Commitments and Contingencies

6 Months Ended

Jun. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

8. Commitments and Contingencies

Insurance –

The Company carries comprehensive insurance, including general liability, property, rental loss and umbrella liability coverage on all of its hotels. In addition, the Company carries flood coverage on certain hotels when available on commercially reasonable terms for hotels where the Company believes such coverage is warranted or required under the terms of the Loan.

On or around June 5, 2015, the Company evacuated and temporarily closed the Homewood Suites in Fort Worth, Texas due to damage incurred from extensive flooding in the area during late May 2015. Remediation work commenced immediately, and while the hotel reopened on October 27, 2015, all rooms were not restored to service until April 2017. Three other hotels the Company owns in the Dallas-Fort Worth area (SpringHill Suites Dallas Downtown, TownePlace Suites Las Colinas, and Residence Inn Forth Worth Cultural District) were significantly damaged in the same May 2015 storm. The remaining insurance receivables related to fiscal year 2015 property insurance claims totaled $5.1 million as of December 31, 2016. After negotiations with the insurance providers failed to resolve the dispute, the Company filed a lawsuit in August 2017 in order to collect the remaining amounts due from the insurance providers. Since the matter was subject to litigation and the collectability of the insurance receivable was no longer deemed probable and reasonably assured due to the uncertainty involved with the outcome of the litigation, during the fourth quarter of 2017, the Company recorded an allowance of $5.0 million against the insurance receivable and a corresponding loss on disposals of investment in real estate of $5.0 million for the year ended December 31, 2017. On March 4, 2019, the Company and the property insurer defendants concluded a settlement agreement for $16.1 million, resolving the insurance coverage dispute between them with respect to the properties at issue in the coverage litigation. The property insurers paid the settlement amount during the six months ended June 30, 2019. In addition, on April 1, 2019, the Company and a separate pollution legal liability insurer defendant reached an agreement to settle their coverage dispute regarding the same relevant properties. In April of 2019, the pollution legal liability insurer paid its settlement amount of $4.3 million and the pending coverage litigation was thereafter dismissed.

In September 2018, the Company evacuated and temporarily closed the Courtyard in Myrtle Beach, South Carolina due to damage incurred from Hurricane Florence. In October 2018, Hurricane Michael struck the Florida Panhandle as a category 5 hurricane which resulted in widespread damage, flooding and power outages. The Company evacuated and temporarily closed the Courtyard in Panama City and three additional hotels were also impacted by the hurricane but were able to remain open. One of the impacted hotels, the Courtyard in Dothan, Alabama was sold in February 2019. The Company maintains insurance for properties under ownership which is subject to a deductible of approximately $1.2 million. The Company recorded an insurance receivable of $9.4 million and $12.0 million as of June 30, 2019 and December 31, 2018. In addition, the Company recorded an impairment on investment in real estate of $0.5 million during the six months ended June 30, 2019 and $4.8 million during the year ended December 31, 2018, which represents the Company’s estimate of property damage and remediation costs incurred up to the insurance policy deductibles. The Company also anticipates receiving proceeds from business interruption insurance to cover business lost as a result of the hurricanes.

Litigation –

The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material impact on the liquidity, results of operations, business or financial condition of the Company.

The Company, as the successor to Apple Six, is subject to claims for alleged acts of Apple Six that occurred prior to the Merger. On February 24, 2017, a putative class action, captioned

Wilchfort v. Knight, et al.

, Civil Action No. 17-cv-01046 (E.D.N.Y.), was filed in the United States District Court for the Eastern District of New York against BRE Select Hotels Corp, as successor-in-interest to Apple REIT Six, Inc., Apple Hospitality REIT, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. (together with Apple REIT Six, Inc. and Apple REIT Seven, Inc., the “Apple REITs”), certain of the Apple REITs’ directors, officers and advisors, and Apple Fund Management, LLC. Plaintiff seeks to represent a class of all persons and entities who elected to participate in Apple REITs’ Dividend Reinvestment Plans (“DRIPs”) between July 17, 2007 and the later of the termination and/or suspension of the respective DRIPs or February 12, 2014. The complaint alleges, among other things, that the prices at which plaintiff and the purported class members purchased additional shares through the DRIPs were artificially inflated and not indicative of the true value of units in the Apple REITs. Plaintiff asserts claims for breach of contract, tortious interference with contract and tortious interference with business expectancy and breach of implied duty of good faith and fair dealing and seeks, among other things, damages and other costs and expenses. On March 30, 2018, the court granted in part and denied in part the Company’s motion to dismiss and, on April 13, 2018, plaintiffs filed an amended complaint, captioned Wilchfort et al. v. BRE Select Hotels Corp., Civil Action No. 17-cv-1046 (E.D.N.Y.). On May 31, 2018, plaintiff filed a Second Amended Class Action Complaint, captioned Battaglia v. BRE Select Hotels Corp., Civil Action No. 17-cv-01046 (E.D.N.Y.), which, among other things, narrowed the putative class period to February 24, 2011 through November 29, 2012. On June 4, 2018, plaintiff filed a motion for class certification. On June 27, 2018, the Company filed an Answer to the Second Amended Class Action Complaint. On March 1, 2019, the parties executed a settlement agreement to resolve all of plaintiff’s claims without any admission of wrongdoing for $3.75 million. Also, on March 1, 2019, the plaintiff filed a motion for preliminary approval of the settlement agreement. On July 16, 2019, the Court granted plaintiff’s motion for preliminary approval of the settlement agreement and scheduled the Final Approval Hearing for November 6, 2019.The settlement agreement is also subject to final approval by the court, and there can be no assurance that the court will approve such settlement. As of June 30, 2019 and December 31, 2018, the Company had fully reserved for this settlement amount of $3.75 million in accounts payable, accrued expenses, and other liabilities. The Company paid the settlement amount into an escrow account in August 2019.

Franchise Agreements

– As of June 30, 2019, the Company’s hotel properties, other than the Courtyard in Myrtle Beach, South Carolina, the SpringHill Suites in Fort Worth, Texas, which was sold in December 2018, and the Marriott in Redmond, Washington, which was sold in February 2018, (the “Marriott Managed Properties”) were operated under franchise agreements between the Company’s TRS and Marriott or Hilton Worldwide Holdings Inc. or its affiliates (“Hilton”). The franchise agreements for these hotels allow the properties to operate under the brand identified in the applicable franchise agreements. The management agreements for each of the Marriott Managed Properties allow the Marriott Managed Properties to operate under the brand identified therein. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.5% and 6.0% of room revenue, which is included in franchise fees in the condensed consolidated statements of operations. Program fees, which include additional fees for marketing, are included in sales and marketing expense, and central reservation system and other franchisor costs are included in operating expense in the condensed consolidated statements of operations.

Management Agreements –

As of June 30, 2019, each of the Company’s 45 hotels were operated and managed under separate management agreements, by affiliates of the following companies: Marriott, Texas Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“White”), Inn Ventures, Inc. (“Inn Ventures”), Interstate Hotels & Resorts, Inc. (“Interstate”), OTO Development, LLC (“OTO”), or Sage Hospitality (“Sage”). The management agreements require the Company to pay a monthly fee calculated as a percentage of revenues, generally between 2.0% and 7.0%, as well as annual incentive fees, if applicable, and are included in management fees in the condensed consolidated statements of operations. The agreements have remaining terms generally ranging from less than

one year

to 15 years. The agreements with less than one year remaining in their term generally automatically renew on annual or

month-to-month

terms unless either party to the agreement gives prior notice of the termination thereof. If the Company terminates a management agreement prior to its expiration, it may be liable for estimated management fees through the remaining term and liquidated damages. Additionally, the Company, from time to time, may enter into management agreements to manage retail premises ancillary to its hotels.

TRS Lease Agreements –

The Company’s lease agreements are intercompany agreements between the TRS lessees and the Company’s property-owning subsidiaries. These agreements generally contain terms which are customary for third-party lease agreements, including terms for rent payments and other expenses. All rental income and expense related to the TRS lease agreements eliminate on a consolidated basis, and therefore have no impact on the condensed consolidated financial statements.

Leases

– As of June 30, 2019, two of the Company’s hotel properties had ground leases with remaining terms of less than two years, which may be extended at the Company’s election. In addition,

the Company is the lessee in a parking lease with a remaining term of eight years.

As of June 30, 2019, the Company had operating lease ROU assets of $0.6 million recorded within investments in real estate, net, and corresponding lease liabilities of $0.6 million recorded within accounts payable, accrued expenses, and other liabilities on the condensed consolidated balance sheet. Cash paid related to operating lease liabilities was $0.1 million during the six months ended June 30, 2019 and is included in net cash provided by operating activities on the condensed consolidated statement of cash flows.

The weighted average discount rate used to measure the ROU assets and lease liabilities for operating leases was approximately 4.5% as of June 30, 2019. The weighted average remaining lease term for the Company’s operating leases was approximately seven years as of June 30, 2019. Additionally, the Company has elected as an accounting policy not to recognize short-term leases (i.e. leases with a lease term of 12 months or less), on the condensed consolidated balance sheet.

After the adoption of the new accounting guidance related to leasing, future minimum base rental payments payable under these non-cancelable operating leases in effect at June 30, 2019 are as follows:


2019 (remaining months)	$	90
2020		119
2021		76
2022		78
2023		81
2024		83
Thereafter		219
Total undiscounted future lease payments	$	746
Less: Discount		(113	)
Total lease liabilities	$	633

Prior to the adoption of the new accounting guidance related to leasing, future minimum base rental payments payable under

non-cancelable

leases in effect as of December 31, 2018 were as follows:


2019 (remaining months)	$	107
2020		45
2021		—
2022		—
2023		—
2024		—
Thereafter		—
Total	$	152