|
|
5.28
|
%
|
(1)
|
Finance ground lease assets are net of accumulated amortization of approximately $1.0 million as of March 31, 2019.
|
Lease
Costs for the Three Months Ended March 31, 2019
The following table sets forth the lease costs related to the Company’s operating and finance ground leases included in the Company’s consolidated statement of operations for the three months ended March 31, 2019 (in thousands):
|
Consolidated Statement of Operations Classification
|
|
Three Months Ended March 31, 2019
|
|
Operating lease costs
(1)
|
Operating ground lease expense
|
|
$
|
405
|
|
Finance lease costs:
|
|
|
|
|
|
Amortization of lease assets
|
Depreciation and amortization expense
|
|
|
1,041
|
|
Interest on lease liabilities
|
Interest and other expense, net
|
|
|
1,826
|
|
Total lease costs
|
|
$
|
3,272
|
|
(1)
|
Represents costs related to ground leases, including variable lease costs. Excludes costs related to hotel equipment leases, which are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases, which are included in general and administrative expense in the Company's consolidated statement of operations.
|
Undiscounted Cash Flows
The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the operating lease liabilities and finance lease liabilities included in the Company’s consolidated balance sheet as of March 31, 2019 (in thousands):
|
|
Operating leases
|
|
|
Finance leases
|
|
2019 (Apr- Dec)
|
|
$
|
1,075
|
|
|
$
|
5,569
|
|
2020
|
|
|
1,246
|
|
|
|
7,385
|
|
2021
|
|
|
1,021
|
|
|
|
7,552
|
|
2022
|
|
|
854
|
|
|
|
7,702
|
|
2023
|
|
|
784
|
|
|
|
8,051
|
|
Thereafter
|
|
|
33,187
|
|
|
|
363,147
|
|
Total minimum lease payments
|
|
|
38,167
|
|
|
|
399,406
|
|
Less: amount of lease payments representing interest
|
|
|
25,451
|
|
|
|
236,588
|
|
Present value of lease liabilities
|
|
$
|
12,716
|
|
|
$
|
162,818
|
|
Other Information
The following table sets forth supplemental cash flow information related to the Company’s operating and finance leases for the three months ended March 31, 2019 (in thousands):
|
|
Three Months Ended March 31, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows for operating leases
|
|
$
|
377
|
|
Operating cash flows for finance leases
|
|
|
1,443
|
|
10
.
Subsequent Events
In April 2019, the Company paid approximately $22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders.
In April 2019, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of May 2019. The distribution is payable on May 15, 2019.
In April 2019, the Company entered into a purchase contract for the purchase of a hotel to be constructed in Denver, Colorado, for a gross purchase price of a minimum of $49.1 million, which is subject to adjustment based on the actual number of rooms. The hotel is planned to be a Courtyard by Marriott which is expected to contain a minimum of 182 guest rooms. Although the Company is working towards acquiring this hotel, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on this hotel will occur.