UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended
or
| Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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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.
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 ☐
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.
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).
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.
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 ☐
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 $
The number of common shares outstanding on February 14, 2020 was
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 14, 2020.
APPLE HOSPITALITY REIT, INC.
FORM 10-K
Index
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Part I |
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Item 1. |
3 | |
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Item 1A. |
10 | |
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Item 1B. |
24 | |
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Item 2. |
25 | |
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Item 3. |
30 | |
Item 4. |
30 |
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Part II |
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Item 5. |
31 | |
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Item 6. |
34 | |
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Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
35 |
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Item 7A. |
48 | |
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Item 8. |
50 | |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
81 |
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Item 9A. |
81 | |
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Item 9B. |
81 | |
Part III |
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Item 10. |
82 | |
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Item 11. |
82 | |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
82 |
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Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
82 |
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Item 14. |
82 | |
Part IV |
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Item 15. |
83 | |
Item 16. |
84 | ||
89 |
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 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.
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 of 1986, as amended (the “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, 2019, the Company owned 233 hotels with an aggregate of 29,870 rooms located in urban, high-end suburban and developing markets throughout 34 states, including one hotel with 105 rooms classified as held for sale, which was sold to an unrelated party in January 2020. As of December 31, 2019, substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 21 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:
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pursuing thoughtful capital allocation with selective acquisitions and dispositions of primarily rooms-focused hotels in the upscale sector of the lodging industry; |
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employing broad geographic diversification of its investments; |
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franchising and collaborating with leading brands in the sector; |
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utilizing strong experienced operators for its hotels and enhancing their performance with proactive asset management; |
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reinvesting in the Company’s hotels to maintain their competitive advantage; and |
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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. Due to their efficient operating model and strong consumer preference, the Company concentrates on the acquisition of rooms-focused hotels. The Company’s 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 revenue 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, 2019 closing share price) ratio at December 31, 2019 of 27%, the Company is positioned to opportunistically consider investments that further improve shareholder value.
Hotel Operating Performance
As of December 31, 2019, the Company owned 233 hotels with a total of 29,870 rooms as compared to 241 hotels with a total of 30,812 rooms as of December 31, 2018. Operating performance is included only for the period of ownership for hotels acquired or disposed of during 2019 and 2018. During 2019, the Company acquired one newly constructed hotel on March 19, 2019 and two existing hotels (one on March 4, 2019 and one on October 9, 2019), and sold 11 hotels (nine on March 28, 2019, one on December 19, 2019 and one on December 30, 2019). 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). 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, |
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2019 |
2018 |
Percent Change |
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ADR |
$ | 137.30 | $ | 136.04 | 0.9 | % | ||||||
Occupancy |
77.0 | % | 76.9 | % | 0.1 | % | ||||||
RevPAR |
$ | 105.72 | $ | 104.66 | 1.0 | % |
Comparable Hotels Operating Performance
The following table reflects certain operating statistics for the Company’s 232 hotels owned and held for use as of December 31, 2019 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 232 hotels owned and held for use 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 and assets held for sale, results have been excluded for the Company’s period of ownership.
Years Ended December 31, |
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2019 |
2018 |
Percent Change |
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ADR |
$ | 137.70 | $ | 137.43 | 0.2 | % | ||||||
Occupancy |
77.1 | % | 77.2 | % | -0.1 | % | ||||||
RevPAR |
$ | 106.12 | $ | 106.07 | - |
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 in the lodging sector. With flat growth in RevPAR and increased labor costs, the Company’s Comparable Hotels produced slightly lower operating results during 2019 as compared to 2018. There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging industry and the Company, including but not limited to, continued 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, travel-related health concerns, political changes and economic concerns in the U.S. The Company is forecasting flat to slightly negative RevPAR growth and lower operating results for its Comparable Hotels for 2020 as compared to 2019, which reflects modest expectations for demand growth, consistent with modest growth expectations for the U.S. economy, relatively consistent anticipated hotel supply growth, unfavorable comparisons caused by outsized demand in 2019 related to natural disaster recovery efforts in certain markets and the transition of the Company’s full service hotel in New York, New York from the Renaissance brand to an independent boutique hotel as discussed below. 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.
Recent Investing Activities
Acquisitions and Contracts for Potential Acquisitions
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 three hotels for an aggregate purchase price of approximately $59.3 million during 2019: a 160-room existing Hampton Inn & Suites in St. Paul, Minnesota, a 128-room newly constructed Home2 Suites in Orlando, Florida and a 55-room existing independent boutique hotel in Richmond, Virginia. Although the independent boutique hotel is not affiliated with a brand, the Company plans to reposition the hotel to operate consistently with its rooms-focused hotels. Also, as of December 31, 2019, the Company had outstanding contracts for the potential purchase of six hotels for a total expected purchase price of approximately $208.8 million, all of which are under development and are planned to be completed and opened for business over the next five to 18 months from December 31, 2019, at which time closings on these hotels are expected to occur. In each case, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities available at closing for any additional acquisitions.
Dispositions and Contracts for Potential Dispositions
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, in 2019, the Company sold a total of 11 hotels for a total combined gross sales price of approximately $121.7 million. In January 2020, the Company sold one of its hotels for a gross sales price of $13.0 million and, as of January 31, 2020, the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately $32.0 million. Although the Company is working towards the sale of the hotel under contract, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding sale contract. If the closing occurs, this sale is expected to be completed in the first quarter of 2020. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility.
See Note 2 titled “Investment in Real Estate” and Note 3 titled “Assets Held for Sale, 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 Conversion
Effective January 20, 2020, the Company converted its New York, New York Renaissance hotel to an independent boutique hotel. The Company anticipates that it will incur total conversion costs of approximately $1.0
million to complete the transition, of which approximately $0.1 million was incurred in 2019. The intent of the conversion is to provide greater long-term flexibility with the operations of the hotel. Although the Company is not able to fully estimate the near-term impact associated with the transition, it does anticipate operational disruption as the management team works to replace revenue that historically came from participation in the Renaissance brand system. With the conversion of this hotel and the October 2019 acquisition of the existing independent boutique hotel in Richmond, Virginia, mentioned above, the Company has two independent boutique hotels with a combined total of 263 rooms.
Share Repurchases
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 2019, the Company purchased approximately 0.3 million of its common shares under its existing share repurchase program at a weighted-average market purchase price of approximately $14.92 per common share for an aggregate purchase price, including commissions, of approximately $4.3 million. As of December 31, 2019, approximately $359.8 million remained available for repurchases under this share repurchase program. 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 7 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.
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
Substantially all of the Company’s hotels operate under Marriott or Hilton brands, and as of December 31, 2019, consisted of the following:
Number of Hotels and Guest Rooms by Brand |
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Number of |
Number of |
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Brand |
Hotels |
Rooms |
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Hilton Garden Inn |
41 | 5,665 | ||||||
Hampton |
39 | 4,956 | ||||||
Courtyard |
36 | 4,948 | ||||||
Residence Inn |
33 | 3,939 | ||||||
Homewood Suites |
33 | 3,731 | ||||||
SpringHill Suites |
15 | 2,040 | ||||||
Fairfield |
11 | 1,300 | ||||||
Home2 Suites |
9 | 1,038 | ||||||
TownePlace Suites |
9 | 931 | ||||||
Marriott |
2 | 616 | ||||||
Embassy Suites |
2 | 316 | ||||||
Renaissance |
1 | 208 | * | |||||
Hyatt Place |
1 | 127 | ||||||
Independent |
1 | 55 | ||||||
Total |
233 | 29,870 |
* | On January 20, 2020, the New York, New York Renaissance hotel became an independent boutique hotel. |
Each of the Company’s 233 hotels owned as of December 31, 2019 is operated and managed under separate management agreements with 21 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, 2019, over 80% of the Company’s hotels operate under a variable management fee agreement, with an average initial term of approximately 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.
Fifteen 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 branded 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.
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 2019 and 2018, the Company’s capital improvements for its hotels were approximately $78.7 million and $71.1 million, respectively. During 2020, the Company anticipates investing approximately $80 to $90 million in capital improvements, which includes various scheduled renovation projects for approximately 25 to 30 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 may enter into additional secured and unsecured debt financing or issue common shares through equity offerings. 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).
As of December 31, 2019, the Company had approximately $1.3 billion of total outstanding debt with a combined weighted-average interest rate, including the effect of interest rate swaps, of approximately 3.59%, consisting of approximately $455.0 million in outstanding mortgage debt secured by 29 properties, with maturity dates ranging from June 2020 to January 2038 and stated interest rates ranging from 3.55% to 6.25%, and approximately $870.9 million in outstanding debt under its unsecured credit facilities with maturity dates ranging from July 2022 to December 2029 and effective interest rates, including the effect of interest rate swaps, ranging from 2.49% to 4.59%.
The Company’s unused borrowing capacity under its $425 million revolving credit facility as of December 31, 2019 was $374.1 million, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders. As discussed
above, the Company has historically maintained and plans in the future to maintain relatively low leverage as compared to the real estate industry as a whole and the lodging sector in particular. The Company’s ratio of total debt to total capitalization as of December 31, 2019 was 27%. 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 property dispositions or the issuance of equity 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 4 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.
The Company has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing on April 25, 2019. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended. Future offerings 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 distributions on a monthly basis, with distributions based on anticipated cash generated from operations. The Company attempts to set a rate that can be consistent over a period of time as it forecasts its cash available from operations. The Company’s annualized distribution rate was $1.20 per common share at December 31, 2019. 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, cyber threats 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.
Sustainability
In addition to being more operationally efficient, rooms-focused hotels are more environmentally efficient than full service hotels and resorts. With less open or unused space and less equipment needed for operating than full service hotels, rooms-focused hotels use less electricity, water and natural gas on a per-square-foot basis than full service or resort hotels. In addition to its overall strategy of investing in rooms-focused hotels, the Company is committed to identifying and incorporating sustainability opportunities into its investment and asset management strategies, with a focus on minimizing its environmental impact through reductions in energy and water consumption and improvements in waste management. The Company seeks to invest in proven sustainability practices when renovating its hotels and in portfolio-wide capital projects that can enhance asset value while also improving environmental performance. For example, the Company has realized cost savings and reductions in its carbon footprint through the installation of LED lighting, energy management systems, smart irrigation systems and the use of energy and water conservation guidelines at the property level. Additionally, as part of the Company’s acquisition due diligence, the Company performs sustainability assessments to identify areas of opportunity that will improve the property’s environmental performance, and when working with developers to construct new hotels, strives to implement environmentally efficient construction and building functionality.
Social Engagement
The Company is committed to strengthening its communities through charitable giving, encouraging employees to volunteer their time and talents, and participation in the many philanthropic programs important to its employees and leaders within its industry, including its brands, the American Hotel & Lodging Association® and its hotel management companies. Since forming Apple Gives, an employee-led charitable organization established in 2017 to expand the Company’s impact and further the advance of corporate philanthropic goals, employees of the Company have volunteered over 450 hours and supported over 80 non-profit organizations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Related Parties
The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. See Note 6 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 2019, 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, 2019, the Company had 67 employees. The employees not only provide support to the Company, but, as discussed in Note 6 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 Annual Report on Form 10-K.
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:
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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; |
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competition from other hotels and lodging alternatives in the markets in which the Company operates; |
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a downturn in the hospitality industry; |
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dependence on business and leisure travel; |
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increases in energy costs and other travel expenses, which may affect travel patterns and reduce business and leisure travel; |
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reduced business and leisure travel due to geo-political uncertainty, including terrorism, travel-related health concerns, including the widespread outbreak of infectious or contagious diseases in the U.S., inclement weather conditions, including natural disasters such as hurricanes and earthquakes, and government shutdowns, airline strikes or other disruptions; |
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reduced travel due to adverse national, regional or local economic and market conditions; |
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seasonality of the hotel industry may cause quarterly fluctuations in operating results; |
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changes in marketing and distribution for the hospitality industry including the cost and the ability of third-party internet and other travel intermediaries to attract and retain customers; |
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changes in hotel room demand generators in a local market; |
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ability of a hotel franchise to fulfill its obligations to franchisees; |
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brand expansion; |
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the performance of third-party managers of the Company’s hotels; |
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increases in operating costs, including ground lease payments, 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; |
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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; |
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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with applicable laws and regulations; |
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business interruptions due to cyber-attacks and other technological events; |
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requirements for periodic capital reinvestment to repair and upgrade hotels; |
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limited alternative uses for hotel buildings; and |
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condemnation or uninsured losses. |
Any of these factors, among others, may reduce the Company’s operating results, the value of the properties that the Company owns, and 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. An 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, 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 substantially all of its 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 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 was 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 to 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.
Substantially all of the Company’s hotels operate under Marriott or Hilton brands; therefore, the Company is subject to risks associated with concentrating its portfolio in these brand families.
Substantially all of the Company’s hotels operate under brands owned by Marriott or Hilton. As a result, the Company’s success is dependent in part on the continued success of Marriott and Hilton and their respective brands. The Company believes that building brand value is critical to increase demand and strengthen customer loyalty. Consequently, if market recognition or the positive perception of any of these brands is reduced or compromised, the goodwill associated with the Marriott or Hilton branded hotels in the Company’s portfolio may be adversely affected. Also, if Marriott or Hilton alter certain policies, including their respective guest loyalty programs, this could reduce the Company’s future revenues. Furthermore, if the Company’s relationship with Marriott or Hilton were to deteriorate or terminate as a result of disputes regarding the Company’s hotels or for other reasons, 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.
Although substantially all of the Company’s hotels operate under the brands noted above, the Company owns and may from time to time acquire independent hotels or hotels affiliated with other brands, and/or may choose to operate hotels independently of a brand if the Company believes that these properties will operate most effectively as independent hotels. However, without the support and recognition of a large established brand, the capability of these independent or less recognized branded hotels to market the hotel, maintain guest loyalty, attract new guests, and operate in a cost-effective manner may be difficult, which could adversely affect the Company’s overall operating results.
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, including third-party providers of short-term rental properties and serviced apartments 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 management companies 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, based on the terms of the applicable management agreement, the Company or manager may terminate the agreement. In the event that any of the Company’s management agreements are terminated, the Company can provide no assurance that it could identify a replacement manager, that the franchisor will consent to the replacement manager in a timely manner, or at all, 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, a decrease in its revenues, or both. Furthermore, if one of the Company’s third-party managers is financially unable or unwilling to perform its obligations pursuant to its management agreements with the Company, the Company’s ability to find a replacement manager or managers for those properties could be costly and time-consuming for the Company and disrupt hotel operations which could materially and adversely affect the Company.
The growing use of non-franchisor lodging distribution channels could adversely affect the Company’s business and profitability.
Although a majority of rooms sold are sold through the hotel franchisors’ distribution 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 and updates to brand standards 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. As properties increase in age, the frequency and cost of renovations needed to maintain appealing facilities for hotel guests may increase. The Company may also need to make significant capital improvements to hotels that it acquires. Additionally, increases in the costs of imported goods and materials due to changes in tariffs or other applicable international regulations could have the effect of increasing renovation costs for the Company. 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 disruption 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, 2019, 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 Code relating to REITs have certain limits on the Company’s ability to sell hotels.
Real estate impairment losses may adversely affect the Company’s financial condition and results of operations.
As a result of changes in an individual hotel’s operating results or to the Company’s planned hold period for a hotel, the Company may be required to record an impairment loss for a property. The Company analyzes its hotel properties individually for indicators of impairment throughout the year. The Company records an impairment loss 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 and demand dynamics and, accordingly, increase the price the Company must pay for hotels it seeks to acquire, or 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. Also, if the Company does not reinvest proceeds received from hotel dispositions into new properties in a timely manner, the Company’s profitability could be negatively impacted. 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 disrupt the Company’s business 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 hedging arrangements.
Replacement of LIBOR as the reference interest rate under the Company’s variable-rate debt and hedging arrangements could have a material adverse effect on the business, financial condition and results of operations of the Company.
The Company’s variable-rate debt and hedging arrangements use the London Inter-Bank Offered Rate (“LIBOR”) as the reference rate. LIBOR is expected to be phased out after 2021, and accordingly, the Company expects a transition from LIBOR to another reference rate in the near term. The Secured Overnight Financing Rate (“SOFR”), which is published by the New York Federal Reserve and is based on transactions in the more robust U.S. Treasury repurchase market, has been proposed as the alternative to LIBOR for use in derivatives and other financial contracts that use LIBOR as a reference rate. The transition from LIBOR to SOFR or any other replacement rate adopted is likely to cause uncertainty due to a mismatch in the LIBOR maturities and the terms of SOFR. Additionally, there is some possibility that LIBOR continues to be published, but that the quantity of loans used to calculate LIBOR diminishes significantly enough to reduce the appropriateness of the rate as a reference rate. In the event that LIBOR is discontinued, the interest rate for the Company’s variable-rate debt and the swap rate for its interest rate swaps following such event will be based on an alternative reference rate as specified in the applicable documentation governing such debt or swaps or as otherwise agreed upon. Such an event would not affect the Company’s ability to borrow or maintain already outstanding borrowings or outstanding swaps, but the alternative reference rate could be higher and more volatile than LIBOR prior to its discontinuance. The Company can provide
no assurance regarding the future of LIBOR and when the Company’s variable-rate debt and interest rate swaps will transition from LIBOR as a reference rate to SOFR or another replacement reference rate. The transition from LIBOR, or any changes or reforms to the determination of LIBOR, could have an adverse impact on the Company’s interest rates on its current or future indebtedness, as well as its variable-rate hedging arrangements, which could have a material adverse effect on the business, financial condition and results of operations of the Company.
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, or its inability to make required principal and interest payments, could cause a default under the applicable debt agreement, which could result in the acceleration of the debt, requiring the Company to repay such debt with capital obtained from other sources, which may not be available to the Company or may only be available on unfavorable terms.
If the Company defaults on its secured debt, lenders may 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 for the Company. 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, personally identifiable information, reservations, billing and operating data. 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 customer information, such as personally identifiable information, including information relating to financial accounts. A number of hotels, hotel management companies, and brands have been subject to successful cyber-attacks, including those seeking guest credit card information. Moreover, the risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, nation-state affiliated actors and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. It is possible that the safety and security measures taken by the Company and its hotel managers and franchisors 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, whether through physical or electronic break-ins, cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, social engineering or phishing schemes, 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 the reputations of the Company, the Company’s hotel managers or franchisors, and subject the Company to liability claims or regulatory penalties that may not be fully covered by insurance, all of which 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 hospitality 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 the relevant 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 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.
The Company faces possible risks associated with the physical effects of, and laws and regulations related to, 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, the markets in which the Company operates 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 the Company’s 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 and water at its properties. The federal government and some of the states and localities in which the Company operates have enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions, and may enact new laws in the future. Although these laws and regulations have not had any known material adverse effect on the Company to date, they could impact companies with which the Company does business or result in substantial costs to the Company, including compliance costs, construction costs, monitoring and reporting costs and capital expenditures for environmental control facilities and other new equipment. Climate change, and any future laws and regulations, or future interpretations of current laws and regulations, 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 the 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 required 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, if, as part of the remediation of a contaminated property, the Company were to dispose of certain waste products at a waste disposal facility, such as a landfill or an incinerator, the Company may be liable for costs associated with the 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 are subject to regulation (e.g., swimming pool chemicals and cleaning supplies). The Company’s hotels incur costs to comply with these environmental, health and safety laws and regulations, and could be subject to fines and penalties for non-compliance with applicable requirements.
Liabilities and costs associated with environmental contamination at, on, under or emanating from the hotel’s properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws and regulations could be material and could materially and adversely affect the Company. The Company can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of its hotels will not be affected by its operations, the condition of the properties in the vicinity of its hotels, or by third parties unrelated to the Company. The discovery of material environmental liabilities at its properties could subject the Company to unanticipated significant costs, which could significantly reduce or eliminate its profitability.
The Company may incur significant costs complying with various regulatory requirements, which could materially and adversely affect the Company.
The Company and its hotels are subject to various U.S. federal, state and local regulatory requirements. These requirements are wide-ranging and include among others, state and local fire and life safety requirements, federal laws such as the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder and the Sarbanes-Oxley Act of 2002. Liabilities 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 have material and adverse effects on 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 costs of fines or 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 from 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 issuance of preferred shares may adversely affect the voting power or ownership interest of the holders of common shares or limit the ability of a third party to acquire control of the Company.
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 Corporate 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 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 depends on key personnel.
The Company depends on the services of its senior management team to manage the Company’s day-to-day operations and to execute its business strategy. To the extent that any of them departs, the Company could incur severance or other costs. The loss of the services from any of the members of the Company’s management team, and
its inability to find suitable replacements on a timely basis, could disrupt the Company’s business and have an adverse effect on the market price of the Company’s common shares.
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 that are 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 REITs and other owners in the hospitality industry; |
● |
the performance and market valuations of similar companies; |
● |
strategic actions by the Company or its competitors, such as acquisitions or dispositions; |
● |
fluctuations in the stock price and operating results of the Company’s competitors; |
● |
speculation in the press or investment community; |
● |
changes in accounting principles; |
● |
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 historically experienced volatility that has often been unrelated to the operating performance of a particular company or industry. Similar 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 in conjunction with 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 continue 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 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 depends 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 the Company 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 other uses, such as 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,
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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, |
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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 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 |
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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 unfavorable market conditions; (2) incur debt or issue additional equity on disadvantageous 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 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.
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% 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 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 avoid application of the 100% excise tax. The most significant transactions between the Company and its TRSs are the hotel leases from the Company to its TRSs. While the Company believes its leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree.
Complying with REIT requirements may force the Company to forgo and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amount it distributes to its shareholders and the ownership of its common shares. In order to meet these tests, the Company may be required to liquidate from its portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain its qualification as a REIT. These actions could have the effect of reducing the Company’s income and amounts available for distribution to its shareholders. In addition, the Company may be required to make distributions to shareholders at disadvantageous times or when the Company does not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make, and, in certain cases, maintain ownership of, certain attractive investments.
The Company may be subject to adverse legislative or regulatory tax changes.
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.
Item 2. |
Properties |
As of December 31, 2019, the Company owned 233 hotels with an aggregate of 29,870 rooms located in 34 states, including one hotel with 105 rooms classified as held for sale, which was sold to an unrelated party in January 2020. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 21 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 |
41 | 5,665 | ||||||
Hampton |
39 | 4,956 | ||||||
Courtyard |
36 | 4,948 | ||||||
Residence Inn |
33 | 3,939 | ||||||
Homewood Suites |
33 | 3,731 | ||||||
SpringHill Suites |
15 | 2,040 | ||||||
Fairfield |
11 | 1,300 | ||||||
Home2 Suites |
9 | 1,038 | ||||||
TownePlace Suites |
9 | 931 | ||||||
Marriott |
2 | 616 | ||||||
Embassy Suites |
2 | 316 | ||||||
Renaissance |
1 | 208 | * | |||||
Hyatt Place |
1 | 127 | ||||||
Independent |
1 | 55 | ||||||
Total |
233 | 29,870 |
* | On January 20, 2020, the New York, New York Renaissance hotel became an independent boutique hotel. |
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 |
22 | 2,803 | ||||||
Georgia |
6 | 672 | ||||||
Idaho |
2 | 416 | ||||||
Illinois |
8 | 1,420 | ||||||
Indiana |
4 | 479 | ||||||
Iowa |
3 | 301 | ||||||
Kansas |
4 | 422 | ||||||
Louisiana |
3 | 422 | ||||||
Maine |
1 | 179 | ||||||
Maryland |
2 | 233 | ||||||
Massachusetts |
4 | 466 | ||||||
Michigan |
1 | 148 | ||||||
Minnesota |
3 | 404 | ||||||
Mississippi |
2 | 168 | ||||||
Missouri |
4 | 544 | ||||||
Nebraska |
4 | 621 | ||||||
New Jersey |
5 | 629 | ||||||
New York |
4 | 553 | ||||||
North Carolina |
10 | 1,091 | ||||||
Ohio |
2 | 252 | ||||||
Oklahoma |
4 | 545 | ||||||
Pennsylvania |
3 | 391 | ||||||
South Carolina |
5 | 538 | ||||||
Tennessee |
13 | 1,502 | ||||||
Texas |
31 | 3,755 | ||||||
Utah |
3 | 393 | ||||||
Virginia |
13 | 1,822 | ||||||
Washington |
4 | 609 | ||||||
Total |
233 | 29,870 |
The following table is a list of the 233 hotels the Company owned as of December 31, 2019. As noted below, 13 of the Company’s hotels are subject to ground leases and 29 of its hotels are encumbered by mortgage notes.
City |
State |
Brand |
Manager |
Date Acquired or Completed |
Rooms |
||||||||
Anchorage |
AK |
Embassy Suites |
Stonebridge |
4/30/2010 |
169 | (1) | |||||||
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 | (1) | |||||||
Mobile |
AL |
Hampton |
McKibbon |
9/1/2016 |
101 | (2) | |||||||
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 | (1) | |||||||
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 | (2) | |||||||
Phoenix |
AZ |
Hampton |
North Central |
5/2/2018 |
210 | ||||||||
Phoenix |
AZ |
Homewood Suites |
North Central |
9/1/2016 |
134 | (2) | |||||||
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 | (1) | |||||||
Burbank |
CA |
Residence Inn |
Marriott |
3/1/2014 |
166 | ||||||||
Burbank |
CA |
SpringHill Suites |
Marriott |
7/13/2015 |
170 | (1) | |||||||
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 | (1) | |||||||
Oceanside |
CA |
Residence Inn |
Marriott |
3/1/2014 |
125 | ||||||||
Rancho Bernardo/San Diego |
CA |
Courtyard |
InnVentures |
3/1/2014 |
210 | (1) | |||||||
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 | (1) | |||||||
San Diego |
CA |
Hampton |
Dimension |
3/1/2014 |
177 | (1) | |||||||
San Diego |
CA |
Hilton Garden Inn |
InnVentures |
3/1/2014 |
200 | ||||||||
San Diego |
CA |
Residence Inn |
Dimension |
3/1/2014 |
121 | (1) | |||||||
San Jose |
CA |
Homewood Suites |
Dimension |
3/1/2014 |
140 | (1) | |||||||
San Juan Capistrano |
CA |
Residence Inn |
Marriott |
9/1/2016 |
130 | (1)(2) | |||||||
Santa Ana |
CA |
Courtyard |
Dimension |
5/23/2011 |
155 | (1) | |||||||
Santa Clarita |
CA |
Courtyard |
Dimension |
9/24/2008 |
140 |
City | State | Brand | Manager | Date Acquired or Completed | Rooms | ||||||||
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 | ||||||||
Colorado Springs |
CO |
Hampton |
Chartwell |
9/1/2016 |
101 | (1) | |||||||
Denver |
CO |
Hilton Garden Inn |
Stonebridge |
9/1/2016 |
221 | (1) | |||||||
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 |
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 | (2) | |||||||
Miami |
FL |
Hampton |
White Lodging |
4/9/2010 |
121 | ||||||||
Miami |
FL |
Homewood Suites |
Dimension |
3/1/2014 |
162 | (1) | |||||||
Orlando |
FL |
Fairfield |
Marriott |
7/1/2009 |
200 | ||||||||
Orlando |
FL |
Home2 Suites |
LBA |
3/19/2019 |
128 | ||||||||
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 | (3) | |||||||
Tallahassee |
FL |
Fairfield |
LBA |
9/1/2016 |
97 | ||||||||
Tallahassee |
FL |
Hilton Garden Inn |
LBA |
3/1/2014 |
85 | (2) | |||||||
Tampa |
FL |
Embassy Suites |
White Lodging |
11/2/2010 |
147 | ||||||||
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 | (2) | |||||||
Savannah |
GA |
Hilton Garden Inn |
Newport |
3/1/2014 |
105 | (2) | |||||||
Cedar Rapids |
IA |
Hampton |
Aimbridge |
9/1/2016 |
103 | (4) | |||||||
Cedar Rapids |
IA |
Homewood Suites |
Aimbridge |
9/1/2016 |
95 | (4) | |||||||
Davenport |
IA |
Hampton |
Aimbridge |
9/1/2016 |
103 | (4) | |||||||
Boise |
ID |
Hampton |
Raymond |
4/30/2010 |
186 | (1) | |||||||
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 |
City | State | Brand | Manager | Date Acquired or Completed | Rooms | ||||||||
Overland Park |
KS |
SpringHill Suites |
True North |
3/1/2014 |
102 | ||||||||
Wichita |
KS |
Courtyard |
Aimbridge |
3/1/2014 |
90 | ||||||||
Lafayette |
LA |
Hilton Garden Inn |
LBA |
7/30/2010 |
153 | (2) | |||||||
Lafayette |
LA |
SpringHill Suites |
LBA |
6/23/2011 |
103 | ||||||||
New Orleans |
LA |
Homewood Suites |
Dimension |
3/1/2014 |
166 | (1) | |||||||
Andover |
MA |
SpringHill Suites |
Marriott |
11/5/2010 |
136 | ||||||||
Marlborough |
MA |
Residence Inn |
True North |
3/1/2014 |
112 | ||||||||
Westford |
MA |
Hampton |
True North |
3/1/2014 |
110 | ||||||||
Westford |
MA |
Residence Inn |
True North |
3/1/2014 |
108 | (1) | |||||||
Annapolis |
MD |
Hilton Garden Inn |
Crestline |
3/1/2014 |
126 | (4) | |||||||
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 | ||||||||
St. Paul |
MN |
Hampton |
Vista Host |
3/4/2019 |
160 | ||||||||
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 | (1) | |||||||
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 |
LBA |
3/1/2014 |
92 | ||||||||
Greensboro |
NC |
SpringHill Suites |
Newport |
3/1/2014 |
82 | ||||||||
Jacksonville |
NC |
Home2 Suites |
LBA |
9/1/2016 |
105 | ||||||||
Wilmington |
NC |
Fairfield |
Crestline |
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 | (1) | |||||||
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 |
Crestline |
3/1/2014 |
165 | (4) | |||||||
New York |
NY |
Renaissance |
Highgate |
3/1/2014 |
208 | (2)(5) | |||||||
Syracuse |
NY |
Courtyard |
Crestline |
10/16/2015 |
102 | (4) | |||||||
Syracuse |
NY |
Residence Inn |
Crestline |
10/16/2015 |
78 | (4) | |||||||
Mason |
OH |
Hilton Garden Inn |
Raymond |
9/1/2016 |
110 | (4) | |||||||
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 | (1) | |||||||
Malvern/Philadelphia |
PA |
Courtyard |
White Lodging |
11/30/2010 |
127 | ||||||||
Pittsburgh |
PA |
Hampton |
Newport |
12/31/2008 |
132 | (4) | |||||||
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 |
City | State | Brand | Manager | Date Acquired or Completed | Rooms | ||||||||
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 | (1) | |||||||
Franklin |
TN |
Residence Inn |
Chartwell |
9/1/2016 |
124 | (1) | |||||||
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 | ||||||||
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 | ||||||||
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 | (1) | |||||||
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 |
Hampton |
Aimbridge |
1/31/2011 |
81 | ||||||||
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 | ||||||||
Charlottesville |
VA |
Courtyard |
Crestline |
3/1/2014 |
139 | ||||||||
Manassas |
VA |
Residence Inn |
Crestline |
2/16/2011 |
107 | ||||||||
Richmond |
VA |
Independent |
Crestline |
10/9/2019 |
55 | ||||||||
Richmond |
VA |
Courtyard |
White Lodging |
12/8/2014 |
135 | ||||||||
Richmond |
VA |
Marriott |
White Lodging |
3/1/2014 |
410 | (2) | |||||||
Richmond |
VA |
Residence Inn |
White Lodging |
12/8/2014 |
75 |
City | State | Brand | Manager | Date Acquired or Completed | Rooms | ||||||||
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 | (1) | |||||||
Seattle |
WA |
Residence Inn |
InnVentures |
3/1/2014 |
234 | (1)(2) | |||||||
Tukwila |
WA |
Homewood Suites |
Dimension |
3/1/2014 |
106 | (1) | |||||||
Vancouver |
WA |
SpringHill Suites |
InnVentures |
3/1/2014 |
119 | ||||||||
Total |
29,870 |
(1) |
Hotel is encumbered by mortgage. |
(2) |
Hotel is subject to ground lease. |
(3) |
Hotel is classified as held for sale as of December 31, 2019 and was subsequently sold in January 2020. |
(4) |
Manager noted was effective January 1, 2020. |
(5) |
Became an independent boutique hotel on January 20, 2020. |
The Company’s investment in real estate at December 31, 2019, consisted of the following (in thousands):
Land |
$ | 724,054 | ||
Building and Improvements |
4,458,383 | |||
Furniture, Fixtures and Equipment |
486,386 | |||
Finance Ground Lease Assets |
197,617 | |||
Franchise Fees |
13,727 | |||
5,880,167 | ||||
Less Accumulated Depreciation and Amortization |
(1,054,429 | ) | ||
Investment in Real Estate, net |
$ | 4,825,738 |
For additional information about the Company’s properties, refer to Schedule III – Real Estate and Accumulated Depreciation and Amortization 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.
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, 2019 and February 14, 2020, the last reported closing price per share for the Company’s common shares as reported on the NYSE was $16.25 and $15.21, 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, 2019. 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 |
12/31/19 |
||||||||||||||||||
Apple Hospitality REIT, Inc. |
$ | 100.00 | $ | 115.73 | $ | 123.34 | $ | 128.27 | $ | 99.81 | $ | 122.64 | ||||||||||||
S&P 500 Index |
$ | 100.00 | $ | 97.29 | $ | 108.92 | $ | 132.70 | $ | 126.88 | $ | 166.84 | ||||||||||||
SNL U.S. REIT Hotel Index |
$ | 100.00 | $ | 81.94 | $ | 101.55 | $ | 107.92 | $ | 93.39 | $ | 108.24 |
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 of 1934, as amended, 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 14, 2020, the Company had approximately 70 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
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, 2019 and 2018, the Company paid distributions of $1.20 per common share, for a total of approximately $268.7 million and $275.9 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 2019, the Company’s Board of Directors approved an extension of its existing share repurchase program (the “Share Repurchase Program”), authorizing share repurchases up to an aggregate of $360 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2020 if not terminated earlier. The Company has a written trading plan that provides for share repurchases in open market transactions that is intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. During 2019, the Company purchased approximately 0.3 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.92 per common share for an aggregate purchase price, including commissions, of approximately $4.3 million and, in 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. As of December 31, 2019, approximately $359.8 million remained available for repurchases under this Share Repurchase Program. 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.
Additionally, during 2019 and 2018, 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 8 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.
The following is a summary of all share repurchases during the fourth quarter of 2019:
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, 2019 |
- | - | - | $ | 359,800 | |||||||||||
November 1 - November 30, 2019 |
- | - | - | $ | 359,800 | |||||||||||
December 1 - December 31, 2019 (2) |
5,502 | $ | 15.77 | - | $ | 359,800 | ||||||||||
Total |
5,502 | - |
(1) |
Represents amount outstanding under the Company's authorized $360 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 2020. No shares were repurchased under the program during the fourth quarter of 2019. |
(2) |
Consists of 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, 2019:
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) (3) |
||||||||||
Equity compensation plans approved by security holders |
297,333 | $ | 21.81 | 8,992,653 | ||||||||
Equity compensation plans not approved by security holders |
- | - | - | |||||||||
Total equity compensation plans |
297,333 | $ | 21.81 | 8,992,653 |
(1) |
Represents 249,895 stock options granted to the Company’s current and former directors under the Directors’ Plan. Also includes 47,438 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. |
(3) |
Does not include remaining shares registered under the Directors’ Plan, as no further grants can be made under the Plan. |
Item 6. |
Selected Financial Data |
The following table sets forth selected financial data for the five years ended December 31, 2019. 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) |
2019 |
2018 |
2017 |
2016 (1) | 2015 | |||||||||||||||
Revenues: |
||||||||||||||||||||
Room |
$ | 1,167,203 | $ | 1,172,331 | $ | 1,143,987 | $ | 956,119 | $ | 821,733 | ||||||||||
Food and beverage |
59,815 | 62,600 | 66,030 | 59,558 | 54,710 | |||||||||||||||
Other |
39,579 | 35,624 | 28,605 | 25,348 | 21,871 | |||||||||||||||
Total revenue |
1,266,597 | 1,270,555 | 1,238,622 | 1,041,025 | 898,314 | |||||||||||||||
Expenses and other income: |
||||||||||||||||||||
Hotel operating expense |
724,416 | 715,934 | 697,402 | 582,839 | 507,081 | |||||||||||||||
Property taxes, insurance and other expense |
75,840 | 74,640 | 69,391 | 56,860 | 46,023 | |||||||||||||||
Operating ground lease expense (2) |
1,658 | 11,364 | 11,313 | 10,409 | 9,996 | |||||||||||||||
General and administrative expense |
36,210 | 24,294 | 26,341 | 17,032 | 19,552 | |||||||||||||||
Loss on impairment of depreciable real estate assets |
6,467 | 3,135 | 45,875 | 5,471 | 45,000 | |||||||||||||||
Depreciation and amortization expense (2) |
193,240 | 183,482 | 176,499 | 148,163 | 127,449 | |||||||||||||||
Transaction and litigation costs (reimbursements) |
- | - | (2,586 | ) | 34,989 | 7,181 | ||||||||||||||
(Gain) loss on sale of real estate |
(5,021 | ) | (152 | ) | (16,295 | ) | 153 | (15,286 | ) | |||||||||||
Interest and other expense, net (2) |
61,191 | 51,185 | 47,343 | 40,026 | 33,132 | |||||||||||||||
Income tax expense |
679 | 587 | 847 | 431 | 898 | |||||||||||||||
Total expenses and other income |
1,094,680 | 1,064,469 | 1,056,130 | 896,373 | 781,026 | |||||||||||||||
Net income |
$ | 171,917 | $ | 206,086 | $ | 182,492 | $ | 144,652 | $ | 117,288 | ||||||||||
Per Share: |
||||||||||||||||||||
Net income per common share |
$ | 0.77 | $ | 0.90 | $ | 0.82 | $ | 0.76 | $ | 0.65 | ||||||||||
Distributions declared per common share (3) |
$ | 1.20 | $ | 1.20 | $ | 1.20 | $ | 1.20 | $ | 1.37 | ||||||||||
Weighted-average common shares outstanding - basic and diluted |
223,910 | 229,659 | 223,526 | 190,856 | 180,261 | |||||||||||||||
Balance Sheet Data (at end of period): |
||||||||||||||||||||
Investment in real estate, net (2) |
$ | 4,825,738 | $ | 4,816,410 | $ | 4,793,159 | $ | 4,823,489 | $ | 3,641,767 | ||||||||||
Assets held for sale |
$ | 12,093 | $ | - | $ | - | $ | 39,000 | $ | - | ||||||||||
Total assets (2) |
$ | 4,942,411 | $ | 4,928,672 | $ | 4,902,338 | $ | 4,979,883 | $ | 3,722,775 | ||||||||||
Debt, net |
$ | 1,320,407 | $ | 1,412,242 | $ | 1,222,196 | $ | 1,337,963 | $ | 998,103 | ||||||||||
Finance lease liabilities (2) |
$ | 216,627 | $ | - | $ | - | $ | - | $ | - | ||||||||||
Shareholders' equity |
$ | 3,291,013 | $ | 3,409,010 | $ | 3,571,085 | $ | 3,517,064 | $ | 2,647,058 | ||||||||||
Net book value per share |
$ | 14.70 | $ | 15.22 | $ | 15.53 | $ | 15.78 | $ | 15.18 | ||||||||||
Other Data: |
||||||||||||||||||||
Cash Flow From (Used In): |
||||||||||||||||||||
Operating activities |
$ | 381,674 | $ | 404,812 | $ | 384,071 | $ | 331,171 | $ | 279,628 | ||||||||||
Investing activities |
$ | (14,324 | ) | $ | (210,160 | ) | $ | (158,256 | ) | $ | (162,200 | ) | $ | (90,736 | ) | |||||
Financing activities |
$ | (366,321 | ) | $ | (190,811 | ) | $ | (225,449 | ) | $ | (162,197 | ) | $ | (198,767 | ) | |||||
Number of hotels owned at end of period |
233 | 241 | 239 | 235 | 179 |
(1) |
Effective September 1, 2016, the Company completed the merger with Apple REIT Ten, Inc. and added 56 hotels located in 17 states with an aggregate of 7,209 rooms to the Company’s real estate portfolio. |
(2) |
Effective January 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (Topic 842), electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity without restating the presentation of periods prior to the effective date. Under the new lease accounting standard, the Company classified four ground leases as finance leases that were previously classified as operating leases in accordance with the previous accounting standard. In 2019, the Company recognized approximately $4.5 million of amortization expense and approximately $8.2 million of interest expense associated with these four finance leases. Results prior to January 1, 2019 were not restated and therefore, for the years ended December 31, 2018, 2017, 2016 and 2015, the Company recognized approximately $9.5 million, $9.5 million, $8.9 million and $8.6 million, respectively, of operating ground lease expense associated with these four ground leases. See Note 1 titled “Organization and Summary of Significant Accounting Policies” and Note 10 titled “Lease Commitments” 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 on the adoption of the new lease accounting standard. |
(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. |
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 U.S. As of December 31, 2019, the Company owned 233 hotels with an aggregate of 29,870 rooms located in urban, high-end suburban and developing markets throughout 34 states, including one hotel with 105 rooms classified as held for sale, which was sold to an unrelated party in January 2020. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 21 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.”
Recent 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 three hotels for an aggregate purchase price of approximately $59.3 million during 2019: a 160-room existing Hampton Inn & Suites in St. Paul, Minnesota, a 128-room newly constructed Home2 Suites in Orlando, Florida and a 55-room existing independent boutique hotel in Richmond, Virginia. Although the independent boutique hotel is not affiliated with a brand, the Company plans to reposition the hotel to operate consistently with its rooms-focused hotels. Also, as of December 31, 2019, the Company had outstanding contracts for the potential purchase of six hotels for a total expected purchase price of approximately $208.8 million, all of which are under development and are planned to be completed and opened for business over the next five to 18 months from December 31, 2019, at which time closings on these hotels are expected to occur. In each case, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities available at closing 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, in 2019, the Company sold a total of 11 hotels for a total combined gross sales price of approximately $121.7 million. In January 2020, the Company sold one of its hotels for a gross sales price of $13.0 million and, as of January 31, 2020, the Company had an outstanding contract to sell one of its hotels for a gross sales price of approximately $32.0 million. Although the Company is working towards the sale of the hotel under contract, there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that a closing on this hotel will occur under the outstanding sale contract. If the closing occurs, this sale is expected to be completed in the first quarter of 2020. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility.
See Note 2 titled “Investment in Real Estate” and Note 3 titled “Assets Held for Sale, 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.
Effective January 20, 2020, the Company converted its New York, New York Renaissance hotel to an independent boutique hotel. The Company anticipates that it will incur total conversion costs of approximately $1.0 million to complete the transition, of which approximately $0.1 million was incurred in 2019. The intent of the conversion is to provide greater long-term flexibility with the operations of the hotel. Although the Company is not able to fully estimate the near-term impact associated with the transition, it does anticipate operational disruption as the management team works to replace revenue that historically came from participation in the Renaissance brand system. With the conversion of this hotel and the October 2019 acquisition of the existing independent boutique hotel
in Richmond, Virginia, mentioned above, the Company has two independent boutique hotels with a combined total of 263 rooms.
New Lease Accounting Standard
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity, without restating the presentation of periods prior to the effective date (the “new lease accounting standard”). Under the new lease accounting standard, beginning in 2019, four of the Company’s ground leases that were previously accounted for as operating leases are accounted for as finance leases. For these finance leases, effective January 1, 2019, the Company recognizes amortization expense, included in depreciation and amortization expense, and interest expense, included in interest and other expense, net, instead of operating ground lease expense, in the Company’s consolidated statements of operations. Results prior to January 1, 2019 have not been restated. As a result, the comparability of operating ground lease expense, depreciation and amortization expense, and interest and other expense, net for the years ended December 31, 2019, 2018 and 2017 as noted below are affected by the implementation of the new lease accounting standard. See Note 1 titled “Organization and Summary of Significant Accounting Policies” and Note 10 titled “Lease Commitments” 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 on the adoption of the new lease accounting standard.
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, improvements in the general U.S. economy, which have broadly increased demand for hotels, have been offset by increased lodging supply in many markets. With flat growth in RevPAR and increased labor costs, the Company’s Comparable Hotels produced slightly lower operating results during 2019 as compared to 2018. There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging industry and the Company, including but not limited to, continued 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, travel-related health concerns, political changes and economic concerns in the U.S. The Company is forecasting flat to slightly negative RevPAR growth and lower operating results for its Comparable Hotels for 2020 as compared to 2019, which reflects modest expectations for demand growth, consistent with modest growth expectations for the U.S. economy, relatively consistent anticipated hotel supply growth, unfavorable comparisons caused by outsized demand in 2019 related to natural disaster recovery efforts in certain markets and the transition of the Company’s full service hotel in New York, New York from the Renaissance brand to an independent boutique hotel as discussed above.
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) |
2019 |
Percent of Revenue |
2018 |
Percent of Revenue |
Change 2018 to 2019 |
2017 |
Percent of Revenue |
Change 2017 to 2018 |
||||||||||||||||||||||||
Total revenue |
$ | 1,266,597 | 100.0 | % | $ | 1,270,555 | 100.0 | % | -0.3 | % | $ | 1,238,622 | 100.0 | % | 2.6 | % | ||||||||||||||||
Hotel operating expense |
724,416 | 57.2 | % | 715,934 | 56.3 | % | 1.2 | % | 697,402 | 56.3 | % | 2.7 | % | |||||||||||||||||||
Property taxes, insurance and other expense |
75,840 | 6.0 | % | 74,640 | 5.9 | % | 1.6 | % | 69,391 | 5.6 | % | 7.6 | % | |||||||||||||||||||
Operating ground lease expense(1) |
1,658 | 0.1 | % | 11,364 | 0.9 | % | -85.4 | % | 11,313 | 0.9 | % | 0.5 | % | |||||||||||||||||||
General and administrative expense |
36,210 | 2.9 | % | 24,294 | 1.9 | % | 49.0 | % | 26,341 | 2.1 | % | -7.8 | % | |||||||||||||||||||
Loss on impairment of depreciable real estate assets |
6,467 | 3,135 | n/a | 45,875 | n/a | |||||||||||||||||||||||||||
Depreciation and amortization expense(1) |
193,240 | 183,482 | 5.3 | % | 176,499 | 4.0 | % | |||||||||||||||||||||||||
Transaction and litigation costs (reimbursements) |
- | - | n/a | (2,586 | ) | n/a | ||||||||||||||||||||||||||
Gain on sale of real estate |
5,021 | 152 | n/a | 16,295 | n/a | |||||||||||||||||||||||||||
Interest and other expense, net(1) |
61,191 | 51,185 | 19.5 | % | 47,343 | 8.1 | % | |||||||||||||||||||||||||
Income tax expense |
679 | 587 | 15.7 | % | 847 | -30.7 | % | |||||||||||||||||||||||||
Number of hotels owned at end of period |
233 | 241 | -3.3 | % | 239 | 0.8 | % | |||||||||||||||||||||||||
ADR |
$ | 137.30 | $ | 136.04 | 0.9 | % | $ | 134.61 | 1.1 | % | ||||||||||||||||||||||
Occupancy |
77.0 | % | 76.9 | % | 0.1 | % | 77.4 | % | -0.6 | % | ||||||||||||||||||||||
RevPAR |
$ | 105.72 | $ | 104.66 | 1.0 | % | $ | 104.13 | 0.5 | % |
(1) |
As discussed above, effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), electing to recognize and measure its leases prospectively at the beginning of the period of adoption through a cumulative-effect adjustment to shareholders’ equity without restating the presentation of periods prior to the effective date. Under the new lease accounting standard, the Company classified four ground leases as finance leases that were previously classified as operating leases in accordance with the previous accounting standard. In 2019, the Company recognized approximately $4.5 million of amortization expense and approximately $8.2 million of interest expense associated with these four finance leases. Results prior to January 1, 2019 were not restated and therefore, for the years ended December 31, 2018 and 2017, the Company recognized approximately $9.5 million each year of operating ground lease expense associated with these four ground leases. See Note 1 titled “Organization and Summary of Significant Accounting Policies” and Note 10 titled “Lease Commitments” 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 on the adoption of the new lease accounting standard. |
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company’s 232 hotels owned and held for use as of December 31, 2019. The Company defines metrics from Comparable Hotels as results generated by the 232 hotels owned and held for use 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 and assets held for sale, results have been excluded for the Company’s period of ownership.
Years Ended December 31, |
||||||||||||||||||||
2019 |
2018 |
Change 2018 to 2019 |
2017 |
Change 2017 to 2018 |
||||||||||||||||
ADR |
$ | 137.70 | $ | 137.43 | 0.2 | % | $ | 136.44 | 0.7 | % | ||||||||||
Occupancy |
77.1 | % | 77.2 | % | -0.1 | % | 77.8 | % | -0.8 | % | ||||||||||
RevPAR |
$ | 106.12 | $ | 106.07 | - | $ | 106.13 | -0.1 | % |
Same Store Operating Results
The following table reflects certain operating statistics for the 218 hotels owned and held for use by the Company as of January 1, 2017 and during the entirety of the reporting periods being compared (“Same Store Hotels”). This information has not been audited.
Years Ended December 31, | ||||||||||||||||||||
2019 |
2018 |
Change 2018 to 2019 |
2017 |
Change 2017 to 2018 |
||||||||||||||||
ADR |
$ | 136.93 | $ | 136.86 | 0.1 | % | $ | 135.94 | 0.7 | % | ||||||||||
Occupancy |
77.2 | % | 77.4 | % | -0.3 | % | 78.0 | % | -0.8 | % | ||||||||||
RevPAR |
$ | 105.73 | $ | 105.88 | -0.1 | % | $ | 105.98 | -0.1 | % |
As discussed above, hotel performance is impacted by many factors, including the economic conditions in the U.S. as well as each individual locality. Economic indicators in the U.S. have generally been favorable, which has been offset by increased lodging supply in many of the Company’s markets. As a result, the Company’s revenue for its Comparable Hotels and Same Store Hotels were generally unchanged from 2017 to 2019. The Company expects its RevPAR growth for its Comparable Hotels in 2020 to be flat to slightly negative compared to its performance in 2019. The Company’s hotels in general have shown results consistent with to slightly favorable as compared to industry, brand and chain scale averages. From 2017 to 2019, the Company’s results were impacted by recovery and restoration efforts from natural disasters affecting several markets. In 2017, the Company experienced an increase in demand as a result of the restoration and recovery efforts in Houston and Austin, Texas and in many of its Florida markets resulting from hurricanes Harvey and Irma. In 2018, the Company’s hotels located in eastern North Carolina, southern Alabama and the Florida Panhandle were affected by hurricanes Florence and Michael, including the closure of the Company’s two hotels in the Panama City, Florida area. During 2019, the Company experienced increases in demand for markets affected by hurricanes Florence and Michael and also experienced an increase in demand in Anchorage, Alaska resulting from recovery and restoration efforts related to the late 2018 earthquake in the area.
Results of Operations
A discussion regarding the Company’s results of operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 is presented below. A discussion regarding the results of operations for the year ended December 31, 2018 compared to the year ended December 31, 2017 can be found under the section titled “Results of Operations for Years 2018 and 2017” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 25, 2019, which is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov and in the Investor Information section of the Company’s website at www.applehospitalityreit.com.
As of December 31, 2019, the Company owned 233 hotels with a total of 29,870 rooms as compared to 241 hotels with a total of 30,812 rooms as of December 31, 2018. Results of operations are included only for the period of ownership for hotels acquired or disposed of during all periods presented. During 2019, the Company acquired one newly constructed hotel on March 19, 2019 and two existing hotels (one on March 4, 2019 and one on October 9, 2019), and sold 11 hotels (nine on March 28, 2019, one on December 19, 2019 and one on December 30, 2019). 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). As a result, the comparability of results for the years ended December 31, 2019 and 2018 as discussed below is impacted by these transactions.
Revenues
The Company’s principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For each of the years ended December 31, 2019 and 2018, the Company had total revenue of $1.3 billion. For the years ended December 31, 2019 and 2018, respectively, Comparable Hotels achieved combined average occupancy of 77.1% and 77.2%, ADR of $137.70 and $137.43 and RevPAR of $106.12 and $106.07.
During 2019, the Company’s Comparable Hotels experienced a slight increase in ADR and a slight decrease in occupancy as compared to 2018, leaving RevPAR for Comparable Hotels virtually unchanged. Overall, because of its geographic diversity, the Company’s Comparable Hotels’ RevPAR change for 2019 was generally consistent to slightly favorable as compared to industry, brand and chain scale averages. As a result of the recovery and restoration efforts in certain markets that began during the fourth quarter of 2018, the Company’s Comparable Hotels’ RevPAR decreased 0.9% in the fourth quarter of 2019 as compared to the same period of 2018. The Company, for the full year of 2019, experienced increased revenue due to demand in the Florida Panhandle, southern Alabama, eastern North Carolina and Anchorage, Alaska resulting from recovery and restoration efforts related to hurricanes Florence and Michael and the 2018 earthquake in Anchorage, Alaska. Markets and areas with above average growth in 2019 for the Company and industry included Birmingham, Alabama, Norfolk, Virginia, Phoenix and Tucson, Arizona, Portland, Maine and Sacramento, California. Markets that were below average for the Company and industry included central and southern Florida, Boston, Massachusetts, Houston, Texas, Oklahoma City, Oklahoma and Seattle, Washington.
Hotel Operating Expense
Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the years ended December 31, 2019 and 2018, respectively, hotel operating expense totaled $724.4 million and $715.9 million or 57.2% and 56.3% of total revenue for each respective year, which is consistent with the increases in Comparable Hotels hotel operating expense as a percentage of revenue for the same period. Increases in labor costs as a percentage of revenue during 2019 as compared to 2018 were the primary cause of the increase in hotel operating expense, which were slightly offset by decreases in utility costs. The Company anticipates continued increases in labor costs due to government regulations surrounding wages, healthcare and other benefits, other wage-related initiatives and lower unemployment rates. The Company will continue to work with its management companies to reduce or mitigate costs as a percentage of revenue where possible while maintaining quality and service levels at each property.
Property Taxes, Insurance and Other Expense
Property taxes, insurance and other expense for the years ended December 31, 2019 and 2018 totaled $75.8 million and $74.6 million, respectively, or 6.0% and 5.9% of total revenue for each respective year, which is consistent with Comparable Hotels expense as a percentage of revenue for the same period. For the Company’s Comparable Hotels, real estate taxes increased in 2019 compared to 2018, with tax increases at certain locations due to the reassessment of property values by localities related to the improved economy, partially offset by decreases at other locations due to successful appeals of tax assessments. With the economy continuing to improve, the Company anticipates continued increases in property tax assessments in 2020. The Company will continue to appeal tax assessments in certain jurisdictions to attempt to minimize tax increases as warranted. Additionally, due to increased losses incurred by property insurance carriers during the past few years, the Company’s property insurance costs increased as a percentage of revenue for 2019 as compared to 2018, which was partially offset by a decrease in remediation and repair costs below insurance deductibles related to wind and water damage resulting from hurricanes during the same periods.
Operating Ground Lease Expense
Operating ground lease expense for the years ended December 31, 2019 and 2018 was $1.7 million and $11.4 million, respectively. Operating ground lease expense in 2019 primarily represents the expense incurred by the Company to lease land for nine of its hotel properties. Operating ground lease expense in 2018 primarily represents the expense incurred by the Company to lease land for 13 of its hotel properties, which included approximately $9.5 million of expense related to four ground leases that were previously classified as operating leases that are classified as finance leases under the new lease accounting standard effective January 1, 2019.
General and Administrative Expense
General and administrative expense for the years ended December 31, 2019 and 2018 was $36.2 million and $24.3 million, respectively, or 2.9% and 1.9% of total revenue for each respective year. The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses. The increase in general and administrative expense in 2019 as compared to 2018 was due primarily to costs
associated with personnel changes involving the Company’s senior management and improved performance under the Company’s incentive plans which resulted in increased compensation expense. Based on the Company’s performance in 2019 in relation to the operational performance and shareholder return metrics of the 2019 incentive plans effective January 1, 2019 (“2019 Incentive Plans”), the amounts earned under the 2019 Incentive Plans were higher than the comparable compensation earned under the 2018 incentive plans (“2018 Incentive Plans”), resulting in an increase in compensation expense for 2019 of approximately $8.6 million, as compared to 2018. Compensation expense in 2019 also included approximately $2.1 million related to separation agreements with two executive officers who departed during the year.
Loss on Impairment of Depreciable Real Estate Assets
Loss on impairment of depreciable real estate assets was approximately $6.5 million and $3.1 million for the years ended December 31, 2019 and 2018, respectively, and consisted of impairment charges related to the potential sales of the Winston-Salem, North Carolina Courtyard recorded in 2019 and the Columbus, Georgia SpringHill Suites and TownePlace Suites hotels and the Springdale, Arkansas Residence Inn recorded in 2018, all of which were subsequently sold by the Company. See Note 2 titled “Investment in Real Estate” 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 impairment losses.
Depreciation and Amortization Expense
Depreciation and amortization expense for the years ended December 31, 2019 and 2018 was $193.2 million and $183.5 million, respectively. Depreciation and amortization expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. The increase was primarily due to the acquisition of three hotels in 2019 and five hotels in 2018 and renovations completed throughout 2019 and 2018, partially offset by the sale of 11 hotels in 2019 and three hotels in 2018. Additionally, depreciation and amortization expense for the year ended December 31, 2019 includes approximately $4.5 million of expense associated with amortization of the Company’s four finance ground lease assets in accordance with the new lease accounting standard.
Interest and Other Expense, net
Interest and other expense, net for the years ended December 31, 2019 and 2018 was $61.2 million and $51.2 million, respectively, and is net of approximately $1.3 million and $1.0 million, respectively, of interest capitalized associated with renovation projects. Additionally, interest and other expense, net for the year ended December 31, 2019 includes approximately $8.2 million of interest recorded on the Company’s four finance lease liabilities in accordance with the new lease accounting standard. Interest expense related to the Company’s debt increased as a result of increased average borrowings in 2019 as compared to 2018 resulting from acquisitions and share repurchases, partially offset by the repayment of borrowings with proceeds from dispositions, while the average effective interest rate remained relatively stable from 2018 through 2019. Approximately 98% of the Company’s outstanding debt was effectively fixed-rate debt at December 31, 2019 based on outstanding interest rate swaps at December 31, 2019. Based on outstanding swaps at December 31, 2019, the proportion of fixed-rate debt will decrease in 2020, as the Company had two interest rate swaps due to mature in the first half of 2020 which will be partially offset by three interest rate swaps that will become effective during the same period, resulting in a net decrease in the notional amount totaling $172.5 million, which will result in a decrease in the amount of variable-rate debt that is fixed by interest rate swaps. See Note 5 titled “Fair Value of Financial Instruments” 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 interest rate swaps.
Non-GAAP Financial Measures
The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations (“FFO”), Modified FFO (“MFFO”), Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), and Adjusted EBITDAre (“Adjusted EBITDAre”). These non-GAAP financial measures should be considered along with, but not as alternatives to, net income, cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre and Adjusted
EBITDAre are not necessarily indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. Although FFO, MFFO, EBITDA, EBITDAre and Adjusted EBITDAre, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre and Adjusted EBITDAre as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company’s results between periods and with other REITs.
FFO and MFFO
The Company calculates and presents FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“Nareit”), which defines FFO as net income (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.
The Company calculates MFFO by further adjusting FFO for (i) the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels, and (ii) the exclusion of transaction and litigation costs (reimbursements), as these costs (reimbursements) do not represent ongoing operations. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.
The following table reconciles the Company’s GAAP net income to FFO and MFFO for the years ended December 31, 2019, 2018 and 2017 (in thousands).
Years Ended December 31, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Net income |
$ | 171,917 | $ | 206,086 | $ | 182,492 | ||||||
Depreciation of real estate owned |
187,729 | 182,527 | 175,581 | |||||||||
Gain on sale of real estate |
(5,021 | ) | (152 | ) | (16,295 | ) | ||||||
Loss on impairment of depreciable real estate assets |
6,467 | 3,135 | 45,875 | |||||||||
Funds from operations |
361,092 | 391,596 | 387,653 | |||||||||
Amortization of finance ground lease assets |
4,517 | - | - | |||||||||
Amortization of favorable and unfavorable operating leases, net |
124 | 647 | 663 | |||||||||
Non-cash straight-line operating ground lease expense |
188 | 3,542 | 3,700 | |||||||||
Transaction and litigation costs (reimbursements) |
- | - | (2,586 | ) | ||||||||
Modified funds from operations |
$ | 365,921 | $ | 395,785 | $ | 389,430 |
EBITDA, EBITDAre and Adjusted EBITDAre
EBITDA is a commonly used measure of performance in many industries and is defined as net income excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.
In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because
it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition.
The Company also considers the exclusion of certain additional items from EBITDAre useful, including (i) the exclusion of non-cash straight-line operating ground lease expense, as this expense does not reflect the underlying performance of the related hotels, and (ii) the exclusion of transaction and litigation costs (reimbursements), as these costs (reimbursements) do not represent ongoing operations.
The following table reconciles the Company’s GAAP net income to EBITDA, EBITDAre and Adjusted EBITDAre for the years ended December 31, 2019, 2018 and 2017 (in thousands).
Years Ended December 31, |
||||||||||||
2019 |
2018(1) | 2017(1) | ||||||||||
Net income |
$ | 171,917 | $ | 206,086 | $ | 182,492 | ||||||
Depreciation and amortization |
193,240 | 183,482 | 176,499 | |||||||||
Amortization of favorable and unfavorable operating leases, net |
124 | 647 | 663 | |||||||||
Interest and other expense, net |
61,191 | 51,185 | 47,343 | |||||||||
Income tax expense |
679 | 587 | 847 | |||||||||
EBITDA |
427,151 | 441,987 | 407,844 | |||||||||
Gain on sale of real estate |
(5,021 | ) | (152 | ) | (16,295 | ) | ||||||
Loss on impairment of depreciable real estate assets |
6,467 | 3,135 | 45,875 | |||||||||
EBITDAre |
428,597 | 444,970 | 437,424 | |||||||||
Non-cash straight-line operating ground lease expense |
188 | 3,542 | 3,700 | |||||||||
Transaction and litigation costs (reimbursements) |
- | - | (2,586 | ) | ||||||||
Adjusted EBITDAre |
$ | 428,785 | $ | 448,512 | $ | 438,538 |
(1) |
EBITDA, EBITDAre and Adjusted EBITDAre for the years ended December 31, 2018 and 2017 include approximately $5.7 million and $5.5 million, respectively, of lease payments recorded to operating ground lease expense related to four of the Company’s ground leases that were classified as operating leases prior to 2019. Under the new lease accounting standard, effective January 1, 2019, these four ground leases are classified as finance leases, for which the Company recognizes amortization expense and interest expense in the Company’s consolidated statements of operations (which are both excluded from EBITDA, EBITDAre and Adjusted EBITDAre calculations), instead of operating ground lease expense. |
Hotels Owned
As of December 31, 2019, the Company owned 233 hotels with an aggregate of 29,870 rooms located in 34 states, including one hotel with 105 rooms classified as held for sale, which was sold to an unrelated party in January 2020. The following tables summarize the number of hotels and rooms by brand and by state:
Number of Hotels and Guest Rooms by Brand |
||||||||
Number of |
Number of |
|||||||
Brand |
Hotels |
Rooms |
||||||
Hilton Garden Inn |
41 | 5,665 | ||||||
Hampton |
39 | 4,956 | ||||||
Courtyard |
36 | 4,948 | ||||||
Residence Inn |
33 | 3,939 | ||||||
Homewood Suites |
33 | 3,731 | ||||||
SpringHill Suites |
15 | 2,040 | ||||||
Fairfield |
11 | 1,300 | ||||||
Home2 Suites |
9 | 1,038 | ||||||
TownePlace Suites |
9 | 931 | ||||||
Marriott |
2 | 616 | ||||||
Embassy Suites |
2 | 316 | ||||||
Renaissance |
1 | 208 | * | |||||
Hyatt Place |
1 | 127 | ||||||
Independent |
1 | 55 | ||||||
Total |
233 | 29,870 |
* | On January 20, 2020, the New York, New York Renaissance hotel became an independent boutique hotel. |
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 |
22 | 2,803 | ||||||
Georgia |
6 | 672 | ||||||
Idaho |
2 | 416 | ||||||
Illinois |
8 | 1,420 | ||||||
Indiana |
4 | 479 | ||||||
Iowa |
3 | 301 | ||||||
Kansas |
4 | 422 | ||||||
Louisiana |
3 | 422 | ||||||
Maine |
1 | 179 | ||||||
Maryland |
2 | 233 | ||||||
Massachusetts |
4 | 466 | ||||||
Michigan |
1 | 148 | ||||||
Minnesota |
3 | 404 | ||||||
Mississippi |
2 | 168 | ||||||
Missouri |
4 | 544 | ||||||
Nebraska |
4 | 621 | ||||||
New Jersey |
5 | 629 | ||||||
New York |
4 | 553 | ||||||
North Carolina |
10 | 1,091 | ||||||
Ohio |
2 | 252 | ||||||
Oklahoma |
4 | 545 | ||||||
Pennsylvania |
3 | 391 | ||||||
South Carolina |
5 | 538 | ||||||
Tennessee |
13 | 1,502 | ||||||
Texas |
31 | 3,755 | ||||||
Utah |
3 | 393 | ||||||
Virginia |
13 | 1,822 | ||||||
Washington |
4 | 609 | ||||||
Total |
233 | 29,870 |
Refer to Part I, Item 2, of this Annual Report on Form 10-K for a table summarizing the location, brand, manager, date acquired or completed and number of rooms for each of the 233 hotels the Company owned as of December 31, 2019.
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 6 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.
Liquidity and Capital Resources
Contractual Commitments
The following is a summary of the Company’s significant contractual obligations as of December 31, 2019 (in thousands):
Amount of Commitments Expiring per Period |
||||||||||||||||||||
Total |
1 Year |
2-3 Years |
4-5 Years |
Over 5 Years |
||||||||||||||||
Property Purchase Commitments |
$ | 208,817 | $ | 110,045 | $ | 98,772 | $ | - | $ | - | ||||||||||
Debt (including interest of $229.1 million) |
1,554,924 | 76,615 | 297,520 | 687,749 | 493,040 | |||||||||||||||
Finance Leases |
516,360 | 9,541 | 19,385 | 21,365 | 466,069 | |||||||||||||||
Operating Leases |
37,119 | 1,252 | 1,880 | 1,540 | 32,447 | |||||||||||||||
$ | 2,317,220 | $ | 197,453 | $ | 417,557 | $ | 710,654 | $ | 991,556 |
Capital Resources
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. Periodically, the Company may receive proceeds from strategic dispositions of certain hotels, entering into additional secured and unsecured debt financing, or issuing common shares through equity offerings.
As of December 31, 2019, the Company had approximately $1.3 billion of total outstanding debt consisting of $455.0 million of mortgage debt and $870.9 million outstanding under its credit facilities, which include its $850 million credit facility, its $225 million term loan facility and two $85 million term loan facilities (together, the “credit facilities”), excluding unamortized debt issuance costs and fair value adjustments. The Company’s unused borrowing capacity under its $425 million revolving credit facility as of December 31, 2019 was $374.1 million, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders.
The credit agreements governing the credit facilities contain mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. The Company was in compliance with the applicable covenants at December 31, 2019 and anticipates being in compliance during 2020.
See Note 4 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 a description of the Company’s debt instruments as of December 31, 2019 and a summary of the financial and restrictive covenants as defined in the credit agreements.
The Company has a universal shelf registration statement on Form S-3 (No. 333-231021) that was automatically effective upon filing on April 25, 2019. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred
shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended. Future offerings 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.
As discussed in Note 3, “Assets Held for Sale, 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, as of December 31, 2019, the Company had outstanding contracts to sell two of its hotels for a combined gross sales price of approximately $45.0 million. The Company completed the sale of one of these hotels in January 2020 for $13.0 million, and if the closing occurs on the sale of the other hotel, it is expected to be completed in the first quarter of 2020. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility.
Capital Uses
The Company anticipates that cash flow from operations, availability under its credit facilities, additional borrowings and proceeds from hotel dispositions and equity offerings 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).
Distributions
To maintain its REIT status the Company is required to distribute at least 90% of its ordinary income. Distributions paid for each of the three years ended December 31, 2019 were $1.20 per common share and were paid at a monthly rate of $0.10 per common share for a total of approximately $268.7 million, $275.9 million and $267.9 million, respectively. For the same periods, the Company’s net cash generated from operations was approximately $381.7 million, $404.8 million and $384.1 million, respectively.
The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. 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 will be 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 assurances it will be successful with this strategy and may need to reduce its distributions to required levels. 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.
Share Repurchases
In May 2019, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $360 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2020 if not terminated earlier. During 2019, the Company purchased approximately 0.3 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.92 per common share, for an aggregate purchase price, including commissions, of approximately $4.3 million and, in 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. As of December 31, 2019, approximately $359.8 million remained available for repurchases under this Share Repurchase Program. 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.
Capital Improvements
The Company has ongoing capital commitments to fund its capital improvements. 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. Under certain loan and management agreements, the Company is required to place in escrow funds for the repair, replacement and refurbishing of furniture, fixtures, and equipment, based on a percentage of gross revenues, provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of December 31, 2019, the Company held approximately $30.9 million in reserve related to these properties. During 2019, the Company invested approximately $78.7 million in capital expenditures and anticipates spending approximately $80 to $90 million during 2020, which includes various scheduled renovation projects for approximately 25 to 30 properties. The Company does not currently have any existing or planned projects for development.
Hotel Purchase Contract Commitments
As of December 31, 2019, the Company had outstanding contracts for the potential purchase of six hotels for a total expected purchase price of approximately $208.8 million, which are under development and are planned to be completed and opened for business over the next five to 18 months from December 31, 2019, at which time closings on these hotels are expected to occur. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. It is anticipated that the purchase price for the six hotels will be funded through the Company’s credit facilities.
Lease Commitments
Under the terms of the Company’s ground leases, certain minimum lease payments are subject to change based on criteria specified in the lease. Minimum lease payments may be estimated if the change date occurs and the new minimum lease payments are not yet determinable. During 2019, the Company estimated a required increase in lease payments under one of its finance ground leases, resulting in an increase in the finance ground lease right-of-use (“ROU”) asset and liability at the anticipated date of the change. The amount of the increase and the effective date of the change are subject to agreement with the lessor and could increase in the future. As of December 31, 2019, the Company and the lessor had not reached an agreement on the increase in future lease payments and, as a result, the projected future lease payments and impact on the lease ROU asset and liability is uncertain. See Note 10 titled “Lease Commitments” 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.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6 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 day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Management and Franchise Agreements
Each of the Company’s 233 hotels owned as of December 31, 2019 is operated and managed under separate management agreements with 21 hotel management companies, none of which are affiliated with the Company. Fifteen 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 branded hotels they manage were required to obtain separate franchise agreements with the applicable franchisor. See Note 9 titled “Management and Franchise Agreements” 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 pertaining to the management and franchise agreements, including a listing of the Company’s hotel management companies. For the
years ended December 31, 2019, 2018 and 2017, the Company incurred approximately $43.8 million, $43.9 million and $42.7 million, respectively, in management fees. For the years ended December 31, 2019, 2018 and 2017, the Company incurred approximately $54.9 million, $54.5 million and $52.9 million, respectively, in franchise royalty fees.
Impact of Inflation
The Company relies on the performance of its hotels and the ability of its hotel operators to increase revenue to keep pace with inflation. Hotel operators, in general, possess the ability to adjust room rates daily to reflect the effects of inflation on the Company’s operating expenses. However, recent competitive pressures have and may continue to limit the operators’ ability to raise room rates and, as a result, the Company may not be able to offset increased operating expenses with increases in revenue.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes it has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Critical Accounting Policies
The following contains a discussion of what the Company believes to be its critical accounting policies. These items should be read to gain a further understanding of the principles used to prepare the Company’s financial statements. These principles include application of judgment; therefore, changes in judgments may have a significant impact on the Company’s reported results of operations and financial condition.
Investment Policy
Upon acquisition of real estate properties, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, and assumed debt based on the evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparables and other information which is subjective in nature. The Company has not assigned any value to management contracts and franchise agreements as such contracts are generally at current market rates based on the remaining terms of the contracts and any other value attributable to these contracts is not considered material. Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition, including title, legal, accounting, brokerage commissions and other related costs, being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred.
Capitalization Policy
The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.
Impairment Losses Policy
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties’ carrying amount. Indicators of impairment include 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 monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares an annual recoverability analysis for each of its properties to assist with its evaluation of impairment indicators. The analysis compares each property’s net book value to each property’s estimated operating income using current operating results for each stabilized property and projected stabilized operating results based on the property’s market for properties that recently opened, were recently renovated or experienced other short-term business disruption. The Company’s planned initial hold period for each property is generally 39 years. If events or circumstances change, such as the Company’s intended hold period for a property or if the operating performance of a property declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. The Company’s ongoing analyses and annual recoverability analyses have not identified any impairment losses other than the losses on impairment of one property recorded in 2019, three properties recorded in 2018 and three properties recorded in 2017 totaling approximately $6.5 million, $3.1 million and $45.9 million, respectively, as discussed herein in Note 2 titled “Investment in Real Estate” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
New Accounting Standards
See 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 for information on the adoption of the new lease accounting standard on January 1, 2019 and the anticipated adoption of recently issued accounting standards.
Subsequent Events
In both January 2020 and February 2020, the Company paid approximately $22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders.
In February 2020, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of March 2020. The distribution is payable on March 16, 2020.
In January 2020, the Company completed the sale of its 105-room Sanford, Florida SpringHill Suites for a gross sales price of $13.0 million. The net proceeds from the sale were used to pay down borrowings on the Company’s revolving credit facility.
Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
As of December 31, 2019, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. However, the Company is exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its revolving credit facility and due to the portion of its variable-rate term debt that is not fixed by interest rate swaps. As of December 31, 2019, after giving effect to interest rate swaps, as described below, approximately $28.4 million, or approximately 2% of the Company’s total debt outstanding, was subject to variable interest rates. Based on the Company’s variable-rate debt outstanding as of December 31, 2019, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $0.3 million, all other factors remaining the same. With the exception of interest rate swap transactions, the Company has not engaged in transactions in derivative financial instruments or derivative commodity instruments. The Company’s cash and cash equivalents at December
31, 2019 were $0. As of December 31, 2019, the Company had two interest rate swaps due to mature in the first half of 2020 and three interest rate swaps that will become effective during the same period, resulting in a net decrease in the notional amount of $172.5 million, which will result in a corresponding increase in the amount of the Company’s variable-rate debt that is not fixed by interest rate swaps.
As of December 31, 2019, the Company’s variable-rate debt consisted of its credit facilities, including borrowings outstanding under its $425 million revolving credit facility and $820 million of term loans. Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable-rate debt. As of December 31, 2019, the Company had 11 interest rate swap agreements that effectively fix the interest payments on approximately $842.5 million of the Company’s variable-rate debt outstanding with maturity dates ranging from May 2020 (representing two swaps with a total notional amount of $322.5 million) to December 2029. In addition, the Company has entered into a total of four interest rate swap agreements which, beginning January 31, 2020, May 18, 2020 and May 18, 2021, will effectively fix the interest rate on $25 million, $125 million and $75 million, respectively, of its variable-rate debt. Under the terms of all of the Company’s interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one-month LIBOR. See Note 5 titled “Fair Value of Financial Instruments” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for a description of the Company’s interest rate swaps as of December 31, 2019.
In addition to its variable-rate debt and interest rate swaps discussed above, the Company has assumed or originated fixed interest rate mortgages payable to lenders under permanent financing arrangements. The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt and borrowings outstanding under its credit facilities at December 31, 2019. All dollar amounts are in thousands.
2020 |
2021 |
2022 |
2023 |
2024 |
Thereafter |
Total |
Fair Market Value |
|||||||||||||||||||||||||
Total debt: |
||||||||||||||||||||||||||||||||
Maturities |
$ | 28,349 | $ | 47,586 | $ | 160,152 | $ | 295,615 | $ | 337,981 | $ | 456,184 | $ | 1,325,867 | $ | 1,333,638 | ||||||||||||||||
Average interest rates (1) |
3.6 | % | 3.6 | % | 3.5 | % | 3.5 | % | 3.6 | % | 3.8 | % | ||||||||||||||||||||
Variable-rate debt: |
||||||||||||||||||||||||||||||||
Maturities |
$ | - | $ | - | $ | 50,900 | $ | 250,000 | $ | 310,000 | $ | 260,000 | $ | 870,900 | $ | 870,719 | ||||||||||||||||
Average interest rates (1) |
3.2 | % | 3.2 | % | 3.2 | % | 3.3 | % | 3.4 | % | 3.5 | % | ||||||||||||||||||||
Fixed-rate debt: |
||||||||||||||||||||||||||||||||
Maturities |
$ | 28,349 | $ | 47,586 | $ | 109,252 | $ | 45,615 | $ | 27,981 | $ | 196,184 | $ | 454,967 | $ | 462,919 | ||||||||||||||||
Average interest rates |
4.4 | % | 4.4 | % | 4.2 | % | 4.1 | % | 4.1 | % | 4.0 | % |
(1) |
The average interest rate gives effect to interest rate swaps, as applicable. |
Item 8. |
Financial Statements and Supplementary Data |
Report of Management
on Internal Control over Financial Reporting
February 24, 2020
To the Shareholders
Apple Hospitality REIT, Inc.
Management of Apple Hospitality REIT, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of December 31, 2019, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on the Company’s internal control over financial reporting, a copy of which appears on the next page of this annual report.
/s/ Justin G. Knight |
|
/s/ Bryan Peery |
Justin G. Knight, President and |
|
Bryan Peery, Chief Financial Officer |
Chief Executive Officer (Principal Executive Officer) |
|
(Principal Financial and Principal Accounting Officer) |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Hospitality REIT, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Hospitality REIT, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Apple Hospitality REIT, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(2) and our report dated February 24, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Richmond, Virginia
February 24, 2020
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Hospitality REIT, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Hospitality REIT, Inc. (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 24, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Investments in Real Estate – Indicators of impairment |
||
Description of the Matter |
As of December 31, 2019, the Company had investments in real estate, net of accumulated depreciation and amortization of $4.8 billion. As more fully described in Notes 1 and 2 to the consolidated financial statements, the Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties’ carrying amounts. Many indicators of impairment, such as a change in the intended holding period of the property, are subjective and the Company also prepares an annual recoverability analysis assuming estimated cash flows for each of its properties to assist with its evaluation of impairment indicators.
Auditing management’s analysis is complex due to the highly judgmental nature of identifying indicators of impairment as well as a change in a property’s intended hold period. |
|
How We Addressed the Matter in Our Audit |
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s review for indicators of impairment, including changes in the intended hold period. For example, we tested controls over management’s review of the recoverability analysis and significant assumptions described above.
Our testing of the Company’s indicators of impairment included, among others, testing the recoverability analysis. For example, we tested estimated cash flows by comparing them to historical operating results by property and current industry, market, and economic trends. In addition, we considered the hold period necessary for the property’s carrying value to be recovered via undiscounted cash flows. We held discussions with management about the current status of potential transactions and management’s judgments to understand the probability of future events that could affect the holding period and other cash flow assumptions for the properties. We searched for and evaluated information that corroborated or contradicted the Company’s assumptions. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Richmond, Virginia
February 24, 2020
Apple Hospitality REIT, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
As of December 31, |
||||||||
2019 |
2018 |
|||||||
Assets |
||||||||
Investment in real estate, net of accumulated depreciation and amortization of $ |
$ | $ | ||||||
Assets held for sale |
||||||||
Restricted cash-furniture, fixtures and other escrows |
||||||||
Due from third party managers, net |
||||||||
Other assets, net |
||||||||
Total Assets |
$ | $ | ||||||
Liabilities |
||||||||
Debt, net |
$ | $ | ||||||
Finance lease liabilities |
||||||||
Accounts payable and other liabilities |
||||||||
Total Liabilities |
||||||||
Shareholders’ Equity |
||||||||
Preferred stock, authorized |
||||||||
Common stock, no par value, authorized outstanding |
||||||||
Accumulated other comprehensive income (loss) |
( |
) | ||||||
Distributions greater than net income |
( |
) | ( |
) | ||||
Total Shareholders’ Equity |
||||||||
Total Liabilities and Shareholders’ Equity |
$ | $ |
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
Years Ended December 31, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Revenues: |
||||||||||||
Room |
$ | $ | $ | |||||||||
Food and beverage |
||||||||||||
Other |
||||||||||||
Total revenue |
||||||||||||
Expenses: |
||||||||||||
Hotel operating expense: |
||||||||||||
Operating |
||||||||||||
Hotel administrative |
||||||||||||
Sales and marketing |
||||||||||||
Utilities |
||||||||||||
Repair and maintenance |
||||||||||||
Franchise fees |
||||||||||||
Management fees |
||||||||||||
Total hotel operating expense |
||||||||||||
Property taxes, insurance and other |
||||||||||||
Operating ground lease |
||||||||||||
General and administrative |
||||||||||||
Loss on impairment of depreciable real estate assets |
||||||||||||
Depreciation and amortization |
||||||||||||
Transaction and litigation costs (reimbursements) |
( |
) | ||||||||||
Total expense |
||||||||||||
Gain on sale of real estate |
||||||||||||
Operating income |
||||||||||||
Interest and other expense, net |
( |
) | ( |
) | ( |
) | ||||||
Income before income taxes |
||||||||||||
Income tax expense |
( |
) | ( |
) | ( |
) | ||||||
Net income |
$ | $ | $ | |||||||||
Other comprehensive income (loss): |
||||||||||||
Interest rate derivatives |
( |
) | ||||||||||
Comprehensive income |
$ | $ | $ | |||||||||
Basic and diluted net income per common share |
$ | $ | $ | |||||||||
Weighted average common shares outstanding - basic and diluted |
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands, except per share data)
Common Stock | Accumulated Other | Distributions | ||||||||||||||||||
Number of Shares |
Amount |
Comprehensive Income (Loss) |
Greater Than Net Income |
Total | ||||||||||||||||
Balance at December 31, 2016 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
Share based compensation, net |
- | - | ||||||||||||||||||
Issuance of common shares, net |
- | - | ||||||||||||||||||
Interest rate derivatives |
- | - | - | |||||||||||||||||
Net income |
- | - | - | |||||||||||||||||
Distributions declared to shareholders ($ |
- | - | - | ( |
) | ( |
) | |||||||||||||
Balance at December 31, 2017 |
( |
) | ||||||||||||||||||
Share based compensation, net(1) |
- | - | ||||||||||||||||||
Issuance of common shares, net |
- | - | ||||||||||||||||||
Common shares repurchased |
( |
) | ( |
) | - | - | ( |
) | ||||||||||||
Interest rate derivatives |
- | - | - | |||||||||||||||||
Net income |
- | - | - | |||||||||||||||||
Distributions declared to shareholders ($ |
- | - | - | ( |
) | ( |
) | |||||||||||||
Balance at December 31, 2018 |
( |
) | ||||||||||||||||||
Cumulative effect of the adoption of ASU 2016-02 related to leases |
- | - | - | ( |
) | ( |
) | |||||||||||||
Share based compensation, net(1) |
- | - | ||||||||||||||||||
Common shares repurchased |
( |
) | ( |
) | - | - | ( |
) | ||||||||||||
Interest rate derivatives |
- | - | ( |
) | - | ( |
) | |||||||||||||
Net income |
- | - | - | |||||||||||||||||
Distributions declared to shareholders ($ |
- | - | - | ( |
) | ( |
) | |||||||||||||
Balance at December 31, 2019 |
$ | $ | ( |
) | $ | ( |
) | $ |
(1) | |
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | $ | $ | |||||||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
||||||||||||
Loss on impairment of depreciable real estate assets |
||||||||||||
Gain on sale of real estate |
( |
) | ( |
) | ( |
) | ||||||
Other non-cash expenses, net |
||||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Decrease in due from third party managers, net |
||||||||||||
(Increase) decrease in other assets, net |
( |
) | ( |
) | ||||||||
Increase (decrease) in accounts payable and other liabilities |
( |
) | ||||||||||
Net cash provided by operating activities |
||||||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of hotel properties, net |
( |
) | ( |
) | ( |
) | ||||||
Deposits and other disbursements for potential acquisitions |
( |
) | ( |
) | ( |
) | ||||||
Capital improvements |
( |
) | ( |
) | ( |
) | ||||||
Net proceeds from sale of real estate |
||||||||||||
Net cash used in investing activities |
( |
) | ( |
) | ( |
) | ||||||
Cash flows from financing activities: |
||||||||||||
Net proceeds related to issuance of common shares |
||||||||||||
Repurchases of common shares |
( |
) | ( |
) | ||||||||
Repurchases of common shares to satisfy employee withholding requirements |
( |
) | ( |
) | ( |
) | ||||||
Distributions paid to common shareholders |
( |
) | ( |
) | ( |
) | ||||||
Net (payments on) proceeds from existing revolving credit facility |
( |
) | ||||||||||
Net payments on extinguished revolving credit facility |
( |
) | ( |
) | ||||||||
Proceeds from term loans |
||||||||||||
Repayment of term loans |
( |
) | ||||||||||
Proceeds from mortgage debt |
||||||||||||
Payments of mortgage debt |
( |
) | ( |
) | ( |
) | ||||||
Financing costs |
( |
) | ( |
) | ( |
) | ||||||
Net cash used in financing activities |
( |
) | ( |
) | ( |
) | ||||||
Net change in cash, cash equivalents and restricted cash |
||||||||||||
Cash, cash equivalents and restricted cash, beginning of period |
||||||||||||
Cash, cash equivalents and restricted cash, end of period |
$ | $ | $ | |||||||||
Supplemental cash flow information: |
||||||||||||
Interest paid |
$ | $ | $ | |||||||||
Income taxes paid |
$ | $ | $ | |||||||||
Supplemental disclosure of noncash investing and financing activities: |
||||||||||||
Accrued distribution to common shareholders |
$ | $ | $ | |||||||||
Mortgage debt assumed by buyer upon sale of real estate |
$ | $ | $ | |||||||||
Reconciliation of cash, cash equivalents and restricted cash: |
||||||||||||
Cash and cash equivalents, beginning of period |
$ | $ | $ | |||||||||
Restricted cash-furniture, fixtures and other escrows, beginning of period |
||||||||||||
Cash, cash equivalents and restricted cash, beginning of period |
$ | $ | $ | |||||||||
Cash and cash equivalents, end of period |
$ | $ | $ | |||||||||
Restricted cash-furniture, fixtures and other escrows, end of period |
||||||||||||
Cash, cash equivalents and restricted cash, end of period |
$ | $ | $ |
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Notes to Consolidated Financial Statements
Note 1
Organization and Summary of Significant Accounting Policies
Organization
Apple Hospitality REIT, Inc., formed in November 2007 as a Virginia corporation, together with its wholly-owned subsidiaries (the “Company”), is a self-advised real estate investment trust (“REIT”) that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only
The Company has elected to be treated as a REIT for federal income tax purposes. The Company has a wholly-owned taxable REIT subsidiary (or subsidiaries thereof) (collectively, the “Lessee”), which leases all of the Company’s hotels.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. Cash balances may at times exceed federal depository insurance limits.
Restricted Cash
Restricted cash includes reserves for debt service, real estate taxes, and insurance, and reserves for furniture, fixtures, and equipment replacements of
Investment in Real Estate and Related Depreciation and Amortization
Real estate is stated at cost, net of depreciation and amortization. Repair and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. As further discussed in Note 10, finance ground lease assets are capitalized at the estimated present value of the remaining minimum lease payments under the leases. Depreciation and amortization are computed using the straight-line method over the average estimated useful lives of the assets, which are generally
The Company considers expenditures to be capital in nature based on the following criteria:
Upon acquisition of real estate properties, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, and assumed debt based on the evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparables and other information which is subjective in nature. The Company has not assigned any value to management contracts and franchise agreements as such contracts are generally at current market rates based on the remaining terms of the contracts and any other value attributable to these contracts is not considered material. Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition, including title, legal, accounting, brokerage commissions and other related costs, being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred.
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties’ carrying amount. Indicators of impairment include 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 monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares an annual recoverability analysis for each of its properties to assist with its evaluation of impairment indicators. The analysis compares each property’s net book value to each property’s estimated operating income using current operating results for each stabilized property and projected stabilized operating results based on the property’s market for properties that recently opened, were recently renovated or experienced other short-term business disruption. The Company’s planned initial hold period for each property is generally
Assets Held for Sale
The Company classifies assets as held for sale when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, no significant contingencies exist which could prevent the transaction from being completed in a timely manner, and the sale is expected to close within one year. If these criteria are met, the Company will cease recording depreciation and amortization and will record an impairment charge if the fair value less costs to sell is less than the carrying amount of the disposal group. The Company will generally classify the impairment charge, together with the related operating results, as continuing operations in the Company’s consolidated statements of operations and classify the assets and related liabilities as held for sale in the Company’s consolidated balance sheets. If the Company’s plan of sale changes and the Company subsequently decides not to sell a property that is classified as held for sale, the property will be reclassified as held and used in the period the change occurs. As of December 31, 2019, the Company had one hotel classified as held for sale, which was sold to an unrelated party in January 2020, discussed further in Note 3. As of December 31, 2018, the Company did not have any assets classified as held for sale.
Revenue Recognition
Revenues consist of amounts derived from hotel operations, including room sales, food and beverage sales, and other hotel revenues, and are presented on a disaggregated basis in the Company’s consolidated statements of operations. The Company recognizes hotel operating revenue when guestrooms are occupied, services have been provided or fees have been earned. Revenues are recorded net of any sales, occupancy or other taxes collected from customers on behalf of third parties. Room revenue is recognized when the Company’s hotels satisfy their performance obligation of providing a hotel room. The hotel reservation defines the terms of the agreement including
an agreed-upon rate and length of stay. Food and beverage revenue is recognized at the time the food or beverage is purchased by and provided to the customer. Other operating revenue is recognized at the time when the goods or services are provided to the customer or when the performance obligation is satisfied. Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some customers prepaying for their rooms prior to the stay. Payments received from a customer prior to arrival are recorded as an advance deposit and are recognized as revenue at the time of occupancy.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which is comprised of unrealized gains or losses resulting from hedging activity.
Net Income Per Common Share
Basic net income per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted net income per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. Basic and dilutive net income per common share were the same for each of the years presented.
Income Taxes
The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended. Earnings and profits, which will determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes primarily due to the differences for federal income tax purposes in the carrying value (basis) of the investment in properties and estimated useful lives used to compute depreciation, transaction and litigation costs (reimbursements), straight-line operating ground lease expense, amortization of favorable and unfavorable leases, amortization and interest expense versus lease payments related to finance ground leases, loss on impairment of depreciable real estate assets and gain (loss) on sale of real estate assets. The characterization of 2019 paid distributions of $
The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. Due to historical cumulative operating losses, the taxable REIT subsidiary did not incur federal income tax for the three years ended December 31, 2019 and recorded a valuation allowance against the entire deferred asset for all periods presented. The total net operating loss carry forward for federal income tax purposes was approximately $
As of December 31, 2019, the tax years that remain subject to examination by major tax jurisdictions generally include
Sales and Marketing Costs
Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly attributable to advertising and promotion.
Use of Estimates
The preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Standards Recently Adopted
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which replaces Leases (Topic 840), and along with subsequent amendments, provides the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under the new standard, lessees are required to recognize most leases on their balance sheets as right-of-use assets and lease liabilities. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Leases with a term of 12 months or less are accounted for similarly to the previous accounting guidance under Leases (Topic 840), for operating leases. Topic 842 provided an optional transition method, which the Company elected, to apply the new standard using the modified retrospective approach at its effective date, versus restating the prior periods presented, and recognizing a cumulative-effect adjustment to the opening balance of retained earnings for the effect of initially applying Topic 842 in the period of adoption. Consequently, an entity’s reporting for periods presented prior to adoption of the new lease requirements in the consolidated financial statements continue in accordance with Leases (Topic 840), including disclosures. The Company adopted Topic 842 effective January 1, 2019, and at adoption, recorded a cumulative-effect adjustment totaling approximately $
At adoption of the new standard, the Company recorded right-of-use assets and lease liabilities for its ground leases and certain applicable operating leases (including hotel equipment leases and office space leases) measured at the estimated present value of the remaining minimum lease payments under the leases.
Accounting Standards Recently Issued
Fair Value Measurement
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which removes, modifies and adds fair value disclosure requirements, including a new requirement to disclose the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements. Certain disclosures are required to be applied retrospectively and others applied prospectively. This standard is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard as of January 1, 2020, and based on its assessment, this standard is not expected to have a material impact on the Company’s consolidated financial statements.
Note 2
Investment in Real Estate
December 31, |
December 31, |
|||||||
2019 |
2018 |
|||||||
Land |
$ | $ | ||||||
Building and Improvements |
||||||||
Furniture, Fixtures and Equipment |
||||||||
Finance Ground Lease Assets |
||||||||
Franchise Fees |
||||||||
Less Accumulated Depreciation and Amortization |
( |
) | ( |
) | ||||
Investment in Real Estate, net |
$ | $ |
Effective January 1, 2019, the Company adopted ASU No. 2016-02. Leases (Topic 842), as amended, and, as a result, recorded finance ground lease assets for
As of December 31, 2019, the Company owned
The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.
2019 and 2018 Acquisitions
City |
State |
Brand |
Manager |
Date Acquired |
Rooms |
Gross Purchase Price |
||||||||||
St. Paul |
MN |
Hampton |
|
|
$ | |||||||||||
Orlando |
FL |
Home2 Suites |
|
|
||||||||||||
Richmond |
VA |
Independent |
|
|
||||||||||||
$ |
City |
State |
Brand |
Manager |
Date Acquired |
Rooms |
Gross Purchase Price |
||||||||||
Atlanta/Downtown |
GA |
Hampton |
|
|
$ | |||||||||||
Memphis |
TN |
Hampton |
|
|
||||||||||||
Phoenix |
AZ |
Hampton |
|
|
||||||||||||
Atlanta/Perimeter Dunwoody |
GA |
Hampton |
|
|
||||||||||||
Jacksonville |
FL |
Hyatt Place |
|
|
||||||||||||
$ |
The Company used borrowings under its revolving credit facility to purchase each of these hotels. The acquisitions of these hotel properties were accounted for as an acquisition of a group of assets, with costs incurred to
effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired. For the three hotels acquired during 2019, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through December 31, 2019 was approximately $
Loss on Impairment of Depreciable Real Estate Assets
During the years ended December 31, 2019, 2018 and 2017, the Company recorded impairment losses totaling approximately $
During the third quarter of 2019, the Company identified the Winston-Salem, North Carolina Courtyard for potential sale and, in August 2019, entered into a purchase and sale agreement with an unrelated party (which was subsequently amended) for the sale of the hotel for a gross sales price of approximately $
During the second quarter of 2018, the Company recognized impairment losses of approximately $
The
During the fourth quarter of 2017, upon finalizing its 2018 property level budgets and experiencing delays and increased costs in leasing the property’s retail rental space, the Company identified indicators of impairment at its Renaissance hotel in New York, New York, due to declines in the current and forecasted cash flows from the property. The Company performed a test of recoverability and determined that the carrying value of the hotel exceeded its estimated undiscounted future cash flows. The shortfall in estimated cash flows was triggered by a combination of (a) declines in hotel market conditions in New York, (b) new supply in the market and (c) the loss of retail tenants. Upon concluding that the carrying cost exceeded the estimated undiscounted future cash flows, the Company adjusted the carrying value of the hotel (approximately $
Note 3
Assets Held for Sale, Dispositions and Hotel Sale Contracts
Assets Held for Sale
In October 2019, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its
2019 Dispositions
City |
State |
Brand |
Date Sold |
Rooms |
||||||
Sarasota |
FL |
Homewood Suites |
|
|||||||
Tampa |
FL |
TownePlace Suites |
|
|||||||
Baton Rouge |
LA |
SpringHill Suites |
|
|||||||
Holly Springs |
NC |
Hampton |
|
|||||||
Duncanville |
TX |
Hilton Garden Inn |
|
|||||||
Texarkana |
TX |
Courtyard |
|
|||||||
Texarkana |
TX |
TownePlace Suites |
|
|||||||
Bristol |
VA |
Courtyard |
|
|||||||
Harrisonburg |
VA |
Courtyard |
|
|||||||
Winston-Salem |
NC |
Courtyard |
|
|||||||
Fort Lauderdale |
FL |
Hampton |
|
|||||||
Total |
2018 Dispositions
City |
State |
Brand |
Date Sold |
Rooms |
||||||
Columbus |
GA |
SpringHill Suites |
|
|||||||
Columbus |
GA |
TownePlace Suites |
|
|||||||
Springdale |
AR |
Residence Inn |
|
|||||||
Total |
2017 Dispositions
approximately $
City |
State |
Brand |
Date Sold |
Rooms |
||||||
Dallas |
TX |
Hilton |
|
|||||||
Fairfax |
VA |
Marriott |
|
|||||||
Total |
Excluding gains on sale of real estate, the Company’s consolidated statements of operations include operating income (loss) of approximately $(
Hotel Sale Contracts
In December 2019, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its
Note 4
Debt
Summary
December 31, |
December 31, 2018 |
|||||||
Revolving credit facility |
$ | $ | ||||||
Term loans, net |
||||||||
Mortgage debt, net |
||||||||
Debt, net |
$ | $ |
2020 |
$ | |||
2021 |
||||
2022 |
||||
2023 |
||||
2024 |
||||
Thereafter |
||||
Unamortized fair value adjustment of assumed debt |
||||
Unamortized debt issuance costs related to term loans and mortgage debt |
( |
) | ||
Total |
$ |
December 31, |
Percentage |
December 31, 2018 |
Percentage |
|||||||||||||
Fixed-rate debt (1) |
$ | % | $ | % | ||||||||||||
Variable-rate debt |
% | % | ||||||||||||||
Total |
$ | $ | ||||||||||||||
Weighted-average interest rate of debt |
% | % |
(1) | |
Credit Facilities
$850 Million Credit Facility
Prior to the Company’s refinancing of the facility in July 2018, the Company utilized an unsecured “$965 million credit facility” comprised of (i) a $
$225 Million Term Loan Facility
Prior to the Company’s refinancing of the facility in August 2018, the Company utilized an unsecured $150 million term loan facility (the “$150 million term loan facility”) consisting of a $
margin ranging from
2017 $85 Million Term Loan Facility
On July 25, 2017, the Company entered into an unsecured $
2019 $85 Million Term Loan Facility
On December 31, 2019, the Company entered into an unsecured $
Outstanding Balance |
|||||||||||
Interest Rate |
Maturity Date |
December 31, |
December 31, 2018 |
||||||||
Revolving credit facility (1) |
|
|
$ | $ | |||||||
Term loans |
|||||||||||
$200 million term loan |
|
|
|||||||||
$225 million term loan |
|
|
|||||||||
$50 million term loan |
|
|
|||||||||
$175 million term loan |
|
|
|||||||||
2017 $85 million term loan |
|
|
|||||||||
2019 $85 million term loan |
|
|
|||||||||
Term loans at stated value |
|||||||||||
Unamortized debt issuance costs |
( |
) | ( |
) | |||||||
Term loans, net |
|||||||||||
Revolving credit facility and term loans, net (1) |
$ | $ | |||||||||
Weighted-average interest rate (3) |
% | % |
(1) | |
(2) | |
(3) | |
The credit agreements governing the credit facilities contain mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. The credit agreements contain the following financial and restrictive covenants (capitalized terms are defined in the credit agreements).
● |
A ratio of Consolidated Total Indebtedness to Consolidated EBITDA of not more than 6.50 to 1.00 (subject to a higher amount in certain circumstances); |
● |
A ratio of Consolidated Secured Indebtedness to Consolidated Total Assets of not more than 45%; |
● |
A minimum Consolidated Tangible Net Worth of approximately $3.2 billion (plus an amount equal to 75% of the Net Cash Proceeds from issuances and sales of Equity Interests occurring after the Closing Date, subject to adjustment); |
● |
A ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges of not less than 1.50 to 1.00 for the trailing four full quarters; |
● |
A ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness of not less than 2.00 to 1.00 for the trailing four full quarters; |
● |
A ratio of Consolidated Unsecured Indebtedness to Unencumbered Asset Value of not more than 60% (subject to a higher level in certain circumstances); and |
● |
A ratio of Consolidated Secured Recourse Indebtedness to Consolidated Total Assets of not more than 10%. |
The Company was in compliance with the applicable covenants at December 31, 2019.
Mortgage Debt
Location |
Brand |
Interest Rate (1) |
Loan Assumption or Origination Date |
Maturity Date |
Principal Assumed or Originated |
Outstanding balance as of December 31, 2019 |
Outstanding balance as of December 31, 2018 |
||||||||||||||||
Syracuse, NY |
Courtyard |
% | |
(2) | $ | $ | $ | ||||||||||||||||
Syracuse, NY |
Residence Inn |
% | |
(2) | |||||||||||||||||||
San Juan Capistrano, CA |
Residence Inn |
% | |
|
|||||||||||||||||||
Colorado Springs, CO |
Hampton |
% | |
|
|||||||||||||||||||
Franklin, TN |
Courtyard |
% | |
|
|||||||||||||||||||
Franklin, TN |
Residence Inn |
% | |
|
|||||||||||||||||||
Grapevine, TX |
Hilton Garden Inn |
% | |
|
|||||||||||||||||||
Collegeville/Philadelphia, PA |
Courtyard |
% | |
|
|||||||||||||||||||
Hattiesburg, MS |
Courtyard |
% | |
|
|||||||||||||||||||
Rancho Bernardo/San Diego, CA |
Courtyard |
% | |
|
|||||||||||||||||||
Kirkland, WA |
Courtyard |
% | |
|
|||||||||||||||||||
Seattle, WA |
Residence Inn |
% | |
|
|||||||||||||||||||
Anchorage, AK |
Embassy Suites |
% | |
|
|||||||||||||||||||
Somerset, NJ |
Courtyard |
% | |
|
|||||||||||||||||||
Tukwila, WA |
Homewood Suites |
% | |
|
|||||||||||||||||||
Prattville, AL |
Courtyard |
% | |
|
|||||||||||||||||||
Huntsville, AL |
Homewood Suites |
% | |
|
Location | Brand | Interest Rate (1) | Loan Assumption or Origination Date | Maturity Date | Principal Assumed or Originated | Outstanding balance as of December 31, 2019 | Outstanding balance as of December 31, 2018 | ||||||||||||||||
San Diego, CA |
Residence Inn |
% | |
|
$ | $ | $ | ||||||||||||||||
Miami, FL |
Homewood Suites |
% | |
|
- | ||||||||||||||||||
New Orleans, LA |
Homewood Suites |
% | |
|
|||||||||||||||||||
Westford, MA |
Residence Inn |
% | |
|
|||||||||||||||||||
Denver, CO |
Hilton Garden Inn |
% | |
|
|||||||||||||||||||
Oceanside, CA |
Courtyard |
% | |
|
|||||||||||||||||||
Omaha, NE |
Hilton Garden Inn |
% | |
|
|||||||||||||||||||
Boise, ID |
Hampton |
% | |
|
|||||||||||||||||||
Burbank, CA |
Courtyard |
% | |
|
|||||||||||||||||||
San Diego, CA |
Courtyard |
% | |
|
|||||||||||||||||||
San Diego, CA |
Hampton |
% | |
|
|||||||||||||||||||
Burbank, CA |
SpringHill Suites |
% | |
|
|||||||||||||||||||
Santa Ana, CA |
Courtyard |
% | |
|
|||||||||||||||||||
San Jose, CA |
Homewood Suites |
% | |
|
|||||||||||||||||||
$ | |||||||||||||||||||||||
Unamortized fair value adjustment of assumed debt |
|||||||||||||||||||||||
Unamortized debt issuance costs |
( |
) | ( |
) | |||||||||||||||||||
Total |
$ | $ |
(1) | |
(2) | |
The total fair value, net premium adjustment for all of the Company’s debt assumptions is being amortized as a reduction to interest expense over the remaining term of the respective mortgages using a method approximating the effective interest rate method, and totaled approximately $
Debt issuance costs related to the assumption or origination of debt are amortized over the period to maturity of the applicable debt instrument, as an addition to interest expense, and totaled approximately $
The Company’s interest expense in 2019, 2018 and 2017 is net of interest capitalized in conjunction with hotel renovations totaling approximately $
Note 5
Fair Value of Financial Instruments
Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.
Debt
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of December 31, 2019, both the carrying value and estimated fair value of the Company’s debt were approximately $
Derivative Instruments
Notional Amount at December 31, 2019 |
Fair Value Asset (Liability) |
||||||||||||||||||||
Hedge Type |
Origination Date |
Effective Date |
Maturity Date |
Swap Fixed Interest Rate |
December 31, |
December 31, 2018 |
|||||||||||||||
Cash flow hedge |
$ | |
|
|
% | $ | $ | ||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | |||||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | |||||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | ( |
) | |||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | |||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | |||||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | ( |
) | |||||||||||||
Cash flow hedge |
|
|
|
% | ( |
) | ( |
) | |||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
Cash flow hedge |
|
|
|
% | |||||||||||||||||
$ | $ | ( |
) | $ |
The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. The Company elected to early adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018, using the modified retrospective approach for all of its hedging relationships that existed as of that date. As a result, effective January 1, 2018, the entire change in the fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income (loss), a component of shareholders’ equity in the Company’s consolidated balance sheets. Prior to January 1, 2018, changes in fair value on the effective portion of all designated cash flow hedges were recorded to accumulated other comprehensive income, while changes in fair value on the ineffective portion of all designated cash flow hedges were recorded to interest and other expense, net in the Company’s consolidated statements of operations. Since prior to January 1, 2018 there was no material ineffectiveness related to the Company’s outstanding designated cash flow hedges, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Amounts reported in accumulated other comprehensive income (loss) will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives. The Company estimates that approximately $
Net Unrealized Gain (Loss) Recognized in Other Comprehensive Income (Loss) |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Interest rate derivatives in cash flow hedging relationships |
$ | ( |
) | $ | $ |
Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net |
||||||||||||
2019 |
2018 |
2017 |
||||||||||
Interest rate derivatives in cash flow hedging relationships |
$ | $ | $ | ( |
) |
Note 6
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. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (including the relationships discussed in this section) and are required to approve any significant modifications to the existing relationships, as well as any new significant related party transactions. The Board of Directors is not required to approve each individual transaction that falls under the related party relationships. However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction. Below is a summary of the significant related party relationships in effect and transactions that occurred during each of the three years in the period ended December 31, 2019.
Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receives support services from ARG.
The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. Under this cost sharing structure, amounts reimbursed to the Company include both compensation for personnel and office related costs (including office rent, utilities, office supplies, etc.) used by ARG. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for the years ended December 31, 2019, 2018 and 2017 totaled approximately $
As part of the cost sharing arrangement, certain day-to-day transactions may result in amounts due to or from the Company and ARG.
The Company, through its wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation and public relations purposes. The aircraft is also leased to affiliates of the Company based on third-party rates, which leasing activity was not significant during the reporting periods. The Company also utilizes aircraft, owned through two entities, one of which is owned by the Company’s Executive
Chairman, and the other, by its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third-party rates. Total costs incurred for the use of these aircraft during 2019, 2018 and 2017 were approximately $
Note 7
Shareholders’ Equity
Distributions
The Company’s current annual distribution rate, payable monthly, is $
Issuance of Shares
On February 28, 2017, the Company entered into an equity distribution agreement which was terminated effective April 11, 2019, pursuant to which the Company could sell, from time to time, up to an aggregate of $
Share Repurchases
In May 2019, the Company’s Board of Directors approved an extension of its existing share repurchase program (the “Share Repurchase Program”), authorizing share repurchases up to an aggregate of $
Preferred Shares
preferred shares available for issuance in the future gives the Company the ability to respond to future developments and allows preferred shares to be issued without the expense and delay of a special shareholders’ meeting. At present, the Company has no specific financing or acquisition plans involving the issuance of preferred shares and the Company does not propose to fix the characteristics of any series of preferred shares in anticipation of issuing preferred shares. The Company cannot now predict whether or to what extent, if any, preferred shares will be used or if so used what the characteristics of a particular series may be. A series of preferred shares could be given rights that are superior to rights of holders of common shares and a series having preferential distribution rights could limit common share distributions and reduce the amount holders of common shares would otherwise receive on dissolution. Unless otherwise required by applicable law or regulation, the preferred shares would be issuable without further authorization by holders of the common shares and on such terms and for such consideration as may be determined by the Board of Directors. The preferred shares could be issued in one or more series having varying voting rights, redemption and conversion features, distribution (including liquidating distribution) rights and preferences, and other rights, including rights of approval of specified transactions. The voting rights and rights to distributions of the holders of common shares will be subject to the priority rights of the holders of any subsequently-issued preferred shares.
Note 8
Compensation Plans
In May 2014, the Board of Directors adopted the Company’s 2014 Omnibus Incentive Plan (the “Omnibus Plan”), and in May 2015, the Company’s shareholders approved the Omnibus Plan. The Omnibus Plan permits the grant of awards of stock options, stock appreciation rights, restricted stock, stock units, deferred stock units, unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards to any employee, officer, or director of the Company or an affiliate of the Company, a consultant or adviser currently providing services to the Company or an affiliate of the Company, or any other person whose participation in the Omnibus Plan is determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) to be in the best interests of the Company. The maximum number of the Company’s common shares available for issuance under the Omnibus Plan is
Each year, the Company establishes an incentive plan for its executive management, which is approved by the Compensation Committee. Under the incentive plan for 2019 (the “2019 Incentive Plan”), participants are eligible to receive a bonus based on the achievement of certain 2019 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return over one-year, two-year and three-year periods).
Under the incentive plan for 2018 (the “2018 Incentive Plan”), the Company accrued approximately $
a liability for executive bonus payments, which was included in general and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 2017.
In December 2019, in connection with the resignation of the Company’s Executive Vice President and Chief Financial Officer at the time, the Company entered into a separation and general release agreement, pursuant to which the Company accrued a one-time separation payment of approximately $
During the year ended December 31, 2019, the Company incurred a one-time separation payment of $
Share-Based Compensation Awards
2018 Incentive Plan |
2017 Incentive Plan |
2016 Incentive Plan |
|||||||||||||
Period common shares issued |
|
|
|
||||||||||||
Common shares earned under each incentive plan |
|||||||||||||||
Common shares surrendered on issuance date to satisfy tax withholding obligations |
|||||||||||||||
Common shares earned and issued under each incentive plan, net of common shares surrendered on issuance date to satisfy tax withholding obligations |
|||||||||||||||
Closing stock price on issuance date |
$ | $ | $ | ||||||||||||
Total share-based compensation earned, including the surrendered shares (in millions) |
$ | (1) | $ | (2) | $ | (3) | |||||||||
Of the total common shares earned and issued, total common shares unrestricted at time of issuance |
|||||||||||||||
Of the total common shares earned and issued, total common shares restricted at time of issuance |
|||||||||||||||
Restricted common shares vesting date |
|
|
|
||||||||||||
Common shares surrendered on vesting date to satisfy tax withholding requirements resulting from vesting of restricted common shares |
(1) | |
(2) | |
(3) |
Non-Employee Director Deferral Program
In 2018, the Board of Directors adopted the Non-Employee Director Deferral Program (the “Director Deferral Program”) under the Omnibus Plan for the purpose of providing non-employee members of the Board the opportunity to elect to defer receipt of all or a portion of the annual retainer payable to them for their service on the Board, including amounts payable in both cash and fully vested shares of the Company’s common shares, in the form of deferred cash fees (“DCFs”) and/or deferred stock units (“DSUs”). DCFs and DSUs that are issued to the Company’s non-employee directors are fully vested and non-forfeitable on the grant date. The grant date fair values of DCFs are equal to the dollar value of the deferred fee on the grant date, while the grant date fair values of DSUs are equal to the fair market value of the Company’s common shares on the grant date. DCFs are settled for cash and DSUs are settled for shares of the Company’s common stock, which are deliverable upon either: i) termination of the director’s service from the Board, ii) a date previously elected by the director, or iii) the earlier of the two dates, as determined by the director at the time he or she makes the election. The deferred amounts will also be paid if prior to the date specified by the director, the Company experiences a change in control or upon death of the director. During the years ended December 31, 2019 and 2018, non-employee directors participating in the Director Deferral Program deferred approximately $
Note 9
Management and Franchise Agreements
Manager |
Number of Hotels |
|||
LBAM-Investor Group, LLC (“LBA”) |
||||
White Lodging Services Corporation (“White Lodging”) |
||||
Dimension Development Two, LLC (“Dimension”) |
||||
MHH Management, LLC (“McKibbon”) |
||||
Texas Western Management Partners, LP (“Western”) |
||||
Raymond Management Company, Inc. (“Raymond”) |
||||
Crestline Hotels & Resorts, LLC (“Crestline”) |
||||
Marriott International, Inc. (“Marriott”) |
||||
North Central Hospitality, LLC (“North Central”) |
||||
Newport Hospitality Group, Inc. (“Newport”) |
||||
InnVentures IVI, LP (“InnVentures”) |
||||
Vista Host, Inc. (“Vista Host”) |
||||
True North Hotel Group, Inc. (“True North”) |
||||
Aimbridge Hospitality, LLC (“Aimbridge”)(1) |
||||
Chartwell Hospitality, LLC (“Chartwell”) |
||||
Interstate Gateway Management LLC (“Interstate”)(1) |
||||
Huntington Hotel Group, LP (“Huntington”) |
||||
Stonebridge Realty Advisors, Inc. (“Stonebridge”) |
||||
Highgate Hotels, L.P. (“Highgate”) |
||||
Hilton Worldwide Holdings Inc. (“Hilton”) |
||||
Pyramid Advisors Limited Partnership (“Pyramid”) |
||||
Total |
(1) | |
The management agreements generally provide for initial terms of
Note 10
Lease Commitments
The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of December 31, 2019, the Company had
Adoption of the New Lease Accounting Standard
The Company adopted ASU No. 2016-02, Leases (Topic 842), as discussed further in Note 1 in the section titled “Accounting Standards Recently Adopted”, effective January 1, 2019, which requires leases with durations greater than twelve months to be recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities. Prior year financial statements were not restated under the new standard.
Under the new standard, the Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, at inception of the lease the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed scheduled rent increases) and renewal options that are factored into the determination of lease payments when appropriate and the present value of the remaining lease payments is adjusted accordingly. The Company utilizes interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, to determine the present value of the lease payments. At transition to the new standard, the Company used information available at that time to determine the incremental borrowing rates on its existing leases at January 1, 2019 based on estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.
Operating Leases
Finance Leases
Under the terms of the Company’s ground leases, certain minimum lease payments are subject to change based on criteria specified in the lease. Changes in minimum lease payments that are not fixed scheduled increases are reflected in the ROU asset and lease liability when the payments become fixed and determinable based on the actual criteria defined in the lease. Minimum lease payments may be estimated if the change date occurs and the new minimum lease payments are not yet determinable. During 2019, the Company, based on additional information, estimated a required increase in lease payments under
Lease Position as of December 31, 2019
Consolidated Balance Sheet Classification |
December 31, 2019 |
||||
Assets |
|||||
Operating lease assets, net |
Other assets, net |
$ | |||
Finance ground lease assets, net (1) |
Investment in real estate, net |
||||
Total lease assets |
$ | ||||
Liabilities |
|||||
Operating lease liabilities |
Accounts payable and other liabilities |
$ | |||
Finance lease liabilities |
Finance lease liabilities |
||||
Total lease liabilities |
$ | ||||
Weighted-average remaining lease term |
|||||
Operating leases |
|
||||
Finance leases |
|
||||
Weighted-average discount rate |
|||||
Operating leases |
|||||
Finance leases |
(1) | |
Lease Costs for the Year Ended December 31, 2019
Consolidated Statement of Operations Classification |
Year Ended December 31, 2019 |
||||
Operating lease costs (1) |
Operating ground lease expense |
$ | |||
Finance lease costs: |
|||||
Amortization of lease assets |
Depreciation and amortization expense |
||||
Interest on lease liabilities |
Interest and other expense, net |
||||
Total lease costs |
$ |
(1) | |
Undiscounted Cash Flows
Operating leases |
Finance leases |
|||||||
2020 |
$ | $ | ||||||
2021 |
||||||||
2022 |
||||||||
2023 |
||||||||
2024 |
||||||||
Thereafter |
||||||||
Total minimum lease payments |
||||||||
Less: amount of lease payments representing interest |
||||||||
Present value of lease liabilities |
$ | $ |
Supplemental Cash Flow Information
Year Ended December 31, 2019 |
||||
Cash paid for amounts included in the measurement of lease liabilities: |
||||
Operating cash flows for operating leases |
$ | |||
Operating cash flows for finance leases |
Information for Periods Prior to the Adoption of the New Lease Accounting Standard
Prior to the adoption of Topic 842, the Company’s leases were classified as operating leases. The Company recorded, at the time of acquisition, initial intangible assets for ground leases assumed that were below market leases, which totaled approximately $
Note 11
Industry Segments
The Company owns hotel properties throughout the U.S. that generate rental, food and beverage, and other property-related income. The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic characteristics, facilities, and services, and each hotel is not individually significant, the properties have been aggregated into a single reportable segment. All segment disclosures are included in or can be derived from the Company’s consolidated financial statements.
Note 12
Hotel Purchase Contract Commitments
Location (1) |
Brands |
Date of Purchase Contract |
Rooms |
Refundable Deposits |
Gross Purchase Price |
|||||||||||
Cape Canaveral, FL (2) |
Hampton and Home2 Suites |
|
$ | $ | ||||||||||||
Tempe, AZ (3) |
Hyatt House and Hyatt Place |
|
||||||||||||||
Denver, CO |
Courtyard |
|
||||||||||||||
Madison, WI |
Hilton Garden Inn |
|
||||||||||||||
$ | $ |
(1) | |
(2) | |
(3) | |
The Company plans to utilize its credit facilities available at closing to purchase the hotels under contract if closings occur.
Note 13
Transaction and Litigation Costs (Reimbursements)
During 2017, transaction and litigation costs (reimbursements) totaled $(
Note 14
Quarterly Financial Data (Unaudited)
2019 |
||||||||||||||||
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
Total revenue |
$ | $ | $ | $ | ||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Comprehensive income |
$ | $ | $ | $ | ||||||||||||
Basic and diluted net income per common share |
$ | $ | $ | $ |
2018 |
||||||||||||||||
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
Total revenue |
$ | $ | $ | $ | ||||||||||||
Net income |
$ | $ | $ | $ | ||||||||||||
Comprehensive income |
$ | $ | $ | $ | ||||||||||||
Basic and diluted net income per common share(1) |
$ | $ | $ | $ |
(1) | |
Note 15
Subsequent Events
In both January 2020 and February 2020, the Company paid approximately $
In February 2020, the Company declared a regular monthly cash distribution of $
In January 2020, the Company completed the sale of its
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. |
Controls and Procedures |
Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2019. There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Item 8 for the Report of Management on Internal Control over Financial Reporting and the Company’s Independent Registered Public Accounting Firm’s attestation report regarding internal control over financial reporting, which are incorporated herein by reference.
Item 9B. |
Other Information |
None.
PART III
Item 10. |
Directors, Executive Officers and Corporate Governance |
The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be set forth in the Company’s definitive proxy statement for its 2020 Annual Meeting of Shareholders (the “2020 Proxy Statement”). For the limited purpose of providing the information necessary to comply with this Item 10, the 2020 Proxy Statement is incorporated herein by this reference.
Item 11. |
Executive Compensation |
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be set forth in the Company’s 2020 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2020 Proxy Statement is incorporated herein by this reference.
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Company’s 2020 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2020 Proxy Statement is incorporated herein by this reference.
Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
The information required by Items 404 and 407(a) of Regulation S-K will be set forth in the Company’s 2020 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2020 Proxy Statement is incorporated herein by this reference.
Item 14. |
Principal Accounting Fees and Services |
The information required by Item 9(e) of Schedule 14A will be set forth in the Company’s 2020 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2020 Proxy Statement is incorporated herein by this reference.
PART IV
Item 15. |
Exhibits, Financial Statement Schedules |
1. Financial Statements of Apple Hospitality REIT, Inc.
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm—Ernst & Young LLP
Report of Independent Registered Public Accounting Firm—Ernst & Young LLP
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference.
2. Financial Statement Schedules
Schedule III—Real Estate and Accumulated Depreciation and Amortization (Included at the end of this Part IV of this report.)
Financial statement schedules not listed are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibit Listing
Exhibit Number |
Description of Documents |
3.1 |
|
3.2 |
|
4.1 |
Description of Securities Registered Under Section 12 of the Exchange Act (FILED HEREWITH) |
10.1* |
|
10.2* |
|
10.3* |
Exhibit Number |
Description of Documents |
10.4* |
|
10.5 |
|
10.6* |
|
10.7* |
|
10.8* |
|
10.9 |
|
21.1 |
|
23.1 |
|
31.1 |
|
31.2 |
|
32.1 |
|
101 |
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH) |
104 |
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL and contained in Exhibit 101. |
* Denotes Management Contract or Compensation Plan.
Item 16. |
Form 10-K Summary |
None.
SCHEDULE III
Real Estate and Accumulated Depreciation and Amortization
As of December 31, 2019
(dollars in thousands)
Subsequently |
||||||||||||||||||||||||||||||||||||||||
Initial Cost |
Capitalized |
|
||||||||||||||||||||||||||||||||||||||
City |
State |
Description |
Encumbrances |
Land (1) |
Bldg./ FF&E / Other |
Bldg. Imp. & FF&E |
Total Gross Cost (2) |
Acc. Deprec. |
Date of Construction |
Date Acquired |
Depreciable Life |
# of Rooms |
||||||||||||||||||||||||||||
Anchorage |
AK |
Embassy Suites |
$ | $ | $ | $ | $ | $ | ( |
) | |
|
||||||||||||||||||||||||||||
Anchorage |
AK |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Auburn |
AL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Birmingham |
AL |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Birmingham |
AL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Birmingham |
AL |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Birmingham |
AL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Dothan |
AL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Dothan |
AL |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Huntsville |
AL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Huntsville |
AL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Huntsville |
AL |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Huntsville |
AL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Mobile |
AL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Montgomery |
AL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Montgomery |
AL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Prattville |
AL |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rogers |
AR |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rogers |
AR |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rogers |
AR |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Chandler |
AZ |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Chandler |
AZ |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Phoenix |
AZ |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Scottsdale |
AZ |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tucson |
AZ |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tucson |
AZ |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tucson |
AZ |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Agoura Hills |
CA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Burbank |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Burbank |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Burbank |
CA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Clovis |
CA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Clovis |
CA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cypress |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cypress |
CA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oceanside |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oceanside |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rancho Bernardo/San Diego |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Sacramento |
CA |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Bernardino |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Diego |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Diego |
CA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Diego |
CA |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Diego |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Jose |
CA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Juan Capistrano |
CA |
Residence Inn |
(6) | ( |
) | |
|
|||||||||||||||||||||||||||||||||
Santa Ana |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Santa Clarita |
CA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Santa Clarita |
CA |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Santa Clarita |
CA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Santa Clarita |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tulare |
CA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tustin |
CA |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tustin |
CA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Colorado Springs |
CO |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Denver |
CO |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Highlands Ranch |
CO |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Highlands Ranch |
CO |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Boca Raton |
FL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cape Canaveral |
FL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fort Lauderdale |
FL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fort Lauderdale |
FL |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Gainesville |
FL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Gainesville |
FL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Jacksonville |
FL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Jacksonville |
FL |
Hyatt Place |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Lakeland |
FL |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Miami |
FL |
Courtyard |
( |
) | |
|
SCHEDULE III
Real Estate and Accumulated Depreciation and Amortization - (continued)
As of December 31, 2019
(dollars in thousands)
Subsequently | ||||||||||||||||||||||||||||||||||||||||
Initial Cost | Capitalized | |||||||||||||||||||||||||||||||||||||||
City | State | Description | Encumbrances | Land (1) |
Bldg./ FF&E / Other |
Bldg. Imp. & FF&E |
Total Gross Cost (2) |
Acc. Deprec. |
Date of Construction |
Date Acquired |
Depreciable Life |
# of Rooms |
||||||||||||||||||||||||||||
Miami |
FL |
Hampton |
$ | $ | $ | $ | $ | $ | ( |
) | |
|
||||||||||||||||||||||||||||
Miami |
FL |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Orlando |
FL |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Orlando |
FL |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Orlando |
FL |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Panama City |
FL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Panama City |
FL |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Pensacola |
FL |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tallahassee |
FL |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tallahassee |
FL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Tampa |
FL |
Embassy Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Albany |
GA |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Atlanta / Downtown |
GA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Atlanta / Perimeter Dunwoody |
GA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Atlanta |
GA |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Macon |
GA |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Savannah |
GA |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cedar Rapids |
IA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cedar Rapids |
IA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Davenport |
IA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Boise |
ID |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Boise |
ID |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Des Plaines |
IL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Hoffman Estates |
IL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Mettawa |
IL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Mettawa |
IL |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rosemont |
IL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Schaumburg |
IL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Skokie |
IL |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Warrenville |
IL |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Indianapolis |
IN |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Merrillville |
IN |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Mishawaka |
IN |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
South Bend |
IN |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Overland Park |
KS |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Overland Park |
KS |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Overland Park |
KS |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Wichita |
KS |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Lafayette |
LA |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Lafayette |
LA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
New Orleans |
LA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Andover |
MA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Marlborough |
MA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Westford |
MA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Westford |
MA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Annapolis |
MD |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Silver Spring |
MD |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Portland |
ME |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Novi |
MI |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Maple Grove |
MN |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Rochester |
MN |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
St. Paul |
MN |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Kansas City |
MO |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Kansas City |
MO |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
St. Louis |
MO |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
St. Louis |
MO |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Hattiesburg |
MS |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Hattiesburg |
MS |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Carolina Beach |
NC |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Charlotte |
NC |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Charlotte |
NC |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Durham |
NC |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fayetteville |
NC |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fayetteville |
NC |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Greensboro |
NC |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Jacksonville |
NC |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Wilmington |
NC |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Winston-Salem |
NC |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Omaha |
NE |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Omaha |
NE |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Omaha |
NE |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Omaha |
NE |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Cranford |
NJ |
Homewood Suites |
( |
) | |
|
SCHEDULE III
Real Estate and Accumulated Depreciation and Amortization - (continued)
As of December 31, 2019
(dollars in thousands)
Subsequently | ||||||||||||||||||||||||||||||||||||||||
Initial Cost | Capitalized | |||||||||||||||||||||||||||||||||||||||
City | State | Description | Encumbrances | Land (1) |
Bldg./ FF&E / Other |
Bldg. Imp. & FF&E |
Total Gross Cost (2) |
Acc. Deprec. |
Date of Construction |
Date Acquired |
Depreciable Life |
# of Rooms |
||||||||||||||||||||||||||||
Mahwah |
NJ |
Homewood Suites |
$ | $ | $ | $ | $ | $ | ( |
) | |
|
||||||||||||||||||||||||||||
Mount Laurel |
NJ |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Somerset |
NJ |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
West Orange |
NJ |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Islip/Ronkonkoma |
NY |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
New York |
NY |
Renaissance (4) |
(6) | ( |
) | (3) | ( |
) | |
|
||||||||||||||||||||||||||||||
Syracuse |
NY |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Syracuse |
NY |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Mason |
OH |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Twinsburg |
OH |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oklahoma City |
OK |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oklahoma City |
OK |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oklahoma City |
OK |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Oklahoma City (West) |
OK |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Collegeville/Philadelphia |
PA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Malvern/Philadelphia |
PA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Pittsburgh |
PA |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Charleston |
SC |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Columbia |
SC |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Columbia |
SC |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Greenville |
SC |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Hilton Head |
SC |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Chattanooga |
TN |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Franklin |
TN |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Franklin |
TN |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Jackson |
TN |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Johnson City |
TN |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Knoxville |
TN |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Knoxville |
TN |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Knoxville |
TN |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Memphis |
TN |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Memphis |
TN |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Nashville |
TN |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Nashville |
TN |
Home2 Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Nashville |
TN |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Addison |
TX |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Allen |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Allen |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Arlington |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin |
TX |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin |
TX |
Fairfield |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Austin/Round Rock |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Beaumont |
TX |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Burleson/Fort Worth |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Dallas |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Denton |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
El Paso |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
El Paso |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fort Worth |
TX |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Fort Worth |
TX |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Frisco |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Grapevine |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Houston |
TX |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Houston |
TX |
Marriott |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Houston |
TX |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Houston |
TX |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Irving |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Lewisville |
TX |
Hilton Garden Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Round Rock |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
San Antonio |
TX |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Shenandoah |
TX |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Stafford |
TX |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Texarkana |
TX |
Hampton |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Provo |
UT |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Salt Lake City |
UT |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Salt Lake City |
UT |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Alexandria |
VA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Alexandria |
VA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Charlottesville |
VA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Manassas |
VA |
Residence Inn |
( |
) | |
|
SCHEDULE III
Real Estate and Accumulated Depreciation and Amortization - (continued)
As of December 31, 2019
(dollars in thousands)
Subsequently | ||||||||||||||||||||||||||||||||||||||||
Initial Cost | Capitalized | |||||||||||||||||||||||||||||||||||||||
City | State | Description | Encumbrances | Land (1) |
Bldg./ FF&E / Other |
Bldg. Imp. & FF&E |
Total Gross Cost (2) |
Acc. Deprec. |
Date of Construction |
Date Acquired |
Depreciable Life |
# of Rooms |
||||||||||||||||||||||||||||
Richmond |
VA |
Courtyard |
$ | $ | $ | $ | $ | $ | ( |
) | |
|
||||||||||||||||||||||||||||
Richmond |
VA |
Independent |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Richmond |
VA |
Marriott |
(6) | ( |
) | |
|
|||||||||||||||||||||||||||||||||
Richmond |
VA |
Residence Inn |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Richmond |
VA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Suffolk |
VA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Suffolk |
VA |
TownePlace Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Virginia Beach |
VA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Virginia Beach |
VA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Kirkland |
WA |
Courtyard |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Seattle |
WA |
Residence Inn |
(6) | ( |
) | |
|
|||||||||||||||||||||||||||||||||
Tukwila |
WA |
Homewood Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Vancouver |
WA |
SpringHill Suites |
( |
) | |
|
||||||||||||||||||||||||||||||||||
Richmond |
VA |
Corporate Office |
( |
) | |
|
||||||||||||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | ( |
) |
Investment in Real Estate: |
2019 |
2018 |
2017 |
|||||||||
Balance as of January 1 |
$ | $ | $ | |||||||||
Acquisitions |
||||||||||||
Improvements |
||||||||||||
Dispositions |
( |
) | ( |
) | ( |
) | ||||||
Assets Held for Sale (5) |
( |
) | ||||||||||
Impairment of Depreciable Assets |
( |
) | ( |
) | ( |
) | ||||||
Total Gross Cost as of December 31 |
||||||||||||
Finance Ground Lease Assets as of December 31 (6) |
||||||||||||
Total Investment in Real Estate |
$ | $ | $ |
Accumulated Depreciation and Amortization: |
2019 |
2018 |
2017 |
|||||||||
Accumulated Depreciation as of January 1 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
Depreciation Expense |
( |
) | ( |
) | ( |
) | ||||||
Accumulated Depreciation on Dispositions |
||||||||||||
Assets Held for Sale (5) |
||||||||||||
Accumulated Depreciation as of December 31 |
( |
) | ( |
) | ( |
) | ||||||
Accumulated Amortization of Finance Leases as of December 31 (6) |
( |
) | ||||||||||
Accumulated Depreciation and Amortization as of December 31 |
$ | ( |
) | $ | ( |
) | $ | ( |
) |
(1) | |
(2) | |
(3) | |
(4) | |
(5) | |
(6) | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Apple Hospitality REIT, Inc. |
|
|
||
By: |
/s/ Justin G. Knight |
|
|
Date: February 24, 2020 |
|
Justin G. Knight, President and Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
|
|
|
By: |
/s/ Bryan Peery |
|
|
Date: February 24, 2020 |
|
Bryan Peery, |
|
|
|
|
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
By: |
/s/ Glade M. Knight |
Date: February 24, 2020 |
||
Glade M. Knight, Executive Chairman and Director |
||||
By: |
/s/ Justin G. Knight |
|
|
Date: February 24, 2020 |
|
Justin G. Knight, President and Chief Executive Officer and Director (Principal Executive Officer) |
|
|
|
By: |
/s/ Bryan Peery |
|
|
Date: February 24, 2020 |
|
Bryan Peery, |
|
|
|
|
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
|
|
|
By: |
/s/ Glenn W. Bunting, Jr. |
|
|
Date: February 24, 2020 |
|
Glenn W. Bunting, Jr., Director |
|
|
|
By: |
/s/ Jon A. Fosheim |
Date: February 24, 2020 |
||
Jon A. Fosheim, Director |
||||
By: |
/s/ Kristian M. Gathright |
Date: February 24, 2020 |
||
Kristian M. Gathright, Director |
||||
By: |
/s/ Blythe J. McGarvie |
Date: February 24, 2020 |
||
Blythe J. McGarvie, Director |
||||
By: |
/s/ Daryl A. Nickel |
Date: February 24, 2020 |
||
Daryl A. Nickel, Director |
||||
By: |
/s/ L. Hugh Redd |
|
|
Date: February 24, 2020 |
|
L. Hugh Redd, Director |
|
|
|
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
The following description sets forth certain material terms and provisions of our common shares, no par value per share, which is our only security registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless the context requires otherwise, references in this Exhibit 4.1 to “we,” “our,” “us” and “our company” refer to Apple Hospitality REIT, Inc., a Virginia corporation. This description also summarizes relevant provisions of the Virginia Stock Corporation Act and certain provisions of our amended and restated articles of incorporation, as amended (the “articles of incorporation”) and our second amended and restated bylaws (the “bylaws”). The following summary does not purport to be complete and is subject to and qualified in its entirety by reference to applicable Virginia law and to our articles of incorporation and bylaws, each of which are incorporated by reference as exhibits to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part. We encourage you to read our articles of incorporation, our bylaws and the applicable provisions of Virginia law for additional information.
General
Our articles of incorporation provide that we may issue up to 800,000,000 common shares, no par value per share, and 30,000,000 preferred shares, no par value per share, which are undesignated preferred shares. Our articles of incorporation authorize our board of directors, without shareholder approval, to amend our articles of incorporation to fix in whole or in part the preferences, limitations and relative rights, within the limits set forth in the Virginia Stock Corporation Act, of any series within the preferred shares prior to the issuance of any shares of that series. As of February 14, 2020, 223,862,913 common shares were issued and outstanding and no preferred shares were issued and outstanding. Under the Virginia Stock Corporation Act, shareholders generally are not liable for the corporation’s debt or obligations.
Voting Rights of Common Shares
Subject to the provisions of our articles of incorporation and our bylaws regarding the restrictions on transfer and ownership of capital shares, each outstanding common share entitles the holder to one vote on all matters submitted to a vote of shareholders. The holders of our common shares have exclusive voting power with respect to the election of directors and for all other purposes, except as otherwise required by law or as provided in our articles of incorporation with respect to any series of preferred shares then outstanding. There is no cumulative voting in the election of directors. Directors are elected by the plurality of votes cast and entitled to vote in the election of directors; provided, 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.
For more information regarding voting rights of common shareholders, see — “Certain Provisions of Virginia Law and Our Articles of Incorporation and Bylaws—Amendment of Our Articles of Incorporation and Bylaws and Approval of Extraordinary Transactions” below.
Dividends, Distributions, Liquidation and Other Rights
Subject to the preferential rights of any other class or series of shares and to the provisions of our articles of incorporation and bylaws regarding the restrictions on transfer and ownership of capital shares, holders of our common shares are entitled to receive dividends on such common shares if, as and when authorized by our board of directors, and declared by us out of assets legally available therefor. Subject to the rights of holders of shares
ranking senior to the holders of our common shares as to dividends and distributions, holders of our common shares also are entitled to receive, if and when declared by our board of directors, dividends and distribution of our net assets legally available for distribution to shareholders in the event of our liquidation, dissolution or winding up of the affairs of our company.
Holders of our common shares have no preference, conversion, exchange, sinking fund or redemption rights and have no preemptive rights to subscribe for any of our securities. Subject to the provisions of our articles of incorporation and bylaws regarding the restrictions on transfer and ownership of capital shares, common shares will have equal dividend, liquidation and other rights.
Transfer Agent and Registrar
The transfer agent and registrar for our common shares is American Stock Transfer & Trust Company, LLC.
Listing
Our common shares are listed on the New York Stock Exchange and trade under the symbol "APLE."
Restrictions on Ownership and Transfer
In order to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), our shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Also, no more than 50% of the value of our outstanding shares (after taking into account options to acquire common shares) may be owned, directly, indirectly, or through attribution, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of a taxable year.
Because our board of directors believes that it is essential for us to qualify as a REIT, our articles of incorporation, subject to certain exceptions, contain restrictions on the number of shares of our capital stock that a person may own.
In order to assist us in complying with the limitations on the concentration of ownership of our shares imposed by the Code, our articles of incorporation generally prohibit any person or entity (other than a person or entity who has been granted an exception) from directly or indirectly, beneficially or constructively, owning more than 9.8% of the aggregate of our outstanding common shares, by value or by number of shares, whichever is more restrictive, or 9.8% of the aggregate of the outstanding preferred shares of any class or series, by value or by number of shares, whichever is more restrictive. However, our articles of incorporation permit (but do not require) exceptions to be made for shareholders provided that our board of directors determines that such exceptions will not jeopardize our qualification as a REIT.
Our articles of incorporation also prohibit any person from (1) beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Code, (2) transferring our shares if such transfer would result in us being beneficially owned by fewer than 100 persons (determined without regard to any rules of attribution), (3) beneficially or constructively owning our shares that would result in our owning (directly or constructively) 10% or more of the ownership interest in a tenant of our real property if income derived from such tenant for our taxable year would result in more than a de minimis amount of non-qualifying income for purposes of the REIT tests that, taking into account any other non-qualifying gross income of ours, would cause us to fail to satisfy an applicable REIT gross income requirement, and (4) beneficially or constructively owning our shares that would cause us otherwise to fail to qualify as a REIT, including, but not limited to, as a result of any “eligible independent contractor” (as defined in Section 856(d)(9)(A) of the Code) that operates a “qualified lodging facility” (as defined in Section 856(d)(9)(D)(i) of the Code) on behalf of a taxable REIT subsidiary, or TRS, failing to qualify as such. Any person who acquires or attempts or intends to acquire beneficial ownership of our shares that will or may violate any of the foregoing restrictions on transferability and ownership will be required to give written notice immediately to us and provide us with such other information as
we may request in order to determine the effect of such transfers on our qualification as a REIT. The foregoing restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interest to attempt to qualify, or to qualify, or to continue to qualify, as a REIT. In addition, our board of directors may determine that compliance with the foregoing restrictions is no longer required for our qualification as a REIT.
Our board of directors, in its sole discretion, may waive the 9.8% ownership limit for common shares or preferred shares for a shareholder that is not an individual if such shareholder provides information and makes representations to the board that are satisfactory to the board, in its reasonable discretion, to establish that such person’s ownership in excess of the 9.8% limit for common or preferred shares would not jeopardize our qualification as a REIT. As a condition of granting the waiver, our board of directors, in its sole and absolute discretion as it may deem necessary or advisable, may require a ruling from the Internal Revenue Service, or IRS, or an opinion of counsel in either case in form and substance satisfactory to our board of directors in order to determine or ensure our qualification as a REIT.
In addition, our board of directors from time to time may increase the share ownership limits. However, the share ownership limits may not be increased if, after giving effect to such increase, five or fewer individuals could own or constructively own in the aggregate, more than 49.9% in value of the shares then outstanding.
If any transfer of our shares of beneficial interest occurs which, if effective, would result in any person beneficially or constructively owning shares in excess, or in violation, of the above transfer or ownership limitations, known as a prohibited owner, then that number of shares, the beneficial or constructive ownership of which otherwise would cause such person to violate the transfer or ownership limitations (rounded up to the nearest whole share), will be automatically transferred to a charitable trust for the exclusive benefit of a charitable beneficiary, and the prohibited owner will not acquire any rights in such shares. This automatic transfer will be considered effective as of the close of business on the business day before the violative transfer. If the transfer to the charitable trust would not be effective for any reason to prevent the violation of the above transfer or ownership limitations, then the transfer of that number of shares that otherwise would cause any person to violate the above limitations will be void. Shares held in the charitable trust will continue to constitute issued and outstanding shares. The prohibited owner will not benefit economically from ownership of any shares held in the charitable trust, will have no rights to dividends or other distributions and will not possess any rights to vote or other rights attributable to the shares held in the charitable trust. The trustee of the charitable trust will be designated by us and must be unaffiliated with us or any prohibited owner and will have all voting rights and rights to dividends or other distributions with respect to shares held in the charitable trust, and these rights will be exercised for the exclusive benefit of the trust’s charitable beneficiary. Any dividend or other distribution paid before our discovery that shares have been transferred to the trustee will be paid by the recipient of such dividend or distribution to the trustee upon demand, and any dividend or other distribution authorized but unpaid will be paid when due to the trustee. Any dividend or distribution so paid to the trustee will be held in trust for the trust’s charitable beneficiary. Subject to Virginia law, effective as of the date that such shares have been transferred to the charitable trust, the trustee, in its sole discretion, will have the authority to:
● |
rescind as void any vote cast by a prohibited owner prior to our discovery that such shares have been transferred to the charitable trust; and |
● |
recast such vote in accordance with the desires of the trustee acting for the benefit of the trust’s charitable beneficiary. |
However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast such vote.
Within 20 days of receiving notice from us that shares have been transferred to the charitable trust, and unless we buy the shares first as described below, the trustee will sell the shares held in the charitable trust to a person, designated by the trustee, whose ownership of the shares will not violate the share ownership limits in our articles of incorporation. Upon the sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the prohibited owner and to the charitable beneficiary. The prohibited owner will receive the lesser of:
● |
the price paid by the prohibited owner for the shares or, if the prohibited owner did not give value for the shares in connection with the event causing the shares to be held in the charitable trust (for example, in the case of a gift or devise), the market price of the shares on the day of the event causing the shares to be held in the charitable trust; and |
● |
the price per share received by the trustee from the sale or other disposition of the shares held in the charitable trust (less any commission and other expenses of a sale). |
The trustee may reduce the amount payable to the prohibited owner by the amount of dividends and distributions paid to the prohibited owner and owed by the prohibited owner to the trustee. Any net sale proceeds in excess of the amount payable to the prohibited owner will be paid immediately to the charitable beneficiary. If, before our discovery that our shares have been transferred to the charitable trust, such shares are sold by a prohibited owner, then:
● |
such shares will be deemed to have been sold on behalf of the charitable trust; and |
● |
to the extent that the prohibited owner received an amount for such shares that exceeds the amount that the prohibited owner was entitled to receive as described above, the excess must be paid to the trustee upon demand. |
In addition, shares held in the charitable trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of:
● |
the price per share in the transaction that resulted in such transfer to the charitable trust (or, in the case of a gift or devise, the market price at the time of the gift or devise); and |
● |
the market price on the date we, or our designee, accepts such offer. |
We may reduce the amount payable to the prohibited owner by the amount of dividends and distributions paid to the prohibited owner and owed by the prohibited owner to the trustee. We may pay the amount of such reduction to the trustee for the benefit of the charitable beneficiary. We will have the right to accept the offer until the trustee has sold the shares held in the charitable trust. Upon such a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the prohibited owner and any dividends or other distributions held by the trustee will be paid to the charitable beneficiary.
All certificates, if any, representing our shares will bear a legend referring to the restrictions described above.
Every shareholder of record of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) in value of the outstanding shares will be required to give written notice to us within 30 days after the end of each taxable year stating the name and address of each actual owner, the number of shares of each class and series of shares that each actual owner beneficially owns and a description of the manner in which such shares are held. Each such shareholder shall provide to us such additional information as we may request in order to determine the effect, if any, of such beneficial ownership on our status as a REIT and to ensure compliance with the ownership limitations. In addition, each shareholder shall upon demand be required to provide to us such information as we may request, in good faith, in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.
These share ownership limitations could delay, deter or prevent a transaction or a change in control that might involve a premium price for holders of our common shares or might otherwise be in the best interest of our shareholders.
Certain Provisions of Virginia Law and our Articles of Incorporation and Bylaws
Our Board of Directors
Our bylaws provide that the number of directors of our company may be determined by our board of directors, but may not be less than three nor more than 15.
Our bylaws provide that any vacancy, including a vacancy created by an increase in the number of directors, in our board of directors may be filled by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, or by a sole remaining director. If, however, a vacancy is created by the removal of a director by a vote or written consent of our shareholders or court order, such vacancy may be filled only by the vote of a majority of shares entitled to vote or by the written consent of all of the shareholders entitled to vote. Our shareholders may also elect, by the consent of a majority of outstanding shares entitled to vote, a director or directors at any time to fill a vacancy or vacancies not filled by our directors. Any director elected to fill a vacancy will serve until a successor is elected at an annual or special meeting of shareholders. Effective with the 2020 annual meeting of shareholders, the terms of all directors will expire and at such annual meeting and at each annual meeting thereafter, all directors will be elected for one-year terms expiring at the next annual meeting.
Holders of our common shares do not have a right to cumulative voting in the election of directors. Pursuant to our bylaws, directors are elected by the plurality of votes cast and entitled to vote in the election of directors. However, our 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. The Nominating and Governance Committee of the Board will consider, and determine whether to accept, such resignation.
Removal of Directors
Our bylaws provide that our board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has pled guilty or nolo contendere to or been convicted of a felony involving moral turpitude. In addition, any or all directors may be removed for cause (which is defined as a willful violation of our articles of incorporation or bylaws or gross negligence in the performance of a director’s duties) and only by the affirmative vote of either (i) the vote or written consent of all directors other than the director who is being removed, or (ii) the vote of holders of a majority of our outstanding common shares at a meeting of shareholders called for such purpose. Our bylaws also provide that any or all directors may be removed without cause upon the affirmative vote of a majority of the outstanding common shares entitled to vote at a meeting of shareholders called for such purpose.
Affiliated Transactions
The Virginia Stock Corporation Act limits “affiliated transactions” between a corporation and an “interested shareholder” for three years after the date on which the interested shareholder became an interested shareholder, except in compliance with the Virginia Stock Corporation Act. These affiliated transactions include a merger, statutory share exchange, dissolution, or, in circumstances specified in the statute, certain transfers of assets, certain share issuances and transfers and reclassifications involving interested shareholders. Virginia law defines an interested shareholder as:
● |
any person who beneficially owns more than 10% of any class of the corporation’s outstanding voting shares (defined as shares of a class that is entitled to vote generally in the election of directors); or |
● |
an affiliate or associate of the corporation who, at any time within the three-year period prior to the date in question, was the beneficial owner of more than 10% of any class of the corporation’s then-outstanding voting shares. |
The Virginia Stock Corporation Act provides that no corporation may engage in any affiliated transaction with any interested shareholder for a period of three years following the date on which an interested shareholder becomes an interested shareholder, unless approved by the affirmative vote of the holders of at least two-thirds of the voting shares of the corporation, other than the shares beneficially owned by the interested shareholder, and by a majority (but not less than two) of the “disinterested directors.” A disinterested director means, with respect to a
particular interested shareholder, a member of a corporation’s board of directors who (i) was a member before the later of January 1, 1988 and the date on which an interested shareholder became an interested shareholder and (ii) was recommended for election by, or was elected to fill a vacancy and received the affirmative vote of, a majority of the disinterested directors then on the board. At the expiration of the three-year period, these provisions generally require approval of affiliated transactions by the affirmative vote of the holders of at least two-thirds of the voting shares of the corporation, other than those beneficially owned by the interested shareholder.
The statute permits various exemptions from its provisions, including for affiliated transactions entered into with an interested shareholder after the three-year period that are approved by a majority of disinterested directors or are approved by the affirmative vote of the holders of two-thirds of the voting shares other than shares beneficially owned by the interested shareholders, and affiliated transactions where the consideration will be paid to the holders of each class or series of voting shares and certain other statutory fair price conditions are met. Virginia law also requires that, during the three years preceding the announcement of the proposed affiliated transaction, all required dividends have been paid and no special financial accommodations have been accorded the interested shareholder unless approved by a majority of the disinterested directors.
As permitted by the Virginia Stock Corporation Act, we have elected pursuant to a provision in our articles of incorporation to “opt-out” of the affiliated transactions provisions of the statute.
Control Share Acquisitions
The Virginia Stock Corporation Act provides that shares of a Virginia corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the affirmative vote of the holders of a majority of the shares entitled to vote on the matter, excluding “interested shares” in a Virginia corporation. “Interested shares” are shares of a corporation which any of the following persons is entitled to exercise or direct the exercise of the voting power in the election of directors: (1) an acquiring person with respect to a control share acquisition; (2) any officer of such corporation; or (3) any employee of such corporation who is also a director of the corporation. A “control share acquisition” means the direct or indirect acquisition of shares, other than in an excepted acquisition, by a person that when added to all other shares which then have voting rights or are beneficially owned by such person would cause such person to become entitled, immediately upon acquisition of such shares, to vote or direct the vote of, shares having voting power within any of the following ranges of the votes entitled to be cast in an election of directors:
● |
one-fifth or more but less than one-third of such votes; |
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one-third or more but less than a majority of such votes; or |
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a majority or more of such votes. |
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses and making a “control share acquisition statement” as described in the Virginia Stock Corporation Act), may compel our board of directors to call a special meeting of shareholders to be held within 50 days of the acquiring person’s request to consider the voting rights of the shares. If no request for a special meeting is made, the corporation may itself present the question at any shareholders’ meeting.
If voting rights for control shares are approved at a shareholders’ meeting and the acquiror has beneficial ownership of shares entitled to cast a majority of the votes which could be cast in an election of directors, all shareholders other than the acquiring person may be entitled to exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares acquired in a merger or share exchange if the corporation is a party to the transaction.
As permitted by the Virginia Stock Corporation Act, we have elected pursuant to a provision in our bylaws to exempt any acquisition of our shares from the control share acquisition provisions of the statute. However, the board of directors may further amend the bylaws to opt into the control share provisions at any time in the future.
Amendment of Our Articles of Incorporation and Bylaws and Approval of Extraordinary Transactions
Under the Virginia Stock Corporation Act, a Virginia corporation generally cannot dissolve, amend its articles of incorporation, merge, sell all or substantially all of its assets or engage in a share exchange unless approved by the affirmative vote of more than two-thirds of all votes entitled to be cast on the matter, unless a greater or lesser proportion of votes (but not less than a majority of all votes cast) is specified in the corporation’s articles of incorporation. Our articles of incorporation provide that our shareholders, by vote of the holders of a majority of our common shares issued and outstanding and a majority of the votes entitled to be voted by any other voting group required by law to vote thereon as a separate voting group, may vote to approve a plan of merger, share exchange or dissolution or to sell, lease, exchange or otherwise dispose of all or substantially all of our property other than in the usual and regular course of business. Our articles of incorporation also provide that, except as otherwise provided by law or our articles of incorporation with respect to any outstanding series of our preferred shares, our articles of incorporation may be amended at any time, and from time to time, upon the vote of the holders of a majority of our common shares issued and outstanding.
Our articles of incorporation provide that our bylaws may be amended or repealed, or new bylaws adopted, at any time by (1) our board of directors or (2) by a vote of the holders of a majority of our issued and outstanding common shares, and our shareholders in amending, repealing or adopting a bylaw may, except as prohibited by applicable law, expressly provide that our board of directors may not amend, repeal or reinstate that bylaw.
Meetings of Shareholders
Under our bylaws, annual meetings of shareholders will be held each year at a date and time as determined by our president or our board of directors. Special meetings of shareholders may be called by our president, by a majority of our board of directors or by the chairman of our board of directors. Additionally, subject to the provisions of our bylaws, special meetings of the shareholders shall be called by our chairman of the board, president or secretary upon the written request of shareholders holding not less than 10% of the eligible votes. Only matters set forth in the notice of the special meeting may be considered and acted upon at such a meeting. Virginia law and our bylaws provide that any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting by unanimous written consent, if that consent describes that action, is signed by each shareholder entitled to vote on the matter, bearing the date of each signature, and is delivered to the secretary of our company for inclusion in the minutes or filing with our corporate records.
Advance Notice of Director Nominations and New Business
Our bylaws provide that:
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with respect to an annual meeting of shareholders, the proposal of business to be considered by shareholders at the annual meeting may be made only: |
o |
pursuant to our notice of the meeting; |
o |
by or at the direction of our board of directors; or |
o |
by a shareholder who is a shareholder of record of a class of shares entitled to vote on the business that such shareholder has proposed both at the time of giving of the notice of the meeting and on the record date of such annual meeting, and who complies with the advance notice procedures set forth in our bylaws. |
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with respect to special meetings of shareholders, only the business specified in our notice of meeting may be brought before the meeting of shareholders. |
● |
nominations of persons for election to our board of directors may be made only: |
o |
pursuant to our notice of the meeting; |
o |
by our board of directors or any committee thereof; or |
o |
by a shareholder who is a shareholder of record of a class of shares entitled to vote for the election of directors both at the time of giving of the notice required by our bylaws and on the record date for the meeting at which the nominee(s) will be voted upon, and who complies with the advance notice provisions set forth in our bylaws. |
The purpose of requiring shareholders to give advance notice of nominations and other proposals is to afford our board of directors the opportunity to consider the qualifications of the proposed nominees or the advisability of the other proposals and, to the extent considered necessary by our board of directors, to inform shareholders and make recommendations regarding the nominations or other proposals. The advance notice procedures also permit a more orderly procedure for conducting our shareholder meetings. Although our bylaws do not give our board of directors the power to disapprove timely shareholder nominations and proposals, our bylaws may have the effect of precluding a contest for the election of directors or proposals for other action if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors to our board of directors or to approve its own proposal.
Anti-takeover Effect of Certain Provisions of Virginia Law and Our Articles of Incorporation and Bylaws
The provisions of our bylaws on removal of directors and advance notice of director nominations could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders of our common shares or otherwise be in the best interests of our shareholders. Likewise, provisions of the Virginia Stock Corporation Act that restrict affiliated transactions and control share acquisitions, if we are subject to those provisions in the future, could have similar anti-takeover effects. See “—Affiliated Transactions” and “—Control Share Acquisitions” for additional information on the voting requirements related to these transactions.
Indemnification and Limitation of Directors’ and Officers’ Liability
Our articles of incorporation provide for the limitation or elimination of liability of our directors and officers to our company or our shareholders to the same extent permitted by the Virginia Stock Corporation Act.
The Virginia Stock Corporation Act permits, and our articles of incorporation require, to the fullest extent permitted by Virginia law, that we indemnify our officers and directors in a variety of circumstances, which may include indemnification for liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Under Sections 13.1-697 and 13.1-702 of the Virginia Stock Corporation Act, a Virginia corporation generally is authorized to indemnify its directors and officers in civil and criminal actions if such officer or director acted in good faith and believed, in the case of conduct in his or her official capacity with the corporation, that his conduct was in the best interests of the corporation or in all other cases, that his conduct was at least not opposed to its best interests, and, in the case of any criminal proceeding, he had no reasonable cause to believe that his conduct was unlawful. The Virginia Stock Corporation Act requires such indemnification, unless limited by a corporation’s articles of incorporation, when a director or officer entirely prevails in the defense of any proceeding to which he was a party because he is or was a director or officer of the corporation.
Our articles of incorporation provide that we must indemnify any individual who is, was or is threatened to be made a party to a civil, criminal, administrative, investigative or other proceeding (including a proceeding by or in the right of our company or by or on behalf of our shareholders) because such individual is or was a director or officer of our company or of any legal entity controlled by our company, or is or was a fiduciary of any employee benefit plan established at the direction of our company, against all liabilities and reasonable expenses incurred by him on account of the proceeding, provided that our directors (excluding the indemnified party) determine in good faith that his course of conduct which caused the loss or liability was in the best interests of our company, and provided further that such liabilities and expenses were not incurred because of his willful misconduct, bad faith,
reckless disregard of duties or knowing violation of the criminal law. Before any indemnification is paid, a determination must be made that indemnification is permissible in the circumstances because the person seeking indemnification is eligible for indemnification and has met the standard of conduct set forth above. Such determination must be made in the manner provided by Virginia law for determining that indemnification of a director is permissible; provided, however, that if a majority of our directors has changed after the date of the alleged conduct giving rise to a claim for indemnification, the determination that indemnification is permissible must, at the option of the person claiming indemnification, be made by special legal counsel agreed upon by our board of directors and such person.
Unless a determination has been made that indemnification is not permissible, we must make advances and reimbursement for expenses incurred by any person named above upon receipt of an undertaking from him to repay the same if it is ultimately determined that such individual is not entitled to indemnification. We are authorized to contract in advance to indemnify our directors and officers to the extent it is required to indemnify them pursuant to the provisions described above.
Notwithstanding the above, indemnification will not be allowed for any liability imposed by judgment, and costs associated therewith, including attorneys’ fees, arising from or out of an alleged violation of federal or state securities laws associated with the public offering of our common shares unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee, or (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee, or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which our securities were offered or sold as to indemnification for violations of securities laws.
The rights of each person or entity entitled to indemnification under our articles of incorporation shall inure to the benefit of such person’s or entity’s heirs, executors, administrators, successors or assigns. Indemnification pursuant to our articles of incorporation shall not be exclusive of any other right of indemnification to which any person or entity may be entitled, including indemnification pursuant to a valid contract, indemnification by legal entities other than our company, and indemnification under policies of insurance purchased and maintained by us or others. However, no person or entity shall be entitled to indemnification by us to the extent such person or entity is indemnified by another, including an insurer.
Insofar as the foregoing provisions permit indemnification of directors or officers for liability arising under the Securities Act, we have been informed that, in the opinion of the Securities and Exchange Commission, this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
Exhibit 21.1
Subsidiaries of
Apple Hospitality REIT, Inc.
At December 31, 2019
(The state of incorporation or organization of each subsidiary is Virginia, except as noted below)
A. Direct Subsidiaries
Apple Air Holding, LLC
Apple Fund Management, LLC
Apple Nine Hospitality, Inc.
Apple Nine Oklahoma, LLC
Apple REIT Eight, Inc.
Apple REIT Seven, Inc.
Apple REIT Ten, Inc.
B. Indirect Subsidiaries (held through direct subsidiaries or other indirect subsidiaries)
Apple Eight California, Inc.
Apple Eight Hospitality, Inc.
Apple Eight Hospitality Management, Inc.
Apple Eight Hospitality Massachusetts Services, Inc.
Apple Eight Hospitality Massachusetts, Inc.
Apple Eight Hospitality Midwest, LLC
Apple Eight Hospitality Ownership, Inc.
Apple Eight Hospitality Texas Services, LLC
Apple Eight NC GP, Inc.
Apple Eight NC LP, Inc.
Apple Eight North Carolina, L.P.
Apple Eight Services Fayetteville, Inc.
Apple Eight Services Jacksonville, Inc.
Apple Eight Services Westford, Inc.
Apple Eight Services Winston-Salem, Inc.
Apple Eight SPE Savannah, Inc.
Apple Eight SPE Somerset, Inc.
Apple Eight SPE Tukwila, Inc.
Apple Eight SPE Westford, Inc.
Apple Nine Collegeville Business Trust
Apple Nine Florida Services, Inc.
Apple Nine Hospitality Management, Inc.
Apple Nine Hospitality Ownership, Inc.
Apple Nine Hospitality Texas Services, Inc.
Apple Nine Hospitality Texas Services II, Inc.
Apple Nine Hospitality Texas Services III, Inc.
Apple Nine Hospitality Texas Services IV, Inc.
Apple Nine Louisiana GP, Inc.
Apple Nine Louisiana, L.P.
Apple Nine Malvern Pennsylvania Business Trust *
Apple Nine Missouri, LLC
Apple Nine NC GP, Inc.
Apple Nine NC LP, Inc.
Exhibit 21.1
Subsidiaries of
Apple Hospitality REIT, Inc. (continued)
At December 31, 2019
Apple Nine North Carolina, L.P.
Apple Nine Pennsylvania, Inc.
Apple Nine Pennsylvania Business Trust *
Apple Nine Services Boise, Inc.
Apple Nine Services Bristol, Inc.
Apple Nine Services Richmond, Inc.
Apple Nine SPE Anchorage, Inc.
Apple Nine SPE Boise, Inc.
Apple Nine SPE Burbana, Inc.
Apple Nine SPE Grapevine, Inc.
Apple Nine SPE Malvern, Inc.
Apple Nine SPE Portland, Inc.
Apple Nine SPE Richmond, Inc.
Apple Nine SPE San Jose, Inc.
Apple Seven Hospitality, Inc.
Apple Seven Hospitality Management, Inc.
Apple Seven Hospitality Ownership, Inc.
Apple Seven Management Services GP, Inc.
Apple Seven Management Services LP, Inc.
Apple Seven Management Services New Orleans GP, Inc.
Apple Seven New Orleans GP, Inc.
Apple Seven New Orleans LP, Inc.
Apple Seven Services Highlands Ranch, Inc.
Apple Seven Services, LLC
Apple Seven Services II, LLC
Apple Seven Services Lakeland, Inc.
Apple Seven Services Miami, Inc.
Apple Seven Services New Orleans, L.P.
Apple Seven Services Provo-San Diego, Inc.
Apple Seven Services Richmond, Inc.
Apple Seven Services San Diego, Inc.
Apple Seven Services Southeast, L.P.
Apple Seven SPE Hattiesburg, Inc.
Apple Seven SPE Huntsville, Inc.
Apple Seven SPE Kirkland, Inc.
Apple Seven SPE Miami, Inc.
Apple Seven SPE New Orleans, L.P.
Apple Seven SPE Prattville, Inc.
Apple Seven SPE Rancho Bernardo, Inc.
Apple Seven SPE Richmond, Inc.
Apple Seven SPE San Diego, Inc.
Apple Seven SPE Seattle, Inc.
Apple Seven SPE SoCal, Inc.
Apple Six Hospitality Air, LLC
Apple Ten Alabama Services, LLC
Apple Ten Business Trust
Apple Ten Florida Services, Inc.
Apple Ten Hospitality, Inc.
Exhibit 21.1
Subsidiaries of
Apple Hospitality REIT, Inc. (continued)
At December 31, 2019
Apple Ten Hospitality Management, Inc.
Apple Ten Hospitality Ownership, Inc.
Apple Ten Hospitality Texas Services, Inc.
Apple Ten Hospitality Texas Services II, Inc.
Apple Ten Hospitality Texas Services III, Inc.
Apple Ten Hospitality Texas Services IV, Inc.
Apple Ten Illinois, LLC
Apple Ten Illinois MM, Inc.
Apple Ten Illinois Services, Inc.
Apple Ten NC GP, Inc.
Apple Ten NC LP, Inc.
Apple Ten Nebraska, LLC
Apple Ten North Carolina, L.P.
Apple Ten Oklahoma, LLC
Apple Ten Oklahoma Services, Inc.
Apple Ten Services Capistrano, Inc.
Apple Ten Services Colorado Springs, Inc.
Apple Ten Services Denver, Inc.
Apple Ten Services Franklin I, Inc.
Apple Ten Services Franklin II, Inc.
Apple Ten Services Gainesville, Inc.
Apple Ten Services Knoxville II, Inc.
Apple Ten Services OHare, Inc.
Apple Ten Services Scottsdale, Inc.
Apple Ten SPE Calibraska, Inc.
Apple Ten SPE Capistrano, Inc.
Apple Ten SPE Colorado Springs, Inc.
Apple Ten SPE Denver, Inc.
Apple Ten SPE Franklin I, Inc.
Apple Ten SPE Franklin II, Inc.
D&D Beverage Services, LLC **
* State of organization is Pennsylvania.
** State of organization is Kansas
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) |
Registration Statement (Form S-8 No. 333-204171) pertaining to the 2014 Omnibus Incentive Plan and the 2008 Non-Employee Directors Stock Option Plan of Apple Hospitality REIT, Inc., and |
(2) |
Registration Statement (Form S-3 No. 333-231021) of Apple Hospitality REIT, Inc.; |
of our reports dated February 24, 2020, with respect to the consolidated financial statements and schedule of Apple Hospitality REIT, Inc. and the effectiveness of internal control over financial reporting of Apple Hospitality REIT, Inc., included in this Annual Report (Form 10-K) of Apple Hospitality REIT, Inc. for the year ended December 31, 2019.
/s/ ERNST & YOUNG LLP
Richmond, Virginia
February 24, 2020
Exhibit 31.1
CERTIFICATION
I, Justin G. Knight, certify that:
1. I have reviewed this report on Form 10-K of Apple Hospitality REIT Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 24, 2020 |
|
/s/ Justin G. Knight |
|
|
Justin G. Knight President and Chief Executive Officer |
|
|
Apple Hospitality REIT, Inc. |
Exhibit 31.2
CERTIFICATION
I, Bryan Peery, certify that:
1. I have reviewed this report on Form 10-K of Apple Hospitality REIT, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: February 24, 2020 |
|
/s/ Bryan Peery |
|
|
Bryan Peery Chief Financial Officer Apple Hospitality REIT, Inc. |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Apple Hospitality REIT, Inc., (the “Company”) on Form 10-K for the year ending December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of December 31, 2019, and for the period then ended.
Apple Hospitality REIT, Inc.
/s/ Justin G. Knight |
|
Justin G. Knight |
|
President and Chief Executive Officer |
|
/s/ Bryan Peery |
|
Bryan Peery |
|
Chief Financial Officer |
|
February 24, 2020 |
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Management and Franchise Agreements (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contractors [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Hotel Properties Managed by Third Parties [Table Text Block] | Each of the Company’s 233 hotels owned as of December 31, 2019 is operated and managed under a separate management agreement with one of the following management companies or one of their affiliates, none of which are affiliated with the Company (number of hotels by manager are as of January 1, 2020):
|
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