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  • Location: Virginia 
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    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2018 or ☐ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-37389 APPLE HOSPITALITY REIT, INC. (Exact name of registrant as specified in its charter) Virginia 26-1379210 (State of Organization) (I.R.S. Employer Identification Number) 814 East Main Street Richmond, Virginia 23219 (Address of principal executive offices) (Zip Code) (804) 344-8121 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Shares, no par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of the common shares held by non-affiliates of the registrant (based on the closing sale price on the New York Stock Exchange) was approximately $3,866,233,000 as of June 30, 2018. The number of common shares outstanding on February 15, 2019 was 223,724,569. Documents Incorporated by Reference The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the Company’s annual meeting of shareholders to be held on May 16, 2019.


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    APPLE HOSPITALITY REIT, INC. FORM 10-K Index Page Part I Item 1. Business ............................................................................................................................ 3 Item 1A. Risk Factors ...................................................................................................................... 9 Item 1B. Unresolved Staff Comments .............................................................................................. 22 Item 2. Properties .......................................................................................................................... 23 Item 3. Legal Proceedings ............................................................................................................. 28 Item 4. Mine Safety Disclosures .................................................................................................... 28 Part II Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities ....................................................................................... 29 Item 6. Selected Financial Data ..................................................................................................... 32 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33 Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................................. 48 Item 8. Financial Statements and Supplementary Data .................................................................. 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 80 Item 9A. Controls and Procedures .................................................................................................... 80 Item 9B. Other Information ............................................................................................................. 80 Part III Item 10. Directors, Executive Officers and Corporate Governance .................................................. 81 Item 11. Executive Compensation ................................................................................................... 81 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ....................................................................................................... 81 Item 13. Certain Relationships and Related Transactions, and Director Independence ..................... 81 Item 14. Principal Accounting Fees and Services ............................................................................ 81 Part IV Item 15. Exhibits, Financial Statement Schedules ........................................................................... 82 Item 16. Form 10-K Summary ......................................................................................................... 83 Signatures ....................................................................................................................................................... 88 This Form 10-K includes references to certain trademarks or service marks. The Courtyard by Marriott®, Fairfield by Marriott®, Marriott® Hotels, Renaissance® Hotels, Residence Inn by Marriott®, SpringHill Suites by Marriott® and TownePlace Suites by Marriott® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Embassy Suites by Hilton®, Hampton by Hilton®, Hampton Inn & Suites by Hilton®, Hilton® Hotels & Resorts, Hilton Garden Inn®, Home2 Suites by Hilton® and Homewood Suites by Hilton® trademarks are the property of Hilton Worldwide Holdings Inc. or one or more of its affiliates. The Hyatt®, Hyatt House® and Hyatt Place® trademarks are the property of Hyatt Hotels Corporation or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.


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    PART I Forward-Looking Statements This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are typically identified by use of statements that include phrases such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “outlook,” “strategy,” and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Apple Hospitality REIT, Inc. and its wholly-owned subsidiaries (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward- looking statements. Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; adverse changes in the real estate and real estate capital markets; financing risks; litigation risks; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a real estate investment trust (“REIT”). Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Annual Report will prove to be accurate. In light of the significant uncertainties inherent in the forward- looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled “Risk Factors” in Item 1A in this Annual Report. Any forward- looking statement that the Company makes speaks only as of the date of this Annual Report. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law. Item 1. Business The Company, formed in November 2007 as a Virginia corporation, is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company has elected to be treated as a REIT for federal income tax purposes. As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in urban, high-end suburban and developing markets throughout 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt brands. The hotels are operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.” The Company has no foreign operations or assets and its operating structure includes only one reportable segment. Refer to Part II, Item 8, for the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. Business Objectives The Company is one of the largest hospitality REITs in the U.S., in both the number of hotels and guest rooms, with significant geographic and brand diversity. The Company’s primary business objective is to maximize shareholder value by achieving long-term growth in cash available for distributions to its shareholders. The Company has pursued and will continue to pursue this objective through the following investment strategies: • pursuing thoughtful capital allocation with selective acquisitions and dispositions of primarily rooms- focused hotels in the upscale sector of the lodging industry; • employing broad geographic diversification of its investments; • franchising and collaborating with leading brands in the sector; • utilizing strong experienced operators for its hotels and enhancing their performance with proactive asset management; 3


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    • reinvesting in the Company’s hotels to maintain their competitive advantage; and • maintaining low leverage providing the Company with financial flexibility. The Company has generally acquired fee simple ownership of its properties, with a focus on hotels that have or have the potential to have diverse demand generators, strong brand recognition, high levels of customer satisfaction and strong operating margins. The acquisitions have been in broadly diversified markets across the U.S. to limit dependence on any one geographic area or demand generator. With an emphasis on upscale rooms-focused hotels, the Company utilizes its asset management experience and expertise to improve the quality and performance of its hotels by working with its property managers to aggressively manage room rates and cost structure by benchmarking with internal and external data, using the Company’s scale to help negotiate favorable vendor contracts, engaging industry leaders in hotel management, and franchising the hotels with leading brands and actively participating with the franchisors to strengthen the brands. To maintain its competitive advantage in each market, the Company continually reinvests in its hotels. With its depth of ownership in many upscale and upper mid-scale rooms-focused brands and extensive experience with the Hilton and Marriott rooms-focused brands, the Company has been able to enhance its reinvestment approach. By maintaining a flexible balance sheet, with a total debt to total capitalization (total debt outstanding plus equity market capitalization based on the Company’s December 31, 2018 closing share price) ratio at December 31, 2018 of 31%, the Company is positioned to opportunistically consider investments that further improve shareholder value. Hotel Operating Performance As of December 31, 2018, the Company owned 241 hotels with a total of 30,812 rooms as compared to 239 hotels with a total of 30,322 rooms as of December 31, 2017. Operating performance is included only for the period of ownership for hotels acquired or disposed of during 2018 and 2017. During 2018, the Company acquired one newly constructed hotel on May 2, 2018 and four existing hotels (two on February 5, 2018, one on June 28, 2018 and one on December 7, 2018), and sold three hotels (two on July 13, 2018 and one on November 29, 2018). During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017, one on October 20, 2017, and one on December 1, 2017) and sold two hotels (one on April 20, 2017 and one on October 5, 2017). The following table reflects certain operating statistics for the Company’s hotels for their respective periods of ownership by the Company. Average Daily Rate (“ADR”) is calculated as room revenue divided by the number of rooms sold, and revenue per available room (“RevPAR”) is calculated as occupancy multiplied by ADR. Years Ended December 31, Percent 2018 2017 Change ADR ............................................ $ 136.04 $ 134.61 1.1% Occupancy .................................. 76.9% 77.4% -0.6% RevPAR ...................................... $ 104.66 $ 104.13 0.5% Comparable Hotels Operating Performance The following table reflects certain operating statistics for the Company’s 241 hotels owned as of December 31, 2018 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 241 hotels owned as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions, results have been excluded for the Company’s period of ownership. Years Ended December 31, Percent 2018 2017 Change ADR ............................................ $ 136.11 $ 135.22 0.7% Occupancy .................................. 77.0% 77.7% -0.9% RevPAR ...................................... $ 104.80 $ 105.00 -0.2% 4


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    Hotel performance is impacted by many factors, including the economic conditions in the U.S. and in each individual locality. Improvements in the general U.S. economy have been offset by increased lodging supply in many markets, offsetting increases in demand and resulting in essentially flat revenue growth. During 2018, the Company’s Comparable Hotels experienced a slight increase in ADR and a slight decrease in occupancy as compared to 2017, leaving RevPAR virtually unchanged. Overall, the Company’s Comparable Hotels’ RevPAR change for 2018 was in line with industry/brand averages. The Company, on a comparable basis, is forecasting slightly negative to slightly positive RevPAR growth for 2019 as compared to 2018, which reflects modestly lower expectations for demand growth, consistent with lower expected Gross Domestic Product growth in the U.S., relatively consistent anticipated hotel supply growth and slightly favorable comparisons caused by natural disasters. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere in this Annual Report on Form 10-K for more information on the Company’s results of operations. 2018 Investing Activities The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, the Company acquired five hotels for an aggregate purchase price of approximately $152.2 million during 2018: a 119-room Hampton Inn & Suites in downtown Atlanta, Georgia; a 144-room Hampton Inn & Suites in Memphis, Tennessee; a 210-room Hampton Inn & Suites in downtown Phoenix, Arizona; a 132-room Hampton Inn & Suites in Atlanta Perimeter Dunwoody, Georgia; and a 127-room Hyatt Place in Jacksonville, Florida. As of January 31, 2019, the Company also has outstanding contracts for the potential purchase of six additional hotels for a total purchase price of approximately $162.5 million, five of which are under development and are planned to be completed and opened for business over the next three to 24 months from December 31, 2018, at which time closings on these hotels are expected to occur, and one existing hotel that is expected to close in the first quarter of 2019. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities for any additional acquisitions. For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. As a result, the Company sold three hotels for an aggregate sales price of approximately $15.8 million during 2018: its 89-room SpringHill Suites and its 86-room TownePlace Suites in Columbus, Georgia (the “two Columbus hotels”), and its 72-room Residence Inn in Springdale, Arkansas. Additionally, as of December 31, 2018, the Company had an outstanding contract to sell 16 of its hotels for a gross sales price of $175 million. This contract was terminated in February 2019 and the Company entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine properties for a total combined gross sales price of $95 million. The Company holds a non-refundable deposit of $7 million on these contracts. If the closings occur, these sales are expected to be completed in the first half of 2019. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility. See Note 3 titled “Investment in Real Estate” and Note 4 titled “Dispositions and Hotel Sale Contracts” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning these transactions. In addition to continually considering opportunities to invest in rooms-focused hotels, the Company also monitors the trading price of its common shares and repurchases its common shares when it believes there is an opportunity to increase shareholder value. During 2018, the Company purchased under its authorized $464 million share repurchase program (“Share Repurchase Program”) approximately 6.6 million of its common shares at a weighted-average market purchase price of approximately $15.87 per common share for an aggregate purchase price, including commissions, of approximately $104.3 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. See Note 8 titled “Shareholders’ Equity” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Share Repurchase Program. 5


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    Hotel Industry and Competition The hotel industry is highly competitive. Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels or lodging facilities in its geographic market. An increase in the number of competitive hotels or other lodging facilities in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area. The Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal competitive factors affecting the Company’s hotels. Additionally, general economic conditions in a particular market and nationally impact the performance of the hotel industry. Management and Franchise Agreements All of the Company’s hotels operate under Marriott, Hilton or Hyatt brands, and as of December 31, 2018, consisted of the following: Number of Hotels and Guest Rooms by Brand Number of Number of Brand Hotels Rooms Hilton Garden Inn ................................................. 42 5,807 Courtyard .............................................................. 40 5,460 Hampton ............................................................... 40 5,029 Homewood Suites ................................................. 34 3,831 Residence Inn ........................................................ 33 3,939 SpringHill Suites ................................................... 16 2,159 Fairfield ................................................................ 11 1,300 TownePlace Suites ................................................ 11 1,110 Home2 Suites ........................................................ 8 910 Marriott ................................................................. 2 616 Embassy Suites ..................................................... 2 316 Renaissance ........................................................... 1 208 Hyatt Place ............................................................ 1 127 Total .................................................................. 241 30,812 Each of the Company’s 241 hotels owned as of December 31, 2018 is operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company. The management agreements generally provide for initial terms of one to 30 years. The Company has the option to terminate the management agreements if specified performance thresholds are not satisfied. As of December 31, 2018, over 80% of the Company’s hotels operate under a variable management fee agreement, with an average initial term of two years, which the Company believes better aligns incentives for each hotel manager to maximize each property’s performance than a base-plus-incentive management fee structure, as described below, which is more common throughout the industry. Under the variable fee structure, the management fee earned for each hotel is generally within a range of 2.5% to 3.5% of gross revenues, based on each hotel’s performance relative to other hotels owned by the Company. The performance measures are based on various financial and quality performance metrics. The Company’s remaining hotels operate under a management fee structure which generally includes the payment of base management fees and an opportunity for incentive management fees. Under this structure, base management fees are calculated as a percentage of gross revenues and the incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. In addition to the above, management fees for all of the Company’s hotels generally include accounting fees and other fees for centralized services, which are allocated among all of the hotels that receive the benefit of such services. Sixteen of the Company’s hotels are managed by affiliates of Marriott or Hilton. The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and, as a result, the hotels they manage were required to obtain separate franchise agreements with each respective franchisor. The franchise agreements generally provide for initial terms of approximately 10 to 30 years and generally provide for renewals subject to franchise requirements at the time of renewal. The Company pays various fees under these agreements, including the payment of royalty fees, marketing fees, reservation fees, a communications support fee, brand loyalty program fees and other similar fees based on room revenues. 6


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    The franchise and/or management agreements provide a variety of benefits for the Company, which include national advertising, publicity, and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards, centralized reservation systems and best practices within the industry. Hotel Maintenance and Renovation The Company’s hotels have an ongoing need for renovation and refurbishment. To maintain and enhance each property’s competitive position in its market, the Company has invested in and plans to continue to reinvest in its hotels. During 2018 and 2017, the Company’s capital improvements for its hotels were approximately $71.1 million and $69.1 million, respectively. During 2019, the Company anticipates investing approximately $80 to $90 million in capital improvements, which includes various scheduled renovation projects for approximately 30 to 35 properties. Financing The Company’s principal daily sources of liquidity are the operating cash flow generated from the Company’s properties and availability under its revolving credit facility. Depending on market conditions, the Company also has the ability to enter into additional secured and unsecured debt financing and to issue common shares under its at-the-market offering program discussed below. The Company anticipates that funds from these sources will be adequate to meet its anticipated liquidity requirements, including debt service, hotel acquisitions, hotel renovations, share repurchases, and required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes). During 2018, the Company completed the refinancing of two of its primary credit facilities. In July and August 2018, the Company entered into an amendment and restatement of its $965 million credit facility and its $150 million term loan facility. The changes under the facilities included: reducing the capacity of the $965 million credit facility to $850 million; increasing the capacity of the $150 million term loan facility to $225 million; extending the maturities of each of the loans under the facilities; reducing the annual interest rate; and improving certain covenants as compared to the previous agreements. As of December 31, 2018, the Company had approximately $1.4 billion of total outstanding debt with a combined weighted-average interest rate, including the effect of interest rate swaps, of approximately 3.74%, consisting of approximately $488.8 million in outstanding mortgage debt secured by 31 properties, with maturity dates ranging from June 2020 to January 2038 and stated interest rates ranging from 3.55% to 6.25%, and approximately $928.8 million in outstanding debt under its unsecured credit facilities with maturity dates ranging from July 2022 to August 2025 and effective interest rates, including the effect of interest rate swaps, ranging from 2.44% to 4.24%. The Company’s unused borrowing capacity under its credit facilities as of December 31, 2018 was $231.2 million, consisting of $156.2 million available under its $425 million revolving credit facility, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders, and $75.0 million under its $225 million term loan facility, which was drawn by the Company on January 29, 2019 and used to pay down borrowings on the Company’s revolving credit facility. As discussed above, the Company has historically maintained and plans in the future to maintain relatively low leverage as compared to the real estate industry as a whole and the lodging sector in particular. The Company’s ratio of total debt to total capitalization as of December 31, 2018 was 31%. Although this ratio is low relative to the industry, it is slightly higher than in prior years as a result of market declines in the Company’s share price (which have affected the lodging sector as a whole) and share repurchases made by the Company in the fourth quarter of 2018. However, the Company anticipates this ratio declining if the potential sales transactions discussed above are completed. As it did during the fourth quarter of 2018, the Company may increase debt levels at any time to take advantage of investment opportunities, but would plan to reduce any significant increases as appropriate with the issuance of equity or property dispositions to maintain its flexible balance sheet and reduce risks to investors compared to those of highly leveraged companies. The Company plans to maintain staggered maturities of its debt, utilize unsecured debt when available and fix the rate on the majority of its debt. All of these strategies reduce shareholder risk related to the Company’s financing structure. See Note 5 titled “Debt” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information regarding the Company’s debt. 7


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    In 2017, the Company executed an equity distribution agreement that allows the Company to sell, from time to time, up to an aggregate of $300 million of its common shares through sales agents under an at-the-market offering program (the “ATM Program”). During the first quarter of 2018, the Company sold approximately 0.2 million common shares under its ATM Program at a weighted-average market sales price of approximately $19.73 per common share and received aggregate gross proceeds of approximately $4.8 million before commissions and issuance costs. During the fourth quarter of 2017, the Company sold approximately 6.9 million common shares under its ATM Program at a weighted-average market sales price of approximately $19.55 per common share and received aggregate gross proceeds of approximately $135.1 million before commissions and issuance costs. The Company used the proceeds from the sale of these shares to pay down borrowings on its revolving credit facility. Future sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company's common shares and opportunities for uses of any proceeds. Distribution Policy The Company plans to continue to pay a consistent distribution on a monthly basis, with distributions based on anticipated cash generated from operations. The Company’s annualized distribution rate was $1.20 per common share at December 31, 2018. As it has done historically, due to seasonality, the Company may use its revolving credit facility to maintain the consistency of the monthly distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles. Any distribution is subject to approval of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at the current annual distribution rate. The Board of Directors monitors the Company’s distribution rate relative to the performance of its hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company. If cash flow from operations and the revolving credit facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions. Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy and may need to reduce its distributions to required levels to maintain its REIT status. If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions. Insurance The Company maintains comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of its hotels. These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties in similar locations. However, various types of catastrophic losses, like earthquakes, hurricanes, or certain types of terrorism, may not be insurable or may not be economically insurable. Environmental Matters The Company’s hotels are subject to various U.S. federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and waste water discharges, lead-based paint, mold and mildew and waste management, and impose liability for contamination. In connection with each of the Company’s hotel acquisitions, the Company reviewed a Phase I Environmental Report and additional environmental reports and surveys, as were necessitated by the preliminary report. Based on the reports, the Company is not aware of any environmental situations requiring remediation at the Company’s properties, which have not been, or are not currently being remediated as necessary. No material remediation costs have occurred or are expected to occur. Under various laws, owners as well as tenants and operators of real estate may be required to investigate and clean up or remove hazardous substances present at or migrating from properties they own, lease or operate and may be held liable for property damage or personal injuries that result from hazardous substances. These laws also expose the Company to the possibility that it may become liable to reimburse governments for damages and costs they incur in connection with hazardous substances. Seasonality The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues are greater 8


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    in the second and third quarters than in the first and fourth quarters. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements. Related Parties The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. See Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Company’s related party transactions. Employees During 2018, all employees involved in the day-to-day operation of the Company’s hotels were employed by third party management companies engaged pursuant to the hotel management agreements. At December 31, 2018, the Company had 62 employees. The employees not only provide support to the Company, but, as discussed in Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, certain employees also provide support services to Apple Realty Group, Inc. (“ARG”), which is wholly owned by Glade M. Knight, Executive Chairman of the Company. ARG reimburses the Company for the support services that it receives. Website Access The address of the Company’s Internet website is www.applehospitalityreit.com. The Company makes available free of charge through its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Information contained on the Company’s website is not incorporated by reference into this report. Item 1A. Risk Factors The Company has identified the following significant risk factors which may affect, among other things, the Company’s business, financial position, results of operations, operating cash flow, market value, and ability to service its debt obligations and make distributions to its shareholders. You should carefully consider the risks described below and the risks disclosed by the Company in other filings with the SEC, in addition to the other information contained in this report. Risks Related to the Company’s Business and Operations The Company is subject to various risks which are common to the hotel industry on a national, regional and local market basis that are beyond its control and could adversely affect its business. The success of the Company’s hotels depends largely on the hotel operators’ ability to adapt to dominant trends and risks in the hotel industry, both nationally and in individual local markets. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses. The following is a summary of risks that may affect the hotel industry in general and as a result may affect the Company: • over-building of hotels in the markets in which the Company operates, resulting in an increase in supply of hotel rooms that exceeds increases in demand; • competition from other hotels and lodging alternatives in the markets in which the Company operates; • dependence on business and leisure travel; • increases in energy costs and other travel expenses, which may affect travel patterns and reduce business and leisure travel; • reduced business and leisure travel due to geo-political uncertainty, including terrorism, travel-related health concerns, including the widespread outbreak of infectious or contagious diseases in the U.S., 9


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    inclement weather conditions, including natural disasters such as hurricanes and earthquakes, and airline strikes or disruptions; • reduced travel due to adverse national, regional or local economic and market conditions; • seasonality of the hotel industry may cause quarterly fluctuations in operating results; • changes in marketing and distribution for the industry including the cost and the ability of third-party internet and other travel intermediaries to attract and retain customers; • changes in hotel room demand generators in a local market; • ability of a hotel franchise to fulfill its obligations to franchisees; • brand expansion; • the performance of third-party managers of the Company’s hotels; • increases in operating costs, including increases in the cost of property insurance, utilities and real estate and personal property taxes, due to inflation and other factors that may not be offset by increased room rates; • labor shortages and increases in the cost of labor due to low unemployment rates or to government regulations surrounding work rules, wage rates, health care coverage and other benefits; • changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with applicable laws and regulations; • business interruptions due to cyber-attacks; • requirements for periodic capital reinvestment to repair and upgrade hotels; • limited alternative uses for the hotel buildings; • condemnation or uninsured losses; and • downturn in the hospitality industry. Any of these factors may reduce operating results and the value of the properties that the Company owns. Additionally, these items, among others, may reduce the availability of capital to the Company. Economic conditions in the U.S. and individual markets may adversely affect the Company’s business operations and financial performance. The performance of the lodging industry has historically been highly cyclical and closely linked to the performance of the general economy both nationally and within local markets in the U.S. The lodging industry is also sensitive to government, business and personal discretionary spending levels. Declines in government and corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the revenue and profitability of the Company’s hotels and therefore the net operating profits of its investments. Another economic downturn may lead to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels and significantly reduced room rates. The Company cannot predict the pace or duration of an economic cycle or the cycles of the lodging industry. In the event conditions in the industry deteriorate or do not continue to see sustained improvement, or there is an extended period of economic weakness, the Company’s revenue and profitability could be adversely affected. Furthermore, even if the economy in the U.S. in general continues to improve, the Company cannot provide any assurances that demand for hotels will increase from current levels, nationally or more specifically regionally, where the Company’s properties are located. In addition, many of the expenses associated with the Company’s business, including certain personnel costs, interest expense, ground leases, property taxes, insurance and utilities, are relatively fixed. During a period of overall economic weakness, if the Company is unable to meaningfully decrease these costs as demand for its hotels decreases, the Company’s business operations and financial performance may be adversely affected. The Company is affected by restrictions in, and compliance with, its franchise and license agreements. The Company’s wholly-owned taxable REIT subsidiaries (“TRSs”) (or subsidiaries thereof) operate all of the hotels pursuant to franchise or license agreements with nationally recognized hotel brands. These franchise and license agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Company’s hotels in order to maintain uniformity within the franchisor system. The Company may be required to incur costs to comply with these standards and these standards could potentially conflict with the Company’s ability to create specific business plans tailored to each property and to each market. Failure to comply with these brand standards may result in termination of the applicable franchise or license agreement. In addition, as the Company’s 10


  • Page 11

    franchise and license agreements expire, the Company may not be able to renew them on favorable terms or at all. If the Company were to lose or be unable to renew a franchise or license agreement, the Company would be required to re-brand the hotel, which could result in a decline in the value of the hotel, the loss of marketing support and participation in guest loyalty programs, and harm the Company’s relationship with the franchisor, impeding the Company’s ability to operate other hotels under the same brand. Additionally, the franchise and license agreements have provisions that could limit the Company’s ability to sell or finance a hotel which could further affect the Company. All of the Company’s hotels operate under Marriott, Hilton or Hyatt brands; therefore, the Company is subject to risks associated with concentrating its portfolio in only three brand families. All of the hotels that the Company owned as of December 31, 2018 operate under brands owned by Marriott, Hilton or Hyatt. As a result, the Company’s success is dependent in part on the continued success of Marriott, Hilton or Hyatt and their respective brands. The Company believes that building brand value is critical to increase demand and strengthen customer loyalty. Consequently, if market recognition or the positive perception of any of these brands is reduced or compromised, the goodwill associated with the Marriott, Hilton or Hyatt branded hotels in the Company’s portfolio may be adversely affected. Also, if Marriott, Hilton or Hyatt alter certain policies, including their respective guest loyalty programs, this could reduce the Company’s future revenues. Furthermore, if the Company’s relationship with Marriott, Hilton or Hyatt were to deteriorate or terminate as a result of disputes regarding the Company’s hotels or for other reasons, the franchisors could, under certain circumstances, terminate the Company’s current franchise licenses with them or decline to provide franchise licenses for hotels that the Company may acquire in the future. If any of the foregoing were to occur, it could have a material adverse effect on the Company. Competition in the markets where the Company owns hotels may adversely affect the Company’s results of operations. The hotel industry is highly competitive. Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels in its geographic market. The Company also competes with numerous owners and operators of vacation ownership resorts, as well as alternative lodging companies, such as HomeAway and Airbnb, which operate websites that market available furnished, privately-owned residential properties, including homes and condominiums, that can be rented on a nightly, weekly or monthly basis. An increase in the number of competitive hotels, vacation ownership resorts and alternative lodging arrangements in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area and lower the Company’s revenue and profitability. The Company is dependent on third-party hotel managers to operate its hotels and could be adversely affected if such managers do not manage the hotels successfully. To maintain its status as a REIT, the Company is not permitted to operate any of its hotels. As a result, the Company has entered into management agreements with third-party managers to operate its hotels. For this reason, the Company’s ability to direct and control how its hotels are operated is less than if the Company were able to manage its hotels directly. Under the terms of the hotel management agreements, the Company’s ability to participate in operating decisions regarding its hotels is limited to certain matters, and it does not have the authority to require any hotel to be operated in a particular manner (for instance, setting room rates). The Company does not supervise any of the hotel managers or their respective personnel on a day-to-day basis. The Company cannot be assured that the hotel managers will manage its hotels in a manner that is consistent with their respective obligations under the applicable management agreement or the Company’s obligations under its hotel franchise agreements. The Company could be materially and adversely affected if any of its third-party managers fail to effectively manage revenues and expenses, provide quality services and amenities, or otherwise fail to manage its hotels in its best interest, and may be financially responsible for the actions and inactions of the managers. In certain situations, the Company may terminate the management agreement. However, the Company can provide no assurances that it could identify a replacement manager, that the franchisor will consent to the replacement manager, or that the replacement manager will manage the hotel successfully. A failure by the Company’s hotel managers to successfully manage its hotels could lead to an increase in its operating expenses or decrease in its revenues, or both. 11


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    The growth of lodging distribution channels could adversely affect the Company’s business and profitability. Although a majority of rooms sold are sold through the hotel franchisors’ channels, a growing number of the Company’s hotel rooms are sold through other channels or intermediaries. Rooms sold through non-franchisors’ channels are generally less profitable (after associated fees) than rooms sold through franchisors’ channels. Although the Company’s franchisors may have established agreements with many of these alternative channels or intermediaries that limit transaction fees for hotels, there can be no assurance that the Company’s franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, alternative channels or intermediaries may employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to those of the Company’s franchisors. If this happens, the Company’s business and profitability may be materially and adversely affected. Renovations and capital improvements may reduce the Company’s profitability. The Company has ongoing needs for hotel renovations and capital improvements, including maintenance requirements under all of its hotel franchise and management agreements and certain loan agreements. In addition, from time to time the Company will need to make renovations and capital improvements to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of its hotels. The Company also may need to make significant capital improvements to hotels that it acquires. Occupancy and ADR are often affected during periods of renovations and capital improvements at a hotel, especially if the Company encounters delays, or if the improvements require significant disruptions at the hotel. The costs of renovations and capital improvements the Company needs or chooses to make could reduce the funds available for other purposes and may reduce the Company’s profitability. Certain hotels are subject to ground leases that may affect the Company’s ability to use the hotel or restrict its ability to sell the hotel. As of December 31, 2018, 13 of the Company’s hotels were subject to ground leases. Accordingly, the Company effectively only owns a long-term leasehold interest in these hotels. If the Company is found to be in breach of a ground lease, it could lose the right to use the hotel. In addition, unless the Company can purchase a fee interest in the underlying land or renew the terms of these leases before their expiration, as to which no assurance can be given, the Company will lose its right to operate these properties and its interest in the property, including any investment that it made in the property. The Company’s ability to exercise any extension options relating to its ground leases is subject to the condition that the Company is not in default under the terms of the ground lease at the time that it exercises such options, and the Company can provide no assurances that it will be able to exercise any available options at such time. If the Company were to lose the right to use a hotel due to a breach or non-renewal of a ground lease, it would be unable to derive income from such hotel. Finally, the Company may not be permitted to sell or finance a hotel subject to a ground lease without the consent of the lessor. The Company may not be able to complete hotel dispositions when and as anticipated. The Company continually monitors the profitability of its hotels, market conditions, and capital requirements and attempts to maximize shareholder value by timely disposal of its hotels. Real estate investments are, in general, relatively difficult to sell due to, among other factors, the size of the required investment and the volatility in availability of adequate financing for a potential buyer. This illiquidity will tend to limit the Company’s ability to promptly vary its portfolio in response to changes in economic or other conditions. Additionally, factors specific to an individual property, such as its specific market and operating performance, restrictions in franchise and management agreements, debt secured by the property, a ground lease, or capital expenditure needs may further increase the difficulty in selling a property. Therefore, the Company cannot predict whether it will be able to sell any hotels for the price or on the terms set by the Company, or whether any price or other terms offered by a prospective purchaser would be acceptable to the Company. In addition, provisions of the Internal Revenue Code of 1986, as amended (the “Code”) relating to REITs have certain limits on the Company’s ability to sell hotels. 12


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    Real estate impairment losses may adversely affect the Company’s financial condition and results of operations. As a result of changes in an individual hotel’s operating results or to the Company’s planned hold period for a hotel, the Company may be required to record an impairment loss for a property. The Company analyzes its hotel properties individually for indicators of impairment throughout the year. The Company records impairment losses on a hotel property if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective property over its estimated remaining useful life, based on historical and industry data, is less than the property’s carrying amount. Indicators of impairment include, but are not limited to, a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable. The Company’s failure to identify and complete accretive acquisitions may adversely affect the profitability of the Company. The Company’s business strategy includes identifying and completing accretive hotel acquisitions. The Company competes with other investors who are engaged in the acquisition of hotels, and these competitors may affect the supply/demand dynamics and, accordingly, increase the price the Company must pay for hotels it seeks to acquire, and these competitors may succeed in acquiring those hotels. Any delay or failure on the Company’s part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede the Company’s growth. The Company may also incur costs that it cannot recover if it abandons a potential acquisition. If the Company does not reinvest proceeds received from hotel dispositions timely, it could result in lower income. The Company’s profitability may also suffer because future acquisitions of hotels may not yield the returns the Company expects and the integration of such acquisitions may cause disruptions in the Company’s business and to management or may take longer than projected. The Company’s inability to obtain financing on favorable terms or pay amounts due on its financing may adversely affect the Company’s operating results. Although the Company anticipates maintaining relatively low levels of debt, it may periodically use financing to acquire properties, perform renovations to its properties, or make shareholder distributions or share repurchases in periods of fluctuating income from its properties. The credit markets have historically been volatile and subject to increased regulation, and as a result, the Company may not be able to obtain debt financing to meet its cash requirements, including refinancing any scheduled debt maturities, which may adversely affect its ability to execute its business strategy. If the Company refinances debt, such refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced. If the Company is unable to refinance its debt, it may be forced to dispose of hotels or issue equity at inopportune times or on disadvantageous terms, which could result in higher costs of capital. The Company is also subject to risks associated with increases in interest rates with respect to the Company’s variable-rate debt which could reduce cash from operations. In addition, the Company has used interest rate swaps to manage its interest rate risks on a portion of its variable-rate debt, and in the future it may use hedging arrangements, such as interest rate swaps to manage its exposure to interest rate volatility. The Company’s actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. There is no assurance that the Company’s hedging strategy will achieve its objectives, and the Company may be subject to costs, such as transaction fees or breakage costs, if it terminates these arrangements. Compliance with financial and other covenants in the Company’s existing or future debt agreements may reduce operational flexibility and create default risk. The Company’s existing indebtedness, whether secured by mortgages on certain properties or unsecured, contains, and indebtedness that the Company may enter into in the future likely will contain, customary covenants that may restrict the Company’s operations and limit its ability to enter into future indebtedness. In addition, the Company’s ability to borrow under its unsecured credit facilities is subject to compliance with its financial and other covenants, including, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and restrictions on certain investments. The Company’s failure to comply with the covenants in its existing or future indebtedness, as well as its inability to make required principal and interest payments, could 13


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    cause a default under the applicable debt agreement, which could result in the acceleration of the debt and require the Company to repay such debt with capital obtained from other sources, which may not be available to the Company or may be available only on unfavorable terms. If the Company defaults on its secured debt, lenders can take possession of the property or properties securing such debt. As a general policy, the Company seeks to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of its assets. If recourse on any loan incurred by the Company to acquire or refinance any particular property includes all of its assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan. If a loan is secured by a mortgage on a single property, the Company could lose that property through foreclosure if it defaults on that loan. If the Company defaults under a loan, it is possible that it could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs. Additionally, defaulting under a loan may damage the Company’s reputation as a borrower and may limit its ability to secure financing in the future. Technology is used in operations, and any material failure, inadequacy, interruption or security failure of that technology from cyber-attacks or other events could harm the Company’s business. The Company, and its hotel managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, reservations, billing and operating data. Some of the information technology is purchased from third party vendors, on whom the systems depend. The Company and its hotel managers and franchisors rely on commercially available and internally developed systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and other customer information, such as individually identifiable information, including information relating to financial accounts. Although the Company, and its hotel managers and franchisors have taken steps necessary to protect the security of their information systems and the data maintained in those systems, it is possible that the safety and security measures taken will not be able to prevent damage to the systems, the systems’ improper functioning, or the improper access or disclosure of personally identifiable information. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of information systems could interrupt operations, damage reputations, subject the Company to liability claims or regulatory penalties and could have a material adverse effect on the business, financial condition and results of operations of the Company. Potential losses not covered by insurance may adversely affect the Company’s financial condition. The Company maintains comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of its hotels. These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties. There are no assurances that coverage will be available or at reasonable rates in the future. Also, various types of catastrophic losses, like earthquakes, hurricanes, or certain types of terrorism, may not be insurable or may not be economically insurable for all or certain locations. Even when insurable, these policies may have high deductibles and/or high premiums. Additionally, although the Company may be insured for a particular loss, the Company is not insured against the impact a catastrophic event may have on the industry as a whole. There also can be risks such as certain environmental hazards that may be deemed to fall outside of the coverage. In the event of a substantial loss, the Company’s insurance coverage may not be sufficient to cover the full current market value or replacement cost of its lost investment. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, the Company might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also prevent the Company from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. The Company also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that the Company believes to be covered under its policy. Under those circumstances, the insurance proceeds the Company receives might be inadequate to restore its economic position in the damaged or destroyed hotel. Additionally, as a result of making substantial claims, insurance carriers may reduce insured limits and/or increase premiums, if insurance coverage is provided at all, in the future. Any of these or similar events could have a material adverse effect on the Company’s financial condition and results of operations. 14


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    The Company faces possible risks associated with the physical effects of climate change. The Company is subject to the risks associated with the physical effects of climate change, which could include more frequent or severe storms, droughts, hurricanes and flooding, any of which could have a material adverse effect on the Company’s properties, operations and business. To the extent climate change causes changes in weather patterns, its markets could experience increases in storm intensity and rising sea-levels causing damage to the Company’s properties. Over time, these conditions could result in declining hotel demand or the Company’s inability to operate the affected hotels at all. Climate change also may have indirect effects on its business by increasing the cost of (or making unavailable) property insurance on terms the Company finds acceptable, as well as increasing the cost of renovations, energy, water and snow removal at its properties. The Company cannot predict with certainty whether climate change is occurring and, if so, at what rate, and therefore, climate change could have a material adverse effect on the Company. The Company could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could have a material adverse effect on the Company. The Company’s hotels are subject to various U.S. federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require the Company, as the current owner of a hotel, to perform or pay for the clean-up of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste, petroleum products or mold) at, on, under or emanating from the hotel and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned or operated a property at the time it became contaminated, it is possible the Company could incur cleanup costs or other environmental liabilities even after it sells or no longer operates hotels. Contamination at, on, under or emanating from the Company’s hotels also may expose it to liability to private parties for costs of remediation, personal injury and/or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs it incurs to address such contamination. If contamination is discovered on the Company’s properties, environmental laws also may impose restrictions on the manner in which the properties may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner's ability to borrow funds using the property as collateral or to sell the property on favorable terms or at all. Furthermore, persons who sent waste to a waste disposal facility, such as a landfill or an incinerator, may be liable for costs associated with cleanup of that facility. In addition, the Company’s hotels are subject to various U.S. federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management. Some of the Company’s hotels routinely handle and use hazardous or regulated substances and wastes as part of their operations, which substances and wastes are subject to regulation (e.g., swimming pool chemicals and cleaning supplies). The Company’s hotels incur costs to comply with these environmental, health and safety laws and regulations and could be subject to fines and penalties for non-compliance with applicable requirements. Liabilities and costs associated with environmental contamination at, on, under or emanating from the hotel’s properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws and regulations could be material and could materially and adversely affect the Company. The Company can make no assurances that changes in current laws or regulations or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of its hotels will not be affected by its operations, the condition of the properties in the vicinity of its hotels, or by third parties unrelated to the Company. The discovery of material environmental liabilities at its properties could subject the Company to unanticipated significant costs, which could significantly reduce or eliminate its profitability. The Company may incur significant costs complying with various regulatory requirements, which could materially and adversely affect the Company. The Company and its hotels are subject to various U.S. federal, state and local regulatory requirements. These requirements are wide ranging and include among others, state and local fire and life safety requirements, federal laws 15


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    such as the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder and the Sarbanes-Oxley Act of 2002. Liability and costs associated with complying with these requirements are and could be material. If the Company fails to comply with these various requirements, it could incur governmental fines or private damage awards. In addition, existing requirements could change and future requirements might require the Company to make significant unanticipated expenditures, which could materially and adversely affect the Company. In addition, as a result of these significant regulations, the Company could become subject to regulatory investigations and lawsuits. Regulatory investigations and lawsuits could result in significant costs to respond and fines/settlements or changes in the Company’s business practices, any of which could have a material adverse effect on the financial condition, results of operations, liquidity and capital resources, and cash flows of the Company. The ability of the Company to access capital markets, including commercial debt markets, could also be negatively impacted by unfavorable, or the possibility of unfavorable, outcomes to adverse regulatory actions or lawsuits. Risks Related to the Company’s Organization and Structure The Company’s ownership limitations may restrict or prevent certain acquisitions and transfers of its shares. In order for the Company to maintain its qualification as a REIT under the Code, not more than 50% in value of its outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following the Company’s first year (the “5/50 Test”). Additionally, at least 100 persons must beneficially own the Company’s shares during at least 335 days of each taxable year (the “100 Shareholder Test”). The Company’s amended and restated articles of incorporation (the “Charter”), with certain exceptions, authorizes the Company’s Board of Directors to take the actions that are necessary and desirable to preserve its qualification as a REIT. In addition to the 5/50 Test and the 100 Shareholder Test, the Company’s Charter provides that no person or entity may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series (“share ownership limits”). The Company’s Board of Directors may, in its sole discretion, grant an exemption to the share ownership limits, subject to certain conditions and the receipt by the Board of Directors of certain representations and undertakings. In addition, the Board of Directors may change the share ownership limits. The share ownership limits contained in the Charter key off the ownership at any time by any “person,” which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code. The share ownership limits might delay or prevent a transaction or a change in the Company’s control that might involve a premium price for the Company’s common shares or otherwise be in the best interests of its shareholders. The Company’s Charter allows the Board of Directors to issue up to 30 million “blank check” preferred shares. The Company’s Charter allows the Board of Directors to issue up to 30 million “blank check” preferred shares, without action by shareholders. Preferred shares may be issued on terms determined by the Board of Directors, and may have rights, privileges and preferences superior to those of common shares. Without limiting the foregoing, (i) such preferred shares could have liquidation rights that are senior to the liquidation preference applicable to common shares, (ii) such preferred shares could have voting or conversion rights, which could adversely affect the voting power of the holders of common shares and (iii) the ownership interest of holders of common shares will be diluted following the issuance of any such preferred shares. In addition, the issuance of blank check preferred shares could have the effect of discouraging, delaying or preventing a change of control of the Company. Provisions of the Company’s second amended and restated bylaws could inhibit changes in control. Provisions in the Company’s second amended and restated bylaws may make it difficult for another company to acquire it and for shareholders to receive any related takeover premium for its common shares. Pursuant to the Company’s second amended and restated bylaws, directors are elected by the plurality of votes cast and entitled to vote in the election of directors. However, the Company’s corporate governance guidelines require that if an incumbent director fails to receive at least a majority of the votes cast, such director will tender his or her resignation from the Board of Directors. The Nominating and Governance Committee of the Board of Directors will consider, and determine whether to accept, such resignation. Additionally, the second amended and restated bylaws of the Company have various advance notice provisions that require shareholders to meet certain requirements and deadlines for proposals at an annual meeting of shareholders. These provisions may have the effect of delaying, deferring or 16


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    preventing a transaction or a change in control of the Company that might involve a premium to the price of the Company’s common shares or otherwise be in the shareholders’ best interests. The Company’s Executive Chairman has interests that may conflict with the interests of the Company. Glade M. Knight, the Company’s Executive Chairman, is and will be a principal in other real estate investment transactions or programs that may compete with the Company, and he is and may be a principal in other business ventures. Mr. Knight’s management and economic interests in these other transactions or programs may conflict with the interests of the Company. The Company’s executive officers provide services to other companies that may detract from the time devoted to the Company. The Company’s executive officers and other employees of the Company may devote time to other companies which have been or may be organized by Mr. Knight in the future. Neither Mr. Knight nor any of the other executive officers is required to devote a fixed amount of time and attention to the Company’s business affairs as opposed to the other companies, which could detract from time devoted to the Company. The Company may change its operational policies, investment guidelines and its investment and growth strategies without shareholder consent, which may subject it to different and more significant risks in the future, which could materially and adversely affect the Company. The Board of Directors determines the Company’s operational policies, investment guidelines and its investment and growth strategies, subject to the restrictions on certain transactions as set forth in the second amended and restated bylaws. The Board of Directors may make changes to, or approve transactions that deviate from, those policies, guidelines and strategies without a vote of, or notice to, shareholders. This could result in the Company conducting operational matters, making investments or pursuing investment or growth strategies different than those contemplated in this Annual Report on Form 10-K. Under any of these circumstances, the Company may expose itself to different and more significant risks in the future, which could materially and adversely affect the Company. Risks Related to the Ownership of the Company’s Common Shares The market price and trading volume of the Company’s common shares may fluctuate widely and could decline substantially in the future. The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.” The market price and trading volume of the Company’s common shares may fluctuate widely, depending on many factors, some of which may be beyond the Company’s control, including: • actual versus anticipated differences in the Company’s operating results, liquidity, or financial condition; • changes in actual and/or estimated financial performance; • publication of research reports about the Company, its hotels or the lodging or overall real estate industry; • failure to meet analysts’ revenue or earnings estimates; • the extent of institutional investors’ interest in the Company and their decision to buy or sell the Company’s common shares; • issuances of common shares or other securities by the Company; • the passage of legislation or other regulatory developments that may adversely affect the Company or its industry; • the reputation of REITs and real estate investments generally, and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income instruments; • changes in market interest rates compared to the Company’s distribution yield on its common shares; • additions and departures of key personnel; • announcements by franchisors, operators or other owners in the hospitality industry; • the performance and market valuations of similar companies; • strategic actions by the Company or its competitors, such as acquisitions or dispositions; • fluctuations in the stock price and operating results of the Company’s competitors; 17


  • Page 18

    • speculation in the press or investment community; • changes in accounting principles; • changes in capital costs; • terrorist acts; • general market and economic conditions, including factors unrelated to the Company’s operating performance; and • the realization of any of the other risk factors presented in this Annual Report on Form 10-K. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price and volume of the Company’s common shares. The Company may change its distribution policy or may not have funds available to make distributions to shareholders. The Board of Directors will continue to evaluate the Company’s distribution policy, the impact of the economy on its operations, actual and projected financial condition and results of operations, capital expenditure requirements and other factors, including those discussed in this Annual Report on Form 10-K. While the Company intends to make monthly distributions to shareholders, there can be no assurance that the Company will be able to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future. The Company evaluates the distribution rate on an ongoing basis and may make changes at any time if the Company believes the rate is not appropriate based on REIT taxable income, limitations under financing arrangements, or other cash needs. A reduction in the Company’s distribution rate could have a material adverse effect on the market price of the Company’s common shares. While the Company generally seeks to make distributions from its operating cash flows, distributions may be made (although there is no obligation to do so) in certain circumstances, in part, from financing proceeds or other sources. While distributions made from such sources would result in the shareholder receiving cash, the consequences to the shareholders would differ from a distribution made from the Company’s operating cash flows. For example, if debt financing is the source of a distribution, that financing would not be available for other opportunities and would have to be repaid. Future offerings or the perception that future offerings could occur may adversely affect the market price of the Company’s common shares and future offerings may be dilutive to existing shareholders. The Company has in the past and may in the future issue additional common shares. Proceeds from any issuance may be used to finance hotel acquisitions, fund capital expenditures, pay down outstanding debt, or for other corporate purposes. A large volume of sales of the Company’s common shares could decrease the market price of the Company’s common shares and could impair the Company’s ability to raise additional capital through the sale of equity securities in the future. Also, a perception of the possibility of a substantial sale of common shares could depress the market price of the Company’s common shares and have a negative effect on the Company’s ability to raise capital in the future. In addition, anticipated downward pressure on the price of the Company’s common shares due to actual or anticipated sales of common shares could cause some institutions or individuals to engage in short sales of the common shares, which may itself cause the price of the common shares to decline. Because the Company’s decision to issue equity securities in any future offering will depend on market conditions and other factors beyond its control, the Company cannot predict or estimate the amount, timing or nature of its future offerings. Therefore, the Company’s shareholders bear the risk of the Company’s future offerings reducing the market price of its common shares and diluting shareholders equity interests in the Company. Tax-Related Risks and Risks Related to the Company’s Status as a REIT Qualifying as a REIT involves highly technical and complex provisions of the Code and failure of the Company to qualify as a REIT would have adverse consequences to the Company and its shareholders. The Company’s qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. Moreover, new legislation, court decisions or 18


  • Page 19

    administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the Company to qualify as a REIT. Maintaining the Company’s qualification as a REIT will depend on the Company’s satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the REIT income and asset tests depends upon the Company’s analysis of the characterization and fair market values of the Company’s assets, some of which are not susceptible to a precise determination and for which the Company will not obtain independent appraisals, and upon the Company’s ability to successfully manage the composition of its income and assets on an ongoing basis. In addition, the Company’s ability to satisfy the requirements to maintain its qualification as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence. If the Company does not qualify as a REIT or if the Company fails to remain qualified as a REIT, the Company will be subject to U.S. federal income tax and potentially state and local taxes, which would reduce the Company’s earnings and the amount of cash available for distribution to its shareholders. If the Company failed to qualify as a REIT in any taxable year and any available relief provisions did not apply, the Company would be subject to U.S. federal and state corporate income tax on its taxable income at regular corporate rates, and dividends paid to its shareholders would not be deductible by it in computing its taxable income. Unless the Company was entitled to statutory relief under certain Code provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year in which it failed to qualify as a REIT. Any determination that the Company does not qualify as a REIT would have a material adverse effect on the Company’s results of operations and could materially reduce the market price of its common shares. The Company’s additional tax liability could be substantial and would reduce its net earnings available for investment, debt service or distributions to shareholders. Furthermore, the Company would no longer be required to make any distributions to shareholders as a condition to REIT qualification and all of its distributions to shareholders would be taxable as ordinary C corporation dividends to the extent of its current and accumulated earnings and profits. The Company’s failure to qualify as a REIT also could cause an event of default under loan documents governing its debt. Even if the Company qualifies as a REIT, it may face other tax liabilities that reduce its cash flow. Even if the Company qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes, including payroll taxes, taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, a 100% excise tax on any transactions with a TRS that are not conducted on an arm’s-length basis, and state or local income, franchise, property and transfer taxes. Moreover, if the Company has net income from the sale of properties that are “dealer” properties (a “prohibited transaction” under the Code), that income will be subject to a 100% tax. The Company could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain its qualification as a REIT. In addition, the Company’s TRSs will be subject to U.S. federal, state and local corporate income taxes on their net taxable income, if any. Any of these taxes would decrease cash available for the payment of the Company’s debt obligations and distributions to shareholders. The Company may incur adverse tax consequences if Apple REIT Ten, Inc. (“Apple Ten”) failed to qualify as a REIT for U.S. federal income tax purposes or if the Apple Ten merger failed to qualify as a tax free reorganization under the Code. On September 1, 2016, Apple Ten merged into an acquisition subsidiary of the Company and ceased its separate corporate existence (the “merger” or “Apple Ten merger”). If Apple Ten failed to qualify as a REIT for any of its taxable years ending on or before the date of the Apple Ten merger, Apple Ten would be liable for (and the Company would be obligated to pay) U.S. federal income tax on its taxable income for such years at regular corporate rates and, assuming the Apple Ten merger qualified as a reorganization within the meaning of Section 368(a) of the Code, • the Company would be subject to tax on the built-in gain on each asset of Apple Ten, existing at the time of the merger if the Company was to dispose of Apple Ten’s assets for up to 5 years following the merger. Such tax would be imposed at the highest regular corporate rate in effect at the date of the sale, • the Company would succeed to any earnings and profits accumulated by Apple Ten for taxable periods that it did not qualify as a REIT, and the Company would have to pay a special dividend and/or employ 19


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    applicable deficiency dividend procedures (including interest payments to the Internal Revenue Service (the “IRS”)) to eliminate such earnings and profits (if the Company does not timely distribute those earnings and profits, the Company could fail to qualify as a REIT), and • if Apple Ten incurred any unpaid tax liabilities prior to the merger, those tax liabilities would be transferred to the Company as a result of the merger. If there is an adjustment to any of Apple Ten’s taxable income or dividends paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain Apple Ten’s REIT status. That deficiency dividend procedure could require the Company to make significant distributions to its shareholders and to pay significant interest to the IRS. Moreover, and irrespective of whether Apple Ten qualified as a REIT, if Apple Ten were to incur tax liabilities as a result of the failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, those tax liabilities would be transferred to the Company as a result of the merger. Apple Ten’s failure (before or at the date of the merger) to qualify as a REIT and/or a failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could impair the Company’s ability after the merger to expand its business and raise capital, and could materially adversely affect the value of the Company’s common shares. REIT distribution requirements could adversely affect the Company’s ability to execute its business plan or cause it to increase debt levels or issue additional equity during unfavorable market conditions. The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that it distributes. To the extent that the Company satisfies this distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to U.S. federal corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a 4% nondeductible excise tax if the actual amount that the Company pays out to its shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. If there is an adjustment to any of the Company’s taxable income or dividends paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain the Company’s REIT status. That deficiency dividend procedure could require the Company to make significant distributions to its shareholders and to pay significant interest to the IRS. From time to time, the Company may generate taxable income greater than its income for financial reporting purposes prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, the Company may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where the Company experiences differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of its taxable income could cause it to: (1) sell assets in adverse market conditions; (2) incur debt or issue additional equity on unfavorable terms; (3) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt; or (4) make a taxable distribution of its common shares as part of a distribution in which shareholders may elect to receive the Company’s common shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. These alternatives could increase the Company’s costs or dilute its equity. In addition, because the REIT distribution requirement prevents the Company from retaining earnings, the Company generally will be required to refinance debt at its maturity with additional debt or equity. Thus, compliance with the REIT requirements may hinder the Company’s ability to grow, which could adversely affect the market price of its common shares. The Company may in the future choose to pay dividends in the form of common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends they receive. The Company may seek in the future to distribute taxable dividends that are payable in cash and common shares, at the election of each shareholder. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of the Company’s current and accumulated earnings and profits for U.S. federal income tax purposes, however, generally a shareholder will receive a taxable income deduction for 20% of all ordinary dividends received from a REIT. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. shareholder sells the 20


  • Page 21

    common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of common shares at the time of the sale. In addition, in such case, a U.S. shareholder could have a capital loss with respect to the common shares sold that could not be used to offset such dividend income. Furthermore, with respect to certain non-U.S. shareholders, the Company may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common shares. In addition, such a taxable share dividend could be viewed as equivalent to a reduction in the Company’s cash distributions, and that factor, as well as the possibility that a significant number of the Company’s shareholders could determine to sell the common shares in order to pay taxes owed on dividends, may put downward pressure on the market price of the Company’s common shares. If the Company’s leases are not respected as true leases for U.S. federal income tax purposes, the Company would likely fail to qualify as a REIT. To qualify as a REIT, the Company must satisfy two gross income tests, pursuant to which specified percentages of the Company’s gross income must be passive income, such as rent. For the rent paid pursuant to the hotel leases with the Company’s TRSs, which the Company currently expects will continue to constitute substantially all of the REIT’s gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some other type of arrangement. The Company believes that the leases have been and will continue to be respected as true leases for federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If the leases were not respected as true leases for federal income tax purposes, the Company may not be able to satisfy either of the two gross income tests applicable to REITs and may lose its REIT status. Additionally, the Company could be subject to a 100% excise tax for any adjustment to its leases. If any of the hotel management companies that the Company’s TRSs engage do not qualify as “eligible independent contractors,” or if the Company’s hotels are not “qualified lodging facilities,” the Company would likely fail to qualify as a REIT. Rent paid by a lessee that is a “related party tenant” of the Company generally will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied. The Company intends to continue to take advantage of this exception. A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. Although the Company intends to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code provide only limited guidance for making determinations under the requirements for “qualified lodging facilities”, and there can be no assurance that these requirements will be satisfied in all cases. In addition, the Company’s TRS lessees have engaged hotel management companies that are intended to qualify as “eligible independent contractors.” Among other requirements, in order to qualify as an “eligible independent contractor”, the hotel management company must not own, directly or through its shareholders, more than 35% of the Company’s outstanding shares, and no person or group of persons can own more than 35% of the Company’s outstanding shares and the shares (or ownership interest) of the hotel management company (taking into account certain ownership attribution rules). The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of the Company’s shares by the hotel management companies and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded. In addition, for a hotel management company to qualify as an “eligible independent contractor,” such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined above) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS. As of the date hereof, the Company believes the hotel management companies operate “qualified lodging facilities” for certain persons who are not related to the Company or its TRSs. However, no assurances can be provided that this will continue to be the case or that any other hotel management companies that the Company may engage in the future will in fact comply with this requirement in the future. 21


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    The Company’s ownership of TRSs is limited, and the Company’s transactions with its TRSs will cause it to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s- length terms. A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% (25% for tax years beginning prior to January 1, 2018) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. The rules also impose a 100% excise tax on certain transactions, including the leases, between the TRS and the REIT that are not conducted on an arm’s-length basis. The Company’s TRSs will pay U.S. federal, state and local income taxes on their net taxable income, and their after-tax net income will be available for distribution to the REIT, but is not required to be distributed. The Company believes that the aggregate value of the stock and securities of its TRSs has been and will continue to be less than 20% (25% for tax years beginning prior to January 1, 2018) of the value of its total assets (including the stock and securities of its TRSs). Furthermore, the Company has monitored and will continue to monitor the value of its respective investments in its TRSs for the purpose of ensuring compliance with the ownership limitations applicable to TRSs. In addition, the Company will continue to scrutinize all of its transactions with its TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax. There can be no assurance, however, that the Company will be able to comply with the rules regarding TRSs or to avoid application of the 100% excise tax. The most significant transactions between the Company and its TRSs are the hotel leases from the Company to its TRSs. While the Company believes its leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree. Complying with REIT requirements may force the Company to forgo and/or liquidate otherwise attractive investment opportunities. To qualify as a REIT, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amount it distributes to its shareholders and the ownership of its common shares. In order to meet these tests, the Company may be required to liquidate from its portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain its qualification as a REIT. These actions could have the effect of reducing the Company’s income and amounts available for distribution to its shareholders. In addition, the Company may be required to make distributions to shareholders at disadvantageous times or when the Company does not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make, and, in certain cases, maintain ownership of, certain attractive investments. There is a risk of changes in the tax law applicable to REITs. The IRS, the U.S. Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended or modified. The Company cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted or modified. Any legislative action may prospectively or retroactively modify the Company’s tax treatment and, therefore, may adversely affect taxation of the Company or the Company’s shareholders. The Company urges shareholders and prospective shareholders to consult with their tax advisors with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Company’s shares. Although REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated as a C corporation for U.S. federal income tax purposes. Item 1B. Unresolved Staff Comments None. 22


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    Item 2. Properties As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt brands. The hotels are operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company. The following tables summarize the number of hotels and rooms by brand and state: Number of Hotels and Guest Rooms by Brand Number of Number of Brand Hotels Rooms Hilton Garden Inn ................................................. 42 5,807 Courtyard .............................................................. 40 5,460 Hampton ............................................................... 40 5,029 Homewood Suites ................................................. 34 3,831 Residence Inn ........................................................ 33 3,939 SpringHill Suites ................................................... 16 2,159 Fairfield ................................................................ 11 1,300 TownePlace Suites ................................................ 11 1,110 Home2 Suites ........................................................ 8 910 Marriott ................................................................. 2 616 Embassy Suites ..................................................... 2 316 Renaissance ........................................................... 1 208 Hyatt Place ............................................................ 1 127 Total .................................................................. 241 30,812 Number of Hotels and Guest Rooms by State Number of Number of State Hotels Rooms Alabama ................................................................ 15 1,434 Alaska ................................................................... 2 304 Arizona ................................................................. 12 1,644 Arkansas ............................................................... 3 336 California .............................................................. 27 3,807 Colorado ............................................................... 4 567 Florida .................................................................. 24 2,978 Georgia ................................................................. 6 672 Idaho ..................................................................... 2 416 Illinois................................................................... 8 1,420 Indiana .................................................................. 4 479 Iowa ...................................................................... 3 301 Kansas .................................................................. 4 422 Louisiana .............................................................. 4 541 Maine .................................................................... 1 179 Maryland ............................................................... 2 233 Massachusetts ....................................................... 4 466 Michigan ............................................................... 1 148 Minnesota ............................................................. 2 244 Mississippi ............................................................ 2 168 Missouri ................................................................ 4 544 Nebraska ............................................................... 4 621 New Jersey ............................................................ 5 629 New York .............................................................. 4 553 North Carolina ...................................................... 12 1,337 Ohio ...................................................................... 2 252 Oklahoma .............................................................. 4 545 Pennsylvania ......................................................... 3 391 South Carolina ...................................................... 5 538 Tennessee .............................................................. 13 1,502 Texas ..................................................................... 34 4,072 Utah ...................................................................... 3 393 Virginia ................................................................. 14 2,067 Washington ........................................................... 4 609 Total .................................................................. 241 30,812 23


  • Page 24

    The following table is a list of the 241 hotels the Company owned as of December 31, 2018. As noted below, 13 of the Company’s hotels are subject to ground leases and 31 of its hotels are encumbered by mortgage notes. Date Acquired City State Brand Manager or Completed Rooms Anchorage ............................ AK Embassy Suites Stonebridge 4/30/2010 169 (2) Anchorage ............................ AK Home2 Suites Stonebridge 12/1/2017 135 Auburn ................................. AL Hilton Garden Inn LBA 3/1/2014 101 Birmingham ......................... AL Courtyard LBA 3/1/2014 84 Birmingham ......................... AL Hilton Garden Inn LBA 9/12/2017 104 Birmingham ......................... AL Home2 Suites LBA 9/12/2017 106 Birmingham ......................... AL Homewood Suites McKibbon 3/1/2014 95 Dothan ................................. AL Hilton Garden Inn LBA 6/1/2009 104 Dothan ................................. AL Residence Inn LBA 3/1/2014 84 Huntsville ............................ AL Hampton LBA 9/1/2016 98 Huntsville ............................ AL Hilton Garden Inn LBA 3/1/2014 101 Huntsville ............................ AL Home2 Suites LBA 9/1/2016 77 Huntsville ............................ AL Homewood Suites LBA 3/1/2014 107 (2) Mobile ................................. AL Hampton McKibbon 9/1/2016 101 (1) Montgomery ......................... AL Hilton Garden Inn LBA 3/1/2014 97 Montgomery ......................... AL Homewood Suites LBA 3/1/2014 91 Prattville .............................. AL Courtyard LBA 3/1/2014 84 (2) Rogers .................................. AR Hampton Raymond 8/31/2010 122 Rogers .................................. AR Homewood Suites Raymond 4/30/2010 126 Rogers .................................. AR Residence Inn Raymond 3/1/2014 88 Chandler .............................. AZ Courtyard North Central 11/2/2010 150 Chandler .............................. AZ Fairfield North Central 11/2/2010 110 Phoenix ................................ AZ Courtyard North Central 11/2/2010 164 Phoenix ................................ AZ Courtyard North Central 9/1/2016 127 Phoenix ................................ AZ Hampton North Central 9/1/2016 125 (1) Phoenix ................................ AZ Hampton North Central 5/2/2018 210 Phoenix ................................ AZ Homewood Suites North Central 9/1/2016 134 (1) Phoenix ................................ AZ Residence Inn North Central 11/2/2010 129 Scottsdale ............................. AZ Hilton Garden Inn North Central 9/1/2016 122 Tucson ................................. AZ Hilton Garden Inn Western 7/31/2008 125 Tucson ................................. AZ Residence Inn Western 3/1/2014 124 Tucson ................................. AZ TownePlace Suites Western 10/6/2011 124 Agoura Hills ......................... CA Homewood Suites Dimension 3/1/2014 125 Burbank ............................... CA Courtyard Huntington 8/11/2015 190 (2) Burbank ............................... CA Residence Inn Marriott 3/1/2014 166 Burbank ............................... CA SpringHill Suites Marriott 7/13/2015 170 (2) Clovis .................................. CA Hampton Dimension 7/31/2009 86 Clovis .................................. CA Homewood Suites Dimension 2/2/2010 83 Cypress ................................ CA Courtyard Dimension 3/1/2014 180 Cypress ................................ CA Hampton Dimension 6/29/2015 110 Oceanside ............................. CA Courtyard Marriott 9/1/2016 142 (2) Oceanside ............................. CA Residence Inn Marriott 3/1/2014 125 Rancho Bernardo/San Diego... CA Courtyard InnVentures 3/1/2014 210 (2) Sacramento .......................... CA Hilton Garden Inn Dimension 3/1/2014 153 San Bernardino..................... CA Residence Inn InnVentures 2/16/2011 95 San Diego ............................ CA Courtyard Huntington 9/1/2015 245 (2) San Diego ............................ CA Hampton Dimension 3/1/2014 177 (2) San Diego ............................ CA Hilton Garden Inn InnVentures 3/1/2014 200 San Diego ............................ CA Residence Inn Dimension 3/1/2014 121 (2) San Jose ............................... CA Homewood Suites Dimension 3/1/2014 140 (2) San Juan Capistrano ............. CA Residence Inn Marriott 9/1/2016 130 (1)(2) Santa Ana ............................. CA Courtyard Dimension 5/23/2011 155 (2) Santa Clarita ........................ CA Courtyard Dimension 9/24/2008 140 Santa Clarita ........................ CA Fairfield Dimension 10/29/2008 66 Santa Clarita ........................ CA Hampton Dimension 10/29/2008 128 Santa Clarita ........................ CA Residence Inn Dimension 10/29/2008 90 Tulare ................................... CA Hampton InnVentures 3/1/2014 86 Tustin ................................... CA Fairfield Marriott 9/1/2016 145 Tustin ................................... CA Residence Inn Marriott 9/1/2016 149 24


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    Date Acquired City State Brand Manager or Completed Rooms Colorado Springs.................. CO Hampton Chartwell 9/1/2016 101 (2) Denver ................................. CO Hilton Garden Inn Stonebridge 9/1/2016 221 (2) Highlands Ranch .................. CO Hilton Garden Inn Dimension 3/1/2014 128 Highlands Ranch .................. CO Residence Inn Dimension 3/1/2014 117 Boca Raton ........................... FL Hilton Garden Inn White Lodging 9/1/2016 149 Cape Canaveral .................... FL Homewood Suites LBA 9/1/2016 153 Fort Lauderdale .................... FL Hampton Vista Host 12/31/2008 109 Fort Lauderdale .................... FL Hampton LBA 6/23/2015 156 Fort Lauderdale .................... FL Residence Inn LBA 9/1/2016 156 Gainesville ........................... FL Hilton Garden Inn McKibbon 9/1/2016 104 Gainesville ........................... FL Homewood Suites McKibbon 9/1/2016 103 Jacksonville ......................... FL Homewood Suites McKibbon 3/1/2014 119 Jacksonville ......................... FL Hyatt Place LBA 12/7/2018 127 Lakeland .............................. FL Courtyard LBA 3/1/2014 78 Miami .................................. FL Courtyard Dimension 3/1/2014 118 (1) Miami .................................. FL Hampton White Lodging 4/9/2010 121 Miami .................................. FL Homewood Suites Dimension 3/1/2014 162 (2) Orlando ................................ FL Fairfield Marriott 7/1/2009 200 Orlando ................................ FL SpringHill Suites Marriott 7/1/2009 200 Panama City ......................... FL Hampton LBA 3/12/2009 95 Panama City ......................... FL TownePlace Suites LBA 1/19/2010 103 Pensacola ............................. FL TownePlace Suites McKibbon 9/1/2016 97 Sanford ................................ FL SpringHill Suites LBA 3/1/2014 105 Sarasota ............................... FL Homewood Suites Hilton 3/1/2014 100 Tallahassee ........................... FL Fairfield LBA 9/1/2016 97 Tallahassee ........................... FL Hilton Garden Inn LBA 3/1/2014 85 (1) Tampa .................................. FL Embassy Suites White Lodging 11/2/2010 147 Tampa .................................. FL TownePlace Suites McKibbon 3/1/2014 94 Albany ................................. GA Fairfield LBA 1/14/2010 87 Atlanta/Downtown ............... GA Hampton McKibbon 2/5/2018 119 Atlanta/Perimeter Dunwoody GA Hampton LBA 6/28/2018 132 Atlanta ................................. GA Home2 Suites McKibbon 7/1/2016 128 Macon .................................. GA Hilton Garden Inn LBA 3/1/2014 101 (1) Savannah .............................. GA Hilton Garden Inn Newport 3/1/2014 105 (1) Cedar Rapids ........................ IA Hampton Schulte 9/1/2016 103 Cedar Rapids ........................ IA Homewood Suites Schulte 9/1/2016 95 Davenport ............................ IA Hampton Schulte 9/1/2016 103 Boise .................................... ID Hampton Raymond 4/30/2010 186 (2) Boise .................................... ID SpringHill Suites InnVentures 3/1/2014 230 Des Plaines .......................... IL Hilton Garden Inn Raymond 9/1/2016 252 Hoffman Estates ................... IL Hilton Garden Inn White Lodging 9/1/2016 184 Mettawa ............................... IL Hilton Garden Inn White Lodging 11/2/2010 170 Mettawa ............................... IL Residence Inn White Lodging 11/2/2010 130 Rosemont ............................. IL Hampton Raymond 9/1/2016 158 Schaumburg ......................... IL Hilton Garden Inn White Lodging 11/2/2010 166 Skokie .................................. IL Hampton Raymond 9/1/2016 225 Warrenville .......................... IL Hilton Garden Inn White Lodging 11/2/2010 135 Indianapolis ......................... IN SpringHill Suites White Lodging 11/2/2010 130 Merrillville ........................... IN Hilton Garden Inn White Lodging 9/1/2016 124 Mishawaka ........................... IN Residence Inn White Lodging 11/2/2010 106 South Bend........................... IN Fairfield White Lodging 9/1/2016 119 Overland Park ...................... KS Fairfield True North 3/1/2014 110 Overland Park ...................... KS Residence Inn True North 3/1/2014 120 Overland Park ...................... KS SpringHill Suites True North 3/1/2014 102 Wichita................................. KS Courtyard Aimbridge 3/1/2014 90 Baton Rouge ........................ LA SpringHill Suites Dimension 9/25/2009 119 Lafayette .............................. LA Hilton Garden Inn LBA 7/30/2010 153 (1) Lafayette .............................. LA SpringHill Suites LBA 6/23/2011 103 New Orleans ........................ LA Homewood Suites Dimension 3/1/2014 166 (2) Andover ............................... MA SpringHill Suites Marriott 11/5/2010 136 Marlborough ........................ MA Residence Inn True North 3/1/2014 112 Westford ............................... MA Hampton True North 3/1/2014 110 25


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    Date Acquired City State Brand Manager or Completed Rooms Westford ............................... MA Residence Inn True North 3/1/2014 108 (2) Annapolis ............................. MD Hilton Garden Inn White Lodging 3/1/2014 126 Silver Spring ........................ MD Hilton Garden Inn White Lodging 7/30/2010 107 Portland ............................... ME Residence Inn Pyramid 10/13/2017 179 Novi ..................................... MI Hilton Garden Inn White Lodging 11/2/2010 148 Maple Grove ........................ MN Hilton Garden Inn North Central 9/1/2016 120 Rochester ............................. MN Hampton Raymond 8/3/2009 124 Kansas City .......................... MO Hampton Raymond 8/31/2010 122 Kansas City .......................... MO Residence Inn True North 3/1/2014 106 St. Louis ............................... MO Hampton Raymond 8/31/2010 190 St. Louis ............................... MO Hampton Raymond 4/30/2010 126 Hattiesburg ........................... MS Courtyard LBA 3/1/2014 84 (2) Hattiesburg ........................... MS Residence Inn LBA 12/11/2008 84 Carolina Beach ..................... NC Courtyard Crestline 3/1/2014 144 Charlotte .............................. NC Fairfield Newport 9/1/2016 94 Charlotte .............................. NC Homewood Suites McKibbon 9/24/2008 118 Durham ................................ NC Homewood Suites McKibbon 12/4/2008 122 Fayetteville .......................... NC Home2 Suites LBA 2/3/2011 118 Fayetteville .......................... NC Residence Inn Aimbridge 3/1/2014 92 Greensboro ........................... NC SpringHill Suites Newport 3/1/2014 82 Holly Springs ....................... NC Hampton LBA 11/30/2010 124 Jacksonville ......................... NC Home2 Suites LBA 9/1/2016 105 Wilmington .......................... NC Fairfield Crestline 3/1/2014 122 Winston-Salem ..................... NC Courtyard McKibbon 3/1/2014 122 Winston-Salem ..................... NC Hampton McKibbon 9/1/2016 94 Omaha .................................. NE Courtyard Marriott 3/1/2014 181 Omaha .................................. NE Hampton White Lodging 9/1/2016 139 Omaha .................................. NE Hilton Garden Inn White Lodging 9/1/2016 178 (2) Omaha .................................. NE Homewood Suites White Lodging 9/1/2016 123 Cranford ............................... NJ Homewood Suites Dimension 3/1/2014 108 Mahwah ............................... NJ Homewood Suites Dimension 3/1/2014 110 Mount Laurel ....................... NJ Homewood Suites Newport 1/11/2011 118 Somerset .............................. NJ Courtyard Newport 3/1/2014 162 (1)(2) West Orange ......................... NJ Courtyard Newport 1/11/2011 131 Islip/Ronkonkoma ................ NY Hilton Garden Inn White Lodging 3/1/2014 165 New York ............................. NY Renaissance Highgate 3/1/2014 208 (1) Syracuse ............................... NY Courtyard New Castle 10/16/2015 102 (2) Syracuse ............................... NY Residence Inn New Castle 10/16/2015 78 (2) Mason .................................. OH Hilton Garden Inn Schulte 9/1/2016 110 Twinsburg ............................ OH Hilton Garden Inn Interstate 10/7/2008 142 Oklahoma City ..................... OK Hampton Raymond 5/28/2010 200 Oklahoma City ..................... OK Hilton Garden Inn Raymond 9/1/2016 155 Oklahoma City ..................... OK Homewood Suites Raymond 9/1/2016 100 Oklahoma City (West) .......... OK Homewood Suites Chartwell 9/1/2016 90 Collegeville/Philadelphia ..... PA Courtyard White Lodging 11/15/2010 132 (2) Malvern/Philadelphia ........... PA Courtyard White Lodging 11/30/2010 127 Pittsburgh ............................. PA Hampton Vista Host 12/31/2008 132 Charleston ............................ SC Home2 Suites LBA 9/1/2016 122 Columbia ............................. SC Hilton Garden Inn Newport 3/1/2014 143 Columbia ............................. SC TownePlace Suites Newport 9/1/2016 91 Greenville ............................ SC Residence Inn McKibbon 3/1/2014 78 Hilton Head .......................... SC Hilton Garden Inn McKibbon 3/1/2014 104 Chattanooga ......................... TN Homewood Suites LBA 3/1/2014 76 Franklin ............................... TN Courtyard Chartwell 9/1/2016 126 (2) Franklin ............................... TN Residence Inn Chartwell 9/1/2016 124 (2) Jackson ................................ TN Hampton Vista Host 12/30/2008 85 Johnson City ........................ TN Courtyard LBA 9/25/2009 90 Knoxville ............................. TN Homewood Suites McKibbon 9/1/2016 103 Knoxville ............................. TN SpringHill Suites McKibbon 9/1/2016 103 Knoxville ............................. TN TownePlace Suites McKibbon 9/1/2016 97 Memphis .............................. TN Hampton Crestline 2/5/2018 144 Memphis .............................. TN Homewood Suites Hilton 3/1/2014 140 26


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    Date Acquired City State Brand Manager or Completed Rooms Nashville .............................. TN Hilton Garden Inn Vista Host 9/30/2010 194 Nashville .............................. TN Home2 Suites Vista Host 5/31/2012 119 Nashville .............................. TN TownePlace Suites LBA 9/1/2016 101 Addison ................................ TX SpringHill Suites Marriott 3/1/2014 159 Allen .................................... TX Hampton Interstate 9/26/2008 103 Allen .................................... TX Hilton Garden Inn Interstate 10/31/2008 150 Arlington .............................. TX Hampton Western 12/1/2010 98 Austin .................................. TX Courtyard White Lodging 11/2/2010 145 Austin .................................. TX Fairfield White Lodging 11/2/2010 150 Austin .................................. TX Hampton Vista Host 4/14/2009 124 Austin .................................. TX Hilton Garden Inn White Lodging 11/2/2010 117 Austin .................................. TX Homewood Suites Vista Host 4/14/2009 97 Austin/Round Rock .............. TX Homewood Suites Vista Host 9/1/2016 115 Beaumont ............................. TX Residence Inn Western 10/29/2008 133 Burleson/Fort Worth ............. TX Hampton LBA 10/7/2014 88 Dallas ................................... TX Homewood Suites Western 9/1/2016 130 Denton ................................. TX Homewood Suites Chartwell 9/1/2016 107 Duncanville .......................... TX Hilton Garden Inn Interstate 10/21/2008 142 El Paso ................................. TX Hilton Garden Inn Western 12/19/2011 145 El Paso ................................. TX Homewood Suites Western 3/1/2014 114 Fort Worth ............................ TX Courtyard LBA 2/2/2017 124 Fort Worth ............................ TX TownePlace Suites Western 7/19/2010 140 Frisco ................................... TX Hilton Garden Inn Western 12/31/2008 102 Grapevine ............................. TX Hilton Garden Inn Western 9/24/2010 110 (2) Houston ................................ TX Courtyard LBA 9/1/2016 124 Houston ................................ TX Marriott Western 1/8/2010 206 Houston ................................ TX Residence Inn Western 3/1/2014 129 Houston ................................ TX Residence Inn Western 9/1/2016 120 Irving ................................... TX Homewood Suites Western 12/29/2010 77 Lewisville ............................ TX Hilton Garden Inn Interstate 10/16/2008 165 Round Rock ......................... TX Hampton Vista Host 3/6/2009 94 San Antonio ......................... TX TownePlace Suites Western 3/1/2014 106 Shenandoah .......................... TX Courtyard LBA 9/1/2016 124 Stafford ................................ TX Homewood Suites Western 3/1/2014 78 Texarkana ............................. TX Courtyard Aimbridge 3/1/2014 90 Texarkana ............................. TX Hampton Aimbridge 1/31/2011 81 Texarkana ............................. TX TownePlace Suites Aimbridge 3/1/2014 85 Provo ................................... UT Residence Inn Dimension 3/1/2014 114 Salt Lake City ...................... UT Residence Inn Huntington 10/20/2017 136 Salt Lake City ...................... UT SpringHill Suites White Lodging 11/2/2010 143 Alexandria ........................... VA Courtyard Marriott 3/1/2014 178 Alexandria ........................... VA SpringHill Suites Marriott 3/28/2011 155 Bristol .................................. VA Courtyard LBA 11/7/2008 175 Charlottesville ...................... VA Courtyard Crestline 3/1/2014 139 Harrisonburg ........................ VA Courtyard Newport 3/1/2014 125 Manassas .............................. VA Residence Inn Crestline 2/16/2011 107 Richmond ............................. VA Courtyard White Lodging 12/8/2014 135 Richmond ............................. VA Marriott White Lodging 3/1/2014 410 (1) Richmond ............................. VA Residence Inn White Lodging 12/8/2014 75 Richmond ............................. VA SpringHill Suites McKibbon 9/1/2016 103 Suffolk ................................. VA Courtyard Crestline 3/1/2014 92 Suffolk ................................. VA TownePlace Suites Crestline 3/1/2014 72 Virginia Beach ..................... VA Courtyard Crestline 3/1/2014 141 Virginia Beach ..................... VA Courtyard Crestline 3/1/2014 160 Kirkland ............................... WA Courtyard InnVentures 3/1/2014 150 (2) Seattle .................................. WA Residence Inn InnVentures 3/1/2014 234 (1)(2) Tukwila ................................ WA Homewood Suites Dimension 3/1/2014 106 (2) Vancouver ............................ WA SpringHill Suites InnVentures 3/1/2014 119 Total ................................. 30,812 (1) Hotel is subject to ground lease. (2) Hotel is encumbered by mortgage. 27


  • Page 28

    The Company’s investment in real estate at December 31, 2018, consisted of the following (in thousands): Land ................................................................................... $ 737,822 Building and Improvements ............................................... 4,503,728 Furniture, Fixtures and Equipment ..................................... 471,399 Franchise Fees.................................................................... 13,354 5,726,303 Less Accumulated Depreciation ......................................... (909,893) Investment in Real Estate, net ............................................ $ 4,816,410 For additional information about the Company’s properties, refer to Schedule III – Real Estate and Accumulated Depreciation included at the end of Part IV, appearing elsewhere in this Annual Report on Form 10-K. Item 3. Legal Proceedings The Company is or may be a party to various legal proceedings that arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to management’s knowledge, is any litigation threatened against the Company where the outcome would, in management’s judgment based on information currently available to the Company, have a material adverse effect on the Company’s consolidated financial position or results of operations. Item 4. Mine Safety Disclosures Not Applicable. 28


  • Page 29

    PART II Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information On May 18, 2015, the Company’s common shares were listed and began trading on the NYSE under the ticker symbol “APLE” (the “Listing”). Prior to that time, there was no public market for the Company’s common shares. As of December 31, 2018 and February 15, 2019, the last reported closing price per share for the Company’s common shares as reported on the NYSE was $14.26 and $16.36, respectively. Share Return Performance The following graph compares the cumulative total shareholder return of the Company’s common shares to the cumulative total returns of the Standard and Poor’s 500 Stock Index (“S&P 500 Index”) and the SNL U.S. REIT Hotel Index for the period from May 18, 2015, the date of the Company’s Listing, to December 31, 2018. The SNL U.S. REIT Hotel Index is comprised of publicly traded REITs which focus on investments in hotel properties. The graph assumes an initial investment of $100 in the Company’s common shares and in each of the indices, and also assumes the reinvestment of dividends. Value of Initial Investment at Name 05/18/15 12/31/15 12/31/16 12/31/17 12/31/18 Apple Hospitality REIT, Inc. ............. $ 100.00 $ 115.73 $ 123.34 $ 128.27 $ 99.81 S&P 500 Index .................................. $ 100.00 $ 97.29 $ 108.92 $ 132.70 $ 126.88 SNL U.S. REIT Hotel Index .............. $ 100.00 $ 81.94 $ 101.55 $ 107.92 $ 93.39 This performance graph shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act, except as shall be expressly set forth by specific reference in such filing. The performance graph is not indicative of future investment performance. The Company does not make or endorse any predictions as to future share price performance. Shareholder Information As of February 15, 2019, the Company had approximately 72 holders of record of its common shares and there were approximately 224 million common shares outstanding. Because many of the Company’s common shares are 29


  • Page 30

    held by brokers and other institutions on behalf of shareholders, the Company believes there are substantially more beneficial holders of its common shares than record holders. In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s Charter provides that, subject to certain exceptions, no person or entity (other than a person or entity who has been granted an exemption) may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series. Distribution Information To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income. For the years ended December 31, 2018 and 2017, the Company paid distributions of $1.20 per common share, for a total of approximately $275.9 million and $267.9 million, respectively. The Company’s current annual distribution rate, payable monthly, is $1.20 per common share. Although the Company intends to continue paying distributions on a monthly basis, the amount and timing of distributions to shareholders are within the discretion of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at the current annual distribution rate. The amount and frequency of future distributions will depend on certain items, including but not limited to, the Company’s results of operations, cash flow from operations, economic conditions, working capital requirements, cash requirements to fund investing and financing activities, and capital expenditure requirements, including improvements to and expansions of properties, as well as the distribution requirements under federal income tax provisions for qualification as a REIT. As it has done historically, due to seasonality, the Company may use its revolving credit facility to maintain the consistency of the monthly distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles. Share Repurchases In May 2018, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $464 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2019 if not terminated earlier. As part of the implementation of the Share Repurchase Program, the Company has utilized written trading plans that provide for share repurchases in open market transactions that are intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, the most recent of which was established in March 2018. During 2018, the Company purchased approximately 6.6 million of its common shares at a weighted-average market purchase price of approximately $15.87 per common share for an aggregate purchase price, including commissions, of approximately $104.3 million. The Company did not repurchase any common shares under its Share Repurchase Program during 2017. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. As of December 31, 2018, approximately $364.0 million remained available for purchase under the Share Repurchase Program. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. Additionally, during 2018 and 2017, certain of the Company’s employees surrendered common shares to satisfy their tax withholding obligations associated with the vesting of common shares issued under the 2014 Omnibus Incentive Plan (the “Omnibus Plan”) as described in Note 9 titled “Compensation Plans” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. 30


  • Page 31

    The following is a summary of all share repurchases during the fourth quarter of 2018: Issuer Purchases of Equity Securities (a) (b) (c) (d) Total Number Approximate Dollar of Shares Value of Shares Purchased as that May Yet Be Total Number Part of Publicly Purchased Under the of Shares Average Price Announced Plans Plans or Programs Period Purchased Paid per Share or Programs (in thousands) (1) October 1 - October 31, 2018 .......... 1,576,520 $ 16.35 1,576,520 $ 438,200 November 1 - November 30, 2018 ... 2,554,278 $ 16.03 2,554,278 $ 397,200 December 1 - December 31, 2018 (2) 2,225,598 $ 15.22 2,184,209 $ 364,000 Total ................................................ 6,356,396 6,315,007 (1) Represents amount outstanding under the Company's authorized $464 million share repurchase program. This program may be suspended or terminated at any time by the Company. If not terminated earlier, the program will end in July 2019. (2) Includes 41,389 common shares surrendered to the Company to satisfy tax withholding obligations associated with the vesting of restricted common shares. Equity Compensation Plans The Company’s Board of Directors adopted and the Company’s shareholders approved the Omnibus Plan, which provides for the issuance of up to 10 million common shares, subject to adjustments, to employees, officers, and directors of the Company or affiliates of the Company, consultants or advisers currently providing services to the Company or affiliates of the Company, and any other person whose participation in the Omnibus Plan is determined by the Compensation Committee to be in the best interests of the Company. The Company’s Board of Directors previously adopted and the Company’s shareholders approved the non-employee directors’ stock option plan (the “Directors’ Plan”) to provide incentives to attract and retain directors. In May 2015, the Directors’ Plan was terminated effective upon the Listing, and no further grants can be made under the Directors’ Plan, provided however, that the termination did not affect any outstanding director option awards previously issued under the Directors’ Plan. The following is a summary of securities issued under the Company’s equity compensation plans as of December 31, 2018: Number of Securities Number of Securities Remaining Available for to be Issued Weighted-Average Future Issuance Under Upon Exercise Exercise Price Equity Compensation of Outstanding of Outstanding Plans (Excluding Options, Warrants Options, Warrants Securities Reflected in and Rights (1) and Rights (2) First Column) Equity compensation plans approved by security holders ................................... 467,321 $ 20.92 10,728,614 Equity compensation plans not approved by security holders .............................. - - - Total equity compensation plans ............. 467,321 $ 20.92 10,728,614 (1) Represents 282,718 stock options granted to the Company’s directors under the Directors’ Plan and 166,041 stock options granted under the Omnibus Plan in exchange for all of Apple Ten’s outstanding stock options as a result of the Apple Ten merger effective September 1, 2016. Also includes 18,562 fully vested deferred stock units, including quarterly distributions earned, under the non-employee director deferral program under the Omnibus Plan, adopted by the Board of Directors in 2018, effective June 1, 2018, that are not included in the calculation of the weighted-average exercise price of outstanding options. (2) The weighted-average exercise price of outstanding options relates solely to stock options, which are the only currently outstanding exercisable security. 31


  • Page 32

    Item 6. Selected Financial Data The following table sets forth selected financial data for the five years ended December 31, 2018. Certain information in the table has been derived from the Company’s audited financial statements and notes thereto. This data should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. Year Ended December 31, (in thousands except per share and statistical data) 2018 2017 2016 (1) 2015 2014 (2) Revenues: Room .......................................................................... $ 1,172,331 $ 1,143,987 $ 956,119 $ 821,733 $ 735,882 Food and beverage ...................................................... 62,600 66,030 59,558 54,710 47,768 Other ........................................................................... 35,624 28,605 25,348 21,871 20,246 Total revenue............................................................... 1,270,555 1,238,622 1,041,025 898,314 803,896 Expenses and other income: Hotel operating expense .............................................. 715,934 697,402 582,839 507,081 455,895 Property taxes, insurance and other expense ................ 74,640 69,391 56,860 46,023 40,046 Ground lease expense .................................................. 11,364 11,313 10,409 9,996 8,341 General and administrative expense ............................ 24,294 26,341 17,032 19,552 20,914 Transaction and litigation costs (reimbursements) ....... - (2,586) 34,989 7,181 5,142 Loss on impairment of depreciable real estate assets ... 3,135 45,875 5,471 45,000 10,988 Depreciation expense .................................................. 183,482 176,499 148,163 127,449 113,112 Series B convertible preferred share expense ............... - - - - 117,133 (Gain) loss on sale of real estate .................................. (152) (16,295) 153 (15,286) - Interest and other expense, net .................................... 51,185 47,343 40,026 33,132 23,523 Income tax expense ..................................................... 587 847 431 898 1,969 Total expenses and other income ................................. 1,064,469 1,056,130 896,373 781,026 797,063 Net income .................................................................. $ 206,086 $ 182,492 $ 144,652 $ 117,288 $ 6,833 Per Share: Net income per common share .................................... $ 0.90 $ 0.82 $ 0.76 $ 0.65 $ 0.04 Distributions declared per common share (3) .............. $ 1.20 $ 1.20 $ 1.20 $ 1.37 $ 1.39 Weighted-average common shares outstanding - basic and diluted ................................................ 229,659 223,526 190,856 180,261 171,489 Balance Sheet Data (at end of period): Investment in real estate, net ....................................... $ 4,816,410 $ 4,793,159 $ 4,823,489 $ 3,641,767 $ 3,492,821 Assets held for sale ..................................................... $ - $ - $ 39,000 $ - $ 195,588 Total assets .................................................................. $ 4,928,672 $ 4,902,338 $ 4,979,883 $ 3,722,775 $ 3,776,805 Total debt, net ............................................................. $ 1,412,242 $ 1,222,196 $ 1,337,963 $ 998,103 $ 706,626 Shareholders’ equity .................................................... $ 3,409,010 $ 3,571,085 $ 3,517,064 $ 2,647,058 $ 3,014,624 Net book value per share ............................................. $ 15.22 $ 15.53 $ 15.78 $ 15.18 $ 16.13 Other Data: Cash Flow From (Used In): Operating activities (4) ........................................ $ 404,812 $ 384,071 $ 331,171 $ 279,628 $ 251,593 Investing activities (4) ......................................... $ (210,160) $ (158,256) $ (162,200) $ (90,736) $ (34,700) Financing activities .............................................. $ (190,811) $ (225,449) $ (162,197) $ (198,767) $ (211,885) Number of hotels owned at end of period .................... 241 239 235 179 191 (1) Effective September 1, 2016, the Company completed the merger with Apple Ten as described in Note 2 titled “Merger with Apple REIT Ten, Inc.” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. (2) Effective March 1, 2014, the Company completed the mergers with Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”) and added 99 continuing hotels located in 27 states with an aggregate of 12,121 rooms to the Company's real estate portfolio. In connection with the Apple Seven and Apple Eight mergers, the Company issued approximately 90 million common shares to Apple Seven and Apple Eight shareholders. Also, upon completion of the Apple Seven and Apple Eight mergers, the Company became self-advised and the advisory agreements between the Company and its advisors were terminated, resulting in the conversion of the Company's Series B convertible preferred shares into approximately 5.8 million common shares. In connection with this event, during the first quarter of 2014, the Company recorded a noncash expense totaling approximately $117.1 million. (3) 2015 distributions include a distribution of $0.10 per common share that was declared in December 2015 and paid in January 2016. For all other periods presented, distributions per common share declared equaled distributions paid. (4) Amounts for 2014 through 2017 reflect the retrospective adjustments to the Consolidated Statements of Cash Flows in accordance with the adoption of Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, effective January 1, 2018, as discussed in Note 1 titled “Organization and Summary of Significant Accounting Policies” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K. 32


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    Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with Item 8, the Consolidated Financial Statements and Notes thereto, the introduction of Part I regarding “Forward-Looking Statements,” and Item 1A, “Risk Factors” appearing elsewhere in this Annual Report on Form 10-K. Overview The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the United States. As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in urban, high-end suburban and developing markets throughout 34 states. All of the Company’s hotels operate under Marriott, Hilton or Hyatt brands. The hotels are operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.” 2018 Hotel Portfolio Activities The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, the Company acquired five hotels for an aggregate purchase price of approximately $152.2 million during 2018: a 119-room Hampton Inn & Suites in downtown Atlanta, Georgia; a 144-room Hampton Inn & Suites in Memphis, Tennessee; a 210-room Hampton Inn & Suites in downtown Phoenix, Arizona; a 132-room Hampton Inn & Suites in Atlanta Perimeter Dunwoody, Georgia; and a 127-room Hyatt Place in Jacksonville, Florida. As of January 31, 2019, the Company also has outstanding contracts for the potential purchase of six additional hotels for a total purchase price of approximately $162.5 million, five of which are under development and are planned to be completed and opened for business over the next three to 24 months from December 31, 2018, at which time closings on these hotels are expected to occur, and one existing hotel that is expected to close in the first quarter of 2019. The Company utilized its revolving credit facility to fund the completed acquisitions and plans to utilize its credit facilities for any additional acquisitions. For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. As a result, the Company sold three hotels for an aggregate sales price of approximately $15.8 million during 2018: its 89-room SpringHill Suites and its 86-room TownePlace Suites in Columbus, Georgia, and its 72-room Residence Inn in Springdale, Arkansas. Additionally, as of December 31, 2018, the Company had an outstanding contract to sell 16 of its hotels for a gross sales price of $175 million. This contract was terminated in February 2019 and the Company entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine properties for a total combined gross sales price of $95 million. The Company holds a non-refundable deposit of $7 million on these contracts. If the closings occur, these sales are expected to be completed in the first half of 2019. The net proceeds from the sales were or will be used to pay down borrowings on the Company’s revolving credit facility. See Note 3 titled “Investment in Real Estate” and Note 4 titled “Dispositions and Hotel Sale Contracts” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning these transactions. Hotel Operations Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the U.S. and the performance of individual managers assigned to each hotel, performance of the Company’s hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned. Over the past several years, the lodging industry and the Company have experienced modest revenue growth. Improvements in the general U.S. economy have been offset by increased lodging supply in many markets, offsetting increases in demand. With essentially flat growth in RevPAR, the Company produced stable operating results during 2018 on a comparable basis (as defined below). There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging 33


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    industry and the Company, including but not limited to, increased hotel supply in certain markets, labor uncertainty both for the economy as a whole and the lodging industry in particular, global volatility, government fiscal policies and economic concerns in the U.S. The Company, on a comparable basis, is forecasting slightly negative to slightly positive RevPAR growth for 2019 as compared to 2018, which reflects modestly lower expectations for demand growth, consistent with lower expected Gross Domestic Product growth in the U.S., relatively consistent anticipated hotel supply growth and slightly favorable comparisons caused by natural disasters. In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and RevPAR, and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below. The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company. Years Ended December 31, Percent Percent Change Percent Change of of 2017 to of 2016 to (in thousands, except statistical data) 2018 Revenue 2017 Revenue 2018 2016 Revenue 2017 Total revenue ......................................... $1,270,555 100.0% $1,238,622 100.0% 2.6% $1,041,025 100.0% 19.0% Hotel operating expense........................ 715,934 56.3% 697,402 56.3% 2.7% 582,839 56.0% 19.7% Property taxes, insurance and other expense.............................................. 74,640 5.9% 69,391 5.6% 7.6% 56,860 5.5% 22.0% Ground lease expense ........................... 11,364 0.9% 11,313 0.9% 0.5% 10,409 1.0% 8.7% General and administrative expense ..... 24,294 1.9% 26,341 2.1% -7.8% 17,032 1.6% 54.7% Transaction and litigation costs (reimbursements) .............................. - (2,586) n/a 34,989 n/a Loss on impairment of depreciable real estate assets ....................................... 3,135 45,875 n/a 5,471 n/a Depreciation expense ............................ 183,482 176,499 4.0% 148,163 19.1% Gain (loss) on sale of real estate ........... 152 16,295 n/a (153) n/a Interest and other expense, net .............. 51,185 47,343 8.1% 40,026 18.3% Income tax expense ............................... 587 847 -30.7% 431 96.5% Number of hotels owned at end of period ................................................ 241 239 0.8% 235 1.7% ADR ...................................................... $ 136.04 $ 134.61 1.1% $ 133.61 0.7% Occupancy............................................. 76.9% 77.4% -0.6% 76.9% 0.7% RevPAR ................................................. $ 104.66 $ 104.13 0.5% $ 102.80 1.3% Comparable Hotels Operating Results The following table reflects certain operating statistics for the Company’s 241 hotels owned as of December 31, 2018 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 241 hotels owned as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions, results have been excluded for the Company’s period of ownership. Years Ended December 31, Change Change 2017 to 2016 to 2018 2017 2018 2016 2017 ADR ............................................... $ 136.11 $ 135.22 0.7% $ 133.89 1.0% Occupancy ..................................... 77.0% 77.7% -0.9% 77.1% 0.8% RevPAR ......................................... $ 104.80 $ 105.00 -0.2% $ 103.27 1.7% 34


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    Same Store Operating Results The following table reflects certain operating statistics for the 174 hotels owned by the Company as of January 1, 2016 and during the entirety of the reporting periods being compared (“Same Store Hotels”). This information has not been audited. Years Ended December 31, Change Change 2017 to 2016 to 2018 2017 2018 2016 2017 ADR ............................................... $ 136.92 $ 136.01 0.7% $ 134.71 1.0% Occupancy ..................................... 77.2% 77.7% -0.6% 77.6% 0.1% RevPAR ......................................... $ 105.70 $ 105.69 - $ 104.50 1.1% 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 and operating results for its Comparable Hotels and Same Store Hotels were generally unchanged from 2017 to 2018 and experienced modest growth in 2017 as compared to 2016. The Company expects its RevPAR growth and operating results for its Comparable Hotels in 2019 to be slightly negative to slightly positive compared to its performance in 2018. The Company’s hotels in general have shown results consistent with industry and brand averages for the period of ownership. The Company’s fourth quarter 2017 and 2018 and full year 2017 and 2018 results were impacted by recovery and restoration efforts from hurricanes affecting several markets. During the second half of 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. Although rooms went back into service at these two hotels throughout the fourth quarter, the Hampton Inn & Suites did not return to full operation until December 2018 and the TownePlace Suites returned to full operation in February 2019. Due to the increased demand from the 2017 hurricanes, and the impact of the hotel closures and associated damage subject to insurance deductibles in 2018, the Company’s Comparable Hotels RevPAR and operating income declined in the fourth quarter of 2018 compared to the same period of 2017. The decline was partially offset by an increase in demand from recovery and restoration efforts in certain markets impacted by the 2018 hurricanes. Although the impact from the 2018 hurricanes should ultimately be mitigated by business interruption insurance, the proceeds from that coverage will not be recognized until received. Any proceeds received are subject to the insurance claims process. Results of Operations for Years 2018 and 2017 As of December 31, 2018, the Company owned 241 hotels with a total of 30,812 rooms as compared to 239 hotels with a total of 30,322 rooms as of December 31, 2017. Results of operations are included only for the period of ownership for hotels acquired or disposed of during all periods presented. During 2018, the Company acquired one newly constructed hotel on May 2, 2018 and four existing hotels (two on February 5, 2018, one on June 28, 2018 and one on December 7, 2018), and sold three hotels (two on July 13, 2018 and one on November 29, 2018). During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017, one on October 20, 2017 and one on December 1, 2017), and sold two hotels (one on April 20, 2017 and one on October 5, 2017). As a result, the comparability of results for the years ended December 31, 2018 and 2017 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 the years ended December 31, 2018 and 2017, the Company had total revenue of $1.3 billion and $1.2 billion, respectively. For the years ended December 31, 2018 and 2017, respectively, Comparable Hotels achieved combined average occupancy of 77.0% and 77.7%, ADR of $136.11 and $135.22 and RevPAR of $104.80 and $105.00. 35


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    During 2018, the Company’s Comparable Hotels experienced a slight increase in ADR and a slight decrease in occupancy as compared to 2017, leaving RevPAR for Comparable Hotels virtually unchanged. Overall, because of its geographic diversity, the Company’s Comparable Hotels’ RevPAR change for 2018 was in line with industry/ brand averages. During the fourth quarter of 2018, the Company’s Comparable Hotels’ RevPAR decreased 0.8%. Markets/areas with above average growth in 2018 for the Company and industry included Fort Worth, Texas, Knoxville, Tennessee, Tucson, Arizona, Chicago, Illinois, Norfolk, Virginia and Atlanta, Georgia. Markets that were below average for the Company and industry included Kansas City, Missouri, Houston, Texas, Austin, Texas and Washington, D.C. Comparable Hotels RevPAR in the latter half of 2018 as compared to the same period in the prior year was negatively impacted by the hurricane activity in 2017 and 2018 as described above. 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, 2018 and 2017, respectively, hotel operating expense totaled $715.9 million and $697.4 million or 56.3% of total revenue for each respective year. For the Company’s Comparable Hotels, hotel operating expense as a percentage of revenue increased approximately 30 basis points for 2018 as compared to 2017. Increases in labor costs as a percentage of revenue during 2018 as compared to 2017 were the primary cause of the increased Comparable Hotels operating expense. 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 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, 2018 and 2017 totaled $74.6 million and $69.4 million, respectively, or 5.9% and 5.6% of total revenue for each respective year. The increase as a percentage of revenue was the same for Comparable Hotels. For the Company’s Comparable Hotels, real estate taxes increased in 2018 compared to 2017, 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 2019. The Company will continue to appeal tax assessments in certain jurisdictions to attempt to minimize tax increases as warranted. Additionally, due to increased losses in 2017 for property insurance carriers, the Company’s property insurance costs increased slightly as a percentage of revenue for 2018 as compared to 2017. The Company incurred approximately $1.7 million in remediation and repair costs below its deductibles in 2018 related to wind and water damage at certain of its North Carolina and Florida properties as a result of Hurricanes Florence and Michael. In addition, Hurricane Michael caused the closure of the Company’s two hotels in the Panama City, Florida area in October 2018. Although rooms went back into service at these hotels throughout the fourth quarter, the Hampton Inn & Suites did not return to full operation until December 2018 and the TownePlace Suites returned to full operation in February 2019. Ground Lease Expense Ground lease expense for the years ended December 31, 2018 and 2017 was $11.4 million and $11.3 million, respectively. Ground lease expense primarily represents the expense incurred by the Company to lease the underlying land for 14 of its hotels, including expense related to a ground lease that was assumed by the buyer of the Columbus, Georgia TownePlace Suites in July 2018 until the date of sale. On January 1, 2019, the Company adopted the new accounting standard on leases, 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 this standard, beginning 2019, certain ground leases that were accounted for as operating leases will be accounted for as finance leases. For these finance leases, the Company will recognize depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statements of operations, instead of ground lease expense. While the total expense recognized over the life of a lease will be unchanged, the timing of expense recognition for finance leases will result in higher expense recognition during the earlier years of the lease and lower expense during the later years of the lease. See Note 1 titled “Organization and Summary of Significant Accounting Policies” in Part II, Item 8, 36


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    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 leasing standard. General and Administrative Expense General and administrative expense for the years ended December 31, 2018 and 2017 was $24.3 million and $26.3 million, respectively, or 1.9% and 2.1% 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 decrease in general and administrative expense in 2018 as compared to 2017 was due primarily to a decrease in compensation expense. Based on the Company’s performance in 2018 in relation to the operational performance and shareholder return metrics of the 2018 executive management incentive plan effective January 1, 2018 (“2018 Incentive Plan”), the amounts earned under the 2018 Incentive Plan were lower than the comparable compensation earned under the 2017 executive management incentive plan (“2017 Incentive Plan”), resulting in a decrease in executive compensation expense for 2018 of approximately $3.3 million, as compared to 2017, which is net of a $0.8 million increase in share-based compensation expense related to restricted stock issued under the 2017 Incentive Plan vesting in 2018. Transaction and Litigation Costs (Reimbursements) During 2017, transaction and litigation costs (reimbursements) totaled $(2.6) million which primarily related to additional proceeds received in May 2017 from the Company’s directors and officers insurance carriers in connection with a legal settlement that occurred in 2017 related to the Apple Ten merger in 2016. Loss on Impairment of Depreciable Real Estate Assets Loss on impairment of depreciable real estate assets was approximately $3.1 million and $45.9 million for the years ended December 31, 2018 and 2017, respectively, and consisted of impairment charges of $0.5 million and $7.9 million for the two Columbus hotels recorded in 2018 and 2017, respectively, $2.6 million for the Springdale, Arkansas Residence Inn recorded in 2018 and $38.0 million for the New York, New York Renaissance hotel recorded in 2017. See Note 3 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 Expense Depreciation expense for the years ended December 31, 2018 and 2017 was $183.5 million and $176.5 million, respectively. Depreciation 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 increase in the number of properties owned as a result of the acquisition of five hotels in 2018 and six hotels in 2017 and renovations completed throughout 2018 and 2017. Interest and Other Expense, net Interest and other expense, net for the years ended December 31, 2018 and 2017 was $51.2 million and $47.3 million, respectively, and is net of approximately $1.0 million and $1.3 million, respectively, of interest capitalized associated with renovation projects. Interest expense increased as a result of increased average borrowings in 2018 as compared to 2017 resulting from acquisitions and share repurchases, partially offset by dispositions, combined with an increase in the Company’s effective interest rate during 2018 as compared to 2017, due to (a) the issuance of longer term fixed-rate debt in late 2017 and early 2018, which was used to reduce the Company’s revolving credit facility, resulting in a higher average interest rate than the variable-rate borrowings repaid, and (b) an increase in interest rates on the Company’s variable-rate debt, with the one-month LIBOR (the London Inter-Bank Offered Rate for a one-month term) increasing from 1.56% at December 31, 2017 to 2.50% at December 31, 2018. While approximately 74% of the Company’s outstanding debt was effectively fixed-rate debt at December 31, 2018, the Company does expect interest costs for its remaining variable-rate debt to continue to increase in 2019 due to higher expected average interest rates as compared to the prior year. The impact from higher interest rates will be partially mitigated by the Company’s 2018 debt refinancing, resulting in lower spreads charged on outstanding borrowings under its revolving credit facility and $575 million of its outstanding term loans by 10 to 15 basis points, depending on the 37


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    Company’s leverage ratio. See Note 5 titled “Debt” in the 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 debt refinancing. Results of Operations for Years 2017 and 2016 As of December 31, 2017, the Company owned 239 hotels with a total of 30,322 rooms as compared to 235 hotels with a total of 30,073 rooms as of December 31, 2016. During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017, one on October 20, 2017 and one on December 1, 2017), and sold two hotels (one on April 20, 2017 and one on October 5, 2017). During 2016, the Company acquired 56 hotels in the Apple Ten merger effective September 1, 2016, acquired one additional newly constructed hotel on July 1, 2016 and sold one hotel on December 6, 2016. As a result, the comparability of results for the years ended December 31, 2017 and 2016 as discussed below is significantly impacted by these transactions. Revenues For the years ended December 31, 2017 and 2016, the Company had total revenue of $1.2 billion and $1.0 billion, respectively. For the years ended December 31, 2017 and 2016, respectively, Comparable Hotels achieved combined average occupancy of 77.7% and 77.1%, ADR of $135.22 and $133.89 and RevPAR of $105.00 and $103.27. During 2017, the Company experienced modest increases in both occupancy and ADR as compared to 2016, resulting in a 1.7% increase in RevPAR for Comparable Hotels. Markets with above average growth in 2017 for both the Company and industry included Richmond, Virginia, Houston, Texas, Knoxville, Tennessee, Kansas City, Missouri, San Diego, California and Tampa, Florida. Markets that were below average for both the Company and industry included Dallas, Texas, Austin, Texas and Charlotte, North Carolina. In the second half of 2017, Houston and certain Florida markets experienced an increase in demand due to evacuation and restoration efforts related to hurricanes Harvey and Irma, which led to increased RevPAR for the Company and industry in those markets. While certain of the Company’s hotels incurred minor wind and water related damage from the hurricanes, the overall impact was not material. The Company’s growth during 2017 was also impacted by a decline in the Los Angeles, California market due to outsized growth in 2016 from the Porter Ranch gas leak. Hotel Operating Expense For the years ended December 31, 2017 and 2016, respectively, hotel operating expense totaled $697.4 million and $582.8 million or 56.3% and 56.0% of total revenue for each respective year. For the Company’s Comparable Hotels, hotel operating expense as a percentage of revenue increased approximately 90 basis points for 2017 as compared to 2016. During 2017, the Company experienced increases in labor costs as a percentage of revenue, which was the primary cause of the increase in Comparable Hotels operating expense. Property Taxes, Insurance and Other Expense Property taxes, insurance and other expense for the years ended December 31, 2017 and 2016 totaled $69.4 million and $56.9 million, respectively, or 5.6% and 5.5% of total revenue for each respective year, and for Comparable Hotels, 5.6% of total revenue for each year. For the Company’s Comparable Hotels, real estate taxes increased slightly in 2017 compared to 2016, 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. Ground Lease Expense Ground lease expense for the years ended December 31, 2017 and 2016 was $11.3 million and $10.4 million, respectively. Ground lease expense primarily represents the expense incurred by the Company to lease land for 14 of its hotel properties, including four hotels acquired in the Apple Ten merger effective September 1, 2016. 38


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    General and Administrative Expense General and administrative expense for the years ended December 31, 2017 and 2016 was $26.3 million and $17.0 million, respectively, or 2.1% and 1.6% of total revenue for each respective year. Through August 31, 2016, the Company provided to Apple Ten the advisory services contemplated under its advisory agreement, and the Company received fees and reimbursement of expenses payable under the advisory agreement from Apple Ten totaling approximately $3.5 million, which were recorded as reductions to general and administrative expenses. Effective September 1, 2016, in connection with the completion of the Apple Ten merger, the advisory agreement was terminated and the Company no longer receives the fees and reimbursement of expenses payable under the advisory agreement from Apple Ten, which resulted in an increase in the Company’s general and administrative expense from the prior year. Although expense for the Company in total dollars increased from the prior year, since both the advisory fees and reimbursed costs received by the Company from Apple Ten were recorded as general and administrative expense by Apple Ten and as reductions to general and administrative expense by the Company, the termination of the advisory agreement had no financial impact on the combined company after the effective time of the Apple Ten merger. General and administrative expense also increased in 2017 as compared to 2016 due to an increase in compensation expense. Based on the Company’s performance in 2017 in relation to the operational performance and shareholder return metrics of the 2017 Incentive Plan, the amounts earned under the 2017 Incentive Plan were higher than the comparable compensation earned under the 2016 executive management incentive plan, resulting in an increase in executive compensation expense for 2017 of approximately $4.5 million, as compared to 2016. Transaction and Litigation Costs (Reimbursements) Transaction and litigation costs (reimbursements) for the years ended December 31, 2017 and 2016 were approximately $(2.6) million and $35.0 million, respectively. Transaction and litigation costs (reimbursements) for 2017 primarily related to additional proceeds received in May 2017 from the Company’s directors and officers insurance carriers in connection with a legal settlement that occurred in 2017 related to the Apple Ten merger. Transaction and litigation costs (reimbursements) for 2016 consisted primarily of (i) costs related to the Apple Ten merger totaling approximately $29.2 million (including approximately $25.1 million in costs related to the Apple Ten merger litigation, net of directors and officers insurance proceeds), (ii) $5.5 million of costs incurred to settle the litigation related to Apple Seven’s and Apple Eight’s terminated Dividend Reinvestment Plans, funded by the Company in January 2018, and (iii) other acquisition related costs totaling approximately $0.4 million. On January 1, 2017, the Company adopted the accounting standard on business combinations that modifies the definition of a business. Under this guidance, acquisition of hotel properties will generally be accounted for as an acquisition of a group of assets with transaction costs associated with the acquisition capitalized as part of the cost of the asset acquired instead of expensed in the period they are incurred. In accordance with this standard, the Company capitalized approximately $0.4 million in transaction costs related to the acquisition of six hotels during 2017. Loss on Impairment of Depreciable Real Estate Assets Loss on impairment of depreciable real estate assets was approximately $45.9 million and $5.5 million for the years ended December 31, 2017 and 2016, respectively, and consisted of impairment charges of $38.0 million for the New York, New York Renaissance hotel recorded in 2017, $7.9 million for the two Columbus hotels recorded in 2017, and $5.5 million for the Chesapeake, Virginia Marriott hotel recorded in 2016. See Note 3 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 Expense Depreciation expense for the years ended December 31, 2017 and 2016 was $176.5 million and $148.2 million, respectively. The increase was primarily due to the increase in the number of properties owned as a result of the acquisition of six hotels in 2017, the Apple Ten merger effective September 1, 2016, the acquisition of one hotel on July 1, 2016 and renovations completed throughout 2017 and 2016. 39


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    Interest and Other Expense, net Interest and other expense, net for the years ended December 31, 2017 and 2016 was $47.3 million and $40.0 million, respectively, and is net of approximately $1.3 million and $1.6 million, respectively, of interest capitalized associated with renovation projects. The increase in interest expense was primarily due to an increase in the Company’s average outstanding borrowings during 2017 as compared to 2016 which is primarily attributable to (a) mortgage debt assumed in the Apple Ten merger effective September 1, 2016 and (b) borrowings to fund (i) the cash payment portion of the Apple Ten merger, (ii) the repayment of Apple Ten’s outstanding balance on its extinguished credit facility assumed in the merger and (iii) the acquisition of seven hotels (six in 2017 and one on July 1, 2016), which increases were partially offset by proceeds from the sale of three hotels (one in December 2016, one in April 2017 and one in October 2017) and issuance of common shares in the fourth quarter of 2017 under the Company’s ATM Program. Although during 2017 variable interest rates increased in the U.S. with one-month LIBOR increasing from 0.77% at December 31, 2016 to 1.56% at December 31, 2017, the Company was able to offset the increases by hedging a portion of its variable-rate debt and entering into fixed-rate mortgages, achieving comparable effective borrowing rates for 2016 and 2017. 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 further adjusts FFO for certain additional items, including (i) the exclusion of transaction and litigation costs (reimbursements), as these costs do not represent ongoing operations, and (ii) the exclusion of amortization of favorable and unfavorable leases, net and non-cash straight-line ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance. 40


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    The following table reconciles the Company’s GAAP net income to FFO and MFFO for the years ended December 31, 2018, 2017 and 2016 (in thousands). Years Ended December 31, 2018 2017 2016 Net income .......................................................................................... $ 206,086 $ 182,492 $ 144,652 Depreciation of real estate owned ........................................................ 182,527 175,581 147,244 (Gain) loss on sale of real estate .......................................................... (152) (16,295) 153 Loss on impairment of depreciable real estate assets ........................... 3,135 45,875 5,471 Funds from operations ..................................................................... 391,596 387,653 297,520 Transaction and litigation costs (reimbursements) ............................... - (2,586) 34,989 Amortization of favorable and unfavorable leases, net ........................ 647 663 674 Non-cash straight-line ground lease expense ....................................... 3,542 3,700 3,419 Modified funds from operations ....................................................... $ 395,785 $ 389,430 $ 336,602 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, as defined in its September 2017 white paper “Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate.” Nareit 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 transaction and litigation costs (reimbursements), as these costs do not represent ongoing operations, and (ii) the exclusion of non-cash straight-line ground lease expense, as this expense does not reflect the underlying performance of the related hotels. The following table reconciles the Company’s GAAP net income to EBITDA, EBITDAre and Adjusted EBITDAre for the years ended December 31, 2018, 2017 and 2016 (in thousands). Years Ended December 31, 2018 2017 2016 Net income .......................................................................................... $ 206,086 $ 182,492 $ 144,652 Depreciation ........................................................................................ 183,482 176,499 148,163 Amortization of favorable and unfavorable leases, net ........................ 647 663 674 Interest and other expense, net ............................................................ 51,185 47,343 40,026 Income tax expense ............................................................................. 587 847 431 EBITDA........................................................................................... 441,987 407,844 333,946 (Gain) loss on sale of real estate .......................................................... (152) (16,295) 153 Loss on impairment of depreciable real estate assets ........................... 3,135 45,875 5,471 EBITDAre ....................................................................................... 444,970 437,424 339,570 Transaction and litigation costs (reimbursements) ............................... - (2,586) 34,989 Non-cash straight-line ground lease expense ....................................... 3,542 3,700 3,419 Adjusted EBITDAre......................................................................... $ 448,512 $ 438,538 $ 377,978 41


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    Hotels Owned As of December 31, 2018, the Company owned 241 hotels with an aggregate of 30,812 rooms located in 34 states. 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 .............................................................. 42 5,807 Courtyard ........................................................................... 40 5,460 Hampton ............................................................................ 40 5,029 Homewood Suites .............................................................. 34 3,831 Residence Inn ..................................................................... 33 3,939 SpringHill Suites ................................................................ 16 2,159 Fairfield ............................................................................. 11 1,300 TownePlace Suites ............................................................. 11 1,110 Home2 Suites ..................................................................... 8 910 Marriott .............................................................................. 2 616 Embassy Suites .................................................................. 2 316 Renaissance ........................................................................ 1 208 Hyatt Place ......................................................................... 1 127 Total ............................................................................... 241 30,812 Number of Hotels and Guest Rooms by State Number of Number of State Hotels Rooms Alabama ............................................................................. 15 1,434 Alaska ................................................................................ 2 304 Arizona .............................................................................. 12 1,644 Arkansas ............................................................................ 3 336 California ........................................................................... 27 3,807 Colorado ............................................................................ 4 567 Florida ............................................................................... 24 2,978 Georgia .............................................................................. 6 672 Idaho .................................................................................. 2 416 Illinois................................................................................ 8 1,420 Indiana ............................................................................... 4 479 Iowa ................................................................................... 3 301 Kansas ............................................................................... 4 422 Louisiana ........................................................................... 4 541 Maine ................................................................................. 1 179 Maryland ............................................................................ 2 233 Massachusetts .................................................................... 4 466 Michigan ............................................................................ 1 148 Minnesota .......................................................................... 2 244 Mississippi ......................................................................... 2 168 Missouri ............................................................................. 4 544 Nebraska ............................................................................ 4 621 New Jersey ......................................................................... 5 629 New York ........................................................................... 4 553 North Carolina ................................................................... 12 1,337 Ohio ................................................................................... 2 252 Oklahoma ........................................................................... 4 545 Pennsylvania ...................................................................... 3 391 South Carolina ................................................................... 5 538 Tennessee ........................................................................... 13 1,502 Texas .................................................................................. 34 4,072 Utah ................................................................................... 3 393 Virginia .............................................................................. 14 2,067 Washington ........................................................................ 4 609 Total ............................................................................... 241 30,812 42


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    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 241 hotels the Company owned as of December 31, 2018. Related Parties The Company has, and is expected to continue to engage in, transactions with related parties. These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties. See Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Company’s related party transactions. Liquidity and Capital Resources Contractual Commitments The following is a summary of the Company’s significant contractual obligations as of December 31, 2018 (in thousands): Amount of Commitments Expiring per Period Total 1 Year 2-3 Years 4-5 Years Over 5 Years Property Purchase Commitments .............. $ 130,781 $ 20,736 $ 110,045 $ - $ - Debt (including interest of $275.9 million) 1,693,507 87,052 183,440 752,160 670,855 Ground Leases ......................................... 436,750 7,594 16,135 17,000 396,021 $ 2,261,038 $ 115,382 $ 309,620 $ 769,160 $ 1,066,876 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 additional secured and unsecured debt financing, dispositions of its hotel properties and offerings of the Company’s common shares. On July 27, 2018, the Company entered into an amendment and restatement of its $965 million credit facility, reducing the borrowing capacity to $850 million and, on August 2, 2018, the Company entered into an amendment and restatement of its $150 million term loan facility, increasing the borrowing capacity to $225 million, thereby reducing the overall total borrowing capacity of the facilities by $40 million. The amendments and restatements effectively extended the maturity dates of both facilities, reduced the annual interest rates and improved certain covenants as compared to the prior agreements. As of December 31, 2018, the Company had approximately $1.4 billion of total outstanding debt consisting of $488.8 million of mortgage debt and $928.8 million outstanding under its credit facilities, which include its $850 million credit facility, its $225 million term loan facility and its $85 million term loan (together, the “credit facilities”), excluding unamortized debt issuance costs and fair value adjustments. The Company’s unused borrowing capacity under its credit facilities as of December 31, 2018 was $231.2 million, consisting of $156.2 million available under its $425 million revolving credit facility, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders, and $75.0 million under its $225 million term loan facility, which was drawn by the Company on January 29, 2019 and used to pay down borrowings on the Company’s revolving credit facility. 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, 2018 and anticipates being in compliance during 2019. 43


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    See Note 5 titled “Debt” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for a description of the Company’s debt instruments as of December 31, 2018 and a summary of the financial and restrictive covenants as defined in the credit agreements. The Company’s ATM Program allows it to sell, from time to time, up to an aggregate of $300 million of its common shares through sales agents. Since inception of the ATM Program in February 2017 through December 31, 2018, the Company has sold approximately 7.2 million common shares at a weighted-average market sales price of approximately $19.56 per common share and received aggregate gross proceeds of approximately $139.8 million and proceeds net of offering costs of approximately $137.5 million, including the sale of approximately 0.2 million common shares during the first quarter of 2018 at a weighted-average market sales price of approximately $19.73 per common share and approximately 6.9 million common shares in the fourth quarter of 2017 at a weighted-average market sales price of approximately $19.55 per common share. The Company used the proceeds from the sale of these shares to pay down borrowings on its revolving credit facility. Future sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company's common shares and opportunities for uses of any proceeds. As discussed in Note 4, “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, 2018 the Company had an outstanding contract to sell 16 of its hotels for a gross sales price of $175.0 million. This contract was terminated in February 2019 and the Company entered into two purchase and sale agreements with the same unrelated party for the sale of a total of nine properties for a total combined gross sales price of $95 million. The Company holds a non-refundable deposit of $7 million on these contracts. If the closings occur, these sales are expected to be completed in the first half of 2019. The Company plans to use the net proceeds from the sales to pay down borrowings on its 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, 2018 were $1.20 per common share and were paid at a monthly rate of $0.10 per common share for a total of approximately $275.9 million, $267.9 million and $229.1 million, respectively. For the same periods, the Company’s net cash generated from operations was approximately $404.8 million, $384.1 million and $331.2 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 During 2018, the Company’s Board of Directors approved an extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $464 million. The Share Repurchase Program may be 44


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    suspended or terminated at any time by the Company and will end in July 2019 if not terminated earlier. During 2018, the Company purchased approximately 6.6 million of its common shares at a weighted-average market purchase price of approximately $15.87 per common share for an aggregate purchase price, including commissions, of approximately $104.3 million and, in 2016, purchased approximately 0.4 million of its common shares at a weighted-average market purchase price of approximately $17.72 per common share for an aggregate purchase price, including commissions, of approximately $7.9 million. The Company did not repurchase any common shares under its Share Repurchase Program during 2017. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its credit facilities. As of December 31, 2018, approximately $364.0 million remained available for purchase under the Share Repurchase Program. The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will depend upon prevailing market conditions, regulatory requirements and other factors. 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, 2018, the Company held approximately $30.1 million in reserve related to these properties. During 2018, the Company invested approximately $71.1 million in capital expenditures and anticipates spending approximately $80 to $90 million during 2019, which includes various scheduled renovation projects for approximately 30 to 35 properties. The Company does not currently have any existing or planned projects for development. Hotel Purchase Contract Commitments As of January 31, 2019, the Company had outstanding contracts for the potential purchase of six hotels for a total purchase price of approximately $162.5 million, five of which are under development and are planned to be completed and opened for business over the next three to 24 months from December 31, 2018, at which time closings on these hotels are expected to occur, and one existing hotel that is expected to close in the first quarter of 2019. Although the Company is working towards acquiring these six hotels, there are many 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. Cash Management Activities As part of the cost sharing arrangements discussed in Note 7 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, certain 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 241 hotels owned as of December 31, 2018 is operated and managed under separate management agreements with 23 hotel management companies, none of which are affiliated with the Company. Sixteen of the Company’s hotels are managed by affiliates of Marriott or Hilton. The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and as a result, the hotels they manage were required to obtain separate franchise agreements with the applicable franchisor. See Note 10 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, 2018, 2017 and 2016, the Company incurred approximately $43.9 million, $42.7 million 45


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    and $35.6 million, respectively, in management fees. For the years ended December 31, 2018, 2017 and 2016, the Company incurred approximately $54.5 million, $52.9 million and $44.2 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. Beginning January 1, 2017, acquisitions of hotel properties have been and will generally be 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. Prior to January 1, 2017, the Company’s acquisitions of hotel properties were accounted for as acquisitions of existing businesses, and therefore all transaction costs associated with the acquisitions were expensed as 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. 46


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    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 three properties recorded in 2018, three properties recorded in 2017 and one property recorded in 2016 totaling approximately $3.1 million, $45.9 million and $5.5 million, respectively, as discussed herein under “Results of Operations” and in Note 3 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 accounting standards in 2018 and the anticipated adoption of recently issued accounting standards. Subsequent Events In both January 2019 and February 2019, the Company paid approximately $22.4 million, or $0.10 per outstanding common share, in distributions to its common shareholders. In February 2019, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of March 2019. The distribution is payable on March 18, 2019. In January 2019, the Company entered into a contract to purchase an existing 160-room Hampton Inn & Suites in St. Paul, Minnesota, for a gross purchase price of $31.7 million. Although the Company is working towards acquiring this hotel, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on this hotel will occur. During the month of January 2019, the Company purchased, under its Share Repurchase Program, approximately 0.2 million of its common shares, at a weighted-average market purchase price of approximately $14.81 per common share, for an aggregate purchase price of approximately $3.6 million. 47


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    Item 7A. Quantitative and Qualitative Disclosures About Market Risk As of December 31, 2018, 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, 2018, after giving effect to interest rate swaps, as described below, approximately $371.3 million, or approximately 26% 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, 2018, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $3.7 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 balance at December 31, 2018 was $0. As of December 31, 2018, the Company’s variable-rate debt consisted of its credit facilities, including borrowings outstanding under its $425 million revolving credit facility and $735 million term loan capacity, of which $660 million was outstanding and the remaining $75 million was funded on January 29, 2019. 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, 2018, the Company had six interest rate swap agreements that effectively fix the interest payments on approximately $557.5 million of the Company’s variable-rate debt outstanding. In addition, in June 2018, the Company entered into an interest rate swap agreement which, beginning January 31, 2019, will effectively fix the interest rate on $50 million of its variable-rate debt, and in December 2018, the Company entered into two interest rate swap agreements which, beginning January 31, 2020 and May 18, 2020, will effectively fix the interest rate on $25 million and $50 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. 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, 2018. All dollar amounts are in thousands. Fair Market 2019 2020 2021 2022 2023 Thereafter Total Value Total debt: Maturities ..................... $ 33,805 $ 28,349 $ 47,586 $378,052 $295,616 $ 634,165 $1,417,573 $ 1,396,638 Average interest rates (1) 3.7% 3.9% 3.9% 3.9% 3.9% 4.0% Variable rate debt: Maturities ..................... $ - $ - $ - $268,800 $250,000 $ 410,000 $ 928,800 $ 929,435 Average interest rates (1) 3.4% 3.6% 3.8% 3.8% 3.9% 4.0% Fixed rate debt: Maturities ..................... $ 33,805 $ 28,349 $ 47,586 $109,252 $ 45,616 $ 224,165 $ 488,773 $ 467,203 Average interest rates ... 4.4% 4.4% 4.4% 4.2% 4.1% 4.1% (1) The average interest rate gives effect to interest rate swaps, as applicable. 48


  • Page 49

    Item 8. Financial Statements and Supplementary Data Report of Management on Internal Control over Financial Reporting February 25, 2019 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, 2018, 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, 2018, 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, Bryan Peery, President and Chief Financial Officer Chief Executive Officer (Principal Financial and Principal (Principal Executive Officer) Accounting Officer) 49


  • Page 50

    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, 2018, 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, 2018, 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, 2018 and 2017, 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, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(2) and our report dated February 25, 2019 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 25, 2019 50

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