Apple Hospitality REIT(APLE) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited consolidated financial statements, including balance sheets, operations, equity, and cash flows, with detailed notes Consolidated Balance Sheets Total assets and liabilities slightly increased, while shareholders' equity decreased due to finance lease liabilities and reduced debt Consolidated Balance Sheets (in thousands) | Metric | December 31, 2018 (in thousands) | June 30, 2019 (in thousands) | Change (in thousands) | | :------------------------------------- | :------------------------------- | :--------------------------- | :-------------------- | | Assets | | | | | Investment in real estate, net | $4,816,410 | $4,858,103 | $41,693 | | Restricted cash | $33,632 | $33,199 | $(433) | | Due from third party managers, net | $29,091 | $52,214 | $23,123 | | Other assets, net | $49,539 | $45,323 | $(4,216) | | Total Assets | $4,928,672 | $4,988,839 | $60,167 | | Liabilities | | | | | Debt, net | $1,412,242 | $1,384,314 | $(27,928) | | Finance lease liabilities | $- | $163,508 | $163,508 | | Accounts payable and other liabilities | $107,420 | $88,949 | $(18,471) | | Total Liabilities | $1,519,662 | $1,636,771 | $117,109 | | Shareholders' Equity | | | | | Common stock | $4,495,073 | $4,493,598 | $(1,475) | | Accumulated other comprehensive income (loss) | $10,006 | $(6,158) | $(16,164) | | Distributions greater than net income | $(1,096,069) | $(1,135,372) | $(39,303) | | Total Shareholders' Equity | $3,409,010 | $3,352,068 | $(56,942) | | Total Liabilities and Shareholders' Equity | $4,928,672 | $4,988,839 | $60,167 | Consolidated Statements of Operations and Comprehensive Income Total revenue showed mixed trends, while net and comprehensive income declined for Q2 and H1 2019, influenced by interest and derivatives Consolidated Statements of Operations and Comprehensive Income (in thousands, except per share data) | Metric (in thousands, except per share data) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $341,117 | $344,714 | $644,904 | $643,103 | | Total expense | $262,853 | $263,723 | $514,002 | $507,848 | | Operating income | $78,103 | $80,991 | $131,954 | $135,255 | | Interest and other expense, net | $(15,857) | $(13,210) | $(31,351) | $(25,129) | | Income before income taxes | $62,246 | $67,781 | $100,603 | $110,126 | | Net income | $62,090 | $67,630 | $100,241 | $109,812 | | Other comprehensive income (loss): Interest rate derivatives | $(10,120) | $1,740 | $(16,164) | $8,032 | | Comprehensive income | $51,970 | $69,370 | $84,077 | $117,844 | | Basic and diluted net income per common share | $0.28 | $0.29 | $0.45 | $0.48 | | Weighted average common shares outstanding | 223,899 | 230,342 | 223,915 | 230,428 | Consolidated Statements of Shareholders' Equity Shareholders' equity decreased due to negative derivative adjustments and distributions exceeding net income, despite share-based compensation and repurchases Consolidated Statements of Shareholders' Equity (in thousands) | Metric (in thousands) | Balance at December 31, 2018 | Six Months Ended June 30, 2019 Changes | Balance at June 30, 2019 | | :------------------------------------------------ | :--------------------------- | :------------------------------------- | :----------------------- | | Common Stock Amount | $4,495,073 | $(1,475) | $4,493,598 | | Accumulated Other Comprehensive Income (Loss) | $10,006 | $(16,164) | $(6,158) | | Distributions Greater Than Net Income | $(1,096,069) | $(39,303) | $(1,135,372) | | Total Shareholders' Equity | $3,409,010 | $(56,942) | $3,352,068 | Key Changes (Six Months Ended June 30, 2019): * Cumulative effect of ASU 2016-02 adoption: $(5,201) thousand (to Distributions Greater Than Net Income) * Share based compensation, net: $2,621 thousand * Common shares repurchased: $(4,096) thousand * Interest rate derivatives: $(16,164) thousand * Net income: $100,241 thousand * Distributions declared to shareholders ($0.60 per share): $(134,343) thousand Consolidated Statements of Cash Flows Operating cash flows remained stable, investing activities shifted to a net inflow, and financing activities resulted in a net outflow Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $164,072 | $166,368 | | Net cash provided by (used in) investing activities | $2,731 | $(174,605) | | Net cash (used in) provided by financing activities | $(167,236) | $10,725 | | Net change in cash, cash equivalents and restricted cash | $(433) | $2,488 | | Cash, cash equivalents and restricted cash, end of period | $33,199 | $32,279 | - Investing activities shifted from a net outflow of $174.6 million in H1 2018 to a net inflow of $2.7 million in H1 2019, primarily due to $95.0 million in net proceeds from real estate sales in 2019[16] - Financing activities saw a significant change from a net inflow of $10.7 million in H1 2018 to a net outflow of $167.2 million in H1 2019, driven by net payments on the revolving credit facility and distributions paid[16] Notes to Consolidated Financial Statements The notes detail accounting policies, financial instrument valuations, and specific transactions, including new lease accounting, real estate, debt, and compensation 1. Organization and Summary of Significant Accounting Policies Apple Hospitality REIT, Inc., a self-advised REIT, adopted new lease accounting standards on January 1, 2019, recognizing right-of-use assets and lease liabilities - Apple Hospitality REIT, Inc. is a self-advised REIT focused on income-producing real estate in the U.S. lodging sector[18] - As of June 30, 2019, the Company owned 234 hotels with 30,046 rooms in 34 states[18][25] - The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[21][22] - A cumulative-effect adjustment of approximately $5.2 million was recorded to distributions greater than net income upon adoption of Topic 842[22][23] 2. Investment in Real Estate Net investment in real estate increased to $4.86 billion, with two hotel acquisitions and commitments for five more totaling $159.2 million in H1 2019 Investment in Real Estate, net (in thousands) | Investment Category (in thousands) | December 31, 2018 | June 30, 2019 | | :--------------------------------- | :---------------- | :------------ | | Land | $737,822 | $730,614 | | Building and Improvements | $4,503,728 | $4,469,348 | | Furniture, Fixtures and Equipment | $471,399 | $471,324 | | Finance Ground Lease Assets | $- | $144,768 | | Franchise Fees | $13,354 | $13,787 | | Less Accumulated Depreciation and Amortization | $(909,893) | $(971,738) | | Investment in Real Estate, net | $4,816,410 | $4,858,103 | - The Company acquired two hotels in H1 2019 for an aggregate purchase price of approximately $52.4 million, adding 288 rooms[27][28] - As of June 30, 2019, the Company had outstanding contracts for the potential purchase of five hotels for approximately $159.2 million, expected to be completed and opened over the next 12 to 24 months[30][32] 3. Hotel Dispositions In March 2019, the Company sold nine hotels for $95.0 million, realizing a $1.7 million gain, with proceeds reducing debt - In March 2019, the Company sold nine hotels for a total combined gross sales price of $95.0 million, realizing a gain of approximately $1.7 million[34] - During 2018, three hotels were sold for approximately $15.8 million, resulting in a combined gain of $0.2 million, following impairment losses of approximately $3.1 million recognized in Q2 2018[35] - Net proceeds from the 2019 sales were used to pay down borrowings on the Company's revolving credit facility[37] 4. Debt Total debt, net, decreased to $1.38 billion as of June 30, 2019, with 77% fixed-rate and 23% variable-rate after swaps, at a 3.76% weighted-average rate Debt Category (in thousands) | Debt Category (in thousands) | December 31, 2018 | June 30, 2019 | | :--------------------------- | :---------------- | :------------ | | Revolving credit facility | $268,800 | $192,700 | | Term loans, net | $653,382 | $729,022 | | Mortgage debt, net | $490,060 | $462,592 | | Total Debt, net | $1,412,242 | $1,384,314 | Debt Type (in thousands) | Debt Type (in thousands) | December 31, 2018 | Percentage | June 30, 2019 | Percentage | | :----------------------- | :---------------- | :--------- | :------------ | :--------- | | Fixed-rate debt | $1,046,273 | 74% | $1,069,067 | 77% | | Variable-rate debt | $371,300 | 26% | $320,200 | 23% | | Total | $1,417,573 | | $1,389,267 | | | Weighted-average interest rate of debt | 3.74% | | 3.76% | | - The Company's credit facilities include an $850 million facility (comprising a $425 million revolving credit facility and a $425 million term loan facility), a $225 million term loan facility, and an $85 million term loan[41][42][43] - As of June 30, 2019, approximately $461.6 million in outstanding mortgage debt was secured by 29 properties, with interest rates ranging from 3.55% to 6.25%[48] 5. Fair Value of Financial Instruments Debt's carrying value approximates fair value; interest rate swaps manage variable-rate debt risk, with changes recorded in other comprehensive income - The carrying value and estimated fair value of the Company's debt were approximately $1.4 billion as of June 30, 2019, and December 31, 2018[53] - The Company uses interest rate swaps to manage interest rate risks on variable-rate debt, paying a fixed rate and receiving a floating rate (one-month LIBOR)[54] Hedge Type (in thousands) | Hedge Type | Notional Amount at June 30, 2019 (in thousands) | Fair Value Asset (Liability) June 30, 2019 (in thousands) | Fair Value Asset (Liability) December 31, 2018 (in thousands) | | :--------- | :------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Cash flow hedge | $682,500 | $(6,158) | $10,006 | - Approximately $1.0 million of net unrealized gains from cash flow hedges are expected to be reclassified as a decrease to interest and other expense, net, within the next 12 months[57] 6. Related Parties The Company engages in related party transactions, primarily with Apple Realty Group, Inc. (ARG), for support services and aircraft usage - The Company provides support services to Apple Realty Group, Inc. (ARG), owned by its Executive Chairman, and is reimbursed for these costs[59][60] - Total reimbursed costs from ARG for the six months ended June 30, 2019, and 2018 were approximately $0.6 million and $0.5 million, respectively[60] - The Company also utilizes aircraft owned by affiliates, reimbursing them at third-party rates, with total costs of approximately $0.05 million for the six months ended June 30, 2019 and 2018[63] 7. Shareholders' Equity The Company maintains a $1.20 per share annual distribution, paid $0.60 per share in H1 2019, and extended its $360 million share repurchase program - The Company's current annual distribution rate is $1.20 per common share, payable monthly[64] - For the six months ended June 30, 2019, the Company paid distributions of $0.60 per common share, totaling $134.3 million[64] - In May 2019, the Board extended the Share Repurchase Program, authorizing repurchases up to an aggregate of $360 million, ending in July 2020[65] - During Q1 2019, approximately 0.3 million common shares were repurchased for an aggregate of $4.1 million[65] 8. Compensation Plans The 2019 Incentive Plan links executive bonuses to operational and shareholder return metrics, with $4.7 million accrued and 75% of awards in stock - The 2019 Incentive Plan bases executive bonuses on 50% operational performance metrics and 50% shareholder return metrics[66] - As of June 30, 2019, approximately $4.7 million was accrued for potential executive bonus payments under the 2019 Incentive Plan[66] - Compensation expense recognized under the 2019 Incentive Plan totaled approximately $4.7 million for the six months ended June 30, 2019[66] - 75% of awards under the 2019 Incentive Plan, if any, will be issued in stock, with two-thirds vesting at the end of 2019 and one-third in December 2020[66] 9. Leases Following ASU No. 2016-02 adoption, the Company recognized $171.6 million in lease assets and $176.0 million in lease liabilities, reclassifying four ground leases as finance leases - The Company adopted ASU No. 2016-02 (Topic 842) effective January 1, 2019, requiring recognition of ROU assets and lease liabilities for leases over 12 months[72] - Four of the Company's ground leases, previously operating leases, are now classified as finance leases under Topic 842, leading to amortization and interest expense recognition instead of operating ground lease expense[23][76] Lease Position (in thousands) | Lease Position (in thousands) | Amount | | :------------------------------ | :----- | | Total lease assets | $171,602 | | Total lease liabilities | $175,978 | | Weighted-average remaining lease term (Operating leases) | 36 years | | Weighted-average remaining lease term (Finance leases) | 32 years | | Weighted-average discount rate (Operating leases) | 5.43% | | Weighted-average discount rate (Finance leases) | 5.28% | Lease Costs (in thousands) | Lease Costs (in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :----------------------------- | | Operating lease costs | $423 | $828 | | Amortization of lease assets (Finance) | $1,149 | $2,190 | | Interest on lease liabilities (Finance) | $2,133 | $3,959 | | Total lease costs | $3,705 | $6,977 | 10. Subsequent Events In July 2019, the Company paid $22.4 million in distributions, declared another monthly distribution, and entered into two new hotel purchase contracts totaling $56.9 million - In July 2019, the Company paid approximately $22.4 million ($0.10 per common share) in distributions and declared a similar distribution for August 2019[84][85] - The Company entered into two new hotel purchase contracts in July 2019 for a total anticipated gross purchase price of approximately $56.9 million[85] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the Company's financial performance, condition, and outlook, focusing on new lease accounting, hotel portfolio activities, operating results, non-GAAP measures, liquidity, and capital Overview Apple Hospitality REIT, Inc. is a self-advised REIT investing in U.S. lodging real estate, owning 234 Marriott, Hilton, or Hyatt branded hotels - The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes, investing in income-producing real estate, primarily in the U.S. lodging sector[89] - As of June 30, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states, all operating under Marriott, Hilton, or Hyatt brands[89] New Lease Accounting Standard The Company adopted ASU No. 2016-02 (Topic 842) on January 1, 2019, reclassifying four ground leases to finance leases, impacting expense comparability - The Company adopted ASU No. 2016-02, Leases (Topic 842), effective January 1, 2019, without restating prior periods[90] - Four ground leases previously classified as operating leases are now accounted for as finance leases, leading to amortization and interest expense recognition instead of operating ground lease expense[90] - The implementation of the new lease accounting standard affects the comparability of operating ground lease expense, depreciation and amortization expense, and interest and other expense, net[90] 2019 Hotel Portfolio Activities In H1 2019, the Company acquired two hotels for $52.4 million and sold nine for $95.0 million, using proceeds for debt reduction, with seven additional purchase contracts totaling $216.1 million - During the first six months of 2019, the Company acquired two hotels for approximately $52.4 million[92] - In March 2019, the Company sold nine hotels for a total combined gross sales price of $95.0 million, with net proceeds used to pay down borrowings[93] - As of July 31, 2019, the Company had outstanding contracts for the potential purchase of seven hotels for approximately $216.1 million, with six under development and one existing hotel[92] Hotel Operations Hotel operations in H1 2019 showed stable RevPAR for Comparable Hotels, with modest ADR increases offset by slight occupancy decreases, while expenses generally rose Operating Results Summary Total revenue decreased by 1.0% for Q2 but increased by 0.3% for H1 2019, with slight ADR and RevPAR increases and minor occupancy decline Operating Results Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Percent Change | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Percent Change | | :------------------------------------ | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | Total revenue | $341,117 | $344,714 | -1.0% | $644,904 | $643,103 | 0.3% | | Hotel operating expense | $187,190 | $186,531 | 0.4% | $362,639 | $358,860 | 1.1% | | Property taxes, insurance and other expense | $18,823 | $18,681 | 0.8% | $38,031 | $35,910 | 5.9% | | Operating ground lease expense | $423 | $2,912 | -85.5% | $828 | $5,762 | -85.6% | | General and administrative expense | $8,308 | $6,721 | 23.6% | $16,445 | $13,598 | 20.9% | | Loss on impairment of depreciable real estate assets | $- | $3,135 | n/a | $- | $3,135 | n/a | | Depreciation and amortization expense | $48,109 | $45,743 | 5.2% | $96,059 | $90,583 | 6.0% | | Interest and other expense, net | $15,857 | $13,210 | 20.0% | $31,351 | $25,129 | 24.8% | | ADR | $141.60 | $139.58 | 1.4% | $139.09 | $137.09 | 1.5% | | Occupancy | 81.4% | 81.7% | -0.4% | 77.6% | 78.2% | -0.8% | | RevPAR | $115.30 | $114.09 | 1.1% | $107.95 | $107.20 | 0.7% | Comparable Hotels Operating Results For 234 Comparable Hotels, ADR increased modestly while occupancy slightly decreased, resulting in virtually flat RevPAR for Q2 and H1 2019 Comparable Hotels Operating Results | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Percent Change | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Percent Change | | :-------- | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | ADR | $141.60 | $140.94 | 0.5% | $139.62 | $138.49 | 0.8% | | Occupancy | 81.4% | 81.9% | -0.6% | 77.8% | 78.4% | -0.8% | | RevPAR | $115.30 | $115.44 | -0.1% | $108.58 | $108.62 | - | Same Store Operating Results For 227 Same Store Hotels, ADR increased slightly, occupancy decreased marginally, leading to a nearly flat RevPAR for Q2 and H1 2019 Same Store Operating Results | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Percent Change | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Percent Change | | :-------- | :------------------------------- | :------------------------------- | :------------- | :----------------------------- | :----------------------------- | :------------- | | ADR | $141.52 | $140.72 | 0.6% | $139.11 | $138.13 | 0.7% | | Occupancy | 81.8% | 82.1% | -0.4% | 78.0% | 78.5% | -0.6% | | RevPAR | $115.73 | $115.59 | 0.1% | $108.52 | $108.45 | 0.1% | - The Company expects its RevPAR growth for Comparable Hotels for the full year of 2019 to be slightly negative to slightly positive compared to 2018[104] Revenues Total revenue for Comparable Hotels showed modest ADR increases offset by modest occupancy decreases, resulting in unchanged RevPAR, with varied regional performance - For the three months ended June 30, 2019, total revenue was $341.1 million, and for the six months, it was $644.9 million[105] - Comparable Hotels experienced modest increases in ADR (0.5% for Q2, 0.8% for H1) offset by modest decreases in occupancy (-0.6% for Q2, -0.8% for H1), leading to virtually unchanged RevPAR[101][105] - Markets with above-average growth included Birmingham, AL; Sacramento, CA; Norfolk, VA; and Phoenix and Tucson, AZ. Below-average markets included Houston, TX; Seattle, WA; and southern Florida[106] Hotel Operating Expense Hotel operating expense increased by 0.4% for Q2 and 1.1% for H1 2019, primarily due to higher labor costs, partially offset by lower utilities Hotel Operating Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Hotel operating expense | $187,190 | $186,531 | $362,639 | $358,860 | | % of total revenue | 54.9% | 54.1% | 56.2% | 55.8% | - The primary cause of the increase in hotel operating expense was higher labor costs as a percentage of revenue, slightly offset by decreases in utility costs[107] - The Company anticipates continued increases in labor costs due to government regulations, wage-related initiatives, and lower unemployment rates[107] Property Taxes, Insurance and Other Expense Property taxes, insurance, and other expenses increased by 0.8% for Q2 and 5.9% for H1 2019, driven by higher real estate taxes and insurance Property Taxes, Insurance and Other Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Property taxes, insurance and other expense | $18,823 | $18,681 | $38,031 | $35,910 | | % of total revenue | 5.5% | 5.4% | 5.9% | 5.6% | - Real estate taxes increased due to property value reassessments, partially offset by successful appeals. Property insurance costs also increased due to higher losses incurred by carriers[109] - The Company anticipates continued increases in property tax assessments and property insurance costs for the remainder of 2019[109] Operating Ground Lease Expense Operating ground lease expense significantly decreased by over 85% for Q2 and H1 2019, due to reclassification of four ground leases as finance leases Operating Ground Lease Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating ground lease expense | $423 | $2,912 | $828 | $5,762 | | Percent Change | -85.5% | | -85.6% | | - The substantial decrease in operating ground lease expense is primarily due to the reclassification of four ground leases as finance leases under the new lease accounting standard, effective January 1, 2019[110] General and Administrative Expense General and administrative expense increased by 23.6% for Q2 and 20.9% for H1 2019, mainly due to higher incentive plan accruals and management changes General and Administrative Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | General and administrative expense | $8,308 | $6,721 | $16,445 | $13,598 | | % of total revenue | 2.4% | 1.9% | 2.5% | 2.1% | - The increase in general and administrative expense was primarily due to increased accruals for anticipated performance under the Company's incentive plans and costs associated with senior management changes[111] Loss on Impairment of Depreciable Real Estate Assets No impairment losses were recognized for Q2 and H1 2019, compared to $3.1 million in 2018, related to subsequently sold hotels Loss on Impairment of Depreciable Real Estate Assets (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss on impairment of depreciable real estate assets | $- | $3,135 | $- | $3,135 | - The $3.1 million impairment loss in 2018 was related to the two Columbus hotels and the Springdale, Arkansas Residence Inn, which were subsequently sold[112] Depreciation and Amortization Expense Depreciation and amortization expense increased by 5.2% for Q2 and 6.0% for H1 2019, due to hotel acquisitions, renovations, and finance ground lease amortization Depreciation and Amortization Expense (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Depreciation and amortization expense | $48,109 | $45,743 | $96,059 | $90,583 | | Percent Change | 5.2% | | 6.0% | | - The increase was primarily due to the acquisition of two hotels in Q1 2019 and five hotels in 2018, as well as renovations completed throughout 2019 and 2018[113] - Depreciation and amortization expense for H1 2019 includes approximately $2.2 million associated with the amortization of the Company's four finance ground lease assets due to the new lease accounting standard[113] Interest and Other Expense, net Interest and other expense, net, increased by 20.0% for Q2 and 24.8% for H1 2019, driven by higher average borrowings, increased effective interest rates, and finance lease interest Interest and Other Expense, net (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest and other expense, net | $15,857 | $13,210 | $31,351 | $25,129 | | Percent Change | 20.0% | | 24.8% | | - The increase was a result of increased average borrowings from acquisitions and share repurchases, partially offset by debt repayment from dispositions[114] - The Company's effective interest rate increased due to a rise in the one-month LIBOR from 2.09% at June 30, 2018, to 2.40% at June 30, 2019[114] - Interest and other expense, net, for H1 2019 includes approximately $4.0 million of interest recorded on the Company's four finance lease liabilities under the new lease accounting standard[114] Non-GAAP Financial Measures The Company uses non-GAAP measures like FFO, MFFO, EBITDA, EBITDAre, and Adjusted EBITDAre to provide supplemental insights into operating performance FFO and MFFO FFO and MFFO are presented to compare operating performance, with FFO at $192.6 million and MFFO at $194.9 million for H1 2019 - FFO is defined by Nareit as net income excluding gains/losses from real estate sales, extraordinary items, and cumulative effect of accounting changes, plus real estate depreciation, amortization, and impairments[116] - MFFO further adjusts FFO by excluding amortization of finance ground lease assets, amortization of favorable/unfavorable operating leases, and non-cash straight-line operating ground lease expense[117] FFO and MFFO (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $62,090 | $67,630 | $100,241 | $109,812 | | Funds from operations (FFO) | $108,963 | $116,267 | $192,567 | $203,059 | | Modified funds from operations (MFFO) | $110,190 | $117,313 | $194,914 | $205,215 | EBITDA, EBITDAre and Adjusted EBITDAre EBITDA, EBITDAre, and Adjusted EBITDAre evaluate ongoing operating performance, with Adjusted EBITDAre at $227.1 million for H1 2019 - EBITDA is defined as net income excluding interest, income taxes, depreciation, and amortization[120] - EBITDAre, per Nareit, further excludes gains/losses from real estate sales and includes real estate related impairments[121] - Adjusted EBITDAre additionally excludes non-cash straight-line operating ground lease expense[122] EBITDA, EBITDAre and Adjusted EBITDAre (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $62,090 | $67,630 | $100,241 | $109,812 | | EBITDA | $126,243 | $126,882 | $228,075 | $226,192 | | EBITDAre | $126,404 | $130,017 | $227,023 | $229,327 | | Adjusted EBITDAre | $126,451 | $130,915 | $227,118 | $231,129 | Hotels Owned As of June 30, 2019, the Company owned 234 hotels with 30,046 rooms across 34 states, diversified across major brands - As of June 30, 2019, the Company owned 234 hotels with an aggregate of 30,046 rooms located in 34 states[125] Hotels Owned by Brand | Brand | Number of Hotels | Number of Rooms | | :------------------ | :--------------- | :-------------- | | Hilton Garden Inn | 41 | 5,665 | | Hampton | 40 | 5,065 | | Courtyard | 37 | 5,070 | | Residence Inn | 33 | 3,939 | | Homewood Suites | 33 | 3,731 | | SpringHill Suites | 15 | 2,040 | | Fairfield | 11 | 1,300 | | Home2 Suites | 9 | 1,038 | | TownePlace Suites | 9 | 931 | | Marriott | 2 | 616 | | Embassy Suites | 2 | 316 | | Renaissance | 1 | 208 | | Hyatt Place | 1 | 127 | | Total | 234 | 30,046 | - Texas (31 hotels, 3,755 rooms), California (27 hotels, 3,807 rooms), and Florida (23 hotels, 2,912 rooms) represent the largest concentrations of hotels by state[126] Related Parties The Company engages in non-arm's length related party transactions, primarily with Apple Realty Group, Inc. (ARG) - The Company engages in transactions with related parties, including Apple Realty Group, Inc. (ARG), which are not at arm's length[136] Liquidity and Capital Resources Liquidity is supported by operating cash flow and a $232.3 million available revolving credit facility, with capital used for distributions, share repurchases, capital improvements, and hotel acquisitions - Principal daily sources of liquidity are operating cash flow and availability under the revolving credit facility[137] - As of June 30, 2019, the Company had $232.3 million in unused borrowing capacity under its $425 million revolving credit facility[138] - The Company anticipates cash flow from operations, credit facilities, additional borrowings, and proceeds from dispositions/equity offerings will meet liquidity requirements[143] - Distributions paid during the six months ended June 30, 2019, totaled approximately $134.3 million ($0.60 per common share), while net cash generated from operations was $164.1 million[144] - During the six months ended June 30, 2019, the Company invested approximately $33.2 million in capital expenditures and anticipates spending an additional $45 million to $55 million during the remainder of 2019[149] - As of July 31, 2019, the Company had outstanding contracts for the potential purchase of seven hotels for approximately $216.1 million[150] Seasonality The hotel industry is seasonal, with higher occupancy and revenues in Q2 and Q3, requiring the Company to use cash or financing during lower cash flow periods - The hotel industry is seasonal, with occupancy rates and hotel revenues generally greater in the second and third quarters than in the first and fourth quarters[153] - The Company expects to utilize cash on hand or available financing sources to meet cash requirements during quarters with insufficient operating cash flow due to seasonal fluctuations[153] Subsequent Events In July 2019, the Company paid $22.4 million in distributions, declared another monthly distribution, and entered into two new hotel purchase contracts totaling $56.9 million - In July 2019, the Company paid approximately $22.4 million ($0.10 per common share) in distributions to common shareholders and declared a regular monthly cash distribution of $0.10 per common share for August 2019[154][155] - The Company entered into two new hotel purchase contracts in July 2019 for a total anticipated gross purchase price of approximately $56.9 million[156] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to interest rate risk from its variable-rate debt (23% of total debt), mitigated by interest rate swaps; a 100 basis point change would impact annual net income by $3.2 million - The Company is exposed to interest rate risk due to its variable-rate debt, which constituted approximately 23% ($320.2 million) of its total debt outstanding as of June 30, 2019, after giving effect to interest rate swaps[157] - A 100 basis point change in interest rates would impact the Company's annual net income by approximately $3.2 million[157] - The Company uses interest rate swaps to manage this risk, with seven agreements effectively fixing interest rates on approximately $607.5 million of variable-rate debt as of June 30, 2019[158] Debt Maturity and Interest Rates (in thousands) | Debt Type | Maturities (July-Dec 2019) | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | Average Interest Rates (1) | | :---------------- | :------------------------- | :--- | :--- | :--- | :--- | :--------- | :---- | :------------------------- | | Total debt (in thousands) | $6,600 | $28,349 | $47,586 | $301,952 | $295,615 | $709,165 | $1,389,267 | 3.76% | | Variable rate debt (in thousands) | $- | $- | $- | $192,700 | $250,000 | $485,000 | $927,700 | 3.42% | | Fixed rate debt (in thousands) | $6,600 | $28,349 | $47,586 | $109,252 | $45,615 | $224,165 | $461,567 | 4.28% | (1) The average interest rate gives effect to interest rate swaps, as applicable. Item 4. Controls and Procedures Senior management concluded disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal control over financial reporting - The Company's disclosure controls and procedures were effective as of June 30, 2019, as evaluated by senior management[160] - There have been no material changes in the Company's internal control over financial reporting during the last fiscal quarter[160] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is not currently involved in any material or threatened litigation that would adversely affect its financial position or results - The Company is not currently involved in any material litigation, nor is any litigation threatened, that would have a material adverse effect on its consolidated financial position or results of operations[162] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Company's 2018 Form 10-K - There have been no material changes to the risk factors previously disclosed in the Company's 2018 Form 10-K[163] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, compensation plans, certifications, and iXBRL financial statements - Exhibits include Amended and Restated Articles of Incorporation, Second Amended and Restated Bylaws, Executive Severance Pay Plan, Separation Agreement, CEO/CFO/CAO certifications, and iXBRL financial statements[164] Signatures The report is duly signed on August 5, 2019, by Justin G. Knight (President and CEO), Rachael S. Rothman (CFO), and Bryan Peery (CAO) - The report was signed on August 5, 2019, by Justin G. Knight (President and Chief Executive Officer), Rachael S. Rothman (Chief Financial Officer), and Bryan Peery (Chief Accounting Officer)[166]