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

 
FORM 10-Q
 

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

For the quarterly period ended June 30, 2017March 31, 2018

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

Commission File Number 001-37389

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer   
Non-accelerated filer   ¨ (Do not check if a smaller reporting company) 
Smaller reporting company 
Emerging growth company   
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Number of registrant’s common shares outstanding as of AugustMay 1, 2017: 223,055,3402018: 230,339,578 

Apple Hospitality REIT, Inc.
Form 10-Q
Index
 

 
Page Number
PART I.  FINANCIAL INFORMATION  
   
 Item 1.  
     
  3 
     
  4 
     
  5 
     
  6 
     
 Item 2.1817 
     
 Item 3.3431 
     
 Item 4.3431 
   
PART II.  OTHER INFORMATION  
   
 Item 1.3532 
     
 Item 1A.3532 
     
Item 2.32
Item 6.3533 
   
3634

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


PART I.    FINANCIAL INFORMATION

Item 1.      Financial Statements

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

      
 June 30,  December 31,  March 31,  December 31, 
 2017  2016  2018  2017 
 (unaudited)     (unaudited)    
Assets            
Investment in real estate, net of accumulated depreciation
of $644,718 and $557,597, respectively
 $4,770,883  $4,823,489 
Assets held for sale  0   39,000 
Investment in real estate, net of accumulated depreciation
of $775,894 and $731,284, respectively
 $4,829,776  $4,793,159 
Restricted cash-furniture, fixtures and other escrows  28,244   29,425   31,438   29,791 
Due from third party managers, net  57,676   31,460   57,240   31,457 
Other assets, net  47,771   56,509   54,917   47,931 
Total Assets $4,904,574  $4,979,883  $4,973,371  $4,902,338 
          
Liabilities                
Revolving credit facility $301,300  $270,000  $170,700  $106,900 
Term loans  571,461   570,934   656,569   656,279 
Mortgage debt  435,556   497,029   500,189   459,017 
Accounts payable and other liabilities  88,685   124,856   89,439   109,057 
Total Liabilities  1,397,002   1,462,819   1,416,897   1,331,253 
                
Shareholders' Equity  
Shareholders’ Equity        
Preferred stock, authorized 30,000,000 shares; none issued
and outstanding
  0   0   -   - 
Common stock, no par value, authorized 800,000,000 shares;
issued and outstanding 223,055,340 and 222,938,648 shares, respectively
  4,455,191   4,453,205 
Common stock, no par value, authorized 800,000,000 shares;
issued and outstanding 230,339,578 and 229,961,548 shares, respectively
  4,594,247   4,588,188 
Accumulated other comprehensive income  4,959   4,589   16,070   9,778 
Distributions greater than net income  (952,578)  (940,730)  (1,053,843)  (1,026,881)
Total Shareholders' Equity  3,507,572   3,517,064 
Total Shareholders’ Equity  3,556,474   3,571,085 
                
Total Liabilities and Shareholders' Equity $4,904,574  $4,979,883 
Total Liabilities and Shareholders’ Equity $4,973,371  $4,902,338 

See notes to consolidated financial statements.
3


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

 Three Months Ended  Six Months Ended  Three Months Ended 
 June 30,  June 30,  March 31, 
 2017  2016  2017  2016  2018  2017 
Revenues:                  
Room $306,283  $237,340  $575,676  $443,490  $274,836  $269,393 
Other  25,421   20,296   48,953   38,633   23,553   23,532 
Total revenue  331,704   257,636   624,629   482,123   298,389   292,925 
                        
Expenses:                        
Operating  80,345   61,459   155,499   118,288   75,954   75,154 
Hotel administrative  25,217   18,857   50,053   37,055   25,102   24,836 
Sales and marketing  26,270   19,896   50,379   37,915   25,332   24,109 
Utilities  10,193   7,719   19,946   15,319   10,283   9,753 
Repair and maintenance  12,279   9,605   24,195   18,689   12,453   11,916 
Franchise fees  14,163   10,933   26,637   20,378   12,733   12,474 
Management fees  11,545   8,947   21,757   16,984   10,472   10,212 
Property taxes, insurance and other  17,821   13,076   34,748   25,528   17,229   16,927 
Ground lease  2,839   2,506   5,655   4,972   2,850   2,816 
General and administrative  6,151   5,060   12,905   9,888   6,877   6,754 
Transaction and litigation costs (reimbursements)  (2,586)  1,116   (2,586)  1,409 
Loss on impairment of depreciable real estate assets  0   0   7,875   0   -   7,875 
Depreciation  43,893   33,824   87,660   67,308   44,840   43,767 
Total expenses  248,130   192,998   494,723   373,733   244,125   246,593 
                        
Operating income  83,574   64,638   129,906   108,390   54,264   46,332 
                        
Interest and other expense, net  (11,849)  (9,560)  (23,566)  (18,363)  (11,919)  (11,717)
Gain on sale of real estate  16,140   0   16,140   0 
                        
Income before income taxes  87,865   55,078   122,480   90,027   42,345   34,615 
                        
Income tax expense  (259)  (360)  (509)  (623)  (163)  (250)
                        
Net income $87,606  $54,718  $121,971  $89,404  $42,182  $34,365 
                        
Other comprehensive income (loss):                
Other comprehensive income:        
Interest rate derivatives  (1,175)  (5,501)  370   (12,195)  6,292   1,545 
                        
Comprehensive income $86,431  $49,217  $122,341  $77,209  $48,474  $35,910 
                        
Basic and diluted net income per common share $0.39  $0.31  $0.55  $0.51  $0.18  $0.15 
                        
Weighted average common shares outstanding - basic and diluted  223,052   174,667   223,049   174,667   230,515   223,047 

See notes to consolidated financial statements.

4


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

 Six Months Ended  Three Months Ended 
 June 30,  March 31, 
 2017  2016  2018  2017 
Cash flows from operating activities:            
Net income $121,971  $89,404  $42,182  $34,365 
Adjustments to reconcile net income to cash provided by operating activities:                
Depreciation  87,660   67,308   44,840   43,767 
Loss on impairment of depreciable real estate assets  7,875   0   -   7,875 
Gain on sale of real estate  (16,140)  0 
Other non-cash expenses, net  3,617   3,233   1,992   1,849 
Changes in operating assets and liabilities, net of amounts acquired or
assumed with acquisitions:
        
Changes in operating assets and liabilities:        
Increase in due from third party managers, net  (26,206)  (20,350)  (25,920)  (26,222)
Decrease (increase) in other assets, net  8,429   (1,552)  (2,485)  9,345 
Decrease in accounts payable and other liabilities  (30,897)  (1,373)  (7,746)  (34,814)
Net cash provided by operating activities  156,309   136,670   52,863   36,165 
                
Cash flows from investing activities:                
Acquisition of hotel properties, net  (18,131)  0   (61,614)  (18,131)
Deposits and other disbursements for potential acquisitions  0   (503)  (204)  - 
Capital improvements  (28,866)  (35,488)  (24,672)  (17,461)
Decrease (increase) in capital improvement reserves  (190)  1,611 
Net proceeds from sale of real estate  28,531   0 
Net cash used in investing activities  (18,656)  (34,380)  (86,490)  (35,592)
                
Cash flows from financing activities:                
Net proceeds related to issuance of common shares  4,731   - 
Repurchases of common shares  0   (361)  (4,304)  - 
Repurchases of common shares to satisfy employee withholding requirements  (432)  (459)  (876)  (432)
Distributions paid to common shareholders  (133,811)  (104,713)  (69,144)  (66,908)
Net proceeds from revolving credit facility  31,300   40,800   63,800   96,600 
Proceeds from term loans  0   50,000 
Proceeds from mortgage debt  0   24,000   44,000   - 
Payments of mortgage debt  (34,590)  (86,881)  (2,933)  (31,949)
Financing costs  (120)  (3,062)
Net cash used in financing activities  (137,653)  (80,676)
Net cash provided by (used in) financing activities  35,274   (2,689)
                
Net change in cash and cash equivalents  0   21,614 
Net change in cash, cash equivalents and restricted cash  1,647   (2,116)
                
Cash and cash equivalents, beginning of period  0   0 
Cash, cash equivalents and restricted cash, beginning of period  29,791   29,425 
                
Cash and cash equivalents, end of period $0  $21,614 
Cash, cash equivalents and restricted cash, end of period $31,438  $27,309 
                
Supplemental cash flow information:                
Interest paid $23,532  $19,620  $11,760  $11,855 
                
Supplemental disclosure of noncash investing and financing activities:                
Accrued distribution to common shareholders $22,301  $17,451  $23,020  $22,301 
Mortgage debt assumed by buyer upon sale of real estate $27,073  $0 
        
Reconciliation of cash, cash equivalents and restricted cash:        
Cash and cash equivalents, beginning of period $-  $- 
Restricted cash-furniture, fixtures and other escrows, beginning of period  29,791   29,425 
Cash, cash equivalents and restricted cash, beginning of period $29,791  $29,425 
        
Cash and cash equivalents, end of period $-  $- 
Restricted cash-furniture, fixtures and other escrows, end of period  31,438   27,309 
Cash, cash equivalents and restricted cash, end of period $31,438  $27,309 

See notes to consolidated financial statements.

5


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

1.  Organization and Summary of Significant Accounting Policies

Organization
  
Apple Hospitality REIT, Inc., together with its wholly-owned subsidiaries (the “Company”), is a Virginia corporation that has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes.  The Company is a self-advised REIT that invests in income-producing real estate, primarily in the lodging sector, in the United States.  The Company’s fiscal year end is December 31.  The Company has no foreign operations or assets and its operating structure includes only one reportable segment.  The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated.  Although the Company has interests in potential variable interest entities through its purchase commitments, it is not the primary beneficiary as the Company does not have any elements of power in the decision making process of these entities, and therefore does not consolidate the entities.  As of June 30, 2017,March 31, 2018, the Company owned 235241 hotels with an aggregate of 29,97830,585 rooms located in 3334 states.  The Company’s common shares are listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “APLE.”

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q.  Accordingly, they do not include all of the information required by United States generally accepted accounting principles generally accepted in the United States(“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2016 Annual Report on Form 10-K.10-K for the year ended December 31, 2017 (the “2017 Form 10-K”).  Operating results for the three and six months ended June 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2017.2018.

Use of Estimates

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

Net Income Per Common Share

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

Accounting Standards Recently Adopted

In January 2017,May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which is intended to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The standard is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted.  The Company adopted this standard effective January 1, 2017 on a prospective basis.  Prior to the adoption of this standard, the Company’s acquisitions of hotel properties were accounted for as existing businesses, and therefore all transaction costs associated with the acquisitions, including title, legal, accounting, brokerage commissions and other related costs were expensed as incurred.  Under the new standard, effective January 1, 2017, acquisitions of hotel properties (including the acquisition of one hotel during the first quarter of 2017, as discussed in Note 3) will generally be accounted for as acquisitions of a group of assets, with costs incurred to effect an acquisition being capitalized as part of the cost of the assets acquired, instead of accounted for separately as expenses in the period that they are incurred.  Asset acquisitions now require the Company to complete its allocation of the purchase price at the time of the acquisition as the measurement period applicable to business combinations does not apply to asset acquisitions.

6


Accounting Standards Recently Issued

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which affects virtually all aspects of an entity’s revenue recognition..  The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  In March, April, May and December 2016, the FASB issued ASUs No. 2016-08, 2016-10, 2016-12 and 2016-20, respectively, all related to Revenue from Contracts with Customers (Topic 606), which further clarify the application of the standard.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effectiveness of ASU No. 2014-09 toThe standard became effective for annual and interim periods beginning after December 15, 2017, and permitted early application for annual reporting periods beginning after December 15, 2016.2017.  The Company plans to adoptadopted this standard onas of January 1, 2018 using the modified retrospective approach.  AlthoughThe Company evaluated each of its revenue streams under the Company is still evaluatingnew standard and concluded that the adoption of this ASU, based on its assessment to date, the Company doesstandard did not believe there will be a significant change toimpact the amount or timing of revenue recognition in the recording of revenue in itsCompany’s consolidated financial statements.  The Company also considered and determined that the following disaggregated revenue reflects the nature and timing of its significant revenue streams (in thousands).
6

  Three Months Ended March 31, 
  2018  2017 
Revenues:      
    Room $274,836  $269,393 
    Food and beverage  15,710   16,733 
    Other  7,843   6,799 
Total revenue $298,389  $292,925 
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows.  The standard was effective for annual and interim periods beginning after December 15, 2017.  The Company adopted this standard as of January 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, which is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash in the statement of cash flows.  The standard was effective for annual and interim periods beginning after December 15, 2017.  Under this standard, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown in the statements of cash flows.  The Company adopted this standard as of January 1, 2018.  Amounts included in restricted cash on the Company’s consolidated balance sheets are now included with cash and cash equivalents in the Company’s consolidated statements of cash flows for all periods presented.  The adoption of this standard required retrospective revision to the statement of cash flows for the three months ended March 31, 2017.  Other than the reclassification of restricted cash balances and activity in the statements of cash flows, the adoption of the standard did not have an impact on the Company’s consolidated financial statements and related disclosures.

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

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to adoptAccounting for Hedging Activities, which amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements and enhance the transparency and understandability of hedging activity.  The standard simplifies the application of hedge accounting and reduces the administrative burden of hedge documentation requirements and assessing hedge effectiveness.  The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted.  The Company adopted this standard on January 1, 2018 using the modified retrospective approach.  TThe he adoption of this standard isdid not expected to have a material impact on the Company’s consolidated financial statements.statements and related disclosures.

2.  Merger with Apple REIT Ten, Inc.

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

The Company accounted for the merger in accordance with ASC 805, Business Combinations.  The Company was considered the acquirer for financial reporting purposes, which required, among other things, that the assets acquired and liabilities assumed from Apple Ten be recognized at their acquisition date fair values.  For purpose of accounting for the transaction, the aggregate value of the merger consideration paid to Apple Ten shareholders was estimated to be approximately $1.0 billion, and was comprised of approximately $956.1 million for the issuance of approximately 48.7 million common shares of the Company valued at $19.62 per share, which was the closing price of the Company’s common shares on August 31, 2016 (the date that the merger was approved), and $93.6 million in cash, which was funded through borrowings on the Company’s $540 million revolving credit facility (the “revolving credit facility”).  Transaction and litigation costs (reimbursements) related to the merger were expensed in the period incurred and totaled approximately $1.2 million for the six months ended June 30, 2016.  Transaction and litigation costs (reimbursements) for the six months ended June 30, 2017 included $2.6 million of additional proceeds from the Company’s director and officer insurance carriers in connection with the merger litigation.  Further discussion of the merger litigation is included in Note 10.

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

7


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

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

  Three Months Ended June 30,  Six Months Ended June 30, 
  2017  2016  2017  2016 
Total revenue $331,704  $333,869  $624,629  $623,836 
Net income $85,020  $72,179  $119,385  $117,025 
Basic and diluted net income per common share $0.38  $0.32  $0.54  $0.52 
Weighted average common shares outstanding - basic and diluted  223,052   223,397   223,049   223,397 

For purposes of calculating these pro forma amounts, merger transaction and litigation costs (reimbursements) totaling approximately ($2.6) million for each of the three and six months ended June 30, 2017, and $1.0 million and $1.2 million for the three and six months ended June 30, 2016, respectively, included in the Company’s consolidated statements of operations, were excluded from the pro forma amounts since these costs and reimbursements are attributable to the merger and related transactions and do not have an ongoing impact to the statements of operations.

3.  Investment in Real Estate

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

 June 30,  December 31,  March 31,  December 31, 
 2017  2016  2018  2017 
            
Land $710,191  $707,878  $730,763  $720,465 
Building and Improvements  4,288,611   4,270,095   4,425,158   4,362,929 
Furniture, Fixtures and Equipment  405,015   391,421   437,084   428,734 
Franchise Fees  11,784   11,692   12,665   12,315 
  5,415,601   5,381,086   5,605,670   5,524,443 
Less Accumulated Depreciation  (644,718)  (557,597)  (775,894)  (731,284)
Investment in Real Estate, net $4,770,883  $4,823,489  $4,829,776  $4,793,159 

7

As of June 30, 2017,March 31, 2018, the Company owned 235241 hotels with an aggregate of 29,97830,585 rooms located in 3334 states.

On February 2,The Company leases all of its hotels to its wholly-owned taxable REIT subsidiary (or a subsidiary thereof) under master hotel lease agreements.

Acquisitions

The Company acquired two hotels during the first three months of 2018.  The following table sets forth the location, brand, manager, date acquired, number of rooms and gross purchase price for each hotel.  All dollar amounts are in thousands.

City State Brand Manager Date Acquired Rooms  
Gross Purchase
Price (a)
 
Atlanta GA Hampton McKibbon 2/5/2018  119  $24,000 
Memphis TN Hampton Crestline 2/5/2018  144   39,000 
           263  $63,000 

(a)The gross purchase price excludes transaction costs.

During the year ended December 31, 2017, the Company closed onacquired six hotels including one in the purchasefirst quarter of a newly constructed 124-room Courtyard by Marriott in Fort Worth, Texas,2017.  The following table sets forth the same day the hotel opened for business, for alocation, brand, manager, date acquired, number of rooms and gross purchase price of approximately $18.0 million, excluding capitalized transaction costs.  for each hotel.  All dollar amounts are in thousands.

City State Brand Manager Date Acquired Rooms  
Gross Purchase
Price (a)
 
Fort Worth TX Courtyard LBA 2/2/2017  124  $18,034 
Birmingham (b) AL Hilton Garden Inn LBA 9/12/2017  104   19,162 
Birmingham (b) AL Home2 Suites LBA 9/12/2017  106   19,276 
Portland ME Residence Inn Pyramid 10/13/2017  179   55,750 
Salt Lake City UT Residence Inn Huntington 10/20/2017  136   25,500 
Anchorage AK Home2 Suites Stonebridge 12/1/2017  135   24,048 
           784  $161,770 

(a)The gross purchase price excludes transaction costs.
(b)The Hilton Garden Inn and Home2 Suites hotels in Birmingham, AL are part of an adjoining two-hotel complex located on the same site.

The Company used borrowings under its $540 million revolving credit facility (the “revolving credit facility”) to purchase the hotel.each of these hotels.  The acquisitionacquisitions of thisthese hotel property wasproperties were accounted for as an acquisition of a group of assets, with costs incurred to effect the acquisition, which were not significant, capitalized as part of the cost of the assets acquired.  For the two hotels acquired during the three months ended March 31, 2018, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2018 was approximately $2.4 million and $0.8 million, respectively.  For the hotel acquired during the three months ended March 31, 2017, the amount of revenue and operating income included in the Company’s consolidated statement of operations from the date of acquisition through March 31, 2017 was approximately $0.7 million and $0.04 million, respectively.

There were no acquisitions during the six month period ended June 30, 2016.

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

8

Hotel Contract Commitments

As of June 30, 2017,March 31, 2018, the Company had outstanding contracts for the potential purchase of fourtwo additional hotels, which were under construction, for a total purchase price of approximately $103.3$65.0 million.  All four hotels are underThe Phoenix Hampton Inn & Suites was acquired on May 2, 2018, the same day the hotel opened for business.  It is anticipated that the construction and are planned toof the Orlando Home2 Suites will be completed and opened for business overduring the next three to 15 months from June 30, 2017,fourth quarter of 2018, at which time a closing on these hotelsthis hotel is expected to occur.  Although the Company is working towards acquiring these hotels,this hotel, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on these hotelsthis hotel will occur under the outstanding purchase contracts.contract.  The following table summarizes the location, brand, date of purchase contract, expected number of rooms, refundable (if the seller does not meet its obligations under the contract) contract deposits paid, and gross purchase price for each of the contracts outstanding at June 30, 2017.March 31, 2018.  All dollar amounts are in thousands.

8
Location Brand Date of Purchase Contract Rooms  Refundable Deposits  Gross Purchase Price 
Birmingham, AL (a)(b) Home2 Suites 8/28/2015  105  $3  $19,219 
Birmingham, AL (a)(b) Hilton Garden Inn 8/28/2015  105   2   19,219 
Phoenix, AZ (a) Hampton 10/25/2016  210   500   44,100 
Orlando, FL (a) Home2 Suites 1/18/2017  128   3   20,736 
       548  $508  $103,274 


Location Brand Date of Purchase Contract Rooms  Refundable Deposits  
Gross Purchase
Price
 
Phoenix, AZ (a) Hampton 10/25/2016  210  $500  $44,300 
Orlando, FL (b) Home2 Suites 1/18/2017  128   3   20,736 
       338  $503  $65,036 

(a)As of June 30, 2017, these hotels wereNewly constructed hotel was acquired on May 2, 2018, the same day the hotel opened for business.
(b)This hotel is currently under construction.  The table shows the expected number of rooms upon hotel completion and the expected franchise brands.brand.  Assuming all conditions to closing are met, the purchasespurchase of these hotels arethis hotel is expected to close overduring the next three to 15 months from June 30, 2017.fourth quarter of 2018.  If the seller meets all of the conditions to closing, the Company is obligated to specifically perform under the contract.  As the property is under construction, at this time, the seller has not met all of the conditions to closing.
(b)The Home2 Suites and Hilton Garden Inn hotels in Birmingham, AL are part of an adjoining two-hotel complex located on the same site.

The Company intends to use borrowings under itspurchase of the Phoenix Hampton Inn & Suites was funded through the Company’s revolving credit facility toand it is anticipated that the purchase of the hotels under contractOrlando Home2 Suites will be funded similarly if a closing occurs.

Loss on Impairment of Depreciable Real Estate Assets

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

In June 2017, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its 316-room Marriott hotel in Fairfax, Virginia for a gross sales price of $42.0 million, which exceeds its carrying value as of June 30, 2017, plus costs to sell.  The contract is subject to a number of conditions to closing and therefore there can be no assurance that a closing will occur.  If the closing occurs, the sale is expected to be completed within six months from June 30, 2017. The Company plans to use the net proceeds from the sale to pay down borrowings on its revolving credit facility.  Since the due diligence period under the contract has not passed and the deposit made by the buyer is refundable as of June 30, 2017, the assets and liabilities related to this property have not been classified as held for sale in the Company’s consolidated balance sheet at June 30, 2017.

9


4.  Dispositions

In December 2016, the Company entered into a purchase and sale agreement with an unrelated party for the sale of its 224-room Hilton hotel in Dallas, Texas for a gross sales price of approximately $56.1 million, as amended.  The hotel was classified as held for sale at its historical cost (which was less than the contract price, net of costs to sell) in the Company’s consolidated balance sheet at December 31, 2016.  On April 20, 2017, the Company completed the sale resulting in a gain of approximately $16.1 million, which is included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2017.  The hotel had a carrying value totaling approximately $39.0 million at the date of sale.  Under the contract, at closing, the mortgage loan secured by the Dallas, Texas Hilton hotel was assumed by the buyer with the buyer receiving a credit for the amount assumed, which was approximately $27.1 million at the date of sale.  The net proceeds from the sale were used to pay down borrowings on the Company’s revolving credit facility.  The Company’s consolidated statements of operations include operating income of approximately $0.1 million and $0.7 million for the three months ended June 30, 2017 and 2016, respectively, and approximately $1.2 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively, relating to the results of operations of the Dallas, Texas Hilton hotel.  The sale of this property 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 this property are included in income from continuing operations for the three and six months ended June 30, 2017 and 2016.

5.3.  Debt

$965 Million Credit Facility

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

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

109

$85 Million Term Loan

On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024 (the “$85 million term loan” and, together with the $425 million term loans and the $150 million term loans, the “term loans”).  The credit agreement contains requirements and covenants similar to the Company’s $965 million credit facility.  The Company may make voluntary prepayments in whole or in part, at any time, subject to certain conditions.  Interest payments on the $85 million term loan are due monthly and the interest rate is equal to an annual rate of the one-month LIBOR plus a margin ranging from 1.80% to 2.60%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.

As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the details of the Company’s revolving credit facility $425 million term loans and $150 million term loans were as set forth below.  All dollar amounts are in thousands.

    As of June 30, 2017   As of December 31, 2016      As of March 31, 2018    As of December 31, 2017   
 Maturity Date Outstanding Balance  Interest Rate   Outstanding Balance  Interest Rate   Maturity Date Outstanding Balance  Interest Rate  Outstanding Balance  Interest Rate  
Revolving credit facility (1) 5/18/2019 $301,300   2.77%(2) $270,000   2.32%(2) 5/18/2019 $170,700   3.43% (2)  $106,900   3.11% (2) 
                                          
Term loans                                          
$425 million term loans 5/18/2020  425,000   3.01%(3)  425,000   2.90%(3) 5/18/2020  425,000   3.16% (3)   425,000   3.09% (3) 
$50 million term loan 4/8/2021  50,000   2.54%(4)  50,000   2.54%(4) 4/8/2021  50,000   2.54% (4)   50,000   2.54% (4) 
$100 million term loan 4/8/2023  100,000   3.13%(4)  100,000   3.13%(4) 4/8/2023  100,000   3.13% (4)   100,000   3.13% (4) 
$85 million term loan 7/25/2024  85,000   3.76% (4)   85,000   3.76% (4) 
Total term loans at stated value    575,000        575,000          660,000         660,000       
Unamortized debt issuance costs    (3,539)       (4,066)         (3,431)        (3,721)      
Total term loans    571,461        570,934          656,569         656,279       
                                          
Total revolving credit facility and term loans   $872,761       $840,934         $827,269        $763,179       

(1)Unamortized debt issuance costs related to the revolving credit facility totaled approximately $2.3$1.3 million and $2.8$1.7 million as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, and are included in other assets, net in the Company'sCompany’s consolidated balance sheets.
(2)Annual variable interest rate at the balance sheet date.
(3)Effective annual interest rate at the balance sheet date which includes the effect of interest rate swaps on $322.5 million of the outstanding loan balance, resulting in an annual fixed interest rate of approximately 3.10% on this portion of the debt, subject to adjustment based on the Company'sCompany’s leverage ratio.ratio, through maturity.  See Note 64 for more information on the interest rate swap agreements.  Remaining portion is variable rate debt.
(4)Annual fixed interest rate at the balance sheet date which includes the effect of an interest rate swapswaps on the outstanding loan balance, subject to adjustment based on the Company’s leverage ratio.ratio, through maturity.  See Note 64 for more information on the interest rate swap agreements.

The credit agreements governing the $965 million credit facility, andthe $150 million term loan facility and the $85 million term loan contain mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default.  The credit agreements require that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, limits on dividend payments and share repurchases and restrictions on certain investments.  The Company was in compliance with the applicable covenants at June 30, 2017.

$85 Million Term Loan

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

11

2018.

Mortgage Debt

As of June 30, 2017,March 31, 2018, the Company had approximately $432.8$498.5 million in outstanding property levelmortgage debt secured by 2831 properties, with maturity dates ranging from June 2020 to December 2026,January 2038, stated interest rates ranging from 3.55% to 6.25% and effective interest rates ranging from 3.55% to 4.97%.  The loans generally provide for monthly payments of principal and interest on an amortized basis and defeasance or prepayment penalties if prepaid.  The following table sets forth the hotel properties securing each loan, the interest rate, loan assumption or origination date, maturity date, the principal amount assumed or originated, and the outstanding balance prior to any fair value adjustments or debt issuance costs as of June 30, 2017March 31, 2018 and December 31, 20162017 for each of the Company’s debt obligations.  All dollar amounts are in thousands.

10
Location Brand Interest Rate (1)  Loan Assumption or Origination Date Maturity Date  Principal Assumed or Originated  Outstanding balance as of June 30, 2017  Outstanding balance as of December 31, 2016 
Irving, TX Homewood Suites  5.83% 12/29/2010 (2) $6,052  $0  $5,072 
Gainesville, FL Homewood Suites  5.89% 9/1/2016 (2)  12,051   0   11,966 
Duncanville, TX Hilton Garden Inn  5.88% 10/21/2008 (2)  13,966   0   12,126 
Dallas, TX Hilton  3.95% 5/22/2015 (3)  28,000   0   27,246 
San Juan Capistrano, CA Residence Inn  4.15% 9/1/2016 6/1/2020   16,210   15,940   16,104 
Colorado Springs, CO Hampton  6.25% 9/1/2016 7/6/2021   7,923   7,819   7,883 
Franklin, TN Courtyard  6.25% 9/1/2016 8/6/2021   14,679   14,487   14,604 
Franklin, TN Residence Inn  6.25% 9/1/2016 8/6/2021   14,679   14,487   14,604 
Grapevine, TX Hilton Garden Inn  4.89% 8/29/2012 9/1/2022   11,810   10,560   10,707 
Collegeville/Philadelphia, PA Courtyard  4.89% 8/30/2012 9/1/2022   12,650   11,312   11,468 
Hattiesburg, MS Courtyard  5.00% 3/1/2014 9/1/2022   5,732   5,285   5,357 
Rancho Bernardo, CA Courtyard  5.00% 3/1/2014 9/1/2022   15,060   13,884   14,074 
Kirkland, WA Courtyard  5.00% 3/1/2014 9/1/2022   12,145   11,197   11,350 
Seattle, WA Residence Inn  4.96% 3/1/2014 9/1/2022   28,269   26,050   26,409 
Anchorage, AK Embassy Suites  4.97% 9/13/2012 10/1/2022   23,230   20,848   21,133 
Somerset, NJ Courtyard  4.73% 3/1/2014 10/6/2022   8,750   8,047   8,160 
Tukwila, WA Homewood Suites  4.73% 3/1/2014 10/6/2022   9,431   8,672   8,795 
Prattville, AL Courtyard  4.12% 3/1/2014 2/6/2023   6,596   6,033   6,123 
Huntsville, AL Homewood Suites  4.12% 3/1/2014 2/6/2023   8,306   7,598   7,711 
San Diego, CA Residence Inn  3.97% 3/1/2014 3/6/2023   18,600   16,992   17,248 
Miami, FL Homewood Suites  4.02% 3/1/2014 4/1/2023   16,677   15,252   15,479 
Syracuse, NY Courtyard  4.75% 10/16/2015 8/1/2024(4)  11,199   10,772   10,905 
Syracuse, NY Residence Inn  4.75% 10/16/2015 8/1/2024(4)  11,199   10,772   10,905 
New Orleans, LA Homewood Suites  4.36% 7/17/2014 8/11/2024   27,000   25,251   25,577 
Westford, MA Residence Inn  4.28% 3/18/2015 4/11/2025   10,000   9,507   9,626 
Denver, CO Hilton Garden Inn  4.46% 9/1/2016 6/11/2025   34,118   33,454   33,857 
Oceanside, CA Courtyard  4.28% 9/1/2016 10/1/2025   13,655   13,456   13,576 
Omaha, NE Hilton Garden Inn  4.28% 9/1/2016 10/1/2025   22,682   22,350   22,550 
Boise, ID Hampton  4.37% 5/26/2016 6/11/2026   24,000   23,618   23,813 
Burbank, CA Courtyard  3.55% 11/3/2016 12/1/2026   25,564   25,243   25,564 
San Diego, CA Courtyard  3.55% 11/3/2016 12/1/2026   25,473   25,153   25,473 
San Diego, CA Hampton  3.55% 11/3/2016 12/1/2026   18,963   18,725   18,963 
             $514,669   432,764   494,428 
Unamortized fair value adjustment of assumed debt               4,781   5,229 
Unamortized debt issuance costs               (1,989)  (2,628)
    Total                $435,556  $497,029 

Location Brand Interest Rate (1)  Loan Assumption or Origination Date 
Maturity
Date
  Principal Assumed or Originated  
Outstanding balance as of
March 31, 2018
  Outstanding balance as of December 31, 2017 
San Juan Capistrano, CA Residence Inn  4.15% 9/1/2016 6/1/2020  $16,210  $15,687  $15,774 
Colorado Springs, CO Hampton  6.25% 9/1/2016 7/6/2021   7,923   7,719   7,754 
Franklin, TN Courtyard  6.25% 9/1/2016 8/6/2021   14,679   14,303   14,368 
Franklin, TN Residence Inn  6.25% 9/1/2016 8/6/2021   14,679   14,303   14,368 
Grapevine, TX Hilton Garden Inn  4.89% 8/29/2012 9/1/2022   11,810   10,334   10,412 
Collegeville/Philadelphia, PA Courtyard  4.89% 8/30/2012 9/1/2022   12,650   11,069   11,152 
Hattiesburg, MS Courtyard  5.00% 3/1/2014 9/1/2022   5,732   5,173   5,212 
Rancho Bernardo/San Diego, CA Courtyard  5.00% 3/1/2014 9/1/2022   15,060   13,591   13,692 
Kirkland, WA Courtyard  5.00% 3/1/2014 9/1/2022   12,145   10,960   11,042 
Seattle, WA Residence Inn  4.96% 3/1/2014 9/1/2022   28,269   25,496   25,687 
Anchorage, AK Embassy Suites  4.97% 9/13/2012 10/1/2022   23,230   20,408   20,560 
Somerset, NJ Courtyard  4.73% 3/1/2014 10/6/2022   8,750   7,872   7,932 
Tukwila, WA Homewood Suites  4.73% 3/1/2014 10/6/2022   9,431   8,484   8,549 
Prattville, AL Courtyard  4.12% 3/1/2014 2/6/2023   6,596   5,895   5,943 
Huntsville, AL Homewood Suites  4.12% 3/1/2014 2/6/2023   8,306   7,424   7,483 
San Diego, CA Residence Inn  3.97% 3/1/2014 3/6/2023   18,600   16,599   16,733 
Miami, FL Homewood Suites  4.02% 3/1/2014 4/1/2023   16,677   14,903   15,022 
Syracuse, NY Courtyard  4.75% 10/16/2015 8/1/2024(2)   11,199   10,567   10,637 
Syracuse, NY Residence Inn  4.75% 10/16/2015 8/1/2024(2)   11,199   10,567   10,637 
New Orleans, LA Homewood Suites  4.36% 7/17/2014 8/11/2024   27,000   24,747   24,919 
Westford, MA Residence Inn  4.28% 3/18/2015 4/11/2025   10,000   9,324   9,386 
Denver, CO Hilton Garden Inn  4.46% 9/1/2016 6/11/2025   34,118   32,833   33,046 
Oceanside, CA Courtyard  4.28% 9/1/2016 10/1/2025   13,655   13,269   13,332 
Omaha, NE Hilton Garden Inn  4.28% 9/1/2016 10/1/2025   22,682   22,040   22,145 
Boise, ID Hampton  4.37% 5/26/2016 6/11/2026   24,000   23,319   23,422 
Burbank, CA Courtyard  3.55% 11/3/2016 12/1/2026   25,564   24,752   24,917 
San Diego, CA Courtyard  3.55% 11/3/2016 12/1/2026   25,473   24,664   24,828 
San Diego, CA Hampton  3.55% 11/3/2016 12/1/2026   18,963   18,360   18,483 
Burbank, CA SpringHill Suites  3.94% 3/9/2018 4/1/2028   28,470   28,470   - 
Santa Ana, CA Courtyard  3.94% 3/9/2018 4/1/2028   15,530   15,530   - 
San Jose, CA Homewood Suites  4.22% 12/22/2017 1/1/2038   30,000   29,840   30,000 
                 $528,600   498,502   457,435 
Unamortized fair value adjustment of assumed debt         4,105   4,330 
Unamortized debt issuance costs            (2,418)  (2,748)
    Total                $500,189  $459,017 

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

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The aggregate amounts of principal payable under the Company’s total debt obligations (including mortgage debt, the revolving credit facility and term loans), for the five years subsequent to June 30, 2017March 31, 2018 and thereafter are as follows (in thousands):

2017 (July - December) $5,329 
2018  11,071 
2018 (April - December) $9,730 
2019  333,008   204,505 
2020  451,164   453,349 
2021  95,311   97,586 
2022  109,252 
Thereafter  413,181   454,780 
  1,309,064   1,329,202 
Unamortized fair value adjustment of assumed debt  4,781   4,105 
Unamortized debt issuance costs related to term loans and mortgage debt  (5,528)  (5,849)
Total $1,308,317  $1,327,458 

6.4.  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 June 30, 2017 and DecemberMarch 31, 2016,2018, both the carrying value and estimated fair value of the Company’s debt were approximately $1.3 billion.  As of December 31, 2017, both the carrying value and estimated fair value of the Company’s debt were approximately $1.2 billion.  Both the carrying value and estimated fair value of the Company’s debt (as discussed above) is net of unamortized debt issuance costs related to term loans and mortgage debt for each specific year.

Derivative Instruments

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable rate debt.  Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one monthone-month LIBOR.  The swaps are designed to effectively fix the interest payments on variable rate debt instruments.  These swap instruments are recorded at fair value and if in an asset position, are included in other assets, net, and, if in a liability position, are included in accounts payable and other liabilities in the Company’s consolidated balance sheets.  The fair values of the Company’s interest rate swap agreements are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts, which is considered a Level 2 measurement under the fair value hierarchy.  The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  The following table sets forth information for each of the Company’s interest rate swap agreements outstanding as of June 30, 2017March 31, 2018 and December 31, 2016.2017.  All dollar amounts are in thousands.

 Hedge Type 
Notional Amount at
June 30, 2017
  Origination Date  Maturity Date  Swap Fixed Interest Rate  Fair Value Asset (Liability)  
      June 30, 2017  December 31, 2016 
Cash flow hedge $212,500 5/21/2015 5/18/2020  1.58% $262  $(198)
Cash flow hedge  110,000 7/2/2015 5/18/2020  1.62%  12   (246)
Cash flow hedge  50,000 4/7/2016 3/31/2021  1.09%  1,169   1,289 
Cash flow hedge  100,000 4/7/2016 3/31/2023  1.33%  3,250   3,744 
Cash flow hedge (1)  75,000 5/31/2017 6/30/2024  1.96%  266   0 
             $4,959  $4,589 
(1)In May 2017, the Company entered into a forward interest rate swap agreement with a commercial bank, which beginning on July 31, 2017 will effectively fix the interest rate on $75 million of the $85 million term loan.  See Note 5 for more information on the term loan.
         Fair Value Asset    
  Notional Amount at
March 31, 2018
             
Hedge Type  Origination Date Maturity Date Swap Fixed Interest Rate  March 31, 2018  December 31, 2017 
Cash flow hedge $212,500 5/21/2015 5/18/2020  1.58% $3,478  $2,033 
Cash flow hedge  110,000 7/2/2015 5/18/2020  1.62%  1,709   951 
Cash flow hedge  50,000 4/7/2016 3/31/2021  1.09%  2,007   1,544 
Cash flow hedge  100,000 4/7/2016 3/31/2023  1.33%  5,819   4,098 
Cash flow hedge  75,000 5/31/2017 6/30/2024  1.96%  2,724   1,043 
Cash flow hedge  10,000 8/10/2017 6/30/2024  2.01%  333   109 
  $557,500         $16,070  $9,778 

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The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedges.  ChangesThe Company elected to early adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities, on January 1, 2018, using the modified retrospective approach for all of its hedging relationships that existed as of that date.  As a result, effective January 1, 2018, the entire change in the fair value onof the effective portion of allCompany’s designated cash flow hedges areis recorded to accumulated other comprehensive income, a component of shareholders’ equity in the Company’s consolidated balance sheets.  ChangesPrior to January 1, 2018, changes in fair value on the effective portion of all designated cash flow hedges were recorded to accumulated other comprehensive income, while changes in fair value on the ineffective portion of all designated cash flow hedges arewere recorded to interest and other expense, net in the Company’s consolidated statements of operations.  

To adjust qualifyingSince prior to January 1, 2018 there was no material ineffectiveness related to the Company’s outstanding designated cash flow hedges, to their fair valuethe adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

The following table presents the effect of derivative instruments in cash flow hedging relationships in the Company’s consolidated statements of operations and recognize the impact of hedge accounting, the Company recorded net unrealized gains (losses) of approximately $(1.2) million and $(5.5) million duringcomprehensive income for the three months ended June 30,March 31, 2018 and 2017 and 2016, respectively, and approximately $0.4 million and $(12.2) million during the six months ended June 30, 2017 and 2016, respectively, to other comprehensive income (loss).  There was no ineffectiveness recorded on designated cash flow hedges during the three and six months ended June 30, 2017 and 2016.  (in thousands):

  
Net Unrealized Gain Recognized in
Other Comprehensive Income
  Net Unrealized Gain (Loss) Reclassified from Accumulated Other Comprehensive Income to Interest and Other Expense, net 
  Three Months Ended March 31,  Three Months Ended March 31, 
  2018  2017  2018  2017 
Interest rate derivatives in cash flow hedging relationships $6,348  $723  $56  $(822)


Amounts reported in accumulated other comprehensive income will be reclassified to interest and other expense, net as interest payments are made or received on the Company’s variable-rate derivatives.  Net unrealized gains (losses) on cash flow hedges recorded to other comprehensive income (loss) during the three months ended June 30, 2017 and 2016, include approximately $(0.6) million and $(0.9) million, respectively, and during the six months ended June 30, 2017 and 2016, include approximately $(1.4) million and $(1.9) million, respectively, reclassified from accumulated other comprehensive income to interest and other expense, net.  The Company estimates that approximately $1.0$3.2 million of net unrealized gains (losses) included in accumulated other comprehensive income at June 30, 2017March 31, 2018 will be reclassified as a net increasedecrease to interest and other expense, net within the next 12 months.

7.5.  Related Parties

The Company has, and is expected to continue to engage in, transactions with related parties.  These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.  There have been no changes to the contracts and relationships discussed in the Company’s 2016 Annual Report on2017 Form 10-K.  Below is a summary of the significant related party relationships in effect during the sixthree months ended June 30, 2017March 31, 2018 and 2016.2017.

Prior to the merger, Glade M. Knight, Executive Chairman of the Company, was Chairman and Chief Executive Officer of Apple Ten.  Apple Ten’s advisors, Apple Ten Advisors, Inc. (“A10A”) andowns Apple Realty Group, Inc. (“ARG”), are wholly owned by Mr. Knight.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.  Justin G. Knight, the Company’s President and Chief Executive Officer, and a member, each of the Company’s Board of Directors, also served as President of Apple Ten prior to the merger.which receive support services from ARG.

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

Effective September 1, 2016, the Company completed its merger with Apple Ten.  As contemplated in the Merger Agreement, in connection with the completion of the merger, the advisory and related party arrangements with respect to the Company, Apple Ten and Apple Ten’s advisors, A10A and ARG, were terminated.  Prior to the merger, A10A subcontracted its obligations under the advisory agreement between A10A and Apple Ten to the Company.  The Company provided to Apple Ten the advisoryprovides support services, contemplated under the A10A advisory agreement and received an annual advisory fee and was reimbursed by Apple Ten forincluding the use of the Company’s employees and corporate office, to ARG and other costs associated withis reimbursed by ARG for the advisory agreement.  Additionally,cost of these services.  The amounts reimbursed to the Company provided supportare based on the actual costs of the services to Apple Ten’s advisors, who agreed to reimburseand a good faith estimate of the Company for its costs in providing these services.  Both the advisory fees and reimbursed costs receivedproportionate amount of time incurred by the Company from Apple Ten were recorded as general and administrative expense by Apple Ten and reductions to general and administrative expense by the Company and, therefore, the terminationCompany’s employees on behalf of the subcontract agreement had no financial impact on the combined company after the effective time of the merger.  After the merger, the Company has continued and will continue to provide support services to ARG for activities unrelated to Apple Ten.

Prior to the merger, advisory fees earned by the Company from Apple Ten for the six months ended June 30, 2016 totaled approximately $1.2 million and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statement of operations.ARG.  Total reimbursed costs received by the Company from these entitiesARG for the sixthree months ended June 30,March 31, 2018 and 2017 and 2016 (including Apple Ten, A10A and ARG prior to September 1, 2016 and ARG thereafter) totaled approximately $0.3$0.2 million and $1.7 million, respectively,in each period, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations. As of June 30, 2017 and December 31, 2016, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.1 million and $0.2 million, respectively, and are included in other assets, net in the Company’s consolidated balance sheets.

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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 March 31, 2018 and December 31, 2017, total amounts due from ARG for reimbursements under the cost sharing structure each totaled approximately $0.3 million at each date, and are included in other assets, net in the Company’s consolidated balance sheets.

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

The aircraft is also leased to affiliates of the Company based on third party rates, whichrates.  Leasing activity to affiliates was not significant during the reporting periods.  The Company also utilizes aircraft, owned through two entities, one of which is owned by the Company’s Executive Chairman, and the other, by its President and Chief Executive Officer, for acquisition, asset management, renovation and public relations purposes, and reimburses these entities at third party rates.  Total amountscosts incurred for the use of these aircraft during the sixthree months ended June 30,March 31, 2018 and 2017 and 2016 were approximately $0.1$0.03 million in each period related to aircraft owned through these two entitiesand $0.04 million, respectively, and are included in general and administrative expenses in the Company’s consolidated statements of operations.

8.6.  Shareholders’ Equity

Distributions

The Company’s current annual distribution rate, payable monthly, is $1.20 per common share.  For the three months ended June 30,March 31, 2018 and 2017, and 2016, the Company paid distributions of $0.30 per common share for a total of $66.9$69.1 million and $52.4 million, respectively.  For the six months ended June 30, 2017 and 2016, the Company paid distributions of $0.60 per common share for a total of $133.8 million and $104.7$66.9 million, respectively.  Additionally, in June 2017,March 2018, the Company declared a monthly distribution of $0.10 per common share, totaling $22.3$23.0 million, which was recorded as a payable as of June 30, 2017March 31, 2018 and paid in July 2017.April 2018.  As of December 31, 2016,2017, a monthly distribution of $0.10 per common share, totaling $22.3$23.0 million, was recorded as a payable and paid in January 2017.2018.  These accrued distributions were included in accounts payable and other liabilities in the Company’s consolidated balance sheets.

Equity Distribution AgreementIssuance of Shares

OnIn February 28, 2017, the Company entered intoexecuted an equity distribution agreement with Robert W. Baird & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Canaccord Genuity Inc., FBR Capital Markets & Co., Jefferies LLC, KeyBanc Capital Markets Inc. and Scotia Capital (USA) Inc. (collectively, the “Sales Agents”), pursuant to whichthat allows the Company mayto sell, from time to time, up to an aggregate of $300 million of its common shares through the Sales Agentssales agents under an at-the-market offering program (the “ATM Program”).  DuringSince inception of the sixATM Program in February 2017 through March 31, 2018, the Company has sold approximately 7.2 million common shares at a weighted-average market sales price of approximately $19.56 per common share and received aggregate gross proceeds of approximately $139.8 million before commission and issuance costs, including the sale of approximately 0.2 million common shares during the three months ended June 30, 2017,March 31, 2018 at a weighted-average market sales price of approximately $19.73 per common share and receipt of aggregate gross proceeds of approximately $4.8 million.  The Company used the Company had no salesproceeds from the sale of these shares to pay down borrowings on its revolving credit facility.  No shares were issued under the ATM Program during the three months ended March 31, 2017.  As of March 31, 2018, approximately $160.2 million remained available for issuance under the ATM Program.

Share Repurchase ProgramRepurchases

In connection with the implementation of its ATM Program, in February 2017, the Company terminated its existing written trading plan under the Company’s share repurchase program.  During the first sixthree months of 2016,2018, the Company purchased, under its $475 million share repurchase program (the “Share Repurchase Program”), approximately 20,0000.3 million of its common shares at a weighted-average market purchase price of approximately $18.10$16.89 per common share for an aggregate purchase price of approximately $0.4$4.3 million.  The Company did not repurchasepurchase any common shares under its share repurchase programShare Repurchase Program during the first sixthree months of 2017.  TheIn March 2018, the Company plans to continue to consider opportunisticestablished a new written trading plan as part of the Share Repurchase Program that provides for share repurchases in open market transactions that is intended to comply with Rule 10b5-1 under the $467.5Securities Exchange Act of 1934, as amended.  Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its revolving credit facility.  As of March 31, 2018, approximately $463.2 million remaining portion ofremained available for repurchase under the authorized $475 million share repurchase program, which will depend on prevailing market conditions and other factors.Share Repurchase Program.  The programShare Repurchase Program may be suspended or terminated at any time by the Company and as a result of an extension of the program approved by the Board of Directors in May 2017, will end in July 2018 if not terminated earlier.

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9.7.  Compensation Plans

In February 2017, the Compensation Committee of the Board of Directors (“Compensation Committee”) approvedThe Company annually establishes an executive incentive plan (“2017for its executive management.  Under the incentive plan for 2018 (the “2018 Incentive Plan”), effective January 1, 2017, and established incentive goals for 2017.  Under the 2017 Incentive Plan, participants are eligible to receive a bonus based on the achievement of certain 20172018 performance measures, consisting of operational performance metrics (including targeted Modified Funds from Operations per share, Comparable Hotels revenue per available room growth and Adjusted Hotel EBITDA Margin growth) and shareholder return metrics (including shareholder return relative to a peer group and total shareholder return, over one-year, two-year and two-yearthree-year periods).  The components of the operational performance metrics and shareholder return metrics are equally weighted and the two metrics each account for 50% of the total target incentive compensation.  The range of potential aggregate payouts under the 20172018 Incentive Plan is $0 - $18$20 million.  Based on performance through June 30, 2017,March 31, 2018, the Company has accrued approximately $3.5$1.9 million as a liability for potential executive bonus payments under the 20172018 Incentive Plan, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheet as of June 30, 2017.  Compensation expense recognized by the Company under the 2017 Incentive Plan is includedMarch 31, 2018 and in general and administrative expenseexpenses in the Company’s consolidated statementsstatement of operations and totaled approximately $1.4 million and $3.5 million for the three and six months ended June 30, 2017, respectively.March 31, 2018.  Approximately 25% of awards under the 20172018 Incentive Plan, if any, will be paid in cash, and 75% will be issued in stock under the Company’s 2014 Omnibus Incentive Plan, approximately two-thirds of which wouldwill vest at the end of 20172018 and one-third of which wouldwill vest atin December 2019.  Under the end of 2018.  During 2016 and 2015, comparable executive incentive plans were approved by the Compensation Committee (“2016 Incentive Plan” and “2015plan for 2017 (the “2017 Incentive Plan”) that were effective January 1, 2016 and January 1, 2015, respectively.  The, the Company recorded approximately $1.7 million and $3.6$2.0 million in general and administrative expense related to the 2016 Incentive Planexpenses in the Company’s consolidated statementsstatement of operations for the three and six months ended June 30, 2016, respectively.March 31, 2017. 

Share Based Compensation Awards

During the first quarters of 20172018 and 2016,2017, the Company issued 101,305367,333 and 304,345101,305 common shares earned under the 2017 Incentive Plan and the incentive plan for 2016 and 2015(the “2016 Incentive PlansPlan”) (net of 19,66748,533 and 11,78719,667 common shares surrendered to satisfy tax withholding obligations) at $19.10$16.92 and $19.87$19.10 per share, or approximately $2.3$7.0 million and $6.3$2.3 million in share based compensation, including the surrendered shares, respectively.  Of the total shares issued under the 2017 Incentive Plan, 223,421 shares were unrestricted at the time of issuance, and the remaining 143,912 restricted shares will vest on December 14, 2018.  Of the total shares issued under the 2016 Incentive Plan, 60,028 shares were unrestricted at the time of issuance, and the remaining 41,277 restricted shares will vestvested on December 15, 2017.  Of the total shares issued under the 2015 Incentive Plan, 146,279 shares were unrestricted at the time of issuance, and the remaining 158,066 restricted shares vested on December 31, 2016,2017, of which 50,04413,129 common shares were surrendered to satisfy tax withholding obligations.  Of the total 20162017 share based compensation, approximately $1.9$5.8 million was recorded as a liability as of December 31, 2016,2017, which was included in accounts payable and other liabilities in the Company’s consolidated balance sheet and the remaining $0.4$1.2 million, which is subject to vesting on December 15, 2017,14, 2018, will be recognized as compensation expense proportionately throughout 2017.2018.  Of the total 20152016 share based compensation, approximately $1.6$0.4 million, which vested on December 31, 2016,15, 2017, was recognized as compensation expense proportionately throughout 2016.2017.  For the three months ended June 30,March 31, 2018 and 2017, and 2016, the Company recognized approximately $0.1$0.3 million and $0.4 million, respectively, and for the six months ended June 30, 2017 and 2016, the Company recognized approximately $0.2 million and $0.8$0.1 million, respectively, of share based compensation expense related to the unvested restricted share awards.

10.
8.  Legal Proceedings

Quinn v. Knight, et al.

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

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

As previously disclosed in the 20162017 Form 10-K, on April 22, 2014, Plaintiff Susan Moses, purportedly a purported shareholder of Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”), filed a class action against the Company and several individual directors on behalf of all then-existing shareholders and former shareholders of Apple Seven and Apple Eight, who purchased additional shares under the Dividend Reinvestment Plans (“DRIP”) of Apple Seven, Apple Eight and the Company between July 17, 2007 and February 12, 2014.2014 (the “2014 DRIP litigation”).  In January 2017, the parties reached an agreement in principle to settle the litigation forwhich the court approved by order dated March 27, 2018.  In January 2018, the Company funded the settlement amount of $5.5 million, which settlement remains subject to final court approval, and was included in accounts payable and other liabilities in the Company’s consolidated balance sheetssheet as of December 31, 2016 and June 30, 2017, and in transaction and litigation costs (reimbursements) in the Company’s consolidated statement of operations for the year ended December 31, 2016.  At this time, no assurance can be given that the proposed settlement will be approved, and therefore the actual loss incurred could be in excess of the amount accrued as of June 30, 2017.

15

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

OnAs previously disclosed in the 2017 Form 10-K, on February 24, 2017, Plaintiff Marsha Wilchfort, purportedly a purported shareholder of Apple REIT Six, Inc. (“Apple Six”), Apple Seven and Apple Eight, filed a class action against, among others, the Company and the former individual directors of Apple Six, Apple Seven and Apple Eight, including Mr. Glade Knight (“the Apple REIT Defendants”), on behalf of all then-existing shareholders and former shareholders of Apple Six, Apple Seven and Apple Eight, who purchased additional shares under Apple Six’s, Apple Seven’s and Apple Eight’s DRIP between July 17, 2007 and December 2012 (in the case of Apple Six shareholders) or June 30, 2013 (in the case of Apple Seven and Apple Eight shareholders).  The complaint was filed in the United States District Court for the Eastern District of New York and alleges, among other items, breach of contract under Virginia law, tortious interference and breach of implied duty of good faith and fair dealing.  The complaint alleges that the prices at which Plaintiff and the purported class members purchased additional shares through the DRIPs were not indicativeOn May 1, 2018, all of the true value ofApple REIT Defendants were dismissed from the units of Apple Six, Apple Seven and Apple Eight.complaint without prejudice by the plaintiff.

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

11.9.  Subsequent Events

In July 2017,April 2018, the Company paid approximately $22.3$23.0 million, or $0.10 per outstanding common share, in distributions to its common shareholders.

In July 2017,April 2018, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of August 2017.May 2018.  The distribution is payable on AugustMay 15, 2017.2018.

In April 2018, the Company, through one of its indirect wholly-owned subsidiaries, entered into a purchase contract for the purchase of all of the ownership interests in a limited liability company which plans to construct a dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida, with a combined total of 224 guest rooms for a purchase price of approximately $46.7 million.  Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on these hotels will occur.

On July 25, 2017,May 2, 2018, the Company entered into the $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024.  The Company used the proceeds, net of closing costs, to pay down the borrowingsclosed on the Company’s revolving credit facility.  See Note 5purchase of a newly constructed 210-room Hampton Inn & Suites in Phoenix, Arizona, the same day the hotel opened for additional information related to the $85 million term loan.business.  The gross purchase price was approximately $44.3 million.
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are typically identified by use of termsstatements that include phrases such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “outlook,” “strategy,” and similar expressions that convey the uncertainty of future events or outcomes.  Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Apple Hospitality REIT, Inc. (the “Company”)the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to successfully integrate pending transactions and implement its operating strategy; changes in general political, economic and competitive conditions and specific market conditions; adverse changes in the real estate and real estate capital markets; financing risks; the outcome of current and future litigation, including any legal proceedings that have been or may be instituted against the Company or others; regulatory proceedings or inquiries; and changes in laws or regulations or interpretations of current laws and regulations that impact the Company’s business, assets or classification as a real estate investment trust (“REIT”).REIT.  Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this Quarterly Report will prove to be accurate.  In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.  In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code.  Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled “Risk Factors” in the Company’s Annual Report on2017 Form 10-K for the year ended December 31, 2016.10-K.  Any forward-looking statement that the Company makes speaks only as of the date of this Quarterly Report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

The following discussion and analysis should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the Company’s Annual Report on2017 Form 10-K for the year ended December 31, 2016.10-K.

Overview

The Company is a Virginia corporation that has elected to be treated as a REIT for federal income tax purposes.  The Company is self-advised and invests in income-producing real estate, primarily in the lodging sector, in the United States.  As of June 30, 2017,March 31, 2018, the Company owned 235241 hotels with an aggregate of 29,97830,585 rooms located in urban, high-end suburban and developing markets throughout 3334 states.  All of the Company’s hotels operate under Marriott or Hilton brands.  The hotels are operated and managed under separate management agreements with 2223 hotel management companies, none of which are affiliated with the Company.  The Company’s common shares are listed on the New York Stock ExchangeNYSE under the ticker symbol “APLE.”

Investing2018 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 inover the long term.  Consistent with this strategy and the Company’s focus on investing in select-service hotels, the Company acquired two hotels for an aggregate purchase price of approximately $63.0 million during the first three months of 2018: a newly constructed 124-room Courtyard by Marriott hotel119-room Hampton Inn & Suites in Fort Worth, Texas on FebruaryAtlanta, Georgia and a 144-room Hampton Inn & Suites in Memphis, Tennessee.  On May 2, 2017,2018, the same day the hotel opened for business, the Company acquired a 210-room Hampton Inn & Suites in Phoenix, Arizona for a purchase price of approximately $18.0$44.3 million.  The purchase price for this property was funded through borrowings on the Company’s $540 million revolving credit facility (the “revolving credit facility”).  As of June 30, 2017,May 2, 2018, the Company also had outstanding contracts for the potential purchase of four additionalthree hotels that were under construction for a total purchase price of approximately $103.3 million.  These hotels are under construction and are$67.4 million, including  a 128-room Home2 Suites in Orlando, Florida which is planned to be completed and opened for business overin the next threefourth quarter of 2018, and a combined 224-room dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida which is planned to 15 months from June 30, 2017, at which time closing on these hotels is expectedbe completed and opened for business in 2020.  The Company utilized its revolving credit facility to occur.fund the completed acquisitions and plans to utilize the revolving credit facility for any additional acquisitions.

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Additionally, for its existing portfolio, the Company monitors each property’s profitability, market conditions and capital requirements and attempts to maximize shareholder value by disposing of properties when it believes that superior value can be provided by the proceeds from the sale of the property.  As a result, on April 20, 2017, the Company completed the sale of its 224-room Hilton hotel in Dallas, Texas, which was classified as held for sale as of December 31, 2016, for approximately $56.1 million, resulting in a gain of approximately $16.1 million, which is included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2017.  The net proceeds from the sale of the Dallas, Texas Hilton were used to pay down borrowings on the Company’s revolving credit facility. Also, in June 2017, the Company entered into a purchase and sale agreement for the sale of its 316-room Marriott hotel in Fairfax, Virginia for a gross sales price of $42.0 million.  The contract is subject to a number of conditions to closing and therefore there can be no assurance that a closing will occur.  If the closing occurs, the sale is expected to be completed within six months from June 30, 2017.  See Note 32 titled “Investment in Real Estate” and Note 49 titled “Dispositions”“Subsequent Events” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning these transactions.

Hotel Operations

Although hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, performance of the Company’s hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned.  Over the most recent quarters,past several years, the lodging industry and the Company have experienced no to low single-digitmodest revenue growth.  Moderate improvements in the general U. S.U.S. economy have been partially offset by increased supply in many markets.  With modest revenue growth, the Company has produced stable operating results during the first halfthree months of 20172018 on a comparable basis (as defined below) with expense increases generally offsetting revenue growth.  There is no way to predict future economic conditions, and there are certaincontinue to be additional factors that could negatively affect the lodging industry and the Company, including but not limited to, increased hotel supply in certain markets, labor uncertainty both for the economy as a whole and the lodging industry in particular, global volatility and government fiscal policies.  The Company, on a comparable basis, and industry are forecasting a low single-digitsingle digit percentage increase in revenue for the full year of 20172018 as compared to 2016.2017.  The Company’s revenueanticipated low growth rate for comparable hotels in 2017 is anticipated to be lower than the growth achieved in 2016, primarily due to inconsistent demand in certain markets and increased hotel supply meeting demand growth in others, limiting the Company’s ability to increase rates.

As of March 31, 2018, the Company owned 241 hotels with a total of 30,585 rooms as compared to 236 hotels with a total of 30,203 rooms as of March 31, 2017, however, results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year.  During the three months ended March 31, 2018, the Company acquired two existing hotels (both on February 5, 2018).  During 2017, the Company acquired three newly constructed hotels (one on February 2, 2017 and two on September 12, 2017) and three existing hotels (one on October 13, 2017, one on October 20, 2017 and one on December 1, 2017), and sold two hotels (one on April 20, 2017 and one on October 5, 2017).  As a result, the comparability of results for the three months ended March 31, 2018 and 2017 as discussed below is 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, average daily rate (“ADR”) and revenue per available room (“RevPAR”), and expenses, such as hotel operating expenses, general and administrative expenses and other expenses described below.

As of June 30, 2017, the Company owned 235 hotels with 29,978 rooms as compared to 179 hotels with a total of 22,961 rooms as of June 30, 2016.  Results of operations are included only for the period of ownership for hotels acquired or disposed of during the current reporting period and prior year.  During the six months ended June 30, 2017, the Company acquired one newly constructed hotel on February 2, 2017, and sold one hotel on April 20, 2017.  During 2016, the Company acquired 56 hotels in the Apple REIT Ten, Inc. (“Apple Ten”) merger effective September 1, 2016 (the “Apple Ten merger”), acquired one additional newly constructed hotel on July 1, 2016 and sold one hotel on December 6, 2016.  As a result, the comparability of results for the three and six months ended June 30, 2017 and 2016 as discussed below is significantly impacted by these transactions.

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

 Three Months Ended June 30,   Six Months Ended June 30,  Three Months Ended March 31, 
(in thousands, except statistical data) 2017  Percent of Revenue  2016  Percent of Revenue  Percent Change  2017  Percent of Revenue  2016  Percent of Revenue  Percent Change  2018  Percent of Revenue  2017  Percent of Revenue  Percent Change 
                                             
Total revenue $331,704   100.0% $257,636   100.0%  28.7% $624,629   100.0% $482,123   100.0%  29.6% $298,389   100.0% $292,925   100.0%  1.9%
Hotel operating expense  180,012   54.3%  137,416   53.3%  31.0%  348,466   55.8%  264,628   54.9%  31.7%  172,329   57.8%  168,454   57.5%  2.3%
Property taxes, insurance and other expense  17,821   5.4%  13,076   5.1%  36.3%  34,748   5.6%  25,528   5.3%  36.1%  17,229   5.8%  16,927   5.8%  1.8%
Ground lease expense  2,839   0.9%  2,506   1.0%  13.3%  5,655   0.9%  4,972   1.0%  13.7%  2,850   1.0%  2,816   1.0%  1.2%
General and administrative expense  6,151   1.9%  5,060   2.0%  21.6%  12,905   2.1%  9,888   2.1%  30.5%  6,877   2.3%  6,754   2.3%  1.8%
                                                            
Transaction and litigation costs (reimbursements)  (2,586)      1,116       n/a   (2,586)      1,409       n/a 
Loss on impairment of depreciable real estate assets  -       -       n/a   7,875       -       n/a   -       7,875       n/a 
Depreciation expense  43,893       33,824       29.8%  87,660       67,308    ��  30.2%  44,840       43,767       2.5%
Interest and other expense, net  11,849       9,560       23.9%  23,566       18,363       28.3%  11,919       11,717       1.7%
Gain on sale of real estate  16,140       -       n/a   16,140       -       n/a 
Income tax expense  259       360       -28.1%  509       623       -18.3%  163       250       -34.8%
                                                            
Number of hotels owned at end of period  235       179       31.3%  235       179       31.3%  241       236       2.1%
ADR $137.56      $138.16       -0.4% $135.58      $135.79       -0.2% $134.32      $133.39       0.7%
Occupancy  81.5%      82.2%      -0.9%  78.0%      78.2%      -0.3%  74.6%      74.4%      0.3%
RevPAR $112.10      $113.59       -1.3% $105.70      $106.13       -0.4% $100.18      $99.27       0.9%

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Comparable Hotels Operating Results

The following table reflects certain operating statistics for the Company’s 235241 hotels owned as of June 30, 2017March 31, 2018 (“Comparable Hotels”).  The Company defines metrics from Comparable Hotels as results generated by the 235241 hotels owned as of the end of the reporting period.  For the hotels acquired during the current reporting period and prior year, the Company has included, as applicable, results of those hotels for periods prior to the Company’s ownership using information provided by the properties’ prior owners at the time of acquisition and not adjusted by the Company.  This information has not been audited, either for the periods owned or prior to ownership by the Company.  For dispositions, results have been excluded for the Company’s period of ownership.

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended March 31, 
 2017  2016  Percent Change  2017  2016  Percent Change  2018  2017  Percent Change 
                           
ADR $137.53  $137.08   0.3% $135.42  $134.99   0.3% $134.43  $133.25   0.9%
Occupancy  81.5%  81.9%  -0.5%  78.0%  77.8%  0.3%  74.6%  74.5%  0.1%
RevPAR $112.08  $112.27   -0.2% $105.59  $104.97   0.6% $100.23  $99.31   0.9%

Same Store Operating Results

The following table reflects certain operating statistics for the Company’s 233 hotels owned by the Company as of January 1, 2017 and during the entirety of the reporting periods being compared (“Same Store Hotels”).  This information has not been audited.

  Three Months Ended March 31, 
  2018  2017  Percent Change 
          
ADR $134.26  $132.98   1.0%
Occupancy  74.8%  74.7%  0.1%
RevPAR $100.37  $99.31   1.1%

As discussed above, hotel performance is impacted by many factors, including the economic conditions in the United States as well as each individual locality.  Economic indicators in the United States have generally been favorable, which has been partially offset by increased supply in many of the Company’s markets.  As a result, the Company’s revenue and operating results for its Comparable Hotels and Same Store Hotels experienced modest growth during the first quarter of 2018 as compared to 2017.  The Company expects continued modest improvement in both revenue and operating results for its Comparable Hotels in 2018 as compared to 2017.  The Company’s hotels in general have shown results consistent with industry and brand averages for the period of ownership.  During the first quarter of 2018, revenue growth from the leisure travel sector of the industry was estimated to be stronger than from the business travel sector as a result of the shift of the Easter holiday to March and April in 2018.  With a greater proportion of its revenue generated from business travel as compared to leisure travel, the Company’s growth was slightly below industry averages.

Revenues

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue.  For the three months ended June 30,March 31, 2018 and 2017, and 2016, the Company had total revenue of $331.7$298.4 million and $257.6 million, respectively.  For the six months ended June 30, 2017 and 2016, the Company had total revenue of $624.6 million and $482.1$292.9 million, respectively.  For the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, Comparable Hotels achieved combined average occupancy of 81.5%74.6% and 81.9%74.5%, ADR of $137.53$134.43 and $137.08$133.25 and RevPAR of $112.08$100.23 and $112.27.  For the six months ended June 30, 2017 and 2016, respectively, Comparable Hotels achieved combined average occupancy of 78.0% and 77.8%, ADR of $135.42 and $134.99 and RevPAR of $105.59 and $104.97.$99.31.  ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.

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Compared to the same periods in 2016, duringDuring the first halfquarter of 2017,2018, the Company experienced a modest increasesincrease in occupancyADR and ADR,stable occupancy, resulting in a 0.6%0.9% increase in RevPAR for Comparable Hotels and, duecompared to a slight decrease in occupancy in the second quarter of 2017, the Company experienced a 0.2% decline in RevPAR for the second quarter.  Both periods’ RevPAR growth was slightly below industry averages.  The Company’s growth was impacted in both the second quarter and first six months of 2017 by a decline in the Los Angeles market due to outsized growth in 2016 from the Porter Ranch gas leak.  The second quarter was also impacted by the shifting of the Easter holiday to the second quarter of 2017 versus the first quarter of 2016.  The Company anticipates that with its geographically diverse portfolio of upscale and upper midscale select-service hotels, on a comparable basis, overall RevPAR growth for the remainder of the year will approximate industry averages.  Although certain markets will vary based on local supply/demand dynamics and local market economic conditions, with continued overall room rate improvement combined with expected stable overall demand growth compared to supply growth, the Company, on a comparable basis, and industry are forecasting a low single-digit percentage increase in revenue for the full year of 2017 as compared to 2016.2017.  Markets with above average growth in the secondfirst quarter and first half of 20172018 for the Company and industry included Richmond, Orlando, Seattle, Kansas City, San DiegoFort Worth, Texas, Knoxville, Tennessee, Norfolk/Virginia Beach, Virginia and Norfolk/Virginia Beach.South Florida.  Markets that were below average for the Company and industry included Dallas,Austin, Texas, Kansas City, Missouri, Omaha, HoustonNebraska and Miami.Washington, D.C.   

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Hotel Operating Expense

Hotel operating expense consists of direct room operating expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees.  For the three months ended June 30,March 31, 2018 and 2017, and 2016, respectively, hotel operating expense totaled $180.0$172.3 million and $137.4$168.5 million or 54.3%57.8% and 53.3%57.5% of total revenue for each respective period.  For the six months ended June 30, 2017 and 2016, respectively, hotel operating expense totaled $348.5 million and $264.6 million or 55.8% and 54.9% of total revenue for each respective period.  Overall hotel operational expenses for the first six months of 2017 include the results of the 57 hotels acquired during 2016, including one hotel acquired on July 1, 2016 and 56 hotels acquired with the Apple Ten merger effective September 1, 2016, for the full period and one hotel acquired on February 2, 2017 from the date of acquisition.  Expenses for 2017 also include the results of one hotel sold on April 20, 2017 until the date of sale.  Expenses for the first six months of 2016 include the results of one hotel sold on December 6, 2016 and the hotel sold on April 20, 2017 for the full period.  For the Company’s Comparable Hotels, hotel operating expense as a percentage of revenue increased approximately 140 and 13050 basis points respectively, for the three and six months ended June 30, 2017March 31, 2018 as compared to the same periodsperiod in 2016.  During the first half of 2017, the Company experienced increases2017.  Increases in labor costs as a percentage of revenue whichduring the first quarter of 2018 as compared to the same period in 2017 was the primary cause of the increase inincreased hotel operating expense.  The Company anticipates continued increases in labor costs are likely to continue to grow at increased rates due to government regulations surrounding wages, healthcare and other benefits, and other wage-related initiatives which could negatively impact operating expenses in certain markets moving forward.  Additionally, labor costs have been and could be impacted in certain markets due to lower unemployment rates.  With less qualified available labor, costs have increased.  Although operating expenses will increase as revenue increases, the Company will continue to work with its management companies to reduce costs as a percentage of revenue where possible while maintaining quality and service levels at each property.

Property Taxes, Insurance and Other Expense

Property taxes, insurance, and other expense for the three months ended June 30,March 31, 2018 and 2017 and 2016 totaled $17.8$17.2 million and $13.1$16.9 million, respectively, or 5.4% and 5.1% of total revenue, respectively, and for Comparable Hotels, 5.4% and 5.2%5.8% of total revenue for each respective period.  For the six months ended June 30, 2017 and 2016, property taxes, insurance and other expense totaled $34.7 million and $25.5 million, respectively, or 5.6% and 5.3% of total revenue, respectively,period, and for Comparable Hotels, 5.6% and 5.5%5.8% of total revenue for each respective period.  For the Company’s Comparable Hotels, real estate taxes increased slightly during the first halfthree months of 20172018 compared to the first halfthree months of 2016,2017, with tax increases at certain locations due to the reassessment of property values by localities related to the improved economy, partially offset by decreases at other locations due to successful appeals of tax assessments.  With the economy continuing to improve, the Company anticipates continued increases in property tax assessments during the remainder of 2017.2018.  The Company will continue to appeal tax assessments in certain jurisdictions to attempt to minimize tax increases as warranted.

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  Additionally, due to increased losses in 2017 for property insurance carriers, the Company’s property insurance costs are anticipated to increase slightly as a percentage of revenue for the full year of 2018 as compared to 2017.

Ground Lease Expense

Ground lease expense for the three months ended June 30,March 31, 2018 and 2017 and 2016 was $2.8$2.9 million and $2.5 million, respectively.  For the six months ended June 30, 2017 and 2016, ground lease expense was $5.7 million and $5.0$2.8 million, respectively.  Ground lease expense primarily represents the expense incurred by the Company to lease land for 14 of its hotel properties, including four acquired in the Apple Ten merger effective September 1, 2016.properties.

General and Administrative Expense

General and administrative expense for the three months ended June 30,March 31, 2018 and 2017 and 2016 was $6.2$6.9 million and $5.1$6.8 million, respectively, or 1.9% and 2.0%2.3% of total revenue respectively.  For the six months ended June 30, 2017 and 2016, general and administrative expense was $12.9 million and $9.9 million, respectively, or 2.1% of total revenue infor each respective period.  The principal components of general and administrative expense are payroll and related benefit costs, legal fees, accounting fees and reporting expenses.  In addition, during the first six months of 2016, the Company provided to Apple Ten the advisory services contemplated under their advisory agreement, and the Company received fees and reimbursement of expenses payable under the advisory agreement from Apple Ten totaling approximately $2.7 million, which were recorded as reductions to general and administrative expenses.  Effective September 1, 2016, in connection with the completion of the Apple Ten merger, the advisory agreement was terminated and the Company no longer receives the fees and reimbursement of expenses payable under the advisory agreement from Apple Ten, which resulted in an increase in the Company’s general and administrative expenses from the prior period.  Although expense for the Company in total dollars increased from the prior period, since both the advisory fees and reimbursed costs received by the Company from Apple Ten were recorded as general and administrative expense by Apple Ten and as reductions to general and administrative expense by the Company, the termination of the advisory agreement had no financial impact on the combined company after the effective time of the Apple Ten merger.

Transaction and Litigation Costs (Reimbursements)

During the three and six months ended June 30, 2017, transaction and litigation costs (reimbursements) each totaled approximately $(2.6) million which primarily related to the additional proceeds received from the Company’s directors and officers insurance carriers in connection with the Apple Ten merger litigation, as discussed herein.  During the three and six months ended June 30, 2016, transaction and litigation costs (reimbursements) were approximately $1.1 million and $1.4 million, respectively, and consisted primarily of costs related to the Apple Ten merger discussed herein totaling approximately $1.0 million and $1.2 million, respectively, and other acquisition related costs totaling approximately $0.2 million and $0.3 million, respectively.  On January 1, 2017, the Company adopted the newly issued accounting standard on business combinations that modifies the definition of a business.  Under the new guidance, acquisition of hotel properties will generally be accounted for as an acquisition of a group of assets with transaction costs associated with the acquisition capitalized as part of the cost of the asset acquired instead of expensed in the period they are incurred.  In accordance with this standard, the Company capitalized approximately $0.1 million in transaction costs related to the acquisition of the Fort Worth, Texas hotel during the six months ended June 30, 2017.

Loss on Impairment of Depreciable Real Estate Assets

The Company did not experience any loss on impairment of depreciable real estate assets for the three months ended March 31, 2018.  Loss on impairment of depreciable real estate assets was approximately $7.9 million for the sixthree months ended June 30,March 31, 2017, and related to the Columbus, Georgia SpringHill Suites and TownePlace Suites hotelstwo properties that the Company identified for potential sale during the first quarter of 2017.  See Note 32 titled “Investment in Real Estate” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning this impairment loss.

Depreciation Expense

Depreciation expense for the three months ended June 30,March 31, 2018 and 2017 and 2016 was $43.9$44.8 million and $33.8 million, respectively.  For the six months ended June 30, 2017 and 2016, depreciation expense was $87.7 million and $67.3$43.8 million, respectively.  Depreciation expense primarily represents expense of the Company’s hotel buildings and related improvements, and associated personal property (furniture, fixtures, and equipment) for their respective periods owned.  The increase was primarily due to the increase in the number of properties owned as a result of the Apple Ten merger effective September 1, 2016, the acquisition of one hotel eachtwo hotels in February 20172018 and July 2016six hotels in 2017 and renovations completed throughout 20172018 and 2016.2017.

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Interest and Other Expense, net

Interest and other expense, net for the three months ended June 30,March 31, 2018 and 2017 and 2016 was $11.8$11.9 million and $9.6$11.7 million, respectively, and is net of approximately $0.1$0.5 million in each respective period, of interest capitalized associated with renovation projects.  ForAlthough average outstanding debt was less in the six months ended June 30,first quarter of 2018 as compared to the first quarter of 2017, and 2016, interest and other expense, net was $23.6 million and $18.4 million, respectively, and is net of approximately $0.6 million and $1.0 million of interest capitalized associated with renovation projects, respectively.  The increase in interest expense was primarily due toincreased slightly as a result of an increase in the Company’s average outstanding borrowingseffective interest rate during the first halfquarter of 20172018 as compared to 2016 which is primarily attributable2017, due to (a) mortgagethe issuance of longer term fixed-rate debt assumed insubsequent to March 31, 2017, which was used to reduce the Apple Ten merger effective September 1, 2016 and (b) borrowings to fund (i) the cash payment portion of the Apple Ten merger, (ii) the repayment of Apple Ten’s outstanding balance on its extinguishedCompany’s revolving credit facility, assumedresulting in the Apple Ten merger and (iii) the acquisition of two hotels (one in July 2016 and one in February 2017); which increases were partially offset by the sale of two hotels (one in December 2016 and one in April 2017).  The impact ofa higher debt balances and the increasing cost of variable rate debt was partially offset by a reduction in the average interest rate incurredthan the variable-rate borrowings repaid, and (b) an increase in interest rates on the Company’s totalvariable-rate debt, with the one-month LIBOR increasing from 0.98% at March 31, 2017 to 1.88% at March 31, 2018.  While approximately 79% of the Company’s outstanding debt resulting fromwas effectively fixed rate at March 31, 2018, the repaymentCompany does expect interest costs to continue to increase for the remainder of maturing fixed-rate mortgage debt with lower2018 due to increased rates for its remaining variable rate borrowings primarily from its $150 million term loan facility and new mortgage debt originations.debt.

Non-GAAP Financial Measures

The Company considers the following non-GAAP financial measures useful to investors as key supplemental measures of its operating performance: Funds from Operations (“FFO”), Modified FFO (“MFFO”), Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”), and Adjusted EBITDA (“Adjusted EBITDA”).  These non-GAAP financial measures should be considered along with, but not as alternatives to, net income, cash flow from operations or any other operating GAAP measure.  FFO, MFFO, EBITDA and Adjusted EBITDA are not necessarily indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions.  Although FFO, MFFO, EBITDA and Adjusted EBITDA, as calculated by the Company, may not be comparable to FFO, MFFO, EBITDA and Adjusted EBITDA as reported by other companies that do not define such terms exactly as the Company defines such terms, the Company believes these supplemental measures are useful to investors when comparing the Company’s results between periods and with other REITs.

FFO and MFFO

The Company calculates and presents FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”Nareit”), which defines FFO as net income (computed in accordance with generally accepted accounting principles (“GAAP”))GAAP), excluding gains or losses from sales of real estate, 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 partnerships and joint ventures.  Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations.  The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the NAREITNareit definition.  FFO as presented by the Company is applicable only to its common shareholders, but does not represent an amount that accrues directly to common shareholders.

The Company further adjusts FFO for certain additional items that are not in NAREIT’s definition of FFO, including: (i) the exclusion of transaction and litigation costs (reimbursements) as these costs do not represent ongoing operations and (ii) the exclusion of non-cash straight-line ground lease expense as this expense does not reflect the underlying performance of the related hotels.  The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.

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The following table reconciles the Company’s GAAP net income to FFO and MFFO for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 (in thousands).

 Three Months Ended June 30,  Six Months Ended June 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2018  2017 
Net income $87,606  $54,718  $121,971  $89,404  $42,182  $34,365 
Depreciation of real estate owned  43,664   33,594   87,201   66,848   44,610   43,537 
Gain on sale of real estate  (16,140)  -   (16,140)  - 
Loss on impairment of depreciable real estate assets  -   -   7,875   -   -   7,875 
Amortization of favorable and unfavorable leases, net  168   119   333   381   206   165 
Funds from operations  115,298   88,431   201,240   156,633   86,998   85,942 
Transaction and litigation costs (reimbursements)  (2,586)  1,116   (2,586)  1,409 
Non-cash straight-line ground lease expense  938   817   1,877   1,636   904   939 
Modified funds from operations $113,650  $90,364  $200,531  $159,678  $87,902  $86,881 

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EBITDA and Adjusted EBITDA

EBITDA is a commonly used measure of performance in many industries and is defined as net income excluding interest, income taxes, and depreciation and amortization.  The Company believes EBITDA is useful to investors because it helps the Company and its investors evaluate the ongoing operating performance of the Company by removing the impact of its capital structure (primarily interest expense) and its asset base (primarily depreciation and amortization).  In addition, certain covenants included in the agreements governing the Company’s indebtedness use EBITDA, as defined in the specific credit agreement, as a measure of financial compliance.

The Company considers the exclusion of certain additional items from EBITDA useful, including: (i) the exclusion of transaction and litigation costs (reimbursements), gains or losses from sales of real estate and the loss on impairment of depreciable real estate assets as these items dothis item does not represent ongoing operations and (ii) the exclusion of non-cash straight-line ground lease expense as this expense does not reflect the underlying performance of the related hotels.

The following table reconciles the Company’s GAAP net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 (in thousands).

  Three Months Ended June 30,  Six Months Ended June 30, 
  2017  2016  2017  2016 
Net income $87,606  $54,718  $121,971  $89,404 
Depreciation  43,893   33,824   87,660   67,308 
Amortization of favorable and unfavorable leases, net  168   119   333   381 
Interest and other expense, net  11,849   9,560   23,566   18,363 
Income tax expense  259   360   509   623 
EBITDA  143,775   98,581   234,039   176,079 
Transaction and litigation costs (reimbursements)  (2,586)  1,116   (2,586)  1,409 
Gain on sale of real estate  (16,140)  -   (16,140)  - 
Loss on impairment of depreciable real estate assets  -   -   7,875   - 
Non-cash straight-line ground lease expense  938   817   1,877   1,636 
Adjusted EBITDA $125,987  $100,514  $225,065  $179,124 

24

  Three Months Ended March 31, 
  2018  2017 
Net income $42,182  $34,365 
Depreciation  44,840   43,767 
Amortization of favorable and unfavorable leases, net  206   165 
Interest and other expense, net  11,919   11,717 
Income tax expense  163   250 
EBITDA  99,310   90,264 
Loss on impairment of depreciable real estate assets  -   7,875 
Non-cash straight-line ground lease expense  904   939 
Adjusted EBITDA $100,214  $99,078 

Hotels Owned
 
As of June 30, 2017,March 31, 2018, the Company owned 235241 hotels with an aggregate of 29,97830,585 rooms located in 3334 states.  The following tables summarize the number of hotels and rooms by brand and by state:

Number of Hotels and Guest Rooms by Brand 
  Number of  Number of 
Brand Hotels  Rooms 
Hilton Garden Inn  41   5,703 
Courtyard  40   5,460 
Hampton  36   4,422 
Homewood Suites  34   3,831 
Residence Inn  32   3,696 
SpringHill Suites  17   2,248 
TownePlace Suites  12   1,196 
Fairfield Inn  11   1,300 
Home2 Suites  6   669 
Marriott  3   932 
Embassy Suites  2   316 
Renaissance  1   205 
    Total  235   29,978 

Number of Hotels and Guest Rooms by State 
  Number of  Number of 
State Hotels  Rooms 
Alabama  13   1,224 
Alaska  1   169 
Arizona  11   1,434 
Arkansas  4   408 
California  27   3,807 
Colorado  4   567 
Florida  23   2,851 
Georgia  6   596 
Idaho  2   416 
Illinois  8   1,420 
Indiana  4   479 
Iowa  3   301 
Kansas  4   422 
Louisiana  4   541 
Maryland  2   233 
Massachusetts  4   466 
Michigan  1   148 
Minnesota  2   244 
Mississippi  2   168 
Missouri  4   544 
Nebraska  4   621 
New Jersey  5   629 
New York  4   550 
North Carolina  12   1,337 
Ohio  2   252 
Oklahoma  4   545 
Pennsylvania  3   391 
South Carolina  5   538 
Tennessee  12   1,356 
Texas  34   4,072 
Utah  2   257 
Virginia  15   2,383 
Washington  4   609 
    Total  235   29,978 

Number of Hotels and Guest Rooms by Brand 
  Number of  Number of 
Brand Hotels  Rooms 
Hilton Garden Inn  42   5,807 
Courtyard  40   5,460 
Hampton  38   4,685 
Residence Inn  34   4,011 
Homewood Suites  34   3,831 
SpringHill Suites  17   2,248 
TownePlace Suites  12   1,196 
Fairfield Inn  11   1,300 
Home2 Suites  8   910 
Marriott  2   616 
Embassy Suites  2   316 
Renaissance  1   205 
    Total  241   30,585 

2522


Number of Hotels and Guest Rooms by State 
  Number of  Number of 
State Hotels  Rooms 
Alabama  15   1,434 
Alaska  2   304 
Arizona  11   1,434 
Arkansas  4   408 
California  27   3,807 
Colorado  4   567 
Florida  23   2,851 
Georgia  7   715 
Idaho  2   416 
Illinois  8   1,420 
Indiana  4   479 
Iowa  3   301 
Kansas  4   422 
Louisiana  4   541 
Maine  1   179 
Maryland  2   233 
Massachusetts  4   466 
Michigan  1   148 
Minnesota  2   244 
Mississippi  2   168 
Missouri  4   544 
Nebraska  4   621 
New Jersey  5   629 
New York  4   550 
North Carolina  12   1,337 
Ohio  2   252 
Oklahoma  4   545 
Pennsylvania  3   391 
South Carolina  5   538 
Tennessee  13   1,500 
Texas  34   4,072 
Utah  3   393 
Virginia  14   2,067 
Washington  4   609 
    Total  241   30,585 
The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 235241 hotels the Company owned as of June 30, 2017.March 31, 2018.

City State Brand Manager 
Date Acquired or
Completed
 Rooms 
Anchorage AK Embassy Suites Stonebridge 4/30/2010  169
AnchorageAKHome2 SuitesStonebridge12/1/2017135 
Auburn AL Hilton Garden Inn LBA 3/1/2014  101 
Birmingham AL Courtyard LBA 3/1/2014  84
BirminghamALHilton Garden InnLBA9/12/2017104
BirminghamALHome2 SuitesLBA9/12/2017106 
Birmingham AL Homewood Suites McKibbon 3/1/2014  95 
Dothan AL Hilton Garden Inn LBA 6/1/2009  104 
Dothan AL Residence Inn LBA 3/1/2014  84 
Huntsville AL Hampton LBA 9/1/2016  98 
Huntsville AL Hilton Garden Inn LBA 3/1/2014  101 
Huntsville AL Home2 Suites LBA 9/1/2016  77 
Huntsville AL Homewood Suites LBA 3/1/2014  107
23

CityStateBrandManager
Date Acquired or
Completed
Rooms 
Mobile AL Hampton McKibbon 9/1/2016  101 
Montgomery AL Hilton Garden Inn LBA 3/1/2014  97 
Montgomery AL Homewood Suites LBA 3/1/2014  91 
Prattville AL Courtyard LBA 3/1/2014  84 
Rogers AR Hampton Raymond 8/31/2010  122 
Rogers AR Homewood Suites Raymond 4/30/2010  126 
Rogers AR Residence Inn Raymond 3/1/2014  88 
Springdale AR Residence Inn Aimbridge 3/1/2014  72 
Chandler AZ Courtyard North Central 11/2/2010  150 
Chandler AZ Fairfield Inn & Suites North Central 11/2/2010  110 
Phoenix AZ Courtyard North Central 11/2/2010  164 
Phoenix AZ Courtyard North Central 9/1/2016  127 
Phoenix AZ Hampton North Central 9/1/2016  125 
Phoenix AZ Homewood Suites North Central 9/1/2016  134 
Phoenix AZ Residence Inn North Central 11/2/2010  129 
Scottsdale AZ Hilton Garden Inn North Central 9/1/2016  122 
Tucson AZ Hilton Garden Inn Western 7/31/2008  125 
Tucson AZ Residence Inn Western 3/1/2014  124 
Tucson AZ TownePlace Suites Western 10/6/2011  124 
Agoura Hills CA Homewood Suites Dimension 3/1/2014  125 
Burbank CA Courtyard Huntington 8/11/2015  190 
Burbank CA Residence Inn Marriott 3/1/2014  166 
Burbank CA SpringHill Suites Marriott 7/13/2015  170 
Clovis CA Hampton Dimension 7/31/2009  86 
Clovis CA Homewood Suites Dimension 2/2/2010  83 
Cypress CA Courtyard Dimension 3/1/2014  180 
Cypress CA Hampton Dimension 6/29/2015  110 
Oceanside CA Courtyard Marriott 9/1/2016  142 
Oceanside CA Residence Inn Marriott 3/1/2014  125 
Rancho Bernardo/San Diego CA Courtyard InnVentures 3/1/2014  210 
Sacramento CA Hilton Garden Inn Dimension 3/1/2014  153 
San Bernardino CA Residence Inn InnVentures 2/16/2011  95 
San Diego CA Courtyard Huntington 9/1/2015  245 
San Diego CA Hampton Dimension 3/1/2014  177 
San Diego CA Hilton Garden Inn InnVentures 3/1/2014  200 
San Diego CA Residence Inn Dimension 3/1/2014  121 
San Jose CA Homewood Suites Dimension 3/1/2014  140 
San Juan Capistrano CA Residence Inn Marriott 9/1/2016  130 

26

CityStateBrandManagerDate Acquired or CompletedRooms
Santa Ana CA Courtyard Dimension 5/23/2011  155 
Santa Clarita CA Courtyard Dimension 9/24/2008  140 
Santa Clarita CA Fairfield Inn Dimension 10/29/2008  66 
Santa Clarita CA Hampton Dimension 10/29/2008  128 
Santa Clarita CA Residence Inn Dimension 10/29/2008  90 
Tulare CA Hampton InnVentures 3/1/2014  86 
Tustin CA Fairfield Inn & Suites Marriott 9/1/2016  145 
Tustin CA Residence Inn Marriott 9/1/2016  149 
Colorado Springs CO Hampton Chartwell 9/1/2016  101 
Denver CO Hilton Garden Inn Stonebridge 9/1/2016  221 
Highlands Ranch CO Hilton Garden Inn Dimension 3/1/2014  128 
Highlands Ranch CO Residence Inn Dimension 3/1/2014  117 
Boca Raton FL Hilton Garden Inn White Lodging 9/1/2016  149 
Cape Canaveral FL Homewood Suites LBA 9/1/2016  153 
Fort Lauderdale FL Hampton Vista Host 12/31/2008  109 
Fort Lauderdale FL Hampton LBA 6/23/2015  156 
Fort Lauderdale FL Residence Inn LBA 9/1/2016  156
24

CityStateBrandManager
Date Acquired or
Completed
Rooms 
Gainesville FL Hilton Garden Inn McKibbon 9/1/2016  104 
Gainesville FL Homewood Suites McKibbon 9/1/2016  103 
Jacksonville FL Homewood Suites McKibbon 3/1/2014  119 
Lakeland FL Courtyard LBA 3/1/2014  78 
Miami FL Courtyard Dimension 3/1/2014  118 
Miami FL Hampton White Lodging 4/9/2010  121 
Miami FL Homewood Suites Dimension 3/1/2014  162 
Orlando FL Fairfield Inn & Suites Marriott 7/1/2009  200 
Orlando FL SpringHill Suites Marriott 7/1/2009  200 
Panama City FL Hampton LBA 3/12/2009  95 
Panama City FL TownePlace Suites LBA 1/19/2010  103 
Pensacola FL TownePlace Suites McKibbon 9/1/2016  97 
Sanford FL SpringHill Suites LBA 3/1/2014  105 
Sarasota FL Homewood Suites Hilton 3/1/2014  100 
Tallahassee FL Fairfield Inn & Suites LBA 9/1/2016  97 
Tallahassee FL Hilton Garden Inn LBA 3/1/2014  85 
Tampa FL Embassy Suites White Lodging 11/2/2010  147 
Tampa FL TownePlace Suites McKibbon 3/1/2014  94 
Albany GA Fairfield Inn & Suites LBA 1/14/2010  87 
Atlanta GA HamptonMcKibbon2/5/2018119
AtlantaGAHome2 Suites McKibbon 7/1/2016  128 
Columbus GA SpringHill Suites LBA 3/1/2014  89 
Columbus GA TownePlace Suites LBA 3/1/2014  86 
Macon GA Hilton Garden Inn LBA 3/1/2014  101 
Savannah GA Hilton Garden Inn Newport 3/1/2014  105 
Cedar Rapids IA Hampton Schulte 9/1/2016  103 
Cedar Rapids IA Homewood Suites Schulte 9/1/2016  95 
Davenport IA Hampton Schulte 9/1/2016  103 
Boise ID Hampton Raymond 4/30/2010  186 
Boise ID SpringHill Suites InnVentures 3/1/2014  230 
Des Plaines IL Hilton Garden Inn Raymond 9/1/2016  252 
Hoffman Estates IL Hilton Garden Inn White Lodging 9/1/2016  184 
Mettawa IL Hilton Garden Inn White Lodging 11/2/2010  170 
Mettawa IL Residence Inn White Lodging 11/2/2010  130 
Rosemont IL Hampton Raymond 9/1/2016  158 
Schaumburg IL Hilton Garden Inn White Lodging 11/2/2010  166

27

CityStateBrandManagerDate Acquired or CompletedRooms 
Skokie IL Hampton Raymond 9/1/2016  225 
Warrenville IL Hilton Garden Inn White Lodging 11/2/2010  135 
Indianapolis IN SpringHill Suites White Lodging 11/2/2010  130 
Merrillville IN Hilton Garden Inn White Lodging 9/1/2016  124 
Mishawaka IN Residence Inn White Lodging 11/2/2010  106 
South Bend IN Fairfield Inn & Suites White Lodging 9/1/2016  119 
Overland Park KS Fairfield Inn & Suites True North 3/1/2014  110 
Overland Park KS Residence Inn True North 3/1/2014  120 
Overland Park KS SpringHill Suites True North 3/1/2014  102 
Wichita KS Courtyard Aimbridge 3/1/2014  90 
Baton Rouge LA SpringHill Suites Dimension 9/25/2009  119 
Lafayette LA Hilton Garden Inn LBA 7/30/2010  153 
Lafayette LA SpringHill Suites LBA 6/23/2011  103 
New Orleans LA Homewood Suites Dimension 3/1/2014  166 
Andover MA SpringHill Suites Marriott 11/5/2010  136 
Marlborough MA Residence Inn True North 3/1/2014  112 
Westford MA Hampton True North 3/1/2014  110 
Westford MA Residence Inn True North 3/1/2014  108 
Annapolis MD Hilton Garden Inn White Lodging 3/1/2014  126 
Silver Spring MD Hilton Garden Inn White Lodging 7/30/2010  107
PortlandMEResidence InnPyramid10/13/2017179
25

CityStateBrandManager
Date Acquired or
Completed
Rooms 
Novi MI Hilton Garden Inn White Lodging 11/2/2010  148 
Maple Grove MN Hilton Garden Inn North Central 9/1/2016  120 
Rochester MN Hampton Raymond 8/3/2009  124 
Kansas City MO Hampton Raymond 8/31/2010  122 
Kansas City MO Residence Inn True North 3/1/2014  106 
St. Louis MO Hampton Raymond 8/31/2010  190 
St. Louis MO Hampton Raymond 4/30/2010  126 
Hattiesburg MS Courtyard LBA 3/1/2014  84 
Hattiesburg MS Residence Inn LBA 12/11/2008  84 
Carolina Beach NC Courtyard Crestline 3/1/2014  144 
Charlotte NC Fairfield Inn & Suites Newport 9/1/2016  94 
Charlotte NC Homewood Suites McKibbon 9/24/2008  118 
Durham NC Homewood Suites McKibbon 12/4/2008  122 
Fayetteville NC Home2 Suites LBA 2/3/2011  118 
Fayetteville NC Residence Inn Aimbridge 3/1/2014  92 
Greensboro NC SpringHill Suites Newport 3/1/2014  82 
Holly Springs NC Hampton LBA 11/30/2010  124 
Jacksonville NC Home2 Suites LBA 9/1/2016  105 
Wilmington NC Fairfield Inn & Suites Crestline 3/1/2014  122 
Winston-Salem NC Courtyard McKibbon 3/1/2014  122 
Winston-Salem NC Hampton McKibbon 9/1/2016  94 
Omaha NE Courtyard Marriott 3/1/2014  181 
Omaha NE Hampton White Lodging 9/1/2016  139 
Omaha NE Hilton Garden Inn White Lodging 9/1/2016  178 
Omaha NE Homewood Suites White Lodging 9/1/2016  123 
Cranford NJ Homewood Suites Dimension 3/1/2014  108 
Mahwah NJ Homewood Suites Dimension 3/1/2014  110 
Mount Laurel NJ Homewood Suites Newport 1/11/2011  118 
Somerset NJ Courtyard Newport 3/1/2014  162 
West Orange NJ Courtyard Newport 1/11/2011  131 
Islip/Ronkonkoma NY Hilton Garden Inn White Lodging 3/1/2014  165 
New York NY Renaissance Highgate 3/1/2014  205 

28

CityStateBrandManagerDate Acquired or CompletedRooms
Syracuse NY Courtyard New Castle 10/16/2015  102 
Syracuse NY Residence Inn New Castle 10/16/2015  78 
Mason OH Hilton Garden Inn Schulte 9/1/2016  110 
Twinsburg OH Hilton Garden Inn GatewayInterstate 10/7/2008  142 
Oklahoma City OK Hampton Raymond 5/28/2010  200 
Oklahoma City OK Hilton Garden Inn Raymond 9/1/2016  155 
Oklahoma City OK Homewood Suites Raymond 9/1/2016  100 
Oklahoma City (West) OK Homewood Suites Chartwell 9/1/2016  90 
Collegeville/Philadelphia PA Courtyard White Lodging 11/15/2010  132 
Malvern/Philadelphia PA Courtyard White Lodging 11/30/2010  127 
Pittsburgh PA Hampton Vista Host 12/31/2008  132 
Charleston SC Home2 Suites LBA 9/1/2016  122 
Columbia SC Hilton Garden Inn Newport 3/1/2014  143 
Columbia SC TownePlace Suites Newport 9/1/2016  91 
Greenville SC Residence Inn McKibbon 3/1/2014  78 
Hilton Head SC Hilton Garden Inn McKibbon 3/1/2014  104 
Chattanooga TN Homewood Suites LBA 3/1/2014  76 
Franklin TN Courtyard Chartwell 9/1/2016  126 
Franklin TN Residence Inn Chartwell 9/1/2016  124 
Jackson TN Hampton Vista Host 12/30/2008  83 
Johnson City TN Courtyard LBA 9/25/2009  90 
Knoxville TN Homewood Suites McKibbon 9/1/2016  103 
Knoxville TN SpringHill Suites McKibbon 9/1/2016  103 
Knoxville TN TownePlace Suites McKibbon 9/1/2016  97 
Memphis TN HamptonCrestline2/5/2018144
MemphisTNHomewood Suites Hilton 3/1/2014  140
26

CityStateBrandManager
Date Acquired or
Completed
Rooms 
Nashville TN Hilton Garden Inn Vista Host 9/30/2010  194 
Nashville TN Home2 Suites Vista Host 5/31/2012  119 
Nashville TN TownePlace Suites LBA 9/1/2016  101 
Addison TX SpringHill Suites Marriott 3/1/2014  159 
Allen TX Hampton GatewayInterstate 9/26/2008  103 
Allen TX Hilton Garden Inn GatewayInterstate 10/31/2008  150 
Arlington TX Hampton Western 12/1/2010  98 
Austin TX Courtyard White Lodging 11/2/2010  145 
Austin TX Fairfield Inn & Suites White Lodging 11/2/2010  150 
Austin TX Hampton Vista Host 4/14/2009  124 
Austin TX Hilton Garden Inn White Lodging 11/2/2010  117 
Austin TX Homewood Suites Vista Host 4/14/2009  97 
Austin/Round Rock TX Homewood Suites Vista Host 9/1/2016  115 
Beaumont TX Residence Inn Western 10/29/2008  133 
Burleson/Fort Worth TX Hampton LBA 10/7/2014  88 
Dallas TX Homewood Suites Western 9/1/2016  130 
Denton TX Homewood Suites Chartwell 9/1/2016  107 
Duncanville TX Hilton Garden Inn GatewayInterstate 10/21/2008  142 
El Paso TX Hilton Garden Inn Western 12/19/2011  145 
El Paso TX Homewood Suites Western 3/1/2014  114 
Fort Worth TX Courtyard LBA 2/2/2017  124 
Fort Worth TX TownePlace Suites Western 7/19/2010  140 
Frisco TX Hilton Garden Inn Western 12/31/2008  102 
Grapevine TX Hilton Garden Inn Western 9/24/2010  110 
Houston TX Courtyard LBA 9/1/2016  124 
Houston TX Marriott Western 1/8/2010  206 
Houston TX Residence Inn Western 3/1/2014  129 
Houston TX Residence Inn Western 9/1/2016  120 
Irving TX Homewood Suites Western 12/29/2010  77 

29

CityStateBrandManagerDate Acquired or CompletedRooms
Lewisville TX Hilton Garden Inn GatewayInterstate 10/16/2008  165 
Round Rock TX Hampton Vista Host 3/6/2009  94 
San Antonio TX TownePlace Suites Western 3/1/2014  106 
Shenandoah TX Courtyard LBA 9/1/2016  124 
Stafford TX Homewood Suites Western 3/1/2014  78 
Texarkana TX Courtyard Aimbridge 3/1/2014  90 
Texarkana TX Hampton Aimbridge 1/31/2011  81 
Texarkana TX TownePlace Suites Aimbridge 3/1/2014  85 
Provo UT Residence Inn Dimension 3/1/2014  114 
Salt Lake City UT Residence InnHuntington10/20/2017136
Salt Lake CityUTSpringHill Suites White Lodging 11/2/2010  143 
Alexandria VA Courtyard Marriott 3/1/2014  178 
Alexandria VA SpringHill Suites Marriott 3/28/2011  155 
Bristol VA Courtyard LBA 11/7/2008  175 
Charlottesville VA Courtyard Crestline 3/1/2014  139
FairfaxVAMarriottWhite Lodging9/1/2016316 
Harrisonburg VA Courtyard Newport 3/1/2014  125 
Manassas VA Residence Inn Crestline 2/16/2011  107 
Richmond VA Courtyard White Lodging 12/8/2014  135 
Richmond VA Marriott White Lodging 3/1/2014  410 
Richmond VA Residence Inn White Lodging 12/8/2014  75 
Richmond VA SpringHill Suites McKibbon 9/1/2016  103 
Suffolk VA Courtyard Crestline 3/1/2014  92 
Suffolk VA TownePlace Suites Crestline 3/1/2014  72 
Virginia Beach VA Courtyard Crestline 3/1/2014  141 
Virginia Beach VA Courtyard Crestline 3/1/2014  160 
Kirkland WA Courtyard InnVentures 3/1/2014  150 
Seattle WA Residence Inn InnVentures 3/1/2014  234 
Tukwila WA Homewood Suites Dimension 3/1/2014  106 
Vancouver WA SpringHill Suites InnVentures 3/1/2014  119 
    Total          29,97830,585 

3027


Related Parties

The Company has, and is expected to continue to engage in, transactions with related parties.  These transactions cannot be construed to be at arm’s length and the results of the Company’s operations may be different if these transactions were conducted with non-related parties.  See Note 75 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for additional information concerning the Company’s related party transactions.

Liquidity and Capital Resources

Capital Resources

The Company’s principal daily sources of liquidity are the operating cash flow generated from the Company’s properties and availability under its $540 million unsecured revolving credit facility,facility.  Periodically the Company may receive proceeds from the strategic dispositionadditional secured and unsecured debt financing, dispositions of its hotel properties and proceeds from potential offerings of the Company’s common shares.

The revolving credit facility has an initial maturity of May 18, 2019 and, subject to certain conditions and fees, may be extended one year.  The revolving credit facility, which as of June 30, 2017March 31, 2018 had unused borrowing capacity of approximately $238.7$369.3 million, is available for share repurchases, acquisitions, hotel renovations and development, share repurchases, working capital and other general corporate funding purposes, including the payment of distributions to shareholders.  As of June 30, 2017,March 31, 2018, the Company’s revolving credit facility had an outstanding principal balance of approximately $301.3$170.7 million with an annual variable interest rate of approximately 2.77%3.43%.

The credit agreement governing the revolving credit facility contains mandatory prepayment requirements, customary affirmative covenants, negative covenants and events of default.  The credit agreement requires that the Company comply with various covenants, which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios, limits on dividend payments and share repurchases and restrictions on certain investments.  The Company was in compliance with the applicable covenants at June 30, 2017.March 31, 2018.

In February 2017,See Note 3 titled “Debt” in the Company executed an equity distribution agreement thatCompany’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for a description of the Company’s other debt instruments.

The Company’s ATM Program allows the Companyit to sell, from time to time, up to an aggregate of $300 million of its common shares through sales agents (the “ATM Program”).  Actualagents.  Since inception of the ATM Program in February 2017 through March 31, 2018, the Company has sold approximately 7.2 million common shares at a weighted-average market sales price of approximately $19.56 per common share and received aggregate gross proceeds of approximately $139.8 million and proceeds net of offering costs of approximately $137.5 million.  During the three months ended March 31, 2018, the Company sold approximately 0.2 million common shares under its ATM Program at a weighted-average market sales price of approximately $19.73 per common share and aggregate gross proceeds of approximately $4.8 million.  The Company used the proceeds from the sale of these shares to pay down borrowings on its revolving credit facility.  No shares were issued under the ATM Program during the three months ended March 31, 2017.  As of March 31, 2018, approximately $160.2 million remained available for issuance under the ATM program.  Future sales will depend on a variety of factors to be determined by the Company, including market conditions, the trading price of the Company'sCompany’s common shares and determinations by the Company of the appropriateopportunities for uses of any proceeds. As of June 30, 2017, the Company had not sold any shares under the ATM Program.

On July 25, 2017, the Company entered into an unsecured $85 million term loan with a syndicate of commercial banks (the “$85 million term loan”).  In conjunction with the $85 million term loan, the Company entered into an interest rate swap agreement in May 2017, which was effective on July 31, 2017, to effectively fix the interest payments on $75 million of the $85 million term loan through the debt’s maturity on July 25, 2024.  The loan agreement has requirements and covenants similar to the Company’s unsecured $965 million credit facility.  See “Subsequent Events” section below as well as Note 5 titled “Debt” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q for additional information regarding the $85 million term loan.  Proceeds from the $85 million term loan were used to pay down borrowings on the Company’s revolving credit facility.

Capital Uses

The Company anticipates that cash flow from operations, availability under its revolving credit facility, additional borrowings and proceeds from hotel dispositions and equity offerings will be adequate to meet its anticipated liquidity requirements, including debt service, hotel acquisitions, hotel renovations, share repurchases, and required distributions to shareholders (the Company is not required to make distributions at its current rate for REIT purposes) and share repurchases..

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Distributions

To maintain its REIT status, the Company is required to distribute at least 90% of its ordinary income.  Distributions paid during the sixthree months ended June 30, 2017March 31, 2018 totaled approximately $133.8$69.1 million or $0.60$0.30 per common share and were paid at a monthly rate of $0.10 per common share.  For the same period, the Company’s net cash generated from operations was approximately $156.3$52.9 million, which included a payment of approximately $19.4$5.5 million net of reimbursements received from the Company’s directors and officers insurance carriers, during the first half of 2017 to settle the Apple Ten merger lawsuit2014 DRIP litigation which is discussed in Note 108 titled “Legal Proceedings” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.This shortfall includes a return of capital and was funded primarily by borrowings on the Company’s revolving credit facility.  At this time, the Company does not anticipate distributions for the full year of 2018 to exceed net cash generated from operations.

The Company’s current annual distribution rate, payable monthly, is $1.20 per common share.  As it has done historically, due to seasonality, the Company may use its revolving credit facility to maintain the consistency of the monthly distribution rate, taking into consideration any acquisitions, dispositions, capital improvements and economic cycles.  Any distribution will be subject to approval of the Company’s Board of Directors and there can be no assurance of the classification or duration of distributions at the current annual distribution rate.  The Board of Directors monitors the Company’s distribution rate relative to the performance of the hotels on an ongoing basis and may make adjustments to the distribution rate as determined to be prudent in relation to other cash requirements of the Company.  If cash flow from operations and the revolving credit facility are not adequate to meet liquidity requirements, the Company may utilize additional financing sources to make distributions.  Although the Company has relatively low levels of debt, there can be no assurances it will be successful with this strategy and may need to reduce its distributions to required levels.  If the Company were unable to extend its maturing debt in future periods or if it were to default on its debt, it may be unable to make distributions.

Share Repurchases

In connection withDuring the implementationfirst three months of the ATM Program, in February 2017 the Company terminated its existing written trading plan under the Company’s share repurchase program.  In January 2016,2018, the Company purchased, under its $475 million share repurchase program, approximately 20,0000.3 million of its common shares at a weighted-average market purchase price of approximately $18.10$16.89 per common share for an aggregate purchase price of approximately $0.4$4.3 million.  The Company did not repurchasepurchase any common shares under its share repurchase programShare Repurchase Program during the first sixthree months of 2017.  Repurchases under the Share Repurchase Program have been funded, and the Company intends to fund future repurchases, with availability under its revolving credit facility.  The Company plans to continue to consider opportunistictiming of share repurchases and the number of common shares to be repurchased under the $467.5 million remaining portion of the authorized $475 million share repurchase program, whichShare Repurchase Program will depend onupon prevailing market conditions, regulatory requirements and other factors.  As of March 31, 2018, approximately $463.2 million remained available for repurchase under the Share Repurchase Program.  The programShare Repurchase Program may be suspended or terminated at any time by the Company and as a result of an extension of the program approved by the Board of Directors in May 2017, will end in July 2018 if not terminated earlier.

Capital Improvements

The Company has ongoing capital commitments to fund its capital improvements.  To maintain and enhance each property’s competitive position in its market, the Company has invested 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 June 30, 2017,March 31, 2018, the Company held $25.6$28.4 million in reserve related to these properties.  During the sixthree months ended June 30, 2017,March 31, 2018, the Company invested approximately $24.4$18.1 million in capital expenditures and anticipates spending an additional $35$50 million to $45$60 million during the remainder of 2017,2018, which includes various scheduled renovation projects for approximately 15-2025 to 30 properties.  The Company does not currently have any existing or planned projects for development.

Hotel Contract Commitments

AsOn May 2, 2018, the same day the hotel opened for business, the Company completed the purchase of June 30, 2017,a 210-room Hampton Inn & Suites in Phoenix, Arizona for approximately $44.3 million, using borrowings under its revolving credit facility.  After this purchase, the Company had outstanding contracts for the potential purchase of four additionalthree hotels that were under construction for a total purchase price of approximately $103.3 million.  All four hotels are under construction and are$67.4 million, including a 128-room Home2 Suites in Orlando, Florida which is planned to be completed and opened for business overin the next threefourth quarter of 2018, and a combined 224-room dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida which is planned to 15 months from June 30, 2017, at which time closingbe completed and opened for business in 2020.  Closing on thesethe remaining hotels is expected to occur.occur upon completion of construction.  Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied and there can be no assurance that a closing on these hotels will occur under the outstanding purchase contracts.  The Company intends to use borrowings under its revolving credit facility to purchase the hotels under contract if a closing occurs.

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Cash Management Activities

As part of the cost sharing arrangements discussed in Note 75 titled “Related Parties” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, certain day-to-day transactions may result in amounts due to or from the Company and Apple Realty Group, Inc. (“ARG”).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.

Impact of Inflation

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

Business Interruption

Being in the real estate industry, the Company is exposed to natural disasters on both a local and national scale.  Although management believes there is adequate insurance to cover this exposure, there can be no assurance that such events will not have a material adverse effect on the Company’s financial position or results of operations.

Seasonality

The hotel industry historically has been seasonal in nature.  Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues.  Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters.  To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.

New Accounting Standards

See Note 1 titled “Organization and Summary of Significant Accounting Policies” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for information on the adoption of accounting standards in the first sixthree months of 20172018 and the anticipated adoption of recently issued accounting standards.

Subsequent Events

In July 2017,April 2018, the Company paid approximately $22.3$23.0 million, or $0.10 per outstanding common share, in distributions to its common shareholders.

In July 2017,April 2018, the Company declared a regular monthly cash distribution of $0.10 per common share for the month of August 2017.May 2018.  The distribution is payable on AugustMay 15, 2017.2018.

In April 2018, the Company, through one of its indirect wholly-owned subsidiaries, entered into a purchase contract for the purchase of all of the ownership interests in a limited liability company which plans to construct a dual-branded Hampton Inn & Suites and Home2 Suites by Hilton property in Cape Canaveral, Florida, with a combined total of 224 guest rooms for a purchase price of approximately $46.7 million.  Although the Company is working towards acquiring these hotels, there are many conditions to closing that have not yet been satisfied, and there can be no assurance that a closing on these hotels will occur.

On July 25, 2017,May 2, 2018, the Company entered into the $85 million term loan with a syndicate of commercial banks, with a maturity date of July 25, 2024.  The Company used the proceeds, net of closing costs, to pay down the borrowingsclosed on the Company’s revolving credit facility.  See Note 5 titled “Debt”purchase of a newly constructed 210-room Hampton Inn & Suites in Phoenix, Arizona, the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Qsame day the hotel opened for additional information related to the $85 million term loan.business.  The gross purchase price was approximately $44.3 million.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

As of June 30, 2017,March 31, 2018, the Company’s financial instruments were not exposed to significant market risk due to foreign currency exchange risk, commodity price risk or equity price risk.  However, the Company is exposed to interest rate risk due to possible changes in short term interest rates as it invests its cash or borrows on its revolving credit facility and due to its variable interest rate term loan.  As of June 30, 2017,March 31, 2018, after giving effect to interest rate swaps, as described below, approximately $403.8$273.2 million, or approximately 31%21% of the Company’s total debt outstanding, was subject to variable interest rates.  Based on the Company’s variable rate debt outstanding as of June 30, 2017,March 31, 2018, every 100 basis points change in interest rates will impact the Company’s annual net income by approximately $4.0$2.7 million, all other factors remaining the same.  With the exception of interest rate swap transactions, the Company has not engaged in transactions in derivative financial instruments or derivative commodity instruments.  The Company’s cash balanceand cash equivalents at June 30, 2017 wasMarch 31, 2018 were $0.

As of June 30, 2017,March 31, 2018, the Company’s variable rate debt consisted of its $965$540 million revolving credit facility and its $150 millionsix term loan facility.loans totaling $660 million.  Currently, the Company uses interest rate swaps to manage its interest rate risk on a portion of its variable rate debt.  As of June 30, 2017,March 31, 2018, the Company had foursix interest rate swap agreements that effectively fix the interest payments on approximately $472.5$557.5 million of the Company’s variable rate debt outstanding as of June 30, 2017 (consisting of fourfive term loans) through maturity.  In addition, in May 2017, the Company entered into a forward interest rate swap agreement with a commercial bank, which effectively fixes the interest rate on $75 million of the $85 million term loan beginning on July 31, 2017.  Under the terms of all of the Company’s interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one monthone-month LIBOR.

In addition to its variable rate debt and interest rate swaps discussed above, the Company has assumed or originated fixed interest rate mortgages payable to lenders under permanent financing arrangements.  The following table summarizes the annual maturities and average interest rates of the Company’s mortgage debt, $965the six term loans and borrowings outstanding under the $540 million revolving credit facility and $150 million term loan facility outstanding at June 30, 2017.March 31, 2018.  All dollar amounts are in thousands.

 
July 1 -
December 31, 2017
  2018  2019  2020  2021  Thereafter  Total  Fair Market Value  
April 1 -
December 31, 2018
  2019  2020  2021  2022  Thereafter  Total  Fair Market Value 
Total debt:                                                
Maturities $5,329  $11,071  $333,008  $451,164  $95,311  $413,181  $1,309,064  $1,306,559  $9,730  $204,505  $453,349  $97,586  $109,252  $454,780  $1,329,202  $1,326,386 
Average interest rates  3.4%  3.4%  3.5%  3.8%  4.1%  4.0%          3.7%  3.7%  3.8%  4.0%  3.9%  3.8%        
                                                                
Variable rate debt:                                                                
Maturities $-  $-  $301,300  $425,000  $50,000  $100,000  $876,300  $877,317  $-  $170,700  $425,000  $50,000  $-  $185,000  $830,700  $832,515 
Average interest rates (1)  2.9%  2.9%  2.9%  3.0%  3.0%  3.1%          3.2%  3.2%  3.2%  3.3%  3.4%  3.4%        
                                                                
Fixed rate debt:                                                                
Maturities $5,329  $11,071  $31,708  $26,164  $45,311  $313,181  $432,764  $429,242  $9,730  $33,805  $28,349  $47,586  $109,252  $269,780  $498,502  $493,871 
Average interest rates  4.5%  4.5%  4.5%  4.5%  4.4%  4.3%          4.5%  4.4%  4.4%  4.4%  4.2%  4.1%        

(1)The average interest rate gives effect to interest rate swaps, as applicable.

Item 4.  Controls and Procedures

Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2017.March 31, 2018.  There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

There have been no material changes to the legal proceedings previously disclosed in the Company’s Annual Report on2017 Form 10-K for the year ended December 31, 2016 except as described in Note 108 titled “Legal Proceedings” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, which information is incorporated by reference herein.

Item 1A.  Risk Factors

For a discussion of the Company’s potential risks and uncertainties, see the section titled “Risk Factors” in the 20162017 Form 10-K.10-K.  There have been no material changes to the risk factors previously disclosed in the 20162017 Form 10-K.10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of all share repurchases during the first quarter of 2018.

Issuer Purchases of Equity Securities 
  (a)  (b)  (c)  (d) 
Period Total Number of Shares Purchased  Average Price Paid per Share  Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs  
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) (1)
 
January 1 - January 31, 2018  -   -   -  $467,500 
February 1 - February 28, 2018  -   -   -  $467,500 
March 1 - March 31, 2018 (2)
  306,413  $16.90   254,653  $463,200 
Total  306,413       254,653     

(1)Represents amount outstanding under the Company’s authorized $475 million share repurchase program.  This program may be suspended or terminated at any time by the Company.  If not terminated earlier, the program will end in July 2018.  Refer to Note 6 titled “Shareholders’ Equity” in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, for more information on the Company’s share repurchase program.
(2)Includes 51,760 common shares surrendered to the Company to satisfy tax withholding obligations associated with the issuance of common shares awarded to employees.

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Item 6.  Exhibits

Exhibit
Number
Description of Documents
 
3.1
3.2
  
31.1
31.2
32.1
  
101
The following materials from Apple Hospitality REIT, Inc.’sthe Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017March 31, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail (FILED HEREWITH)
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
     
Apple Hospitality REIT, Inc.  
     
By:  /s/    Justin G. Knight         Date:  AugustMay 7, 20172018
 Justin G. Knight,   
 
President and
Chief Executive Officer
(Principal Executive Officer)
   
     
By:/s/    Bryan Peery       Date:  AugustMay 7, 20172018
 Bryan Peery,   
 
Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
   
 
 
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