Apple Hospitality REIT Reports Results of Operations for Third Quarter 2022

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

Comparable Hotels is defined as the 218 hotels owned by the Company as of September 30, 2022. For hotels acquired during the periods noted, the Company has included, as applicable, results of those hotels for periods prior to the Company's ownership, and for dispositions, results have been excluded for the Company's period of ownership. Results for periods prior to the Company's ownership have not been included in the Company's actual Consolidated Financial Statements and are included only for comparison purposes. Results included for periods prior to the Company's ownership are based on information from the prior owner of each hotel and have not been audited or adjusted.

Justin Knight, Chief Executive Officer of Apple Hospitality, commented, “With continued improvement in business transient demand and the ongoing strength of leisure travel across our markets, we achieved our highest quarterly RevPAR growth over the same period in 2019, with third quarter 2022 RevPAR for our portfolio exceeding third quarter 2019 by approximately 8%. The shift in consumer spending toward experiences and improvements in business travel demand enabled us to build upon second quarter rate growth. Our portfolio ADR was up more than 13% for the third quarter 2022 as compared to the third quarter 2019, despite continued opportunity in occupancy. We believe there is additional upside for our business as corporate travel improves, additional markets fully recover and occupancy across our portfolio further strengthens. In a challenging labor and inflationary environment, we are working with the management teams at our hotels to balance cost controls with guest satisfaction in order to maintain the strong value proposition of our assets and create an environment for sustainable rate improvement. During the quarter, we achieved a strong Comparable Hotels Adjusted Hotel EBITDA Margin of approximately 38% and MFFO of approximately $103 million, or $0.45 per share. Recent acquisitions combined with robust performance from our existing portfolio enabled us to achieve third quarter 2022 Adjusted EBITDAre of $119 million, a 3% increase over the same period in 2019. While we are mindful of potential macroeconomic headwinds, the travel industry has proven resilient and based on what we are seeing in our own portfolio, is poised for a countercyclical recovery.”

Mr. Knight continued, “During the quarter, we successfully refinanced and upsized our primary unsecured credit facility, further enhancing the strength and financial flexibility of our balance sheet and providing the Company with greater access to liquidity for strategic growth. We continue to allocate capital in ways that we believe will optimize our performance and maximize total returns for our shareholders over time, and in recent months opportunistically repurchased shares, increased our monthly distribution, reinvested in our assets and strategically acquired two high-quality hotels poised for future growth. Given the broad consumer appeal, geographic diversification and quality of our hotels, and the strength and financial flexibility of our balance sheet, we are confident we are well positioned for outperformance in any macroeconomic environment.”

Hotel Portfolio Overview

As of September 30, 2022, Apple Hospitality owned 218 hotels with an aggregate of 28,693 guest rooms located in 86 markets throughout 36 states.

Highlights

• Strong operating performance: For the third quarter 2022, as compared to the third quarter 2019, the Company's portfolio achieved an improvement in RevPAR of approximately 8%, despite lower occupancy, with ADR growth of approximately 13% and a decline in occupancy of approximately 5%. Occupancy, ADR and RevPAR for the Company’s portfolio for the third quarter 2022 exceeded industry averages as reported by STR. Occupancy for the Company's portfolio for the month of October 2022 accelerated relative to August and September, reaching approximately 78%, up 7% as compared to October 2021 and down 4% as compared to October 2019, with continued strength in ADR.
• Strong bottom-line performance: The Company achieved Comparable Hotels Adjusted Hotel EBITDA of approximately $129 million for the third quarter 2022, an improvement of approximately 19% and 4%, as compared to the third quarters of 2021 and 2019, respectively. The Company achieved Comparable Hotels Adjusted Hotel EBITDA Margin of approximately 38% for the third quarter 2022, a decline of 40 bps and 80 bps, as compared to the third quarters of 2021 and 2019, respectively. Actual Adjusted Hotel EBITDA Margin for the quarter was 38%, down 10 bps and up 30 bps to the third quarters of 2021 and 2019, respectively.
• Hurricane Ian: The Company's hotels in the direct path of Hurricane Ian did not sustain any material damage and remained open during and after the storm.
• Transactional activity: During the third quarter 2022, the Company sold a 55-room independent boutique hotel in Richmond, Virginia, for approximately $8.5 million. In October 2022, the Company acquired the AC Hotel by Marriott Louisville Downtown and the AC Hotel by Marriott Pittsburgh Downtown for a total combined purchase price of $85 million.
• Balance sheet: In July 2022, the Company amended and restated its existing unsecured $850 million credit facility, increasing the total credit facility to approximately $1.2 billion and extending the maturity dates while achieving improved pricing terms across the total credit facility.
• Monthly distributions: During the quarter, the Company's Board of Directors approved an increase in the Company's regular monthly cash distribution to $0.07 per common share, up from $0.05 per common share, beginning with the Company's September 2022 distribution payment. Then, in October 2022, the Company's Board of Directors approved an additional increase in the Company's regular monthly cash distribution to $0.08 per common share, beginning with the Company's November 2022 distribution payment.

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

Portfolio Activity

Acquisitions

As previously announced, in October 2022, the Company acquired the existing 156-room AC Hotel Louisville Downtown in Louisville, Kentucky, for $51 million, or approximately $327,000 per key, and the existing 134-room AC Hotel Pittsburgh Downtown in Pittsburgh, Pennsylvania, for $34 million, or approximately $254,000 per key.

Disposition

In September 2022, the Company sold its 55-room independent boutique hotel in Richmond, Virginia, for a gross sales price of approximately $8.5 million, resulting in a gain on sale of approximately $1.8 million, which is included in the Company's consolidated statement of operations for the nine months ended September 30, 2022.

Contract for Potential Acquisition

As previously announced, the Company has an outstanding contract for the purchase of an Embassy Suites by Hilton in Madison, Wisconsin, for an anticipated total purchase price of approximately $79 million. The hotel is currently under development and expected to include 260 rooms. There are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on this hotel will occur under the outstanding purchase contract. Assuming all conditions to closing are met, the Company anticipates acquiring the hotel following completion of construction, which is expected to occur in early 2024.

Capital Improvements

Apple Hospitality consistently reinvests in its hotels to maintain and enhance each property’s relevance and competitive position within its respective market. During the nine months ended September 30, 2022, the Company invested approximately $32 million in capital expenditures. The Company anticipates investing approximately $55 million to $65 million in capital improvements during 2022, which includes various renovation projects for approximately 20 to 25 hotels; however, inflationary pressures or supply chain shortages, among other issues, may result in increased costs and delays for anticipated projects.

Balance Sheet and Liquidity

Summary

As of September 30, 2022, the Company had approximately $1.3 billion of total outstanding debt with a current combined weighted-average interest rate of approximately 3.7%, cash on hand of approximately $26 million, availability under its revolving credit facility of $650 million and term loan availability of $100 million, of which $50 million was drawn subsequent to September 30, 2022. Excluding unamortized debt issuance costs and fair value adjustments, the Company’s total outstanding debt is comprised of approximately $332 million in property-level debt secured by 19 hotels and approximately $1.0 billion outstanding under its unsecured credit facilities. The number of unencumbered hotels in the Company’s portfolio as of September 30, 2022, was 199. The Company’s total debt to total capitalization, net of cash and cash equivalents at September 30, 2022, was approximately 29%. The Company’s weighted-average debt maturities are 4.7 years.

Amended and Restated Primary Unsecured Credit Facility

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

Capital Markets

Share Repurchase Program

The Company has in place a Share Repurchase Program that provides for share repurchases in open market transactions. During the nine months ended September 30, 2022, the Company purchased, under its Share Repurchase Program, approximately 0.1 million of its common shares at a weighted-average market purchase price of approximately $14.20 per common share, for an aggregate purchase price of approximately $1.5 million. Subsequent to the end of the third quarter, the Company purchased, under its Share Repurchase Program, an additional 81,100 common shares, bringing the total shares purchased year-to-date through October 31, 2022, to approximately 0.2 million common shares at a weighted-average market purchase price of approximately $14.21 per common share, for an aggregate purchase price of approximately $2.7 million. As of October 31, 2022, the Company had approximately $342.3 million remaining under its Share Repurchase Program for the repurchase of shares. Shares were repurchased under a written trading plan as part of the Share Repurchase Program that provides for share repurchases in open market transactions and that is intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934.

ATM Program

The Company also has in place an at-the-market offering program (the “ATM Program”). As of September 30, 2022, the Company had approximately $224 million remaining under its ATM Program for the issuance of shares. No shares were sold under the ATM program during the nine months ended September 30, 2022.

Shareholder Distributions

During the three months ended September 30, 2022, the Company paid distributions totaling $0.17 per common share. In August 2022, the Company's Board of Directors approved an increase in the Company's regular monthly cash distribution from $0.05 to $0.07 per common share, which was paid in September and October. In October 2022, the Company's Board of Directors approved an additional increase in the Company's regular monthly cash distribution from $0.07 to $0.08 per common share and declared a regular monthly cash distribution of $0.08 per common share for the month of November 2022. Based on the Company’s common stock closing price of $16.21 on November 4, 2022, the current annualized distribution of $0.96 per common share represents an annual yield of approximately 5.9%. While the Company expects monthly distributions to continue, each distribution is subject to approval by the Company’s Board of Directors. The Company’s Board of Directors, in consultation with management, will continue to monitor the Company’s distribution rate and timing relative to the performance of its hotels, capital improvement needs, varying economic cycles, acquisitions, dispositions, other cash requirements and the Company’s REIT status for federal income tax purposes, and may make adjustments as it deems appropriate.

2022 Outlook

The Company is providing the following full year 2022 outlook regarding certain corporate expenses, which is based on management’s current view and does not take into account any unanticipated developments in its business or changes in its operating environment:

• General and administrative expenses are projected to be approximately $38 million to $42 million, including both cash and share-based compensation.
• Interest expense is projected to be approximately $58 million to $63 million.
• Capital expenditures are projected to be approximately $55 million to $65 million.

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

About Apple Hospitality REIT, Inc.

Apple Hospitality REIT, Inc. (NYSE: APLE) is a publicly traded real estate investment trust (“REIT”) that owns one of the largest and most diverse portfolios of upscale, rooms-focused hotels in the United States. Apple Hospitality’s portfolio consists of 220 hotels with approximately 29,000 guest rooms located in 87 markets throughout 37 states. Concentrated with industry-leading brands, the Company’s portfolio consists of 96 Marriott-branded hotels, 119 Hilton-branded hotels, four Hyatt-branded hotels and one independent hotel.

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

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

Apple Hospitality REIT, Inc.

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

(Unaudited)

(in thousands)

EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.

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

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

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

The following table reconciles the Company’s GAAP net income (loss) to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA on a quarterly basis for 2019, 2021 and 2022:

Apple Hospitality REIT, Inc.

Reconciliation of Net Income to FFO and MFFO

(Unaudited)

(in thousands)

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

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

The following table reconciles the Company’s GAAP net income to FFO and MFFO for the three and nine months ended September 30, 2022 and 2021: