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EX-31.1 - EX-31.1 - Apple Hospitality REIT, Inc.ex31-1.htm


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

 
FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______

Commission File Number 001-37389

APPLE HOSPITALITY REIT, INC.
(Exact name of registrant as specified in its charter)
 
Virginia
26-1379210
(State or other jurisdiction
of incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
814 East Main Street
Richmond, Virginia
23219
(Address of principal executive offices)
(Zip Code)
 
(804) 344-8121
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer   
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)  Smaller reporting company 
 
Emerging growth company   
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of registrant’s common shares outstanding as of November 1, 2017: 223,060,840


Apple Hospitality REIT, Inc.
Form 10-Q
Index
 
 
Page Number
PART I.  FINANCIAL INFORMATION
   
     
 
Item 1.
   
         
   
3
 
         
   
4
 
         
   
5
 
         
   
6
 
         
 
Item 2.
19
 
         
 
Item 3.
34
 
         
 
Item 4.
35
 
         
PART II.  OTHER INFORMATION
   
     
 
Item 1.
36
 
         
 
Item 1A.
36
 
         
 
Item 6.
36
 
         
37
 

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

PART I.    FINANCIAL INFORMATION

Item 1.      Financial Statements

Apple Hospitality REIT, Inc.
Consolidated Balance Sheets
(in thousands, except share data)

   
September 30,
   
December 31,
 
   
2017
   
2016
 
   
(unaudited)
       
Assets
           
Investment in real estate, net of accumulated depreciation of $686,787 and $557,597, respectively
 
$
4,742,590
   
$
4,823,489
 
Assets held for sale
   
40,626
     
39,000
 
Restricted cash-furniture, fixtures and other escrows
   
30,299
     
29,425
 
Due from third party managers, net
   
52,354
     
31,460
 
Other assets, net
   
48,018
     
56,509
 
Total Assets
 
$
4,913,887
   
$
4,979,883
 
     
Liabilities
               
Revolving credit facility
 
$
216,700
   
$
270,000
 
Term loans
   
655,988
     
570,934
 
Mortgage debt
   
432,783
     
497,029
 
Accounts payable and other liabilities
   
104,467
     
124,856
 
Total Liabilities
   
1,409,938
     
1,462,819
 
                 
Shareholders' Equity
   
Preferred stock, authorized 30,000,000 shares; none issued and outstanding
   
0
     
0
 
Common stock, no par value, authorized 800,000,000 shares; issued and outstanding 223,060,840 and 222,938,648 shares, respectively
   
4,455,390
     
4,453,205
 
Accumulated other comprehensive income
   
5,218
     
4,589
 
Distributions greater than net income
   
(956,659
)
   
(940,730
)
Total Shareholders' Equity
   
3,503,949
     
3,517,064
 
                 
Total Liabilities and Shareholders' Equity
 
$
4,913,887
   
$
4,979,883
 

See notes to consolidated financial statements.
3


Apple Hospitality REIT, Inc.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except per share data)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Revenues:
                       
    Room
 
$
302,298
   
$
255,269
   
$
877,974
   
$
698,759
 
    Other
   
22,628
     
21,202
     
71,581
     
59,835
 
Total revenue
   
324,926
     
276,471
     
949,555
     
758,594
 
                                 
Expenses:
                               
    Operating
   
79,975
     
69,082
     
235,474
     
187,370
 
    Hotel administrative
   
24,842
     
20,866
     
74,895
     
57,921
 
    Sales and marketing
   
25,488
     
21,329
     
75,867
     
59,244
 
    Utilities
   
12,036
     
10,543
     
31,982
     
25,862
 
    Repair and maintenance
   
12,199
     
10,478
     
36,394
     
29,167
 
    Franchise fees
   
13,974
     
11,834
     
40,611
     
32,212
 
    Management fees
   
11,315
     
9,205
     
33,072
     
26,189
 
    Property taxes, insurance and other
   
17,598
     
14,787
     
52,346
     
40,315
 
    Ground lease
   
2,831
     
2,615
     
8,486
     
7,587
 
    General and administrative
   
5,350
     
2,623
     
18,255
     
12,511
 
    Transaction and litigation costs (reimbursements)
   
0
     
36,452
     
(2,586
)
   
37,861
 
    Loss on impairment of depreciable real estate assets
   
0
     
5,471
     
7,875
     
5,471
 
    Depreciation
   
44,110
     
37,343
     
131,770
     
104,651
 
Total expenses
   
249,718
     
252,628
     
744,441
     
626,361
 
                                 
Operating income
   
75,208
     
23,843
     
205,114
     
132,233
 
                                 
    Interest and other expense, net
   
(12,024
)
   
(10,156
)
   
(35,590
)
   
(28,519
)
    Gain (loss) on sale of real estate
   
(157
)
   
0
     
15,983
     
0
 
                                 
Income before income taxes
   
63,027
     
13,687
     
185,507
     
103,714
 
                                 
    Income tax benefit (expense)
   
(203
)
   
7
     
(712
)
   
(616
)
                                 
Net income
 
$
62,824
   
$
13,694
   
$
184,795
   
$
103,098
 
                                 
Other comprehensive income (loss):
                               
    Interest rate derivatives
   
259
     
4,261
     
629
     
(7,934
)
                                 
Comprehensive income
 
$
63,083
   
$
17,955
   
$
185,424
   
$
95,164
 
                                 
Basic and diluted net income per common share
 
$
0.28
   
$
0.07
   
$
0.83
   
$
0.57
 
                                 
Weighted average common shares outstanding - basic and diluted
   
223,057
     
190,563
     
223,052
     
180,004
 

See notes to consolidated financial statements.
4


Apple Hospitality REIT, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

   
Nine Months Ended
 
   
September 30,
 
   
2017
   
2016
 
Cash flows from operating activities:
           
Net income
 
$
184,795
   
$
103,098
 
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation
   
131,770
     
104,651
 
Loss on impairment of depreciable real estate assets
   
7,875
     
5,471
 
Gain on sale of real estate
   
(15,983
)
   
0
 
Other non-cash expenses, net
   
5,372
     
4,806
 
Changes in operating assets and liabilities, net of amounts acquired or
assumed with acquisitions:
               
Increase in due from third party managers, net
   
(20,883
)
   
(14,350
)
Decrease (increase) in other assets, net
   
8,507
     
(1,014
)
Increase (decrease) in accounts payable and other liabilities
   
(20,944
)
   
35,309
 
Net cash provided by operating activities
   
280,509
     
237,971
 
                 
Cash flows from investing activities:
               
Cash consideration in Apple Ten merger
   
0
     
(93,590
)
Acquisition of hotel properties, net
   
(56,794
)
   
(23,994
)
Deposits and other disbursements for potential acquisitions
   
(1,810
)
   
0
 
Capital improvements
   
(41,370
)
   
(47,523
)
Decrease (increase) in capital improvement reserves
   
(1,351
)
   
2,459
 
Net proceeds from sale of real estate
   
28,374
     
0
 
Net cash used in investing activities
   
(72,951
)
   
(162,648
)
                 
Cash flows from financing activities:
               
Repurchases of common shares
   
0
     
(361
)
Repurchases of common shares to satisfy employee withholding requirements
   
(432
)
   
(459
)
Equity issuance costs
   
0
     
(1,176
)
Distributions paid to common shareholders
   
(200,716
)
   
(161,940
)
Net proceeds from (payments on) revolving credit facility
   
(53,300
)
   
187,300
 
Payments on extinguished credit facility
   
0
     
(111,100
)
Proceeds from term loans
   
85,000
     
150,000
 
Proceeds from mortgage debt
   
0
     
24,000
 
Payments of mortgage debt
   
(37,219
)
   
(157,823
)
Financing costs
   
(891
)
   
(3,764
)
Net cash used in financing activities
   
(207,558
)
   
(75,323
)
                 
Net change in cash and cash equivalents
   
0
     
0
 
                 
Cash and cash equivalents, beginning of period
   
0
     
0
 
                 
Cash and cash equivalents, end of period
 
$
0
   
$
0
 
                 
Supplemental cash flow information:
               
Interest paid
 
$
35,049
   
$
30,192
 
                 
Supplemental disclosure of noncash investing and financing activities:
               
    Stock consideration in Apple Ten merger (see note 2)
 
$
0
   
$
956,086
 
    Accrued distribution to common shareholders
 
$
22,302
   
$
22,325
 
    Mortgage debt assumed by buyer upon sale of real estate
 
$
27,073
   
$
0
 

See notes to consolidated financial statements.
5


Apple Hospitality REIT, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1.  Organization and Summary of Significant Accounting Policies

Organization
  
Apple Hospitality REIT, Inc., together with its wholly-owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes.  The Company is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States.  The Company’s fiscal year end is December 31.  The Company has no foreign operations or assets and its operating structure includes only one reportable segment.  The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated.  Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision making process of these entities, and therefore does not consolidate the entities.  As of September 30, 2017, the Company owned 237 hotels with an aggregate of 30,188 rooms located in 33 states, including one hotel with 316 rooms classified as held for sale, which was sold to an unrelated party in October 2017.  The Company’s common shares are listed on the New York Stock Exchange under the ticker symbol “APLE.”

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q.  Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2016 Annual Report on Form 10-K.  Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2017.

Use of Estimates

The preparation of the financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Net Income Per Common Share

Basic net income per common share is computed based upon the weighted average number of shares outstanding during the period.  Diluted net income per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period.  Basic and diluted net income per common share were the same for each of the periods presented.

Accounting Standards Recently Adopted

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which is intended to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The standard is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted.  The Company adopted this standard effective January 1, 2017 on a prospective basis.  Prior to the adoption of this standard, the Company’s acquisitions of hotel properties were accounted for as existing businesses, and therefore all transaction costs associated with the acquisitions, including title, legal, accounting, brokerage commissions and other related costs were expensed as incurred.  Under the new standard, effective January 1, 2017, acquisitions of hotel properties (including the acquisition of three hotels during the first nine months of 2017, as discussed in Note 3) will generally be accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition 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.  Asset acquisitions now require the Company to complete its allocation of the purchase price at the time of the acquisition as the measurement period applicable to business combinations does not apply to asset acquisitions.

6


Accounting Standards Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which affects virtually all aspects of an entity’s revenue recognition.  The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In March, April, May and December 2016, the FASB issued ASUs No. 2016-08, 2016-10, 2016-12 and 2016-20, respectively, all related to Revenue from Contracts with Customers (Topic 606), which further clarify the application of the standard.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effectiveness of ASU No. 2014-09 to annual and interim periods beginning after December 15, 2017, and permitted early application for annual reporting periods beginning after December 15, 2016.  The Company plans to adopt this standard on January 1, 2018 using the modified retrospective approach.  Although the Company is still evaluating this ASU, based on its assessment to date, the Company does not believe there will be a significant change to the amount or timing of the recording of revenue in its consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of Accounting Standards Codification (“ASC”) Subtopic 610-20 and adds guidance for the derecognition of nonfinancial assets, including partial sales.  The standard is effective in conjunction with ASU No. 2014-09, presented above, which is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted.  The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09.  The Company plans to adopt this standard on January 1, 2018 using the modified retrospective approach.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, which amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements and enhance the transparency and understandability of hedging activity.  The standard simplifies the application of hedge accounting and reduces the administrative burden of hedge documentation requirements and assessing hedge effectiveness.  The standard is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted.  The standard requires a modified retrospective approach for all hedge relationships that exist on the date of adoption.  The presentation and disclosure guidance is required only prospectively.  The Company is currently evaluating when it will adopt the standard.  The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

2.  Merger with Apple REIT Ten, Inc.

Effective September 1, 2016, the Company completed its previously announced merger with Apple REIT Ten, Inc. (“Apple Ten”) (the “merger”).  Pursuant to the Agreement and Plan of Merger entered into on April 13, 2016, as amended on July 13, 2016 (the “Merger Agreement”), Apple Ten merged with and into a wholly-owned subsidiary of the Company (“Acquisition Sub”), at which time the separate corporate existence of Apple Ten ceased and Acquisition Sub became the surviving corporation in the merger.  Acquisition Sub was formed solely for the purpose of engaging in the merger and had not conducted any prior activities.  As a result of the merger, the Company acquired the business of Apple Ten, a real estate investment trust, which immediately prior to the effective time of the merger, owned 56 hotels located in 17 states with an aggregate of 7,209 rooms.

The Company accounted for the merger in accordance with ASC 805, Business Combinations.  The Company was considered the acquirer for financial reporting purposes, which required, among other things, that the assets acquired and liabilities assumed from Apple Ten be recognized at their acquisition date fair values.  For purpose of accounting for the transaction, the aggregate value of the merger consideration paid to Apple Ten shareholders was estimated to be approximately $1.0 billion, and was comprised of approximately $956.1 million for the issuance of approximately 48.7 million common shares of the Company valued at $19.62 per share, which was the closing price of the Company’s common shares on August 31, 2016 (the date that the merger was approved), and $93.6 million in cash, which was funded through borrowings on the Company’s $540 million revolving credit facility (the “revolving credit facility”).  All costs (reimbursements) related to the merger were recorded in the period incurred and are included in transaction and litigation costs (reimbursements) in the Company’s consolidated financial statements.  In connection with the merger, the Company incurred approximately $37.6 million in merger costs for the nine months ended September 30, 2016, which included $32.0 million funded by the Company in January 2017 to settle the Apple Ten merger lawsuit and approximately $1.8 million in legal costs incurred to defend the lawsuit.  During 2017, the Company received $12.6 million in proceeds from its director and officer insurance carriers in connection with the merger lawsuit, of which $10.0 million (received in January 2017) and $2.6 million (received in May 2017) were included as reductions in transaction and litigation costs (reimbursements) for the fourth quarter of 2016 and nine months ended September 30, 2017, respectively.  Further discussion of the merger litigation is included in Note 10.

7


Effective September 1, 2016, upon completion of the merger, the Company assumed approximately $145.7 million in mortgage debt, prior to any fair value adjustments, secured by nine properties.  The Company also assumed the outstanding balance on Apple Ten’s credit facility totaling $111.1 million, which was terminated and repaid in full on September 1, 2016 with borrowings on the Company’s revolving credit facility.

As contemplated in the Merger Agreement, in connection with the completion of the merger, the advisory and related party arrangements with respect to Apple Ten and its advisors, as described in more detail in Note 7, were terminated.

The following unaudited pro forma information for the three and nine month periods ended September 30, 2017 and 2016, is presented as if the merger, effective September 1, 2016, had occurred on January 1, 2016, and is based on assumptions and estimates considered appropriate by the Company.  The pro forma information is provided for illustrative purposes only and does not necessarily reflect what the operating results would have been had the merger been completed on January 1, 2016, nor is it necessarily indicative of future operating results.  The pro forma information does not give effect to any cost synergies or other operating efficiencies that could result from the merger.  Amounts are in thousands except per share data.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2017 (Actual)
   
2016 (Proforma)
   
2017 (Proforma)
   
2016 (Proforma)
 
Total revenue
 
$
324,926
   
$
325,924
   
$
949,555
   
$
949,760
 
Net income
 
$
62,824
   
$
59,960
   
$
182,209
   
$
176,985
 
Basic and diluted net income per common share
 
$
0.28
   
$
0.27
   
$
0.82
   
$
0.79
 
Weighted average common shares outstanding - basic and diluted
   
223,057
     
223,403
     
223,052
     
223,399
 

For purposes of calculating these pro forma amounts, merger transaction and litigation costs (reimbursements) totaling approximately ($2.6) million for the nine months ended September 30, 2017, and approximately $36.4 million and $37.6 million for the three and nine months ended September 30, 2016, respectively, included in the Company’s consolidated statements of operations, were excluded from the pro forma amounts since these costs and reimbursements are attributable to the merger and related transactions and do not have an ongoing impact to the statements of operations.

3.  Investment in Real Estate

The Company’s investment in real estate consisted of the following (in thousands):

   
September 30,
   
December 31,
 
   
2017
   
2016
 
             
Land
 
$
711,826
   
$
707,878
 
Building and Improvements
   
4,294,310
     
4,270,095
 
Furniture, Fixtures and Equipment
   
411,376
     
391,421
 
Franchise Fees
   
11,865
     
11,692
 
     
5,429,377
     
5,381,086
 
Less Accumulated Depreciation
   
(686,787
)
   
(557,597
)
Investment in Real Estate, net
 
$
4,742,590
   
$
4,823,489
 

As of September 30, 2017, the Company owned 237 hotels with an aggregate of 30,188 rooms located in 33 states, including one hotel with 316 rooms classified as held for sale, which was sold to an unrelated party in October 2017.

The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.

8


Acquisitions

The Company acquired three hotels during the first nine months of 2017.  The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel.  All dollar amounts are in thousands.

City
 
State
 
Brand
 
Manager
 
Date Acquired
 
Rooms
   
Gross Purchase Price (a)
 
Fort Worth
 
TX
 
Courtyard
 
LBA
 
2/2/2017
   
124
   
$
18,000
 
Birmingham (b)
 
AL
 
Hilton Garden Inn
 
LBA
 
9/12/2017
   
104
     
19,162
 
Birmingham (b)
 
AL
 
Home2 Suites
 
LBA
 
9/12/2017
   
106
     
19,276
 
                     
334
   
$
56,438
 

(a)
The acquisitions of these hotel properties were accounted for as acquisitions of a group of assets, with costs incurred to effect the acquisitions, which were not significant, capitalized as part of the cost of the assets acquired.  The gross purchase price excludes capitalized transaction costs.  At the date of purchase, the purchase price for each of these properties was funded through the Company’s revolving credit facility.
(b)
The Hilton Garden Inn and Home2 Suites hotels in Birmingham, AL are part of an adjoining two-hotel complex located on the same site.

On July 1, 2016, the Company closed on the purchase of a newly constructed 128-room Home2 Suites hotel in Atlanta, Georgia, the same day the hotel opened for business, for a purchase price of approximately $24.6 million.  The Company used borrowings under its revolving credit facility to purchase the hotel.  Additionally, as described in Note 2, effective September 1, 2016, the Company completed the merger with Apple Ten, which added 56 hotels, located in 17 states, with an aggregate of 7,209 rooms to the Company’s real estate portfolio.  The total real estate value of the merger was estimated to be approximately $1.3 billion.  The Company accounted for the purchase of these hotels in accordance with ASC 805, Business Combinations.  No goodwill was recorded in connection with any of these acquisitions.  For the 57 hotels acquired during the nine months ended September 30, 2016, the amount of revenue and operating income (excluding merger and other acquisition related transaction costs) included in the Company’s consolidated statements of operations from the date of acquisition through September 30, 2016 was approximately $25.0 million and $9.5 million, respectively.

Hotel Contract Commitments

As of September 30, 2017, the Company had outstanding contracts for the potential purchase of four additional hotels for a total purchase price of approximately $146.1 million.  Two of the hotels, the Salt Lake City Residence Inn and the Portland Residence Inn, which are already in operation, were acquired in October 2017.  The two remaining hotels are under construction and are planned to be completed and opened for business over the next 12 months from September 30, 2017, at which time closing on these hotels is expected to occur.  Although the Company is working towards acquiring the two hotels under construction, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on these hotels will occur under the outstanding purchase contracts.  The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at September 30, 2017.  All dollar amounts are in thousands.

Location
 
Brand
 
Date of Purchase Contract
 
Rooms
   
Refundable Deposits
   
Gross Purchase Price
 
Operating (a)
                         
Salt Lake City, UT
 
Residence Inn
 
8/22/2017
   
136
   
$
500
   
$
25,500
 
Portland, ME
 
Residence Inn
 
8/30/2017
   
179
     
1,000
     
55,750
 
Under development (b)
                               
Phoenix, AZ
 
Hampton
 
10/25/2016
   
210
     
500
     
44,100
 
Orlando, FL
 
Home2 Suites
 
1/18/2017
   
128
     
3
     
20,736
 
             
653
   
$
2,003
   
$
146,086
 

(a)
Closing on these hotels occurred in October 2017.
(b)
As of September 30, 2017, these hotels were under construction. The table shows the expected number of rooms upon hotel completion and the expected franchise brands. Assuming all conditions to closing are met, the purchases of these hotels are expected to close over the next 12 months from September 30, 2017. If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract. As the property is under construction, at this time, the seller has not met all of the conditions to closing.
 
9


The purchase price for each of the Salt Lake City Residence Inn and Portland Residence Inn was funded through the Company’s revolving credit facility and it is anticipated that the purchase price for the remaining outstanding contracts will be funded similarly.

Loss on Impairment of Depreciable Real Estate Assets

During the first quarter of 2017, the Company identified two properties for potential sale: the Columbus, Georgia SpringHill Suites and TownePlace Suites hotels.  In April 2017, the Company entered into separate contracts with the same unrelated party for the sale of these properties for a total combined gross sales price of approximately $10.0 million.  Due to the change in the anticipated hold period for each of these hotels, the Company reviewed the estimated undiscounted cash flows generated by each property (including its sale price, net of estimated selling costs) and determined that, for each hotel, the undiscounted cash flows were less than its carrying value; therefore the Company recognized an impairment loss of approximately $7.9 million in the first quarter of 2017 to adjust the bases of these properties to their estimated fair values, which were based on the contracted sale price, net of estimated selling costs, a Level 1 input under the fair value hierarchy.  In May 2017, both of these contracts were terminated.

During the third quarter of 2016, the Company identified two properties for potential sale: the Dallas, Texas Hilton hotel and the Chesapeake, Virginia Marriott hotel.  In October 2016, the Company entered into separate contracts for the sale of these properties.  Due to the change in the anticipated hold period for each of these hotels, the Company reviewed the estimated undiscounted cash flows generated by each property (including its sale price, net of commissions and other selling costs) and determined that the Chesapeake, Virginia Marriott’s estimated undiscounted cash flows were less than its carrying value; therefore the Company recognized an impairment loss of approximately $5.5 million in the third quarter of 2016 to adjust the basis of this property to its estimated fair value, which was based on the original contracted sale price, net of broker commissions and other estimated selling costs, a Level 1 input under the fair value hierarchy.  The Chesapeake, Virginia Marriott was sold in December 2016.  The Dallas, Texas Hilton contract was terminated in November 2016, and, as discussed in Note 4, a new purchase and sale agreement was entered into by the Company in December 2016, and the hotel was sold in April 2017.

4.  Assets Held for Sale and Dispositions

In December 2016, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its 224-room Hilton hotel in Dallas, Texas for a gross sales price of approximately $56.1 million, as amended.  The hotel was classified as held for sale at its historical cost (which was less than the contract price, net of costs to sell) in the Company’s consolidated balance sheet at December 31, 2016.  On April 20, 2017, the Company completed the sale resulting in a gain of approximately $16.0 million, which is included in the Company’s consolidated statement of operations for the nine months ended September 30, 2017.  The hotel had a carrying value totaling approximately $39.0 million at the date of sale.  Under the contract, at closing, the mortgage loan secured by the Dallas, Texas Hilton hotel was assumed by the buyer with the buyer receiving a credit for the amount assumed, which was approximately $27.1 million at the date of sale.

In June 2017, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its 316-room Marriott hotel in Fairfax, Virginia, acquired by the Company in the merger with Apple Ten in September 2016, for a gross sales price of $41.5 million, as amended.  The hotel was classified as held for sale at its historical cost (which was less than the contract price, net of costs to sell) in the Company’s consolidated balance sheet as of September 30, 2017.  On October 5, 2017, the Company completed the sale, resulting in an estimated gain of approximately $0.3 million, which will be recognized in the fourth quarter of 2017.  The estimated gain is calculated as the total sales price, net of commissions and selling costs, less the carrying value totaling approximately $40.6 million as of September 30, 2017.

The net proceeds from the sales were used to pay down borrowings on the Company’s revolving credit facility.  The Company’s consolidated statements of operations include operating income of approximately $0.2 million and $0.8 million for the three months ended September 30, 2017 and 2016, respectively, and approximately $2.4 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively, relating to the results of operations of the two hotels noted above for the period of ownership.  The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three and nine months ended September 30, 2017 and 2016.

10


5.  Debt

$965 Million Credit Facility

The Company utilizes an unsecured “$965 million credit facility” comprised of (i) a $540 million revolving credit facility with an initial maturity date of May 18, 2019 and (ii) a $425 million term loan facility with a maturity date of May 18, 2020, consisting of three term loans, all funded during 2015 (the “$425 million term loans”).  Subject to certain conditions including covenant compliance and additional fees, the revolving credit facility maturity date may be extended one year and the amount of the total credit facility may be increased from $965 million to $1.25 billion.  The Company may make voluntary prepayments in whole or in part, at any time.  Interest payments on the $965 million credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month LIBOR (the London Inter-Bank Offered Rate for a one-month term) plus a margin ranging from 1.50% to 2.30%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  In conjunction with the $425 million term loans, the Company entered into two interest rate swap agreements, which effectively fix the interest rate on $322.5 million of the outstanding balance at approximately 3.10%, subject to adjustment based on the Company’s leverage ratio, through maturity.  See Note 6 for more information on the interest rate swap agreements.  The Company is also required to pay quarterly an unused facility fee at an annual rate of 0.20% or 0.30% on the unused portion of the revolving credit facility, based on the amount of borrowings outstanding during the quarter.

$150 Million Term Loan Facility
 
On April 8, 2016, the Company entered into an unsecured $150 million term loan facility with a syndicate of commercial banks (the “$150 million term loan facility”), consisting of a term loan of up to $50 million that will mature on April 8, 2021 (the “$50 million term loan”) and a term loan of up to $100 million that will mature on April 8, 2023 (the “$100 million term loan,” and collectively with the $50 million term loan, the “$150 million term loans”).  The Company initially borrowed $50 million under the $150 million term loan facility on April 8, 2016 and borrowed the remaining $100 million on September 30, 2016.  The credit agreement contains requirements and covenants similar to the Company’s $965 million credit facility.  The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions.  Interest payments on the $150 million term loan facility are due monthly and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.45% to 2.20% for the $50 million term loan and 1.80% to 2.60% for the $100 million term loan, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  The Company also entered into two interest rate swap agreements which, beginning on September 30, 2016, effectively fix the interest rate on the $50 million term loan and $100 million term loan at 2.54% and 3.13%, respectively, subject to adjustment based on the Company’s leverage ratio, through maturity.  See Note 6 for more information on the interest rate swap agreements.  Proceeds from the $150 million term loan facility were used to pay down outstanding borrowings on the Company’s revolving credit facility, using the increased availability to repay scheduled mortgage debt maturities through the end of the first quarter of 2017.

$85 Million Term Loan

On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024 (the “$85 million term loan” and, together with the $425 million term loans and the $150 million term loans, the “term loans”).  Net proceeds from the $85 million term loan were used to pay down outstanding borrowings on the Company’s revolving credit facility.  Subject to certain conditions including covenant compliance and additional fees, the $85 million term loan may be increased to $125 million.  The credit agreement contains requirements and covenants similar to the Company’s $965 million credit facility.  The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions.  Interest payments on the $85 million term loan are due monthly and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.80% to 2.60%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  In conjunction with the $85 million term loan, the Company entered into two interest rate swap agreements (one in May 2017 with a notional amount of $75 million, effective July 31, 2017, and the other in August 2017 with a notional amount of $10 million, effective August 10, 2017), which effectively fix the interest rate on the $85 million term loan at approximately 3.76%, subject to adjustment based on the Company’s leverage ratio, through maturity.  See Note 6 for more information on the interest rate swap agreements.

11


As of September 30, 2017 and December 31, 2016, the details of the Company’s revolving credit facility and term loans were as set forth below.  All dollar amounts are in thousands.

        
As of September 30, 2017
       
As of December 31, 2016
     
 
 
Maturity Date
 
Outstanding Balance
   
Interest Rate
       
Outstanding Balance
   
Interest Rate
     
Revolving credit facility (1)
 
5/18/2019
 
$
216,700
     
2.78
%
(2
)
 
$
270,000
     
2.32
%
(2
)
                                             
Term loans
                                           
$425 million term loans
 
5/18/2020
   
425,000
     
3.01
%
(3
)
   
425,000
     
2.90
%
(3
)
$50 million term loan
 
4/8/2021
   
50,000
     
2.54
%
(4
)
   
50,000
     
2.54
%
(4
)
$100 million term loan
 
4/8/2023
   
100,000
     
3.13
%
(4
)
   
100,000
     
3.13
%
(4
)
$85 million term loan
 
7/25/2024
   
85,000
     
3.76
%
(4
)
   
0
     
n/a
     
Total term loans at stated value
       
660,000
                 
575,000
             
Unamortized debt issuance costs
       
(4,012
)
               
(4,066
)
           
Total term loans
       
655,988
                 
570,934
             
                                             
Total revolving credit facility and term loans
     
$
872,688
               
$
840,934
             

(1)
Unamortized debt issuance costs related to the revolving credit facility totaled approximately $2.0 million and $2.8 million as of September 30, 2017 and December 31, 2016, respectively, and are included in other assets, net in the Company's consolidated balance sheets.
(2)
Annual variable interest rate at the balance sheet date.
(3)
Effective annual interest rate which includes the effect of interest rate swaps on $322.5 million of the outstanding loan balance, resulting in an annual fixed interest rate of approximately 3.10% on this portion of the debt, subject to adjustment based on the Company's leverage ratio.  See Note 6 for more information on the interest rate swap agreements.  Remaining portion is variable rate debt.
(4)
Annual fixed interest rate at the balance sheet date which includes the effect of interest rate swaps on the outstanding loan balance, subject to adjustment based on the Company’s leverage ratio.  See Note 6 for more information on the interest rate swap agreements.

The credit agreements governing the $965 million credit facility, the $150 million term loan facility and the $85 million term loan 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, limits on dividend payments and share repurchases and restrictions on certain investments.  The Company was in compliance with the applicable covenants at September 30, 2017.

Mortgage Debt

As of September 30, 2017, the Company had approximately $430.1 million in outstanding property level debt secured by 28 properties, with maturity dates ranging from June 2020 to December 2026, stated interest rates ranging from 3.55% to 6.25% and effective interest rates ranging from 3.55% to 4.97%.  The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid.  The following table sets forth the hotel properties securing each loan, the interest rate, loan assumption or origination date, maturity date, the principal amount assumed or originated, and the outstanding balance prior to any fair value adjustments or debt issuance costs as of September 30, 2017 and December 31, 2016 for each of the Company’s debt obligations.  All dollar amounts are in thousands.
12



Location
 
Brand
 
Interest Rate (1)
   
Loan Assumption or Origination Date
 
Maturity Date
     
Principal Assumed or Originated
   
Outstanding balance as of September 30, 2017
   
Outstanding balance as of December 31, 2016
 
Irving, TX
 
Homewood Suites
   
5.83
%
 
12/29/2010
 
(2
)  
$
6,052
   
$
0
   
$
5,072
 
Gainesville, FL
 
Homewood Suites
   
5.89
%
 
9/1/2016
  (2 )    
12,051
     
0
     
11,966
 
Duncanville, TX
 
Hilton Garden Inn
   
5.88
%
 
10/21/2008
 
(2
)    
13,966
     
0
     
12,126
 
Dallas, TX
 
Hilton
   
3.95
%
 
5/22/2015
 
(3
)    
28,000
     
0
     
27,246
 
San Juan Capistrano, CA
 
Residence Inn
   
4.15
%
 
9/1/2016
 
6/1/2020
       
16,210
     
15,858
     
16,104
 
Colorado Springs, CO
 
Hampton
   
6.25
%
 
9/1/2016
 
7/6/2021
       
7,923
     
7,787
     
7,883
 
Franklin, TN
 
Courtyard
   
6.25
%
 
9/1/2016
 
8/6/2021
       
14,679
     
14,429
     
14,604
 
Franklin, TN
 
Residence Inn
   
6.25
%
 
9/1/2016
 
8/6/2021
       
14,679
     
14,429
     
14,604
 
Grapevine, TX
 
Hilton Garden Inn
   
4.89
%
 
8/29/2012
 
9/1/2022
       
11,810
     
10,487
     
10,707
 
Collegeville/Philadelphia, PA
 
Courtyard
   
4.89
%
 
8/30/2012
 
9/1/2022
       
12,650
     
11,233
     
11,468
 
Hattiesburg, MS
 
Courtyard
   
5.00
%
 
3/1/2014
 
9/1/2022
       
5,732
     
5,249
     
5,357
 
Rancho Bernardo, CA
 
Courtyard
   
5.00
%
 
3/1/2014
 
9/1/2022
       
15,060
     
13,790
     
14,074
 
Kirkland, WA
 
Courtyard
   
5.00
%
 
3/1/2014
 
9/1/2022
       
12,145
     
11,121
     
11,350
 
Seattle, WA
 
Residence Inn
   
4.96
%
 
3/1/2014
 
9/1/2022
       
28,269
     
25,871
     
26,409
 
Anchorage, AK
 
Embassy Suites
   
4.97
%
 
9/13/2012
 
10/1/2022
       
23,230
     
20,706
     
21,133
 
Somerset, NJ
 
Courtyard
   
4.73
%
 
3/1/2014
 
10/6/2022
       
8,750
     
7,990
     
8,160
 
Tukwila, WA
 
Homewood Suites
   
4.73
%
 
3/1/2014
 
10/6/2022
       
9,431
     
8,611
     
8,795
 
Prattville, AL
 
Courtyard
   
4.12
%
 
3/1/2014
 
2/6/2023
       
6,596
     
5,989
     
6,123
 
Huntsville, AL
 
Homewood Suites
   
4.12
%
 
3/1/2014
 
2/6/2023
       
8,306
     
7,541
     
7,711
 
San Diego, CA
 
Residence Inn
   
3.97
%
 
3/1/2014
 
3/6/2023
       
18,600
     
16,865
     
17,248
 
Miami, FL
 
Homewood Suites
   
4.02
%
 
3/1/2014
 
4/1/2023
       
16,677
     
15,138
     
15,479
 
Syracuse, NY
 
Courtyard
   
4.75
%
 
10/16/2015
 
8/1/2024
(4
)
   
11,199
     
10,706
     
10,905
 
Syracuse, NY
 
Residence Inn
   
4.75
%
 
10/16/2015
 
8/1/2024
(4
)
   
11,199
     
10,706
     
10,905
 
New Orleans, LA
 
Homewood Suites
   
4.36
%
 
7/17/2014
 
8/11/2024
       
27,000
     
25,087
     
25,577
 
Westford, MA
 
Residence Inn
   
4.28
%
 
3/18/2015
 
4/11/2025
       
10,000
     
9,448
     
9,626
 
Denver, CO
 
Hilton Garden Inn
   
4.46
%
 
9/1/2016
 
6/11/2025
       
34,118
     
33,253
     
33,857
 
Oceanside, CA
 
Courtyard
   
4.28
%
 
9/1/2016
 
10/1/2025
       
13,655
     
13,394
     
13,576
 
Omaha, NE
 
Hilton Garden Inn
   
4.28
%
 
9/1/2016
 
10/1/2025
       
22,682
     
22,248
     
22,550
 
Boise, ID
 
Hampton
   
4.37
%
 
5/26/2016
 
6/11/2026
       
24,000
     
23,522
     
23,813
 
Burbank, CA
 
Courtyard
   
3.55
%
 
11/3/2016
 
12/1/2026
       
25,564
     
25,081
     
25,564
 
San Diego, CA
 
Courtyard
   
3.55
%
 
11/3/2016
 
12/1/2026
       
25,473
     
24,992
     
25,473
 
San Diego, CA
 
Hampton
   
3.55
%
 
11/3/2016
 
12/1/2026
       
18,963
     
18,605
     
18,963
 
                           
$
514,669
     
430,136
     
494,428
 
Unamortized fair value adjustment of assumed debt
                               
4,556
     
5,229
 
Unamortized debt issuance costs
                               
(1,909
)
   
(2,628
)
    Total
                                 
$
432,783
   
$
497,029
 

(1)
Interest rates are the rates per the loan agreement.  For loans assumed, the Company adjusted the interest rates per the loan agreement to market rates and is amortizing the adjustments to interest expense over the life of the loan.
(2)
Loans were repaid in full during the three months ended March 31, 2017.
(3)
Assets securing this loan were classified as held for sale as of December 31, 2016.  In April 2017, the assets securing this loan were sold, and the loan was assumed by the buyer of those assets.
(4)
Outstanding principal balance is callable by lender or prepayable by the Company on August 1, 2019.

13


The aggregate amounts of principal payable under the Company’s total debt obligations (including mortgage debt, the revolving credit facility and term loans), for the five years subsequent to September 30, 2017 and thereafter are as follows (in thousands):

2017 (October - December)
 
$
2,701
 
2018
   
11,071
 
2019
   
248,408
 
2020
   
451,164
 
2021
   
95,311
 
Thereafter
   
498,181
 
     
1,306,836
 
Unamortized fair value adjustment of assumed debt
   
4,556
 
Unamortized debt issuance costs related to term loans and mortgage debt
   
(5,921
)
Total
 
$
1,305,471
 

6.  Fair Value of Financial Instruments

Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.

Debt

The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy.  Market rates take into consideration general market conditions and maturity.  As of September 30, 2017 and December 31, 2016, both the carrying value and estimated fair value of the Company’s debt were approximately $1.3 billion.  Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issuance costs related to term loans and mortgage debt for each specific year.

Derivative Instruments

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable rate debt.  Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one month LIBOR.  The swaps are designed to effectively fix the interest payments on variable rate debt instruments.  These swap instruments are recorded at fair value and, if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets.  The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of September 30, 2017 and December 31, 2016.  All dollar amounts are in thousands.

   
 
       
Fair Value Asset (Liability)
 
Hedge Type
 
Notional Amount at
September 30, 2017
 
Origination Date
 
Maturity Date
 
Swap Fixed
Interest Rate
   
September 30,
2017
   
December 31,
2016
 
Cash flow hedge
 
$
212,500
 
5/21/2015
 
5/18/2020
   
1.58
%
 
$
538
   
$
(198
)
Cash flow hedge
   
110,000
 
7/2/2015
 
5/18/2020
   
1.62
%
   
166
     
(246
)
Cash flow hedge
   
50,000
 
4/7/2016
 
3/31/2021
   
1.09
%
   
1,168
     
1,289
 
Cash flow hedge
   
100,000
 
4/7/2016
 
3/31/2023
   
1.33
%
   
3,148
     
3,744
 
Cash flow hedge
   
75,000
 
5/31/2017
 
6/30/2024
   
1.96
%
   
202
     
0
 
Cash flow hedge
   
10,000
 
8/10/2017
 
6/30/2024
   
2.01
%
   
(4
)
   
0
 
   
$
557,500
                 
$
5,218
   
$
4,589
 

14


The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges.  Changes in fair value on the effective portion of all designated cash flow hedges are recorded to accumulated other comprehensive income, a component of shareholders’ equity in the Company’s consolidated balance sheets.  Changes in fair value on the ineffective portion of all designated cash flow hedges are recorded to interest and other expense, net in the Company’s consolidated statements of operations.  

To adjust qualifying cash flow hedges to their fair value and recognize the impact of hedge accounting, the Company recorded net unrealized gains (losses) of approximately $0.3 million and $4.3 million during the three months ended September 30, 2017 and 2016, respectively, and approximately $0.6 million and $(7.9) million during the nine months ended September 30, 2017 and 2016, respectively, to other comprehensive income (loss).  There was no ineffectiveness recorded on designated cash flow hedges during the three and nine months ended September 30, 2017 and 2016.  Amounts reported in accumulated other comprehensive income will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives.  Net unrealized gains (losses) on cash flow hedges previously recorded to other comprehensive income (loss) that were reclassified to interest and other expense, net during the three months ended September 30, 2017 and 2016, include approximately $(0.4) million and $(0.9) million, respectively, and during the nine months ended September 30, 2017 and 2016, include approximately $(1.8) million and $(2.9) million, respectively.  The Company estimates that approximately $(0.6) million of net unrealized gains (losses) included in accumulated other comprehensive income at September 30, 2017 will be reclassified as a net increase to interest and other expense, net within the next 12 months.

7.  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.  There have been no changes to the contracts and relationships discussed in the Company’s 2016 Annual Report on Form 10-K.  Below is a summary of the significant related party relationships in effect during the nine months ended September 30, 2017 and 2016.

Prior to the merger, Glade M. Knight, Executive Chairman of the Company, was Chairman and Chief Executive Officer of Apple Ten.  Apple Ten’s advisors, Apple Ten Advisors, Inc. (“A10A”) and Apple Realty Group, Inc. (“ARG”), are wholly owned by Mr. Knight.  Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P.  Justin G. Knight, the Company’s President and Chief Executive Officer, and a member of the Company’s Board of Directors, also served as President of Apple Ten prior to the merger.

Support Services to Apple Ten, A10A and ARG Prior to and After the Apple Ten Merger

Effective September 1, 2016, the Company completed its merger with Apple Ten.  As contemplated in the Merger Agreement, in connection with the completion of the merger, the advisory and related party arrangements with respect to the Company, Apple Ten and Apple Ten’s advisors, A10A and ARG, were terminated.  Prior to the merger, A10A subcontracted its obligations under the advisory agreement between A10A and Apple Ten to the Company.  The Company provided to Apple Ten the advisory services contemplated under the A10A advisory agreement and received an annual advisory fee and was reimbursed by Apple Ten for the use of the Company’s employees and corporate office and other costs associated with the advisory agreement.  Additionally, the Company provided support services to Apple Ten’s advisors, who agreed to reimburse the Company for its costs in providing these services.  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 reductions to general and administrative expense by the Company and, therefore, the termination of the subcontract agreement had no financial impact on the combined company after the effective time of the merger.  After the merger, the Company has continued and will continue to provide support services to ARG for activities unrelated to Apple Ten.

Prior to the merger, advisory fees earned by the Company from Apple Ten for the nine months ended September 30, 2016 totaled approximately $1.6 million and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statement of operations.  Total reimbursed costs received by the Company from these entities for the nine months ended September 30, 2017 and 2016 (including Apple Ten, A10A and ARG prior to September 1, 2016 and ARG thereafter) totaled approximately $0.5 million and $2.3 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations.  As of September 30, 2017 and December 31, 2016, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million and $0.2 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.

15


As part of the cost sharing arrangement, 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 this 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.

Apple Air Holding, LLC (“Apple Air”)

The Company, through a wholly-owned subsidiary, Apple Air, owns a Learjet used primarily for acquisition, asset management, renovation and public relations purposes.  Prior to the merger, Apple Air was jointly owned by the Company (74%) and Apple Ten (26%), with Apple Ten’s ownership interest accounted for as a minority interest.  Effective September 1, 2016, with the completion of the merger, the Company acquired Apple Ten’s 26% equity interest in Apple Air resulting in a 100% equity ownership interest in Apple Air and the elimination of Apple Ten’s minority interest.

The aircraft is also leased to affiliates of the Company based on third party rates, which was not significant during the reporting periods.  The Company also utilizes aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third party rates.  Total amounts incurred during the nine months ended September 30, 2017 and 2016 were approximately $0.1 million and $0.2 million, respectively, related to aircraft owned through these two entities and are included in general and administrative expenses in the Company’s consolidated statements of operations.

8.  Shareholders’ Equity

Distributions

The Company’s current annual distribution rate, payable monthly, is $1.20 per common share.  For the three months ended September 30, 2017 and 2016, the Company paid distributions of $0.30 per common share for a total of $66.9 million and $57.2 million, respectively.  For the nine months ended September 30, 2017 and 2016, the Company paid distributions of $0.90 per common share for a total of $200.7 million and $161.9 million, respectively.  Additionally, in September 2017, the Company declared a monthly distribution of $0.10 per common share, totaling $22.3 million, which was recorded as a payable as of September 30, 2017 and paid in October 2017.  As of December 31, 2016, a monthly distribution of $0.10 per common share, totaling $22.3 million, was recorded as a payable and paid in January 2017.  These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets.

Equity Distribution Agreement

On February 28, 2017, the Company entered into an equity distribution agreement with Robert W. Baird & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Canaccord Genuity Inc., FBR Capital Markets & Co., Jefferies LLC, KeyBanc Capital Markets Inc. and Scotia Capital (USA) Inc. (collectively, the “Sales Agents”), pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares through the Sales Agents (the “ATM Program”).  During the nine months ended September 30, 2017, the Company had no sales under the ATM Program.

Share Repurchase Program

In connection with the implementation of its ATM Program, in February 2017, the Company terminated its existing written trading plan under the Company’s share repurchase program.  During the first nine months of 2016, the Company purchased, under its share repurchase program, approximately 20,000 of its common shares at a weighted-average market purchase price of approximately $18.10 per common share for an aggregate purchase price of approximately $0.4 million.  The Company did not repurchase any common shares under its share repurchase program during the first nine months of 2017.  The Company plans to continue to consider opportunistic share repurchases under the $467.5 million remaining portion of the authorized $475 million share repurchase program, which will depend on prevailing market conditions and other factors.  The program may be suspended or terminated at any time by the Company and, as a result of an extension of the program approved by the Board of Directors in May 2017, will end in July 2018 if not terminated earlier.

16


9.  Compensation Plans

In February 2017, the Compensation Committee of the Board of Directors (“Compensation Committee”) approved an executive incentive plan (“2017 Incentive Plan”), effective January 1, 2017, and established incentive goals for 2017.  Under the 2017 Incentive Plan, participants are eligible to receive a bonus based on the achievement of certain 2017 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return over one-year and two-year periods).  The components of the operational performance metrics and shareholder return metrics are equally weighted and the two metrics each account for 50% of the total target incentive compensation.  The range of potential aggregate payouts under the 2017 Incentive Plan is $0 - $18 million.  Based on performance through September 30, 2017, the Company has accrued approximately $4.7 million as a liability for potential executive bonus payments under the 2017 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of September 30, 2017.  Compensation expense recognized by the Company under the 2017 Incentive Plan is included in general and administrative expense in the Company’s consolidated statements of operations and totaled approximately $1.2 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.  Approximately 25% of awards under the 2017 Incentive Plan, if any, will be paid in cash, and 75% will be issued in stock under the Company’s 2014 Omnibus Incentive Plan, two-thirds of which would vest at the end of 2017 and one-third of which would vest at the end of 2018.  During 2016 and 2015, comparable executive incentive plans were approved by the Compensation Committee (“2016 Incentive Plan” and “2015 Incentive Plan”) that were effective January 1, 2016 and January 1, 2015, respectively.  The Company recorded a (decrease) increase of approximately $(0.8) million and $2.8 million to general and administrative expense related to the 2016 Incentive Plan in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2016, respectively, with the decrease resulting from the reduction of the previously recorded executive bonus accrual due to lower anticipated 2016 performance.

Share Based Compensation Awards

During the first quarters of 2017 and 2016, the Company issued 101,305 and 304,345 common shares earned under the 2016 and 2015 Incentive Plans (net of 19,667 and 11,787 common shares surrendered to satisfy tax withholding obligations) at $19.10 and $19.87 per share, or approximately $2.3 million and $6.3 million in share based compensation, including the surrendered shares, respectively.  Of the total shares issued under the 2016 Incentive Plan, 60,028 shares were unrestricted at the time of issuance, and the remaining 41,277 restricted shares will vest on December 15, 2017.  Of the total shares issued under the 2015 Incentive Plan, 146,279 shares were unrestricted at the time of issuance, and the remaining 158,066 restricted shares vested on December 31, 2016, of which 50,044 common shares were surrendered to satisfy tax withholding obligations.  Of the total 2016 share based compensation, approximately $1.9 million was recorded as a liability as of December 31, 2016, which was included in accounts payable and other liabilities in the Company’s consolidated balance sheet and the remaining $0.4 million, which is subject to vesting on December 15, 2017, will be recognized as compensation expense proportionately throughout 2017.  Of the total 2015 share based compensation, approximately $1.6 million, which vested on December 31, 2016, was recognized as compensation expense proportionately throughout 2016.  For the three months ended September 30, 2017 and 2016, the Company recognized approximately $0.1 million and $0.4 million, respectively, and for the nine months ended September 30, 2017 and 2016, the Company recognized approximately $0.3 million and $1.2 million, respectively, of share based compensation expense related to the unvested restricted share awards.

10.  Legal Proceedings

Quinn v. Knight, et al.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), on July 19, 2016, a purported shareholder of Apple Ten, now part of the Company, commenced a derivative action in the United States District Court for the Eastern District of Virginia.  On November 2, 2016, the parties reached an agreement in principle to settle the litigation, which the Court approved by order dated March 16, 2017.  In January 2017, the Company funded the settlement amount of $32 million, which was included in accounts payable and other liabilities in its consolidated balance sheet as of December 31, 2016, and received $10 million of proceeds from its director and officer insurance carriers, which was included in other assets, net in its consolidated balance sheet as of December 31, 2016 and the net $22 million was included in transaction and litigation costs (reimbursements) in the Company’s consolidated statement of operations for the year then ended.  In May 2017, the Company received an additional $2.6 million of proceeds from its director and officer insurance carriers, which was included as a reduction in transaction and litigation costs (reimbursements) in the Company’s consolidated statements of operations for the nine months ended September 30, 2017.  The Company does not anticipate additional costs or reimbursements related to this litigation.

17


Moses, et al. v. Apple Hospitality REIT, Inc., et al.

As previously disclosed in the 2016 Form 10-K, on April 22, 2014, Plaintiff Susan Moses, purportedly a shareholder of Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”), filed a class action against the Company and several individual directors on behalf of all then-existing shareholders and former shareholders of Apple Seven and Apple Eight, who purchased additional shares under the Dividend Reinvestment Plans (“DRIP”) of Apple Seven, Apple Eight and the Company between July 17, 2007 and February 12, 2014.  In January 2017, the parties reached an agreement in principle to settle the litigation for $5.5 million.  The settlement was preliminarily approved by the court in September 2017 and a settlement hearing has been scheduled in January 2018.  The settlement amount has been included in accounts payable and other liabilities in the Company’s consolidated balance sheets as of December 31, 2016 and September 30, 2017, and in transaction and litigation costs (reimbursements) in the Company’s consolidated statement of operations for the year ended December 31, 2016.  At this time, no assurance can be given that the proposed settlement will be approved, and therefore the actual loss incurred could be in excess of the amount accrued as of September 30, 2017.

Wilchfort, et al. v. Apple Hospitality REIT, Inc., et al.

On February 24, 2017, Plaintiff Marsha Wilchfort, purportedly a shareholder of Apple REIT Six, Inc. (“Apple Six”), Apple Seven and Apple Eight, filed a class action against, among others, the Company and the former individual directors of Apple Six, Apple Seven and Apple Eight, including Mr. Glade Knight, on behalf of all then-existing shareholders and former shareholders of Apple Six, Apple Seven and Apple Eight, who purchased additional shares under Apple Six’s, Apple Seven’s and Apple Eight’s DRIP between July 17, 2007 and December 2012 (in the case of Apple Six shareholders) or June 30, 2013 (in the case of Apple Seven and Apple Eight shareholders).  The complaint was filed in the United States District Court for the Eastern District of New York and alleges, among other items, breach of contract under Virginia law, tortious interference and breach of implied duty of good faith and fair dealing.  The complaint alleges that the prices at which Plaintiff and the purported class members purchased additional shares through the DRIPs were not indicative of the true value of the units of Apple Six, Apple Seven and Apple Eight.

The Company believes that Plaintiff’s claims are without merit and intends to defend this case vigorously.  At this time, the Company cannot reasonably predict the outcome of this proceeding or provide a reasonable estimate of the possible loss or range of loss due to this proceeding, if any.

11.  Subsequent Events

In October 2017, the Company paid approximately $22.3 million, or $0.10 per outstanding common share, in distributions to its common shareholders.

In October 2017, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of November 2017.  The distribution is payable on November 15, 2017.

On October 5, 2017, the Company completed the sale of the Fairfax, Virginia Marriott for a sale price of approximately $41.5 million.  The Company used the net proceeds from the sale to pay down borrowings on its revolving credit facility.  See Note 4 for additional information.

On October 13, 2017, the Company closed on the purchase of an existing 179-room Residence Inn in Portland, Maine for a gross purchase price of approximately $55.8 million.

On October 20, 2017, the Company closed on the purchase of an existing 136-room Residence Inn in Salt Lake City, Utah for a gross purchase price of $25.5 million.

18

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly 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 terms 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. (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; adverse changes in the real estate and real estate capital markets; financing risks; the outcome of current and future litigation, including any legal proceedings that have been or may be instituted against the Company or others; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a real estate investment trust (“REIT”).  Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Quarterly 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  Any forward-looking statement that the Company makes speaks only as of the date of this Quarterly 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.

The following discussion and analysis should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 September 30, 2017, the Company owned 237 hotels with an aggregate of 30,188 rooms located in urban, high-end suburban and developing markets throughout 33 states, including one hotel with 316 rooms classified as held for sale, which was sold to an unrelated party in October 2017.  All of the Company’s hotels operate under Marriott or Hilton brands.  The hotels are operated and managed under separate management agreements with 22 hotel management companies, none of which are affiliated with the Company.  The Company’s common shares are listed on the New York Stock Exchange under the ticker symbol “APLE.”

2017 Investing Activities

The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value in the long term.  Consistent with this strategy and the Company’s focus on investing in select-service hotels, the Company acquired three newly constructed hotels for an aggregate purchase price of approximately $56.4 million during the first nine months of 2017: a 124-room Courtyard by Marriott hotel in Fort Worth, Texas and a 104-room Hilton Garden Inn and 106-room Home2 Suites dual-branded hotel in Birmingham, Alabama.  The purchase price for each of these properties was funded through borrowings on the Company’s $540 million revolving credit facility (the “revolving credit facility”).  In October 2017, the Company completed the purchase of two additional hotels (a 136-room Residence Inn hotel in Salt Lake City, Utah and a 179-room Residence Inn hotel in Portland, Maine) for an aggregate purchase price of approximately $81.3 million.  The Company also has outstanding contracts for the potential purchase of two additional hotels that are under construction for a total purchase price of approximately $64.8 million, which are planned to be completed and opened for business over the next 12 months from September 30, 2017, at which time closing on these hotels is expected to occur.

19


Additionally, 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 by the proceeds from the sale of the property.  As a result, on April 20, 2017, the Company completed the sale of its 224-room Hilton hotel in Dallas, Texas, which was classified as held for sale as of December 31, 2016, for approximately $56.1 millionAlso, on October 5, 2017, the Company completed the sale of its 316-room Marriott hotel in Fairfax, Virginia, which was classified as held for sale as of September 30. 2017, for a gross sales price of $41.5 million.  The Company used the net proceeds from the sales to pay down borrowings on its revolving credit facility.

See Note 3 titled “Investment in Real Estate” and Note 4 titled “Assets Held for Sale and Dispositions” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q 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 United States 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 quarters, the lodging industry and the Company have experienced low single-digit revenue growth.  Moderate improvements in the general U.S. economy have been partially offset by increased supply in many markets.  With modest revenue growth, the Company has produced stable operating results during the first nine months of 2017 on a comparable basis (as defined below) with expense increases generally offsetting revenue growth.  There is no way to predict future economic conditions, and there are certain additional factors that could negatively affect the lodging 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 and government fiscal policies.  The Company, on a comparable basis, and industry are forecasting a low single-digit percentage increase in revenue for the full year of 2017 as compared to 2016, with this trend expected to continue into 2018.  The Company’s revenue growth rate for comparable hotels in 2017 is anticipated to be lower than the growth achieved in 2016, primarily due to inconsistent demand in certain markets and increased hotel supply meeting demand growth in others, limiting the Company’s ability to increase rates.

In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, average daily rate (“ADR”) and revenue per available room (“RevPAR”), and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.

As of September 30, 2017, the Company owned 237 hotels with a total of 30,188 rooms as compared to 236 hotels with a total of 30,299 rooms as of September 30, 2016, however, results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year.  During the nine months ended September 30, 2017, the Company acquired three newly constructed hotels (one on February 2, 2017, and two on September 12, 2017) and sold one hotel on April 20, 2017.  During 2016, the Company acquired 56 hotels in the Apple REIT Ten, Inc. (“Apple Ten”) merger effective September 1, 2016 (the “Apple Ten merger”), 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 three and nine months ended September 30, 2017 and 2016 as discussed below is significantly impacted by these transactions.

20


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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in thousands, except statistical data)
 
2017
   
Percent of Revenue
   
2016
   
Percent of Revenue
   
Percent Change
   
2017
   
Percent of Revenue
   
2016
   
Percent of Revenue
   
Percent Change
 
                                                             
Total revenue
 
$
324,926
     
100.0
%
 
$
276,471
     
100.0
%
   
17.5
%
 
$
949,555
     
100.0
%
 
$
758,594
     
100.0
%
   
25.2
%
Hotel operating expense
   
179,829
     
55.3
%
   
153,337
     
55.5
%
   
17.3
%
   
528,295
     
55.6
%
   
417,965
     
55.1
%
   
26.4
%
Property taxes, insurance and other expense
   
17,598
     
5.4
%
   
14,787
     
5.3
%
   
19.0
%
   
52,346
     
5.5
%
   
40,315
     
5.3
%
   
29.8
%
Ground lease expense
   
2,831
     
0.9
%
   
2,615
     
0.9
%
   
8.3
%
   
8,486
     
0.9
%
   
7,587
     
1.0
%
   
11.8
%
General and administrative expense
   
5,350
     
1.6
%
   
2,623
     
0.9
%
   
104.0
%
   
18,255
     
1.9
%
   
12,511
     
1.6
%
   
45.9
%
                                                                                 
Transaction and litigation costs (reimbursements)
   
-
             
36,452
             
n/a
     
(2,586
)
           
37,861
             
n/a
 
Loss on impairment of depreciable real estate assets
   
-
             
5,471
             
n/a
     
7,875
             
5,471
             
43.9
%
Depreciation expense
   
44,110
             
37,343
             
18.1
%
   
131,770
             
104,651
             
25.9
%
Interest and other expense, net
   
12,024
             
10,156
             
18.4
%
   
35,590
             
28,519
             
24.8
%
Gain (loss) on sale of real estate
   
(157
)
           
-
             
n/a
     
15,983
             
-
             
n/a
 
Income tax expense (benefit)
   
203
             
(7
)
           
n/a
     
712
             
616
             
15.6
%
                                                                                 
Number of hotels owned at end of period
   
237
             
236
             
0.4
%
   
237
             
236
             
0.4
%
ADR
 
$
136.73
           
$
136.04
             
0.5
%
 
$
135.97
           
$
135.88
             
0.1
%
Occupancy
   
80.0
%
           
80.2
%
           
-0.2
%
   
78.7
%
           
78.9
%
           
-0.3
%
RevPAR
 
$
109.45
           
$
109.07
             
0.3
%
 
$
106.96
           
$
107.18
             
-0.2
%

Comparable Operating Results

The following table reflects certain operating statistics for the Company’s 236 hotels owned and held for use as of September 30, 2017 (“Comparable Hotels”).  The Company defines metrics from Comparable Hotels as results generated by the 236 hotels owned and held for use as of the end of the reporting period.  These metrics do not include the results generated by the Fairfax, Virginia Marriott hotel which was held for sale as of September 30, 2017 and sold on October 5, 2017.  For the hotels acquired during the current reporting period and prior year, 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.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2017
   
2016
   
Percent Change
   
2017
   
2016
   
Percent Change
 
                                     
ADR
 
$
136.83
   
$
134.79
     
1.5
%
 
$
135.84
   
$
134.88
     
0.7
%
Occupancy
   
80.2
%
   
80.4
%
   
-0.2
%
   
78.8
%
   
78.7
%
   
0.1
%
RevPAR
 
$
109.77
   
$
108.32
     
1.3
%
 
$
107.10
   
$
106.20
     
0.8
%

21


Same Store Operating Results

The following table reflects certain operating statistics for the Company’s 177 hotels owned and held for use by the Company as of January 1, 2016 and during the entirety of the periods being compared.  This information has not been audited.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2017
   
2016
   
Percent Change
   
2017
   
2016
   
Percent Change
 
                                     
ADR
 
$
138.86
   
$
136.60
     
1.7
%
 
$
137.09
   
$
136.09
     
0.7
%
Occupancy
   
80.2
%
   
80.5
%
   
-0.4
%
   
79.0
%
   
79.0
%
   
0.0
%
RevPAR
 
$
111.42
   
$
110.02
     
1.3
%
 
$
108.23
   
$
107.49
     
0.7
%

Revenues

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue.  For the three months ended September 30, 2017 and 2016, the Company had total revenue of $324.9 million and $276.5 million, respectively.  For the nine months ended September 30, 2017 and 2016, the Company had total revenue of $949.6 million and $758.6 million, respectively.  For the three months ended September 30, 2017 and 2016, respectively, Comparable Hotels achieved combined average occupancy of 80.2% and 80.4%, ADR of $136.83 and $134.79 and RevPAR of $109.77 and $108.32.  For the nine months ended September 30, 2017 and 2016, respectively, Comparable Hotels achieved combined average occupancy of 78.8% and 78.7%, ADR of $135.84 and $134.88 and RevPAR of $107.10 and $106.20.  ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.

Compared to the same periods in 2016, during the three and nine months ended September 30, 2017, the Company experienced increases in ADR, resulting in increases of 1.3% and 0.8% in RevPAR for Comparable Hotels, respectively.  The Company’s growth during the first nine months of 2017 was impacted by a decline in the Los Angeles market due to outsized growth in 2016 from the Porter Ranch gas leak.  The Company anticipates that with its geographically diverse portfolio of upscale and upper midscale select-service hotels, on a comparable basis, overall RevPAR growth for the remainder of the year will approximate industry averages.  Although certain markets will vary based on local supply/demand dynamics and local market economic conditions, with continued overall room rate improvement combined with expected stable overall demand growth compared to supply growth, the Company, on a comparable basis, and industry are forecasting a low single-digit percentage increase in revenue for the full year of 2017 as compared to 2016, with this trend expected to continue into 2018.  Markets with above average growth in the third quarter and first nine months of 2017 for the Company and industry included Richmond, Knoxville, Kansas City, St. Louis and San Diego.  Markets that were below average for the Company and industry included Dallas, Austin and Philadelphia.  Additionally, in the third quarter 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.

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 three months ended September 30, 2017 and 2016, respectively, hotel operating expense totaled $179.8 million and $153.3 million or 55.3% and 55.5% of total revenue for each respective period.  For the nine months ended September 30, 2017 and 2016, respectively, hotel operating expense totaled $528.3 million and $418.0 million or 55.6% and 55.1% of total revenue for each respective period.  Overall hotel operational expenses for the first nine months of 2017 include the results of the 57 hotels acquired during 2016, including one hotel acquired on July 1, 2016 and 56 hotels acquired with the Apple Ten merger effective September 1, 2016, for the full period and three hotels acquired in 2017 from their respective dates of acquisition.  Expenses for 2017 also include the results of one hotel sold on April 20, 2017 until the date of sale.  Expenses for the first nine months of 2016 include the results of one hotel sold on December 6, 2016 and the hotel sold on April 20, 2017 for the full period, and the results of one hotel acquired on July 1, 2016 from the date of acquisition and the 56 hotels acquired in the Apple Ten merger for the month of September 2016.  For the Company’s Comparable Hotels, hotel operating expense as a percentage of revenue increased approximately 20 and 90 basis points, respectively, for the three and nine months ended September 30, 2017 as compared to the same periods in 2016.  During the first nine months of 2017, the Company experienced increases in labor costs as a percentage of revenue, which was the primary cause of the increase in hotel operating expense.  Although labor costs were the primary cause of the increase in hotel operating expenses in the third quarter of 2017, these increases did moderate as compared to the same period in 2016.  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.  Although operating expenses will increase as revenue increases, 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.

22


Property Taxes, Insurance and Other Expense

Property taxes, insurance, and other expense for the three months ended September 30, 2017 and 2016 totaled $17.6 million and $14.8 million, respectively, or 5.4% and 5.3% of total revenue, respectively, and for Comparable Hotels, 5.4% and 5.5% of total revenue for each respective period.  For the nine months ended September 30, 2017 and 2016, property taxes, insurance and other expense totaled $52.3 million and $40.3 million, respectively, or 5.5% and 5.3% of total revenue, respectively, and for Comparable Hotels, 5.5% of total revenue for each period.  For the Company’s Comparable Hotels, real estate taxes increased slightly during the first nine months of 2017 compared to the first nine months of 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.  With the economy continuing to improve, the Company anticipates continued increases in property tax assessments during the remainder of 2017.  The Company will continue to appeal tax assessments in certain jurisdictions to attempt to minimize tax increases as warranted.

Ground Lease Expense

Ground lease expense for the three months ended September 30, 2017 and 2016 was $2.8 million and $2.6 million, respectively.  For the nine months ended September 30, 2017 and 2016, ground lease expense was $8.5 million and $7.6 million, respectively.  Ground lease expense primarily represents the expense incurred by the Company to lease land for 14 of its hotel properties, including four acquired in the Apple Ten merger effective September 1, 2016.
 
General and Administrative Expense
 
General and administrative expense for the three months ended September 30, 2017 and 2016 was $5.4 million and $2.6 million, respectively, or 1.6% and 0.9% of total revenue, respectively.  For the nine months ended September 30, 2017 and 2016, general and administrative expense was $18.3 million and $12.5 million, respectively, or 1.9% and 1.6% of total revenue, respectively.  The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses.  In addition, during the first eight months of 2016, the Company provided to Apple Ten the advisory services contemplated under their 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 expenses from the prior period.  Although expense for the Company in total dollars increased from the prior period, 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 for both the third quarter and first nine months of 2017 as compared to the prior year due to an increased accrual as of September 30, 2017 for the Company’s executive incentive plan related to better projected performance under the plan.  In comparison, the accrual for potential executive bonus payments was reduced during the third quarter of 2016 by approximately $0.8 million, due to lower than previously anticipated 2016 performance, resulting in a decrease in executive compensation expense for the period.  The increases in the third quarter and the first nine months of 2017 over the same periods of 2016 were $1.7 million and $1.0 million, respectively. 
 
Transaction and Litigation Costs (Reimbursements)

During the nine months ended September 30, 2017, transaction and litigation costs (reimbursements) totaled approximately $(2.6) million which primarily related to the additional proceeds received in May 2017 from the Company’s directors and officers insurance carriers in connection with the Apple Ten merger litigation, as discussed herein.  Combined with the $10.0 million received in January 2017 and recorded to transaction and litigation costs (reimbursements) in the fourth quarter of 2016, total proceeds from the Company’s director and officer coverage related to the Apple Ten merger litigation were $12.6 million.  During the three and nine months ended September 30, 2016, transaction and litigation costs (reimbursements) were approximately $36.5 million and $37.9 million, respectively.  Transaction and litigation costs (reimbursements) for the nine months ended September 30, 2016 consisted primarily of costs related to the Apple Ten merger totaling approximately $37.6 million (including $32 million funded by the Company in January 2017 to settle the Apple Ten merger litigation and approximately $1.8 million in legal costs incurred to defend the litigation) and other acquisition related costs totaling approximately $0.3 million.  On January 1, 2017, the Company adopted the newly issued accounting standard on business combinations that modifies the definition of a business.  Under the new 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 $0.2 million in transaction costs related to the acquisition of three hotels during the nine months ended September 30, 2017.
23


Loss on Impairment of Depreciable Real Estate Assets

Loss on impairment of depreciable real estate assets was approximately $7.9 million for the nine months ended September 30, 2017, and related to the Columbus, Georgia SpringHill Suites and TownePlace Suites hotels that the Company identified for potential sale during the first quarter of 2017.  For each of the three and nine months ended September 30, 2016, loss on impairment of depreciable real estate assets was approximately $5.5 million, and related to the Chesapeake, Virginia Marriott hotel that the Company identified for potential sale during the period.  See Note 3 titled “Investment in Real Estate” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional information concerning these impairment losses.

Depreciation Expense

Depreciation expense for the three months ended September 30, 2017 and 2016 was $44.1 million and $37.3 million, respectively.  For the nine months ended September 30, 2017 and 2016, depreciation expense was $131.8 million and $104.7 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 Apple Ten merger effective September 1, 2016, the acquisition of three hotels in 2017 and one hotel in July 2016 and renovations completed throughout 2017 and 2016.

Interest and Other Expense, net

Interest and other expense, net for the three months ended September 30, 2017 and 2016 was $12.0 million and $10.2 million, respectively, and is net of approximately $0.1 million and $0.2 million, respectively, of interest capitalized associated with renovation projects.  For the nine months ended September 30, 2017 and 2016, interest and other expense, net was $35.6 million and $28.5 million, respectively, and is net of approximately $0.7 million and $1.2 million of interest capitalized associated with renovation projects, respectively.  The increase in interest expense was primarily due to an increase in the Company’s average outstanding borrowings during the first nine months of 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 Apple Ten merger and (iii) the acquisition of four hotels (one in July 2016, one in February 2017 and two in September 2017); which increases were partially offset by the sale of two hotels (one in December 2016 and one in April 2017).  The impact of higher debt balances and the increasing cost of variable rate debt was partially offset by a reduction in the average interest rate incurred on the Company’s total outstanding debt, resulting from the repayment of maturing fixed-rate mortgage debt with lower rate borrowings primarily from its $150 million term loan facility and new mortgage debt originations.

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”), and Adjusted EBITDA (“Adjusted EBITDA”).  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 and Adjusted EBITDA 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 and Adjusted EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA and Adjusted EBITDA 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 generally accepted accounting principles (“GAAP”)), excluding gains or losses from sales of real estate, extraordinary items as defined by GAAP, the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated partnerships and joint ventures.  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.

24


The Company further adjusts FFO for certain additional items that are not in NAREIT’s definition of FFO, 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 Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.

The following table reconciles the Company’s GAAP net income to FFO and MFFO for the three and nine months ended September 30, 2017 and 2016 (in thousands).

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
62,824
   
$
13,694
   
$
184,795
   
$
103,098
 
Depreciation of real estate owned
   
43,880
     
37,114
     
131,081
     
103,962
 
(Gain) loss on sale of real estate
   
157
     
-
     
(15,983
)
   
-
 
Loss on impairment of depreciable real estate assets
   
-
     
5,471
     
7,875
     
5,471
 
Amortization of favorable and unfavorable leases, net
   
165
     
132
     
498
     
513
 
Funds from operations
   
107,026
     
56,411
     
308,266
     
213,044
 
Transaction and litigation costs (reimbursements)
   
-
     
36,452
     
(2,586
)
   
37,861
 
Non-cash straight-line ground lease expense
   
917
     
843
     
2,794
     
2,479
 
Modified funds from operations
 
$
107,943
   
$
93,706
   
$
308,474
   
$
253,384
 

EBITDA and Adjusted EBITDA

EBITDA is a commonly used measure of performance in many industries and is defined as net income excluding interest, income taxes and 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.

The Company considers the exclusion of certain additional items from EBITDA useful, including: (i) the exclusion of transaction and litigation costs (reimbursements), gains or losses from sales of real estate and the loss on impairment of depreciable real estate assets as these items 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 and Adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016 (in thousands).

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net income
 
$
62,824
   
$
13,694
   
$
184,795
   
$
103,098
 
Depreciation
   
44,110
     
37,343
     
131,770
     
104,651
 
Amortization of favorable and unfavorable leases, net
   
165
     
132
     
498
     
513
 
Interest and other expense, net
   
12,024
     
10,156
     
35,590
     
28,519
 
Income tax expense (benefit)
   
203
     
(7
)
   
712
     
616
 
EBITDA
   
119,326
     
61,318
     
353,365
     
237,397
 
Transaction and litigation costs (reimbursements)
   
-
     
36,452
     
(2,586
)
   
37,861
 
(Gain) loss on sale of real estate
   
157
     
-
     
(15,983
)
   
-
 
Loss on impairment of depreciable real estate assets
   
-
     
5,471
     
7,875
     
5,471
 
Non-cash straight-line ground lease expense
   
917
     
843
     
2,794
     
2,479
 
Adjusted EBITDA
 
$
120,400
   
$
104,084
   
$
345,465
   
$
283,208
 

25


Hotels Owned
 
As of September 30, 2017, the Company owned 237 hotels with an aggregate of 30,188 rooms located in 33 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
   
36
     
4,422
 
Homewood Suites
   
34
     
3,831
 
Residence Inn
   
32
     
3,696
 
SpringHill Suites
   
17
     
2,248
 
TownePlace Suites
   
12
     
1,196
 
Fairfield Inn
   
11
     
1,300
 
Home2 Suites
   
7
     
775
 
Marriott
   
3
     
932
 
Embassy Suites
   
2
     
316
 
Renaissance
   
1
     
205
 
    Total
   
237
     
30,188
 

Number of Hotels and Guest Rooms by State
 
   
Number of
   
Number of
 
State
 
Hotels
   
Rooms
 
Alabama
   
15
     
1,434
 
Alaska
   
1
     
169
 
Arizona
   
11
     
1,434
 
Arkansas
   
4
     
408
 
California
   
27
     
3,807
 
Colorado
   
4
     
567
 
Florida
   
23
     
2,851
 
Georgia
   
6
     
596
 
Idaho
   
2
     
416
 
Illinois
   
8
     
1,420
 
Indiana
   
4
     
479
 
Iowa
   
3
     
301
 
Kansas
   
4
     
422
 
Louisiana
   
4
     
541
 
Maryland
   
2
     
233
 
Massachusetts
   
4
     
466
 
Michigan
   
1
     
148
 
Minnesota
   
2
     
244
 
Mississippi
   
2
     
168
 
Missouri
   
4
     
544
 
Nebraska
   
4
     
621
 
New Jersey
   
5
     
629
 
New York
   
4
     
550
 
North Carolina
   
12
     
1,337
 
Ohio
   
2
     
252
 
Oklahoma
   
4
     
545
 
Pennsylvania
   
3
     
391
 
South Carolina
   
5
     
538
 
Tennessee
   
12
     
1,356
 
Texas
   
34
     
4,072
 
Utah
   
2
     
257
 
Virginia
   
15
     
2,383
 
Washington
   
4
     
609
 
    Total
   
237
     
30,188
 

26


The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 237 hotels the Company owned as of September 30, 2017.

City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
 
Anchorage
 
AK
 
Embassy Suites
 
Stonebridge
 
4/30/2010
   
169
 
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
 
Homewood Suites
 
McKibbon
 
3/1/2014
   
95
 
Birmingham
 
AL
 
Home2 Suites
 
LBA
 
9/12/2017
   
106
 
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
 
Mobile
 
AL
 
Hampton
 
McKibbon
 
9/1/2016
   
101
 
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
 
Rogers
 
AR
 
Hampton
 
Raymond
 
8/31/2010
   
122
 
Rogers
 
AR
 
Homewood Suites
 
Raymond
 
4/30/2010
   
126
 
Rogers
 
AR
 
Residence Inn
 
Raymond
 
3/1/2014
   
88
 
Springdale
 
AR
 
Residence Inn
 
Aimbridge
 
3/1/2014
   
72
 
Chandler
 
AZ
 
Courtyard
 
North Central
 
11/2/2010
   
150
 
Chandler
 
AZ
 
Fairfield Inn & Suites
 
North Central
 
11/2/2010
   
110
 
Phoenix
 
AZ
 
Courtyard
 
North Central
 
11/2/2010
   
164
 
Phoenix
 
AZ
 
Courtyard
 
North Central
 
9/1/2016
   
127
 
Phoenix
 
AZ
 
Hampton
 
North Central
 
9/1/2016
   
125
 
Phoenix
 
AZ
 
Homewood Suites
 
North Central
 
9/1/2016
   
134
 
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
 
Burbank
 
CA
 
Residence Inn
 
Marriott
 
3/1/2014
   
166
 
Burbank
 
CA
 
SpringHill Suites
 
Marriott
 
7/13/2015
   
170
 
Clovis
 
CA
 
Hampton
 
Dimension
 
7/31/2009
   
86
 
Clovis
 
CA
 
Homewood Suites
 
Dimension
 
2/2/2010
   
83
 
Cypress
 
CA
 
Courtyard
 
Dimension
 
3/1/2014
   
180
 
Cypress
 
CA
 
Hampton
 
Dimension
 
6/29/2015
   
110
 
Oceanside
 
CA
 
Courtyard
 
Marriott
 
9/1/2016
   
142
 
Oceanside
 
CA
 
Residence Inn
 
Marriott
 
3/1/2014
   
125
 
Rancho Bernardo/San Diego
 
CA
 
Courtyard
 
InnVentures
 
3/1/2014
   
210
 
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
 
San Diego
 
CA
 
Hampton
 
Dimension
 
3/1/2014
   
177
 

27

 
City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
 
San Diego
 
CA
 
Hilton Garden Inn
 
InnVentures
 
3/1/2014
   
200
 
San Diego
 
CA
 
Residence Inn
 
Dimension
 
3/1/2014
   
121
 
San Jose
 
CA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
140
 
San Juan Capistrano
 
CA
 
Residence Inn
 
Marriott
 
9/1/2016
   
130
 
Santa Ana
 
CA
 
Courtyard
 
Dimension
 
5/23/2011
   
155
 
Santa Clarita
 
CA
 
Courtyard
 
Dimension
 
9/24/2008
   
140
 
Santa Clarita
 
CA
 
Fairfield Inn
 
Dimension
 
10/29/2008
   
66
 
Santa Clarita
 
CA
 
Hampton
 
Dimension
 
10/29/2008
   
128
 
Santa Clarita
 
CA
 
Residence Inn
 
Dimension
 
10/29/2008
   
90
 
Tulare
 
CA
 
Hampton
 
InnVentures
 
3/1/2014
   
86
 
Tustin
 
CA
 
Fairfield Inn & Suites
 
Marriott
 
9/1/2016
   
145
 
Tustin
 
CA
 
Residence Inn
 
Marriott
 
9/1/2016
   
149
 
Colorado Springs
 
CO
 
Hampton
 
Chartwell
 
9/1/2016
   
101
 
Denver
 
CO
 
Hilton Garden Inn
 
Stonebridge
 
9/1/2016
   
221
 
Highlands Ranch
 
CO
 
Hilton Garden Inn
 
Dimension
 
3/1/2014
   
128
 
Highlands Ranch
 
CO
 
Residence Inn
 
Dimension
 
3/1/2014
   
117
 
Boca Raton
 
FL
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
149
 
Cape Canaveral
 
FL
 
Homewood Suites
 
LBA
 
9/1/2016
   
153
 
Fort Lauderdale
 
FL
 
Hampton
 
Vista Host
 
12/31/2008
   
109
 
Fort Lauderdale
 
FL
 
Hampton
 
LBA
 
6/23/2015
   
156
 
Fort Lauderdale
 
FL
 
Residence Inn
 
LBA
 
9/1/2016
   
156
 
Gainesville
 
FL
 
Hilton Garden Inn
 
McKibbon
 
9/1/2016
   
104
 
Gainesville
 
FL
 
Homewood Suites
 
McKibbon
 
9/1/2016
   
103
 
Jacksonville
 
FL
 
Homewood Suites
 
McKibbon
 
3/1/2014
   
119
 
Lakeland
 
FL
 
Courtyard
 
LBA
 
3/1/2014
   
78
 
Miami
 
FL
 
Courtyard
 
Dimension
 
3/1/2014
   
118
 
Miami
 
FL
 
Hampton
 
White Lodging
 
4/9/2010
   
121
 
Miami
 
FL
 
Homewood Suites
 
Dimension
 
3/1/2014
   
162
 
Orlando
 
FL
 
Fairfield Inn & Suites
 
Marriott
 
7/1/2009
   
200
 
Orlando
 
FL
 
SpringHill Suites
 
Marriott
 
7/1/2009
   
200
 
Panama City
 
FL
 
Hampton
 
LBA
 
3/12/2009
   
95
 
Panama City
 
FL
 
TownePlace Suites
 
LBA
 
1/19/2010
   
103
 
Pensacola
 
FL
 
TownePlace Suites
 
McKibbon
 
9/1/2016
   
97
 
Sanford
 
FL
 
SpringHill Suites
 
LBA
 
3/1/2014
   
105
 
Sarasota
 
FL
 
Homewood Suites
 
Hilton
 
3/1/2014
   
100
 
Tallahassee
 
FL
 
Fairfield Inn & Suites
 
LBA
 
9/1/2016
   
97
 
Tallahassee
 
FL
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
85
 
Tampa
 
FL
 
Embassy Suites
 
White Lodging
 
11/2/2010
   
147
 
Tampa
 
FL
 
TownePlace Suites
 
McKibbon
 
3/1/2014
   
94
 
Albany
 
GA
 
Fairfield Inn & Suites
 
LBA
 
1/14/2010
   
87
 
Atlanta
 
GA
 
Home2 Suites
 
McKibbon
 
7/1/2016
   
128
 
Columbus
 
GA
 
SpringHill Suites
 
LBA
 
3/1/2014
   
89
 
Columbus
 
GA
 
TownePlace Suites
 
LBA
 
3/1/2014
   
86
 
Macon
 
GA
 
Hilton Garden Inn
 
LBA
 
3/1/2014
   
101
 
Savannah
 
GA
 
Hilton Garden Inn
 
Newport
 
3/1/2014
   
105
 
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
 

28

 
City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
 
Boise
 
ID
 
Hampton
 
Raymond
 
4/30/2010
   
186
 
Boise
 
ID
 
SpringHill Suites
 
InnVentures
 
3/1/2014
   
230
 
Des Plaines
 
IL
 
Hilton Garden Inn
 
Raymond
 
9/1/2016
   
252
 
Hoffman Estates
 
IL
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
184
 
Mettawa
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
170
 
Mettawa
 
IL
 
Residence Inn
 
White Lodging
 
11/2/2010
   
130
 
Rosemont
 
IL
 
Hampton
 
Raymond
 
9/1/2016
   
158
 
Schaumburg
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
166
 
Skokie
 
IL
 
Hampton
 
Raymond
 
9/1/2016
   
225
 
Warrenville
 
IL
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
135
 
Indianapolis
 
IN
 
SpringHill Suites
 
White Lodging
 
11/2/2010
   
130
 
Merrillville
 
IN
 
Hilton Garden Inn
 
White Lodging
 
9/1/2016
   
124
 
Mishawaka
 
IN
 
Residence Inn
 
White Lodging
 
11/2/2010
   
106
 
South Bend
 
IN
 
Fairfield Inn & Suites
 
White Lodging
 
9/1/2016
   
119
 
Overland Park
 
KS
 
Fairfield Inn & Suites
 
True North
 
3/1/2014
   
110
 
Overland Park
 
KS
 
Residence Inn
 
True North
 
3/1/2014
   
120
 
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
 
Lafayette
 
LA
 
SpringHill Suites
 
LBA
 
6/23/2011
   
103
 
New Orleans
 
LA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
166
 
Andover
 
MA
 
SpringHill Suites
 
Marriott
 
11/5/2010
   
136
 
Marlborough
 
MA
 
Residence Inn
 
True North
 
3/1/2014
   
112
 
Westford
 
MA
 
Hampton
 
True North
 
3/1/2014
   
110
 
Westford
 
MA
 
Residence Inn
 
True North
 
3/1/2014
   
108
 
Annapolis
 
MD
 
Hilton Garden Inn
 
White Lodging
 
3/1/2014
   
126
 
Silver Spring
 
MD
 
Hilton Garden Inn
 
White Lodging
 
7/30/2010
   
107
 
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
 
Hattiesburg
 
MS
 
Residence Inn
 
LBA
 
12/11/2008
   
84
 
Carolina Beach
 
NC
 
Courtyard
 
Crestline
 
3/1/2014
   
144
 
Charlotte
 
NC
 
Fairfield Inn & Suites
 
Newport
 
9/1/2016
   
94
 
Charlotte
 
NC
 
Homewood Suites
 
McKibbon
 
9/24/2008
   
118
 
Durham
 
NC
 
Homewood Suites
 
McKibbon
 
12/4/2008
   
122
 
Fayetteville
 
NC
 
Home2 Suites
 
LBA
 
2/3/2011
   
118
 
Fayetteville
 
NC
 
Residence Inn
 
Aimbridge
 
3/1/2014
   
92
 
Greensboro
 
NC
 
SpringHill Suites
 
Newport
 
3/1/2014
   
82
 
Holly Springs
 
NC
 
Hampton
 
LBA
 
11/30/2010
   
124
 
Jacksonville
 
NC
 
Home2 Suites
 
LBA
 
9/1/2016
   
105
 
Wilmington
 
NC
 
Fairfield Inn & Suites
 
Crestline
 
3/1/2014
   
122
 
Winston-Salem
 
NC
 
Courtyard
 
McKibbon
 
3/1/2014
   
122
 

29

 
City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
 
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
 
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
 
West Orange
 
NJ
 
Courtyard
 
Newport
 
1/11/2011
   
131
 
Islip/Ronkonkoma
 
NY
 
Hilton Garden Inn
 
White Lodging
 
3/1/2014
   
165
 
New York
 
NY
 
Renaissance
 
Highgate
 
3/1/2014
   
205
 
Syracuse
 
NY
 
Courtyard
 
New Castle
 
10/16/2015
   
102
 
Syracuse
 
NY
 
Residence Inn
 
New Castle
 
10/16/2015
   
78
 
Mason
 
OH
 
Hilton Garden Inn
 
Schulte
 
9/1/2016
   
110
 
Twinsburg
 
OH
 
Hilton Garden Inn
 
Gateway
 
10/7/2008
   
142
 
Oklahoma City
 
OK
 
Hampton
 
Raymond
 
5/28/2010
   
200
 
Oklahoma City
 
OK
 
Hilton Garden Inn
 
Raymond
 
9/1/2016
   
155
 
Oklahoma City
 
OK
 
Homewood Suites
 
Raymond
 
9/1/2016
   
100
 
Oklahoma City (West)
 
OK
 
Homewood Suites
 
Chartwell
 
9/1/2016
   
90
 
Collegeville/Philadelphia
 
PA
 
Courtyard
 
White Lodging
 
11/15/2010
   
132
 
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
 
Franklin
 
TN
 
Residence Inn
 
Chartwell
 
9/1/2016
   
124
 
Jackson
 
TN
 
Hampton
 
Vista Host
 
12/30/2008
   
83
 
Johnson City
 
TN
 
Courtyard
 
LBA
 
9/25/2009
   
90
 
Knoxville
 
TN
 
Homewood Suites
 
McKibbon
 
9/1/2016
   
103
 
Knoxville
 
TN
 
SpringHill Suites
 
McKibbon
 
9/1/2016
   
103
 
Knoxville
 
TN
 
TownePlace Suites
 
McKibbon
 
9/1/2016
   
97
 
Memphis
 
TN
 
Homewood Suites
 
Hilton
 
3/1/2014
   
140
 
Nashville
 
TN
 
Hilton Garden Inn
 
Vista Host
 
9/30/2010
   
194
 
Nashville
 
TN
 
Home2 Suites
 
Vista Host
 
5/31/2012
   
119
 
Nashville
 
TN
 
TownePlace Suites
 
LBA
 
9/1/2016
   
101
 
Addison
 
TX
 
SpringHill Suites
 
Marriott
 
3/1/2014
   
159
 
Allen
 
TX
 
Hampton
 
Gateway
 
9/26/2008
   
103
 
Allen
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/31/2008
   
150
 
Arlington
 
TX
 
Hampton
 
Western
 
12/1/2010
   
98
 
Austin
 
TX
 
Courtyard
 
White Lodging
 
11/2/2010
   
145
 
Austin
 
TX
 
Fairfield Inn & Suites
 
White Lodging
 
11/2/2010
   
150
 
Austin
 
TX
 
Hampton
 
Vista Host
 
4/14/2009
   
124
 
Austin
 
TX
 
Hilton Garden Inn
 
White Lodging
 
11/2/2010
   
117
 

30

 
City
 
State
 
Brand
 
Manager
 
Date Acquired or Completed
 
Rooms
 
Austin
 
TX
 
Homewood Suites
 
Vista Host
 
4/14/2009
   
97
 
Austin/Round Rock
 
TX
 
Homewood Suites
 
Vista Host
 
9/1/2016
   
115
 
Beaumont
 
TX
 
Residence Inn
 
Western
 
10/29/2008
   
133
 
Burleson/Fort Worth
 
TX
 
Hampton
 
LBA
 
10/7/2014
   
88
 
Dallas
 
TX
 
Homewood Suites
 
Western
 
9/1/2016
   
130
 
Denton
 
TX
 
Homewood Suites
 
Chartwell
 
9/1/2016
   
107
 
Duncanville
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/21/2008
   
142
 
El Paso
 
TX
 
Hilton Garden Inn
 
Western
 
12/19/2011
   
145
 
El Paso
 
TX
 
Homewood Suites
 
Western
 
3/1/2014
   
114
 
Fort Worth
 
TX
 
Courtyard
 
LBA
 
2/2/2017
   
124
 
Fort Worth
 
TX
 
TownePlace Suites
 
Western
 
7/19/2010
   
140
 
Frisco
 
TX
 
Hilton Garden Inn
 
Western
 
12/31/2008
   
102
 
Grapevine
 
TX
 
Hilton Garden Inn
 
Western
 
9/24/2010
   
110
 
Houston
 
TX
 
Courtyard
 
LBA
 
9/1/2016
   
124
 
Houston
 
TX
 
Marriott
 
Western
 
1/8/2010
   
206
 
Houston
 
TX
 
Residence Inn
 
Western
 
3/1/2014
   
129
 
Houston
 
TX
 
Residence Inn
 
Western
 
9/1/2016
   
120
 
Irving
 
TX
 
Homewood Suites
 
Western
 
12/29/2010
   
77
 
Lewisville
 
TX
 
Hilton Garden Inn
 
Gateway
 
10/16/2008
   
165
 
Round Rock
 
TX
 
Hampton
 
Vista Host
 
3/6/2009
   
94
 
San Antonio
 
TX
 
TownePlace Suites
 
Western
 
3/1/2014
   
106
 
Shenandoah
 
TX
 
Courtyard
 
LBA
 
9/1/2016
   
124
 
Stafford
 
TX
 
Homewood Suites
 
Western
 
3/1/2014
   
78
 
Texarkana
 
TX
 
Courtyard
 
Aimbridge
 
3/1/2014
   
90
 
Texarkana
 
TX
 
Hampton
 
Aimbridge
 
1/31/2011
   
81
 
Texarkana
 
TX
 
TownePlace Suites
 
Aimbridge
 
3/1/2014
   
85
 
Provo
 
UT
 
Residence Inn
 
Dimension
 
3/1/2014
   
114
 
Salt Lake City
 
UT
 
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
 
Fairfax
 
VA
 
Marriott
 
White Lodging
 
9/1/2016
   
316
 
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
 
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
 
Seattle
 
WA
 
Residence Inn
 
InnVentures
 
3/1/2014
   
234
 
Tukwila
 
WA
 
Homewood Suites
 
Dimension
 
3/1/2014
   
106
 
Vancouver
 
WA
 
SpringHill Suites
 
InnVentures
 
3/1/2014
   
119
 
    Total
                   
30,188
 

31


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 the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional information concerning the Company’s related party transactions.

Liquidity and Capital Resources

Capital Resources

The Company’s principal sources of liquidity are the operating cash flow generated from the Company’s properties, availability under its $540 million unsecured revolving credit facility, proceeds from the strategic disposition of its hotel properties and proceeds from potential offerings of the Company’s common shares.

The revolving credit facility, which as of September 30, 2017 had unused borrowing capacity of approximately $323.3 million, is available for share repurchases, acquisitions, hotel renovations and development, working capital and other general corporate funding purposes, including the payment of distributions to shareholders.  As of September 30, 2017, the Company’s revolving credit facility had an outstanding principal balance of approximately $216.7 million with an annual variable interest rate of approximately 2.78%.

The credit agreement governing the revolving credit facility contains mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default.  The credit agreement requires 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, limits on dividend payments and share repurchases and restrictions on certain investments.  The Company was in compliance with the applicable covenants at September 30, 2017.

In February 2017, the Company executed an equity distribution agreement that allows the Company to sell, from time to time, up to an aggregate of $300 million of its common shares through sales agents (the “ATM Program”).  Actual 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 determinations by the Company of the appropriate uses of any proceeds.  As of September 30, 2017, the Company had not sold any shares under the ATM Program.

On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024.  The Company used the net proceeds from the $85 million term loan to pay down the borrowings on the Company’s revolving credit facility.  See Note 5 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional information related to the $85 million term loan.

As discussed below in “Subsequent Events,” in October 2017, the Company sold the Fairfax, Virginia Marriott for a sale price of approximately $41.5 million.  The Company used the net proceeds from the sale to pay down borrowings on its revolving credit facility.

Capital Uses

The Company anticipates that cash flow from operations, availability under its revolving credit facility, 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, required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes) and share repurchases.

Distributions

To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income.  Distributions paid during the nine months ended September 30, 2017 totaled approximately $200.7 million or $0.90 per common share and were paid at a monthly rate of $0.10 per common share.  For the same period, the Company’s net cash generated from operations was approximately $280.5 million, which included a payment of approximately $19.4 million, net of reimbursements received from the Company’s directors and officers insurance carriers, during the first nine months of 2017 to settle the Apple Ten merger lawsuit which is discussed in Note 10 titled “Legal Proceedings” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.
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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 the hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.  If cash flow from operations and the revolving credit facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions.  Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distributions to required levels.  If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.

Share Repurchases

In connection with the implementation of the ATM Program, in February 2017 the Company terminated its existing written trading plan under the Company’s share repurchase program.  In January 2016, the Company purchased, under its share repurchase program, approximately 20,000 of its common shares at a weighted-average market purchase price of approximately $18.10 per common share for an aggregate purchase price of approximately $0.4 million.  The Company did not repurchase any common shares under its share repurchase program during the first nine months of 2017.  The Company plans to continue to consider opportunistic share repurchases under the $467.5 million remaining portion of the authorized $475 million share repurchase program, which will depend on prevailing market conditions and other factors.  The program may be suspended or terminated at any time by the Company and, as a result of an extension of the program approved by the Board of Directors in May 2017, will end in July 2018 if not terminated earlier.

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 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 September 30, 2017, the Company held $26.8 million in reserve related to these properties.  During the nine months ended September 30, 2017, the Company invested approximately $41.9 million in capital expenditures and anticipates spending an additional $25 million during the remainder of 2017, which includes various scheduled renovation projects for approximately 15 properties.  The Company does not currently have any existing or planned projects for development.

Hotel Contract Commitments

As of September 30, 2017, the Company had outstanding contracts for the potential purchase of four additional hotels for a total purchase price of approximately $146.1 million.  Two of the hotels, the Salt Lake City Residence Inn and the Portland Residence Inn, which are already in operation, were acquired in October 2017.  The two remaining hotels are under construction and are planned to be completed and opened for business over the next 12 months from September 30, 2017, at which time closing on these hotels is expected to occur.  Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on these hotels will occur under the outstanding purchase contracts.  The purchase price for each of the Salt Lake City Residence Inn and Portland Residence Inn was funded through the Company’s revolving credit facility and it is anticipated that the purchase price for the remaining outstanding contracts will be funded similarly.

Cash Management Activities

As part of the cost sharing arrangements discussed in Note 7 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, certain day-to-day transactions may result in amounts due to or from the Company and Apple Realty Group, Inc. (“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.

33


Impact of Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation.  Competitive pressures may, however, limit the operators’ ability to raise room rates.  Currently the Company is not experiencing any material impact from inflation.

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 there is 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.

New Accounting Standards

See Note 1 titled “Organization and Summary of Significant Accounting Policies” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for information on the adoption of accounting standards in the first nine months of 2017 and the anticipated adoption of recently issued accounting standards.

Subsequent Events

In October 2017, the Company paid approximately $22.3 million, or $0.10 per outstanding common share, in distributions to its common shareholders.

In October 2017, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of November 2017.  The distribution is payable on November 15, 2017.

On October 5, 2017, the Company completed the sale of the Fairfax, Virginia Marriott for a sale price of approximately $41.5 million.  The Company used the net proceeds from the sale to pay down borrowings on its revolving credit facility.  See Note 4 for additional information.

On October 13, 2017, the Company closed on the purchase of an existing 179-room Residence Inn in Portland, Maine for a gross purchase price of approximately $55.8 million.

On October 20, 2017, the Company closed on the purchase of an existing 136-room Residence Inn in Salt Lake City, Utah for a gross purchase price of $25.5 million.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As of September 30, 2017, 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 its variable interest rate term loan.  As of September 30, 2017, after giving effect to interest rate swaps, as described below, approximately $319.2 million, or approximately 24% of the Company’s total debt outstanding, was subject to variable interest rates.  Based on the Company’s variable rate debt outstanding as of September 30, 2017, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $3.2 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 September 30, 2017 was $0.

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As of September 30, 2017, the Company’s variable rate debt consisted of its $540 million revolving credit facility and six term loans totaling $660 million.  Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable rate debt.  As of September 30, 2017, 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 (consisting of five term loans) through maturity.  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, the six term loans and borrowings outstanding under the $540 million revolving credit facility at September 30, 2017.  All dollar amounts are in thousands.

   
October 1 -
December 31, 2017
   
2018
   
2019
   
2020
   
2021
   
Thereafter
   
Total
   
Fair Market Value
 
Total debt:
                                               
Maturities
 
$
2,701
   
$
11,071
   
$
248,408
   
$
451,164
   
$
95,311
   
$
498,181
   
$
1,306,836
   
$
1,307,025
 
Average interest rates
   
3.5
%
   
3.5
%
   
3.5
%
   
3.8
%
   
4.0
%
   
4.0
%
               
                                                                 
Variable rate debt:
                                                               
Maturities
 
$
-
   
$
-
   
$
216,700
   
$
425,000
   
$
50,000
   
$
185,000
   
$
876,700
   
$
877,783
 
Average interest rates (1)
   
3.0
%
   
3.0
%
   
3.0
%
   
3.1
%
   
3.3
%
   
3.4
%
               
                                                                 
Fixed rate debt:
                                                               
Maturities
 
$
2,701
   
$
11,071
   
$
31,708
   
$
26,164
   
$
45,311
   
$
313,181
   
$
430,136
   
$
429,242
 
Average interest rates
   
4.5
%
   
4.5
%
   
4.5
%
   
4.5
%
   
4.4
%
   
4.3
%
               

(1)
The average interest rate gives effect to interest rate swaps, as applicable.
 
Item 4.  Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.  There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

There have been no material changes to the legal proceedings previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”) except as described in Note 10 titled “Legal Proceedings” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, which information is incorporated by reference herein.

Item 1A.  Risk Factors

For a discussion of the Company’s potential risks and uncertainties, see the section titled “Risk Factors” in the 2016 Form 10-K.  There have been no material changes to the risk factors previously disclosed in the 2016 Form 10-K.

Item 6.  Exhibits
 
Exhibit
Number
Description of Documents
 
 
3.1
 
3.2
 
 
31.1
   
31.2
   
32.1
 
 
101
The following materials from Apple Hospitality REIT, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH)
 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
Apple Hospitality REIT, Inc.
 
 
 
 
 
 
 
By:
  /s/    Justin G. Knight       
 
 
Date:  November 6, 2017
 
Justin G. Knight,
 
 
 
 
President and
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
 
 
 
By:
/s/    Bryan Peery     
 
 
Date:  November 6, 2017
 
Bryan Peery,
 
 
 
 
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
 
 
 
 
 
 
 
 
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