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Section 1: 10-K (FORM 10-K)

aple20181231_10k.htm

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, 2018

 

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 every Interactive Data File required to be submitted 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 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   

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 $3,866,233,000 as of June 30, 2018.

 

The number of common shares outstanding on February 15, 2019 was 223,724,569.

 

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 16, 2019.

 

 

 

APPLE HOSPITALITY REIT, INC.

 

FORM 10-K

 

Index

 

 

Page

Part I

 

 

 

 

Item 1.

Business

3

 

Item 1A.

Risk Factors

9

 

Item 1B.

Unresolved Staff Comments

22

 

Item 2.

Properties

23

 

Item 3.

Legal Proceedings

28

 

Item 4.

Mine Safety Disclosures

28

 

 

 

 

Part II

 

 

 

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

29

 

Item 6.

Selected Financial Data

32

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

48

 

Item 8.

Financial Statements and Supplementary Data

49

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

80

 

Item 9A.

Controls and Procedures

80

 

Item 9B.

Other Information

80

 

 

 

 

Part III

 

 

 

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

81

 

Item 11.

Executive Compensation

81

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

81

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

81

 

Item 14.

Principal Accounting Fees and Services

81

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

Item 15.

Exhibits, Financial Statement Schedules

82

 

Item 16.

Form 10-K Summary

83

Signatures

88

 

This Form 10-K includes references to certain trademarks or service marks. The Courtyard by Marriott®, Fairfield 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. The Hyatt®, Hyatt House® and Hyatt Place® trademarks are the property of Hyatt Hotels Corporation 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.

 

 

Index

 

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; litigation risks; 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 (“U.S.”).  The Company has elected to be treated as a REIT for federal income tax purposes. As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in urban, high-end suburban and developing markets throughout 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt 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 U.S., 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 rooms-focused hotels in the upscale sector of the lodging industry;

 

employing broad geographic diversification of its investments;

 

franchising and collaborating with leading brands in the sector;

 

utilizing strong experienced operators for its hotels and enhancing their performance with proactive asset management;

 

3

Index

 

 

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 U.S. to limit dependence on any one geographic area or demand generator. With an emphasis on upscale rooms-focused 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 many upscale and upper mid-scale rooms-focused brands and extensive experience with the Hilton and Marriott rooms-focused 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, 2018 closing share price) ratio at December 31, 2018 of 31%, the Company is positioned to opportunistically consider investments that further improve shareholder value.

 

Hotel Operating Performance

 

As of December 31, 2018, the Company owned 241 hotels with a total of 30,812 rooms as compared to 239 hotels with a total of 30,322 rooms as of December 31, 2017. Operating performance is included only for the period of ownership for hotels acquired or disposed of during 2018 and 2017. During 2018, the Company acquired one newly constructed hotel on May 2, 2018 and four existing hotels (two on February 5, 2018, one on June 28, 2018 and one on December 7, 2018), and sold three hotels (two on July 13, 2018 and one on November 29, 2018). 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). 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,

 
   

2018

   

2017

   

Percent Change

 
                         

ADR

  $ 136.04     $ 134.61       1.1 %

Occupancy

    76.9 %     77.4 %     -0.6 %

RevPAR

  $ 104.66     $ 104.13       0.5 %

 

Comparable Hotels Operating Performance

 

The following table reflects certain operating statistics for the Company’s 241 hotels owned as of December 31, 2018 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 241 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,

 
   

2018

   

2017

   

Percent Change

 
                         

ADR

  $ 136.11     $ 135.22       0.7 %

Occupancy

    77.0 %     77.7 %     -0.9 %

RevPAR

  $ 104.80     $ 105.00       -0.2 %

 

4

Index

 

Hotel performance is impacted by many factors, including the economic conditions in the U.S. and in each individual locality.  Improvements in the general U.S. economy have been offset by increased lodging supply in many markets, offsetting increases in demand and resulting in essentially flat revenue growth. During 2018, the Company’s Comparable Hotels experienced a slight increase in ADR and a slight decrease in occupancy as compared to 2017, leaving RevPAR virtually unchanged. Overall, the Company’s Comparable Hotels’ RevPAR change for 2018 was in line with industry/brand averages. The Company, on a comparable basis, is forecasting slightly negative to slightly positive RevPAR growth for 2019 as compared to 2018, which reflects modestly lower expectations for demand growth, consistent with lower expected Gross Domestic Product growth in the U.S., relatively consistent anticipated hotel supply growth and slightly favorable comparisons caused by natural disasters. 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.

 

2018 Investing Activities

 

The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term.  Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, the Company acquired five hotels for an aggregate purchase price of approximately $152.2 million during 2018: a 119-room Hampton Inn & Suites in downtown Atlanta, Georgia; a 144-room Hampton Inn & Suites in Memphis, Tennessee; a 210-room Hampton Inn & Suites in downtown Phoenix, Arizona; a 132-room Hampton Inn & Suites in Atlanta Perimeter Dunwoody, Georgia; and a 127-room Hyatt Place in Jacksonville, Florida. As of January 31, 2019, the Company also has outstanding contracts for the potential purchase of six additional hotels for a total purchase price of approximately $162.5 million, five of which are under development and are planned to be completed and opened for business over the next three to 24 months from December 31, 2018, at which time closings on these hotels are expected to occur, and one existing hotel that is expected to close in the first quarter of 2019. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities for any additional acquisitions.

 

For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property.  As a result, the Company sold three hotels for an aggregate sales price of approximately $15.8 million during 2018: its 89-room SpringHill Suites and its 86-room TownePlace Suites in Columbus, Georgia (the “two Columbus hotels”), and its 72-room Residence Inn in Springdale, Arkansas. Additionally, as of December 31, 2018, the Company had an outstanding contract to sell 16 of its hotels for a gross sales price of $175 million. This contract was terminated in February 2019 and the Company entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine properties for a total combined gross sales price of $95 million. The Company holds a non-refundable deposit of $7 million on these contracts. If the closings occur, these sales are expected to be completed in the first half of 2019. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility.

 

See Note 3 titled “Investment in Real Estate” and Note 4 titled “Dispositions and Hotel Sale Contracts” 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 rooms-focused hotels, the Company also monitors the trading price of its common shares and repurchases its common shares when it believes there is an opportunity to increase shareholder value. During 2018, the Company purchased under its authorized $464 million share repurchase program (“Share Repurchase Program”) approximately 6.6 million of its common shares at a weighted-average market purchase price of approximately $15.87 per common share for an aggregate purchase price, including commissions, of approximately $104.3 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. 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.

 

5

Index

 

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, Hilton or Hyatt brands, and as of December 31, 2018, 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

    40       5,029  

Homewood Suites

    34       3,831  

Residence Inn

    33       3,939  

SpringHill Suites

    16       2,159  

Fairfield

    11       1,300  

TownePlace Suites

    11       1,110  

Home2 Suites

    8       910  

Marriott

    2       616  

Embassy Suites

    2       316  

Renaissance

    1       208  

Hyatt Place

    1       127  

    Total

    241       30,812  

 

Each of the Company’s 241 hotels owned as of December 31, 2018 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, 2018, over 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 gross revenues, 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, Hilton or Hyatt, 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

Index

 

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 2018 and 2017, the Company’s capital improvements for its hotels were approximately $71.1 million and $69.1 million, respectively.  During 2019, the Company anticipates investing approximately $80 to $90 million in capital improvements, which includes various scheduled renovation projects for approximately 30 to 35 properties.  

 

Financing

 

The Company’s principal daily 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, share repurchases, and required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes).

 

During 2018, the Company completed the refinancing of two of its primary credit facilities. In July and August 2018, the Company entered into an amendment and restatement of its $965 million credit facility and its $150 million term loan facility. The changes under the facilities included: reducing the capacity of the $965 million credit facility to $850 million; increasing the capacity of the $150 million term loan facility to $225 million; extending the maturities of each of the loans under the facilities; reducing the annual interest rate; and improving certain covenants as compared to the previous agreements.

 

As of December 31, 2018, the Company had approximately $1.4 billion of total outstanding debt with a combined weighted-average interest rate, including the effect of interest rate swaps, of approximately 3.74%, consisting of approximately $488.8 million in outstanding mortgage debt secured by 31 properties, with maturity dates ranging from June 2020 to January 2038 and stated interest rates ranging from 3.55% to 6.25%, and approximately $928.8 million in outstanding debt under its unsecured credit facilities with maturity dates ranging from July 2022 to August 2025 and effective interest rates, including the effect of interest rate swaps, ranging from 2.44% to 4.24%.

 

The Company’s unused borrowing capacity under its credit facilities as of December 31, 2018 was $231.2 million, consisting of $156.2 million available under its $425 million revolving credit facility, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders, and $75.0 million under its $225 million term loan facility, which was drawn by the Company on January 29, 2019 and used to pay down borrowings on the Company’s revolving credit facility. 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, 2018 was 31%. Although this ratio is low relative to the industry, it is slightly higher than in prior years as a result of market declines in the Company’s share price (which have affected the lodging sector as a whole) and share repurchases made by the Company in the fourth quarter of 2018. However, the Company anticipates this ratio declining if the potential sales transactions discussed above are completed. As it did during the fourth quarter of 2018, 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.

 

7

Index

 

In 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 first quarter of 2018, the Company sold approximately 0.2 million common shares under its ATM Program at a weighted-average market sales price of approximately $19.73 per common share and received aggregate gross proceeds of approximately $4.8 million before commissions and issuance costs. 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 before commissions and issuance costs. The Company used the proceeds from the sale of these shares to pay down borrowings on its revolving credit facility. 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. 

 

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, 2018. 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 in similar locations. 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

 

8

Index

 

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.

 

Employees

 

During 2018, 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, 2018, the Company had 62 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, certain employees also provide support services to Apple Realty Group, Inc. (“ARG”), which is wholly owned by Glade M. Knight, Executive Chairman of the Company. ARG reimburses the Company for the support services that it receives. 

 

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 by the Company 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:

 

 

over-building of hotels in the markets in which the Company operates, resulting in 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., 

 

 

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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 generators 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 work rules, wage rates, health care coverage and other benefits;

 

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

 

downturn in the hospitality industry.

 

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

 

Economic conditions in the U.S. and individual markets may adversely affect the Company’s business operations and financial performance.

 

The performance of the lodging industry has historically been highly cyclical and closely linked to the performance of the general economy both nationally and within local markets in the U.S. 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. Another economic downturn may lead to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates. The Company cannot predict the pace or duration of an economic cycle or the cycles of the lodging industry. In the event conditions in the industry deteriorate or do not continue to see sustained improvement, or there is an extended period of economic weakness, the Company’s revenue and profitability could be adversely affected. Furthermore, even if the economy in the U.S. 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 certain 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. In addition, as the Company’s

 

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franchise and license agreements expire, the Company may not be able to renew them on favorable terms or at all. If the Company were to lose or be unable to renew 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 Marriott, Hilton or Hyatt brands; therefore, the Company is subject to risks associated with concentrating its portfolio in only three brand families.

 

All of the hotels that the Company owned as of December 31, 2018 operate under brands owned by Marriott, Hilton or Hyatt. As a result, the Company’s success is dependent in part on the continued success of Marriott, Hilton or Hyatt 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 any of these brands is reduced or compromised, the goodwill associated with the Marriott, Hilton or Hyatt branded hotels in the Company’s portfolio may be adversely affected. Also, if Marriott, Hilton or Hyatt 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, Hilton or Hyatt were to deteriorate or terminate as a result of disputes regarding the Company’s hotels or for other reasons, the franchisors could, under certain circumstances, terminate the Company’s current franchise 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 and lower the Company’s revenue and profitability.

 

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.

 

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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 materially and adversely affected.

 

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

 

The Company has ongoing needs for hotel renovations and capital improvements, including maintenance requirements under all of its hotel franchise and management agreements and certain loan agreements. 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 during periods of renovations and capital improvements at a hotel, especially if the Company encounters delays, or if the improvements require significant disruptions at the hotel. The costs of renovations and 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, 2018, 13 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.

 

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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.

 

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, 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 variable-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 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

 

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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 from cyber-attacks or other events could harm the Company’s 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 possible that the safety and security measures taken will not be able to prevent damage to the systems, the systems’ improper functioning, or the improper access or disclosure of personally identifiable information. 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 reputations, 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 for all or certain locations. 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. Additionally, as a result of making substantial claims, insurance carriers may reduce insured limits and/or increase premiums, if insurance coverage is provided at all, in the future. Any of these or similar events could have a material adverse effect on the Company’s financial condition and results of operations.

 

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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, climate change could 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 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

 

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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.

 

In addition, as a result of these significant regulations, the Company could become subject to regulatory investigations and lawsuits. Regulatory investigations and lawsuits could result in significant costs to respond and fines/settlements 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. The ability of the Company to access capital markets, including commercial debt markets, could also be negatively impacted by unfavorable, or the possibility of unfavorable, outcomes to adverse regulatory actions or lawsuits.

 

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 (the “Charter”), 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 Charter provides 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 Charter 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 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 Charter allows the Board of Directors to issue up to 30 million “blank check” preferred shares.

 

The Company’s Charter allows 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 second amended and restated bylaws could inhibit changes in control.

 

Provisions in the Company’s 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. 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 provisions may have the effect of delaying, deferring or

 

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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.

 

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 and trading volume of the Company’s common shares may fluctuate widely and could decline substantially in the future.

 

The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.” The market price and trading volume 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;

 

17

Index

 

 

speculation in the press or investment community;

 

changes in accounting principles;

 

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 and volume 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 made from such sources would result in the shareholder receiving cash, the consequences to the shareholders would differ from a distribution made 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. Proceeds from any issuance may be used to finance hotel acquisitions, fund capital expenditures, pay down outstanding 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. Also, a perception of the possibility of a substantial sale of common shares 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 the Company’s future offerings reducing the market price of its common shares and diluting shareholders 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

 

18

Index

 

administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the 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 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 Ten, Inc. (“Apple Ten”) failed to qualify as a REIT for U.S. federal income tax purposes or if the Apple Ten merger failed to qualify as a tax free reorganization under the Code.

 

On September 1, 2016, Apple Ten merged into an acquisition subsidiary of the Company and ceased its separate corporate existence (the “merger” or “Apple Ten merger”). If Apple Ten failed to qualify as a REIT for any of its taxable years ending on or before the date of the Apple Ten merger, Apple Ten 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 Apple Ten merger qualified as a reorganization 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 Apple Ten, existing at the time of the merger if the Company was to dispose of Apple Ten’s assets for up to 5 years following the 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 Apple Ten for taxable periods that it did not qualify as a REIT, and the Company would have to pay a special dividend and/or employ 

 

19

Index

 

 

 

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 Apple Ten 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 Apple Ten’s taxable income or dividends paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain Apple Ten’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 Apple Ten qualified as a REIT, if Apple Ten were to incur tax liabilities as a result of the failure of the merger 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 merger. Apple Ten’s failure (before or at the date of the merger) to qualify as a REIT and/or a failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could impair the Company’s ability after the merger 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 U.S. (“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.

 

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, however, generally a shareholder will receive a taxable income deduction for 20% of all ordinary dividends received from a REIT. 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

 

20

Index

 

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 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. 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.

 

In addition, the Company’s TRS lessees have engaged 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 above) 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.

 

21

Index

 

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 20% (25% for tax years beginning prior to January 1, 2018) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. 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.

 

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 20% (25% for tax years beginning prior to January 1, 2018) 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.

 

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

 

The IRS, the U.S. Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended or modified. The Company cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted or modified. 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. The Company urges shareholders and prospective shareholders to consult with their tax advisors with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Company’s shares. Although REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated as a C corporation for U.S. federal income tax purposes.

    

Item 1B.

Unresolved Staff Comments

 

None.

 

22

Index

 

Item 2.

Properties

 

As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt 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

    40       5,029  

Homewood Suites

    34       3,831  

Residence Inn

    33       3,939  

SpringHill Suites

    16       2,159  

Fairfield

    11       1,300  

TownePlace Suites

    11       1,110  

Home2 Suites

    8       910  

Marriott

    2       616  

Embassy Suites

    2       316  

Renaissance

    1       208  

Hyatt Place

    1       127  

    Total

    241       30,812  

 

Number of Hotels and Guest Rooms by State  
   

Number of

   

Number of

 

State

 

Hotels

   

Rooms

 

Alabama

    15       1,434  

Alaska

    2       304  

Arizona

    12       1,644  

Arkansas

    3       336  

California

    27       3,807  

Colorado

    4       567  

Florida

    24       2,978  

Georgia

    6       672  

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       553  

North Carolina

    12       1,337  

Ohio

    2       252  

Oklahoma

    4       545  

Pennsylvania

    3       391  

South Carolina

    5       538  

Tennessee

    13       1,502  

Texas

    34       4,072  

Utah

    3       393  

Virginia

    14       2,067  

Washington

    4       609  

    Total

    241       30,812  

 

23

Index

 

The following table is a list of the 241 hotels the Company owned as of December 31, 2018. As noted below, 13 of the Company’s hotels are subject to ground leases and 31 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

   

Chandler

 

AZ

 

Courtyard

 

North Central

 

11/2/2010

 

           150

   

Chandler

 

AZ

 

Fairfield

 

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

 

Hampton

 

North Central

 

5/2/2018

 

           210

   

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

 

(2)

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

 

(2)

Santa Clarita

 

CA

 

Courtyard

 

Dimension

 

9/24/2008

 

           140

   

Santa Clarita

 

CA

 

Fairfield

 

Dimension

 

10/29/2008

 

             66

   

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

 

Marriott

 

9/1/2016

 

           145

   

Tustin

 

CA

 

Residence Inn

 

Marriott

 

9/1/2016

 

           149

   

 

24

Index

 

City   State   Brand   Manager   Date Acquired or Completed   Rooms    

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

   

Jacksonville

 

FL

 

Hyatt Place

 

LBA

 

12/7/2018

 

           127

   

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

 

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

 

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

 

LBA

 

1/14/2010

 

             87

   

Atlanta/Downtown

 

GA

 

Hampton

 

McKibbon

 

2/5/2018

 

           119

   

Atlanta/Perimeter Dunwoody

GA

 

Hampton

 

LBA

 

6/28/2018

 

           132

   

Atlanta

 

GA

 

Home2 Suites

 

McKibbon

 

7/1/2016

 

           128

   

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

 

White Lodging

 

9/1/2016

 

           119

   

Overland Park

 

KS

 

Fairfield

 

True North

 

3/1/2014

 

           110

   

Overland Park

 

KS

 

Residence Inn

 

True North

 

3/1/2014

 

           120

   

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

   

 

25

Index

 

City   State   Brand   Manager   Date Acquired or Completed   Rooms    

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

 

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

 

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

 

           208

 

(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

 

Interstate

 

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

   

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

 

             85

   

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

 

Hampton

 

Crestline

 

2/5/2018

 

           144

   

Memphis

 

TN

 

Homewood Suites

 

Hilton

 

3/1/2014

 

           140

   

 

26

Index

 

City   State   Brand   Manager   Date Acquired or Completed   Rooms    

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

  Interstate  

9/26/2008

 

           103

   

Allen

 

TX

 

Hilton Garden Inn

  Interstate  

10/31/2008

 

           150

   

Arlington

 

TX

 

Hampton

 

Western

 

12/1/2010

 

             98

   

Austin

 

TX

 

Courtyard

 

White Lodging

 

11/2/2010

 

           145

   

Austin

 

TX

 

Fairfield

 

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

  Interstate  

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

  Interstate  

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

   

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

                 

      30,812

   

(1) Hotel is subject to ground lease.

(2) Hotel is encumbered by mortgage.

 

27

Index

 

The Company’s investment in real estate at December 31, 2018, consisted of the following (in thousands):

 

Land

  $ 737,822  

Building and Improvements

    4,503,728  

Furniture, Fixtures and Equipment

    471,399  

Franchise Fees

    13,354  
      5,726,303  

Less Accumulated Depreciation

    (909,893 )

Investment in Real Estate, net

  $ 4,816,410  

 

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

 

The Company is or may be a party to various legal proceedings that arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to management’s knowledge, is any litigation threatened against the Company where the outcome would, in management’s judgment based on information currently available to the Company, have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

Item 4.

Mine Safety Disclosures

 

Not Applicable.

 

28

Index

 

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, 2018 and February 15, 2019, the last reported closing price per share for the Company’s common shares as reported on the NYSE was $14.26 and $16.36, respectively.

 

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 U.S. REIT Hotel Index for the period from May 18, 2015, the date of the Company’s Listing, to December 31, 2018.  The SNL U.S. 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

   

12/31/15

   

12/31/16

   

12/31/17

   

12/31/18

 

Apple Hospitality REIT, Inc.

  $ 100.00     $ 115.73     $ 123.34     $ 128.27     $ 99.81  

S&P 500 Index

  $ 100.00     $ 97.29     $ 108.92     $ 132.70     $ 126.88  

SNL U.S. REIT Hotel Index

  $ 100.00     $ 81.94     $ 101.55     $ 107.92     $ 93.39  

 

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 15, 2019, the Company had approximately 72 holders of record of its common shares and there were approximately 224 million common shares outstanding. Because many of the Company’s common shares are

 

29

Index

 

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 Charter 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, 2018 and 2017, the Company paid distributions of $1.20 per common share, for a total of approximately $275.9 million and $267.9 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. 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.

 

Share Repurchases

 

In May 2018, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $464 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2019 if not terminated earlier. As part of the implementation of the Share Repurchase Program, the Company has utilized written trading plans that provide for share repurchases in open market transactions that are intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, the most recent of which was established in March 2018. During 2018, the Company purchased approximately 6.6 million of its common shares at a weighted-average market purchase price of approximately $15.87 per common share for an aggregate purchase price, including commissions, of approximately $104.3 million. The Company did not repurchase any common shares under its Share Repurchase Program during 2017.  Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. As of December 31, 2018, approximately $364.0 million remained available for purchase under the Share Repurchase Program. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors.

 

Additionally, during 2018 and 2017, 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.

 

30

Index

 

The following is a summary of all share repurchases during the fourth quarter of 2018:

 

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, 2018

    1,576,520     $ 16.35       1,576,520     $ 438,200  

November 1 - November 30, 2018

    2,554,278     $ 16.03       2,554,278     $ 397,200  

December 1 - December 31, 2018 (2)

    2,225,598     $ 15.22       2,184,209     $ 364,000  

Total

    6,356,396               6,315,007          

(1)

Represents amount outstanding under the Company's authorized $464 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 2019.

(2)

Includes 41,389 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, 2018:

 

   

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 (2)

   

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

    467,321     $ 20.92       10,728,614  

Equity compensation plans not approved by security holders

    -       -       -  

Total equity compensation plans

    467,321     $ 20.92       10,728,614  

(1)

Represents 282,718 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. Also includes 18,562 fully vested deferred stock units, including quarterly distributions earned, under the non-employee director deferral program under the Omnibus Plan, adopted by the Board of Directors in 2018, effective June 1, 2018, that are not included in the calculation of the weighted-average exercise price of outstanding options.

(2)

The weighted-average exercise price of outstanding options relates solely to stock options, which are the only currently outstanding exercisable security.

 

31

Index

 

Item 6.     Selected Financial Data

 

The following table sets forth selected financial data for the five years ended December 31, 2018. 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)

 

2018

   

2017

    2016 (1)     2015     2014 (2)  
                                         

Revenues:

                                       

Room

  $ 1,172,331     $ 1,143,987     $ 956,119     $ 821,733     $ 735,882  

Food and beverage

    62,600       66,030       59,558       54,710       47,768  

Other

    35,624       28,605       25,348       21,871       20,246  

Total revenue

    1,270,555       1,238,622       1,041,025       898,314       803,896  
                                         

Expenses and other income:

                                       

Hotel operating expense

    715,934       697,402       582,839       507,081       455,895  

Property taxes, insurance and other expense

    74,640       69,391       56,860       46,023       40,046  

Ground lease expense

    11,364       11,313       10,409       9,996       8,341  

General and administrative expense

    24,294       26,341       17,032       19,552       20,914  

Transaction and litigation costs (reimbursements)

    -       (2,586 )     34,989       7,181       5,142  

Loss on impairment of depreciable real estate assets

    3,135       45,875       5,471       45,000       10,988  

Depreciation expense

    183,482       176,499       148,163       127,449       113,112  

Series B convertible preferred share expense

    -       -       -       -       117,133  

(Gain) loss on sale of real estate

    (152 )     (16,295 )     153       (15,286 )     -  

Interest and other expense, net

    51,185       47,343       40,026       33,132       23,523  

Income tax expense

    587       847       431       898       1,969  

Total expenses and other income

    1,064,469       1,056,130       896,373       781,026       797,063  

Net income

  $ 206,086     $ 182,492     $ 144,652     $ 117,288     $ 6,833  
                                         

Per Share:

                                       

Net income per common share

  $ 0.90     $ 0.82     $ 0.76     $ 0.65     $ 0.04  

Distributions declared per common share (3)

  $ 1.20     $ 1.20     $ 1.20     $ 1.37     $ 1.39  

Weighted-average common shares outstanding

- basic and diluted

    229,659       223,526       190,856       180,261       171,489  
                                         

Balance Sheet Data (at end of period):

                                       

Investment in real estate, net

  $ 4,816,410     $ 4,793,159     $ 4,823,489     $ 3,641,767     $ 3,492,821  

Assets held for sale

  $ -     $ -     $ 39,000     $ -     $ 195,588  

Total assets

  $ 4,928,672     $ 4,902,338     $ 4,979,883     $ 3,722,775     $ 3,776,805  

Total debt, net

  $ 1,412,242     $ 1,222,196     $ 1,337,963     $ 998,103     $ 706,626  

Shareholders’ equity

  $ 3,409,010     $ 3,571,085     $ 3,517,064     $ 2,647,058     $ 3,014,624  

Net book value per share

  $ 15.22     $ 15.53     $ 15.78     $ 15.18     $ 16.13  
                                         

Other Data:

                                       

Cash Flow From (Used In):

                                       

Operating activities (4)

  $ 404,812     $ 384,071     $ 331,171     $ 279,628     $ 251,593  

Investing activities (4)

  $ (210,160 )   $ (158,256 )   $ (162,200 )   $ (90,736 )   $ (34,700 )

Financing activities

  $ (190,811 )   $ (225,449 )   $ (162,197 )   $ (198,767 )   $ (211,885 )

Number of hotels owned at end of period

    241       239       235       179       191  

(1)

Effective September 1, 2016, the Company completed the merger with Apple Ten as described in 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.

(2)

Effective March 1, 2014, the Company completed the mergers with Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”) and added 99 continuing hotels located in 27 states with an aggregate of 12,121 rooms to the Company's real estate portfolio. In connection with the Apple Seven and Apple Eight mergers, the Company issued approximately 90 million common shares to Apple Seven and Apple Eight shareholders. Also, upon completion of the Apple Seven and Apple Eight mergers, the Company became self-advised and the advisory agreements between the Company and its advisors were terminated, resulting in the conversion of the Company's Series B convertible preferred shares into approximately 5.8 million common shares. In connection with this event, during the first quarter of 2014, the Company recorded a noncash expense totaling approximately $117.1 million.

(3)

2015 distributions include a distribution of $0.10 per common share that was declared in December 2015 and paid in January 2016. For all other periods presented, distributions per common share declared equaled distributions paid.

(4)

Amounts for 2014 through 2017 reflect the retrospective adjustments to the Consolidated Statements of Cash Flows in accordance with the adoption of Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, effective January 1, 2018, as discussed in Note 1 titled “Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.

 

32

Index

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read in conjunction with Item 8, the Consolidated Financial Statements and Notes thereto, the introduction of Part I regarding “Forward-Looking Statements,” and Item 1A, “Risk Factors” appearing elsewhere in this Annual Report on Form 10-K.

 

Overview

 

The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the United States. As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in urban, high-end suburban and developing markets throughout 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt 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 NYSE under the ticker symbol “APLE.”

 

2018 Hotel Portfolio Activities

 

The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term.  Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, the Company acquired five hotels for an aggregate purchase price of approximately $152.2 million during 2018: a 119-room Hampton Inn & Suites in downtown Atlanta, Georgia; a 144-room Hampton Inn & Suites in Memphis, Tennessee; a 210-room Hampton Inn & Suites in downtown Phoenix, Arizona; a 132-room Hampton Inn & Suites in Atlanta Perimeter Dunwoody, Georgia; and a 127-room Hyatt Place in Jacksonville, Florida. As of January 31, 2019, the Company also has outstanding contracts for the potential purchase of six additional hotels for a total purchase price of approximately $162.5 million, five of which are under development and are planned to be completed and opened for business over the next three to 24 months from December 31, 2018, at which time closings on these hotels are expected to occur, and one existing hotel that is expected to close in the first quarter of 2019. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities for any additional acquisitions.

 

For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property.  As a result, the Company sold three hotels for an aggregate sales price of approximately $15.8 million during 2018: its 89-room SpringHill Suites and its 86-room TownePlace Suites in Columbus, Georgia, and its 72-room Residence Inn in Springdale, Arkansas. Additionally, as of December 31, 2018, the Company had an outstanding contract to sell 16 of its hotels for a gross sales price of $175 million. This contract was terminated in February 2019 and the Company entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine properties for a total combined gross sales price of $95 million. The Company holds a non-refundable deposit of $7 million on these contracts. If the closings occur, these sales are expected to be completed in the first half of 2019. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility.

 

See Note 3 titled “Investment in Real Estate” and Note 4 titled “Dispositions and Hotel Sale Contracts” 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.

 

Hotel Operations

 

Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the U.S. and the performance of individual managers assigned to each hotel, performance of the Company’s hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned. Over the past several years, the lodging industry and the Company have experienced modest revenue growth.  Improvements in the general U.S. economy have been offset by increased lodging supply in many markets, offsetting increases in demand. With essentially flat growth in RevPAR, the Company produced stable operating results during 2018 on a comparable basis (as defined below). There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging

 

33

Index

 

industry and the Company, including but not limited to, increased hotel supply in certain markets, labor uncertainty both for the economy as a whole and the lodging industry in particular, global volatility, government fiscal policies and economic concerns in the U.S. The Company, on a comparable basis, is forecasting slightly negative to slightly positive RevPAR growth for 2019 as compared to 2018, which reflects modestly lower expectations for demand growth, consistent with lower expected Gross Domestic Product growth in the U.S., relatively consistent anticipated hotel supply growth and slightly favorable comparisons caused by natural disasters.

 

In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and RevPAR, and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.

 

The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company.

 

   

Years Ended December 31,

 

(in thousands, except statistical data)

 

2018

   

Percent of Revenue

     

2017

   

Percent of Revenue

     

Change 2017 to 2018

     

2016

   

Percent of Revenue

     

Change 2016 to 2017

 
                                                                         

Total revenue

  $ 1,270,555       100.0 %     $ 1,238,622       100.0 %       2.6 %     $ 1,041,025       100.0 %       19.0 %

Hotel operating expense

    715,934       56.3 %       697,402       56.3 %       2.7 %       582,839       56.0 %       19.7 %

Property taxes, insurance and other expense

    74,640       5.9 %       69,391       5.6 %       7.6 %       56,860       5.5 %       22.0 %

Ground lease expense

    11,364       0.9 %       11,313       0.9 %       0.5 %       10,409       1.0 %       8.7 %

General and administrative expense

    24,294       1.9 %       26,341       2.1 %       -7.8 %       17,032       1.6 %       54.7 %
                                                                         

Transaction and litigation costs (reimbursements)

    -                 (2,586 )               n/a         34,989                 n/a  

Loss on impairment of depreciable real estate assets

    3,135                 45,875                 n/a         5,471                 n/a  

Depreciation expense

    183,482                 176,499                 4.0 %       148,163                 19.1 %

Gain (loss) on sale of real estate

    152                 16,295                 n/a         (153 )               n/a  

Interest and other expense, net

    51,185                 47,343                 8.1 %       40,026                 18.3 %

Income tax expense

    587                 847                 -30.7 %       431                 96.5 %
                                                                         

Number of hotels owned at end of period

    241                 239                 0.8 %       235                 1.7 %

ADR

  $ 136.04               $ 134.61                 1.1 %     $ 133.61                 0.7 %

Occupancy

    76.9 %               77.4 %               -0.6 %       76.9 %               0.7 %

RevPAR

  $ 104.66               $ 104.13                 0.5 %     $ 102.80                 1.3 %

 

Comparable Hotels Operating Results

 

The following table reflects certain operating statistics for the Company’s 241 hotels owned as of December 31, 2018 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 241 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,

 
   

2018

   

2017

   

Change 2017 to 2018

     

2016

   

Change 2016 to 2017

 
                                           

ADR

  $ 136.11     $ 135.22       0.7 %     $ 133.89       1.0 %

Occupancy

    77.0 %     77.7 %     -0.9 %       77.1 %     0.8 %

RevPAR

  $ 104.80     $ 105.00       -0.2 %     $ 103.27       1.7 %