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Section 1: 10-K (10-K)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2017
or
 
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 001-37389
 

 
APPLE HOSPITALITY REIT, INC.
(Exact name of registrant as specified in its charter)
 
Virginia
26-1379210
(State of Organization)
(I.R.S. Employer Identification Number)
   
814 East Main Street
Richmond, Virginia
23219
(Address of principal executive offices)
(Zip Code)
 
(804) 344-8121
(Registrant’s telephone number, including area code)
 

 
Securities registered pursuant to Section 12(b) of the Act:
 
                             Title of each class                          
Name of each exchange on which registered
Common Shares, no par value
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      No  
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes      No  
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No  
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
 
Large accelerated filer
Accelerated filer   
Non-accelerated filer   ¨ (Do not check if a smaller reporting company) 
Smaller reporting company 
 
Emerging growth company   
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The aggregate market value of the common shares held by non-affiliates of the registrant (based on the closing sale price on the New York Stock Exchange) was approximately $3,917,705,000 as of June 30, 2017.

The number of common shares outstanding on February 16, 2018 was 230,204,289.

Documents Incorporated by Reference
 
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company’s annual meeting of shareholders to be held on May 17, 2018.

APPLE HOSPITALITY REIT, INC.
 
FORM 10-K
 
Index

 
Page
 
 
Part I
 
 
 
 
Item 1.
 3
 
Item 1A.
 9
 
Item 1B.
 24
 
Item 2.
 25
 
Item 3.
 30
 
Item 4.
 30
       
Part II
 
 
 
       
 
Item 5.
 31
 
Item 6.
 34
 
Item 7.
 35
 
Item 7A.
 49
 
Item 8.
 51
 
Item 9.
 81
 
Item 9A.
 81
 
Item 9B.
 81
       
Part III
 
 
 
       
 
Item 10.
 82
 
Item 11.
 82
 
Item 12.
 82
 
Item 13.
 82
 
Item 14.
 82
       
Part IV
 
 
 
       
 
Item 15.
 83
 
Item 16.
 85
90
     

This Form 10-K includes references to certain trademarks or service marks.  The Courtyard by Marriott®, Fairfield Inn by Marriott®, Fairfield Inn & Suites by Marriott®, Marriott® Hotels, Renaissance® Hotels, Residence Inn by Marriott®, SpringHill Suites by Marriott® and TownePlace Suites by Marriott® trademarks are the property of Marriott International, Inc. or one of its affiliates.  The Embassy Suites by Hilton®, Hampton by Hilton®, Hampton Inn & Suites by Hilton®, Hilton® Hotels & Resorts, Hilton Garden Inn®, Home2 Suites by Hilton® and Homewood Suites by Hilton® trademarks are the property of Hilton Worldwide Holdings Inc. or one or more of its affiliates.  For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.
 

PART I


Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are typically identified by use of statements that include phrases such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “outlook,” “strategy,” and similar expressions that convey the uncertainty of future events or outcomes.  Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Apple Hospitality REIT, Inc. and its wholly-owned subsidiaries (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; adverse changes in the real estate and real estate capital markets; financing risks; the outcome of current and future litigation, including any legal proceedings that have been or may be instituted against the Company or others; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a real estate investment trust (“REIT”).  Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Annual Report will prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.  In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code.  Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled “Risk Factors” in Item 1A in this Annual Report.  Any forward-looking statement that the Company makes speaks only as of the date of this Annual Report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

Item 1.
Business

The Company, formed in November 2007 as a Virginia corporation, is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States.  The Company has elected to be treated as a REIT for federal income tax purposes.  As of December 31, 2017, the Company owned 239 hotels with an aggregate of 30,322 rooms located in urban, high-end suburban and developing markets throughout 34 states.  All of the Company’s hotels operate under Marriott or Hilton brands.  The hotels are operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company.  The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”  The Company has no foreign operations or assets and its operating structure includes only one reportable segment.  Refer to Part II, Item 8, for the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

Business Objectives
 
The Company is one of the largest hospitality REITs in the United States, in both the number of hotels and guest rooms, with significant geographic and brand diversity.  The Company’s primary business objective is to maximize shareholder value by achieving long-term growth in cash available for distributions to its shareholders.  The Company has pursued and will continue to pursue this objective through the following investment strategies:

·
pursuing thoughtful capital allocation with selective acquisitions and dispositions of primarily select-service hotels;
·
focusing on investments in the upscale sector of the lodging industry;
·
employing broad geographic diversification of its investments;
·
franchising and collaborating with leading brands in the sector;
 
3

·
utilizing strong experienced operators for its hotels and enhancing their performance with proactive asset management;
·
reinvesting in the Company’s hotels to maintain their competitive advantage; and
·
maintaining low leverage providing the Company with financial flexibility.

The Company has generally acquired fee simple ownership of its properties, with a focus on hotels that have or have the potential to have diverse demand generators, strong brand recognition, high levels of customer satisfaction and strong operating margins.  The acquisitions have been in broadly diversified markets across the United States to limit dependence on any one geographic area or demand generator.  With an emphasis on upscale select-service hotels, the Company utilizes its asset management experience and expertise to improve the quality and performance of its hotels by working with its property managers to aggressively manage room rates and cost structure by benchmarking with internal and external data, using the Company’s scale to help negotiate favorable vendor contracts, engaging industry leaders in hotel management, and franchising the hotels with leading brands and actively participating with the franchisors to strengthen the brands.  To maintain its competitive advantage in each market, the Company continually reinvests in its hotels.  With its depth of ownership in particular brands and extensive experience with the Hilton and Marriott select-service brands, the Company has been able to enhance its reinvestment approach.  By maintaining a flexible balance sheet, with a total debt to total capitalization (total debt outstanding plus equity market capitalization based on the Company’s December 31, 2017 closing share price) ratio at December 31, 2017 of 21%, the Company is positioned to opportunistically consider investments that further improve shareholder value.

Hotel Operating Performance
 
As of December 31, 2017, the Company owned 239 hotels with a total of 30,322 rooms as compared to 235 hotels with a total of 30,073 rooms as of December 31, 2016, however, operating performance is included only for the period of ownership for hotels acquired or disposed of during 2017 and 2016.  During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017, one on October 20, 2017, and one on December 1, 2017) and sold two hotels (one on April 20, 2017 and one on October 5, 2017).  During 2016, the Company acquired 56 hotels in the Apple REIT Ten, Inc. (“Apple Ten”) merger effective September 1, 2016, acquired one additional newly constructed hotel on July 1, 2016 and sold one hotel on December 6, 2016.  The following table reflects certain operating statistics for the Company’s hotels for their respective periods of ownership by the Company.  Average Daily Rate (“ADR”) is calculated as room revenue divided by the number of rooms sold, and revenue per available room (“RevPAR”) is calculated as occupancy multiplied by ADR.

   
Years Ended December 31,
 
   
2017
   
2016
   
Percent Change
 
                   
ADR
 
$
134.61
   
$
133.61
     
0.7
%
Occupancy
   
77.4
%
   
76.9
%
   
0.7
%
RevPAR
 
$
104.13
   
$
102.80
     
1.3
%

Comparable Hotels Operating Performance

The following table reflects certain operating statistics for the Company’s 239 hotels owned as of December 31, 2017 (“Comparable Hotels”).  The Company defines metrics from Comparable Hotels as results generated by the 239 hotels owned as of the end of the reporting period.  For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company.  This information has not been audited, either for the periods owned or prior to ownership by the Company.  For dispositions, results have been excluded for the Company’s period of ownership.

   
Years Ended December 31,
 
   
2017
   
2016
   
Percent Change
 
                   
ADR
 
$
134.75
   
$
133.45
     
1.0
%
Occupancy
   
77.5
%
   
77.0
%
   
0.6
%
RevPAR
 
$
104.40
   
$
102.80
     
1.6
%

4

Hotel performance is impacted by many factors, including the economic conditions in the United States and each individual locality.  Moderate improvements in the general U.S. economy have been partially offset by increased supply in many markets, resulting in modest revenue growth.  During 2017, the Company experienced a slight increase in both occupancy and ADR resulting in a modest increase in RevPAR as compared to 2016.  Overall, the Company’s Comparable Hotels’ RevPAR growth for 2017 was in line with industry/brand averages.  Although certain markets will vary based on local supply/demand dynamics and local market economic conditions, with continued overall room rate improvement combined with expected stable overall demand growth compared to supply growth, the Company, on a comparable basis, and industry are forecasting a low single digit percentage increase in revenue for 2018 as compared to 2017.  The low growth is primarily due to inconsistent demand in certain markets and increased hotel supply meeting demand growth in others, limiting the Company’s ability to increase rates.  See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere in this Annual Report on Form 10-K for more information on the Company’s results of operations.

2017 Investing Activities

The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior long-term value.  Consistent with this strategy and the Company’s focus on investing in select-service hotels, the Company acquired six hotels for an aggregate purchase price of approximately $161.8 million during 2017: a new 124-room Courtyard in Fort Worth, Texas, a new 104-room Hilton Garden Inn and 106-room Home2 Suites on the same site in Birmingham, Alabama, a 179-room Residence Inn in Portland, Maine, a 136-room Residence Inn in Salt Lake City, Utah and a 135-room Home2 Suites in Anchorage, Alaska.  In February 2018, the Company completed the purchase of two additional hotels (a 119-room Hampton Inn & Suites in Atlanta, Georgia and a 144-room Hampton Inn & Suites in Memphis, Tennessee) for an aggregate purchase price of $63.0 million.  The Company also has outstanding contracts for the potential purchase of two additional hotels that are under construction for a total purchase price of approximately $64.8 million, which are planned to be completed and opened for business during 2018, at which time closing on these hotels is expected to occur.  The Company utilized its $540 million revolving credit facility (the “revolving credit facility”) to fund the 2017 and 2018 acquisitions and plans to utilize the revolving credit facility for any additional acquisitions that are completed in 2018.

Additionally, the Company monitors each of its properties’ profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that the proceeds from the sale of the property can be reinvested into opportunities that have more growth potential.  As a result, on April 20, 2017, the Company completed the sale of its 224-room Hilton hotel in Dallas, Texas, for a gross sales price of approximately $56.1 million.  Also, on October 5, 2017, the Company completed the sale of its 316-room Marriott hotel in Fairfax, Virginia, for a gross sales price of approximately $41.5 million.  The Company used the net proceeds from the sales to pay down borrowings on its revolving credit facility.

See Note 3 titled “Investment in Real Estate” and Note 4 titled “Dispositions” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning these transactions.

In addition to continually considering opportunities to invest in select-service hotels, the Company also monitors the trading price of its common shares and may repurchase common shares should it believe there is an opportunity to increase shareholder value.  Although the Company did not repurchase any common shares in 2017, the Board of Directors has authorized a $475 million share repurchase program which at December 31, 2017 had $467.5 million remaining.  See Note 8 titled “Shareholders’ Equity” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the share repurchase program.

Merger with Apple Ten

Effective September 1, 2016, the Company completed its merger with Apple Ten, and added 56 Marriott and Hilton branded primarily select-service and extended-stay hotels located in 17 states with an aggregate of 7,209 rooms, to the Company’s real estate portfolio (the “Apple Ten merger”).  See Note 2 titled “Merger with Apple REIT Ten, Inc.” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the merger with Apple Ten.

5

Hotel Industry and Competition
 
The hotel industry is highly competitive.  Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels or lodging facilities in its geographic market.  An increase in the number of competitive hotels or other lodging facilities in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area.  The Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal competitive factors affecting the Company’s hotels.  Additionally, general economic conditions in a particular market and nationally impact the performance of the hotel industry.

 Management and Franchise Agreements

All of the Company’s hotels operate under Marriott or Hilton brands, and as of December 31, 2017, consisted of the following:

Number of Hotels and Guest Rooms by Brand
 
   
Number of
   
Number of
 
Brand
 
Hotels
   
Rooms
 
Hilton Garden Inn
   
42
     
5,807
 
Courtyard
   
40
     
5,460
 
Hampton
   
36
     
4,422
 
Residence Inn
   
34
     
4,011
 
Homewood Suites
   
34
     
3,831
 
SpringHill Suites
   
17
     
2,248
 
TownePlace Suites
   
12
     
1,196
 
Fairfield Inn
   
11
     
1,300
 
Home2 Suites
   
8
     
910
 
Marriott
   
2
     
616
 
Embassy Suites
   
2
     
316
 
Renaissance
   
1
     
205
 
    Total
   
239
     
30,322
 

Each of the Company’s 239 hotels owned as of December 31, 2017 is operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company.  The management agreements generally provide for initial terms of one to 30 years.  The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied.  As of December 31, 2017, nearly 80% of the Company’s hotels operate under a variable management fee agreement, with an average initial term of two years, which the Company believes better aligns incentives for each hotel manager to maximize each property’s performance than a base-plus-incentive management fee structure, as described below, which is more common throughout the industry.  Under the variable fee structure, the management fee earned for each hotel is generally within a range of 2.5% to 3.5% of revenue, based on each hotel’s performance relative to other hotels owned by the Company.  The performance measures are based on various financial and quality performance metrics.  The Company’s remaining hotels operate under a management fee structure which generally includes the payment of base management fees and an opportunity for incentive management fees.  Under this structure, base management fees are calculated as a percentage of gross revenues and the incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements.  In addition to the above, management fees for all of the Company’s hotels generally include accounting fees and other fees for centralized services, which are allocated among all of the hotels that receive the benefit of such services.

Sixteen of the Company’s hotels are managed by affiliates of Marriott or Hilton.  The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott or Hilton, and, as a result, the hotels they manage were required to obtain separate franchise agreements with each respective franchisor.  The franchise agreements generally provide for initial terms of approximately 10 to 30 years and generally provide for renewals subject to franchise requirements at the time of renewal.  The Company pays various fees under these agreements, including the payment of royalty fees, marketing fees, reservation fees, a communications support fee, brand loyalty program fees and other similar fees based on room revenues.

6

The franchise and/or management agreements provide a variety of benefits for the Company, which include national advertising, publicity, and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards, centralized reservation systems and best practices within the industry.

 Hotel Maintenance and Renovation
 
The Company’s hotels have an ongoing need for renovation and refurbishment.  To maintain and enhance each property’s competitive position in its market, the Company has invested in and plans to continue to reinvest in its hotels.  During 2017 and 2016, the Company’s capital improvements for existing hotels were approximately $69.1 million and $63.4 million, respectively.  During 2018, the Company anticipates investing approximately $70 to $80 million in capital improvements, which includes various scheduled renovation projects for approximately 30 to 35 properties.  

Financing

The Company’s principal sources of liquidity are the operating cash flow generated from the Company’s properties and availability under its revolving credit facility.  Depending on market conditions, the Company also has the ability to enter into additional secured and unsecured debt financing and to issue common shares under its at-the-market offering program discussed below.  The Company anticipates that funds from these sources will be adequate to meet its anticipated liquidity requirements, including debt service, hotel acquisitions, hotel renovations, required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes) and share repurchases.

As of December 31, 2017, the Company had approximately $457.4 million in outstanding mortgage debt secured by 29 properties, with maturity dates ranging from June 2020 to January 2038 and stated interest rates ranging from 3.55% to 6.25%.  Additionally, the Company had approximately $766.9 million in outstanding debt under its unsecured credit facilities with maturity dates ranging from May 2019 to July 2024 and interest rates ranging from 2.54% to 3.76%.

As of December 31, 2017, the Company’s revolving credit facility had an outstanding principal balance of approximately $106.9 million, with approximately $433.1 million in borrowing capacity.  The revolving credit facility is available for acquisitions, hotel renovations and development, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders.  As discussed above, the Company has historically maintained and plans in the future to maintain relatively low leverage as compared to the real estate industry as a whole and the lodging sector in particular.  The Company’s ratio of total debt to total capitalization as of December 31, 2017 was 21%.  The Company may increase debt levels at any time to take advantage of investment opportunities, but would plan to reduce any significant increases as appropriate with the issuance of equity or property dispositions to maintain its flexible balance sheet and reduce risks to investors compared to those of highly leveraged companies.  The Company plans to maintain staggered maturities of its debt, utilize unsecured debt when available and fix the rate on the majority of its debt.  All of these strategies reduce shareholder risk related to the Company’s financing structure.  See Note 5 titled “Debt” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information regarding the Company’s debt.

In February 2017, the Company executed an equity distribution agreement that allows the Company to sell, from time to time, up to an aggregate of $300 million of its common shares through sales agents under an at-the-market offering program (the “ATM Program”).  During the fourth quarter of 2017, the Company sold approximately 6.9 million common shares under its ATM Program at a weighted-average market sales price of approximately $19.55 per common share and received aggregate gross proceeds of approximately $135.1 million.  The Company used the proceeds from the sale of these shares to pay down borrowings on its revolving credit facility.  As of December 31, 2017, approximately $164.9 million remained available for issuance under the ATM program.  Future sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company’s common shares and opportunities for uses of any proceeds. 

7

Distribution Policy

The Company plans to continue to pay a consistent distribution on a monthly basis, with distributions based on anticipated cash generated from operations.  The Company’s annualized distribution rate was $1.20 per common share at December 31, 2017.  As it has done historically, due to seasonality, the Company may use its revolving credit facility to maintain the consistency of the monthly distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles.  Any distribution is subject to approval of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at the current annual distribution rate.  The Board of Directors monitors the Company’s distribution rate relative to the performance of its hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.  If cash flow from operations and the revolving credit facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions.  Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy and may need to reduce its distributions to required levels to maintain its REIT status.  If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.

Insurance

The Company maintains comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of its hotels.  These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties.  However, various types of catastrophic losses, like earthquakes, hurricanes, or certain types of terrorism, may not be insurable or may not be economically insurable.

 Environmental Matters
 
The Company’s hotels are subject to various U.S. federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and waste water discharges, lead-based paint, mold and mildew and waste management, and impose liability for contamination.  In connection with each of the Company’s hotel acquisitions, the Company reviewed a Phase I Environmental Report and additional environmental reports and surveys, as were necessitated by the preliminary report.  Based on the reports, the Company is not aware of any environmental situations requiring remediation at the Company’s properties, which have not been, or are not currently being remediated as necessary.  No material remediation costs have occurred or are expected to occur.  Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances.  These laws also expose the Company to the possibility that it may become liable to reimburse governments for damages and costs they incur in connection with hazardous substances.

Seasonality
 
The hotel industry historically has been seasonal in nature.  Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues.  Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters.  To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.

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.  See Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Company’s related party transactions.

8

Employees
 
During 2017, all employees involved in the day-to-day operation of the Company’s hotels were employed by third party management companies engaged pursuant to the hotel management agreements.  At December 31, 2017, the Company had 56 employees.  The employees not only provide support to the Company, but, as discussed in Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, provide support services to Apple Realty Group, Inc. (“ARG”), which is wholly owned by Glade M. Knight, Executive Chairman of the Company.

Website Access
 
The address of the Company’s Internet website is www.applehospitalityreit.com.  The Company makes available free of charge through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.  Information contained on the Company’s website is not incorporated by reference into this report.

Item 1A.
Risk Factors

The Company has identified the following significant risk factors which may affect, among other things, the Company’s business, financial position, results of operations, operating cash flow, market value, and ability to service its debt obligations and make distributions to its shareholders.  You should carefully consider the risks described below and the risks disclosed in other filings with the SEC, in addition to the other information contained in this report.

Risks Related to the Company’s Business and Operations

The Company is subject to various risks which are common to the hotel industry on a national, regional and local market basis that are beyond its control and could adversely affect its business.

The success of the Company’s hotels depends largely on the hotel operators’ ability to adapt to dominant trends and risks in the hotel industry, both nationally and in individual local markets.  These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses.  The following is a summary of risks that may affect the hotel industry in general and as a result may affect the Company:

·
an increase in supply of hotel rooms that exceeds increases in demand;
·
competition from other hotels and lodging alternatives in the markets in which the Company operates;
·
dependence on business and leisure travel;
·
increases in energy costs and other travel expenses, which may affect travel patterns and reduce business and leisure travel;
·
reduced business and leisure travel due to geo-political uncertainty, including terrorism, travel-related health concerns, including the widespread outbreak of infectious or contagious diseases in the U.S., inclement weather conditions, including natural disasters such as hurricanes and earthquakes, and airline strikes or disruptions;
·
reduced travel due to adverse national, regional or local economic and market conditions;
·
seasonality of the hotel industry may cause quarterly fluctuations in operating results;
·
changes in marketing and distribution for the industry including the cost and the ability of third-party internet and other travel intermediaries to attract and retain customers;
·
changes in hotel room demand in a local market;
·
ability of a hotel franchise to fulfill its obligations to franchisees;
·
brand expansion;
·
the performance of third-party managers of the Company’s hotels;
·
increases in operating costs, including increases in the cost of property insurance, utilities and real estate and personal property taxes, due to inflation and other factors that may not be offset by increased room rates;
·
labor shortages and increases in the cost of labor due to low unemployment rates or to government regulations surrounding wage rates, health care coverage and other benefits;
 
9

·
changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with applicable laws and regulations;
·
business interruptions due to cyber-attacks;
·
requirements for periodic capital reinvestment to repair and upgrade hotels;
·
limited alternative uses for the hotel buildings;
·
condemnation or uninsured losses; and
·
adverse effects of a downturn in the hospitality industry.

Any of these factors may reduce operating results and the value of properties that the Company owns.  Additionally, these items, among others, may reduce the availability of capital to the Company.

Adverse economic conditions in the United States and individual markets may adversely affect the Company’s business operations and financial performance.

The performance of the lodging industry has historically been closely linked to the performance of the general economy both nationally and within local markets in the United States.  The lodging industry is also sensitive to government, business and personal discretionary spending levels.  Declines in government and corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenue and profitability of the Company’s hotels and therefore the net operating profits of its investments.  A slowing of the current economic growth or new economic weakness could have an adverse effect on the Company’s revenue and negatively affect its profitability.  Furthermore, even if the economy in the United States in general continues to improve, the Company cannot provide any assurances that demand for hotels will increase from current levels, nationally or more specifically regionally, where the Company’s properties are located.

In addition, many of the expenses associated with the Company’s business, including personnel costs, interest expense, ground leases, property taxes, insurance and utilities, are relatively fixed.  During a period of overall economic weakness, if the Company is unable to meaningfully decrease these costs as demand for its hotels decreases, the Company’s business operations and financial performance may be adversely affected.
 
The Company is affected by restrictions in, and compliance with, its franchise and license agreements.

The Company’s wholly-owned taxable REIT subsidiaries (“TRSs”) (or subsidiaries thereof) operate all of the hotels pursuant to franchise or license agreements with nationally recognized hotel brands.  These franchise and license agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Company’s hotels in order to maintain uniformity within the franchisor system.  The Company may be required to incur costs to comply with these standards and these standards could potentially conflict with the Company’s ability to create specific business plans tailored to each property and to each market.  Failure to comply with these brand standards may result in termination of the applicable franchise or license agreement.  If the Company were to lose a franchise or license agreement, the Company would be required to re-brand the hotel, which could result in a decline in the value of the hotel, the loss of marketing support and participation in guest loyalty programs, and harm the Company’s relationship with the franchisor, impeding the Company’s ability to operate other hotels under the same brand.  Additionally, the franchise and license agreements have provisions that could limit the Company’s ability to sell or finance a hotel which could further affect the Company.

All of the Company’s hotels operate under either Marriott or Hilton brands; therefore, the Company is subject to risks associated with concentrating its portfolio in only two brand families.

All of the hotels that the Company owned as of December 31, 2017 operate under brands owned by Marriott or Hilton.  As a result, the Company’s success is dependent in part on the continued success of Marriott and Hilton and their respective brands.  The Company believes that building brand value is critical to increase demand and strengthen customer loyalty. Consequently, if market recognition or the positive perception of Marriott and/or Hilton is reduced or compromised, the goodwill associated with the Marriott and Hilton branded hotels in the Company’s portfolio may be adversely affected.  Also, if Marriott and Hilton alter certain policies, including their respective guest loyalty programs, this could reduce the Company’s future revenues.  Furthermore, if the Company’s relationship with Marriott or Hilton were to deteriorate or terminate as a result of disputes regarding the Company’s hotels or for other reasons, Marriott and/or Hilton could, under certain circumstances, terminate the Company’s current franchise
 
10

licenses with them or decline to provide franchise licenses for hotels that the Company may acquire in the future.  If any of the foregoing were to occur, it could have a material adverse effect on the Company.

Competition in the markets where the Company owns hotels may adversely affect the Company’s results of operations.

The hotel industry is highly competitive.  Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels in its geographic market.  The Company also competes with numerous owners and operators of vacation ownership resorts, as well as alternative lodging companies, such as HomeAway and Airbnb, which operate websites that market available furnished, privately-owned residential properties, including homes and condominiums, that can be rented on a nightly, weekly or monthly basis.  An increase in the number of competitive hotels, vacation ownership resorts and alternative lodging arrangements in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area.

The Company is dependent on third-party hotel managers to operate its hotels and could be adversely affected if such managers do not manage the hotels successfully.

To maintain its status as a REIT, the Company is not permitted to operate any of its hotels.  As a result, the Company has entered into management agreements with third-party managers to operate its hotels.  For this reason, the Company’s ability to direct and control how its hotels are operated is less than if the Company were able to manage its hotels directly.  Under the terms of the hotel management agreements, the Company’s ability to participate in operating decisions regarding its hotels is limited to certain matters, and it does not have the authority to require any hotel to be operated in a particular manner (for instance, setting room rates).  The Company does not supervise any of the hotel managers or their respective personnel on a day-to-day basis.  The Company cannot be assured that the hotel managers will manage its hotels in a manner that is consistent with their respective obligations under the applicable management agreement or the Company’s obligations under its hotel franchise agreements.  The Company could be materially and adversely affected if any of its third-party managers fail to effectively manage revenues and expenses, provide quality services and amenities, or otherwise fail to manage its hotels in its best interest, and may be financially responsible for the actions and inactions of the managers.  In certain situations, the Company may terminate the management agreement.  However, the Company can provide no assurances that it could identify a replacement manager, that the franchisor will consent to the replacement manager, or that the replacement manager will manage the hotel successfully.  A failure by the Company’s hotel managers to successfully manage its hotels could lead to an increase in its operating expenses or decrease in its revenues, or both.

The growth of lodging distribution channels could adversely affect the Company’s business and profitability.

Although a majority of rooms sold are sold through the hotel franchisors’ channels, a growing number of the Company’s hotel rooms are sold through other channels or intermediaries.  Rooms sold through non-franchisors’ channels are generally less profitable (after associated fees) than rooms sold through franchisors’ channels.  Although the Company’s franchisors may have established agreements with many of these alternative channels or intermediaries that limit transaction fees for hotels, there can be no assurance that the Company’s franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today.  Moreover, alternative channels or intermediaries may employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites.  As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to those of the Company’s franchisors.  If this happens, the Company’s business and profitability may be significantly negatively impacted.

Renovations and capital improvements may reduce the Company’s profitability.

The Company has ongoing needs for hotel renovations and capital improvements, including requirements under all of its hotel franchise and management agreements and certain loan agreements to maintain the hotels.  In addition, from time to time the Company will need to make renovations and capital improvements to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of its hotels.  The Company also may need to make significant capital improvements to hotels that it acquires.  Occupancy and ADR are often affected by the maintenance and capital improvements at a hotel, especially in the event that the
 
11

maintenance or improvements are not completed on schedule, or if the improvements require significant disruptions at the hotel.  The costs of capital improvements the Company needs or chooses to make could reduce the funds available for other purposes and may reduce the Company’s profitability.

Certain hotels are subject to ground leases that may affect the Company’s ability to use the hotel or restrict its ability to sell the hotel.

As of December 31, 2017, 14 of the Company’s hotels were subject to ground leases.  Accordingly, the Company effectively only owns a long-term leasehold interest in these hotels.  If the Company is found to be in breach of a ground lease, it could lose the right to use the hotel.  In addition, unless the Company can purchase a fee interest in the underlying land or renew the terms of these leases before their expiration, as to which no assurance can be given, the Company will lose its right to operate these properties and its interest in the property, including any investment that it made in the property.  The Company’s ability to exercise any extension options relating to its ground leases is subject to the condition that the Company is not in default under the terms of the ground lease at the time that it exercises such options, and the Company can provide no assurances that it will be able to exercise any available options at such time.  If the Company were to lose the right to use a hotel due to a breach or non-renewal of a ground lease, it would be unable to derive income from such hotel.  Finally, the Company may not be permitted to sell or finance a hotel subject to a ground lease without the consent of the lessor.

The Company may not be able to complete hotel dispositions when and as anticipated.

The Company continually monitors the profitability of its hotels, market conditions, and capital requirements and attempts to maximize shareholder value by timely disposal of its hotels.  Real estate investments are, in general, relatively difficult to sell due to, among other factors, the size of the required investment and the volatility in availability of adequate financing for a potential buyer.  This illiquidity will tend to limit the Company’s ability to promptly vary its portfolio in response to changes in economic or other conditions.  Additionally, factors specific to an individual property, such as its specific market and operating performance, restrictions in franchise and management agreements, debt secured by the property, a ground lease, or capital expenditure needs may further increase the difficulty in selling a property.  Therefore, the Company cannot predict whether it will be able to sell any hotels for the price or on the terms set by the Company, or whether any price or other terms offered by a prospective purchaser would be acceptable to the Company.  In addition, provisions of the Internal Revenue Code of 1986, as amended (the “Code”) relating to REITs have certain limits on the Company’s ability to sell hotels.

Real estate impairment losses may adversely affect the Company’s financial condition and results of operations.

As a result of changes in an individual hotel’s operating results or to the Company’s planned hold period for a hotel, the Company may be required to record an impairment loss for a property.  The Company analyzes its hotel properties individually for indicators of impairment throughout the year.  The Company records impairment losses on a hotel property if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective property over its estimated remaining useful life, based on historical and industry data, is less than the property’s carrying amount.  Indicators of impairment include, but are not limited to, a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable.

 The Company’s failure to identify and complete accretive acquisitions may adversely affect the profitability of the Company.

The Company’s business strategy includes identifying and completing accretive hotel acquisitions.  The Company competes with other investors who are engaged in the acquisition of hotels, and these competitors may affect the supply/demand dynamics and, accordingly, increase the price the Company must pay for hotels it seeks to acquire, and these competitors may succeed in acquiring those hotels.  Any delay or failure on the Company’s part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede the Company’s growth.  The Company may also incur costs that it cannot recover if it abandons a potential acquisition.  If the Company does not reinvest proceeds received from hotel dispositions timely, it could result in lower income.  The Company’s profitability may also suffer because future acquisitions of hotels may not yield the returns the Company expects and the integration of such acquisitions may cause disruptions in the Company’s business and to management or may take longer than projected.

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The Company’s inability to obtain financing on favorable terms or pay amounts due on its financing may adversely affect the Company’s operating results.

Although the Company anticipates maintaining relatively low levels of debt, it may periodically use financing to acquire properties, perform renovations to its properties, or make shareholder distributions or share repurchases in periods of fluctuating income from its properties.  The credit markets have historically been volatile and subject to increased regulation in recent years, and as a result, the Company may not be able to obtain debt financing to meet its cash requirements, including refinancing any scheduled debt maturities, which may adversely affect its ability to execute its business strategy.  If the Company refinances debt, such refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced.  If the Company is unable to refinance its debt, it may be forced to dispose of hotels or issue equity at inopportune times or on disadvantageous terms, which could result in higher costs of capital.

The Company is also subject to risks associated with increases in interest rates with respect to the Company’s floating rate debt which could reduce cash from operations.  In addition, the Company has used interest rate swaps to manage its interest rate risks on a portion of its variable rate debt, and in the future it may use hedging arrangements, such as interest rate swaps to manage its exposure to interest rate volatility.  The Company’s actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge.  There is no assurance that the Company’s hedging strategy will achieve its objectives, and the Company may be subject to costs, such as transaction fees or breakage costs, if it terminates these arrangements.

Compliance with financial and other covenants in the Company’s existing or future debt agreements may reduce operational flexibility and create default risk.

The Company’s existing indebtedness, whether secured by mortgages on certain properties or unsecured, contains, and indebtedness that the Company may enter into in the future likely will contain, customary covenants that may restrict the Company’s operations and limit its ability to enter into future indebtedness.  In addition, the Company’s ability to borrow under its unsecured credit facilities is subject to compliance with its financial and other covenants, including, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, limits on dividend payments and share repurchases and restrictions on certain investments.  The Company’s failure to comply with the covenants in its existing or future indebtedness, as well as its inability to make required principal and interest payments, could cause a default under the applicable debt agreement, which could result in the acceleration of the debt and require the Company to repay such debt with capital obtained from other sources, which may not be available to the Company or may be available only on unfavorable terms.

If the Company defaults on its secured debt, lenders can take possession of the property or properties securing such debt.  As a general policy, the Company seeks to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of its assets.  If recourse on any loan incurred by the Company to acquire or refinance any particular property includes all of its assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan.  If a loan is secured by a mortgage on a single property, the Company could lose that property through foreclosure if it defaults on that loan.  If the Company defaults under a loan, it is possible that it could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs.  Additionally, defaulting under a loan may damage the Company’s reputation as a borrower and may limit its ability to secure financing in the future.

Technology is used in operations, and any material failure, inadequacy, interruption or security failure of that technology could harm the business.

The Company and its hotel managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data.  Some of the information technology is purchased from third party vendors, on whom the systems depend.  The Company and its hotel managers and franchisors rely on commercially available and internally developed systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts.  Although the Company and its hotel managers and franchisors have taken steps necessary to protect the security of their information systems and the data maintained in those systems, it is
 
13

possible that the safety and security measures taken will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks.  Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information.  Any failure to maintain proper function, security and availability of information systems could interrupt operations, damage reputation, subject the Company to liability claims or regulatory penalties and could have a material adverse effect on the business, financial condition and results of operations of the Company.

Potential losses not covered by insurance may adversely affect the Company’s financial condition.

The Company maintains comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of its hotels.  These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties.  There are no assurances that coverage will be available or at reasonable rates in the future.  Also, various types of catastrophic losses, like earthquakes, hurricanes, or certain types of terrorism, may not be insurable or may not be economically insurable.  Even when insurable, these policies may have high deductibles and/or high premiums.  Additionally, although the Company may be insured for a particular loss, the Company is not insured against the impact a catastrophic event may have on the industry as a whole.  There also can be risks such as certain environmental hazards that may be deemed to fall outside of the coverage.  In the event of a substantial loss, the Company’s insurance coverage may not be sufficient to cover the full current market value or replacement cost of its lost investment.  Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a hotel, as well as the anticipated future revenue from the hotel.  In that event, the Company might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel.  Inflation, changes in building codes and ordinances, environmental considerations and other factors might also prevent the Company from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed.  The Company also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that the Company believes to be covered under its policy.  Under those circumstances, the insurance proceeds the Company receives might be inadequate to restore its economic position in the damaged or destroyed hotel, which could have a material adverse effect on the Company’s financial condition and results of operations.

The Company faces possible risks associated with the physical effects of climate change.

The Company is subject to the risks associated with the physical effects of climate change, which could include more frequent or severe storms, droughts, hurricanes and flooding, any of which could have a material adverse effect on the Company’s properties, operations and business.  To the extent climate change causes changes in weather patterns, its markets could experience increases in storm intensity and rising sea-levels causing damage to the Company’s properties.  Over time, these conditions could result in declining hotel demand or the Company’s inability to operate the affected hotels at all.  Climate change also may have indirect effects on its business by increasing the cost of (or making unavailable) property insurance on terms the Company finds acceptable, as well as increasing the cost of renovations, energy, water and snow removal at its properties.  The Company cannot predict with certainty whether climate change is occurring and, if so, at what rate, and therefore, there can be no assurance that climate change will not have a material adverse effect on the Company.

The Company could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could have a material adverse effect on the Company.

The Company’s hotels are subject to various U.S. federal, state and local environmental laws that impose liability for contamination.  Under these laws, governmental entities have the authority to require the Company, as the current owner of a hotel, to perform or pay for the clean-up of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste, petroleum products or mold) at, on, under or emanating from the hotel and to pay for natural resource damages arising from such contamination.  Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several.  Because these laws also impose liability on persons who owned or operated a property at the time it became contaminated, it is possible the Company could incur cleanup costs or other environmental liabilities even after it sells or no longer operates hotels.  Contamination at, on, under or emanating from the Company’s hotels also may expose it to liability to private parties for costs of remediation, personal injury and/or property damage.  In addition, environmental laws may create liens on contaminated sites in favor of the
 
14

government for damages and costs it incurs to address such contamination.  If contamination is discovered on the Company’s properties, environmental laws also may impose restrictions on the manner in which the properties may be used or businesses may be operated, and these restrictions may require substantial expenditures.  Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all.  Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility.

In addition, the Company’s hotels are subject to various U.S. federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management.  Some of the Company’s hotels routinely handle and use hazardous or regulated substances and wastes as part of their operations, which substances and wastes are subject to regulation (e.g., swimming pool chemicals and cleaning supplies).  The Company’s hotels incur costs to comply with these environmental, health and safety laws and regulations and could be subject to fines and penalties for non-compliance with applicable requirements.

Liabilities and costs associated with environmental contamination at, on, under or emanating from the hotel’s properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws and regulations could be material and could materially and adversely affect the Company.  The Company can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of its hotels will not be affected by its operations, the condition of the properties in the vicinity of its hotels, or by third parties unrelated to the Company.  The discovery of material environmental liabilities at its properties could subject the Company to unanticipated significant costs, which could significantly reduce or eliminate its profitability.

The Company may incur significant costs complying with various regulatory requirements, which could materially and adversely affect the Company.

The Company and its hotels are subject to various U.S. federal, state and local regulatory requirements.  These requirements are wide ranging and include among others, state and local fire and life safety requirements, federal laws such as the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder and the Sarbanes-Oxley Act of 2002.  Liability and costs associated with complying with these requirements are and could be material.  If the Company fails to comply with these various requirements, it could incur governmental fines or private damage awards. In addition, existing requirements could change and future requirements might require the Company to make significant unanticipated expenditures, which could materially and adversely affect the Company.

The Company is currently party to litigation and may be subject to litigation or regulatory inquiries in the future, which may require the Company to incur significant costs.

The Company is currently subject to litigation.  See Part I, Item 3, Legal Proceedings, appearing elsewhere in this Annual Report on Form 10-K for additional information pertaining to this litigation.  Due to the uncertainties related to litigation, the Company is unable at this time to evaluate the likelihood of either a favorable or unfavorable outcome or to estimate the range of potential exposure.  If the outcome is unfavorable, the Company may be required to pay damages and/or change its business practices, any of which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.  Also, other litigation may be filed against the Company in the future.  The ability of the Company to access capital markets, including commercial debt markets, could be negatively impacted by unfavorable, or the possibility of unfavorable, outcomes to lawsuits or adverse regulatory actions.

The Company has been and could be subject to regulatory inquiries in the future, which have resulted in and which could result in costs and personnel time commitment to respond.  It may also be subject to additional investigations and action by governing regulatory agencies, as a result of its activities, which could result in costs to respond and fines or changes in the Company’s business practices, any of which could have a material adverse effect on the financial condition, results of operations, liquidity and capital resources, and cash flows of the Company.

15

Risks Related to the Company’s Organization and Structure

The Company’s ownership limitations may restrict or prevent certain acquisitions and transfers of its shares.

In order for the Company to maintain its qualification as a REIT under the Code, not more than 50% in value of its outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following the Company’s first year (the “5/50 Test”).  Additionally, at least 100 persons must beneficially own the Company’s shares during at least 335 days of each taxable year (the “100 Shareholder Test”). The Company’s amended and restated articles of incorporation, with certain exceptions, authorizes the Company’s Board of Directors to take the actions that are necessary and desirable to preserve its qualification as a REIT.  In addition to the 5/50 Test and the 100 Shareholder Test, the Company’s amended and restated articles of incorporation provide that no person or entity may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series (“share ownership limits”).  The Company’s Board of Directors may, in its sole discretion, grant an exemption to the share ownership limits, subject to certain conditions and the receipt by the Board of Directors of certain representations and undertakings.  In addition, the Board of Directors may change the share ownership limits.  The share ownership limits contained in the amended and restated articles of incorporation key off the ownership at any time by any “person,” which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code.  The share ownership limits also might delay or prevent a transaction or a change in the Company’s control that might involve a premium price for the Company’s common shares or otherwise be in the best interests of its shareholders.

The Company’s amended and restated articles of incorporation allow the Board of Directors to issue up to 30 million “blank check” preferred shares.
 
The Company’s amended and restated articles of incorporation allow the Board of Directors to issue up to 30 million “blank check” preferred shares, without action by shareholders.  Preferred shares may be issued on terms determined by the Board of Directors, and may have rights, privileges and preferences superior to those of common shares.  Without limiting the foregoing, (i) such preferred shares could have liquidation rights that are senior to the liquidation preference applicable to common shares, (ii) such preferred shares could have voting or conversion rights, which could adversely affect the voting power of the holders of common shares and (iii) the ownership interest of holders of common shares will be diluted following the issuance of any such preferred shares.  In addition, the issuance of blank check preferred shares could have the effect of discouraging, delaying or preventing a change of control of the Company.

Provisions of the Company’s amended and restated articles of incorporation and second amended and restated bylaws could inhibit changes in control.

Provisions in the Company’s amended and restated articles of incorporation and second amended and restated bylaws may make it difficult for another company to acquire it and for shareholders to receive any related takeover premium for its common shares.  These provisions include, among other things, a staggered Board of Directors in which the Board of Directors is divided into three classes, with one class elected each year to serve a three-year term, and the absence of cumulative voting in the election of directors.  The Company intends to submit a proposal to the Company’s shareholders at the 2018 annual meeting of shareholders to further amend the Company’s amended and restated articles of incorporation to, among other things, destagger the Board of Directors and provide that all directors serve a one-year term.  In addition, pursuant to the Company’s second amended and restated bylaws, directors are elected by the plurality of votes cast and entitled to vote in the election of directors.  However, the Company’s corporate governance guidelines require that if an incumbent director fails to receive at least a majority of the votes cast, such director will tender his or her resignation from the Board of Directors.  The Nominating and Governance Committee of the Board of Directors will consider, and determine whether to accept, such resignation.  Additionally, the second amended and restated bylaws of the Company have various advance notice provisions that require shareholders to meet certain requirements and deadlines for proposals at an annual meeting of shareholders.  These advance notice provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium to the price of the Company’s common shares or otherwise be in the shareholders’ best interests.

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The Company’s Executive Chairman has interests that may conflict with the interests of the Company.

Glade M. Knight, the Company’s Executive Chairman, is and will be a principal in other real estate investment transactions or programs that may compete with the Company, and he is and may be a principal in other business ventures.  Mr. Knight’s management and economic interests in these other transactions or programs may conflict with the interests of the Company.

The Company’s executive officers provide services to other companies that may detract from the time devoted to the Company.

The Company’s executive officers and other employees of the Company may devote time to other companies which have been or may be organized by Mr. Knight in the future.  Neither Mr. Knight nor any of the other executive officers is required to devote a fixed amount of time and attention to the Company’s business affairs as opposed to the other companies, which could detract from time devoted to the Company.

The Company may change its operational policies, investment guidelines and its investment and growth strategies without shareholder consent, which may subject it to different and more significant risks in the future, which could materially and adversely affect the Company.

The Board of Directors determines the Company’s operational policies, investment guidelines and its investment and growth strategies, subject to the restrictions on certain transactions as set forth in the second amended and restated bylaws.  The Board of Directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, shareholders.  This could result in the Company conducting operational matters, making investments or pursuing investment or growth strategies different than those contemplated in this Annual Report on Form 10-K.  Under any of these circumstances, the Company may expose itself to different and more significant risks in the future, which could materially and adversely affect the Company.

Risks Related to the Ownership of the Company’s Common Shares

The market price of the Company’s common shares may fluctuate widely and there can be no assurance that the market for its common shares will provide shareholders with adequate liquidity.

The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.”  The market price of the Company’s common shares may fluctuate widely, depending on many factors, some of which may be beyond the Company’s control, including:

·
actual versus anticipated differences in the Company’s operating results, liquidity, or financial condition;
·
changes in actual and/or estimated financial performance;
·
publication of research reports about the Company, its hotels or the lodging or overall real estate industry;
·
failure to meet analysts’ revenue or earnings estimates;
·
the extent of institutional investors’ interest in the Company and their decision to buy or sell the Company’s common shares;
·
issuances of common shares or other securities by the Company;
·
the passage of legislation or other regulatory developments that may adversely affect the Company or its industry;
·
the reputation of REITs and real estate investments generally and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income instruments;
·
changes in market interest rates compared to the Company’s distribution yield on its common shares;
·
additions and departures of key personnel;
·
announcements by franchisors, operators or other owners in the hospitality industry;
·
the performance and market valuations of similar companies;
·
strategic actions by the Company or its competitors, such as acquisitions or dispositions;
·
fluctuations in the stock price and operating results of the Company’s competitors;
·
speculation in the press or investment community;
·
changes in accounting principles;
 
17

·
changes in capital costs;
·
terrorist acts;
·
general market and economic conditions, including factors unrelated to the Company’s operating performance; and
·
the realization of any of the other risk factors presented in this Annual Report on Form 10-K.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company.  These broad market fluctuations may adversely affect the trading price of the Company’s common shares.

The Company may change its distribution policy or may not have funds available to make distributions to shareholders.

The Board of Directors will continue to evaluate the Company’s distribution policy, the impact of the economy on its operations, actual and projected financial condition and results of operations, capital expenditure requirements and other factors, including those discussed in this Annual Report on Form 10-K.  While the Company intends to make monthly distributions to shareholders, there can be no assurance that the Company will be able to make distributions at any particular time or rate, or at all.  Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future.  The Company evaluates the distribution rate on an ongoing basis and may make changes at any time if the Company believes the rate is not appropriate based on REIT taxable income, limitations under financing arrangements, or other cash needs.  A reduction in the Company’s distribution rate could have a material adverse effect on the market price of the Company’s common shares.

While the Company generally seeks to make distributions from its operating cash flows, distributions may be made (although there is no obligation to do so) in certain circumstances, in part, from financing proceeds or other sources.  While distributions from such sources would result in the shareholder receiving cash, the consequences to the shareholders would differ from a distribution from the Company’s operating cash flows.  For example, if debt financing is the source of a distribution, that financing would not be available for other opportunities and would have to be repaid.

Future offerings or the perception that future offerings could occur may adversely affect the market price of the Company’s common shares and future offerings may be dilutive to existing shareholders.

The Company has in the past and may in the future issue additional common shares to raise capital necessary to finance hotel acquisitions, fund capital expenditures, pay down outstanding borrowings on its revolving credit facility, refinance debt or for other corporate purposes.  A large volume of sales of the Company’s common shares could decrease the market price of the Company’s common shares and could impair the Company’s ability to raise additional capital through the sale of equity securities in the future.  Even if a substantial number of sales of common shares are not affected, the mere perception of the possibility of these sales could depress the market price of the Company’s common shares and have a negative effect on the Company’s ability to raise capital in the future.  In addition, anticipated downward pressure on the price of the Company’s common shares due to actual or anticipated sales of common shares could cause some institutions or individuals to engage in short sales of the common shares, which may itself cause the price of the common shares to decline.  Because the Company’s decision to issue equity securities in any future offering will depend on market conditions and other factors beyond its control, the Company cannot predict or estimate the amount, timing or nature of its future offerings. Therefore, the Company’s shareholders bear the risk of its future offerings reducing the market price of its common shares and diluting their equity interests in the Company.

Tax-Related Risks and Risks Related to the Company’s Status as a REIT

Qualifying as a REIT involves highly technical and complex provisions of the Code and failure of the Company to qualify as a REIT would have adverse consequences to the Company and its shareholders.

The Company’s qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification.  Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the
 
18

Company to qualify as a REIT.  Maintaining the Company’s qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis.  The Company’s ability to satisfy the REIT income and asset tests depends upon the Company’s analysis of the characterization and fair market values of the Company’s assets, some of which are not susceptible to a precise determination and for which the Company will not obtain independent appraisals, and upon the Company’s ability to successfully manage the composition of its income and assets on an ongoing basis.  In addition, the Company’s ability to satisfy the requirements to maintain its qualification as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence.

If the Company does not qualify as a REIT or if the Company fails to remain qualified as a REIT, the Company will be subject to U.S. federal income tax and potentially state and local taxes, which would reduce the Company’s earnings and the amount of cash available for distribution to its shareholders.

If the Company failed to qualify as a REIT in any taxable year and any available relief provisions did not apply, the Company would be subject to U.S. federal and state corporate income tax, including any applicable alternative minimum tax for taxable years beginning before December 31, 2017, on its taxable income at regular corporate rates, and dividends paid to its shareholders would not be deductible by it in computing its taxable income.  Unless the Company was entitled to statutory relief under certain Code provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year in which it failed to qualify as a REIT.

Any determination that the Company does not qualify as a REIT would have a material adverse effect on the Company’s results of operations and could materially reduce the market price of its common shares.  The Company’s additional tax liability could be substantial and would reduce its net earnings available for investment, debt service or distributions to shareholders.  Furthermore, the Company would no longer be required to make any distributions to shareholders as a condition to REIT qualification and all of its distributions to shareholders would be taxable as ordinary C corporation dividends to the extent of its current and accumulated earnings and profits.  The Company’s failure to qualify as a REIT also could cause an event of default under loan documents governing its debt.

Even if the Company qualifies as a REIT, it may face other tax liabilities that reduce its cash flow.

Even if the Company qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes, including payroll taxes, taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, a 100% excise tax on any transactions with a TRS that are not conducted on an arm’s-length basis, and state or local income, franchise, property and transfer taxes.  Moreover, if the Company has net income from the sale of properties that are “dealer” properties (a “prohibited transaction” under the Code), that income will be subject to a 100% tax.  The Company could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain its qualification as a REIT.  In addition, the Company’s TRSs will be subject to U.S. federal, state and local corporate income taxes on their net taxable income, if any.  Any of these taxes would decrease cash available for the payment of the Company’s debt obligations and distributions to shareholders.

The Company may incur adverse tax consequences if Apple REIT Seven, Inc. (“Apple Seven”), Apple REIT Eight, Inc. (“Apple Eight”) or Apple Ten (collectively, the “merged companies”) failed to qualify as a REIT for U.S. federal income tax purposes, or if the Apple Seven and Apple Eight mergers, and the Apple Ten merger, (collectively, the “mergers”) failed to qualify as a tax free reorganization under the Code.

On March 1, 2014, Apple Seven and Apple Eight merged into acquisition subsidiaries of the Company and ceased their separate corporate existences, and, on September 1, 2016, Apple Ten merged into an acquisition subsidiary of the Company and ceased its separate corporate existence.  If any of the merged companies failed to qualify as a REIT for any of their taxable years ending on or before the date of their respective mergers, each of the merged companies, as the case may be, would be liable for (and the Company would be obligated to pay) U.S. federal income tax on its taxable income for such years at regular corporate rates and, assuming the mergers qualified as reorganizations within the meaning of Section 368(a) of the Code,

·
the Company would be subject to tax on the built-in gain on each asset of the merged companies, as the case may be, existing at the time of each respective merger if the Company was to dispose of
 
19

 
the merged companies assets for up to 5 years following each respective merger. Such tax would be imposed at the highest regular corporate rate in effect at the date of the sale,
·
the Company would succeed to any earnings and profits accumulated by the merged companies for taxable periods that it did not qualify as a REIT, and the Company would have to pay a special dividend and/or employ applicable deficiency dividend procedures (including interest payments to the Internal Revenue Service (the “IRS”)) to eliminate such earnings and profits (if the Company does not timely distribute those earnings and profits, the Company could fail to qualify as a REIT), and
·
if any merged company incurred any unpaid tax liabilities prior to the merger, those tax liabilities would be transferred to the Company as a result of the merger.

If there is an adjustment to any of the merged companies’ taxable income or dividends paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain that merged company’s REIT status.  That deficiency dividend procedure could require the Company to make significant distributions to its shareholders and to pay significant interest to the IRS.

Moreover, and irrespective of whether each of the merged companies qualified as a REIT, if any were to incur tax liabilities as a result of the failure of the mergers to qualify as a reorganization within the meaning of Section 368(a) of the Code, those tax liabilities would be transferred to the Company as a result of the mergers.  Any of the merged companies’ failure (before or at the date of the respective mergers) to qualify as a REIT and/or a failure of the mergers to qualify as reorganizations within the meaning of Section 368(a) of the Code could impair the Company’s ability after the mergers to expand its business and raise capital, and could materially adversely affect the value of the Company’s common shares.

  REIT distribution requirements could adversely affect the Company’s ability to execute its business plan or cause it to increase debt levels or issue additional equity during unfavorable market conditions.

The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that it distributes.  To the extent that the Company satisfies this distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to U.S. federal corporate income tax on its undistributed taxable income.  In addition, the Company will be subject to a 4% nondeductible excise tax if the actual amount that the Company pays out to its shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.  If there is an adjustment to any of the Company’s taxable income or dividends paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain the Company’s REIT status.  That deficiency dividend procedure could require the Company to make significant distributions to its shareholders and to pay significant interest to the IRS.

From time to time, the Company may generate taxable income greater than its income for financial reporting purposes prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur.  As a result, the Company may find it difficult or impossible to meet distribution requirements in certain circumstances.  In particular, where the Company experiences differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of its taxable income could cause it to: (1) sell assets in adverse market conditions; (2) incur debt or issue additional equity on unfavorable terms; (3) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt; or (4) make a taxable distribution of its common shares as part of a distribution in which shareholders may elect to receive the Company’s common shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements.  These alternatives could increase the Company’s costs or dilute its equity.  In addition, because the REIT distribution requirement prevents the Company from retaining earnings, the Company generally will be required to refinance debt at its maturity with additional debt or equity.  Thus, compliance with the REIT requirements may hinder the Company’s ability to grow, which could adversely affect the market price of its common shares.

In the event that distributions made by Apple Seven, Apple Eight, Apple Ten or the Company (the “Apple Companies”) are deemed “preferential dividends,” the Company could be subject to U.S. federal income tax liabilities and could be required to pay a “deficiency dividend” to its shareholders.

20

For taxable years ending on or before December 31, 2014, in order for distributions to be counted toward satisfying the annual distribution requirement for REITs, and to provide the Company with a REIT-level tax deduction, the distributions must not be “preferential dividends.”  A dividend is not a preferential dividend if the distribution is (1) pro rata among all outstanding shares within a particular class, and (2) in accordance with the preferences among different classes of shares as set forth in the Company’s organizational documents.  For each taxable year commencing with the taxable year that began on January 1, 2015, so long as the Company continues to be a “publicly offered REIT” (i.e., a REIT which is required to file annual and periodic reports with the SEC under the Exchange Act), the preferential dividend rule will not apply to the Company.

Each of Apple Seven, Apple Eight, and the Company (the “Apple REITs”) issued units (which, at the time, consisted of one common share together with one Series A preferred share of the applicable Apple REIT) under their dividend reinvestment plans (“DRIPs”) until June 2013.  Participation in the DRIPs was at the discretion of each shareholder.  Pursuant to the DRIPs, each of the Apple REITs sold its units at a price per unit that was based on the most recent price at which an unrelated person had purchased units from that Apple REIT.  This method of issuing units could present the issue of whether the distributions were “preferential distributions” and thus would not have counted toward satisfying the annual distribution requirement which could have resulted in the loss of its REIT status.  The Company believes each Apple REIT’s DRIP has not violated the prohibition on the payment of preferential dividends; however, there can be no assurance or guarantee that the IRS will concur.

If any Apple Company violated the prohibition on the payment of preferential dividends and that violation caused it to fail to meet the annual distribution requirement with respect to any year, such failure would preclude that Apple Company from qualifying as a REIT for U.S. federal income tax purposes and disqualify that Apple Company from taxation as a REIT for the four taxable years following the year during which its qualification was lost.  That result could subject the Company to federal income tax liabilities.  The requirement to pay any federal income tax liabilities could have an adverse effect on the Company’s ability to make the required distributions to meet the 90% distribution requirement.  If it were determined that certain distributions by the Apple Companies to shareholders failed to qualify for the dividends paid deduction for one or more taxable years with the result that any of the Apple Companies would not have satisfied its distribution requirement with respect to any such taxable year, the Company would expect to pay a “deficiency dividend” to its shareholders in the amount necessary to permit each Apple Company to satisfy the distribution requirements of Section 857 of the Code for each such taxable year.  The amount of the deficiency dividend (plus the interest payable to the IRS) that would need to be paid for all of the Apple Companies in that circumstance could be significant.

The Company may in the future choose to pay dividends in the form of common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends they receive.

The Company may seek in the future to distribute taxable dividends that are payable in cash and common shares, at the election of each shareholder.  Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of the Company’s current and accumulated earnings and profits for U.S. federal income tax purposes.  As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.  If a U.S. shareholder sells the common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of common shares at the time of the sale.  In addition, in such case, a U.S. shareholder could have a capital loss with respect to the common shares sold that could not be used to offset such dividend income.  Furthermore, with respect to certain non-U.S. shareholders, the Company may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common shares.  In addition, such a taxable share dividend could be viewed as equivalent to a reduction in the Company’s cash distributions, and that factor, as well as the possibility that a significant number of the Company’s shareholders could determine to sell the common shares in order to pay taxes owed on dividends, may put downward pressure on the market price of the Company’s common shares.

If the Company’s leases are not respected as true leases for U.S. federal income tax purposes, the Company would likely fail to qualify as a REIT.

To qualify as a REIT, the Company must satisfy two gross income tests, pursuant to which specified percentages of the Company’s gross income must be passive income, such as rent.  For the rent paid pursuant to the hotel leases with the Company’s TRSs, which the Company currently expects will continue to constitute substantially
21

all of the REIT’s gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement.  The Company believes that the leases have been and will continue to be respected as true leases for federal income tax purposes.  There can be no assurance, however, that the IRS will agree with this characterization.  If the leases were not respected as true leases for federal income tax purposes, the Company may not be able to satisfy either of the two gross income tests applicable to REITs and may lose its REIT status.  Additionally, the Company could be subject to a 100% excise tax for any adjustment to its leases.

If any of the hotel management companies that the Company’s TRSs engage do not qualify as “eligible independent contractors,” or if the Company’s hotels are not “qualified lodging facilities,” the Company would likely fail to qualify as a REIT.

Rent paid by a lessee that is a “related party tenant” of the Company generally will not be qualifying income for purposes of the two gross income tests applicable to REITs.  An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied.  The Company intends to continue to take advantage of this exception.  The Company leases and expects to continue to lease all or substantially all of its hotels to TRS lessees and to engage hotel management companies that are intended to qualify as “eligible independent contractors.”  Among other requirements, in order to qualify as an eligible independent contractor, the hotel management company must not own, directly or through its shareholders, more than 35% of the Company’s outstanding shares, and no person or group of persons can own more than 35% of the Company’s outstanding shares and the shares (or ownership interest) of the hotel management company (taking into account certain ownership attribution rules).  The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of the Company’s shares by the hotel management companies and their owners may not be practical.  Accordingly, there can be no assurance that these ownership levels will not be exceeded.

In addition, for a hotel management company to qualify as an eligible independent contractor, such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined below) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS.  As of the date hereof, the Company believes the hotel management companies operate qualified lodging facilities for certain persons who are not related to the Company or its TRSs.  However, no assurances can be provided that this will continue to be the case or that any other hotel management companies that the Company may engage in the future will in fact comply with this requirement in the future.  Finally, each hotel with respect to which the Company’s TRS lessees pay rent must be a “qualified lodging facility.”  A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility.  Although the Company intends to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code provide only limited guidance for making determinations under the requirements for qualified lodging facilities, and there can be no assurance that these requirements will be satisfied in all cases.

The Company’s ownership of TRSs is limited, and the Company’s transactions with its TRSs will cause it to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.

A REIT may own up to 100% of the stock of one or more TRSs.  A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT.  Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.  A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS.  Overall, no more than 25% (20% for tax years beginning after December 31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.  In addition, the rules applicable to TRSs limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation.  The rules also impose a 100% excise tax on certain transactions, including the leases, between the TRS and the REIT that are not conducted on an arm’s-length basis.

22

The Company’s TRSs will pay U.S. federal, state and local income taxes on their net taxable income, and their after-tax net income will be available for distribution to the REIT but is not required to be distributed.  The Company believes that the aggregate value of the stock and securities of its TRSs has been and will continue to be less than 25% (20% for tax years beginning after December 31, 2017) of the value of its total assets (including the stock and securities of its TRSs).  Furthermore, the Company has monitored and will continue to monitor the value of its respective investments in its TRSs for the purpose of ensuring compliance with the ownership limitations applicable to TRSs.  In addition, the Company will continue to scrutinize all of its transactions with its TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax.  There can be no assurance, however, that the Company will be able to comply with the rules regarding TRSs or to avoid application of the 100% excise tax.  The most significant transactions between the Company and its TRSs are the hotel leases from the Company to its TRSs.  While the Company believes its leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree.

Complying with REIT requirements may force the Company to forgo and/or liquidate otherwise attractive investment opportunities.

To qualify as a REIT, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amount it distributes to its shareholders and the ownership of its common shares.  In order to meet these tests, the Company may be required to liquidate from its portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain its qualification as a REIT.  These actions could have the effect of reducing the Company’s income and amounts available for distribution to its shareholders.  In addition, the Company may be required to make distributions to shareholders at disadvantageous times or when the Company does not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT.  Thus, compliance with the REIT requirements may hinder the Company’s ability to make, and, in certain cases, maintain ownership of, certain attractive investments.

The Company’s inability to deduct for tax purposes compensation paid to its executives could require it to increase its distributions to shareholders in order to maintain its REIT status or to avoid entity-level taxes.

Section 162(m) of the Code prohibits publicly held corporations from taking a tax deduction for annual compensation in excess of $1 million paid to any of the corporation’s “covered employees.”  Prior to the enactment of the Tax Cuts and Jobs Act (the “Act”), a publicly held corporation’s covered employees included its chief executive officer and three other most highly compensated executive officers (other than the chief financial officer), and certain “performance-based compensation” was excluded from the $1 million cap.  The Act made certain changes to Section 162(m), effective for taxable years beginning after December 31, 2017.  These changes include, among others, expanding the definition of “covered employees” to include the chief financial officer and repealing the performance-based compensation exception to the $1 million cap, subject to a transition rule for remuneration provided pursuant to a written binding contract which was in effect on November 2, 2017, and which was not modified in any material respect on or after that date.

Since the Company qualifies as a REIT under the Code and is generally not subject to U.S. federal income taxes other than through its TRSs, if compensation did not qualify for deduction under Section 162(m), the payment of compensation that fails to satisfy the requirements of Section 162(m) would not have a material adverse consequence to the Company, provided the Company continues to distribute 100% of its taxable income.  Based on the Company’s current taxable income and distributions, the Company does not believe that it will be required to increase its rate of distributions in order to maintain its status as a REIT (or to avoid paying corporate or excise taxes at the entity level) if the Company’s payment of compensation fails to satisfy the requirements of Section 162(m).  However, in that case, a larger portion of shareholder distributions that would otherwise have been treated as a return of capital will be subject to U.S. federal income tax as dividend income.  In the future, if the Company makes compensation payments subject to Section 162(m) limitations on deductibility, the Company may be required to make additional distributions to shareholders to comply with REIT distribution requirements and eliminate U.S. federal income tax liability at the entity level. Any such compensation allocated to the TRSs whose income is subject to U.S. federal income tax would result in an increase in income taxes due to the inability to deduct such compensation.

23

There is a risk of changes in the tax law applicable to REITs.

The IRS, the United States Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance.  The Company cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted.  Any legislative action may prospectively or retroactively modify the Company’s tax treatment and, therefore, may adversely affect taxation of the Company or the Company’s shareholders.  In particular, the Act, which was signed into law on December 22, 2017 and which generally takes effect for taxable years beginning on or after January 1, 2018, makes many significant changes to the U.S. federal income tax laws that will impact the taxation of individuals and corporations (both regular C corporations as well as, to a lesser extent, corporations that have elected to be taxed as REITs).  These changes will impact the Company and the Company’s shareholders in various ways, although, based on the Company’s initial assessment, the impact of these changes are not expected to be material.  To date, the IRS has issued only limited guidance with respect to certain of the new provisions, and there are numerous interpretive issues that will require guidance.  It is highly likely that technical correction legislation will be needed to clarify certain aspects of the new law and give proper effect to Congressional intent.  There can be no assurance, however, that technical clarifications or changes needed to prevent unintended or unforeseen tax consequences will be enacted by Congress in the near future.
 
Item 1B.
Unresolved Staff Comments

None.
 
 
 
 

24


Item 2.
Properties
 
As of December 31, 2017, the Company owned 239 hotels with an aggregate of 30,322 rooms located in 34 states.  All of the Company’s hotels operate under Marriott or Hilton brands.  The hotels are operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company.  The following tables summarize the number of hotels and rooms by brand and state:

Number of Hotels and Guest Rooms by Brand
 
   
Number of
   
Number of
 
Brand
 
Hotels
   
Rooms
 
Hilton Garden Inn
   
42
     
5,807
 
Courtyard
   
40
     
5,460
 
Hampton
   
36
     
4,422
 
Residence Inn
   
34
     
4,011
 
Homewood Suites
   
34
     
3,831
 
SpringHill Suites
   
17
     
2,248
 
TownePlace Suites
   
12
     
1,196
 
Fairfield Inn
   
11
     
1,300
 
Home2 Suites
   
8
     
910
 
Marriott
   
2
     
616
 
Embassy Suites
   
2
     
316
 
Renaissance
   
1
     
205
 
    Total
   
239
     
30,322
 

Number of Hotels and Guest Rooms by State
 
   
Number of
   
Number of
 
State
 
Hotels
   
Rooms
 
Alabama
   
15
     
1,434
 
Alaska
   
2
     
304
 
Arizona
   
11
     
1,434
 
Arkansas
   
4
     
408
 
California
   
27
     
3,807
 
Colorado
   
4
     
567
 
Florida
   
23
     
2,851
 
Georgia
   
6
     
596
 
Idaho
   
2
     
416
 
Illinois
   
8
     
1,420
 
Indiana
   
4
     
479
 
Iowa
   
3
     
301
 
Kansas
   
4
     
422
 
Louisiana
   
4
     
541
 
Maine
   
1
     
179
 
Maryland
   
2
     
233
 
Massachusetts
   
4
     
466
 
Michigan
   
1
     
148
 
Minnesota
   
2
     
244
 
Mississippi
   
2
     
168
 
Missouri
   
4
     
544
 
Nebraska
   
4
     
621
 
New Jersey
   
5
     
629
 
New York
   
4
     
550
 
North Carolina
   
12
     
1,337
 
Ohio
   
2
     
252
 
Oklahoma
   
4
     
545
 
Pennsylvania
   
3
     
391
 
South Carolina
   
5
     
538
 
Tennessee
   
12
     
1,356
 
Texas
   
34
     
4,072
 
Utah
   
3
     
393
 
Virginia
   
14
     
2,067
 
Washington
   
4
     
609
 
    Total
   
239
     
30,322
 

25

The following table is a list of the 239 hotels the Company owned as of December 31, 2017.  As noted below, 14 of the Company’s hotels are subject to ground leases and 29 of its hotels are encumbered by mortgage notes.
 
City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
   
Anchorage
 
AK
 
Embassy Suites
 
Stonebridge
 
4/30/2010
   
169
 
(2)
Anchorage
 
AK
 
Home2 Suites
 
Stonebridge
 
12/1/2017
   
135
   
Auburn
 
AL
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
101
   
Birmingham
 
AL
 
Courtyard
 
LBA
 
3/1/2014
   
84
   
Birmingham
 
AL
 
Hilton Garden Inn
 
LBA
 
9/12/2017
   
104
   
Birmingham
 
AL
 
Home2 Suites
 
LBA
 
9/12/2017
   
106
   
Birmingham
 
AL
 
Homewood Suites
 
McKibbon
 
3/1/2014
   
95
   
Dothan
 
AL
 
Hilton Garden Inn
 
LBA
 
6/1/2009
   
104
   
Dothan
 
AL
 
Residence Inn
 
LBA
 
3/1/2014
   
84
   
Huntsville
 
AL
 
Hampton
 
LBA
 
9/1/2016
   
98
   
Huntsville
 
AL
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
101
   
Huntsville
 
AL
 
Home2 Suites
 
LBA
 
9/1/2016
   
77
   
Huntsville
 
AL
 
Homewood Suites
 
LBA
 
3/1/2014
   
107
 
(2)
Mobile
 
AL
 
Hampton
 
McKibbon
 
9/1/2016
   
101
 
(1)
Montgomery
 
AL
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
97
   
Montgomery
 
AL
 
Homewood Suites
 
LBA
 
3/1/2014
   
91
   
Prattville
 
AL
 
Courtyard
 
LBA
 
3/1/2014
   
84
 
(2)
Rogers
 
AR
 
Hampton
 
Raymond
 
8/31/2010
   
122
   
Rogers
 
AR
 
Homewood Suites
 
Raymond
 
4/30/2010
   
126
   
Rogers
 
AR
 
Residence Inn
 
Raymond
 
3/1/2014
   
88
   
Springdale
 
AR
 
Residence Inn
 
Aimbridge
 
3/1/2014
   
72
   
Chandler
 
AZ
 
Courtyard
 
North Central
 
11/2/2010
   
150
   
Chandler
 
AZ
 
Fairfield Inn & Suites
 
North Central
 
11/2/2010
   
110
   
Phoenix
 
AZ
 
Courtyard
 
North Central
 
11/2/2010
   
164
   
Phoenix
 
AZ
 
Courtyard
 
North Central
 
9/1/2016
   
127
   
Phoenix
 
AZ
 
Hampton
 
North Central
 
9/1/2016
   
125
 
(1)
Phoenix
 
AZ
 
Homewood Suites
 
North Central
 
9/1/2016
   
134
 
(1)
Phoenix
 
AZ
 
Residence Inn
 
North Central
 
11/2/2010
   
129
   
Scottsdale
 
AZ
 
Hilton Garden Inn
 
North Central
 
9/1/2016
   
122
   
Tucson
 
AZ
 
Hilton Garden Inn
 
Western
 
7/31/2008
   
125
   
Tucson
 
AZ
 
Residence Inn
 
Western
 
3/1/2014
   
124
   
Tucson
 
AZ
 
TownePlace Suites
 
Western
 
10/6/2011
   
124
   
Agoura Hills
 
CA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
125
   
Burbank
 
CA
 
Courtyard
 
Huntington
 
8/11/2015
   
190
 
(2)
Burbank
 
CA
 
Residence Inn
 
Marriott
 
3/1/2014
   
166
   
Burbank
 
CA
 
SpringHill Suites
 
Marriott
 
7/13/2015
   
170
   
Clovis
 
CA
 
Hampton
 
Dimension
 
7/31/2009
   
86
   
Clovis
 
CA
 
Homewood Suites
 
Dimension
 
2/2/2010
   
83
   
Cypress
 
CA
 
Courtyard
 
Dimension
 
3/1/2014
   
180
   
Cypress
 
CA
 
Hampton
 
Dimension
 
6/29/2015
   
110
   
Oceanside
 
CA
 
Courtyard
 
Marriott
 
9/1/2016
   
142
 
(2)
Oceanside
 
CA
 
Residence Inn
 
Marriott
 
3/1/2014
   
125
   
Rancho Bernardo/San Diego
 
CA
 
Courtyard
 
InnVentures
 
3/1/2014
   
210
 
(2)
Sacramento
 
CA
 
Hilton Garden Inn
 
Dimension
 
3/1/2014
   
153
   
San Bernardino
 
CA
 
Residence Inn
 
InnVentures
 
2/16/2011
   
95
   
San Diego
 
CA
 
Courtyard
 
Huntington
 
9/1/2015
   
245
 
(2)
San Diego
 
CA
 
Hampton
 
Dimension
 
3/1/2014
   
177
 
(2)
San Diego
 
CA
 
Hilton Garden Inn
 
InnVentures
 
3/1/2014
   
200
   
San Diego
 
CA
 
Residence Inn
 
Dimension
 
3/1/2014
   
121
 
(2)
San Jose
 
CA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
140
 
(2)
San Juan Capistrano
 
CA
 
Residence Inn
 
Marriott
 
9/1/2016
   
130
 
(1)(2)
Santa Ana
 
CA
 
Courtyard
 
Dimension
 
5/23/2011
   
155
   
Santa Clarita
 
CA
 
Courtyard
 
Dimension
 
9/24/2008
   
140
   
Santa Clarita
 
CA
 
Fairfield Inn
 
Dimension
 
10/29/2008
   
66
   
 
26

City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
   
Santa Clarita
 
CA
 
Hampton
 
Dimension
 
10/29/2008
   
128
   
Santa Clarita
 
CA
 
Residence Inn
 
Dimension
 
10/29/2008
   
90
   
Tulare
 
CA
 
Hampton
 
InnVentures
 
3/1/2014
   
86
   
Tustin
 
CA
 
Fairfield Inn & Suites
 
Marriott
 
9/1/2016
   
145
   
Tustin
 
CA
 
Residence Inn
 
Marriott
 
9/1/2016
   
149
   
Colorado Springs
 
CO
 
Hampton
 
Chartwell
 
9/1/2016
   
101
 
(2)
Denver
 
CO
 
Hilton Garden Inn
 
Stonebridge
 
9/1/2016
   
221
 
(2)
Highlands Ranch
 
CO
 
Hilton Garden Inn
 
Dimension
 
3/1/2014
   
128
   
Highlands Ranch
 
CO
 
Residence Inn
 
Dimension
 
3/1/2014
   
117
   
Boca Raton
 
FL
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
149
   
Cape Canaveral
 
FL
 
Homewood Suites
 
LBA
 
9/1/2016
   
153
   
Fort Lauderdale
 
FL
 
Hampton
 
Vista Host
 
12/31/2008
   
109
   
Fort Lauderdale
 
FL
 
Hampton
 
LBA
 
6/23/2015
   
156
   
Fort Lauderdale
 
FL
 
Residence Inn
 
LBA
 
9/1/2016
   
156
   
Gainesville
 
FL
 
Hilton Garden Inn
 
McKibbon
 
9/1/2016
   
104
   
Gainesville
 
FL
 
Homewood Suites
 
McKibbon
 
9/1/2016
   
103
   
Jacksonville
 
FL
 
Homewood Suites
 
McKibbon
 
3/1/2014
   
119
   
Lakeland
 
FL
 
Courtyard
 
LBA
 
3/1/2014
   
78
   
Miami
 
FL
 
Courtyard
 
Dimension
 
3/1/2014
   
118
 
(1)
Miami
 
FL
 
Hampton
 
White Lodging
 
4/9/2010
   
121
   
Miami
 
FL
 
Homewood Suites
 
Dimension
 
3/1/2014
   
162
 
(2)
Orlando
 
FL
 
Fairfield Inn & Suites
 
Marriott
 
7/1/2009
   
200
   
Orlando
 
FL
 
SpringHill Suites
 
Marriott
 
7/1/2009
   
200
   
Panama City
 
FL
 
Hampton
 
LBA
 
3/12/2009
   
95
   
Panama City
 
FL
 
TownePlace Suites
 
LBA
 
1/19/2010
   
103
   
Pensacola
 
FL
 
TownePlace Suites
 
McKibbon
 
9/1/2016
   
97
   
Sanford
 
FL
 
SpringHill Suites
 
LBA
 
3/1/2014
   
105
   
Sarasota
 
FL
 
Homewood Suites
 
Hilton
 
3/1/2014
   
100
   
Tallahassee
 
FL
 
Fairfield Inn & Suites
 
LBA
 
9/1/2016
   
97
   
Tallahassee
 
FL
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
85
 
(1)
Tampa
 
FL
 
Embassy Suites
 
White Lodging
 
11/2/2010
   
147
   
Tampa
 
FL
 
TownePlace Suites
 
McKibbon
 
3/1/2014
   
94
   
Albany
 
GA
 
Fairfield Inn & Suites
 
LBA
 
1/14/2010
   
87
   
Atlanta
 
GA
 
Home2 Suites
 
McKibbon
 
7/1/2016
   
128
   
Columbus
 
GA
 
SpringHill Suites
 
LBA
 
3/1/2014
   
89
   
Columbus
 
GA
 
TownePlace Suites
 
LBA
 
3/1/2014
   
86
 
(1)
Macon
 
GA
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
101
 
(1)
Savannah
 
GA
 
Hilton Garden Inn
 
Newport
 
3/1/2014
   
105
 
(1)
Cedar Rapids
 
IA
 
Hampton
 
Schulte
 
9/1/2016
   
103
   
Cedar Rapids
 
IA
 
Homewood Suites
 
Schulte
 
9/1/2016
   
95
   
Davenport
 
IA
 
Hampton
 
Schulte
 
9/1/2016
   
103
   
Boise
 
ID
 
Hampton
 
Raymond
 
4/30/2010
   
186
 
(2)
Boise
 
ID
 
SpringHill Suites
 
InnVentures
 
3/1/2014
   
230
   
Des Plaines
 
IL
 
Hilton Garden Inn
 
Raymond
 
9/1/2016
   
252
   
Hoffman Estates
 
IL
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
184
   
Mettawa
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
170
   
Mettawa
 
IL
 
Residence Inn
 
White Lodging
 
11/2/2010
   
130
   
Rosemont
 
IL
 
Hampton
 
Raymond
 
9/1/2016
   
158
   
Schaumburg
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
166
   
Skokie
 
IL
 
Hampton
 
Raymond
 
9/1/2016
   
225
   
Warrenville
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
135
   
Indianapolis
 
IN
 
SpringHill Suites
 
White Lodging
 
11/2/2010
   
130
   
Merrillville
 
IN
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
124
   
Mishawaka
 
IN
 
Residence Inn
 
White Lodging
 
11/2/2010
   
106
   
South Bend
 
IN
 
Fairfield Inn & Suites
 
White Lodging
 
9/1/2016
   
119
   
Overland Park
 
KS
 
Fairfield Inn & Suites
 
True North
 
3/1/2014
   
110
   
Overland Park
 
KS
 
Residence Inn
 
True North
 
3/1/2014
   
120
   
 
27

City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
   
Overland Park
 
KS
 
SpringHill Suites
 
True North
 
3/1/2014
   
102
   
Wichita
 
KS
 
Courtyard
 
Aimbridge
 
3/1/2014
   
90
   
Baton Rouge
 
LA
 
SpringHill Suites
 
Dimension
 
9/25/2009
   
119
   
Lafayette
 
LA
 
Hilton Garden Inn
 
LBA
 
7/30/2010
   
153
 
(1)
Lafayette
 
LA
 
SpringHill Suites
 
LBA
 
6/23/2011
   
103
   
New Orleans
 
LA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
166
 
(2)
Andover
 
MA
 
SpringHill Suites
 
Marriott
 
11/5/2010
   
136
   
Marlborough
 
MA
 
Residence Inn
 
True North
 
3/1/2014
   
112
   
Westford
 
MA
 
Hampton
 
True North
 
3/1/2014
   
110
   
Westford
 
MA
 
Residence Inn
 
True North
 
3/1/2014
   
108
 
(2)
Annapolis
 
MD
 
Hilton Garden Inn
 
White Lodging
 
3/1/2014
   
126
   
Silver Spring
 
MD
 
Hilton Garden Inn
 
White Lodging
 
7/30/2010
   
107
   
Portland
 
ME
 
Residence Inn
 
Pyramid
 
10/13/2017
   
179
   
Novi
 
MI
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
148
   
Maple Grove
 
MN
 
Hilton Garden Inn
 
North Central
 
9/1/2016
   
120
   
Rochester
 
MN
 
Hampton
 
Raymond
 
8/3/2009
   
124
   
Kansas City
 
MO
 
Hampton
 
Raymond
 
8/31/2010
   
122
   
Kansas City
 
MO
 
Residence Inn
 
True North
 
3/1/2014
   
106
   
St. Louis
 
MO
 
Hampton
 
Raymond
 
8/31/2010
   
190
   
St. Louis
 
MO
 
Hampton
 
Raymond
 
4/30/2010
   
126
   
Hattiesburg
 
MS
 
Courtyard
 
LBA
 
3/1/2014
   
84
 
(2)
Hattiesburg
 
MS
 
Residence Inn
 
LBA
 
12/11/2008
   
84
   
Carolina Beach
 
NC
 
Courtyard
 
Crestline
 
3/1/2014
   
144
   
Charlotte
 
NC
 
Fairfield Inn & Suites
 
Newport
 
9/1/2016
   
94
   
Charlotte
 
NC
 
Homewood Suites
 
McKibbon
 
9/24/2008
   
118
   
Durham
 
NC
 
Homewood Suites
 
McKibbon
 
12/4/2008
   
122
   
Fayetteville
 
NC
 
Home2 Suites
 
LBA
 
2/3/2011
   
118
   
Fayetteville
 
NC
 
Residence Inn
 
Aimbridge
 
3/1/2014
   
92
   
Greensboro
 
NC
 
SpringHill Suites
 
Newport
 
3/1/2014
   
82
   
Holly Springs
 
NC
 
Hampton
 
LBA
 
11/30/2010
   
124
   
Jacksonville
 
NC
 
Home2 Suites
 
LBA
 
9/1/2016
   
105
   
Wilmington
 
NC
 
Fairfield Inn & Suites
 
Crestline
 
3/1/2014
   
122
   
Winston-Salem
 
NC
 
Courtyard
 
McKibbon
 
3/1/2014
   
122
   
Winston-Salem
 
NC
 
Hampton
 
McKibbon
 
9/1/2016
   
94
   
Omaha
 
NE
 
Courtyard
 
Marriott
 
3/1/2014
   
181
   
Omaha
 
NE
 
Hampton
 
White Lodging
 
9/1/2016
   
139
   
Omaha
 
NE
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
178
 
(2)
Omaha
 
NE
 
Homewood Suites
 
White Lodging
 
9/1/2016
   
123
   
Cranford
 
NJ
 
Homewood Suites
 
Dimension
 
3/1/2014
   
108
   
Mahwah
 
NJ
 
Homewood Suites
 
Dimension
 
3/1/2014
   
110
   
Mount Laurel
 
NJ
 
Homewood Suites
 
Newport
 
1/11/2011
   
118
   
Somerset
 
NJ
 
Courtyard
 
Newport
 
3/1/2014
   
162
 
(1)(2)
West Orange
 
NJ
 
Courtyard
 
Newport
 
1/11/2011
   
131
   
Islip/Ronkonkoma
 
NY
 
Hilton Garden Inn
 
White Lodging
 
3/1/2014
   
165
   
New York
 
NY
 
Renaissance
 
Highgate
 
3/1/2014
   
205
 
(1)
Syracuse
 
NY
 
Courtyard
 
New Castle
 
10/16/2015
   
102
 
(2)
Syracuse
 
NY
 
Residence Inn
 
New Castle
 
10/16/2015
   
78
 
(2)
Mason
 
OH
 
Hilton Garden Inn
 
Schulte
 
9/1/2016
   
110
   
Twinsburg
 
OH
 
Hilton Garden Inn
 
Gateway
 
10/7/2008
   
142
   
Oklahoma City
 
OK
 
Hampton
 
Raymond
 
5/28/2010
   
200
   
Oklahoma City
 
OK
 
Hilton Garden Inn
 
Raymond
 
9/1/2016
   
155
   
Oklahoma City
 
OK
 
Homewood Suites
 
Raymond
 
9/1/2016
   
100
   
Oklahoma City (West)
 
OK
 
Homewood Suites
 
Chartwell
 
9/1/2016
   
90
   
Collegeville/Philadelphia
 
PA
 
Courtyard
 
White Lodging
 
11/15/2010
   
132
 
(2)
Malvern/Philadelphia
 
PA
 
Courtyard
 
White Lodging
 
11/30/2010
   
127
   
Pittsburgh
 
PA
 
Hampton
 
Vista Host
 
12/31/2008
   
132
   
Charleston
 
SC
 
Home2 Suites
 
LBA
 
9/1/2016
   
122
   
Columbia
 
SC
 
Hilton Garden Inn
 
Newport
 
3/1/2014
   
143
   
 
28

City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
   
Columbia
 
SC
 
TownePlace Suites
 
Newport
 
9/1/2016
   
91
   
Greenville
 
SC
 
Residence Inn
 
McKibbon
 
3/1/2014
   
78
   
Hilton Head
 
SC
 
Hilton Garden Inn
 
McKibbon
 
3/1/2014
   
104
   
Chattanooga
 
TN
 
Homewood Suites
 
LBA
 
3/1/2014
   
76
   
Franklin
 
TN
 
Courtyard
 
Chartwell
 
9/1/2016
   
126
 
(2)
Franklin
 
TN
 
Residence Inn
 
Chartwell
 
9/1/2016
   
124
 
(2)
Jackson
 
TN
 
Hampton
 
Vista Host
 
12/30/2008
   
83
   
Johnson City
 
TN
 
Courtyard
 
LBA
 
9/25/2009
   
90
   
Knoxville
 
TN
 
Homewood Suites
 
McKibbon
 
9/1/2016
   
103
   
Knoxville
 
TN
 
SpringHill Suites
 
McKibbon
 
9/1/2016
   
103
   
Knoxville
 
TN
 
TownePlace Suites
 
McKibbon
 
9/1/2016
   
97
   
Memphis
 
TN
 
Homewood Suites
 
Hilton
 
3/1/2014
   
140
   
Nashville
 
TN
 
Hilton Garden Inn
 
Vista Host
 
9/30/2010
   
194
   
Nashville
 
TN
 
Home2 Suites
 
Vista Host
 
5/31/2012
   
119
   
Nashville
 
TN
 
TownePlace Suites
 
LBA
 
9/1/2016
   
101
   
Addison
 
TX
 
SpringHill Suites
 
Marriott
 
3/1/2014
   
159
   
Allen
 
TX
 
Hampton
 
Gateway
 
9/26/2008
   
103
   
Allen
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/31/2008
   
150
   
Arlington
 
TX
 
Hampton
 
Western
 
12/1/2010
   
98
   
Austin
 
TX
 
Courtyard
 
White Lodging
 
11/2/2010
   
145
   
Austin
 
TX
 
Fairfield Inn & Suites
 
White Lodging
 
11/2/2010
   
150
   
Austin
 
TX
 
Hampton
 
Vista Host
 
4/14/2009
   
124
   
Austin
 
TX
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
117
   
Austin
 
TX
 
Homewood Suites
 
Vista Host
 
4/14/2009
   
97
   
Austin/Round Rock
 
TX
 
Homewood Suites
 
Vista Host
 
9/1/2016
   
115
   
Beaumont
 
TX
 
Residence Inn
 
Western
 
10/29/2008
   
133
   
Burleson/Fort Worth
 
TX
 
Hampton
 
LBA
 
10/7/2014
   
88
   
Dallas
 
TX
 
Homewood Suites
 
Western
 
9/1/2016
   
130
   
Denton
 
TX
 
Homewood Suites
 
Chartwell
 
9/1/2016
   
107
   
Duncanville
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/21/2008
   
142
   
El Paso
 
TX
 
Hilton Garden Inn
 
Western
 
12/19/2011
   
145
   
El Paso
 
TX
 
Homewood Suites
 
Western
 
3/1/2014
   
114
   
Fort Worth
 
TX
 
Courtyard
 
LBA
 
2/2/2017
   
124
   
Fort Worth
 
TX
 
TownePlace Suites
 
Western
 
7/19/2010
   
140
   
Frisco
 
TX
 
Hilton Garden Inn
 
Western
 
12/31/2008
   
102
   
Grapevine
 
TX
 
Hilton Garden Inn
 
Western
 
9/24/2010
   
110
 
(2)
Houston
 
TX
 
Courtyard
 
LBA
 
9/1/2016
   
124
   
Houston
 
TX
 
Marriott
 
Western
 
1/8/2010
   
206
   
Houston
 
TX
 
Residence Inn
 
Western
 
3/1/2014
   
129
   
Houston
 
TX
 
Residence Inn
 
Western
 
9/1/2016
   
120
   
Irving
 
TX
 
Homewood Suites
 
Western
 
12/29/2010
   
77
   
Lewisville
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/16/2008
   
165
   
Round Rock
 
TX
 
Hampton
 
Vista Host
 
3/6/2009
   
94
   
San Antonio
 
TX
 
TownePlace Suites
 
Western
 
3/1/2014
   
106
   
Shenandoah
 
TX
 
Courtyard
 
LBA
 
9/1/2016
   
124
   
Stafford
 
TX
 
Homewood Suites
 
Western
 
3/1/2014
   
78
   
Texarkana
 
TX
 
Courtyard
 
Aimbridge
 
3/1/2014
   
90
   
Texarkana
 
TX
 
Hampton
 
Aimbridge
 
1/31/2011
   
81
   
Texarkana
 
TX
 
TownePlace Suites
 
Aimbridge
 
3/1/2014
   
85
   
Provo
 
UT
 
Residence Inn
 
Dimension
 
3/1/2014
   
114
   
Salt Lake City
 
UT
 
Residence Inn
 
Huntington
 
10/20/2017
   
136
   
Salt Lake City
 
UT
 
SpringHill Suites
 
White Lodging
 
11/2/2010
   
143
   
Alexandria
 
VA
 
Courtyard
 
Marriott
 
3/1/2014
   
178
   
Alexandria
 
VA
 
SpringHill Suites
 
Marriott
 
3/28/2011
   
155
   
Bristol
 
VA
 
Courtyard
 
LBA
 
11/7/2008
   
175
   
Charlottesville
 
VA
 
Courtyard
 
Crestline
 
3/1/2014
   
139
   
Harrisonburg
 
VA
 
Courtyard
 
Newport
 
3/1/2014
   
125
   
Manassas
 
VA
 
Residence Inn
 
Crestline
 
2/16/2011
   
107
   
 
29

City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
   
Rooms
   
Richmond
 
VA
 
Courtyard
 
White Lodging
 
12/8/2014
   
135
   
Richmond
 
VA
 
Marriott
 
White Lodging
 
3/1/2014
   
410
 
(1)
Richmond
 
VA
 
Residence Inn
 
White Lodging
 
12/8/2014
   
75
   
Richmond
 
VA
 
SpringHill Suites
 
McKibbon
 
9/1/2016
   
103
   
Suffolk
 
VA
 
Courtyard
 
Crestline
 
3/1/2014
   
92
   
Suffolk
 
VA
 
TownePlace Suites
 
Crestline
 
3/1/2014
   
72
   
Virginia Beach
 
VA
 
Courtyard
 
Crestline
 
3/1/2014
   
141
   
Virginia Beach
 
VA
 
Courtyard
 
Crestline
 
3/1/2014
   
160
   
Kirkland
 
WA
 
Courtyard
 
InnVentures
 
3/1/2014
   
150
 
(2)
Seattle
 
WA
 
Residence Inn
 
InnVentures
 
3/1/2014
   
234
 
(1)(2)
Tukwila
 
WA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
106
 
(2)
Vancouver
 
WA
 
SpringHill Suites
 
InnVentures
 
3/1/2014
   
119
   
    Total
                   
30,322
   

(1) Hotel is subject to ground lease.
(2) Hotel is encumbered by mortgage.

The Company’s investment in real estate at December 31, 2017, consisted of the following (in thousands):

Land
 
$
720,465
 
Building and Improvements
   
4,362,929
 
Furniture, Fixtures and Equipment
   
428,734
 
Franchise Fees
   
12,315
 
     
5,524,443
 
Less Accumulated Depreciation
   
(731,284
)
Investment in Real Estate, net
 
$
4,793,159
 

For additional information about the Company’s properties, refer to Schedule III – Real Estate and Accumulated Depreciation included at the end of Part IV, appearing elsewhere in this Annual Report on Form 10-K.

Item 3.
Legal Proceedings

For a discussion of the Company’s legal proceedings, refer to Note 14 titled “Legal Proceedings” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, which information is incorporated by reference herein.

Item 4.
Mine Safety Disclosures

Not Applicable.
30

PART II
 
Item 5.
Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

On May 18, 2015, the Company’s common shares were listed and began trading on the NYSE under the ticker symbol “APLE” (the “Listing”).  Prior to that time, there was no public market for the Company’s common shares.  As of December 31, 2017 and February 16, 2018, the last reported closing price per share for the Company’s common shares as reported on the NYSE was $19.61 and $18.37, respectively.  The following table sets forth the high and low sales prices per share of the Company’s common shares as reported on the NYSE and distributions declared per common share for each quarterly period indicated:

2017
 
High
   
Low
   
Distributions(1)
 
First Quarter
 
$
20.68
   
$
18.45
   
$
0.30
 
Second Quarter
 
$
19.60
   
$
18.26
   
$
0.30
 
Third Quarter
 
$
19.07
   
$
17.49
   
$
0.30
 
Fourth Quarter
 
$
20.15
   
$
18.66
   
$
0.30
 
                         
2016
 
High
   
Low
   
Distributions(1)
 
First Quarter
 
$
20.53
   
$
16.35
   
$
0.30
 
Second Quarter
 
$
19.78
   
$
17.71
   
$
0.30
 
Third Quarter
 
$
20.65
   
$
18.11
   
$
0.30
 
Fourth Quarter
 
$
20.00
   
$
17.32
   
$
0.30
 
 
(1) During both 2017 and 2016, distributions were declared and paid at a monthly rate of $0.10 per common share. As of December 31, 2017, a monthly distribution of $0.10 per common share had been declared and was paid in January 2018.

Share Return Performance
 
The following graph compares the cumulative total shareholder return of the Company’s common shares to the cumulative total returns of the Standard and Poor’s 500 Stock Index (“S&P 500 Index”) and the SNL US REIT Hotel Index for the period from May 18, 2015, the date of the Company’s Listing, to December 31, 2017.  The SNL US REIT Hotel Index is comprised of publicly traded REITs which focus on investments in hotel properties.  The graph assumes an initial investment of $100 in the Company’s common shares and in each of the indices, and also assumes the reinvestment of dividends.


    Value of Initial Investment at  
Name
 
05/18/15
   
06/30/15
   
12/31/15
   
06/30/16
   
12/31/16
   
06/30/17
   
12/31/17
 
Apple Hospitality REIT, Inc.
 
$
100.00
   
$
105.95
   
$
115.73
   
$
112.53
   
$
123.34
   
$
119.17
   
$
128.27
 
S&P 500 Index
 
$
100.00
   
$
97.14
   
$
97.29
   
$
101.02
   
$
108.92
   
$
119.10
   
$
132.70
 
SNL U.S. REIT Hotel Index
 
$
100.00
   
$
96.87
   
$
81.94
   
$
84.35
   
$
101.55
   
$
101.12
   
$
107.92
 
 
31

This performance graph shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act, except as shall be expressly set forth by specific reference in such filing. The performance graph is not indicative of future investment performance.  The Company does not make or endorse any predictions as to future share price performance.

Shareholder Information

As of February 16, 2018, the Company had approximately 80 holders of record of its common shares and there were approximately 230 million common shares outstanding.  Because many of the Company’s common shares are held by brokers and other institutions on behalf of shareholders, the Company believes there are substantially more beneficial holders of its common shares than record holders.  In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s amended and restated articles of incorporation provides that, subject to certain exceptions, no person or entity (other than a person or entity who has been granted an exemption) may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series.

Distribution Information

To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income.  For the years ended December 31, 2017 and 2016, the Company paid distributions of $1.20 per common share, for a total of approximately $267.9 million and $229.1 million, respectively.  The Company’s current annual distribution rate, payable monthly, is $1.20 per common share.  Although the Company intends to continue paying distributions on a monthly basis, the amount and timing of distributions to shareholders are within the discretion of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at the current annual distribution rate.  The amount and frequency of future distributions will depend on certain items, including but not limited to, the Company’s results of operations, cash flow from operations, economic conditions, working capital requirements, cash requirements to fund investing and financing activities, and capital expenditure requirements, including improvements to and expansions of properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT.  The Company’s $965 million credit facility limits distributions to 95% of funds from operations annually unless the Company is required to distribute more to meet REIT requirements.  As it has done historically, due to seasonality, the Company may use its $540 million revolving credit facility to maintain the consistency of the monthly distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles.

Share Repurchases

During 2017, the Company’s Board of Directors authorized an extension of its share repurchase program to repurchase up to $475 million of its common shares, which program will end in July 2018, if not terminated earlier.  The program may be suspended or terminated at any time by the Company.  As part of the implementation of the program, the Company has utilized written trading plans, with the plans providing for share repurchases in open market transactions.  Since inception of the share repurchase program in July 2015 through December 31, 2017, the Company has purchased approximately 1.7 million of its common shares at a weighted-average market purchase price of approximately $17.64 per common share, for an aggregate purchase price of approximately $29.9 million, including the purchase of approximately 0.4 million of its common shares in 2016, at a weighted-average market purchase price of approximately $17.72 per common share for an aggregate purchase price of approximately $7.9 million.  Repurchases under the program were funded with availability under its revolving credit facility.  In connection with the implementation of the ATM Program, in February 2017 the Company terminated its then existing written trading plan under the Company’s share repurchase program and made no repurchases of its common shares in 2017.  The Company plans to continue to consider opportunistic share repurchases under the $467.5 million remaining portion of the authorized $475 million share repurchase program, which will depend upon prevailing market conditions and other factors.

Additionally, during 2017 and 2016, certain of the Company’s employees surrendered common shares to satisfy their tax withholding obligations associated with the vesting of common shares issued under the 2014 Omnibus Incentive Plan (the “Omnibus Plan”) as described in Note 9 titled “Compensation Plans” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

32

The following is a summary of all share repurchases during the fourth quarter of 2017.

Issuer Purchases of Equity Securities
 
   
(a)
   
(b)
   
(c)
   
(d)
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1)
 
October 1 - October 31, 2017
   
-
     
-
     
-
   
$
467,500
 
November 1 - November 30, 2017
   
-
     
-
     
-
   
$
467,500
 
December 1 - December 31, 2017 (2)
   
13,129
   
$
19.85
     
-
   
$
467,500
 
Total
   
13,129
             
-
         

(1)
Represents amount outstanding under the Company’s authorized $475 million share repurchase program. This program may be suspended or terminated at any time by the Company. If not terminated earlier, the program will end in July 2018. No shares were repurchased during the fourth quarter of 2017.
(2)
Reflects common shares surrendered to the Company to satisfy tax withholding obligations associated with the vesting of restricted common shares.
 
Equity Compensation Plans

The Company’s Board of Directors adopted and the Company’s shareholders approved the Omnibus Plan, which provides for the issuance of up to 10 million common shares, subject to adjustments, to employees, officers, and directors of the Company or affiliates of the Company, consultants or advisers currently providing services to the Company or affiliates of the Company, and any other person whose participation in the Omnibus Plan is determined by the Compensation Committee to be in the best interests of the Company.  The Company’s Board of Directors previously adopted and the Company’s shareholders approved the non-employee directors’ stock option plan (the “Directors’ Plan”) to provide incentives to attract and retain directors.  In May 2015, the Directors Plan was terminated effective upon the Listing, and no further grants can be made under the Directors’ Plan, provided however, that the termination did not affect any outstanding director option awards previously issued under the Directors’ Plan.  The following is a summary of securities issued under the Company’s equity compensation plans as of December 31, 2017:

   
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)
   
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column)
 
Equity compensation plans approved by security holders
   
478,978
   
$
21.05
     
11,079,676
 
Equity compensation plans not approved by security holders
   
-
     
-
     
-
 
Total equity compensation plans
   
478,978
   
$
21.05
     
11,079,676
 

(1)
Represents 312,937 stock options granted to the Company’s directors under the Directors’ Plan and 166,041 stock options granted under the Omnibus Plan in exchange for all of Apple Ten’s outstanding stock options as a result of the Apple Ten merger effective September 1, 2016.
 

33


Item 6.         Selected Financial Data
 
The following table sets forth selected financial data for the five years ended December 31, 2017.  Certain information in the table has been derived from the Company’s audited financial statements and notes thereto.  This data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

   
Year Ended December 31,
 
(in thousands except per share and statistical data)
 
2017
   
2016 (a)
   
2015
   
2014 (b)
   
2013
 
                               
Revenues:
                             
Room
 
$
1,143,987
   
$
956,119
   
$
821,733
   
$
735,882
   
$
353,338
 
Other
   
94,635