RICHMOND, VA—During its earnings call, Apple Hospitality REIT Inc. said it is well prepared to handle the path forward in the aftermath of the COVID-19 pandemic.
“As the economy recovers, we are exceptionally well-positioned to benefit,” said Justin Knight, CEO, Apple Hospitality. “Our assets, our affiliation with strong brands, our partnership with exceptional third-party managers, our data-driven benchmarking approach to asset management, our balance sheet, our broad geographic diversification and our experienced team at Apple provide us with security in uncertain times and the ability to produce strong returns for our investors during the periods of economic prosperity. In our continual effort to refine our portfolios to maximize performance over the long term, we have strategically partnered with trusted developers to invest in new non-prototypical assets in targeted markets.”
The company, its brands and its third-party management companies have taken the following actions to mitigate the operational and financial impact of the COVID-19 pandemic and enhance liquidity:
- Reduced property-level expenses: Beginning in March 2020, the company, its brands and its third-party management companies implemented cost elimination and efficiency initiatives at each of the company’s hotels by reducing labor costs, reducing or eliminating certain services and amenities, and reducing rates under various service contracts. Hotel operating expenses were reduced by 67% during the second quarter of 2020 as compared to the same period last year.
- Sustained hotel operations: As of June 30, 2020, all of the company’s hotels were open and receiving reservations with enhanced health and sanitation measures in place, and the company intentionally consolidated operations at 18 hotels, down from 38 hotels as of May 2020, in market clusters to maximize operational efficiencies. The cost structure of the company’s primarily rooms-focused hotels allows them to operate cost effectively even at very low occupancy levels.
- Enhanced sales efforts: Together with its third-party management companies, the company has enhanced its sales efforts by focusing on COVID-19-specific demand opportunities in certain markets and strategically targeting and maximizing performance based on available demand, such as leisure, construction, manufacturing, government, medical and maintenance focused business.
- Postponed nonessential capital improvement projects: The company has postponed all non-essential capital improvement projects planned for 2020 and anticipates a reduction of approximately $50 million in originally planned capital improvements for the year.
- Suspended distributions: The company suspended its monthly distributions, with the last distribution being paid March 16, 2020.
- Ceased share repurchases: The company terminated its written trading plan under its Share Repurchase Program in March 2020, and no shares were repurchased during the second quarter of 2020.
- Reduced executive compensation: The company’s executive chairman voluntarily agreed to forego six months of his salary, the company’s CEO volunteered to reduce his target compensation by 60% and the non-employee directors on the company’s board of directors volunteered as a group to reduce their annual director fees by more than 15%. General and administrative expenses were reduced by approximately 27% during the second quarter of 2020 as compared to the same period last year primarily due to anticipated decreases in compensation and other overhead expenses.
- Completed amendments to unsecured credit facilities: Effective June 5, 2020, the company entered into amendments to its unsecured credit facilities to suspend its financial covenants until June 30, 2021, and modify the calculations for the following year.
- Terminated purchase contract: In May 2020, the company terminated the contract to purchase the planned Courtyard by Marriott to be constructed in Denver, CO, for approximately $49 million, and the refundable deposit of approximately $0.6 million was repaid to the company.
- Hotel under contract to sell: In June 2020, the company entered into a contract for the sale of its Homewood Suites by Hilton in Memphis, TN, for a gross sales price of $9 million.
While the company experienced a significant decline in operating results during April 2020, as compared to April 2019, occupancy and RevPAR showed sequential improvement in May and June 2020, resulting in positive Adjusted Hotel EBITDA for the months of May and June 2020, as well as in total for the second quarter. Adjusted Hotel EBITDA for the month of June 2020 covered substantially all of the company’s interest and general and administrative expenses, and the company estimates, based on July 2020 occupancy of approximately 45%, that its cash flow for the month of July 2020 will be slightly positive.
The company, its third-party management companies and the brands the company’s hotels are franchised with have aggressively worked to mitigate the costs and uses of cash associated with operating the company’s hotels in a low-occupancy environment and are thoughtfully working to position the hotels to adapt to changes that may occur to guest preferences in the future, the company reports. The operational impact of the COVID-19 pandemic has varied and will vary by market and hotel.
In April 2020, Apple Hospitality closed on the purchase of the newly developed Hampton Inn & Suites by Hilton and Home2 Suites by Hilton in Cape Canaveral, FL, a combined 224-room, dual-branded complex. The company entered into the contract to purchase the hotels in 2018. The purchase price was approximately $47 million, funded by $25 million of cash on hand and a one-year note payable with the developer secured by the hotels for approximately $22 million.
The company has outstanding contracts, all of which were entered into prior to 2020, for the potential purchase of three additional hotels. The three hotels are currently under development and details related to the hotels under contract for purchase are as follows:
- The company has an outstanding contract to purchase a combined 259-room Hyatt House and Hyatt Place dual-branded complex in Tempe, AZ, for a total purchase price of approximately $65 million. The company anticipates acquiring the two hotels in August 2020.
- The company has an outstanding contract to purchase a 176-room Hilton Garden Inn in Madison, WI, for a total purchase price of approximately $50 million. The company anticipates acquiring the hotel during the next 12 months from June 30, 2020.
There are many conditions to closing under each of the contracts that have not yet been satisfied, including completion of construction, and there can be no assurance that closings on the three hotels will occur. If the sellers meet all of the conditions to closing, the company is obligated to specifically perform under these contracts.