EDGAR 10-K Filing

Company CIK: 1418121
Filing Year: 2024
Filename: 1418121_10-K_2024_0000950170-24-018793.json

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ITEM 1. BUSINESS
Item 1.	Business
The Company, formed in November 2007 as a Virginia corporation, is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the U.S. The Company has elected to be treated as a REIT for U.S. federal income tax purposes. As of December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in urban, high-end suburban and developing markets throughout 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. The Company also owns one property leased to third parties. As of December 31, 2023, substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 16 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.” The Company has no foreign operations or assets and its operating structure includes only one reportable segment. Refer to Part II, Item 8, for the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
Business Objectives
The Company is one of the largest hospitality REITs in the U.S., in both the number of hotels and guest rooms, with significant geographic and brand diversity. The Company’s primary business objective is to maximize shareholder value by achieving long-term growth in cash available for distributions to its shareholders. The Company has pursued and will continue to pursue this objective through the following investment strategies:
•pursuing thoughtful capital allocation with selective acquisitions and dispositions of primarily rooms-focused hotels in the upscale sector of the lodging industry;
•employing broad geographic diversification of its investments;
•franchising and collaborating with leading brands in the sector;
•utilizing strong experienced operators for its hotels and enhancing their performance with proactive asset management;
•reinvesting in the Company’s hotels to maintain their competitive advantage; and
•maintaining low leverage providing the Company with financial flexibility.
The Company has generally acquired fee simple ownership of its properties, with a focus on hotels that have or have the potential to have diverse demand generators, strong brand recognition, high levels of customer satisfaction and strong operating margins. Due to their efficient operating model and strong consumer preference, the Company concentrates on the acquisition of rooms-focused hotels. The Company’s acquisitions have been in broadly diversified markets across the U.S. to limit dependence on any one geographic area or demand generator. With an emphasis on upscale rooms-focused hotels, the Company utilizes its asset management experience and expertise to improve the quality and performance of its hotels by working with its property managers to aggressively manage revenue and expenses by benchmarking with internal and external data, using the Company’s scale to help negotiate favorable vendor contracts, engaging industry leaders in hotel management, and franchising the hotels with leading brands and actively participating with the franchisors to strengthen the brands. To maintain its competitive advantage in each market, the Company continually reinvests in its hotels. With its depth of ownership in many upscale and upper midscale rooms-focused brands and extensive experience with the Hilton and Marriott rooms-focused brands, the Company has been able to enhance its reinvestment approach. By maintaining a flexible balance sheet, with a total debt, net of cash, to total capitalization (total debt outstanding, net of cash, plus equity market capitalization based on the Company’s December 29, 2023 closing share price) ratio at December 31, 2023 of 25.4%, the Company is not only positioned to opportunistically consider investments that further improve shareholder value, but management believes it is equipped to address developments caused by adverse economic environments.
Hotel Operating Performance
As of December 31, 2023, the Company owned 225 hotels, including two properties classified as held for sale, with a total of 29,900 rooms as compared to 220 hotels with a total of 28,983 rooms as of December 31, 2022. Operating performance is included only for the period of ownership for hotels acquired or disposed of during 2023 and 2022. During 2023, the Company acquired six hotels and did not dispose of any properties. In May 2023, the Company entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel’s 210 hotel rooms (“non-hotel property”). Lease revenue from this property is recorded in other revenue in the Company’s consolidated statements of operations and comprehensive income. As a result of the lease agreement, this property is excluded from the Company’s hotel and room counts effective May 2023 through the end of the lease term. Results of the hotel operations for the Company’s independent boutique hotel in New York, New York are included only for the period prior to the lease agreement becoming effective in May 2023. During 2022, the Company acquired two hotels and sold one hotel. The following table reflects certain operating statistics for the Company’s hotels for their respective periods of ownership by the Company. Average Daily Rate (“ADR”) is calculated as room revenue divided by the number of rooms sold, and revenue per available room (“RevPAR”) is calculated as occupancy multiplied by ADR.
Years Ended December 31,
Percent Change
ADR
$
155.76
$
149.36
4.3
%
Occupancy
74.2
%
72.6
%
2.2
%
RevPAR
$
115.60
$
108.45
6.6
%
Comparable Hotels Operating Performance
The following table reflects certain operating statistics for the Company’s 223 hotels owned and held for use as of December 31, 2023 (“Comparable Hotels”). The Company defines metrics from Comparable Hotels as results generated by the 223 hotels owned and held for use as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions and assets held for sale, results have been excluded for the Company’s period of ownership.
Years Ended December 31,
Percent Change
ADR
$
156.55
$
149.62
4.6
%
Occupancy
74.2
%
72.6
%
2.2
%
RevPAR
$
116.23
$
108.67
7.0
%
Hotel performance is impacted by many factors, including the economic conditions in the U.S. and in each individual locality. The Company’s revenue and operating results improved during the year ended December 31, 2023 compared to the year ended December 31, 2022, which is consistent with the overall lodging industry. Hotel occupancy was negatively impacted in many markets by the Omicron variant of COVID-19 during the first quarter of 2022, contributing to an increase of the Company’s Comparable Hotels RevPAR of approximately 7.0% for the year ended December 31, 2023, compared to the year ended December 31, 2022. There is no way to predict future economic conditions, and there continue to be additional factors that could negatively affect the lodging industry and the Company, including but not limited to, historical seasonal trends, travel-related health concerns, deterioration of consumer sentiment, labor shortages, supply chain disruptions, a recessionary macroeconomic environment or inflationary pressures. The Company is forecasting low-to-mid single digit RevPAR growth and a slight increase in operating results for its Comparable Hotels for 2024 as compared to 2023, which is comparable to broader industry expectations. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, appearing elsewhere in this Annual Report on Form 10-K for more information on the Company’s results of operations.
Recent Investing Activities
Acquisitions and Contracts for Potential Acquisitions
The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, in 2023, the Company acquired six existing hotels and one free-standing parking garage for an aggregate
purchase price of approximately $289.8 million: a 154-room Courtyard in Cleveland, Ohio, a 175-room Courtyard in Salt Lake City, Utah, a 159-room Hyatt House in Salt Lake City, Utah, a free-standing parking garage which serves both of the Salt Lake City, Utah hotels and the surrounding area, a 146-room Residence Inn in Renton, Washington, a 192-room Embassy Suites in South Jordan, Utah and a 299-room SpringHill Suites in Las Vegas, Nevada. To fund the acquisitions, the Company utilized its available cash on hand, net proceeds from sale of shares under the ATM program (as defined below) and borrowings under its $650 million revolving credit facility with an initial maturity date of July 25, 2026 (the “Revolving Credit Facility”). The Company plans to utilize its available cash, net proceeds from sale of shares under the ATM program or borrowings under its unsecured credit facilities for any future hotel acquisitions. See Note 4 title “Debt” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, appearing elsewhere in this Annual Report on Form 10-K, for a description of the Company’s unsecured credit facilities.
As of December 31, 2023, the Company had separate outstanding contracts for the potential purchase of two hotels, consisting of one hotel in Madison, Wisconsin and one hotel in Nashville, Tennessee, for a total combined purchase price of approximately $177.5 million. Both hotels are under development, with the hotel in Madison, Wisconsin currently planned to be completed and opened for business in mid-2024 and the Nashville, Tennessee hotel currently planned to be completed and opened for business in late 2025, at which respective times the Company expects to complete the purchases of these hotels. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied, and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under the applicable purchase contracts and acquire these hotels. The Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the properties under contract if closings occur.
Dispositions and Contracts for Potential Dispositions
For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. The Company did not dispose of any properties in the year ended December 31, 2023. As of December 31, 2023, the Company had an outstanding contract to sell two of its hotels, which were both sold to an unrelated third party, for a gross sales price of approximately $33.5 million in February 2024. The net proceeds from the sale of both hotels were used for general corporate purposes.
New York Independent Boutique Hotel Lease
In May 2023, the Company entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel’s 210 hotel rooms. Lease revenue from this property is recorded in other revenue in the Company’s consolidated statements of operations and comprehensive income. As a result of the lease agreement, this property is excluded from the Company’s hotel and room counts effective May 2023 and is considered a non-hotel property through the end of the lease term.
See Note 2 titled “Investment in Real Estate” and Note 3 titled “Assets Held for Sale and Dispositions” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning these transactions.
Share Repurchases
In addition to continually considering opportunities to invest in rooms-focused hotels, the Company also monitors the trading price of its common shares and repurchases its common shares when it believes there is an opportunity to increase shareholder value. In May 2023, the Company’s Board of Directors approved a one-year extension of its existing share repurchase program, authorizing share repurchases up to an aggregate of $338.7 million (the “Share Repurchase Program”). The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2024 if not terminated or extended earlier. During the year ended December 31, 2023, the Company purchased approximately 0.5 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.34 per common share for an aggregate purchase price, including commissions, of approximately $6.9 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As of December 31, 2023, approximately $335.4 million remained available for purchase under the Share Repurchase Program.
Hotel Industry and Competition
The hotel industry is highly competitive. Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels or lodging facilities in its geographic market. An increase in the number of competitive hotels or other lodging facilities in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area. The Company believes that brand recognition, location, price and quality (of both the hotel and the services provided) are the principal competitive factors affecting the Company’s hotels. Additionally, general economic conditions, both in a particular market and nationally, impact the performance of the hotel industry.
Management and Franchise Agreements
Substantially all of the Company’s hotels operate under Marriott or Hilton brands, and as of December 31, 2023, consisted of the following:
Number of Hotels and Guest Rooms by Brand
Number of
Number of
Brand
Hotels
Rooms
Hilton Garden Inn
5,593
Hampton
4,953
Courtyard
4,982
Residence Inn
3,694
Homewood Suites
3,417
SpringHill Suites
1,544
Fairfield
1,213
Home2 Suites
1,146
TownePlace Suites
Embassy Suites
AC Hotels
Hyatt Place
Marriott
Hyatt House
Aloft
Total
29,900
Each of the Company’s 225 hotels owned as of December 31, 2023 is operated and managed under separate management agreements with 16 hotel management companies, none of which are affiliated with the Company. The management agreements generally provide for initial terms of one to 30 years and are terminable by the Company for either failure to achieve performance thresholds, upon sale of the property, or without cause. As of December 31, 2023, approximately 85% of the Company’s hotels operated under a variable management fee agreement, with an average initial term of approximately one to two years, which the Company believes better aligns incentives for each hotel manager to maximize each property’s performance than a base-plus-incentive management fee structure, as described below, which is more common throughout the industry. Under the variable fee structure, the management fee earned for each hotel is generally within a range of 2.5% to 3.5% of gross revenues. The performance measures are based on various financial and quality performance metrics. The Company’s remaining hotels operate under a management fee structure which generally includes the payment of base management fees and an opportunity for incentive management fees. Under this structure, base management fees are calculated as a percentage of gross revenues and the incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. In addition to the above, management fees for all of the Company’s hotels generally include accounting fees and other fees for centralized services, which are allocated among all of the hotels that receive the benefit of such services.
Thirteen of the Company’s hotels are managed by affiliates of Marriott. The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and as a result, the branded hotels they manage were required to obtain separate franchise agreements with each respective franchisor. The franchise agreements generally provide for initial terms of approximately 10 to 30 years and generally provide for renewals subject to franchise requirements at the time of renewal. The Company pays various fees under these agreements, including the payment of royalty fees, marketing fees, reservation fees, a communications support fee, brand loyalty program fees and other similar fees based on room revenues.
The franchise and/or management agreements provide a variety of benefits for the Company, which include national advertising, publicity, and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards, centralized reservation systems and best practices within the industry.
Hotel Maintenance and Renovation
Management routinely monitors the condition and operations of its hotels and plans renovations and other improvements as it deems prudent. The Company’s hotels have an ongoing need for renovation and refurbishment. To maintain and enhance each property’s competitive position in its market, the Company has invested in and plans to continue to reinvest in its hotels. During 2023, 2022 and 2021, the Company’s capital improvements for its hotels were approximately $76.8 million, $61.7 million and $25.8 million, respectively. Expenditures for 2023 were higher than 2022 and 2021 due to an increased number of capital improvement projects in 2023 compared to 2022 and 2021, as the number of projects in 2022 and 2021 were limited as a result of COVID-19. During 2024, the Company anticipates investing approximately $75 million to $85 million in capital improvements, which includes comprehensive renovation projects for approximately 20 properties.
Financing
The Company’s principal short-term sources of liquidity are the operating cash flows generated from the Company’s properties and availability under its Revolving Credit Facility. Depending on market conditions, over the long term, the Company may also receive proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties or issuance of common shares through equity offerings, such as the Company’s at-the-market offering program described below. The Company anticipates that funds from these sources will be adequate to meet its anticipated liquidity requirements, including required distributions to shareholders, share repurchases, capital improvements, debt service, hotel acquisitions, lease commitments, and cash management activities.
On July 19, 2023, the Company entered into an amendment of its unsecured $225 million term loan facility, which extended the maturity date of the existing $50 million term loan by two years to August 2, 2025.
As of December 31, 2023, the Company had approximately $1.4 billion of total outstanding debt with a combined weighted-average interest rate, including the effect of interest rate swaps, of approximately 4.26%, consisting of approximately $283.0 million in outstanding mortgage debt secured by 15 properties, with maturity dates ranging from August 2024 to May 2038 and stated interest rates ranging from 3.40% to 4.46%, and approximately $1.1 billion in outstanding debt under its unsecured credit facilities with maturity dates ranging from July 2024 to March 2030 and effective interest rates, including the effect of interest rate swaps, ranging from 2.61% to 7.15%.
The Company’s unused borrowing capacity under its Revolving Credit Facility as of December 31, 2023 was $650 million, which is available for acquisitions, hotel renovations, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders. The Company has historically maintained and plans in the future to maintain relatively low leverage as compared to the real estate industry as a whole and the lodging sector in particular. The Company’s ratio of total debt, net of cash, to total capitalization (total debt outstanding, net of cash, plus equity market capitalization based on the Company's December 29, 2023 closing share price) ratio as of December 31, 2023 was 25.4%. The Company intends to maintain staggered maturities of its debt, utilize unsecured debt when available and fix the rate on a portion of its debt. All of these strategies reduce shareholder risk related to the Company’s financing structure.
See Note 4 title “Debt” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, appearing elsewhere in this Annual Report on Form 10-K, for a description of the Company’s debt instruments as of December 31, 2023 and a summary of the financial and restrictive covenants as defined in the credit agreements.
The Company has a universal shelf registration statement on Form S-3 (No. 333-262915) that was automatically effective upon filing on February 23, 2022. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act.
On August 12, 2020, the Company entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under an at-the-market offering program (the “ATM Program”) under the Company’s prior shelf registration statement and the current shelf registration statement described above. During the year ended December 31, 2023, the Company sold approximately 12.8 million shares under its ATM Program at a weighted-average market sales price of approximately $17.05 per common share and received aggregate gross proceeds of approximately $218.6 million and proceeds net of offering costs, which included $2.6 million of commissions, of approximately $216.0 million. The Company used the net proceeds from the sale of these shares to pay down borrowings under the Revolving Credit Facility, acquisitions of hotel properties and for general corporate purposes. No shares were sold under the Company’s ATM Program during the year ended December 31, 2022. As of December 31, 2023, approximately $5.3 million remained available for issuance under the ATM Program.
The Company plans to use future net proceeds from the sale of shares under the ATM Program, or under a similar successor program, for general corporate purposes which may include, among other things, acquisitions of hotel properties, the repayment of outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties.
Distribution Policy
The Company plans to continue to pay distributions on a monthly basis, with distributions based on anticipated cash generated from operations. The Company attempts to set a rate that can be consistent over a period of time as it forecasts its cash available from operations. The Company’s annualized distribution rate was $0.96 per common share at December 31, 2023. In addition to the regular monthly cash distribution of $0.08 per common share approved by the Board of Directors in December 2023, the Board of Directors approved a special cash distribution of $0.05 per common share for a combined distribution of $0.13 per common share, paid in January 2024, to shareholders of record as of December 29, 2023. While management expects monthly cash distributions to continue, each distribution is subject to approval by the Company’s Board of Directors and there can be no assurance of the classification, timing or duration of distributions at the current distribution rate. The Company’s Board of Directors, in consultation with management, will continue to monitor hotel operations and the timing and level of distributions in relation to the Company’s other cash requirements or in order to maintain its REIT status for U.S. federal income tax purposes. If cash flows from operations and the Revolving Credit Facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions as necessary to maintain its REIT status. As it has done historically, due to seasonality, the Company may use its Revolving Credit Facility to maintain consistency of the distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles. Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy and may need to reduce its distributions to required levels to maintain its REIT status. If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.
Insurance
The Company maintains insurance coverage for general liability, property, business interruption, cyber threats and other risks with respect to all of its hotels. These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties in similar locations. However, various types of catastrophic losses, like earthquakes, hurricanes, or certain types of terrorism, may not be insurable or may not be economically insurable.
Corporate Responsibility
The Company’s environmental, social and governance strategy aims to enhance long-term value for its shareholders through responsible investment in sustainable and equitable practices at the corporate and property levels that: strengthen the resilience of the Company and its hotels while minimizing its overall environmental impact and enhancing the value of its assets; encourage stakeholder engagement and advance human capital; and make positive contributions throughout the Company, the hotel industry, its local community and the many communities its hotels serve.
The Company’s Corporate Responsibility Report, issued in December 2023, provides further detail of the Company’s environmental, social and governance progress, and can be found on the Company’s website at www.applehospitalityreit.com. The contents of the Company’s Corporate Responsibility Report are not incorporated by reference into this Annual Report on Form 10-K and do not form a part of this Form 10-K.
Environmental Stewardship and Sustainability
The environment is a key consideration in the operations of the Company’s hotels. The Company actively monitors key performance indicators of energy, water and waste at its properties, utilizing historical, market and industry data to identify properties where improvements can be made, and works with its management companies to address the opportunities. The Company is committed to enhancing and incorporating sustainability opportunities into its investment and asset management strategies, with a focus on minimizing its environmental impact.
To enhance its commitment to sustainable operations, the Company established a formal energy management program in 2018 to ensure that energy, water and waste management are a priority not only within the Company, but also with the Company's third-party management companies and brands. Developed jointly with the Company’s third-party energy consultants, this program provides its hotels and management companies with operating guidelines designed to consistently use energy and water responsibly across the entire portfolio. The Company seeks to invest in proven sustainability practices when renovating its hotels and in portfolio-wide capital projects that can enhance asset value while also improving environmental performance. The Company targets specific environmental efficiency enhancements, including equipment upgrades and replacements, that reduce energy and water usage and
improve waste management. As part of its acquisition due diligence, the Company performs sustainability assessments to identify areas of opportunity that will improve the property’s environmental performance.
Social Responsibility
The Company is firmly committed to strengthening communities through charitable giving and by volunteering time and talents. The Company is dedicated to making a positive impact throughout its organization, the hotel industry, its local community and the many communities its hotels serve. In 2017, the Company formed Apple Gives, an employee-led charitable initiative, to expand its impact and further advance the achievement of its corporate philanthropic goals. Apple Gives collaborates with organizations that are important to the Company’s employees, its third-party management companies, its hotels and numerous industry organizations, including the American Hotel & Lodging Association (“AHLA”), and works to make a positive impact across the Company’s community and the communities its hotels serve. More specifically, Apple Gives organizes company-wide community events with charitable organizations, deploys aid to markets and associates affected by natural disasters, and allocates funds and other resources to a variety of causes.
Human Capital
The Company believes that each of its 63 team members (as of December 31, 2023) plays a vital role in the success of the organization. The Company believes the physical and mental health, safety and well-being of its employees, the associates at its hotels and its hotel guests are critical to the continued success of its business. The Company aims to provide an inspiring, diverse, equitable and inclusive work environment where employees feel valued, empowered and encouraged to make positive differences within the Company and throughout their communities, with a belief that the most successful management provides clear leadership while empowering the team to make timely and responsible decisions and to take actions necessary to achieve exceptional operating results. The Company is committed to diversity, equity and inclusion and does not tolerate discrimination or harassment in the workplace.
The Company offers competitive compensation and benefits, a flexible leave policy, fully paid parental leave for up to 12 weeks for primary caregivers and three weeks for secondary caregivers for the birth or adoption of a new child, financial assistance for adoption of a new child, a tuition reimbursement program, and a culture that encourages balance of work and personal life. The Company provides its employees with two days paid leave each year for volunteer work and donation matching to support non-profit organizations. The Company emphasizes an open-door policy for communications and conducts regular employee satisfaction surveys and annual performance reviews, which provide the opportunity for continuous improvement.
The Company is committed to working safely and maintaining a safe workplace in compliance with cleanliness guidelines set forth by the Centers for Disease Control and Prevention (CDC), and in compliance with applicable Occupational Safety and Health Act (OSHA) standards.
The Company has implemented various initiatives to ensure the Company remains inclusive, equitable and supportive for all, including a formal online training program that all employees of the Company are required to complete annually for the prevention of discrimination and harassment in the workplace, including unconscious bias.
During 2023, all employees involved in the day-to-day operation of the Company’s hotels were employed by one of 16 third-party management companies engaged pursuant to the hotel management agreements.
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 for the Company’s hotels are greater in the second and third quarters than in the first and fourth quarters. However, due to the effects of COVID-19, these typical seasonal patterns were disrupted until 2023. In the first quarter of 2022, the Company experienced lower than expected operating results due to the Omicron variant of COVID-19 along with the typical seasonal decrease associated with the first quarter. Since that time, the seasonal variability has recovered to its pre-COVID-19 trend. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Related Parties
The Company has engaged in, 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 have been different if these transactions were conducted with non-related parties. Certain employees of the Company also provide support services to Apple Realty Group,
Inc. (“ARG”), which is wholly owned by Glade M. Knight, Executive Chairman of the Company. ARG reimburses the Company for the support services that it receives.
See Note 6 titled “Related Parties” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K for additional information concerning the Company’s related party transactions.
Website Access
The address of the Company’s website is www.applehospitalityreit.com. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Information contained on the Company’s website is not incorporated by reference into this report. The Company’s website also is a key source of important information about the Company. The Company routinely posts to the Investor Information section of its website important information about its business, operating results and financial condition and prospects, including, for example, information about material acquisitions and dispositions, earnings releases and the Company’s Corporate Responsibility Report. The Company also posts to its website copies of investor presentations, which contain important information about the Company, and it updates those presentations periodically. The website has a Corporate Governance page in the Investor Information section that includes, among other things, copies of the Company’s Code of Business Conduct and Ethics, Corporate Governance Guidelines and the charters for each standing committee of the Company’s Board of Directors. Please note that the information contained on the Company’s website is not incorporated by reference in, or considered to be a part of, this report or any other document, unless expressly incorporated by reference therein.

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ITEM 1A. RISK FACTORS
Item 1A.	Risk Factors
The Company has identified the following significant risk factors which may affect, among other things, the Company’s business, financial position, results of operations, operating cash flows, market value, and ability to service its debt obligations and make distributions to its shareholders. You should carefully consider the risks described below and the risks disclosed by the Company in other filings with the SEC, in addition to the other information contained in this Annual Report on Form 10-K.
Risks Related to the Company’s Business and Operations
The Company is subject to various risks which are common to the hotel industry on a national, regional and local market basis that are beyond its control and could adversely affect its business.
The success of the Company’s hotels depends largely on the hotel operators’ ability to adapt to dominant trends and risks in the hotel industry, both nationally and in individual local markets. These risks could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses. The following is a summary of risks that may affect the hotel industry in general and as a result may affect the Company:
•over-building of hotels in the markets in which the Company operates, resulting in an increase in supply of hotel rooms that exceeds increases in demand;
•competition from other hotels and lodging alternatives in the markets in which the Company operates;
•a downturn in the hospitality industry;
•dependence on business and leisure travel;
•increases in energy costs and other travel expenses, which may affect travel patterns and reduce business and leisure travel;
•reduced business and leisure travel due to geo-political uncertainty, including terrorism and acts of war, travel-related health concerns, including widespread outbreaks of infectious or contagious diseases in the U.S., inclement weather conditions, including natural disasters such as hurricanes, earthquakes and wildfires, and government shutdowns, airline strikes or equipment failures, or other disruptions;
•reduced travel due to adverse national, regional or local economic and market conditions;
•seasonality of the hotel industry may cause quarterly fluctuations in operating results;
•changes in marketing and distribution for the hospitality industry, including the cost and the ability of third-party internet and other travel intermediaries to attract and retain customers;
•changes in hotel room demand generators in a local market;
•ability of a hotel franchise to fulfill its obligations to franchisees;
•brand expansion;
•the performance of third-party managers of the Company’s hotels;
•increases in operating costs, including ground lease payments, renovation projects, property and casualty insurance, utilities and real estate and personal property taxes, due to inflation, climate change and other factors that may not be offset by increases in room rates or room revenue;
•inflation which could adversely affect consumer confidence thereby reducing consumer purchasing power and demand for lodging;
•labor shortages and other increases in the cost of labor due to low unemployment rates or to government regulations surrounding work rules, wage rates, health care coverage, immigration policies and other benefits;
•supply chain disruptions and broader inflationary pressures throughout the overall economy and global tensions driving shortages and cost increases for materials and supplies such as food and equipment;
•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with applicable laws and regulations;
•claims, litigation and threatened litigation from guests, visitors to the Company’s hotel properties, contractors, sub-contractors, government agencies and others;
•business interruptions, regulatory costs and equipment loss due to cyber-attacks and other technological events;
•requirements for periodic capital reinvestment to repair and upgrade hotels;
•limited alternative uses for hotel buildings; and
•condemnation or uninsured losses.
Any of these factors, among others, may reduce the Company’s operating results, the value of the properties that the Company owns, and the availability of capital to the Company.
Economic conditions in the U.S. and individual markets may adversely affect the Company’s business operations and financial performance.
The performance of the lodging industry has historically been highly cyclical and closely linked to the performance of the general economy both nationally and within local markets in the U.S. The lodging industry is also sensitive to government, business and personal discretionary spending levels. Declines in government and corporate budgets and consumer demand due to adverse general economic conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions may lower the revenue and profitability of the Company’s hotels and therefore the net operating profits of its investments. An economic downturn or prolonged economic recession, including lower GDP growth, corporate earnings, consumer confidence, employment rates, income levels and personal wealth, may lead to a significant decline in demand for products and services provided by the lodging industry, lower occupancy levels, significantly reduced room rates, and declines in RevPAR. The Company cannot predict the pace or duration of an economic recession or cycle or the cycles of the lodging industry. In the event conditions in the industry deteriorate or do not continue to see sustained improvement, or there is an extended period of economic weakness, the Company’s revenue and profitability could be adversely affected. Furthermore, even if the economy in the U.S. improves, the Company cannot provide any assurances that demand for hotels will increase from current levels, nationally or more specifically, where the Company’s properties are located.
In addition, many of the expenses associated with the Company’s business, including certain personnel costs, interest expense, ground leases, property taxes, insurance and utilities, are relatively fixed. These hotel operating expenses may not decrease when hotel revenues decrease, and some expenses, such as wages, utilities and insurance, may also increase due to factors unrelated to hotel operating performance, such as inflation rates. During a period of overall economic weakness, if the Company is unable to meaningfully decrease these costs as demand for its hotels decreases, or increase room rates to account for higher than expected costs, the Company’s business operations and financial performance may be adversely affected.
The Company is affected by restrictions in, and compliance with, its franchise and license agreements.
The Company’s wholly-owned taxable REIT subsidiaries (“TRSs”) (or subsidiaries thereof) operate substantially all of its hotels pursuant to franchise or license agreements with nationally recognized hotel brands. These franchise and license agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the Company’s hotels in order to maintain
uniformity within the franchisor system. The Company may be required to incur costs to comply with these standards and these standards could potentially conflict with the Company’s ability to create specific business plans tailored to each property and to each market. Failure to comply with these brand standards may result in termination of the applicable franchise or license agreement. In addition, as the Company’s franchise and license agreements expire, the Company may not be able to renew them on favorable terms, or at all. If the Company were to lose or was unable to renew a franchise or license agreement, the Company would be required to re-brand the hotel, which could result in a decline in the value of the hotel, the loss of marketing support and participation in guest loyalty programs, and harm to the Company’s relationship with the franchisor, impeding the Company’s ability to operate other hotels under the same brand. Additionally, the franchise and license agreements have provisions that could limit the Company’s ability to sell or finance a hotel which could further affect the Company.
Substantially all of the Company’s hotels operate under Marriott or Hilton brands; therefore, the Company is subject to risks associated with concentrating its portfolio in these brand families.
Substantially all of the Company’s hotels operate under brands owned by Marriott or Hilton. As a result, the Company’s success is dependent in part on the continued success of Marriott and Hilton and their respective brands. The Company believes that building brand value is critical to increase demand and strengthen customer loyalty. Consequently, if market recognition or the positive perception of any of these brands is reduced or compromised, the goodwill associated with the Marriott or Hilton branded hotels in the Company’s portfolio may be adversely affected. Also, if Marriott or Hilton alter certain policies, including their respective guest loyalty programs, this could reduce the Company’s future revenues. Furthermore, if the Company’s relationship with Marriott or Hilton were to deteriorate or terminate as a result of disputes regarding the Company’s hotels or for other reasons, the franchisors could, under certain circumstances, terminate the Company’s current franchise licenses with them or decline to provide franchise licenses for hotels that the Company may acquire in the future. If any of the foregoing were to occur, it could have a material adverse effect on the Company.
Although substantially all of the Company’s hotels operate under the brands noted above, the Company may from time to time acquire independent hotels or hotels affiliated with other brands, and/or may choose to operate hotels independently of a brand if the Company believes that these properties will operate most effectively as independent hotels. However, without the support and recognition of a large established brand, the capability of these independent or less recognized branded hotels to market the hotel, maintain guest loyalty, attract new guests, and operate in a cost-effective manner may be difficult, which could adversely affect the Company’s overall operating results.
Competition in the markets where the Company owns hotels may adversely affect the Company’s results of operations.
The hotel industry is highly competitive. Each of the Company’s hotels competes for guests primarily with other hotels in its immediate vicinity and secondarily with other hotels in its geographic market. The Company also competes with numerous owners and operators of vacation ownership resorts, as well as alternative lodging companies, including third-party providers of short-term rental properties and serviced apartments that can be rented on a nightly, weekly or monthly basis. An increase in the number of competitive hotels, vacation ownership resorts and alternative lodging arrangements in a particular area could have a material adverse effect on the occupancy, ADR and RevPAR of the Company’s hotels in that area and lower the Company’s revenue and profitability.
The Company is dependent on third-party hotel managers to operate its hotels and could be adversely affected if such management companies do not manage the hotels successfully.
To maintain its status as a REIT, the Company is not permitted to operate any of its hotels. As a result, the Company has entered into management agreements with third-party managers to operate its hotels. For this reason, the Company’s ability to direct and control how its hotels are operated is less than if the Company were able to manage its hotels directly. Under the terms of the hotel management agreements, the Company’s ability to participate in operating decisions regarding its hotels is limited to certain matters, and it does not have the authority to require any hotel to be operated in a particular manner (for instance, setting room rates). The Company does not supervise any of the hotel managers or their respective personnel on a day-to-day basis. The Company cannot be assured that the hotel managers will manage its hotels in a manner that is consistent with their respective obligations under the applicable management agreement or the Company’s obligations under its hotel franchise agreements. The Company could be materially and adversely affected if any of its third-party managers fail to effectively manage revenues and expenses, provide quality services and amenities, or otherwise fail to manage its hotels in its best interest, and may be financially responsible for the actions and inactions of the managers. In certain situations, based on the terms of the applicable management agreement, the Company or manager may terminate the agreement. In the event that any of the Company’s management agreements are terminated, the Company can provide no assurance that it could identify a replacement manager, that the franchisor will consent to the replacement manager in a timely manner, or at all, or that the replacement manager will manage the hotel successfully. A failure by the Company’s hotel managers to successfully manage its hotels could lead to an increase in its operating expenses, a decrease in its revenues, or both.
Furthermore, if one of the Company’s third-party managers is financially unable or unwilling to perform its obligations pursuant to its management agreements with the Company, the Company’s ability to find a replacement manager or managers for those properties could be costly and time-consuming for the Company and disrupt hotel operations which could materially and adversely affect the Company. In addition, at any given time, the Company may become engaged in disputes or litigation with one or more of its third-party managers or franchisors arising from contractual and other disagreements that could make the Company liable to them or result in litigation costs or other expenses.
Labor shortages and increased labor costs could cause significant increases to the Company’s operating costs and decreases to the Company’s operating revenues.
The Company’s third-party hotel managers are responsible for hiring and maintaining the labor force at each of the Company’s hotels. Although the Company does not directly employ or manage employees at its hotels, the Company is still subject to many of the costs and risks generally associated with the hotel labor force. Labor costs can increase due to many factors, including but not limited to, a shortage of hospitality workers, increased dependence on contract workers, increased wages and employee benefit costs, changes in laws and regulations, increased labor turnover and increases in a unionized labor force. Significant labor shortages could prohibit the Company from operating its hotels at full capacity which could result in a decrease in operating revenues. An increased exposure to a unionized labor force could lead to labor disputes, causing higher labor costs, either by increases in wages or benefits or by changes in local labor regulations that raise hotel operating costs.
The growing use of non-franchisor lodging distribution channels could adversely affect the Company’s business and profitability.
Although a majority of rooms sold are sold through the hotel franchisors’ distribution channels, many are sold through other channels or intermediaries. Rooms sold through non-franchisors’ channels are generally less profitable (after associated fees) than rooms sold through franchisors’ channels. Although the Company’s franchisors may have established agreements with many of these alternative channels or intermediaries that limit transaction fees for hotels, there can be no assurance that the Company’s franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, alternative channels or intermediaries may employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to those of the Company’s franchisors. If this happens, the Company’s business and profitability may be materially and adversely affected.
Renovations and capital improvements at the Company’s existing hotels or new hotel developments may reduce the Company’s profitability.
The Company has ongoing needs for hotel renovations and capital improvements, including maintenance requirements and updates to brand standards under all of its hotel franchise and management agreements and certain loan agreements. In addition, from time to time, the Company will need to make renovations and capital improvements to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of its hotels. As properties increase in age, the frequency and cost of renovations needed to maintain appealing facilities for hotel guests may increase. The Company may also need to make significant capital improvements to hotels that it acquires, or may be involved in the development of new hotels. Construction delays and cost overruns, including increases in the cost of labor, goods and materials and delays and cost increases caused by supply chain disruptions, have increased and may continue to increase renovation or development costs for the Company and have delayed and may in the future delay the acquisition or opening of hotels or the length of time that rooms are out of service. Occupancy and ADR are often affected during periods of renovations and capital improvements at a hotel, especially if the Company encounters delays, or if the improvements require significant disruption at the hotel. The costs of renovations and capital improvements the Company needs or chooses to make at the Company’s existing hotels, or the costs related to the development of new hotels, could reduce the funds available for other purposes and may reduce the Company’s profitability.
Certain hotels are subject to ground leases that may affect the Company’s ability to use the hotel or restrict its ability to sell the hotel.
As of December 31, 2023, 14 of the Company’s hotels were subject to ground leases. Accordingly, the Company effectively only owns a long-term leasehold interest in these hotels. If the Company is found to be in breach of a ground lease, it could lose the right to use the hotel. In addition, unless the Company can purchase a fee interest in the underlying land or renew the terms of these leases before their expiration, as to which no assurance can be given, the Company will lose its right to operate these properties and its interest in the property, including any investment that it made in the property. The Company’s ability to exercise any extension options relating to its ground leases is subject to the condition that the Company is not in default under the terms of the ground lease at the time that it exercises such options, and the Company can provide no assurances that it will be able to exercise any available options at such time. If the Company were to lose the right to use a hotel due to a breach or non-renewal of a ground lease, it would be
unable to derive income from such hotel. Finally, the Company may not be permitted to sell or finance a hotel subject to a ground lease without the consent of the lessor.
The Company may not be able to complete hotel dispositions when and as anticipated.
The Company continually monitors the profitability, market conditions, and capital requirements of its hotels and attempts to maximize shareholder value by timely disposal of its hotels. Real estate investments are, in general, relatively difficult to sell due to, among other factors, the size of the required investment and the volatility in availability of adequate financing for a potential buyer. This illiquidity will tend to limit the Company’s ability to promptly vary its portfolio in response to changes in economic or other conditions. Additionally, factors specific to an individual property, such as its specific market and operating performance, restrictions in franchise and management agreements, debt secured by the property, a ground lease, or capital expenditure needs may further increase the difficulty in selling a property. Therefore, the Company cannot predict whether it will be able to sell any hotels on acceptable terms, or at all. In addition, provisions of the Code relating to REITs have certain limits on the Company’s ability to sell hotels.
Real estate impairment losses may adversely affect the Company’s financial condition and results of operations.
As a result of changes in an individual hotel’s operating results or to the Company’s planned hold period for a hotel, the Company may be required to record an impairment loss for a property. The Company analyzes its hotel properties individually for indicators of impairment throughout the year. The Company records an impairment loss on a hotel property if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective property over its estimated remaining useful life, based on historical and industry data, is less than the property’s carrying amount. Indicators of impairment include, but are not limited to, a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable.
The Company’s failure to identify and complete accretive acquisitions may adversely affect the profitability of the Company.
The Company’s business strategy includes identifying and completing accretive hotel acquisitions. The Company competes with other investors who are engaged in the acquisition of hotels, and these competitors may affect the supply and demand dynamics and, accordingly, increase the price the Company must pay for hotels it seeks to acquire, or these competitors may succeed in acquiring those hotels. Any delay or failure on the Company’s part to identify, negotiate, finance on favorable terms, consummate and integrate such acquisitions could materially impede the Company’s growth. The Company may also incur costs that it cannot recover if it abandons a potential acquisition. Also, if the Company does not reinvest proceeds received from hotel dispositions into new properties in a timely manner, the Company’s profitability could be negatively impacted. The Company’s profitability may also suffer because future acquisitions of hotels may not yield the returns the Company expects and the integration of such acquisitions may disrupt the Company’s business or may take longer than projected. Furthermore, the Company may be subject to unknown or contingent liabilities related to hotels it acquires.
The Company’s inability to obtain financing on favorable terms or pay amounts due on its financing may adversely affect the Company’s operating results.
Although the Company anticipates maintaining relatively low levels of debt, it may periodically use financing to acquire properties, perform renovations to its properties, or make shareholder distributions or share repurchases in periods of fluctuating income from its properties. The credit markets have historically been volatile and subject to increased regulation, and as a result, the Company may not be able to obtain debt financing to meet its cash requirements, including refinancing any scheduled debt maturities, which may adversely affect its ability to execute its business strategy. If the Company refinances debt, such refinancing may not be in the same amount or on terms as favorable as the terms of the existing debt being refinanced. If the Company is unable to refinance its debt, it may be forced to dispose of hotels or issue equity at inopportune times or on disadvantageous terms, which could result in higher costs of capital.
The Company is also subject to risks associated with increases in interest rates with respect to the Company’s variable-rate debt which could reduce cash from operations and adversely affect its ability to make distributions to shareholders. In addition, the Company has used interest rate swaps to manage its interest rate risks on a portion of its variable-rate debt, and in the future, it may use hedging arrangements, such as interest rate swaps, to manage its exposure to interest rate volatility. The Company’s actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge. There is no assurance that the Company’s hedging strategy will achieve its objectives, and the Company may be subject to costs, such as transaction fees or breakage costs, if it terminates these hedging arrangements.
Loans under the Company’s Revolving Credit Facility and term loan agreements may bear interest based on SOFR, but experience with SOFR based loans is limited.
The Company’s Revolving Credit Facility and term loan agreements currently bear interest at rates based on the Secured Overnight Financing Rate published by the Federal Reserve Bank of New York (“SOFR”) plus prescribed margins. The use of SOFR based rates replaced rates based on the London Interbank Offered Rate (“LIBOR”), and reflects the cessation of the publication of LIBOR rates previously announced by regulators in the United Kingdom and the discontinuation of the use of LIBOR in the financial markets. The use of SOFR based rates may result in interest rates and/or payments that are higher or lower than the rates and payments that the Company experienced under its prior credit facilities or term loan agreements where interest rates were based on LIBOR. Also, the use of SOFR based rates is relatively new, and there could be unanticipated difficulties or disruptions with the calculation and publication of SOFR based rates.
Compliance with financial and other covenants in the Company’s existing or future debt agreements may reduce operational flexibility and create default risk.
The Company’s existing indebtedness, whether secured by mortgages on certain properties or unsecured, contains, and indebtedness that the Company may enter into in the future likely will contain, customary covenants that may restrict the Company’s operations and limit its ability to enter into future indebtedness. In addition, the Company’s ability to borrow under its unsecured credit facilities is subject to compliance with its financial and other covenants, including, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, and restrictions on certain investments. The Company’s failure to comply with the covenants in its existing or future indebtedness, or its inability to make required principal and interest payments, could cause a default under the applicable debt agreement, which could result in the acceleration of the debt, requiring the Company to repay such debt with capital obtained from other sources, which may not be available to the Company or may only be available on unfavorable terms.
If the Company defaults on its secured debt, lenders may take possession of the property or properties securing such debt. As a general policy, the Company seeks to obtain mortgages securing indebtedness which encumber only the particular property to which the indebtedness relates, but recourse on these loans may include all of its assets. If recourse on any loan incurred by the Company to acquire or refinance any particular property includes all of its assets, the equity in other properties could be reduced or eliminated through foreclosure on that loan. If a loan is secured by a mortgage on a single property, the Company could lose that property through foreclosure if it defaults on that loan. If the Company defaults under a loan, it is possible that it could become involved in litigation related to matters concerning the loan, and such litigation could result in significant costs for the Company. Additionally, defaulting under a loan may damage the Company’s reputation as a borrower and may limit its ability to secure financing in the future.
Pandemics and other health crises could negatively impact the Company’s business, financial performance and condition, operating results and cash flows.
Pandemics, such as COVID-19, as well as both future widespread and localized outbreaks of infectious diseases and other health concerns, and the measures taken to prevent the spread or lessen the impact, could cause a material disruption to the hotel industry or the economy as a whole. COVID-19 disrupted the industry and dramatically reduced business and impacted leisure travel from March 2020 into 2022, which disrupted the Company’s business and had a significant adverse effect, and a similar outbreak could, in the future, significantly adversely impact and disrupt its business, financial performance and condition, operating results and cash flows. Additional factors that may negatively impact the Company’s ability to operate successfully as a result of a pandemic, include, among others:
•sustained negative consumer or business sentiment or corporate travel policy restrictions, which could further adversely impact demand for lodging;
•postponement and cancellation of events, including sporting events, conferences and meetings;
•hotel closures and the Company’s ability to reopen hotels that are temporarily closed in a timely manner, and its ability to attract customers to its hotels when they are able to reopen;
•a severe disruption or instability in the global financial markets or deterioration in credit and financing conditions;
•increased costs and potential difficulty accessing supplies related to personal protective equipment, increased sanitation, social distancing and other mitigation measures at hotels; and
•increased labor costs to attract employees due to perceived risk of exposure to an infectious disease or virus, as well as potential for increased workers’ compensation claims if hotel employees are exposed to such diseases or viruses in the workplace.
Moreover, many risk factors set forth in this Annual Report on Form 10-K would be heightened as a result of another potential pandemic. The full extent of the impact of a pandemic on the Company’s business is largely uncertain and dependent on a number of factors beyond its control, and the Company is not able to estimate with any degree of certainty the effect a pandemic or measures intended to curb its spread could have on the Company’s business, results of operations, financial condition, and cash flows.
Technology is used in operations, and any material failure, inadequacy, interruption or security failure of that technology from cyber-attacks or other events could harm the Company’s business.
The Company and its hotel managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personally identifiable information, reservations, billing and operating data. The Company and its hotel managers and franchisors rely on commercially available and internally developed systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential operator and customer information, such as personally identifiable information, including information relating to financial accounts. A number of hotels, hotel management companies, and brands have been subject to successful cyber-attacks, including those seeking guest credit card information. Moreover, the risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers, nation-state affiliated actors and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. It is possible that the safety and security measures taken by the Company and its hotel managers and franchisors will not be able to prevent damage to the systems, the systems’ improper functioning, or the improper access or disclosure of personally identifiable information.
Security breaches, whether through physical or electronic break-ins, cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, social engineering or phishing schemes, can create system disruptions, shutdowns, deployment of ransomware, theft of the Company’s data, or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of information systems could interrupt operations, interfere with the Company’s ability to comply with financial reporting requirements, damage the reputations of the Company, the Company’s hotel managers or franchisors, and subject the Company to liability claims or regulatory penalties that may not be fully covered by insurance, all of which could have a material adverse effect on the business, financial condition and results of operations of the Company.
Potential losses not covered by insurance may adversely affect the Company’s financial condition.
The Company maintains comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to all of its hotels. These policies offer coverage features and insured limits that the Company believes are customary for similar types of properties. There are no assurances that coverage will be available or at reasonable rates in the future. Also, various types of catastrophic losses, like earthquakes, hurricanes and other storms, wildfires, or certain types of terrorism, may not be insurable or may not be economically insurable for all or certain locations. Even when insurable, these policies may have high deductibles and/or high premiums. Additionally, although the Company may be insured for a particular loss, the Company is not insured against the impact a catastrophic event may have on the hospitality industry as a whole. There also can be risks such as certain environmental hazards that may be deemed to fall outside of the coverage. In the event of a substantial loss, the Company’s insurance coverage may not be sufficient to cover the full current market value or replacement cost of its lost investment. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, the Company might nevertheless remain obligated for any mortgage debt or other financial obligations related to the hotel. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also prevent the Company from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. The Company also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that the Company believes to be covered under the relevant policy. Under those circumstances, the insurance proceeds the Company receives might be inadequate to restore its economic position in the damaged or destroyed hotel. Additionally, as a result of substantial claims, insurance carriers may reduce insured limits and/or increase premiums, if insurance coverage is provided at all, in the future. Any of these or similar events could have a material adverse effect on the Company’s financial condition and results of operations.
The Company faces possible risks associated with the physical effects of, and laws and regulations related to, climate change.
The Company is subject to the risks associated with the physical effects of climate change, which could include more frequent or severe storms, droughts, wildfires, hurricanes, flooding, and utility outages, any of which could have a material adverse effect on the Company’s properties, operations and business. To the extent climate change causes changes in weather patterns, the markets in which the Company operates could experience increases in storm intensity and rising sea levels causing damage to the Company’s properties. Over time, these conditions could result in declining hotel demand or the Company’s inability to operate the affected hotels at all. Climate change also may have indirect effects on the Company’s business by increasing the cost of (or making unavailable) property insurance on terms the Company finds acceptable, as well as increasing the cost of renovations, energy and water at its
properties. The federal government and some of the states and localities in which the Company operates have enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions and may enact new laws in the future. Although these laws and regulations have not had any known material adverse effect on the Company to date, they could impact companies with which the Company does business or result in substantial costs to the Company, including compliance costs, construction costs, monitoring and reporting costs, and capital expenditures for environmental control facilities and other new equipment. Climate change, and any future laws and regulations, or future interpretations of current laws and regulations, could have a material adverse effect on the Company.
The Company could incur significant, material costs related to government regulation and litigation with respect to environmental matters, which could have a material adverse effect on the Company.
The Company’s hotels are subject to various U.S. federal, state and local environmental laws that impose liability for contamination. Under these laws, governmental entities have the authority to require the Company, as the current owner of a hotel, to perform or pay for the cleanup of contamination (including hazardous substances, asbestos and asbestos-containing materials, waste, petroleum products or mold) at, on, under or emanating from the hotel and to pay for natural resource damages arising from such contamination. Such laws often impose liability without regard to whether the owner or operator or other responsible party knew of, or caused such contamination, and the liability may be joint and several. Because these laws also impose liability on persons who owned or operated a property at the time it became contaminated, it is possible the Company could incur cleanup costs or other environmental liabilities even after it sells or no longer operates hotels. Contamination at, on, under or emanating from the Company’s hotels also may expose it to liability to private parties for the costs of remediation, personal injury and/or property damage. In addition, environmental laws may create liens on contaminated sites in favor of the government for damages and costs required to address such contamination. If contamination is discovered on the Company’s properties, environmental laws also may impose restrictions on the manner in which the properties may be used or businesses may be operated, and these restrictions may require substantial expenditures. Moreover, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property on favorable terms, or at all. Furthermore, if, as part of the remediation of a contaminated property, the Company were to dispose of certain waste products at a waste disposal facility, such as a landfill or an incinerator, the Company may be liable for costs associated with the cleanup of that facility.
In addition, the Company’s hotels are subject to various U.S. federal, state, and local environmental, health and safety laws and regulations that address a wide variety of issues, including, but not limited to, storage tanks, air emissions from emergency generators, storm water and wastewater discharges, lead-based paint, mold and mildew, and waste management. Some of the Company’s hotels routinely handle and use hazardous or regulated substances and wastes as part of their operations, which are subject to regulation (e.g., swimming pool chemicals and cleaning supplies). The Company’s hotels incur costs to comply with these environmental, health and safety laws and regulations, and could be subject to fines and penalties for non-compliance with applicable requirements.
Liabilities and costs associated with environmental contamination at or emanating from the Company’s hotel properties, defending against claims related to alleged or actual environmental issues, or complying with environmental, health and safety laws and regulations could be material and could materially and adversely affect the Company. The Company can make no assurances that changes in current laws or regulations, or future laws or regulations will not impose additional or new material environmental liabilities or that the current environmental condition of its hotels will not be affected by its operations, the condition of the properties in the vicinity of its hotels, or by third parties unrelated to the Company. The discovery of material environmental liabilities at its properties could subject the Company to unanticipated significant costs, which could significantly reduce or eliminate its profitability.
The Company may incur significant costs complying with various regulatory requirements, which could materially and adversely affect the Company.
The Company and its hotels are subject to various U.S. federal, state and local regulatory requirements. These requirements are wide-ranging and include among others, state and local fire and life safety requirements, federal laws such as the Americans with Disabilities Act of 1990 and the Accessibility Guidelines promulgated thereunder (“ADA”) and the Sarbanes-Oxley Act of 2002. Liabilities and costs associated with complying with these requirements are and could be material. If the Company fails to comply with these various requirements, it could incur governmental fines or private damage awards. In addition, existing requirements could change, and future requirements might require the Company to make significant unanticipated expenditures, which could have material and adverse effects on the Company.
In addition, as a result of these significant regulations, the Company could become subject to regulatory investigations and lawsuits. Regulatory investigations and lawsuits could result in significant costs to respond and costs of fines or settlements, or changes in the Company’s business practices, any of which could have a material adverse effect on the financial condition, results of operations, liquidity and capital resources, and cash flows of the Company. The ability of the Company to access capital markets, including commercial debt markets, could also be negatively impacted by unfavorable, or the possibility of unfavorable, outcomes from adverse regulatory actions or lawsuits.
Heightened focus on corporate responsibility, specifically related to ESG practices, may impose additional costs and expose the Company to new risks.
Companies across industries face increasing scrutiny from various stakeholders on how they address a variety of Environmental, Social and Governance (“ESG”) matters. Potential and current employees, hotel brands, hotel management companies and vendors may consider these factors when establishing and extending business relationships and hotel guests may consider these factors when choosing a hotel. With this increased focus, public reporting regarding ESG practices is becoming more broadly expected. The Company summarizes its existing ESG programs in its annual Corporate Responsibility Report, which is available on its website. The focus on and activism around ESG and related matters may constrain business operations or cause the Company to incur additional costs. The Company may face reputational damage in the event the Company’s corporate responsibility initiatives do not meet the standards set by various constituencies, including those of third-party providers of corporate responsibility ratings and reports. Furthermore, if competitors outperform the Company in such metrics, potential or current investors may elect to invest with the Company’s competitors, and employees, hotel brands, hotel management companies, vendors and guests may choose not to do business with the Company, which could have a material and adverse impact on the Company’s financial condition, the market price of its common shares and ability to raise capital. Moreover, while the Company makes voluntary disclosures in its Corporate Responsibility Report regarding its ESG practices, certain disclosures are based on hypothetical expectations and assumptions that may differ from actual results. In addition, the SEC is currently evaluating potential new ESG disclosure and other requirements that would impact the Company.
As the Company continues to invest and focus on ESG practices that the Company believes are appropriate for its business, the Company could also be criticized by ESG detractors for the scope or nature of its initiatives or goals. The Company could be subjected to negative responses of governmental actors (such as anti-ESG legislation or retaliatory legislative treatment), hotel brands, hotel management companies and hotel guests, that could have a material adverse effect on the Company’s reputation, financial condition and results of operations.
Risks Related to the Company’s Organization and Structure
The Company’s ownership limitations may restrict or prevent certain acquisitions and transfers of its shares.
In order for the Company to maintain its qualification as a REIT under the Code, not more than 50% in value of its outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year following the Company’s first year (the “5/50 Test”). Additionally, at least 100 persons must beneficially own the Company’s shares during at least 335 days of each taxable year (the “100 Shareholder Test”). The Company’s amended and restated articles of incorporation (the “Charter”), with certain exceptions, authorizes the Company’s Board of Directors to take the actions that are necessary and desirable to preserve its qualification as a REIT. In addition to the 5/50 Test and the 100 Shareholder Test, the Company’s Charter provides that no person or entity may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series (“share ownership limits”). The Company’s Board of Directors may, in its sole discretion, grant an exemption to the share ownership limits, subject to certain conditions and the receipt by the Board of Directors of certain representations and undertakings. In addition, the Board of Directors may change the share ownership limits. The share ownership limits contained in the Charter key off the ownership at any time by any “person,” which term includes entities, and take into account direct and indirect ownership as determined under various ownership attribution rules in the Code. The share ownership limits might delay or prevent a transaction or a change in the Company’s control that might involve a premium price for the Company’s common shares or otherwise be in the best interests of its shareholders.
The Company’s future issuances of preferred shares or debt securities may adversely affect the voting power or ownership interest of the holders of common shares or may limit the ability of a third party to acquire control of the Company.
The Company’s Charter allows the Board of Directors to issue up to 30 million “blank check” preferred shares, without action by shareholders. Preferred shares may be issued on terms determined by the Board of Directors, and may have rights, privileges and preferences superior to those of common shares. Without limiting the foregoing, (i) such preferred shares could have liquidation rights that are senior to the liquidation preference applicable to common shares, (ii) such preferred shares could have voting or conversion rights, which could adversely affect the voting power of the holders of common shares, and (iii) the ownership interest of holders of common shares will be diluted following the issuance of any such preferred shares. In addition, the issuance of blank check preferred shares could have the effect of discouraging, delaying or preventing a change of control of the Company. Additionally, the Company may issue debt securities which would have distribution rights that are senior to common shares and liquidation rights that are senior to the liquidation preference applicable to common shares. Common shareholders bear the risk that the Company’s future issuances of preferred shares or debt securities will negatively affect the market price of the Company’s common shares.
Provisions of the Company’s third amended and restated bylaws could inhibit changes in control.
Provisions in the Company’s third amended and restated bylaws may make it difficult for another company to acquire it and for shareholders to receive any related takeover premium for its common shares. Pursuant to the Company’s third amended and restated bylaws, directors are elected by the plurality of votes cast and entitled to vote in the election of directors. However, the Company’s corporate governance guidelines require that if an incumbent director fails to receive at least a majority of the votes cast, such director will tender his or her resignation from the Board of Directors. The Nominating and Corporate Governance Committee of the Board of Directors will consider, and determine whether to accept, such resignation. Additionally, the third amended and restated bylaws of the Company have various advance notice provisions that require shareholders to meet certain requirements and deadlines for proposals at an annual meeting of shareholders. These provisions may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium to the price of the Company’s common shares or otherwise be in the shareholders’ best interests.
The Company’s Executive Chairman has interests that may conflict with the interests of the Company and that may detract from the time devoted to the Company.
Glade M. Knight, the Company’s Executive Chairman, is and will be a principal in other real estate investment transactions or programs that may compete with the Company, and he is and may be a principal in other business ventures. Mr. Knight’s management and economic interests in these other transactions or programs may conflict with the interests of the Company. Mr. Knight is not required to devote a fixed amount of time and attention to the Company’s business affairs as opposed to the other companies, which could detract from time devoted to the Company.
Tax-Related Risks and Risks Related to the Company’s Status as a REIT
Qualifying as a REIT involves highly technical and complex provisions of the Code and failure of the Company to qualify as a REIT would have adverse consequences to the Company and its shareholders.
The Company’s qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the Company to qualify as a REIT. Maintaining the Company’s qualification as a REIT depends on the Company’s satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. The Company’s ability to satisfy the REIT income and asset tests depends upon the Company’s analysis of the characterization and fair market values of the Company’s assets, some of which are not susceptible to a precise determination and for which the Company will not obtain independent appraisals, and upon the Company’s ability to successfully manage the composition of its income and assets on an ongoing basis. In addition, the Company’s ability to satisfy the requirements to maintain its qualification as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence.
If the Company does not qualify as a REIT or if the Company fails to remain qualified as a REIT, the Company will be subject to U.S. federal corporate income tax and potentially state and local taxes, which would reduce the Company’s earnings and the amount of cash available for distribution to its shareholders.
If the Company failed to qualify as a REIT in any taxable year and any available relief provisions did not apply, the Company would be subject to U.S. federal and state corporate income tax on its taxable income at the regular corporate rate (including any applicable corporate minimum tax), and dividends paid to its shareholders would not be deductible by the Company in computing its taxable income. Unless the Company was entitled to statutory relief under certain Code provisions, the Company also would be disqualified from taxation as a REIT for the four taxable years following the year in which it failed to qualify as a REIT.
Any determination that the Company does not qualify as a REIT would have a material adverse effect on the Company’s results of operations and could materially reduce the market price of its common shares. The Company’s additional tax liability could be substantial and would reduce its net earnings available for investment, debt service or distributions to shareholders. Furthermore, the Company would no longer be required to make any distributions to shareholders as a condition to REIT qualification and all of its distributions to shareholders would be taxable as ordinary C corporation dividends to the extent of its current and accumulated earnings and profits. The Company’s failure to qualify as a REIT also could cause an event of default under loan documents governing its debt.
Even if the Company qualifies as a REIT, it may face other tax liabilities that reduce its cash flow.
Even if the Company qualifies for taxation as a REIT, it may be subject to certain U.S. federal, state and local taxes, including payroll taxes, taxes on any undistributed income, taxes on income from some activities conducted as a result of a foreclosure, a 100%
excise tax on any transactions with a TRS that are not conducted on an arm’s-length basis, and state or local income, franchise, property and transfer taxes. Moreover, if the Company has net income from the sale of properties that are “dealer” properties (a “prohibited transaction” under the Code), that income will be subject to a 100% tax. The Company could, in certain circumstances, be required to pay an excise or penalty tax (which could be significant in amount) in order to utilize one or more relief provisions under the Code to maintain its qualification as a REIT. In addition, the Company’s TRSs will be subject to U.S. federal, state and local corporate income taxes on their net taxable income, if any. Any of these taxes would decrease cash available for other uses, such as the payment of the Company’s debt obligations and distributions to shareholders.
REIT distribution requirements could adversely affect the Company’s ability to execute its business plan or cause it to increase debt levels or issue additional equity during unfavorable market conditions.
The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that it distributes. To the extent that the Company satisfies this distribution requirement but distributes less than 100% of its taxable income, the Company will be subject to U.S. federal corporate income tax on its undistributed taxable income. In addition, the Company will be subject to a 4% nondeductible excise tax if the actual amount that the Company pays out to its shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. If there is an adjustment to any of the Company’s taxable income or dividends-paid deductions, the Company could elect to use the deficiency dividend procedure in order to maintain the Company’s REIT status. That deficiency dividend procedure could require the Company to make significant distributions to its shareholders and to pay significant interest to the IRS.
From time to time, the Company may generate taxable income greater than its income for financial reporting purposes prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). In addition, differences in timing between the recognition of taxable income and the actual receipt of cash may occur. As a result, the Company may find it difficult or impossible to meet distribution requirements in certain circumstances. In particular, where the Company experiences differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of its taxable income could cause it to: (1) sell assets in unfavorable market conditions; (2) incur debt or issue additional equity on disadvantageous terms; (3) distribute amounts that would otherwise be invested in future acquisitions or capital expenditures or used for the repayment of debt; or (4) make a taxable distribution of its common shares as part of a distribution in which shareholders may elect to receive the Company’s common shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. These alternatives could increase the Company’s costs or dilute its equity. In addition, because the REIT distribution requirement prevents the Company from retaining earnings, the Company generally will be required to refinance debt at its maturity with additional debt or equity. Thus, compliance with the REIT requirements may hinder the Company’s ability to grow, which could adversely affect the market price of its common shares.
The Company may in the future choose to pay dividends in the form of common shares, in which case shareholders may be required to pay income taxes in excess of the cash dividends they receive.
The Company may seek in the future to distribute taxable dividends that are payable in cash and common shares, at the election of each shareholder. Taxable shareholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of the Company’s current and accumulated earnings and profits for U.S. federal income tax purposes, however, generally a shareholder will receive a taxable income deduction for 20% of all ordinary dividends received from a REIT. As a result, shareholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. shareholder sells the common shares that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of common shares at the time of the sale. In addition, in such case, a U.S. shareholder could have a capital loss with respect to the common shares sold that could not be used to offset such dividend income. Furthermore, with respect to certain non-U.S. shareholders, the Company may be required to withhold U.S. federal income tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common shares. In addition, such a taxable share dividend could be viewed as equivalent to a reduction in the Company’s cash distributions, and that factor, as well as the possibility that a significant number of the Company’s shareholders could determine to sell the common shares in order to pay taxes owed on dividends, may put downward pressure on the market price of the Company’s common shares.
If the Company’s leases are not respected as true leases for U.S. federal income tax purposes, the Company would likely fail to qualify as a REIT.
To qualify as a REIT, the Company must satisfy two gross income tests, pursuant to which specified percentages of the Company’s gross income must be passive income, such as rent. For the rent paid pursuant to the hotel leases with the Company’s TRSs, which the Company currently expects will continue to constitute substantially all of the REIT’s gross income, to qualify for purposes of the gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and must not be
treated as service contracts, joint ventures or some other type of arrangement. The Company believes that the leases have been and will continue to be respected as true leases for U.S. federal income tax purposes. There can be no assurance, however, that the IRS will agree with this characterization. If the leases were not respected as true leases for U.S. federal income tax purposes, the Company may not be able to satisfy either of the two gross income tests applicable to REITs and may lose its REIT status. Additionally, the Company could be subject to a 100% excise tax for any adjustment to its leases.
If any of the hotel management companies that the Company’s TRSs engage do not qualify as “eligible independent contractors,” or if the Company’s hotels are not “qualified lodging facilities,” the Company would likely fail to qualify as a REIT.
Rent paid by a lessee that is a “related party tenant” of the Company generally will not be qualifying income for purposes of the two gross income tests applicable to REITs. An exception is provided, however, for leases of “qualified lodging facilities” to a TRS so long as the hotels are managed by an “eligible independent contractor” and certain other requirements are satisfied. The Company intends to continue to take advantage of this exception. A “qualified lodging facility” is a hotel, motel, or other establishment more than one-half of the dwelling units in which are used on a transient basis, including customary amenities and facilities, provided that no wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. Although the Company intends to monitor future acquisitions and improvements of hotels, the REIT provisions of the Code provide only limited guidance for making determinations under the requirements for “qualified lodging facilities,” and there can be no assurance that these requirements will be satisfied in all cases.
In addition, the Company’s TRS lessees have engaged hotel management companies that are intended to qualify as “eligible independent contractors.” Among other requirements, in order to qualify as an “eligible independent contractor,” the hotel management company must not own, directly or through its shareholders, more than 35% of the Company’s outstanding shares, and no person or group of persons can own more than 35% of the Company’s outstanding shares and the shares (or ownership interest) of the hotel management company (taking into account certain ownership attribution rules). The ownership attribution rules that apply for purposes of these 35% thresholds are complex, and monitoring actual and constructive ownership of the Company’s shares by the hotel management companies and their owners may not be practical. Accordingly, there can be no assurance that these ownership levels will not be exceeded. In addition, for a hotel management company to qualify as an “eligible independent contractor,” such company or a related person must be actively engaged in the trade or business of operating “qualified lodging facilities” (as defined above) for one or more persons not related to the REIT or its TRSs at each time that such company enters into a hotel management contract with a TRS. As of the date hereof, the Company believes the hotel management companies operate “qualified lodging facilities” for certain persons who are not related to the Company or its TRSs. However, no assurances can be provided that this will continue to be the case or that any other hotel management companies that the Company may engage in the future will in fact comply with this requirement in the future.
The Company’s ownership of TRSs is limited, and the Company’s transactions with its TRSs will cause it to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. The rules also impose a 100% excise tax on certain transactions, including the leases, between the TRS and the REIT that are not conducted on an arm’s-length basis.
The Company’s TRSs will pay U.S. federal, state and local income taxes on their net taxable income, and their after-tax net income will be available for distribution to the REIT, but is not required to be distributed. The Company has monitored and will continue to monitor the value of its respective investments in its TRSs for the purpose of ensuring compliance with the ownership limitations applicable to TRSs. In addition, the Company will continue to scrutinize all of its transactions with its TRSs to ensure that they are entered into on arm’s-length terms to avoid incurring the 100% excise tax. There can be no assurance, however, that the Company will be able to comply with the rules regarding TRSs or avoid application of the 100% excise tax. The most significant transactions between the Company and its TRSs are the hotel leases from the Company to its TRSs. While the Company believes its leases have customary terms and reflect normal business practices and that the rents paid thereto reflect market terms, there can be no assurance that the IRS will agree.
Complying with REIT requirements may force the Company to forgo and/or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature and diversification of its assets, the amount it distributes to its shareholders and the ownership of its common shares. In order to
meet these tests, the Company may be required to liquidate from its portfolio, or contribute to a TRS, otherwise attractive investments in order to maintain its qualification as a REIT. These actions could have the effect of reducing the Company’s income and amounts available for distribution to its shareholders. In addition, the Company may be required to make distributions to shareholders at disadvantageous times or when the Company does not have funds readily available for distribution, and may be unable to pursue investments that would otherwise be advantageous to it in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the Company’s ability to make, and, in certain cases, maintain ownership of, certain attractive investments.
The Company may be subject to adverse legislative or regulatory tax changes.
The IRS, the U.S. Treasury Department and Congress frequently review U.S. federal income tax legislation, regulations and other guidance. At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended or modified. The Company cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be adopted or modified. Changes to the tax laws, including the possibility of major tax legislation, possibly with retroactive application, may adversely affect taxation of the Company or the Company’s shareholders. The Company urges shareholders and prospective shareholders to consult with their tax advisors with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Company’s shares. Although REITs generally receive certain tax advantages compared to entities taxed as C corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated as a C corporation for U.S. federal income tax purposes.
General Risk Factors
The Company may change its distribution policy or may not have funds available to make distributions to shareholders.
The Board of Directors will continue to evaluate the Company’s distribution policy in conjunction with the impact of the economy on its operations, actual and projected financial condition and results of operations, capital expenditure requirements and other factors, including those discussed in this Annual Report on Form 10-K. There can be no assurance that the Company will continue to make distributions at any particular time or rate, or at all. Further, there is no assurance that a distribution rate achieved for a particular period will be maintained in the future. For example, distributions may be suspended or distribution rates may be adjusted from time to time to a level determined to be prudent in relation to the Company’s other cash requirements. The Board of Directors evaluates the distribution rate on an ongoing basis and may make changes at any time if it believes the rate is not appropriate based on REIT taxable income, limitations under financing arrangements, or other cash needs. A suspension of distributions or a reduction in the Company’s distribution rate could have a material adverse effect on the market price of the Company’s common shares.
Further, while the Company generally seeks to make distributions from its operating cash flows, distributions may be made (although there is no obligation to do so) in certain circumstances, in part, from financing proceeds or other sources. While distributions made from such sources would result in the shareholder receiving cash, the consequences to the shareholders would differ from a distribution made from the Company’s operating cash flows. For example, if debt financing is the source of a distribution, that financing would not be available for other opportunities, would have to be repaid and interest would accrue on the financing.
The market price and trading volume of the Company’s common shares may fluctuate widely and could decline substantially in the future.
The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.” The market price and trading volume of the Company’s common shares may fluctuate widely, depending on many factors, some of which may be beyond the Company’s control, including:
•actual versus anticipated differences in the Company’s operating results, liquidity, or financial condition;
•publication of research reports about the Company and the accuracy of information published in these reports, regarding its hotels or the lodging or overall real estate industry;
•changes in and/or failure to meet analysts’ revenue or earnings estimates;
•the reputation of REITs and real estate investments generally, and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income instruments;
•changes in accounting principles or other laws and regulations that may adversely affect the Company or its industry;
•strategic actions by the Company or its competitors, such as acquisitions or dispositions, and announcements by franchisors, operators or REITs and other owners in the hospitality industry;
•fluctuations in the stock price and operating results of the Company’s competitors; and
•the realization of any of the other risk factors presented in this Annual Report on Form 10-K.
Stock markets in general have historically experienced volatility that has often been unrelated to the operating performance of a particular company or industry. Similar broad market fluctuations may adversely affect the trading price and volume of the Company’s common shares.
Future offerings or the perception that future offerings could occur may adversely affect the market price of the Company’s common shares and future offerings may be dilutive to existing shareholders.
The Company has in the past issued and may in the future issue additional common shares. Proceeds from any issuance may be used to finance hotel acquisitions, fund capital expenditures, pay down outstanding debt, or for other corporate purposes. A large volume of sales of the Company’s common shares could decrease the market price of the Company’s common shares and could impair the Company’s ability to raise additional capital through the sale of equity securities in the future. Also, a perception of the possibility of a substantial sale of common shares could depress the market price of the Company’s common shares and have a negative effect on the Company’s ability to raise capital in the future. In addition, anticipated downward pressure on the price of the Company’s common shares due to actual or anticipated sales of common shares could cause some institutions or individuals to engage in short sales of the common shares, which may itself cause the price of the common shares to decline. Because the Company’s decision to issue equity securities in any future offering will depend on market conditions and other factors beyond its control, the Company cannot predict or estimate the amount, timing or nature of its future offerings. Therefore, the Company’s shareholders bear the risk of the Company’s future offerings reducing the market price of its common shares and diluting shareholders’ equity interests in the Company.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B.	 Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2.	Properties
As of December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 16 hotel management companies, none of which are affiliated with the Company. See “Management and Franchise Agreements” in Part I, Item 1, Business, appearing elsewhere in this Annual Report on Form 10-K, for a table summarizing the number of hotels and rooms by brand. The following table summarizes the number of hotels and rooms by state:
Number of Hotels and Guest Rooms by State
Number of
Number of
State
Hotels
Rooms
Alabama
1,246
Alaska
Arizona
1,776
Arkansas
California
3,721
Colorado
Florida
2,844
Georgia
Idaho
Illinois
1,255
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Nebraska
Nevada
New Jersey
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
Tennessee
1,337
Texas
3,328
Utah
Virginia
1,667
Washington
Wisconsin
Total
29,900
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 225 hotels and the non-hotel property that the Company owned as of December 31, 2023. As noted below, 14 of the Company’s hotels are subject to ground leases and 15 of its hotels are encumbered by mortgage notes.
City
State
Brand
Manager (3)
Date
Acquired or
Completed
Rooms
Anchorage
AK
Embassy Suites
InnVentures
4/30/2010
Anchorage
AK
Home2 Suites
InnVentures
12/1/2017
Auburn
AL
Hilton Garden Inn
LBA
3/1/2014
Birmingham
AL
Courtyard
LBA
3/1/2014
Birmingham
AL
Hilton Garden Inn
LBA
9/12/2017
Birmingham
AL
Home2 Suites
LBA
9/12/2017
Birmingham
AL
Homewood Suites
McKibbon
3/1/2014
Dothan
AL
Hilton Garden Inn
LBA
6/1/2009
Dothan
AL
Residence Inn
LBA
3/1/2014
Huntsville
AL
Hampton
LBA
9/1/2016
Huntsville
AL
Hilton Garden Inn
LBA
3/1/2014
Huntsville
AL
Home2 Suites
LBA
9/1/2016
Huntsville
AL
Homewood Suites
LBA
3/1/2014
Mobile
AL
Hampton
McKibbon
9/1/2016
(2)
Prattville
AL
Courtyard
LBA
3/1/2014
Rogers
AR
Hampton
Raymond
8/31/2010
(4)
Rogers
AR
Homewood Suites
Raymond
4/30/2010
(4)
Chandler
AZ
Courtyard
North Central
11/2/2010
Chandler
AZ
Fairfield
North Central
11/2/2010
Phoenix
AZ
Courtyard
North Central
11/2/2010
Phoenix
AZ
Hampton
North Central
9/1/2016
(2)
Phoenix
AZ
Hampton
North Central
5/2/2018
Phoenix
AZ
Homewood Suites
North Central
9/1/2016
(2)
Phoenix
AZ
Residence Inn
North Central
11/2/2010
Scottsdale
AZ
Hilton Garden Inn
North Central
9/1/2016
Tempe
AZ
Hyatt House
Crestline
8/13/2020
(2)
Tempe
AZ
Hyatt Place
Crestline
8/13/2020
(2)
Tucson
AZ
Hilton Garden Inn
Western
7/31/2008
Tucson
AZ
Residence Inn
Western
3/1/2014
Tucson
AZ
TownePlace Suites
Western
10/6/2011
Agoura Hills
CA
Homewood Suites
Dimension
3/1/2014
Burbank
CA
Courtyard
Huntington
8/11/2015
(1)
Burbank
CA
Residence Inn
Marriott
3/1/2014
Burbank
CA
SpringHill Suites
Marriott
7/13/2015
(1)
Clovis
CA
Hampton
Dimension
7/31/2009
Clovis
CA
Homewood Suites
Dimension
2/2/2010
Cypress
CA
Courtyard
Dimension
3/1/2014
Cypress
CA
Hampton
Dimension
6/29/2015
Oceanside
CA
Courtyard
Marriott
9/1/2016
(1)
Oceanside
CA
Residence Inn
Marriott
3/1/2014
Rancho Bernardo/San Diego
CA
Courtyard
InnVentures
3/1/2014
Sacramento
CA
Hilton Garden Inn
Dimension
3/1/2014
San Bernardino
CA
Residence Inn
InnVentures
2/16/2011
San Diego
CA
Courtyard
Huntington
9/1/2015
(1)
San Diego
CA
Hampton
Dimension
3/1/2014
(1)
San Diego
CA
Hilton Garden Inn
InnVentures
3/1/2014
San Diego
CA
Residence Inn
Dimension
3/1/2014
San Jose
CA
Homewood Suites
Dimension
3/1/2014
(1)
San Juan Capistrano
CA
Residence Inn
Marriott
9/1/2016
(2)
City
State
Brand
Manager (3)
Date
Acquired or
Completed
Rooms
Santa Ana
CA
Courtyard
Dimension
5/23/2011
(1)
Santa Clarita
CA
Courtyard
Dimension
9/24/2008
Santa Clarita
CA
Fairfield
Dimension
10/29/2008
Santa Clarita
CA
Hampton
Dimension
10/29/2008
Santa Clarita
CA
Residence Inn
Dimension
10/29/2008
Tustin
CA
Fairfield
Marriott
9/1/2016
Tustin
CA
Residence Inn
Marriott
9/1/2016
Colorado Springs
CO
Hampton
Chartwell
9/1/2016
Denver
CO
Hilton Garden Inn
InnVentures
9/1/2016
(1)
Highlands Ranch
CO
Hilton Garden Inn
Dimension
3/1/2014
Highlands Ranch
CO
Residence Inn
Dimension
3/1/2014
Boca Raton
FL
Hilton Garden Inn
Dimension
9/1/2016
Cape Canaveral
FL
Hampton
LBA
4/30/2020
Cape Canaveral
FL
Homewood Suites
LBA
9/1/2016
Cape Canaveral
FL
Home2 Suites
LBA
4/30/2020
Fort Lauderdale
FL
Hampton
Dimension
6/23/2015
Fort Lauderdale
FL
Residence Inn
LBA
9/1/2016
Gainesville
FL
Hilton Garden Inn
McKibbon
9/1/2016
Gainesville
FL
Homewood Suites
McKibbon
9/1/2016
Jacksonville
FL
Homewood Suites
McKibbon
3/1/2014
Jacksonville
FL
Hyatt Place
Crestline
12/7/2018
Miami
FL
Courtyard
Dimension
3/1/2014
(2)
Miami
FL
Hampton
HHM
4/9/2010
Miami
FL
Homewood Suites
Dimension
3/1/2014
Orlando
FL
Fairfield
Marriott
7/1/2009
Orlando
FL
Home2 Suites
LBA
3/19/2019
Orlando
FL
SpringHill Suites
Marriott
7/1/2009
Panama City
FL
Hampton
LBA
3/12/2009
Panama City
FL
TownePlace Suites
LBA
1/19/2010
Pensacola
FL
TownePlace Suites
McKibbon
9/1/2016
Tallahassee
FL
Fairfield
LBA
9/1/2016
Tallahassee
FL
Hilton Garden Inn
LBA
3/1/2014
(2)
Tampa
FL
Embassy Suites
HHM
11/2/2010
Atlanta/Downtown
GA
Hampton
McKibbon
2/5/2018
Atlanta/Perimeter Dunwoody
GA
Hampton
LBA
6/28/2018
Atlanta
GA
Home2 Suites
McKibbon
7/1/2016
Macon
GA
Hilton Garden Inn
LBA
3/1/2014
(2)
Savannah
GA
Hilton Garden Inn
Newport
3/1/2014
(2)
Cedar Rapids
IA
Hampton
Chartwell
9/1/2016
Cedar Rapids
IA
Homewood Suites
Chartwell
9/1/2016
Davenport
IA
Hampton
Chartwell
9/1/2016
Boise
ID
Hampton
Raymond
4/30/2010
(1)
Des Plaines
IL
Hilton Garden Inn
Raymond
9/1/2016
Hoffman Estates
IL
Hilton Garden Inn
HHM
9/1/2016
Mettawa
IL
Hilton Garden Inn
HHM
11/2/2010
Mettawa
IL
Residence Inn
HHM
11/2/2010
Rosemont
IL
Hampton
Raymond
9/1/2016
Skokie
IL
Hampton
Raymond
9/1/2016
Warrenville
IL
Hilton Garden Inn
HHM
11/2/2010
Indianapolis
IN
SpringHill Suites
HHM
11/2/2010
City
State
Brand
Manager (3)
Date
Acquired or
Completed
Rooms
Merrillville
IN
Hilton Garden Inn
HHM
9/1/2016
Mishawaka
IN
Residence Inn
HHM
11/2/2010
South Bend
IN
Fairfield
HHM
9/1/2016
Overland Park
KS
Fairfield
Raymond
3/1/2014
Overland Park
KS
Residence Inn
Raymond
3/1/2014
Wichita
KS
Courtyard
Chartwell
3/1/2014
Louisville
KY
AC Hotels
Concord
10/25/2022
Lafayette
LA
Hilton Garden Inn
LBA
7/30/2010
(2)
Lafayette
LA
SpringHill Suites
LBA
6/23/2011
New Orleans
LA
Homewood Suites
Dimension
3/1/2014
(1)
Marlborough
MA
Residence Inn
Crestline
3/1/2014
Westford
MA
Hampton
Crestline
3/1/2014
Westford
MA
Residence Inn
Crestline
3/1/2014
(1)
Annapolis
MD
Hilton Garden Inn
Crestline
3/1/2014
Silver Spring
MD
Hilton Garden Inn
Crestline
7/30/2010
Portland
ME
AC Hotels
Crestline
8/20/2021
Portland
ME
Aloft
Crestline
9/10/2021
Portland
ME
Residence Inn
Crestline
10/13/2017
(1)
Novi
MI
Hilton Garden Inn
HHM
11/2/2010
Maple Grove
MN
Hilton Garden Inn
North Central
9/1/2016
Rochester
MN
Hampton
Raymond
8/3/2009
St. Paul
MN
Hampton
Raymond
3/4/2019
Kansas City
MO
Hampton
Raymond
8/31/2010
Kansas City
MO
Residence Inn
Raymond
3/1/2014
St. Louis
MO
Hampton
Raymond
8/31/2010
St. Louis
MO
Hampton
Raymond
4/30/2010
Hattiesburg
MS
Courtyard
LBA
3/1/2014
Hattiesburg
MS
Residence Inn
LBA
12/11/2008
Carolina Beach
NC
Courtyard
Crestline
3/1/2014
Charlotte
NC
Fairfield
Newport
9/1/2016
Durham
NC
Homewood Suites
McKibbon
12/4/2008
Fayetteville
NC
Home2 Suites
LBA
2/3/2011
Greensboro
NC
SpringHill Suites
Newport
3/1/2014
Jacksonville
NC
Home2 Suites
LBA
9/1/2016
Wilmington
NC
Fairfield
Crestline
3/1/2014
Winston-Salem
NC
Hampton
McKibbon
9/1/2016
Omaha
NE
Courtyard
Marriott
3/1/2014
Omaha
NE
Hampton
HHM
9/1/2016
Omaha
NE
Hilton Garden Inn
HHM
9/1/2016
(1)
Omaha
NE
Homewood Suites
HHM
9/1/2016
Cranford
NJ
Homewood Suites
Dimension
3/1/2014
Mahwah
NJ
Homewood Suites
Dimension
3/1/2014
Mount Laurel
NJ
Homewood Suites
Newport
1/11/2011
Somerset
NJ
Courtyard
Newport
3/1/2014
(2)
West Orange
NJ
Courtyard
Newport
1/11/2011
Las Vegas
NV
SpringHill Suites
Crescent
12/27/2023
Islip/Ronkonkoma
NY
Hilton Garden Inn
Crestline
3/1/2014
New York
NY
(non-hotel)
N/A
3/1/2014
-
(2)(5)
Syracuse
NY
Courtyard
Crestline
10/16/2015
Syracuse
NY
Residence Inn
Crestline
10/16/2015
City
State
Brand
Manager (3)
Date
Acquired or
Completed
Rooms
Cleveland
OH
Courtyard
Concord
6/30/2023
Mason
OH
Hilton Garden Inn
Raymond
9/1/2016
Twinsburg
OH
Hilton Garden Inn
Concord
10/7/2008
Oklahoma City
OK
Hampton
Raymond
5/28/2010
Oklahoma City
OK
Hilton Garden Inn
Raymond
9/1/2016
Oklahoma City
OK
Homewood Suites
Raymond
9/1/2016
Oklahoma City (West)
OK
Homewood Suites
Chartwell
9/1/2016
Portland
OR
Hampton
Raymond
11/17/2021
Collegeville/Philadelphia
PA
Courtyard
Newport
11/15/2010
Malvern/Philadelphia
PA
Courtyard
Newport
11/30/2010
Pittsburgh
PA
AC Hotels
Concord
10/25/2022
Pittsburgh
PA
Hampton
Newport
12/31/2008
Charleston
SC
Home2 Suites
LBA
9/1/2016
Columbia
SC
Hilton Garden Inn
Newport
3/1/2014
Columbia
SC
TownePlace Suites
Newport
9/1/2016
Greenville
SC
Hyatt Place
Crestline
9/1/2021
Hilton Head
SC
Hilton Garden Inn
McKibbon
3/1/2014
Chattanooga
TN
Homewood Suites
LBA
3/1/2014
Franklin
TN
Courtyard
Chartwell
9/1/2016
Franklin
TN
Residence Inn
Chartwell
9/1/2016
Knoxville
TN
Homewood Suites
McKibbon
9/1/2016
Knoxville
TN
SpringHill Suites
McKibbon
9/1/2016
Knoxville
TN
TownePlace Suites
McKibbon
9/1/2016
Memphis
TN
Hampton
Crestline
2/5/2018
Memphis
TN
Hilton Garden Inn
Crestline
10/28/2021
Nashville
TN
Hilton Garden Inn
Dimension
9/30/2010
Nashville
TN
Home2 Suites
Dimension
5/31/2012
Nashville
TN
TownePlace Suites
Chartwell
9/1/2016
Addison
TX
SpringHill Suites
Marriott
3/1/2014
Arlington
TX
Hampton
Western
12/1/2010
Austin
TX
Courtyard
HHM
11/2/2010
Austin
TX
Fairfield
HHM
11/2/2010
Austin
TX
Hampton
Dimension
4/14/2009
Austin
TX
Hilton Garden Inn
HHM
11/2/2010
Austin
TX
Homewood Suites
Dimension
4/14/2009
Austin/Round Rock
TX
Hampton
Dimension
3/6/2009
Austin/Round Rock
TX
Homewood Suites
Dimension
9/1/2016
Dallas
TX
Homewood Suites
Western
9/1/2016
Denton
TX
Homewood Suites
Chartwell
9/1/2016
El Paso
TX
Homewood Suites
Western
3/1/2014
Fort Worth
TX
Courtyard
LBA
2/2/2017
Fort Worth
TX
Hilton Garden Inn
Raymond
11/17/2021
Fort Worth
TX
Homewood Suites
Raymond
11/17/2021
Fort Worth
TX
TownePlace Suites
Western
7/19/2010
Frisco
TX
Hilton Garden Inn
Western
12/31/2008
Grapevine
TX
Hilton Garden Inn
Western
9/24/2010
Houston
TX
Courtyard
LBA
9/1/2016
Houston
TX
Marriott
Western
1/8/2010
Houston
TX
Residence Inn
Western
3/1/2014
Houston
TX
Residence Inn
Western
9/1/2016
City
State
Brand
Manager (3)
Date
Acquired or
Completed
Rooms
Lewisville
TX
Hilton Garden Inn
Western
10/16/2008
San Antonio
TX
TownePlace Suites
Western
3/1/2014
Shenandoah
TX
Courtyard
LBA
9/1/2016
Stafford
TX
Homewood Suites
Western
3/1/2014
Texarkana
TX
Hampton
Western
1/31/2011
Provo
UT
Residence Inn
Dimension
3/1/2014
Salt Lake City
UT
Residence Inn
Huntington
10/20/2017
Salt Lake City
UT
SpringHill Suites
HHM
11/2/2010
Salt Lake City
UT
Courtyard
North Central
10/11/2023
Salt Lake City
UT
Hyatt House
North Central
10/11/2023
South Jordan
UT
Embassy Suites
HHM
11/21/2023
Alexandria
VA
Courtyard
Marriott
3/1/2014
Alexandria
VA
SpringHill Suites
Marriott
3/28/2011
Charlottesville
VA
Courtyard
Crestline
3/1/2014
Manassas
VA
Residence Inn
Crestline
2/16/2011
Richmond
VA
Courtyard
White Lodging
12/8/2014
(1)
Richmond
VA
Marriott
White Lodging
3/1/2014
(2)
Richmond
VA
Residence Inn
White Lodging
12/8/2014
(1)
Suffolk
VA
Courtyard
Crestline
3/1/2014
Suffolk
VA
TownePlace Suites
Crestline
3/1/2014
Virginia Beach
VA
Courtyard
Crestline
3/1/2014
Virginia Beach
VA
Courtyard
Crestline
3/1/2014
Kirkland
WA
Courtyard
InnVentures
3/1/2014
Renton
WA
Residence Inn
InnVentures
10/18/2023
Seattle
WA
Residence Inn
InnVentures
3/1/2014
Tukwila
WA
Homewood Suites
Dimension
3/1/2014
Madison
WI
Hilton Garden Inn
Raymond
2/18/2021
Total
29,900
(1)Hotel is encumbered by mortgage.
(2)Hotel is subject to ground lease.
(3)The management companies are defined in Note 9 titled “Management and Franchise Agreements” in Part II, Item 8 in this Annual Report on Form 10-K.
(4)Hotel is classified as held for sale as of December 31, 2023 and was sold to an unrelated party in February 2024.
(5)In May 2023, the Company entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel’s 210 hotel rooms. Lease revenue from this property is recorded in other revenue in the Company’s consolidated statements of operations and comprehensive income. As a result of the lease agreement, this property is excluded from the Company’s hotel and room counts effective May 2023 and is considered a non-hotel property through the end of the lease term.
The Company’s investment in real estate as of December 31, 2023, consisted of the following (in thousands):
Land
$
828,868
Building and improvements
4,917,105
Furniture, fixtures and equipment
571,026
Finance ground lease assets
102,084
Franchise fees
21,233
6,440,316
Less accumulated depreciation and amortization
(1,662,942
)
Investment in real estate, net
$
4,777,374
For additional information about the Company’s properties, refer to Schedule III - Real Estate and Accumulated Depreciation and Amortization included at the end of Part IV, appearing elsewhere in this Annual Report on Form 10-K.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3.	 Legal Proceedings
The Company is or may be a party to various legal proceedings that arise in the ordinary course of business. The Company is not currently involved in any litigation nor, to management’s knowledge, is any litigation threatened against the Company where the outcome would, in management’s judgment based on information currently available to the Company, have a material adverse effect on the Company’s consolidated financial position or results of operations.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4.	 Mine Safety Disclosures
Not Applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. 	Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
On May 18, 2015, the Company’s common shares were listed and began trading on the NYSE under the ticker symbol “APLE” (the “Listing”). Prior to that time, there was no public market for the Company’s common shares. As of December 31, 2023 and February 12, 2024, the last reported closing price per share for the Company’s common shares as reported on the NYSE was $16.61 and $16.22, respectively.
Share Return Performance
The following graph compares the five-year cumulative total shareholder return of the Company’s common shares to the cumulative total returns of the Standard and Poor’s 500 Stock Index (“S&P 500 Index”) and the Dow Jones U.S. Real Estate Hotels Index. The Dow Jones U.S. Real Estate Hotels Index is comprised of publicly traded REITs which focus on investments in hotel properties. The graph assumes an initial investment of $100 in the Company’s common shares and in each of the indices, and also assumes the reinvestment of dividends.
Value of Initial Investment at
Name
12/31/18
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
Apple Hospitality REIT, Inc.
$
100.00
$
121.97
$
98.91
$
124.05
$
127.03
$
142.67
S&P 500 Index
$
100.00
$
131.49
$
155.68
$
200.37
$
164.08
$
207.21
Dow Jones U.S. Real Estate
Hotels Index
$
100.00
$
115.88
$
85.39
$
97.80
$
82.76
$
94.91
This performance graph shall not be deemed “filed” for the purposes of Section 18 of the Exchange Act, or incorporated by reference into any filing by the Company under the Securities Act, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. The performance graph is not indicative of future investment performance. The Company does not make or endorse any predictions as to future share price performance.
Shareholder Information
As of February 12, 2024, the Company had approximately 100 holders of record of its common shares and there were approximately 242 million common shares outstanding. Because many of the Company’s common shares are held by brokers and other institutions on behalf of shareholders, the Company believes there are substantially more beneficial holders of its common shares than record holders. In order to comply with certain requirements related to the Company’s qualification as a REIT, the Company’s Charter provides that, subject to certain exceptions, no person or entity (other than a person or entity who has been granted
an exemption) may directly or indirectly, beneficially or constructively, own more than 9.8% of the aggregate of its outstanding common shares or 9.8% of the aggregate of the outstanding preferred shares of any class or series.
Distribution Information
The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to maintain its REIT status. For the years ended December 31, 2023 and 2022, the Company paid distributions of $1.04 and $0.61 per common share for a total of approximately $238.3 million and $139.5 million, respectively. The Company’s current annual distribution rate, payable monthly, is $0.96 per common share. In addition to the regular monthly cash distribution of $0.08 per common share approved by the Board of Directors in December 2023, the Board of Directors approved a special cash distribution of $0.05 per common share for a combined distribution of $0.13 per common share, paid in January 2024, to shareholders of record as of December 29, 2023. While management currently expects monthly cash distributions to continue at $0.08 per common share, the amount and timing of distributions to shareholders are within the discretion of the Company’s Board of Directors. The amount and frequency of future distributions will depend on certain items, including but not limited to, the Company’s results of operations, cash flow from operations, economic conditions, working capital requirements, cash requirements to fund investing and financing activities, and capital expenditure requirements, including improvements to and expansions of properties, as well as the distribution requirements under U.S. federal income tax provisions for qualification as a REIT. As it has done historically, due to seasonality, the Company may use its Revolving Credit Facility to maintain the consistency of the distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles.
Share Repurchases
In May 2023, the Company’s Board of Directors approved a one-year extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $338.7 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2024 if not terminated or extended earlier. During the year ended December 31, 2023, the Company purchased approximately 0.5 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.34 per common share for an aggregate purchase price, including commissions, of approximately $6.9 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As of December 31, 2023, approximately $335.4 million remained available for purchase under the Share Repurchase Program.
Additionally, during 2023, certain of the Company’s employees surrendered common shares to satisfy their tax withholding obligations associated with the vesting of common shares issued under the 2014 Omnibus Incentive Plan (the “Omnibus Plan”) as described in Note 8 titled “Compensation Plans” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
The following is a summary of all share repurchases during the fourth quarter of 2023:
Issuer Purchases of Equity Securities
(a)
(b)
(c)
(d)
Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1)
October 1 - October 31, 2023
-
-
-
$
335,446
November 1 - November 30, 2023
-
-
-
$
335,446
December 1 - December 31, 2023 (2)
134,085
$
16.90
-
$
335,446
Total
134,085
-
(1)Represents amount outstanding under the Company’s authorized $338.7 million Share Repurchase Program. This program, which was announced in 2015 and most recently extended in May 2023, may be suspended or terminated at any time by the Company and will end in July 2024 if not terminated or extended earlier.
(2)Consists of common shares surrendered to the Company to satisfy tax withholding obligations associated with the vesting of restricted common shares.
Equity Compensation Plans
The Company’s Board of Directors adopted and the Company’s shareholders approved the Omnibus Plan, which provides for the issuance of up to 10 million common shares, subject to adjustments, to employees, officers, and directors of the Company or affiliates of the Company, consultants or advisers currently providing services to the Company or affiliates of the Company, and any other person whose participation in the Omnibus Plan is determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) to be in the best interests of the Company. The Company’s Board of Directors previously adopted, and the Company’s shareholders approved, the non-employee directors’ stock option plan (the “Directors’ Plan”) to provide incentives to attract and retain directors. In May 2015, the Directors’ Plan was terminated effective upon the Listing, and no further grants can be made under the Directors’ Plan, provided however, that the termination did not affect any outstanding director option awards previously issued under the Directors’ Plan. The following is a summary of securities issued under the Company’s equity compensation plans as of December 31, 2023:
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (2)
Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in First Column) (3)
Equity compensation plans approved by
security holders
115,961
$
20.50
6,625,302
Equity compensation plans not approved by
security holders
-
-
-
Total equity compensation plans
115,961
$
20.50
6,625,302
(1)Includes 40,132 stock options granted to the Company’s current and former directors under the Directors’ Plan. Also includes 75,829 fully vested deferred stock units, including quarterly distributions earned, under the Non-Employee Director Deferral Program under the Omnibus Plan, adopted by the Board of Directors in 2018, effective June 1, 2018, that are not included in the calculation of the weighted-average exercise price of outstanding options.
(2)The weighted-average exercise price of outstanding options relates solely to stock options, which are the only currently outstanding exercisable security.
(3)Does not include remaining shares registered under the Directors’ Plan, as no further grants can be made under the Directors’ Plan.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6.	 Reserved

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7.	 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with Item 8, the Consolidated Financial Statements and Notes thereto, the introduction of Part I regarding “Forward-Looking Statements,” and Item 1A, “Risk Factors” appearing elsewhere in this Annual Report on Form 10-K.
Overview
The Company is a Virginia corporation that has elected to be treated as a REIT for U.S. federal income tax purposes. The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the U.S. As of December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in urban, high-end suburban and developing markets throughout 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. The Company also owns one property leased to third parties. Substantially all of the Company’s hotels operate under Marriott or Hilton brands. The hotels are operated and managed under separate management agreements with 16 hotel management companies, none of which are affiliated with the Company. The Company’s common shares are listed on the NYSE under the ticker symbol “APLE.”
Recent Hotel Portfolio Activities
The Company continually monitors market conditions and attempts to maximize shareholder value by investing in properties that it believes provide superior value over the long term. Consistent with this strategy and the Company’s focus on investing in rooms-focused hotels, in 2023, the Company acquired six existing hotels and one free-standing parking garage for an aggregate purchase price of approximately $289.8 million: a 154-room Courtyard in Cleveland, Ohio, a 175-room Courtyard in Salt Lake City, Utah, a 159-room Hyatt House in Salt Lake City, Utah, a free-standing parking garage which serves both of the Salt Lake City, Utah hotels and the surrounding area, a 146-room Residence Inn in Renton, Washington, a 192-room Embassy Suites in South Jordan, Utah and a 299-room SpringHill Suites in Las Vegas, Nevada. The Company utilized its available cash on hand, net proceeds from sale of shares under the ATM program and borrowings under its Revolving Credit Facility to fund the acquisitions and plans to utilize its available cash or borrowings under its unsecured credit facilities for any future acquisitions.
As of December 31, 2023, the Company had separate outstanding contracts for the potential purchase of two hotels, consisting of one hotel in Madison, Wisconsin and one hotel in Nashville, Tennessee, for a total combined purchase price of approximately $177.5 million. Both hotels are under development, with the hotel in Madison, Wisconsin currently planned to be completed and opened for business in mid-2024 and the Nashville, Tennessee hotel currently planned to be completed and opened for business in late 2025, at which respective times the Company expects to complete the purchases of these hotels. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied, and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under the applicable purchase contracts and acquire these hotels. If the closings occur, the Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the properties under contract.
For its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided from the sale of the property. The Company did not dispose of any properties in the year ended December 31, 2023. As of December 31, 2023, the Company had an outstanding contract to sell two of its hotels, which both sold to an unrelated party for a combined gross sales price of approximately $33.5 million in February 2024. The net proceeds from the sale of both hotels were used for general corporate purposes.
New York Independent Boutique Hotel Lease
During the year ended December 31, 2023, the Company entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel’s 210 hotel rooms. Lease revenue from this property is recorded in other revenue in the Company’s consolidated statements of operations and comprehensive income. As a result of the lease agreement, this property is excluded from the Company’s hotel and room counts effective May 2023 and is considered a non-hotel property through the end of the lease term.
See Note 2 titled “Investment in Real Estate” and Note 3 titled “Assets Held for Sale and Dispositions” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for additional information concerning these transactions.
Hotel Operations	
As of December 31, 2023, the Company owned 225 hotels, including two properties classified as held for sale, with a total of 29,900 rooms as compared to 220 hotels with a total of 28,983 rooms as of December 31, 2022. Results of operations are included only for the period of ownership for hotels acquired or disposed of during all periods presented. During 2023, the Company acquired six hotels and did not dispose of any hotels. During 2022, the Company acquired two hotels and sold one hotel. Results of the hotel operations for the Company’s independent boutique hotel in New York, New York are included only for the period prior to the lease agreement becoming effective in May 2023. See further discussion in Note 2 titled “Investments in Real Estate” and Note 3 titled “Assets Held for Sale and Dispositions” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K. As a result, the comparability of results for the years ended December 31, 2023 and 2022, as discussed below, is also impacted by these transactions.
In evaluating financial condition and operating performance, the most important indicators on which the Company focuses are revenue measurements, such as average occupancy, ADR and RevPAR, and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below. RevPAR and operating results may be impacted by regional and local economies and local regulations as well as changes in lodging demand due to macroeconomic factors including inflationary pressures, higher energy prices or a recessionary environment.
The following is a summary of the results from operations of the Company’s hotels for their respective periods of ownership by the Company.
Year Ended December 31,
(in thousands, except statistical
data)
Percent
of
Revenue
Percent
of
Revenue
Change 2022 to 2023
Percent
of
Revenue
Change 2021 to 2022
Total revenue
$
1,343,800
100.0
%
$
1,238,417
100.0
%
8.5
%
$
933,869
100.0
%
32.6
%
Hotel operating expense
780,725
58.1
%
710,481
57.4
%
9.9
%
542,178
58.1
%
31.0
%
Property taxes, insurance and
other expense
79,307
5.9
%
72,907
5.9
%
8.8
%
71,980
7.7
%
1.3
%
General and administrative
expense
47,401
3.5
%
42,464
3.4
%
11.6
%
41,038
4.4
%
3.5
%
Loss on impairment of
depreciable real estate assets
5,644
26,175
-78.4
%
10,754
143.4
%
Depreciation and amortization
expense
183,242
181,697
0.9
%
184,471
-1.5
%
Gain on sale of real estate
-
1,785
n/a
3,596
-50.4
%
Interest and other expense, net
68,857
59,733
15.3
%
67,748
-11.8
%
Income tax expense
1,135
1,940
-41.5
%
314.5
%
Net income
177,489
144,805
22.6
%
18,828
669.1
%
Adjusted Hotel EBITDA (1)
481,892
455,579
5.8
%
320,273
42.2
%
Number of hotels owned at end
of period
2.3
%
0.5
%
ADR
$
155.76
$
149.36
4.3
%
$
123.78
20.7
%
Occupancy
74.2
%
72.6
%
2.2
%
66.3
%
9.5
%
RevPAR
$
115.60
$
108.45
6.6
%
$
82.03
32.2
%
(1)See reconciliation of Adjusted Hotel EBITDA to net income in “Non-GAAP Financial Measures” below.
Comparable Hotels Operating Results
The following table reflects certain operating statistics for the Company’s 223 hotels owned and held for use as of December 31, 2023. The Company defines metrics from Comparable Hotels as results generated by the 223 hotels owned and held for use as of the end of the reporting period. For the hotels acquired during the reporting periods shown, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company. This information has not been audited, either for the periods owned or prior to ownership by the Company. For dispositions and assets held for sale, results have been excluded for the Company’s period of ownership.
Year Ended December 31,
Change 2022 to 2023
Change 2021 to 2022
ADR
$
156.55
$
149.62
4.6
%
$
125.67
19.1
%
Occupancy
74.2
%
72.6
%
2.2
%
66.3
%
9.5
%
RevPAR
$
116.23
$
108.67
7.0
%
$
83.26
30.5
%
Same Store Operating Results
The following table reflects certain operating statistics for the 207 hotels owned and held for use by the Company as of January 1, 2021 and during the entirety of the reporting periods being compared (“Same Store Hotels”). This information has not been audited.
Year Ended December 31,
Change 2022 to 2023
Change 2021 to 2022
ADR
$
153.99
$
147.34
4.5
%
$
124.26
18.6
%
Occupancy
74.3
%
72.7
%
2.2
%
66.7
%
9.0
%
RevPAR
$
114.47
$
107.17
6.8
%
$
82.88
29.3
%
As discussed above, hotel performance is impacted by many factors, including the economic conditions in the U.S. as well as each individual locality. The Company’s Comparable Hotels and Same Store Hotels revenue and operating results improved during the year ended December 31, 2023 compared to the year ended December 31, 2022, which is consistent with the overall lodging industry. Hotel occupancy was negatively impacted in many markets by the Omicron variant of COVID-19 during the first quarter of 2022, contributing to an increase of the Company’s Comparable Hotels and Same Store Hotels RevPAR of approximately 7.0% and 6.8%, respectively, for the year ended December 31, 2023, compared to the year ended December 31, 2022. For the year ended December 31, 2021, the Company’s results were negatively impacted by COVID-19, contributing to an increase of the Company’s Comparable Hotels and Same Store Hotels RevPAR of approximately 30.5% and 29.3%, respectively, for the year ended December 31, 2022. The Company expects low-to-mid single digit RevPAR growth and a slight increase in operating results for its Comparable Hotels for 2024 as compared to 2023, which is comparable to broader industry expectations. For the year ended December 31, 2023, the Company’s hotels in general have shown results that have been consistent with or exceeded industry, brand and chain scale averages.
Results of Operations
A discussion regarding the Company’s results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022 is presented below. A discussion regarding the results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021 can be found under the section titled “Results of Operations” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 21, 2023, which is incorporated herein by reference and which is available free of charge on the SEC’s website at www.sec.gov and in the Investor Information section of the Company’s website at www.applehospitalityreit.com.
Revenues
The Company’s principal source of revenue is hotel revenue consisting of room, food and beverage, and other related revenue. For the years ended December 31, 2023 and 2022, the Company had total revenue of $1.3 billion and $1.2 billion, respectively. For the years ended December 31, 2023 and 2022, respectively, Comparable Hotels achieved combined average occupancy of 74.2% and
72.6%, ADR of $156.55 and $149.62 and RevPAR of $116.23 and $108.67. ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.
Compared to 2022, the Company experienced increases in ADR and occupancy in 2023, resulting in an increase of 7.0% in RevPAR, for Comparable Hotels. Revenue growth in 2023 compared to 2022 was led by continued strength in leisure transient and small group demand, with increased demand from corporate business. Additionally, occupancy during the first quarter of 2022 was negatively impacted in many markets by the Omicron variant of COVID-19. For the year ended December 31, 2023, the Company’s suburban markets continued to see strong demand with urban markets recovering more meaningfully as compared to the year ended December 31, 2022. The Company expects revenue trends to continue, however, future year-over-year revenue growth will likely be at a lower rate given the favorable comparison between 2023 and 2022 due, in large part, to the Omicron variant of COVID-19 negatively impacting the first quarter of 2022. Furthermore, future revenues could be negatively impacted by, among other things, historical seasonal trends, travel-related health concerns, deterioration of consumer sentiment, a recessionary macroeconomic environment or inflationary pressures.
Hotel Operating Expense
Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the years ended December 31, 2023 and 2022, hotel operating expense totaled $780.7 million and $710.5 million, respectively, or 58.1% and 57.4% of total revenue for each respective year.
The increase in hotel operating expense for the year ended December 31, 2023, as compared to the year ended December 31, 2022, was due to increased labor, repairs and maintenance and utility costs driven by increased staff and inflationary pressures throughout the overall economy. Occupancy increased for the year ended December 31, 2023, as compared to the year ended December 31, 2022, in part due to negative impacts from the Omicron variant of COVID-19 throughout most markets during the first quarter of 2022. Adding staff to meet increased demand has been challenging, and the Company’s hotels have often done so at higher wage rates or with more expensive contract labor as compared to 2022. Likewise, broader inflationary pressures throughout the overall economy and global tensions have driven shortages and cost increases for materials and supplies such as food and equipment. The Company continues to work with its management companies to realize operational efficiencies and mitigate the impact of cost pressures resulting from inflation and staffing challenges. The Company will continue to evaluate and work with its management companies to implement adjustments to the hotel operating model in response to continued changes in the operating environment and guest preferences, including evaluating staffing levels at its hotels to maximize efficiency.
Property Taxes, Insurance and Other Expense
Property taxes, insurance and other expense for the years ended December 31, 2023 and 2022 totaled $79.3 million and $72.9 million, respectively, or 5.9% of total revenue for each respective year. The increase in property taxes, insurance, and other expense was primarily due to increases in insurance premiums and increases in property taxes in 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. The Company will continue to aggressively appeal tax assessments in certain jurisdictions in an attempt to minimize tax increases, as warranted.
General and Administrative Expense
General and administrative expense for the years ended December 31, 2023 and 2022 was $47.4 million and $42.5 million, respectively, or 3.5% and 3.4% of total revenue, respectively. The principal components of general and administrative expense are payroll and related benefit costs, executive incentive compensation, legal fees, accounting fees and reporting expenses. The increase in general and administrative expense in 2023 as compared to 2022 was primarily due to improved performance under the Company’s executive incentive compensation plan which resulted in increased compensation expense as well as increased payroll and related benefit costs.
Loss on Impairment of Depreciable Real Estate Assets
Loss on impairment of depreciable real estate assets was approximately $5.6 million for the year ended December 31, 2023, consisting of impairment losses at two hotel properties identified by the Company in the fourth quarter of 2023. Loss on impairment of depreciable real estate assets was $26.2 million for the year ended December 31, 2022, consisting of impairment losses at two hotel properties identified by the Company in the fourth quarter of 2022. See Note 2, titled “Investment in Real Estate” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for additional information concerning these impairment losses.
Depreciation and Amortization Expense
Depreciation and amortization expense for the years ended December 31, 2023 and 2022 was $183.2 million and $181.7 million, respectively. Depreciation and amortization expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned. The increase was primarily due to the purchase of six hotels in 2023 and two hotels in the fourth quarter of 2022, as well as renovations completed throughout both 2023 and 2022, partially offset by the sale of one hotel in the third quarter of 2022.
Interest and Other Expense, net
Interest and other expense, net for the years ended December 31, 2023 and 2022 was $68.9 million and $59.7 million, respectively, and is net of approximately $1.5 million and $1.3 million, respectively, of interest capitalized associated with renovation projects.
Interest expense related to the Company’s debt instruments for the year ended December 31, 2023 increased compared to the year ended December 31, 2022 as a result of higher average borrowings associated with variable-rate debt and higher average interest rates on the Company’s variable-rate debt due to the high inflationary environment within the current economy. See Note 4 titled “Debt” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for additional discussion of the Company’s amended unsecured credit facilities. The Company anticipates interest expense will increase in 2024 as a result of higher average market interest rates over the next twelve months on the Company’s variable-rate debt as interest rates are expected to plateau and then start to decrease at a slower rate compared to how quickly they increased throughout 2023. In addition, the proportion of fixed-rate debt will decrease in 2024, as the Company has six interest rate swaps that mature in 2024, resulting in a decrease in the amount of variable-rate debt that is fixed by interest rate swaps, or if the interest rate swaps are replaced with new agreements, they are expected to be at higher rates.
Income tax expense
Income tax expense for the years ended December 31, 2023 and 2022 was $1.1 million and $1.9 million, respectively. The decrease is primarily due to state income taxes that were higher than normal in several states in 2022 as a result of temporary limitations placed on the application of prior net operating losses.
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 Funds from Operations (“MFFO”), Earnings Before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), Earnings Before Interest, Income Taxes, Depreciation and Amortization for Real Estate (“EBITDAre”), Adjusted EBITDAre (“Adjusted EBITDAre”) and Adjusted Hotel EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income (loss), cash flow from operations or any other operating GAAP measure. FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel 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, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel 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 (loss) (computed in accordance with GAAP), excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), extraordinary items as defined by GAAP, and the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated affiliates. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the Nareit definition. FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.
The Company calculates MFFO by further adjusting FFO for the exclusion of amortization of finance ground lease assets, amortization of favorable and unfavorable operating leases, net and non-cash straight-line operating ground lease expense, as these expenses do not reflect the underlying performance of the related hotels. The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.
The following table reconciles the Company’s GAAP net income to FFO and MFFO for the years ended December 31, 2023, 2022 and 2021 (in thousands).
Year Ended December 31,
Net income
$
177,489
$
144,805
$
18,828
Depreciation of real estate owned
180,185
178,641
179,275
Gain on sale of real estate
-
(1,785
)
(3,596
)
Loss on impairment of depreciable real estate assets
5,644
26,175
10,754
Funds from operations
363,318
347,836
205,261
Amortization of finance ground lease assets
3,038
3,038
5,178
Amortization of favorable and unfavorable operating
leases, net
Non-cash straight-line operating ground lease expense
Modified funds from operations
$
366,884
$
351,424
$
211,001
EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA
EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) excluding interest, income taxes, depreciation and amortization. The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization). In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.
In addition to EBITDA, the Company also calculates and presents EBITDAre in accordance with standards established by Nareit, which defines EBITDAre as EBITDA, excluding gains and losses from the sale of certain real estate assets (including gains and losses from change in control), plus real estate related impairments, and adjustments to reflect the entity’s share of EBITDAre of unconsolidated affiliates. The Company presents EBITDAre because it believes that it provides further useful information to investors in comparing its operating performance between periods and between REITs that report EBITDAre using the Nareit definition.
The Company also considers the exclusion of non-cash straight-line operating ground lease expense from EBITDAre useful, as this expense does not reflect the underlying performance of the related hotels (Adjusted EBITDAre).
The Company further excludes actual corporate-level general and administrative expense for the Company as well as Adjusted EBITDAre from its non-hotel property from Adjusted EBITDAre (Adjusted Hotel EBITDA) to isolate property-level operational performance over which the Company’s hotel operators have direct control. The Company believes Adjusted Hotel EBITDA provides useful supplemental information to investors regarding operating performance and it is used by management to measure the performance of the Company’s hotels and effectiveness of the operators of the hotels.
The following table reconciles the Company’s GAAP net income to EBITDA, EBITDAre, Adjusted EBITDAre and Adjusted Hotel EBITDA for the years ended December 31, 2023, 2022 and 2021 (in thousands).
Year Ended December 31,
Net income
$
177,489
$
144,805
$
18,828
Depreciation and amortization
183,242
181,697
184,471
Amortization of favorable and unfavorable operating leases, net
Interest and other expense, net
68,857
59,733
67,748
Income tax expense
1,135
1,940
EBITDA
431,106
388,571
271,908
Gain on sale of real estate
-
(1,785
)
(3,596
)
Loss on impairment of depreciable real estate assets
5,644
26,175
10,754
EBITDAre
436,750
412,961
279,066
Non-cash straight-line operating ground lease expense
Adjusted EBITDAre
436,895
413,115
279,235
General and administrative expense
47,401
42,464
41,038
Adjusted EBITDAre from non-hotel property (1)
(2,404
)
-
-
Adjusted Hotel EBITDA
$
481,892
$
455,579
$
320,273
(1)Non-hotel property only includes the results of one hotel in New York, New York that is leased to a third-party hotel operator. This property’s Adjusted EBITDAre results are not included in Adjusted Hotel EBITDA starting in the second half of 2023.
Hotels Owned
As of December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. See “Management and Franchise Agreements” in Part I, Item 1, Business, appearing elsewhere in this Annual Report on Form 10-K, for a table summarizing the number of hotels and rooms by brand. Refer to Part I, Item 2, of this Annual Report on Form 10-K for tables summarizing the number of hotels and rooms by state, and summarizing the location, brand, manager, date acquired or completed and number of rooms for each of the 225 hotels the Company owned as of December 31, 2023.
Related Parties
The Company has engaged in, 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 have been different if these transactions
were conducted with non-related parties. See Note 6, titled “Related Parties” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for additional information concerning the Company’s related party transactions.
Liquidity and Capital Resources
Capital Resources
The Company’s principal short-term sources of liquidity are the operating cash flows generated from the Company’s properties and availability under its Revolving Credit Facility. Over the long term, the Company may receive proceeds from strategic additional secured and unsecured debt financing, dispositions of its hotel properties and offerings of the Company’s common shares, including pursuant to the ATM Program. Macroeconomic pressures, including inflation, increases in interest rates and general market uncertainty, could impact the Company’s ability to raise debt or equity capital to fund long-term liquidity requirements in a cost-effective manner.
As of December 31, 2023, the Company had approximately $1.4 billion of total outstanding debt consisting of $283.0 million of mortgage debt and $1.1 billion outstanding under its credit facilities, excluding unamortized debt issuance costs and fair value adjustments. As of December 31, 2023, the Company had available corporate cash on hand of approximately $10.3 million, and unused borrowing capacity under its Revolving Credit Facility of approximately $650 million.
The credit agreements governing the unsecured credit facilities contain mandatory prepayment requirements, customary affirmative and negative covenants and events of default. The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, and restrictions on certain investments. The Company was in compliance with the applicable covenants as of December 31, 2023.
On July 19, 2023, the Company entered into an amendment of its unsecured $225 million term loan facility, which extended the maturity date of the existing $50 million term loan by two years to August 2, 2025.
See Note 4 titled “Debt” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for a description of the Company’s debt instruments as of December 31, 2023 and a summary of the financial and restrictive covenants as defined in the credit agreements.
The Company has a universal shelf registration statement on Form S-3 (No. 333-262915) that was automatically effective upon filing on February 23, 2022. The Company may offer an indeterminate number or amount, as the case may be, of (1) common shares, no par value per share; (2) preferred shares, no par value per share; (3) depository shares representing the Company’s preferred shares; (4) warrants exercisable for the Company’s common shares, preferred shares or depository shares representing preferred shares; (5) rights to purchase common shares; and (6) unsecured senior or subordinate debt securities, all of which may be issued from time to time on a delayed or continuous basis pursuant to Rule 415 under the Securities Act.
On August 12, 2020, the Company entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under the ATM Program under the Company’s prior shelf registration statement and the current shelf registration statement described above. During the year ended December 31, 2023, the Company sold approximately 12.8 million shares under its ATM Program at a weighted-average market sales price of approximately $17.05 per common share and received aggregate gross proceeds of approximately $218.6 million and proceeds net of offering costs, which included $2.6 million of commissions, of approximately $216.0 million. The Company used the net proceeds from the sale of these shares to pay down borrowings under the Revolving Credit Facility, acquisitions of hotel properties and for general corporate purposes. No shares were sold under the Company’s ATM Program during the year ended December 31, 2022. As of December 31, 2023, approximately $5.3 million remained available for issuance under the ATM Program. The Company plans to use future net proceeds from the sale of shares under the ATM Program, or under a similar successor program, for general corporate purposes which may include, among other things, acquisitions of hotel properties, the repayment of outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties. Future offerings will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company’s common shares and opportunities for uses of any proceeds.
As discussed in Note 3, titled “Assets Held for Sale and Dispositions” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, as of December 31, 2023, the Company had an outstanding contract to sell two of its hotels, which were both sold to an unrelated party for a combined gross sales price of approximately $33.5 million in February 2024. The net proceeds from the sale of both hotels were used for general corporate purposes.
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 required distributions to shareholders, share repurchases, capital improvements, debt service, hotel acquisitions, lease commitments, and cash management activities.
Distributions
The Company generally must distribute annually at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order to maintain its REIT status. Subsequent to the distribution paid in March 2020, the Company announced the suspension of its monthly distributions due to the impact of COVID-19 on its operating cash flows. Beginning in March 2021, the Board of Directors declared distributions of $0.01 per common share per quarter or to the extent required to maintain REIT status. In February 2022, the Board of Directors of the Company reinstated its policy of distributions on a monthly basis and declared a monthly cash distribution of $0.05 per common share with the first monthly distribution paid in March 2022. In August and October 2022, the Board of Directors approved subsequent increases to the monthly cash distribution to $0.07 and $0.08 per common share, respectively. In addition to the regular monthly cash distribution of $0.08 per common share approved by the Board of Directors in December 2022, the Board of Directors approved a special cash distribution of $0.08 per common share for a combined distribution of $0.16 per common share, paid in January 2023, to shareholders of record as of December 30, 2022. The Company continued a monthly cash distribution of $0.08 per common share in 2023. In December 2023, in addition to the regular monthly cash distribution of $0.08 per common share, the Board of Directors approved a special cash distribution of $0.05 per common share for a combined distribution of $0.13 per common share, paid in January 2024, to shareholders of record as of December 29, 2023. Distributions paid for the years ended December 31, 2023, 2022 and 2021 were $1.04, $0.61 and $0.03 per common share, respectively, for a total of approximately $238.3 million, $139.5 million and $6.8 million, respectively.
The Company's current annual distribution rate, payable monthly, is $0.96 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. While management currently expects monthly cash distributions to continue at $0.08 per common share, any distribution will be subject to approval of the Company’s Board of Directors and there can be no assurance of the classification, timing or duration of distributions at any particular distribution rate. The Board of Directors monitors the Company’s distribution rate relative to the performance of its hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company or to the extent required to maintain REIT status. If cash flows from operations and the Revolving Credit Facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions. Although the Company has relatively low levels of debt, there can be no assurance it will be successful with this strategy, and it may need to reduce its distributions to minimum levels required to maintain its qualification as a real estate investment trust. If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.
Share Repurchases
In May 2023, the Company’s Board of Directors approved a one-year extension of its existing Share Repurchase Program, authorizing share repurchases up to an aggregate of $338.7 million. The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2024 if not terminated or extended earlier. During the year ended December 31, 2023, the Company purchased approximately 0.5 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.34 per common share for an aggregate purchase price, including commissions, of approximately $6.9 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As of December 31, 2023, approximately $335.4 million remained available for purchase under the Share Repurchase Program.
Capital Improvements
Management routinely monitors the condition and operations of its hotels and plans renovations and other improvements as it deems prudent. The Company is committed to maintaining and enhancing each property’s competitive position in its market. The
Company has invested in and plans to continue to reinvest in its hotels. Under certain loan and management agreements, the Company is required to place in escrow funds for the repair, replacement and refurbishing of furniture, fixtures, and equipment, based on a percentage of gross revenues, provided that such amount may be used for the Company’s capital expenditures with respect to the hotels. As of December 31, 2023, the Company held approximately $30.4 million in reserves related to these properties. During 2023, the Company invested approximately $76.8 million in capital expenditures. The Company anticipates spending approximately $75 million to $85 million during 2024, which includes various comprehensive renovation projects for approximately 20 properties, however, inflationary pressures or supply chain shortages, among other issues, may result in increased costs or delays for anticipated projects. The Company does not currently have any existing or planned projects for new property development.
Upcoming Debt Maturities and Debt Service Payments
As of December 31, 2023, the Company had approximately $175.2 million of principal and interest payments due on its debt over the next 12 months. Included in this total is an $85.0 million term loan and a mortgage loan of approximately $20.3 million, both maturing in the third quarter of 2024. The Company plans to pay outstanding amounts and service payments due upon the upcoming debt maturity dates using funds from operations, borrowings under its Revolving Credit Facility and/or proceeds from new financing, refinancing or loan extensions. Interest expense related to the Company’s unsecured credit facilities is expected to be higher in 2024 than it was during 2023 as a result of increases in market interest rates on its variable-rate debt and increased borrowings on its Revolving Credit Facility. See Note 4 titled “Debt” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for more detail regarding future maturities of the Company’s debt instruments as of December 31, 2023.
Hotel Purchase Contract Commitments
As of December 31, 2023, the Company had separate outstanding contracts for the potential purchase of two hotels, consisting of one hotel in Madison, Wisconsin and one hotel in Nashville, Tennessee, for a total combined purchase price of approximately $177.5 million. Both hotels are under development, with the hotel in Madison, Wisconsin currently planned to be completed and opened for business in mid-2024 and the Nashville, Tennessee hotel currently planned to be completed and opened for business in late 2025, at which respective times the Company expects to complete the purchases of these hotels. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied, and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under the applicable purchase contracts and acquire these hotels. If the closings occur, the Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the properties under contract.
Lease Commitments
The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of December 31, 2023, the Company had 14 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately 15 to 95 years, excluding renewal options. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years. As of December 31, 2023, the Company had total remaining minimum lease payments of $283.4 million, including $7.3 million due in the next year. Refer to Note 10, titled “Lease Commitments” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K for additional details.
Cash Management Activities
As part of the cost sharing arrangements discussed in Note 6, titled “Related Parties” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under the cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies.
Management and Franchise Agreements
Each of the Company’s 225 hotels owned as of December 31, 2023 is operated and managed under separate management agreements with 16 hotel management companies, none of which are affiliated with the Company. Thirteen of the Company’s hotels are managed by affiliates of Marriott. The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and, as a result, the branded hotels they manage were required to obtain separate franchise agreements with each respective franchisor. See Note 9, titled “Management and Franchise Agreements” of the Consolidated Financial Statements
and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for additional information pertaining to the management and franchise agreements, including a listing of the Company’s hotel management companies.
Impact of Inflation
The Company relies on the performance of its hotels and the ability of its hotel operators to increase revenue to keep pace with inflation. Hotel operators, in general, possess the ability to adjust room rates daily to reflect the effects of inflation on the Company's operating expenses. However, competitive pressures could limit the operators’ ability to raise room rates and, as a result, the Company may not be able to offset increased operating expenses with increases in revenue.
Business Interruption
Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale. Although management believes the Company has adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Generally, occupancy rates and hotel revenues for the Company’s hotels are greater in the second and third quarters than in the first and fourth quarters. However, due to the effects of COVID-19, these typical seasonal patterns were disrupted until 2023. In the first quarter of 2022, the Company experienced lower than expected operating results due to the Omicron variant of COVID-19 along with the typical seasonal decrease associated with the first quarter. Since that time, the seasonal variability has recovered to its pre-COVID-19 trend. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Critical Accounting Policies and Estimates
The following contains a discussion of what the Company believes to be its critical accounting policies and estimates. These items should be read to gain a further understanding of the principles and estimates used to prepare the Company’s financial statements. These principles and estimates include application of judgment; therefore, changes in judgments may have a material impact on the Company’s reported results of operations and financial condition.
Investment Policy
Upon acquisition of real estate properties, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, and assumed debt based on the evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparables and other information which is subjective in nature, including comparable land sales as well as industry and Company data regarding building and furniture, fixture and equipment costs, including adjustments for estimated depreciation based on the age of the property acquired and time since its most recent renovation. The Company has not assigned any value to management contracts and franchise agreements as such contracts are generally at current market rates based on the remaining terms of the contracts and any other value attributable to these contracts is not considered material. Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition, including title, legal, accounting, brokerage commissions and other related costs, being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred. The underlying assumptions are subject to uncertainty and thus any changes to the allocation of fair value to each of the various line items within the Company’s consolidated balance sheets could have an impact on the Company’s financial condition as well as results of operations due to resulting changes in depreciation and amortization as a result of the fair value allocation. The acquisitions of real estate subject to this estimate totaled seven properties, including six hotels and one free-standing parking garage, for a combined purchase price of approximately $289.8 million for the year ended December 31, 2023 and two properties for a combined purchase price of $85.0 million for the year ended December 31, 2022.
Capitalization Policy
The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.
Impairment Losses Policy
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties’ carrying amount. Indicators of impairment include a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable. The Company monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares an annual recoverability analysis for each of its properties to assist with its evaluation of impairment indicators. The Company performs an annual recoverability analysis by comparing each property’s net book value to its estimated operating income based on assumptions and estimates about the property’s future revenues, expenses and capital expenditures after recovery from disruption resulting from COVID-19 and other disruptive events such as renovations or newly opened hotels in the same market. The Company’s planned initial hold period for each property is generally 39 years. If events or circumstances change, such as the Company’s intended hold period for a property or if the operating performance of a property declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. The Company’s ongoing analyses and annual recoverability analyses have identified impairment losses on two properties recorded in 2023, two properties recorded in 2022 and five properties recorded in 2021 totaling approximately $5.6 million, $26.2 million and $10.8 million, respectively, as discussed in Note 2, titled “Investment in Real Estate” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K.
New Accounting Standards
See Note 1, titled “Organization and Summary of Significant Accounting Policies” of the Consolidated Financial Statements and Notes thereto in Part II, Item 8, in this Annual Report on Form 10-K, for information on the anticipated adoption of recently issued accounting standards.
Subsequent Events
On January 16, 2024, the Company paid approximately $31.4 million, or $0.13 per common share, in distributions to shareholders of record as of December 29, 2023.
On January 19, 2024, the Company declared a monthly cash distribution of $0.08 per common share. The distribution of approximately $19.3 million was paid on February 15, 2024, to shareholders of record as of January 31, 2024.
On February 9, 2024, the Company completed the sale of two existing hotels in Rogers, Arkansas, including a 122-room Hampton and a 126-room Homewood Suites, for a combined gross sales price of approximately $33.5 million. A portion of the proceeds from the sale of the two hotels will be used to complete a like-kind exchange in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, with future acquisitions, which is expected to result in the deferral of taxable gains of approximately $15 million.
On February 16, 2024, the Company declared a monthly cash distribution of $0.08 per common share. The distribution is payable on March 15, 2024, to shareholders of record as of February 29, 2024.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. 	Quantitative and Qualitative Disclosures About Market Risk
As of December 31, 2023, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk. However, the Company is exposed to interest rate risk due to possible changes in short-term interest rates as it invests its cash or borrows on its Revolving Credit Facility and due to the portion of its variable-rate term debt that is not fixed by interest rate swaps. As of December 31, 2023, after giving effect to interest rate swaps, as described below, approximately $150.0 million, or approximately 11% of the Company’s total debt outstanding, was subject to variable interest rates. Based on the Company’s variable-rate debt outstanding as of December 31, 2023, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $1.5 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.
As of December 31, 2023, the Company’s variable-rate debt consisted of its unsecured credit facilities, including $970 million of term loans. Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable-rate debt. As of December 31, 2023, the Company had 14 interest rate swap agreements that effectively fix the interest payments on approximately $820.0 million of the Company’s variable-rate debt outstanding with swap maturity dates ranging from January 2024 to December 2029. 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 annual rate of the one-month SOFR plus a 0.10% SOFR spread adjustment. See Note 5 titled “Fair Value of Financial Instruments” in Part II, Item 8, of the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Annual Report on Form 10-K, for a description of the Company’s interest rate swaps as of December 31, 2023.
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 as well as two fixed-rate senior notes facilities totaling $125 million. The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt and borrowings outstanding under its unsecured credit facilities at December 31, 2023. All dollar amounts are in thousands.
Thereafter
Total
Fair
Market
Value
Total debt:
Maturities
$
113,597
$
295,140
$
74,649
$
278,602
$
334,066
$
281,948
$
1,378,002
$
1,331,522
Average interest rates (1)
4.6
%
4.9
%
5.3
%
5.3
%
4.7
%
3.9
%
Variable-rate debt:
Maturities
$
85,000
$
225,000
$
-
$
275,000
$
300,000
$
85,000
$
970,000
$
967,761
Average interest rates (1)
4.8
%
5.4
%
5.8
%
5.9
%
5.2
%
3.6
%
Fixed-rate debt:
Maturities
$
28,597
$
70,140
$
74,649
$
3,602
$
34,066
$
196,948
$
408,002
$
363,761
Average interest rates
4.1
%
4.0
%
4.0
%
4.1
%
4.1
%
4.1
%
(1)The average interest rate gives effect to interest rate swaps, as applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.	 Financial Statements and Supplementary Data
Report of Management on Internal Control over Financial Reporting
February 22, 2024
To the Shareholders
Apple Hospitality REIT, Inc.
Management of Apple Hospitality REIT, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of the Company’s principal executive, principal financial and principal accounting officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and the receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual consolidated financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management has concluded that as of December 31, 2023, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Ernst & Young LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report, has issued an attestation report on the Company’s internal control over financial reporting, a copy of which appears on the next page of this annual report.
/s/ Justin G. Knight
/s/ Elizabeth S. Perkins
/s/ Rachel S. Labrecque
Justin G. Knight,
Chief Executive Officer
Elizabeth S. Perkins,
Chief Financial Officer
Rachel S. Labrecque,
Chief Accounting Officer
(Principal Executive Officer)
(Principal Financial
Officer)
(Principal Accounting
Officer)
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Hospitality REIT, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Apple Hospitality REIT, Inc.’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Apple Hospitality REIT, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and the financial statement schedule listed in the Index at Item 15(2) and our report dated February 22, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Richmond, Virginia
February 22, 2024
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Apple Hospitality REIT, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Apple Hospitality REIT, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes and the financial statement schedule listed in the Index at Item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 22, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Investments in Real Estate - Impairment Analysis
Description of the Matter
As of December 31, 2023, the Company had investments in real estate, net of accumulated depreciation and amortization of $4.8 billion. As more fully described in Notes 1 and 2 to the consolidated financial statements, the Company analyzes its hotel properties individually for indicators of impairment throughout the year. For properties with impairment indicators, the Company determines whether projected undiscounted future cash flows from operations are sufficient to recover their carrying value. Impairment charges may result when the carrying value of the properties’ assets exceeds the estimated undiscounted future cash flows over the estimated holding period. The Company’s impairment analysis consists of (1) identifying properties with indicators of impairment, (2) testing the identified property assets for recoverability and (3) measuring the impairment loss. The Company recorded $5.6 million of impairment losses in the fourth quarter of 2023.
Auditing management’s analysis is complex due to the highly judgmental nature of identifying indicators of impairment as well as a change in a property’s intended hold period. Many indicators of impairment, such as a change in the intended holding period of the property, are subjective. The determination of the capitalization rate used in the fair value estimates require significant management judgment.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s review for indicators of impairment, including changes in the intended hold period. For example, we tested controls over management’s review of the recoverability analysis and measurement of the impairment loss, including the significant assumptions described above.
To test whether any indicators of impairment were present, our audit procedures included evaluating management’s analysis, including testing the completeness and accuracy of the underlying data. In addition, we performed an independent assessment using both internally and externally available information to identify evidence that was either corroborative or contrary to management’s analysis. For example, we considered historical trends in dispositions and renovations as well as current year property level performance such as net operating income and challenged management’s hold period assumptions. For the Company’s investment in real estate that was assessed by management using an undiscounted cash flow model, we inspected relevant industry and market outlook data to consider market conditions.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Richmond, Virginia
February 22, 2024
Apple Hospitality REIT , Inc.
Consolidated Balance Sheets
(in thousands, except share data)
As of December 31,
Assets
Investment in real estate, net of accumulated depreciation and amortization of
$1,662,942 and $1,492,097, respectively
$
4,777,374
$
4,610,962
Assets held for sale
15,283
-
Cash and cash equivalents
10,287
4,077
Restricted cash-furniture, fixtures and other escrows
33,331
39,435
Due from third party managers, net
36,437
43,331
Other assets, net
64,586
74,909
Total Assets
$
4,937,298
$
4,772,714
Liabilities
Debt, net
$
1,371,494
$
1,366,249
Finance lease liabilities
111,892
112,006
Accounts payable and other liabilities
129,931
116,064
Total Liabilities
1,613,317
1,594,319
Shareholders’ Equity
Preferred stock, authorized 30,000,000 shares; none issued and outstanding
-
-
Common stock, no par value, authorized 800,000,000 shares; issued and
outstanding 241,515,532 and 228,644,861 shares, respectively
4,794,804
4,577,022
Accumulated other comprehensive income
20,404
36,881
Distributions greater than net income
(1,491,227
)
(1,435,508
)
Total Shareholders’ Equity
3,323,981
3,178,395
Total Liabilities and Shareholders’ Equity
$
4,937,298
$
4,772,714
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except per share data)
Year Ended December 31,
Revenues:
Room
$
1,226,159
$
1,139,436
$
871,436
Food and beverage
56,968
46,010
22,018
Other
60,673
52,971
40,415
Total revenue
1,343,800
1,238,417
933,869
Expenses:
Hotel operating expense:
Operating
332,714
300,852
216,644
Hotel administrative
114,071
105,396
85,066
Sales and marketing
117,538
104,756
79,834
Utilities
47,422
45,017
40,635
Repair and maintenance
65,412
58,729
47,660
Franchise fees
59,315
53,901
40,949
Management fees
44,253
41,830
31,390
Total hotel operating expense
780,725
710,481
542,178
Property taxes, insurance and other
79,307
72,907
71,980
General and administrative
47,401
42,464
41,038
Loss on impairment of depreciable real estate assets
5,644
26,175
10,754
Depreciation and amortization
183,242
181,697
184,471
Total expense
1,096,319
1,033,724
850,421
Gain on sale of real estate
-
1,785
3,596
Operating income
247,481
206,478
87,044
Interest and other expense, net
(68,857
)
(59,733
)
(67,748
)
Income before income taxes
178,624
146,745
19,296
Income tax expense
(1,135
)
(1,940
)
(468
)
Net income
$
177,489
$
144,805
$
18,828
Other comprehensive income (loss):
Interest rate derivatives
(16,477
)
52,389
27,294
Comprehensive income
$
161,012
$
197,194
$
46,122
Basic and diluted net income per common share
$
0.77
$
0.63
$
0.08
Weighted average common shares outstanding - basic and
diluted
229,329
228,946
226,361
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands, except per share data)
Accumulated
Common Stock
Other
Distributions
Number
of Shares
Amount
Comprehensive
Income (Loss)
Greater Than
Net Income
Total
Balance at December 31, 2020
223,212
$
4,488,419
$
(42,802
)
$
(1,416,270
)
$
3,029,347
Share based compensation, net
5,933
-
-
5,933
Issuance of common shares, net
4,677
75,000
-
-
75,000
Interest rate derivatives
-
-
27,294
-
27,294
Net income
-
-
-
18,828
18,828
Distributions declared to shareholders ($0.04 per share)
-
-
-
(9,081
)
(9,081
)
Balance at December 31, 2021
228,256
4,569,352
(15,508
)
(1,406,523
)
3,147,321
Share based compensation, net
10,645
-
-
10,645
Equity issuance costs
-
(300
)
-
-
(300
)
Common shares repurchased
(188
)
(2,675
)
-
-
(2,675
)
Interest rate derivatives
-
-
52,389
-
52,389
Net income
-
-
-
144,805
144,805
Distributions declared to shareholders ($0.76 per share)
-
-
-
(173,790
)
(173,790
)
Balance at December 31, 2022
228,645
4,577,022
36,881
(1,435,508
)
3,178,395
Share based compensation, net
8,772
-
-
8,772
Issuance of common shares, net
12,826
215,890
-
-
215,890
Common shares repurchased
(480
)
(6,880
)
-
-
(6,880
)
Interest rate derivatives
-
-
(16,477
)
-
(16,477
)
Net income
-
-
-
177,489
177,489
Distributions declared to shareholders ($1.01 per share)
-
-
-
(233,208
)
(233,208
)
Balance at December 31, 2023
241,516
$
4,794,804
$
20,404
$
(1,491,227
)
$
3,323,981
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December, 31
Cash flows from operating activities:
Net income
$
177,489
$
144,805
$
18,828
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
183,242
181,697
184,471
Loss on impairment of depreciable real estate assets
5,644
26,175
10,754
Gain on sale of real estate
-
(1,785
)
(3,596
)
Other non-cash expenses, net
8,708
8,653
10,284
Changes in operating assets and liabilities:
Decrease (increase) in due from third party managers, net
7,098
(3,436
)
(18,113
)
Decrease (increase) in other assets, net
(6,088
)
(1,685
)
Increase in accounts payable and other liabilities
22,951
14,022
14,088
Net cash provided by operating activities
399,044
368,446
217,562
Cash flows from investing activities:
Acquisition of hotel properties, net
(291,388
)
(84,827
)
(362,486
)
Disbursements for potential acquisitions, net
(1,177
)
-
(893
)
Capital improvements
(72,066
)
(59,376
)
(18,312
)
Net proceeds from sale of real estate
-
8,293
231,008
Net cash used in investing activities
(364,631
)
(135,910
)
(150,683
)
Cash flows from financing activities:
Net proceeds (disbursements) related to issuance of common shares
215,923
(265
)
75,000
Repurchases of common shares
(6,880
)
(2,675
)
-
Repurchases of common shares to satisfy employee withholding requirements
(8,008
)
(6,333
)
(3,345
)
Distributions paid to common shareholders
(238,283
)
(139,467
)
(6,797
)
Net payments on revolving credit facility
-
(76,000
)
(29,800
)
Proceeds from term loans and senior notes
50,000
175,000
-
Payments of mortgage debt and other loans
(46,213
)
(168,831
)
(70,724
)
Principal payments on finance leases
(340
)
(173
)
(24,045
)
Financing costs
(506
)
(10,229
)
(1,587
)
Net cash used in financing activities
(34,307
)
(228,973
)
(61,298
)
Net change in cash, cash equivalents and restricted cash
3,563
5,581
Cash, cash equivalents and restricted cash, beginning of period
43,512
39,949
34,368
Cash, cash equivalents and restricted cash, end of period
$
43,618
$
43,512
$
39,949
Supplemental cash flow information:
Interest paid
$
67,835
$
57,721
$
63,149
Income taxes paid
$
1,293
$
1,699
$
Supplemental disclosure of noncash investing and financing activities:
Notes payable originated from acquisitions
$
-
$
-
$
56,000
Accrued distribution to common shareholders
$
31,397
$
36,551
$
2,281
Accrued capital expenditures
$
15,816
$
11,050
$
8,924
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents, beginning of period
$
4,077
$
3,282
$
5,556
Restricted cash-furniture, fixtures and other escrows, beginning of period
39,435
$
36,667
28,812
Cash, cash equivalents and restricted cash, beginning of period
$
43,512
$
39,949
$
34,368
Cash and cash equivalents, end of period
$
10,287
$
4,077
$
3,282
Restricted cash-furniture, fixtures and other escrows, end of period
33,331
39,435
36,667
Cash, cash equivalents and restricted cash, end of period
$
43,618
$
43,512
$
39,949
See notes to consolidated financial statements.
Apple Hospitality REIT, Inc.
Notes to Consolidated Financial Statements
Note 1
Organization and Summary of Significant Accounting Policies
Organization
Apple Hospitality REIT, Inc., formed in November 2007 as a Virginia corporation, together with its wholly-owned subsidiaries (the “Company”), is a self-advised real estate investment trust (“REIT”) that invests in income-producing real estate, primarily in the lodging sector, in the United States (“U.S.”). The Company’s fiscal year end is December 31. The Company has no foreign operations or assets and its operating structure includes only 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 December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. The Company also owns one property leased to third parties. All information related to the number of rooms included in these notes to the consolidated financial statements and Schedule III - Real Estate and Accumulated Depreciation and Amortization listed in the Index at Item 15 has not been audited. The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”
The Company has elected to be treated as a REIT for U.S. federal income tax purposes. The Company has a wholly-owned taxable REIT subsidiary (or subsidiaries thereof) (collectively, the “Lessee” or “TRS”), which leases all of the Company’s hotels.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. The fair market value of cash and cash equivalents approximates their carrying value. Cash balances may at times exceed federal depository insurance limits.
Restricted Cash
Restricted cash includes reserves for debt service, real estate taxes, and insurance, and reserves for furniture, fixtures, and equipment replacements of up to 5% of property revenue for certain hotels, as required by certain management or mortgage debt agreement restrictions and provisions. The fair market value of restricted cash approximates its carrying value.
Investment in Real Estate and Related Depreciation and Amortization
Real estate is stated at cost, net of depreciation and amortization. Repair and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements are capitalized. As further discussed in Note 10, finance ground lease assets are capitalized at the estimated present value of the remaining minimum lease payments under the leases. Depreciation and amortization are computed using the straight-line method over the average estimated useful lives of the assets, which are generally 39 years for buildings, the remaining life of the lease for finance ground leases (which in some instances may include renewal options), 10 to 20 years for franchise fees, 10 years for major improvements and three to seven years for furniture and equipment.
The Company considers expenditures to be capital in nature based on the following criteria: (1) for a single asset, the cost must be at least $500, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; (2) for group purchases of 10 or more identical assets, the unit cost for each asset must be at least $50, including all normal and necessary costs to place the asset in service, and the useful life must be at least one year; and (3) for major repairs to a single asset, the repair must be at least $2,500 and the useful life of the asset must be substantially extended.
Upon acquisition of real estate properties, the Company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, and assumed debt based on the evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparables and other information which is subjective in nature, including comparable land sales as well as industry and Company data regarding building and furniture, fixture and equipment costs, including adjustments for estimated depreciation based on the age of the property acquired and time since its most recent renovation. The Company has not assigned any value to management contracts and franchise agreements as such contracts are generally at current market rates based on the remaining terms of the contracts and any other value attributable to these contracts is not considered
material. Acquisitions of hotel properties are generally accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition, including title, legal, accounting, brokerage commissions and other related costs, being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred.
The Company records impairment losses on hotel properties used in operations if indicators of impairment are present, and the sum of the undiscounted cash flows estimated to be generated by the respective properties over their estimated remaining useful life, based on historical and industry data, is less than the properties’ carrying amount. Indicators of impairment include a property with current or potential losses from operations, when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life or when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable. The Company monitors its properties on an ongoing basis by analytically reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares an annual recoverability analysis for each of its properties to assist with its evaluation of impairment indicators. The Company performs an annual recoverability analysis by comparing each property’s net book value to its estimated operating income based on assumptions and estimates about the property’s future revenues, expenses and capital expenditures after recovery from disruption resulting from COVID-19 and other disruptive events such as renovations or newly opened hotels in the same market. The Company’s planned initial hold period for each property is generally 39 years. If events or circumstances change, such as the Company’s intended hold period for a property or if the operating performance of a property declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable, and an impairment loss will be recorded. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. The Company’s ongoing analyses and annual recoverability analyses have identified impairment losses on two properties recorded in 2023, two properties recorded in 2022 and five properties recorded in 2021 totaling approximately $5.6 million, $26.2 million and $10.8 million, respectively, as discussed in Note 2.
Assets Held for Sale
The Company classifies assets as held for sale when a binding agreement to sell the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, no significant contingencies exist which could prevent the transaction from being completed in a timely manner, and the sale is expected to close within one year. If these criteria are met, the Company will cease recording depreciation and amortization and will record an impairment charge if the fair value less costs to sell is less than the carrying amount of the disposal group. The Company will generally classify the impairment charge, together with the related operating results, as continuing operations in the Company’s consolidated statements of operations and classify the assets and related liabilities as held for sale in the Company’s consolidated balance sheets. If the Company’s plan of sale changes and the Company subsequently decides not to sell a property that is classified as held for sale, the property will be reclassified as held and used in the period the change occurs. As of December 31, 2023, the Company had two hotels classified as held for sale, which were both sold to an unrelated party in February 2024, as discussed further in Note 3. As of December 31, 2022, the Company did not have any assets classified as held for sale.
Revenue Recognition
Revenues consist of amounts derived from hotel operations, including room sales, food and beverage sales, and other hotel revenues, and are presented on a disaggregated basis in the Company’s consolidated statements of operations. The Company recognizes hotel operating revenue when guest rooms are occupied, services have been provided or fees have been earned. Revenues are recorded net of any sales, occupancy or other taxes collected from customers on behalf of third parties. Room revenue represents revenue from the occupancy of hotel rooms and is driven by the occupancy and average daily rate charged. Room revenue does not include ancillary services or fees charged. The contracts for room stays with customers generally are very short-term in duration and revenue is recognized over the course of the hotel stay. The hotel reservation defines the terms of the agreement including an agreed-upon rate and length of stay. Food and beverage revenue consists of revenue from group functions such as banquets and conferences as well as revenue from the restaurants and lounges at the Company’s hotels. Food and beverage revenue is recognized at the time the products or services are provided to the customer. Other operating revenue consists of ancillary revenues at the hotel, including attrition and cancelation fees, parking revenue and other guest services and offerings. Other operating revenue is generally recognized at the time when the goods or services are provided to the customer or when the performance obligation is satisfied. Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some customers prepaying for their rooms prior to the stay. Payments received from a customer prior to arrival are recorded as an advance deposit and are recognized as revenue at the time of occupancy.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income (loss), which is comprised of unrealized gains or losses resulting from hedging activity.
Net Income Per Common Share
Basic net income per common share is computed based upon the weighted average number of shares outstanding during the year. Diluted net income per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the year. Basic and dilutive net income per common share were the same for each of the years presented.
Income Taxes
The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its REIT taxable income, subject to certain adjustments and excluding any net capital gain, to shareholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to U.S. federal income tax on its taxable income at regular corporate income tax rates (including any applicable corporate minimum tax) and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which it failed to qualify as a REIT, unless it satisfies certain relief provisions. The Company intends to adhere to the REIT qualification requirements and to maintain its qualification for taxation as a REIT.
As a REIT, the Company is generally not subject to U.S. federal corporate income tax on the portion of taxable income that is distributed to shareholders. The Lessee, as a taxable REIT subsidiary of the Company, is subject to federal and state income taxes. The Company’s income tax expense as shown in the consolidated statements of operations primarily consists of income taxes on the operations of the Lessee and franchise taxes on both the REIT and the Lessee at the state jurisdiction level.
The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and for net operating loss, capital loss and tax credit carryforwards. The deferred tax assets and liabilities are measured using the enacted income tax rates in effect for the year in which those temporary differences are expected to be realized or settled. The effect on the deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period in which the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of all available evidence, including the future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies. Valuation allowances are provided if, based on the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company performs an annual review for any uncertain tax positions and, if necessary, will record the expected future tax consequences of uncertain tax positions in the consolidated financial statements. As of December 31, 2023, the tax years that remain subject to examination by major tax jurisdictions generally include 2020-2023. The Company evaluates whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company has reviewed its tax positions for open tax years and has concluded no provision for income taxes for uncertain tax positions is required in the Company's consolidated financial statements as of December 31, 2023, and 2022. Interest and penalties related to uncertain tax benefits, if any, in the future will be recognized as operating expense.
The Company has and may in the future enter into purchase and sale transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended, for the exchange of like-kind property to defer taxable gains on the sale of real estate properties (“1031 Exchange”).
Sales and Marketing Costs
Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising and reservation systems under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly attributable to advertising and promotion.
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Standards Recently Issued
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of significant segment expenses and other segment items on an annual and interim basis and disclosure in interim periods about a reportable segment’s profit or loss and assets that are currently required annually. Additionally, it requires disclosure of the title and position of the Chief Operating Decision Maker (“CODM”) and requires a public entity that has a single reportable segment to provide all disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. This ASU does not change how a public entity identifies its operating segments, aggregates them, or applies the quantitative thresholds to determine its reportable segments. The new standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. As of December 31, 2023, the Company has not adopted this ASU. The adoption of this ASU is expected to only impact disclosures with no impact on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on income tax disclosures around effective tax rates and cash income taxes paid. This update requires disclosure, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. The new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The amendments in this ASU may be applied prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or the amendments may be applied retrospectively by providing the revised disclosures for all periods presented. As of December 31, 2023, the Company has not adopted this ASU. The adoption of this ASU is expected to only impact disclosures with no impact on the Company’s consolidated financial statements.
Note 2
Investment in Real Estate
The Company’s investment in real estate consisted of the following (in thousands):
December 31,
December 31,
Land
$
828,868
$
802,625
Building and improvements
4,917,105
4,656,343
Furniture, fixtures and equipment
571,026
522,082
Finance ground lease assets
102,084
102,084
Franchise fees
21,233
19,925
6,440,316
6,103,059
Less accumulated depreciation and amortization
(1,662,942
)
(1,492,097
)
Investment in real estate, net
$
4,777,374
$
4,610,962
As of December 31, 2023, the Company owned 225 hotels with an aggregate of 29,900 rooms located in 38 states, including two hotels with a total of 248 rooms classified as held for sale, which were both sold to an unrelated party in February 2024. In May 2023, the Company entered into an operating lease for an initial 15-year term with a third-party hotel operator at its independent boutique hotel in New York, New York for all hotel operations of the hotel’s 210 hotel rooms (“non-hotel property”). Lease revenue from this property is recorded in other revenue in the Company’s consolidated statements of operations and comprehensive income. As a result of the lease agreement, this property is excluded from the Company’s hotel and room counts effective May 2023 through the end of the lease term.
The Company leases all of its 225 hotels to a wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.
2023 and 2022 Acquisitions
During 2023, the Company acquired six hotels and one free-standing parking garage. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each property. All dollar amounts are in thousands.
City
State
Brand
Manager
Date
Acquired
Rooms
Gross
Purchase
Price
Cleveland
OH
Courtyard
Concord
6/30/2023
$
31,000
Salt Lake City
UT
Courtyard
North Central
10/11/2023
48,110
Salt Lake City
UT
Hyatt House
North Central
10/11/2023
34,250
Salt Lake City (1)
UT
N/A
North Central
10/11/2023
N/A
9,140
Renton
WA
Residence Inn
InnVentures
10/18/2023
55,500
South Jordan
UT
Embassy Suites
HHM
11/21/2023
36,750
Las Vegas
NV
SpringHill Suites
Crescent
12/27/2023
75,000
1,125
$
289,750
(1)This property is a free-standing parking garage which serves both the Courtyard and Hyatt House hotels in Salt Lake City, Utah and the surrounding area, however, it is not affiliated with any brand.
During 2022, the Company acquired two hotels. The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price, excluding transaction costs, for each hotel. All dollar amounts are in thousands.
City
State
Brand
Manager
Date
Acquired
Rooms
Gross
Purchase
Price
Louisville
KY
AC Hotels
Concord
10/25/2022
$
51,000
Pittsburgh
PA
AC Hotels
Concord
10/25/2022
34,000
$
85,000
In 2023, the Company utilized its available cash on hand, net proceeds from sale of shares under the ATM program (as defined below) and availability under its Revolving Credit Facility (as defined below) to purchase the properties. In 2022, the Company utilized its available cash on hand and a $50 million draw on its $575 million term loan facility (as defined below) to purchase both hotels. The acquisitions of these hotel properties were accounted for as acquisitions of asset groups, whereby costs incurred to effect the acquisitions (which were not significant) were capitalized as part of the cost of the assets acquired. For the six hotels and free-standing parking garage acquired during 2023, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through December 31, 2023 was approximately $9.7 million and $1.6 million, respectively. For the two hotels acquired during 2022, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through December 31, 2022 was approximately $2.4 million and $0.6 million, respectively.
Loss on Impairment of Depreciable Real Estate Assets
During the years ended December 31, 2023, 2022 and 2021, the Company recorded impairment losses totaling approximately $5.6 million, $26.2 million and $10.8 million, respectively.
During the fourth quarter of 2023, the Company identified indicators of impairment at two properties, due to declines in the current and forecasted cash flows and a shortened hold period. The Company performed a test of recoverability and determined that the carrying value for each property exceeded the estimated undiscounted future cash flows. The shortfalls in estimated cash flows were triggered by declines in existing and forecasted hotel market conditions and new supply in each respective market. For both hotels, the Company utilized an offer from an unrelated party, net of estimated selling costs (categorized as Level 2 inputs under the fair value hierarchy) to adjust the basis of the property to its estimated fair market value. Upon concluding that the carrying cost exceeded the estimated undiscounted future cash flows, the Company adjusted the carrying value of the two hotels (approximately $17.4 million as of December 31, 2023) to their estimated fair market value (approximately $11.8 million as of December 31, 2023), resulting in an impairment loss of $5.6 million.
During the fourth quarter of 2022, the Company identified indicators of impairment at two properties, due to declines in the current and forecasted cash flows and a shortened hold period. The Company performed a test of recoverability and determined that
the carrying value for each property exceeded the estimated undiscounted future cash flows. The shortfalls in estimated cash flows were triggered by declines in existing and forecasted hotel market conditions and new supply in each respective market. For one hotel, the Company engaged a third party to assist with the analysis of the fair market value. The fair market value of the hotel was estimated by using the income and market approaches, as applicable, as outlined under GAAP, using both observable market data (categorized as Level 2 inputs under the fair value hierarchy) and unobservable inputs that reflect the Company’s own internal assumptions and calculations (categorized as Level 3 inputs under the fair value hierarchy). Under the income approach, the fair value estimate was calculated from a discounted cash flow analysis, using expected future cash flows based on stabilized room revenue growth rates of 2.4% to 4.8%, estimated discount rates of approximately 7.5% to 9.0% and other market considerations. For the second hotel, the Company utilized offers from unrelated parties, net of estimated selling costs (categorized as Level 2 inputs under the fair value hierarchy) to adjust the basis of the property to its estimated fair market value. Upon concluding that the carrying cost exceeded the estimated undiscounted future cash flows, the Company adjusted the carrying value of the two hotels (approximately $47.2 million as of December 31, 2022) to their estimated fair market value (approximately $21.0 million as of December 31, 2022), resulting in an impairment loss of $26.2 million.
During the first quarter of 2021, the Company identified 20 hotels for potential sale and, in April 2021, entered into a purchase contract with an unrelated party for the sale of the hotels for a gross sales price of $211.0 million. As a result, the Company recognized impairment losses totaling approximately $9.4 million in the first quarter of 2021, to adjust the carrying values of four of these hotels to their estimated fair values. The fair values of these properties were based on broker opinions of value using multiple methods to determine their value, including but not limited to replacement value, discounted cash flows and the income approach based on historical and forecasted operating results of the specific properties. These valuations are Level 3 inputs under the fair value hierarchy. The Company completed the sale of the hotels in July 2021.
Additionally, during the first quarter of 2021, the Company identified the Overland Park, Kansas SpringHill Suites for potential sale and, in February 2021, entered into a purchase contract with an unrelated party for the sale of the hotel for a gross sales price of $5.3 million. As a result, the Company recognized an impairment loss totaling approximately $1.3 million in the first quarter of 2021, to adjust the carrying value of the hotel to its estimated fair value less cost to sell, which was based on the contracted sales price, a Level 1 input under the fair value hierarchy. The Company completed the sale of the hotel in April 2021.
Note 3
Assets Held for Sale and Dispositions
Assets Held for Sale
In December 2023, the Company entered into a purchase contract with an unrelated party for the sale of both its 122-room Hampton and 126-room Homewood Suites in Rogers, Arkansas for a combined gross sales price of approximately $33.5 million. Since the buyer under the contract had completed its due diligence and had made a non-refundable deposit, as of December 31, 2023, the Company classified the hotels as assets held for sale in its consolidated balance sheet at their carrying value (which was less than the contract price, net of costs to sell). The Company completed the sale of both hotels in February 2024. A portion of the proceeds from the sale of the two hotels will be used to complete a 1031 Exchange with future acquisitions, which will result in the deferral of taxable gains of approximately $15 million.
2023 Dispositions
There were no dispositions during the year ended December 31, 2023.
2022 Dispositions
During the year ended December 31, 2022, the Company sold one hotel, a 55-room independent boutique hotel in Richmond, Virginia, to an unrelated party for a gross sales price of approximately $8.5 million, resulting in a gain on sale of approximately $1.8 million, net of transaction costs, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2022. The hotel had a total carrying value of approximately $6.5 million at the time of the sale.
2021 Dispositions
During the year ended December 31, 2021, the Company sold 23 hotels in four separate transactions with unrelated parties for a total combined gross sales price of approximately $234.6 million, resulting in a combined net gain on sale, after giving effect to impairment charges of approximately $3.6 million, net of transaction costs, which is included in the Company’s consolidated statement of operations for the year ended December 31, 2021. The 23 hotels had a total carrying value of approximately $227.2 million at the time of the sale. The following table lists the 23 hotels sold:
City
State
Brand
Date Sold
Rooms
Charlotte
NC
Homewood Suites
2/25/2021
Memphis
TN
Homewood Suites
3/16/2021
Overland Park
KS
SpringHill Suites
4/30/2021
Montgomery
AL
Hilton Garden Inn
7/22/2021
Montgomery
AL
Homewood Suites
7/22/2021
Rogers
AR
Residence Inn
7/22/2021
Phoenix
AZ
Courtyard
7/22/2021
Lakeland
FL
Courtyard
7/22/2021
Albany
GA
Fairfield
7/22/2021
Schaumburg
IL
Hilton Garden Inn
7/22/2021
Andover
MA
SpringHill Suites
7/22/2021
Fayetteville
NC
Residence Inn
7/22/2021
Greenville
SC
Residence Inn
7/22/2021
Jackson
TN
Hampton
7/22/2021
Johnson City
TN
Courtyard
7/22/2021
Allen
TX
Hampton
7/22/2021
Allen
TX
Hilton Garden Inn
7/22/2021
Beaumont
TX
Residence Inn
7/22/2021
Burleson/Fort Worth
TX
Hampton
7/22/2021
El Paso
TX
Hilton Garden Inn
7/22/2021
Irving
TX
Homewood Suites
7/22/2021
Richmond
VA
SpringHill Suites
7/22/2021
Vancouver
WA
SpringHill Suites
7/22/2021
Total
2,493
A portion of the proceeds from the sale of 20 hotels on July 22, 2021 were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of approximately $23.6 million. The properties acquired for the 1031 Exchange were the fee interest in the land at the Seattle, Washington Residence Inn and the AC Hotel in Portland, Maine.
Excluding gains on sale of real estate, the Company’s consolidated statements of operations include operating income (loss) of approximately $2.7 million, $2.5 million and $(6.3) million for the years ended December 31, 2023, 2022 and 2021, respectively, relating to the results of operations of the 26 hotels noted above (the two hotels classified as held for sale at December 31, 2023, the one hotel sold in 2022 and the 23 hotels sold in 2021) 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 years ended December 31, 2023, as applicable. The net proceeds from the sale of the one hotel in 2022 were used for general corporate purposes, while the net proceeds from the sales of the 23 hotels in 2021 were used to pay down borrowings under the Company’s then-existing $425 million revolving credit facility and for general corporate purposes, including acquisitions of hotel properties.
Note 4
Debt
Summary
As of December 31, 2023 and 2022, the Company’s debt consisted of the following (in thousands):
December 31,
December 31,
Revolving credit facility
$
-
$
-
Term loans and senior notes, net
1,088,904
1,037,384
Mortgage debt, net
282,590
328,865
Debt, net
$
1,371,494
$
1,366,249
The aggregate amounts of principal payable under the Company’s total debt obligations as of December 31, 2023 (including the Revolving Credit Facility (if any) (as defined below), term loans, senior notes and mortgage debt), for the five years subsequent to December 31, 2023 and thereafter are as follows (in thousands):
$
113,597
295,140
74,649
278,602
334,066
Thereafter
281,948
1,378,002
Unamortized fair value adjustment of assumed debt
Unamortized debt issuance costs
(7,034
)
Total
$
1,371,494
The Company uses interest rate swaps to manage its interest rate risk on a portion of its 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 annual SOFR for a one-month term (“one-month SOFR”) plus a 0.10% SOFR spread adjustment. The swaps are designed to effectively fix the interest payments on variable-rate debt instruments. See Note 5 for more information on the interest rate swap agreements. The Company’s total fixed-rate and variable-rate debt, after giving effect to its interest rate swaps in effect at December 31, 2023 and 2022, is set forth below. All dollar amounts are in thousands.
December 31,
Percentage
December 31,
Percentage
Fixed-rate debt (1)
$
1,228,002
%
$
1,149,215
%
Variable-rate debt
150,000
%
225,000
%
Total
$
1,378,002
$
1,374,215
Weighted-average interest rate of debt
4.26
%
3.93
%
(1)Fixed-rate debt includes the portion of variable-rate debt where the interest payments have been effectively fixed by interest rate swaps as of the respective balance sheet date. See Note 5 for more information on the interest rate swap agreements.
Credit Facilities
$1.2 Billion Credit Facility
On July 25, 2022, the Company entered into a credit facility (the “$1.2 billion credit facility”) that is comprised of (i) a $650 million revolving credit facility with an initial maturity date of July 25, 2026 (the “Revolving Credit Facility”), (ii) a $275 million term loan with a maturity date of July 25, 2027, funded at closing, and (iii) a $300 million term loan with a maturity date of January 31, 2028 (including a $150 million delayed draw option until 180 days from closing), of which $200 million was funded at closing, $50 million was funded on October 24, 2022 and the remaining $50 million was funded on January 17, 2023 (the term loans described in clauses (ii) and (iii) are referred to together as the “$575 million term loan facility”).
Subject to certain conditions, including covenant compliance and additional fees, the Revolving Credit Facility maturity date may be extended up to one year. The credit agreement for the $1.2 billion credit facility contains mandatory prepayment requirements, customary affirmative and negative covenants (as described below), restrictions on certain investments and events of default. The Company may make voluntary prepayments, in whole or in part, at any time. Interest payments on the $1.2 billion credit facility are due monthly, and the interest rate, subject to certain exceptions, is equal to the one-month SOFR plus a 0.10% SOFR spread adjustment plus a margin ranging from 1.35% to 2.25%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement. As of December 31, 2023, the Company had availability of $650 million under the Revolving Credit Facility. The Company is also required to pay quarterly an unused facility fee at an annual rate of 0.20% or 0.25% on the unused portion of the Revolving Credit Facility, based on the amount of borrowings outstanding during the quarter.
$225 Million Term Loan Facility
The Company also has an unsecured $225 million term loan facility that is comprised of (i) a $50 million term loan with an initial maturity date of August 2, 2023, which was funded on August 2, 2018, and (ii) a $175 million term loan with a maturity date of August 2, 2025, of which $100 million was funded on August 2, 2018, and the remaining $75 million was funded on January 29, 2019 (the term loans described in clauses (i) and (ii) are referred to together as the “$225 million term loan facility”). On July 19, 2023, the Company entered into an amendment of its $225 million term loan facility, which extended the maturity date of the existing $50 million term loan by two years to August 2, 2025. The Company may make voluntary prepayments, in whole or in part, at any time, subject to certain conditions. Interest payments on the $225 million term loan facility are due monthly and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month SOFR plus a 0.10% SOFR spread adjustment plus a margin ranging from 1.35% to 2.50%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
2017 $85 Million Term Loan Facility
On July 25, 2017, the Company entered into an unsecured $85 million term loan facility with a maturity date of July 25, 2024, consisting of one term loan (the “2017 $85 million term loan facility”) that was funded at closing. The Company may make voluntary prepayments, in whole or in part, at any time, subject to certain conditions. Interest payments on the 2017 $85 million term loan facility are due monthly, and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month SOFR plus a 0.10% SOFR spread adjustment plus a margin ranging from 1.30% to 2.10%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
2019 $85 Million Term Loan Facility
On December 31, 2019, the Company entered into an unsecured $85 million term loan facility with a maturity date of December 31, 2029, consisting of one term loan funded at closing (the “2019 $85 million term loan facility”). Net proceeds from the 2019 $85 million term loan facility were used to pay down borrowings under the Company’s then-existing $425 million revolving credit facility. The Company may make voluntary prepayments, in whole or in part, subject to certain conditions. Interest payments on the 2019 $85 million term loan facility are due monthly, and the interest rate, subject to certain exceptions, is equal to an annual rate of the one-month SOFR plus a 0.10% SOFR spread adjustment plus a margin ranging from 1.70% to 2.55%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.
$50 Million Senior Notes Facility
On March 16, 2020, the Company entered into an unsecured $50 million senior notes facility with a maturity date of March 31, 2030, consisting of senior notes totaling $50 million funded at closing (the “$50 million senior notes facility”). Net proceeds from the $50 million senior notes facility were available to provide funding for general corporate purposes. The Company may make voluntary prepayments, in whole or in part, at any time, subject to certain conditions, including make-whole provisions. Interest payments on the $50 million senior notes facility are due quarterly, and the interest rate, subject to certain exceptions, ranges from an annual rate of 3.60% to 4.35% depending on the Company’s leverage ratio, as calculated under the terms of the note agreement.
$75 Million Senior Notes Facility
On June 2, 2022, the Company entered into an unsecured $75 million senior notes facility with a maturity date of June 2, 2029, consisting of senior notes totaling $75 million funded at closing (the “$75 million senior notes facility”, and collectively with the $1.2 billion credit facility, the $225 million term loan facility, the 2017 $85 million term loan facility, the 2019 $85 million term loan facility and the $50 million senior notes facility, the “unsecured credit facilities”). Net proceeds from the $75 million senior notes facility were available to provide funding for general corporate purposes, including the repayment of borrowings under the Company’s then-existing $425 million revolving credit facility and repayment of mortgage debt. The Company may make voluntary prepayments, in whole or in part, at any time, subject to certain conditions, including make-whole provisions. Interest payments on the $75 million
senior notes facility are due quarterly, and the interest rate, subject to certain exceptions, ranges from an annual rate of 4.88% to 5.63% depending on the Company’s leverage ratio, as calculated under the terms of the note agreement.
As of December 31, 2023 and 2022, the details of the Company’s unsecured credit facilities were as set forth in the table below. All dollar amounts are in thousands.
Outstanding Balance
Interest Rate
Maturity
Date
December 31, 2023
December 31, 2022
Revolving credit facility (1)
SOFR + 0.10% + 1.40% - 2.25%
7/25/2026
$
-
$
-
Term loans and senior notes
$275 million term loan
SOFR + 0.10% + 1.35% - 2.20%
7/25/2027
275,000
275,000
$300 million term loan
SOFR + 0.10% + 1.35% - 2.20%
1/31/2028
300,000
250,000
$50 million term loan
SOFR + 0.10% + 1.35% - 2.20%
8/2/2025
(3)
50,000
50,000
$175 million term loan
SOFR + 0.10% + 1.65% - 2.50%
8/2/2025
175,000
175,000
2017 $85 million term loan
SOFR + 0.10% + 1.30% - 2.10%
7/25/2024
85,000
85,000
2019 $85 million term loan
SOFR + 0.10% + 1.70% - 2.55%
12/31/2029
85,000
85,000
$50 million senior notes
3.60% - 4.35%
3/31/2030
50,000
50,000
$75 million senior notes
4.88% - 5.63%
6/2/2029
75,000
75,000
Term loans and senior notes at stated
value
1,095,000
1,045,000
Unamortized debt issuance costs
(6,096
)
(7,616
)
Term loans and senior notes, net
1,088,904
1,037,384
Credit facilities, net (1)
$
1,088,904
$
1,037,384
Weighted-average interest rate (2)
4.35
%
3.92
%
(1)Excludes unamortized debt issuance costs related to the Revolving Credit Facility totaling approximately $3.5 million and $4.8 million as of December 31, 2023 and December 31, 2022, respectively, which are included in other assets, net in the Company’s consolidated balance sheets.
(2)Interest rate represents the weighted-average effective annual interest rate at the balance sheet date which includes the effect of interest rate swaps in effect on $820.0 million and $695.0 million of the outstanding variable-rate debt as of December 31, 2023 and 2022, respectively. See Note 5 for more information on the interest rate swap agreements. The one-month SOFR at December 31, 2023 and December 31, 2022 was 5.35% and 4.36%, respectively.
(3)On July 19, 2023, the Company entered into an amendment of its $225 million term loan facility, which extended the maturity date of the existing $50 million term loan by two years to August 2, 2025.
Credit Facilities Covenants
The credit agreements governing the unsecured credit facilities (collectively, the “credit agreements”) contain mandatory prepayment requirements, customary affirmative and negative covenants, restrictions on certain investments and events of default, including the following financial and restrictive covenants (capitalized terms not defined below are defined in the credit agreements):
•A ratio of Consolidated Total Indebtedness to Consolidated EBITDA (“Maximum Consolidated Leverage Ratio”) of not more than 7.25 to 1.00;
•A ratio of Consolidated Secured Indebtedness to Consolidated Total Assets (“Maximum Secured Leverage Ratio”) of not more than 45%;
•A minimum Consolidated Tangible Net Worth of approximately $3.4 billion plus an amount equal to 75% of the Net Cash Proceeds from issuances and sales of Equity Interests occurring after the Closing Date, July 25, 2022, subject to adjustment;
•A ratio of Adjusted Consolidated EBITDA to Consolidated Fixed Charges (“Minimum Fixed Charge Coverage Ratio”) of not less than 1.50 to 1.00 for the trailing four full quarters;
•A ratio of Unencumbered Adjusted NOI to Consolidated Implied Interest Expense for Consolidated Unsecured Indebtedness (“Minimum Unsecured Interest Coverage Ratio”) of not less than 2.00 to 1.00 for the trailing four full quarters;
•A ratio of Consolidated Unsecured Indebtedness to Unencumbered Asset Value (“Maximum Unsecured Leverage Ratio”) of not more than 60% (subject to a higher level in certain circumstances); and
•A ratio of Consolidated Secured Recourse Indebtedness to Consolidated Total Assets (“Maximum Secured Recourse Indebtedness”) of not more than 10%.
The Company was in compliance with the applicable covenants at December 31, 2023.
Mortgage Debt
As of December 31, 2023, the Company had approximately $283.0 million in outstanding mortgage debt secured by 15 properties with maturity dates ranging from August 2024 to May 2038, stated interest rates ranging from 3.40% to 4.46% and effective interest rates ranging from 3.40% to 4.37%. 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 December 31, 2023 and 2022 for each of the Company’s mortgage debt obligations. All dollar amounts are in thousands.
Location
Brand
Interest
Rate (1)
Loan
Assumption
or
Origination
Date
Maturity
Date
Principal
Assumed
or
Originated
Outstanding
balance
as of
December 31,
Outstanding
balance
as of
December 31,
Miami, FL
Homewood Suites
4.02
%
3/1/2014
(2)
$
16,677
$
-
$
12,440
Huntsville, AL
Homewood Suites
4.12
%
3/1/2014
(3)
8,306
-
6,193
Prattville, AL
Courtyard
4.12
%
3/1/2014
(3)
6,596
-
4,918
San Diego, CA
Residence Inn
3.97
%
3/1/2014
(4)
18,600
-
13,827
New Orleans, LA
Homewood Suites
4.36
%
7/17/2014
8/11/2024
27,000
20,304
21,161
Westford, MA
Residence Inn
4.28
%
3/18/2015
4/11/2025
10,000
7,713
8,024
Denver, CO
Hilton Garden Inn
4.46
%
9/1/2016
6/11/2025
34,118
27,337
28,400
Oceanside, CA
Courtyard
4.28
%
9/1/2016
10/1/2025
13,655
11,707
12,019
Omaha, NE
Hilton Garden Inn
4.28
%
9/1/2016
10/1/2025
22,681
19,445
19,963
Boise, ID
Hampton
4.37
%
5/26/2016
6/11/2026
24,000
20,685
21,194
Burbank, CA
Courtyard
3.55
%
11/3/2016
12/1/2026
25,564
20,526
21,326
San Diego, CA
Courtyard
3.55
%
11/3/2016
12/1/2026
25,473
20,453
21,250
San Diego, CA
Hampton
3.55
%
11/3/2016
12/1/2026
18,963
15,226
15,819
Burbank, CA
SpringHill Suites
3.94
%
3/9/2018
4/1/2028
28,470
24,237
25,057
Santa Ana, CA
Courtyard
3.94
%
3/9/2018
4/1/2028
15,530
13,221
13,668
Richmond, VA
Courtyard
3.40
%
2/12/2020
3/11/2030
14,950
13,832
14,144
Richmond, VA
Residence Inn
3.40
%
2/12/2020
3/11/2030
14,950
13,832
14,144
Portland, ME
Residence Inn
3.43
%
3/2/2020
3/1/2032
33,500
30,500
30,500
San Jose, CA
Homewood Suites
4.22
%
12/22/2017
5/1/2038
30,000
23,984
25,168
$
389,033
283,002
329,215
Unamortized fair value adjustment
of assumed debt
Unamortized debt issuance costs
(938
)
(1,169
)
Total
$
282,590
$
328,865
(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)Loan was repaid in full on January 3, 2023.
(3)Loan was repaid in full on February 6, 2023.
(4)Loan was repaid in full on March 6, 2023.
The total fair value, net premium adjustment for all of the Company’s debt assumptions is being amortized as a reduction to interest expense over the remaining term of the respective mortgages using a method approximating the effective interest rate method, and totaled approximately $0.3 million, $0.2 million and $0.6 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Debt issuance costs related to the assumption or origination of debt are amortized over the period to maturity of the applicable debt instrument, as an addition to interest expense, and totaled approximately $3.6 million, $4.0 million and $4.2 million for the three years ended December 31, 2023, 2022 and 2021, respectively.
The Company’s interest expense in 2023, 2022 and 2021 is net of interest capitalized in conjunction with hotel renovations totaling approximately $1.5 million, $1.3 million and $0.3 million, respectively.
Note 5
Fair Value of Financial Instruments
Except as described below, the carrying value of the Company’s financial instruments approximates fair value due to the short-term nature of these financial instruments.
Debt
The Company estimates the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity of a debt obligation with similar credit terms and credit characteristics, which are Level 3 inputs under the fair value hierarchy. Market rates take into consideration general market conditions and maturity. As of December 31, 2023, the carrying value and estimated fair value of the Company’s debt was approximately $1.4 billion and $1.3 billion, respectively. As of December 31, 2022, the carrying value and estimated fair value of the Company’s debt were approximately $1.4 billion and $1.3 billion, respectively. 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 risk 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 SOFR plus a 0.10% SOFR spread adjustment. 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 December 31, 2023 and 2022. All dollar amounts are in thousands.
Fair Value Asset (Liability)
Notional Amount at December 31, 2023
Origination
Date
Effective
Date
Maturity
Date
Swap Fixed
Interest
Rate
December 31,
December 31,
Active interest rate swaps designated as cash flow hedges at December 31, 2023:
$
50,000
12/7/2018
5/18/2020
1/31/2024
2.71%
$
$
1,163
75,000
5/31/2017
7/31/2017
6/30/2024
1.95%
1,202
3,026
10,000
8/10/2017
8/10/2017
6/30/2024
2.02%
50,000
7/2/2019
7/5/2019
7/18/2024
1.64%
2,298
50,000
8/21/2019
8/23/2019
8/18/2024
1.31%
1,193
2,675
50,000
8/21/2019
8/23/2019
8/30/2024
1.32%
1,239
2,703
75,000
8/21/2019
5/18/2020
5/18/2025
1.26%
3,273
5,225
50,000
6/1/2018
1/31/2019
6/30/2025
2.88%
1,117
1,655
25,000
12/6/2018
1/31/2020
6/30/2025
2.74%
75,000
8/21/2019
5/18/2021
5/18/2026
1.29%
4,580
6,506
125,000
11/3/2023
11/3/2023
11/18/2026
4.51%
(2,333
)
-
50,000
3/17/2023
3/20/2023
3/18/2028
3.50%
-
50,000
3/17/2023
3/20/2023
3/20/2028
3.49%
-
85,000
12/31/2019
12/31/2019
12/31/2029
1.87%
7,788
9,511
820,000
20,404
36,057
Matured interest rate swap at December 31, 2023:
$
100,000
4/7/2016
9/30/2016
3/31/2023
1.30%
-
$
20,404
$
36,881
The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges. As of December 31, 2023, all 14 active interest rate swap agreements listed above were designated as cash flow hedges. The change in the
fair value of the Company’s designated cash flow hedges is recorded to accumulated other comprehensive income, a component of shareholder’s equity in the Company’s consolidated balance sheets.
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. The Company estimates that approximately $15.8 million of net unrealized gains included in accumulated other comprehensive income at December 31, 2023 will be reclassified as a decrease to interest and other expense, net within the next 12 months.
The following tables present the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and comprehensive income for the years ended December 31, 2023, 2022 and 2021 (in thousands):
Net Unrealized Gain Recognized in Other Comprehensive Income (Loss)
Interest rate derivatives in cash flow hedging
relationships
$
5,870
$
52,714
$
15,904
Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) to Interest and Other Expense, net
Interest rate derivatives in cash flow hedging
relationships
$
22,347
$
$
(11,390
)
Note 6
Related Parties
The Company has engaged in, 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 have been different if these transactions were conducted with non-related parties. The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (including the relationships discussed in this section) and are required to approve any significant modifications to the existing relationships, as well as any new significant related party transactions. The Board of Directors is not required to approve each individual transaction that falls under the related party relationships. However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction. Below is a summary of the significant related party relationships in effect and transactions that occurred during each of the three years ended December 31, 2023, 2022 and 2021, respectively.
Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Mr. Knight is also currently a partner and Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receives support services from ARG.
The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. Under this cost sharing structure, amounts reimbursed to the Company include both compensation for personnel and office related costs (including office rent, utilities, office supplies, etc.) used by ARG. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for the years ended December 31, 2023, 2022 and 2021 totaled approximately $1.2 million, $1.0 million and $0.8 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations.
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. As of December 31, 2023 and
2022, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.5 million and $0.4 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.
The Company, through its wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation, investor, corporate and public relations and other business purposes. The aircraft is also leased to affiliates of the Company based on third-party rates. Lease activity was not significant during the reporting periods.
From time to time, the Company utilizes aircraft, owned by an entity which is owned by the Company’s Executive Chairman, for acquisition, asset management, renovation, investor, corporate and public relations and other business purposes, and reimburses this entity at third-party rates. Total costs incurred for the use of the aircraft during 2023, 2022 and 2021 were less than $0.1 million in each respective year and are included in general and administrative expenses in the Company’s consolidated statements of operations.
Note 7
Shareholders’ Equity
Distributions
For the three years ended December 31, 2023, 2022 and 2021, the Company paid distributions of $1.04, $0.61 and $0.03 per common share, respectively, for a total of approximately $238.3 million, $139.5 million and $6.8 million, respectively. For the year ended December 31, 2023, in addition to the regular monthly cash distribution of $0.08 per common share for December 2023, the Board of Directors approved a special one-time distribution of $0.05 per common share for a combined distribution of $0.13 per common share, totaling $31.4 million, which was recorded as a payable as of December 31, 2023 and paid in January 2024. For the year ended December 31, 2022, in addition to the regular monthly cash distribution of $0.08 per common share approved by the Board of Directors in December 2022, the Board of Directors approved a special one-time distribution of $0.08 per common share for a combined distribution of $0.16 per common share, totaling $36.6 million, which was recorded as a payable as of December 31, 2022 and paid in January 2023. These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets at December 31, 2023 and December 31, 2022, respectively.
Issuance of Shares
On August 12, 2020, the Company entered into an equity distribution agreement pursuant to which the Company may sell, from time to time, up to an aggregate of $300 million of its common shares under an at-the-market offering program (the “ATM Program”) under the Company’s prior shelf registration statement and the current shelf registration statement. During the year ended December 31, 2023, the Company sold approximately 12.8 million shares under its ATM Program at a weighted-average market sales price of approximately $17.05 per common share and received aggregate gross proceeds of approximately $218.6 million and proceeds net of offering costs, which included $2.6 million of commissions, of approximately $216.0 million. The Company used the net proceeds from the sale of these shares to pay down borrowings under the Revolving Credit Facility, acquisitions of hotel properties and for general corporate purposes. No shares were sold under the Company’s ATM Program during the year ended December 31, 2022. As of December 31, 2023, approximately $5.3 million remained available for issuance under the ATM Program. The Company plans to use future net proceeds from the sale of shares under the ATM Program, or under a similar successor program, for general corporate purposes which may include, among other things, acquisitions of hotel properties, the repayment of outstanding indebtedness, capital expenditures, improvement of properties in its portfolio and working capital. The Company may also use the net proceeds to acquire another REIT or other company that invests in income producing properties.
Share Repurchases
In May 2023, the Company’s Board of Directors approved a one-year extension of its existing share repurchase program, authorizing share repurchases up to an aggregate of $338.7 million (the “Share Repurchase Program”). The Share Repurchase Program may be suspended or terminated at any time by the Company and will end in July 2024 if not terminated or extended earlier. During the year ended December 31, 2023, the Company purchased approximately 0.5 million of its common shares under its Share Repurchase Program at a weighted-average market purchase price of approximately $14.34 per common share for an aggregate purchase price, including commissions, of approximately $6.9 million. Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with cash on hand or availability under its unsecured credit facilities, subject to applicable restrictions under the Company’s unsecured credit facilities (if any). The timing of share repurchases and the number of common shares to be repurchased under the Share Repurchase Program will also depend upon prevailing market conditions, regulatory requirements and other factors. As of December 31, 2023, approximately $335.4 million remained available for purchase under the Share Repurchase Program.
Preferred Shares
No preferred shares of the Company are issued and outstanding. The Company’s amended and restated articles of incorporation authorize issuance of up to 30 million preferred shares.
Note 8
Compensation Plans
In May 2014, the Board of Directors adopted the Company’s 2014 Omnibus Incentive Plan (the “Omnibus Plan”), and in May 2015, the Company’s shareholders approved the Omnibus Plan. The Omnibus Plan permits the grant of awards of stock options, stock appreciation rights, restricted stock, stock units, deferred stock units, unrestricted stock, dividend equivalent rights, performance shares and other performance-based awards, other equity-based awards, and cash bonus awards to any employee, officer, or director of the Company or an affiliate of the Company, a consultant or adviser currently providing services to the Company or an affiliate of the Company, or any other person whose participation in the Omnibus Plan is determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”) to be in the best interests of the Company. The maximum number of the Company’s common shares available for issuance under the Omnibus Plan is 10 million. As of December 31, 2023, there were approximately 6.6 million common shares available for issuance under the Omnibus Plan.
The Company annually establishes an incentive plan for its executive management team, which is approved by the Compensation Committee. Under the incentive plan for 2023 (the “2023 Incentive Plan”), participants are eligible to receive incentive compensation based on the achievement of certain 2023 performance measures, with one-half (50%) of incentive compensation based on operational performance goals and metrics and one-half (50%) of incentive compensation based on shareholder return metrics. With respect to the shareholder return metrics, 75% of the target was based on shareholder return relative to a peer group and 25% was based on total shareholder return metrics over one-year, two-year, and three-year periods. With respect to the operational performance goals and metrics, 25% of the target was based on total revenues of the Company, 25% was based on modified funds from operations per share (as defined within this Annual Report on Form 10-K) and 50% of the target was based on operational performance goals, including: management of capital structure; evaluation and pursuit of accretive transactions; management of labor costs and improvement of employee productivity; enhancement of environmental, social and governance reporting; and enhancement of internal business intelligence tools. As of December 31, 2023, the range of potential aggregate payouts under the 2023 Incentive Plan was $0 - $27.1 million. Based on performance during 2023, the Company accrued approximately $20.9 million as a liability for executive incentive compensation payments under the 2023 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of December 31, 2023 and in general and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 2023. Additionally, approximately $3.3 million, which is subject to vesting on December 13, 2024, will be recognized proportionally throughout 2024. Approximately 25% of target awards under the 2023 Incentive Plan will be paid in cash, and 75% will be issued in common shares under the Company’s Omnibus Plan. The portion of awards under the 2023 Incentive Plan payable in common shares will be issued under the Company’s Omnibus Plan during the first quarter of 2024, approximately two-thirds of which will be unrestricted and one-third of which will be restricted and is subject to vesting on December 13, 2024.
Under the incentive plan for 2022 (the “2022 Incentive Plan”), the Company accrued approximately $18.1 million including $12.5 million in share-based compensation as noted below, as a liability for executive incentive compensation payments, which was included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of December 31, 2022 and in general and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 2022. Under the incentive plan for 2021 (the “2021 Incentive Plan”), the Company accrued approximately $18.5 million, including $12.9 million in share-based compensation as noted below, as a liability for executive incentive compensation payments, which was included in general and administrative expenses in the Company’s consolidated statement of operations for the year ended December 31, 2021.
Share-Based Compensation Awards
The following table sets forth information pertaining to the share-based compensation issued under the 2022 Incentive Plan, the 2021 Incentive Plan and the incentive plan for 2020 (the “2020 Incentive Plan”):
2022 Incentive Plan
2021 Incentive Plan
2020 Incentive Plan
Period common shares issued
First Quarter 2023
First Quarter 2022
First Quarter 2021
Common shares earned under each incentive plan
935,189
868,079
555,726
Common shares surrendered on issuance date to satisfy tax
withholding obligations
263,026
245,597
117,647
Common shares earned and issued under each incentive plan, net of
common shares surrendered on issuance date to satisfy
tax withholding obligations
672,163
622,482
438,079
Average of the high and low stock price on issuance date
$
16.70
$
17.79
$
14.03
Total share-based compensation earned, including the
surrendered shares (in millions)
$
15.6
(1)
$
15.4
(2)
$
7.8
(3)
Of the total common shares earned and issued, total common shares
unrestricted at time of issuance
360,176
338,032
160,216
Of the total common shares earned and issued, total common shares
restricted at time of issuance
311,987
284,450
277,863
Restricted common shares vesting date
December 8, 2023
December 9, 2022
December 10, 2021
Common shares surrendered on vesting date to satisfy tax
withholding requirements resulting from vesting of restricted
common shares
134,085
114,147
108,292
(1)Of the total 2022 share-based compensation, approximately $12.5 million was recognized as share-based compensation expense during the year ended December 31, 2022, and included in accounts payable and other liabilities in the Company's consolidated balance sheet at December 31, 2022, and the remaining $2.6 million, which vested on December 8, 2023 and excludes any restricted shares forfeited or vested prior to that date, was recognized as share-based compensation expense during the year ended December 31, 2023.
(2)Of the total 2021 share-based compensation, approximately $12.9 million was recognized as share-based compensation expense during the year ended December 31, 2021, and included in accounts payable and other liabilities in the Company's consolidated balance sheet at December 31, 2021, and the remaining $2.5 million, which vested on December 9, 2022 and excludes any restricted shares forfeited or vested prior to that date, was recognized as share-based compensation expense during the year ended December 31, 2022.
(3)Of the total 2020 share-based compensation, approximately $1.9 million, which vested on December 10, 2021 and excludes any restricted shares forfeited or vested prior to that date, was recognized as share-based compensation expense during the year ended December 31, 2021.
Additionally, in conjunction with the appointment of five new officers of the Company on April 1, 2020, the Company issued to the new officer group a total of approximately 200,000 restricted common shares with an aggregate grant date fair value of approximately $1.8 million. For each grantee, the restricted shares vested on March 31, 2023. The expense associated with the awards was amortized over the 3-year vesting period. For the years ended December 31, 2023, 2022 and 2021, the Company recognized approximately $0.1 million, $0.6 million and $0.6 million, respectively, of share-based compensation expense related to these awards. Upon vesting on March 31, 2023, approximately 83,000 shares were surrendered to satisfy tax withholding obligations.
Non-Employee Director Deferral Program
In 2018, the Board of Directors adopted the Non-Employee Director Deferral Program (the “Director Deferral Program”) under the Omnibus Plan for the purpose of providing non-employee members of the Board of Directors the opportunity to elect to defer receipt of all or a portion of the annual retainer payable to them for their service on the Board of Directors, including amounts payable in both cash and fully vested shares of the Company’s common shares, in the form of deferred cash fees (“DCFs”) and/or deferred stock units (“DSUs”). DCFs and DSUs that are issued to the Company’s non-employee directors are fully vested and non-forfeitable
on the grant date. The grant date fair values of DCFs are equal to the dollar value of the deferred fee on the grant date, while the grant date fair values of DSUs are equal to the fair market value of the Company’s common shares on the grant date. DCFs are settled for cash and DSUs are settled for shares of the Company’s common stock, which are deliverable upon either: i) termination of the director’s service from the Board of Directors, ii) a date previously elected by the director, or iii) the earlier of the two dates, as determined by the director at the time he or she makes the election. The deferred amounts will also be paid if prior to the date specified by the director, the Company experiences a change in control or upon death of the director. During the years ended December 31, 2023, 2022 and 2021, non-employee directors participating in the Director Deferral Program deferred approximately $0.2 million, $0.3 million and $0.4 million, respectively, which is recorded as deferred compensation expense in general and administrative expenses in the Company’s consolidated statements of operations for the years then ended. On each quarterly deferral date (the date that a portion of the annual retainer would be paid), dividends earned on DSUs are credited to the deferral account in the form of additional DSUs based on dividends declared by the Company on its outstanding common shares during the quarter and the fair value of the common shares on such date. Outstanding DSUs at December 31, 2023 and 2022 were approximately 76,000 and 85,000, with weighted-average grant date fair values of $15.48 and $15.20, valued at $1.2 million and $1.3 million, respectively, which is included in common stock, a component of shareholders’ equity in the Company’s consolidated balance sheets as of December 31, 2023 and 2022.
Note 9
Management and Franchise Agreements
Each of the Company’s 225 hotels owned as of December 31, 2023 is operated and managed under a separate management agreement with one of the following management companies or one of their affiliates, none of which are affiliated with the Company (number of hotels by manager are as of January 1, 2024):
Manager
Number of
Hotels
LBAM-Investor Group, LLC (“LBA”)
Dimension Development Two, LLC (“Dimension”)
Crestline Hotels & Resorts, LLC (“Crestline”)
Raymond Management Company, Inc. (“Raymond”)
Hersha Hospitality Management L.P. (“HHM”)
Texas Western Management Partners, LP (“Western”)
MHH Management, LLC (“McKibbon”)
Marriott International, Inc. (“Marriott”)
Newport Hospitality Group, Inc. (“Newport”)
North Central Hospitality, LLC (“North Central”)
Chartwell Hospitality, LLC (“Chartwell”)
InnVentures IVI, LP (“InnVentures”)
Concord Hospitality Enterprises Company, LLC (“Concord”)
Huntington Hotel Group, LP (“Huntington”)
White Lodging Services Corporation (“White Lodging”)
Crescent Hotels & Resorts, LLC (“Crescent”)
Total
The management agreements generally provide for initial terms of one to 30 years and are terminable by the Company for either failure to achieve performance thresholds, upon sale of the property, or without cause. As of December 31, 2023, approximately 85% of the Company’s hotels operated under a variable management fee agreement, with an average initial term of approximately one to two years, which the Company believes better aligns incentives for each hotel manager to maximize each property’s performance than a base-plus-incentive management fee structure, as described below, which is more common throughout the industry. Under the variable fee structure, the management fee earned for each hotel is generally within a range of 2.5% to 3.5% of gross revenues. The performance measures are based on various financial and quality performance metrics. The Company’s remaining hotels operate under a management fee structure which generally includes the payment of base management fees and an opportunity for incentive management fees. Under this structure, base management fees are calculated as a percentage of gross revenues and the incentive management fees are calculated as a percentage of operating profit in excess of a priority return to the Company, as defined in the management agreements. In addition to the above, management fees for all of the Company’s hotels generally include accounting fees and other fees for centralized services, which are allocated among all of the hotels that receive the benefit of such services. During 2022 and 2021, in response to continued uncertainties related to the COVID-19 pandemic and its impact on hotel performance, the management fee under all variable management fee agreements was set to 3% of gross revenues. The Company reinstated the variable
management fee rates in 2023. For the years ended December 31, 2023, 2022 and 2021, the Company incurred approximately $44.3 million, $41.8 million and $31.4 million, respectively, in management fees.
Thirteen of the Company’s hotels are managed by affiliates of Marriott. The remainder of the Company’s hotels are managed by companies that are not affiliated with either Marriott, Hilton or Hyatt, and as a result, the branded hotels they manage were required to obtain separate franchise agreements with each respective franchisor. The franchise agreements generally provide for initial terms of approximately 10 to 30 years and generally provide for renewals subject to franchise requirements at the time of renewal. The Company pays various fees under these agreements, including the payment of royalty fees, marketing fees, reservation fees, a communications support fee, brand loyalty program fees and other similar fees based on room revenues. For the years ended December 31, 2023, 2022 and 2021, the Company incurred approximately $59.3 million, $53.9 million and $40.9 million, respectively, in franchise royalty fees.
Note 10
Lease Commitments
The Company is the lessee on certain ground leases, hotel equipment leases and office space leases. As of December 31, 2023, the Company had 14 hotels subject to ground leases and three parking lot ground leases with remaining terms ranging from approximately 15 to 95 years, excluding renewal options. Certain of its ground leases have options to extend beyond the initial lease term by periods ranging from five to 120 years.
Leases with durations greater than 12 months are recognized on the balance sheet as right-of-use (“ROU”) assets and lease liabilities. The Company’s leases are classified as operating or finance leases. For leases with terms greater than 12 months, at inception of the lease the Company recognizes a ROU asset and lease liability at the estimated present value of the minimum lease payments over the lease term. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Many of the Company’s leases include rental escalation clauses (including fixed scheduled rent increases) and renewal options that are factored into the determination of lease payments, when appropriate, which adjusts the present value of the remaining lease payments. The Company determines the present value of the lease payments utilizing interest rates implicit in the lease if determinable or, if not, it estimates its incremental borrowing rate from information available at lease commencement, such as estimates of rates the Company would pay for senior collateralized loans with terms similar to each lease.
Operating Leases
Twelve of the Company’s hotel and parking lot ground leases as well as certain applicable hotel equipment leases and office space leases are classified as operating leases, for which the Company has recorded ROU assets and lease liabilities. The ROU assets are included in other assets, net and the lease liabilities are included in accounts payable and other liabilities in the Company’s consolidated balance sheet. In addition, the Company's ROU asset balance includes intangible assets for below market ground leases and intangible liabilities for above market ground leases, as well as accrued straight-line lease liabilities related to these operating leases. Lease expense is recognized on a straight-line basis over the term of the respective lease and the value of each lease intangible is amortized over the term of the respective lease. Costs related to operating ground leases and hotel equipment leases are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases are included in general and administrative expense in the Company’s consolidated statements of operations.
Finance Leases
Five of the Company’s hotel ground leases are classified as finance leases, for which the Company recorded ROU assets and lease liabilities. The ROU assets are recorded as finance ground lease assets within investment in real estate, net and the lease liabilities are recorded as finance lease liabilities in the Company’s consolidated balance sheet. In addition, the Company’s ROU asset balance includes intangible assets for below market ground leases and intangible liabilities for above market ground leases related to these finance leases. The ROU asset and value of each lease intangible is amortized over the term of the respective lease. Costs related to finance ground leases are included in depreciation and amortization expense and interest and other expense, net in the Company’s consolidated statement of operations.
Under the terms of the Company’s ground leases, certain minimum lease payments are subject to change based on criteria specified in the lease. Changes in minimum lease payments that are not fixed scheduled increases are reflected in the ROU asset and lease liability when the payments become fixed and determinable based on the actual criteria defined in the lease. Minimum lease payments may be estimated if the change date occurs and the new minimum lease payments are not yet determinable.
Lease Position as of December 31, 2023 and 2022
The following table sets forth the lease-related assets and liabilities included in the Company’s consolidated balance sheet as of December 31, 2023 and 2022. All dollar amounts are in thousands.
December 31,
Consolidated Balance Sheet
Classification
Assets
Operating lease assets, net
Other assets, net
$
25,389
$
26,348
Finance ground lease assets, net (1)
Investment in real estate, net
86,992
90,030
Total lease assets
$
112,381
$
116,378
Liabilities
Operating lease liabilities
Accounts payable and other liabilities
$
11,447
$
11,849
Finance lease liabilities
Finance lease liabilities
111,892
112,006
Total lease liabilities
$
123,339
$
123,855
Weighted-average remaining lease term
Operating leases
36 years
Finance leases
30 years
Weighted-average discount rate
Operating leases
5.49%
Finance leases
5.31%
(1)Finance ground lease assets are net of accumulated amortization of approximately $15.1 million and $12.1 million as of December 31, 2023 and 2022, respectively.
Lease Costs for the Years Ended December 31, 2023, 2022 and 2021
The following table sets forth the lease costs related to the Company’s operating and finance ground leases included in the Company’s consolidated statement of operations for the years ended December 31, 2023 2022 and 2021 (in thousands):
Year Ended December 31,
Consolidated Statement of
Operations Classification
Operating lease costs (1)
Property taxes, insurance and other
expense
$
1,776
$
1,794
$
1,585
Finance lease costs:
Amortization of lease assets
Depreciation and amortization expense
3,038
3,038
5,178
Interest on lease liabilities
Interest and other expense, net
5,877
5,872
9,415
Total lease costs
$
10,691
$
10,704
$
16,178
(1)Represents costs related to ground leases, including variable lease costs. Excludes costs related to hotel equipment leases, which are included in hotel operating expense and property taxes, insurance and other expense, and costs related to office space leases, which are included in general and administrative expense in the Company’s consolidated statement of operations. These costs are not significant for disclosure.
Undiscounted Cash Flows
The following table reconciles the undiscounted cash flows for each of the next five years and total of the remaining years to the operating lease liabilities and finance lease liabilities included in the Company’s consolidated balance sheet as of December 31, 2023 (in thousands):
Operating Leases
Finance Leases
$
1,088
$
6,174
1,089
6,338
6,500
6,700
6,879
Thereafter
29,634
216,675
Total minimum lease payments
34,138
249,266
Less: amount of lease payments representing
interest
22,691
137,374
Present value of lease liabilities
$
11,447
$
111,892
Supplemental Cash Flow Information
The following table sets forth supplemental cash flow information related to the Company’s operating and finance leases for the years ended December 31, 2023, 2022 and 2021 (in thousands):
Year Ended December 31,
Cash paid for amounts included in the
measurement of lease liabilities:
Operating cash flows for operating leases
$
1,106
$
1,166
$
1,109
Operating cash flows for finance leases
5,651
5,469
6,568
Financing cash flows for finance leases
24,045
Note 11
Income Taxes
The Company is operated as, and has elected to be taxed as, a REIT under Sections 856 to 860 of the Code. As a REIT, the Company is generally not subject to corporate level income taxes on REIT taxable income that is distributed to its shareholders. Income related to the Lessee, as a taxable REIT subsidiary (“TRS”) of the Company, is subject to federal and state income taxes.
The components of income tax expense (benefit) are as follows (in thousands):
Year Ended December 31,
Current:
Federal
$
-
$
(34
)
$
(15
)
State
1,135
1,974
Deferred:
Federal
-
-
-
State
-
-
-
Income tax expense
$
1,135
$
1,940
$
Income tax expense for the years ended December 31, 2023 and 2022 was $1.1 million and $1.9 million, respectively. The decrease was primarily due to increases in 2022 state income taxes as a result of limitations placed by certain states on the application of prior net operating losses.
Below is a reconciliation between the provision for income taxes and the amounts computed by applying the federal statutory income tax rate to the income or loss before taxes (in thousands):
Year Ended December 31,
Statutory federal tax expense
$
37,273
$
30,409
$
3,954
Federal tax impact of REIT election
(39,865
)
(27,261
)
4,934
Statutory federal tax expense (benefit) at TRS
(2,592
)
3,148
8,888
State income tax expense (benefit), net of federal tax benefit
1,559
Change in valuation allowance
2,830
(2,767
)
(8,802
)
Income tax expense
$
1,135
$
1,940
$
As of December 31, 2023, the Company had deferred tax assets of approximately $25 million consisting primarily of net operating loss carryforwards. A portion of the federal loss carryforwards expire beginning in 2029; however, a portion of the federal loss carryforwards do not expire. The state loss carryforwards have various expiration dates; however, for certain states some loss carryforwards do not expire. The TRS had a net operating loss carryforward for U.S federal income tax purposes of approximately $87 million as of December 31, 2023, and $78 million as of December 31, 2022. The TRS has historical cumulative operating losses and is expected to be in a cumulative loss for the foreseeable future. As a result, the realizability of the Company’s deferred tax assets as of December 31, 2023 and 2022 is not reasonably assured. Therefore, the Company has recorded a valuation allowance equal to the full 100% of the net deferred tax assets as of December 31, 2023, and 2022.
Characterization of Distributions
For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2023, 2022 and 2021, distributions per share were characterized as follows (unaudited):
Year Ended December 31,
Amount of distributions per share
$
1.01
$
0.76
$
0.04
Characterized as:
Ordinary income
%
%
%
Capital gain distributions
%
%
%
Return of capital
%
%
%
The Company utilized portions of its REIT net loss carryforward to reduce its taxable net income for the years ended December 31, 2022 and 2021. The total REIT net loss carryforward for U.S. federal income tax purposes was approximately $0 as of December 31, 2023 and 2022. No provision for U.S. federal income taxes has been included in the Company’s financial statements for the years ended December 31, 2023, 2022 and 2021 related to its REIT activities.
Note 12
Industry Segments
The Company owns hotel properties throughout the U.S. that generate rental, food and beverage, and other property-related income. The Company separately evaluates the performance of each of its hotel properties. However, because each of the hotels has similar economic characteristics, facilities, and services, and each hotel is not individually significant, the properties have been aggregated into a single reportable segment. All segment disclosures are included in or can be derived from the Company’s consolidated financial statements.
Note 13
Hotel Purchase Contract Commitments
As of December 31, 2023, the Company had separate outstanding contracts for the potential purchase of two hotels, consisting of one hotel in Madison, Wisconsin and one hotel in Nashville, Tennessee, for a total combined purchase price of approximately $177.5 million. Both hotels are under development, with the hotel in Madison, Wisconsin currently planned to be completed and opened for business in mid-2024 and the hotel in Nashville, Tennessee currently planned to be completed and opened for business in late 2025, at which respective times the Company expects to complete the purchases of these hotels. If the closings occur, the Company plans to utilize its available cash or borrowings under its unsecured credit facilities available at closing to purchase the hotels under contract. Although the Company is working towards acquiring these hotels, in each case there are a number of conditions to closing that have not yet been satisfied, and there can be no assurance that closings on these hotels will occur under the outstanding purchase contracts. If the sellers meet all of the conditions to closing, the Company is obligated to specifically perform under the applicable purchase contracts and acquire these hotels. As these properties are under development, at this time, the sellers have not met all of the conditions to closing.
The following table summarizes the location, expected franchise brand, date of purchase contract, expected number of rooms upon completion, refundable (if the seller does not meet its obligations under the contract) deposits paid and gross purchase price for each of the contracts outstanding as of December 31, 2023. All dollar amounts are in thousands.
Location
Brands
Date of
Purchase
Contract
Rooms
Refundable
Deposits
Gross
Purchase
Price
Madison, WI
Embassy Suites
7/27/2021
$
$
79,306
Nashville, TN
Motto
5/16/2023
1,058
98,183
$
1,951
$
177,489
Note 14
Subsequent Events
On January 16, 2024, the Company paid approximately $31.4 million, or $0.13 per common share, in distributions to shareholders of record as of December 29, 2023.
On January 19, 2024, the Company declared a monthly cash distribution of $0.08 per common share. The distribution of approximately $19.3 million was paid on February 15, 2024, to shareholders of record as of January 31, 2024.
On February 9, 2024, the Company completed the sale of two existing hotels in Rogers, Arkansas, including a 122-room Hampton and a 126-room Homewood Suites, for a combined gross sales price of approximately $33.5 million. A portion of the proceeds from the sale of the two hotels will be used to complete a 1031 Exchange with future acquisitions, which is expected to result in the deferral of taxable gains of approximately $15 million.
On February 16, 2024, the Company declared a monthly cash distribution of $0.08 per common share. The distribution is payable on March 15, 2024, to shareholders of record as of February 29, 2024.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.	Controls and Procedures
Senior management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting 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, Chief Financial Officer and Chief Accounting Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2023. There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Item 8 for the Report of Management on Internal Control over Financial Reporting and the Company’s Independent Registered Public Accounting Firm’s attestation report regarding internal control over financial reporting, which are incorporated herein by reference.

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ITEM 9B. OTHER INFORMATION
Item 9B.	Other Information
During the three months ended December 31, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.	Directors, Executive Officers and Corporate Governance
The information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of Regulation S-K will be set forth in the Company’s definitive proxy statement for its 2024 Annual Meeting of Shareholders (the “2024 Proxy Statement”). For the limited purpose of providing the information necessary to comply with this Item 10, the 2024 Proxy Statement is incorporated herein by this reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11.	Executive Compensation
The information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K will be set forth in the Company’s 2024 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 11, the 2024 Proxy Statement is incorporated herein by this reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by Items 201(d) and 403 of Regulation S-K will be set forth in the Company’s 2024 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 12, the 2024 Proxy Statement is incorporated herein by this reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.	Certain Relationships and Related Transactions, and Director Independence
The information required by Items 404 and 407(a) of Regulation S-K will be set forth in the Company’s 2024 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 13, the 2024 Proxy Statement is incorporated herein by this reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.	Principal Accounting Fees and Services
The information required by Item 9(e) of Schedule 14A will be set forth in the Company’s 2024 Proxy Statement. For the limited purpose of providing the information necessary to comply with this Item 14, the 2024 Proxy Statement is incorporated herein by this reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.	Exhibits and Financial Statement Schedules
1. Financial Statements of Apple Hospitality REIT, Inc.
Report of Management on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm-Ernst & Young LLP (PCAOB ID: 42)
Report of Independent Registered Public Accounting Firm-Ernst & Young LLP (PCAOB ID: 42)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023, 2022 and 2021
Consolidated Statements of Cash Flows for the years ended December 31, 2023, 2022 and 2021
Notes to Consolidated Financial Statements
These financial statements are set forth in Item 8 of this report and are hereby incorporated by reference.
2. Financial Statement Schedules
Schedule III-Real Estate and Accumulated Depreciation and Amortization (Included at the end of this Part IV of this report.)
Financial statement schedules not listed are either omitted because they are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibit Listing
Exhibit
Number
Description of Documents
3.1
Amended and Restated Articles of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company’s quarterly report on Form 10-Q (SEC File No. 001-37389) filed August 6, 2018)
3.2
Third Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Company’s quarterly report on Form 10-Q (SEC File No. 001-37389) filed May 18, 2020)
4.1
Description of Securities Registered Under Section 12 of the Exchange Act (FILED HEREWITH)
10.1*
The Company’s 2008 Non-Employee Directors Stock Option Plan (Incorporated by reference to Exhibit 10.4 to the Company’s quarterly report on Form 10-Q (SEC File No. 333-147414) filed May 8, 2008)
10.2*
The Company’s 2014 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K (SEC File No. 000-53603) filed June 4, 2014)
10.3*
The Company’s Executive Severance Pay Plan (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (SEC File No. 000-53603) filed June 4, 2014)
10.4*
First Amendment to the Company’s Executive Severance Pay Plan (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (SEC File No. 001-37389) filed March 27, 2019)
10.5*
Second Amendment to the Company’s Executive Severance Pay Plan (Incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K (SEC File No. 001-37389) filed March 5, 2020
10.6*
Form of Restricted Stock Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (SEC File No. 001-37389) filed February 18, 2016)
10.7*
Non-Employee Director Deferral Program Under the Company’s 2014 Omnibus Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q (SEC File No. 001-37389) filed August 6, 2018)
10.8
Third Amended and Restated Credit Agreement dated as of July 25, 2022, among the Company, as borrower, certain subsidiaries of the Company, as guarantors, Bank of America, N.A., as Administrative Agent, KeyBank National Association and Wells Fargo Bank, National Association, as Co-Syndication Agents, U.S. Bank National Association, as Documentation Agent, Regions Bank as Managing Agent, the Lenders and Letter of Credit Issuers party thereto, and BofA Securities, Inc., KeyBanc Capital Markets, Wells Fargo Securities, LLC and U.S. Bank National Association, as Joint Lead Arrangers and Joint Bookrunners (Incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K (SEC File No. 001-37389) filed July 27, 2022)
The Company’s Policy on Inside Information and Insider Trading (FILED HEREWITH)
21.1
Subsidiaries of the Company (FILED HEREWITH)
23.1
Consent of Ernst & Young LLP (FILED HEREWITH)
31.1
Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
31.2
Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
31.3
Certification of the Company’s Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)
32.1
Certification of the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FURNISHED HEREWITH)
The Company’s Compensation Recovery Policy (FILED HEREWITH)
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH)
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in iXBRL and contained in Exhibit 101.
*	Denotes Management Contract or Compensation Plan.