Apple Hospitality REIT - 10-Q quarterly report FY2015 Q1

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

APPLE HOSPITALITY REIT, INC.

 

 

 

 

This Form 10-Q includes references to certain trademarks or service marks.  The Courtyard® by Marriott, Fairfield Inn® by Marriott, Fairfield Inn and Suites® by Marriott, Marriott®, Renaissance®, 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 Hotels®, Hampton Inn®, Hampton Inn and Suites®, 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.

 

 

 

 

 

 

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 segment.  The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany accounts and transactions have been eliminated.  As of March 31, 2015, the Company owned 173 hotels with an aggregate of 22,003 rooms located in 32 states.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations for reporting on Form 10-Q.  Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  These unaudited financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its 2014 Annual Report on Form 10-K.  Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2015.

Use of Estimates

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

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which is comprised of unrealized gains and losses resulting from hedging activity.

Earnings Per Common Share

Basic earnings per common share is computed based upon the weighted average number of shares outstanding during the period.  Diluted earnings per common share is calculated after giving effect to all potential common shares that were dilutive and outstanding for the period.  There were no potential common shares with a dilutive effect for the three months ended March 31, 2015 and 2014.  As a result, basic and dilutive net income (loss) per common share were the same.  As discussed in Note 2, as a result of becoming self-advised, the Series B convertible preferred shares converted to common shares effective March 1, 2014, resulting in approximately 11.6 million additional common shares outstanding.

 

Effective March 1, 2014, the Company completed its mergers with Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”) (the “A7 and A8 mergers”).  Pursuant to the Agreement and Plan of Merger entered into on August 7, 2013, as amended (the “Merger Agreement”), Apple Seven and Apple Eight merged with and into wholly owned subsidiaries of the Company effective March 1, 2014 and Apple Seven’s and Apple Eight’s separate corporate existence ceased.  With the completion of the A7 and A8 mergers, the Company added 99 continuing hotels located in 27 states (consisting of 48 hotels with an aggregate of 6,209 rooms from Apple Seven and 51 hotels with an aggregate of 5,912 rooms from Apple Eight) to the Company’s real estate portfolio.

In connection with the A7 and A8 mergers, the Company issued approximately 180 million common shares to Apple Seven and Apple Eight shareholders.  The Company accounted for the A7 and A8 mergers in accordance with Accounting Standards Codification (“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 Seven and Apple Eight be recognized at their acquisition date fair values.  For purpose of accounting for the transactions, the total consideration of the Company’s common shares transferred in the A7 and A8 mergers was estimated to be approximately $1.8 billion and was based on a fair value estimate of $10.10 per common share.

As contemplated in the Merger Agreement, in connection with completion of the A7 and A8 mergers, the Company became self-advised and the advisory agreements between the Company and its advisors were terminated.  The termination of the advisory agreements resulted in the conversion of each issued and outstanding Series B convertible preferred share of the Company into 24.17104 common shares of the Company, or approximately 11.6 million common shares.  As a result of the conversion, all of the Company’s Series A preferred shares were terminated and the Company only has common shares outstanding.  In conjunction with this event, during the first quarter of 2014, the Company recorded a non-cash expense totaling approximately $117.1 million, included in the Company’s consolidated statements of operations, to reflect the fair value estimate of the conversion of the Series B convertible preferred shares to common shares at a fair value estimate of $10.10 per common share.

All costs related to the A7 and A8 mergers have been expensed in the period they were incurred and are included in transaction and potential listing costs in the Company’s consolidated statements of operations.  In connection with these activities, the Company has incurred approximately $7.2 million in total merger costs (including approximately $1.4 million of costs incurred to defend the ongoing purported class action related to the A7 and A8 mergers discussed in Note 10), of which approximately $0.7 million and $2.0 million, respectively, were incurred during the three months ended March 31, 2015 and 2014.  During the first quarter of 2015, the merger costs consisted primarily of costs to defend the class action lawsuit.

Effective March 1, 2014, upon completion of the A7 and A8 mergers, the Company assumed approximately $385.1 million in mortgage debt, prior to any fair value adjustments, secured by 34 properties.  The Company also assumed the outstanding balances on Apple Seven’s and Apple Eight’s credit facilities totaling approximately $129.5 million, which were then terminated on March 3, 2014 when the Company entered into a new $345 million unsecured credit facility. 

 

For purposes of calculating these pro forma amounts, merger transaction costs and the expense related to the conversion of the Series B convertible preferred shares, each included in the Company’s consolidated statements of operations, were excluded from the pro forma amounts since these are attributable to the A7 and A8 mergers and related transactions and do not have an ongoing impact to the statements of operations.  Merger transaction costs totaled approximately $0.7 million and $2.0 million for the three months ended March 31, 2015 and 2014.  The expense related to the conversion of the Series B convertible preferred shares was approximately $117.1 million for the three months ended March 31, 2014.  As discussed in Note 4, the Company sold 18 hotels on February 26, 2015, of which 12 of the hotels were acquired with the A7 and A8 mergers, and therefore the pro forma results of the Company for the three months ended March 31, 2015 only include operations of the 18 hotels through the time of the sale on February 26, 2015.

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

As of March 31, 2015, the Company owned 173 hotels with an aggregate of 22,003 rooms located in 32 states.  As further discussed in Note 4, during the first quarter of 2015 the Company decided not to sell the TownePlace Suites in Columbus, Georgia, which was classified as held for sale as of December 31, 2014, and reclassified the property as held and used as of March 31, 2015.

The Company determined there was no impairment of its real estate assets for the three months ended March 31, 2015 or 2014.

 

In December 2014, the Company entered into a purchase and sale agreement for 19 properties for $213 million.  These properties were identified for potential sale during the third quarter of 2014.  The 19 properties were classified as held for sale at historical cost in the Company’s consolidated balance sheet as of December 31, 2014.  On February 26, 2015, the Company completed the sale of 18 of the 19 hotels for a total sales price of $206.4 million, resulting in a gain of approximately $15.6 million, which is included in the Company’s consolidated statement of operations in the first quarter of 2015.  The following table lists the 18 hotels sold:

The 18 hotels had a total carrying value of approximately $188.3 million at the time of the sale.  The Company used a portion of the proceeds from the sale to repay the outstanding balance under its revolving credit facility, with the remaining portion to be used to acquire other hotel properties and fund hotel renovations.  The Company’s consolidated statements of operations include operating income of approximately $2.0 million for both the three months ended March 31, 2015 and 2014 relating to results of operations for the 18 hotels for the respective periods of ownership.  Twelve of the 18 hotels were originally acquired by the Company in the A7 and A8 mergers, effective March 1, 2014 (see table above for a list of properties), and therefore the historical operating results of the Company only include operations from March 1, 2014 through the date of sale for these hotels.  The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three months ended March 31, 2015 and 2014.

As contemplated in the purchase and sale agreement, the buyer exercised its right to exclude the remaining hotel (the TownePlace Suites in Columbus, Georgia with a purchase price of $6.6 million) from the transaction.  At this time, the Company does not have any immediate plans to sell this hotel.  Due to this change in plans, this hotel was reclassified as held and used during the first quarter of 2015 and is included in investment in real estate, net in the Company’s consolidated balance sheet as of March 31, 2015.  There are no assets classified as held for sale as of March 31, 2015.

Prior to the sale, on February 13, 2015, the Company extinguished a mortgage totaling approximately $4.6 million secured by the Hampton Inn located in Concord, North Carolina, and incurred expenses, including defeasance costs during the first quarter of 2015, which were recorded as a reduction to the gain on sale of real estate.

 

On March 3, 2014, the Company entered into a $345 million unsecured credit facility (comprised of a $245 million revolving credit facility and a $100 million term loan).  The $345 million credit facility is available for working capital, hotel acquisitions, hotel renovations and development and other general corporate purposes, including the funding of share repurchases and payment of distributions.  The $345 million credit facility may be increased to $700 million, subject to certain conditions.  Under the terms of the $345 million credit facility, the Company may make voluntary prepayments in whole or in part, at any time.  The $245 million revolving credit facility matures in March 2018; however, the Company has the right, upon satisfaction of certain conditions, including covenant compliance and payment of an extension fee, to extend the maturity date to March 2019.  The $100 million term loan matures in March 2019.  Interest payments on the $345 million credit facility are due monthly and the interest rate, subject to certain exceptions, is equal to the one-month LIBOR (the London Inter-Bank Offered Rate for a one-month term) plus a margin ranging from 1.55% to 2.35%, depending upon the Company’s leverage ratio, as calculated under the terms of the credit agreement.  In conjunction with the $100 million term loan, the Company entered into an interest rate swap agreement for the same notional amount and maturity as the term loan.  The interest rate swap agreement effectively provides the Company with payment requirements equal to a fixed interest rate on the term loan through the maturity of the loan in March 2019 (see Note 6 for more information on the interest rate swap agreement).  The Company is also required to pay an unused facility fee of 0.20% or 0.30% on the unused portion of the $245 million revolving credit facility, based on the amount of borrowings outstanding during the quarter.  As of March 31, 2015, the credit facility had an outstanding principal balance of $100 million, which consisted only of the $100 million term loan with an effective annual fixed interest rate of approximately 3.13%.  As of December 31, 2014, the credit facility had an outstanding principal balance of $191.6 million, including the $100 million term loan with an effective annual fixed interest rate of approximately 3.13% and $91.6 million outstanding on the $245 million revolving credit facility with an annual variable interest rate of approximately 1.77%.

The $345 million credit facility contains customary affirmative covenants, negative covenants and events of defaults.  It also contains covenants restricting the level of certain investments and quarterly financial covenants which include, among others, a minimum tangible net worth, maximum debt limits, minimum interest and fixed charge coverage ratios and maximum dividend payout ratio.  The Company was in compliance with the applicable covenants at March 31, 2015.

As of March 31, 2015, the Company had approximately $503.4 million in outstanding property level debt secured by 45 properties, with maturity dates ranging from April 2015 to October 2032, stated interest rates ranging from 0% to 6.90% and effective interest rates ranging from 3.66% to 6.52%.  The loans generally provide for monthly payments of principal and interest on an amortized basis.  The loans are generally subject to 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 as of March 31, 2015 and December 31, 2014 for each of the Company’s debt obligations.  All dollar amounts are in thousands.

 

 

 

 

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 March 31, 2015, the carrying value and estimated fair value of the Company’s debt was approximately $607.0 million and $618.5 million.  As of December 31, 2014, the carrying value and estimated fair value of the Company’s debt was approximately $709.6 million and $718.9 million.

Currently, the Company uses interest rate swaps to manage its interest rate risks on variable rate debt.  These instruments, as described below, are recorded at fair value and are included in accounts payable and other liabilities in the Company’s consolidated balance sheets.

On March 1, 2014, the Company assumed three interest rate swap agreements, with an aggregate notional amount of $45.7 million that effectively fixed the interest rate on two separate variable-rate mortgage loans assumed with the A7 and A8 mergers through maturity.  The fair value of the interest rate swap agreements assumed was approximately $0.5 million (liability) and was included in accounts payable and other liabilities as part of the purchase price allocation.  Throughout the terms of these interest rate swaps, the Company pays a fixed rate of interest and receives a floating rate of interest equal to the one month LIBOR.  As of December 31, 2014, the fair value of these swaps was approximately $0.3 million (liability).  During the first quarter of 2015, one of these swaps expired.  Additionally, during the first quarter of 2015, one swap was terminated in conjunction with the extinguishment of the related mortgage loan, and the Company incurred a termination fee of approximately $0.05 million, which was equal to the swap’s fair value at the date of termination and was paid in satisfaction of the existing liability.  As of March 31, 2015, the fair value of the remaining swap was approximately $0.3 million (liability).  These interest rate swaps assumed were not designated by the Company as hedges for accounting purposes, and therefore the changes in the fair value for these swaps are recorded to interest and other expense, net in the Company’s consolidated statements of operations.  For the three months ended March 31, 2015 and 2014, the change in fair value (excluding the $0.05 million termination fee) resulted in a net increase of approximately $0.1 million and a net decrease of approximately $0.2 million, respectively, to interest and other expense, net.

In March 2014, the Company entered into an interest rate swap agreement with a commercial bank for the same notional amount and maturity as its $100 million term loan.  The interest rate swap agreement effectively fixes the interest rate on the $100 million term loan (subject to the Company’s leverage ratio) through maturity.  Under the terms of this interest rate swap, the Company pays a fixed interest rate of 1.58% and receives a floating rate of interest equal to the one month LIBOR.  The interest rate swap agreement matures in March 2019.  As of March 31, 2015 and December 31, 2014, the fair value of this swap totaled approximately $1.6 million and $0.5 million (liability), respectively.  At inception, the interest rate swap was designated by the Company as an effective cash flow hedge for accounting purposes.  The Company assesses, both at inception and on an ongoing basis, the effectiveness of its qualifying cash flow hedge.  From inception of the swap through March 2, 2015, the swap was a fully effective hedge for accounting purposes, and therefore the changes in the fair value through this date were recorded in accumulated other comprehensive loss, a component of shareholder’s equity in the Company’s consolidated balance sheets, which totaled $0.8 million and $0.5 million as of March 31, 2015 and December 31, 2014, respectively.  For the three months ended March 31, 2015 and 2014, the Company recorded an unrealized loss of approximately $0.3 million and an unrealized gain of approximately $0.5 million, respectively, in other comprehensive income (loss) relating to this swap.  In 2015, the Company announced its intent to pursue a listing of its common shares on a national securities exchange and intent to enter into a new credit facility to fund a possible tender offer and share buyback program.  As a result of this decision, it was determined that the cash flows being hedged were no longer probable of occurring through the maturity date of the swap.  Therefore the Company discontinued hedge accounting, and the change in fair value resulting in a loss of $0.8 million for the remainder of the quarter was recorded to interest and other expense, net in the Company’s consolidated statement of operations.  The Company will reclassify the amount included in accumulated other comprehensive loss as of March 31, 2015 to interest and other expense, net if it becomes probable that the cash flows relating to interest payments on the $100 million term loan will change.

 

The fair value 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 is a summary of the notional amounts, maturity dates and fair values (liabilities) of the interest rate swap agreements outstanding as of March 31, 2015 and December 31, 2014 (in thousands):

The carrying value of the Company’s other financial instruments approximates fair value due to the short-term nature of these financial instruments.

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.  The Company’s independent members of the Board of Directors oversee and annually review the Company’s related party relationships (including the relationships discussed in this section) and are required to approve any significant modifications to the existing relationships, as well as any new significant related party transactions.  The Board of Directors is not required to approve each individual transaction that falls under the related party relationships.  However, under the direction of the Board of Directors, at least one member of the Company’s senior management team approves each related party transaction.  There have been no changes to the contracts and relationships discussed in the Company’s 2014 Annual Report on Form 10-K.  Below is a summary of the related party relationships in effect as of March 31, 2015.

Prior to the A7 and A8 mergers, Glade M. Knight, Executive Chairman of the Company and formerly Chairman and Chief Executive Officer of the Company, was Chairman and Chief Executive Officer of Apple Seven and Apple Eight and is currently Chairman and Chief Executive Officer of Apple REIT Ten, Inc. (“Apple Ten”).  The former advisors of Apple Seven, Apple Eight and the Company, and the advisors of Apple Ten, are wholly owned by Mr. Knight.  Mr. Knight is also a partner and Chief Executive Officer of Energy 11 GP, LLC, which is the general partner of Energy 11, L.P.  Effective January 1, 2015, Justin G. Knight, the Company’s President and Chief Executive Officer, and Apple Ten’s President, was appointed to the Company’s Board of Directors.

 

Subcontract Agreement with Apple Ten Advisors, Inc.

In connection with the Merger Agreement, on August 7, 2013, the Company entered into a subcontract agreement, as amended with Apple Ten Advisors, Inc. (“A10A”) to subcontract A10A’s obligations under the advisory agreement between A10A and Apple Ten to the Company.  The subcontract agreement provides that, from and after the completion of the A7 and A8 mergers, the Company provides to Apple Ten advisory services and receives an annual fee ranging from 0.1% to 0.25% (based on Apple Ten’s operating results) of total equity proceeds received by Apple Ten, and is reimbursed by Apple Ten for the use of the Company’s employees and corporate office and other costs associated with the advisory agreement, as described below.  Total advisory fees earned by the Company from Apple Ten for the three months ended March 31, 2015 and 2014 totaled approximately $0.4 million and $0.1 million, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations. 

Support Services to Apple Ten, A10A and Apple Suites Realty Group, Inc.

From and after the A7 and A8 mergers, the Company provides support services to Apple Ten, A10A and Apple Suites Realty Group, Inc. (“ASRG”), which have agreed to reimburse the Company for its costs in providing these services.  Total reimbursed costs received by the Company from these entities for the three months ended March 31, 2015 and 2014 totaled approximately $0.7 million and $0.3 million, respectively, and are recorded as a reduction to general and administrative expenses in the Company’s consolidated statements of operations.  Under this cost sharing structure, amounts reimbursed to the Company include both compensation for personnel and office related costs (including office rent, utilities, office supplies, etc.) used by each company.  The amounts reimbursed to the Company are based on a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of Apple Ten, A10A and ASRG.  As part of the cost sharing arrangements, certain day-to-day transactions may result in amounts due to or from the Company, Apple Ten, A10A and ASRG.  To efficiently manage cash disbursements, the Company, Apple Ten, A10A or ASRG may make payments for any or all of the related companies.  Under the cash management process, each of the companies may advance or defer up to $1 million at any time.  Each month, any outstanding amounts are settled among the affected companies.  This process allows each company to minimize its cash on hand, which, in turn, reduces the cost of each company’s credit facility. The amounts outstanding at any point in time are not significant to any of the companies.

The Company, through a jointly-owned subsidiary, Apple Air, owns a Learjet used primarily for acquisition, asset management and renovation purposes.  Apple Air is jointly owned by the Company (74%) and Apple Ten (26%), with Apple Ten’s ownership interest accounted for as a minority interest, which as of both March 31, 2015 and December 31, 2014, totaled approximately $1.0 million and is included in accounts payable and other liabilities in the Company’s consolidated balance sheets.  The aircraft is also leased to affiliates of the Company based on third party rates, which was not significant during the reporting periods.

Distributions

For the three months ended March 31, 2015 and 2014, the Company made distributions of $0.17 and $0.1934 per common share for a total of $63.4 million and $45.9 million, respectively.  The Company’s current annual distribution rate, payable monthly is $0.68 per common share.  As contemplated by the A7 and A8 mergers, the Board of Directors reduced the annual distribution rate from $0.83025 per common share to $0.66 per common share, effective with the March 2014 distribution.  Effective with the September 2014 distribution, the Board of Directors increased the annual distribution rate from $0.66 per common share to $0.68 per common share.

 

Share Redemption Program

In October 2014, the Board of Directors approved reinstating the Company’s share redemption program on a limited basis.  The Board of Directors initially approved limiting redemptions of common shares only in the event of death or eligible disability of a shareholder, and in February 2015, the Board of Directors approved limiting redemptions to death of a shareholder only.  The number of common shares that may be redeemed in any given year is also limited based on the Company’s results of operations, cash flow from operations, and cash required for funding investing and financing activities.  If requested redemptions exceed funds available for redemption, redemptions will be made on a pro rata basis.  During the three months ended March 31, 2015, the Company redeemed approximately 1.2 million common shares at a price of $9.20 per common share, or a total of approximately $10.8 million.  All eligible redemption requests were fulfilled.  No common shares were redeemed under the program during 2014.

Potential Reverse Share Split

In February 2015, the Company filed articles of amendment to the amended articles of incorporation of the Company that provide for a 50% reverse share split of the common shares of the Company immediately prior to, but subject to the effectiveness of, the initial listing of the Company’s common shares on a national securities exchange.  The articles of amendment provide that, in the event a listing occurs, each common share of the Company will be reclassified into one-half (1/2) of such common share.  Such reclassified common shares would have the same respective voting rights, preferences and relative, participating, optional or other rights, and qualifications, limitations or restrictions set forth in the amended articles of incorporation immediately prior to the effectiveness of the reclassification.  These articles of amendment were previously approved by the Company’s shareholders at a special meeting of shareholders in February 2014 in connection with the approval of the A7 and A8 mergers.  The potential reverse share split is not reflected in the Company’s common shares as of March 31, 2015.

In March 2015, the Compensation Committee of the Board of Directors approved an incentive plan (“2015 Incentive Plan”), effective January 1, 2015, for participants and established incentive goals for 2015.  Under the 2015 Incentive Plan, participants will be eligible to receive a bonus to be determined pursuant to a weighted average formula based on the achievement of certain 2015 performance measures.  The range of payouts under the 2015 Incentive Plan is $0 - $13 million.  Based on performance through March 31, 2015, the Company has accrued approximately $2.2 million as a liability for potential bonus payments, which is included in accounts payable and other liabilities in the Company’s consolidated balance sheets as of March 31, 2015 and general and administrative expense in the Company’s consolidated statements of operations for the three months ended March 31, 2015.  A portion of any awards under the 2015 Incentive Plan, if any, may be issued in restricted stock under the 2014 Omnibus Incentive Plan, 50% of which would vest upon issuance and 50% would vest at the end of 2016.  During 2014, a comparable incentive plan was approved by the Board of Directors in May 2014.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, the Company, ASRG, Apple Eight Advisors, Inc., Apple Nine Advisors, Inc., A10A, Apple Fund Management, LLC, Apple REIT Six, Inc., Apple Seven, Apple Eight and Apple Ten, their directors and certain officers, and David Lerner Associates, Inc. and David Lerner were parties to a consolidated matter called In re Apple REITs Litigation, Civil Action No. 1:11-cv-02919-KAM-JO.  On March 25, 2015, United States District Judge Kiyo A. Matsumoto entered a Memorandum and Order dismissing all remaining claims in this matter and judgment was entered in favor of the defendants, including the Company.  The time for appeal on this matter has passed.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, on January 31, 2014, two shareholders of the Company commenced a purported class action against the Company and its directors (the “Defendants”) in the United States District Court for the Eastern District of Virginia (DCG&T, et al. v. Knight, et al., No. 3:14cv67, E.D. Va.).

 

On December 18, 2014, the United States District Court for the Eastern District of Virginia issued an order granting the Defendants’ motion to dismiss in part and denying it in part. Specifically, the court dismissed each of Plaintiffs’ class action claims, but held that Plaintiffs could bring derivative claims for breach of fiduciary duties of care and loyalty (Count II) and for conflicts of interest (Count IV).  On April 1, 2015, the Court entered an agreed stipulation of dismissal, dismissing with prejudice Count IV.

Discovery in the case is proceeding.  A bench trial is scheduled to begin July 13, 2015.

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

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, on April 22, 2014, Plaintiff Susan Moses, purportedly a shareholder of Apple Seven and Apple Eight, now part of the Company, 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, now part of the Company, who purchased additional shares under the Apple REITs’ Dividend Reinvestment Plans between July 17, 2007 and February 12, 2014 (Susan Moses, et al. v. Apple Hospitality REIT, Inc., et al., 14-CV-3131 (DLI)(SMG)).

On March 9, 2015, the Court entered a Memorandum and Order dismissing all claims.  On April 6, 2015, Plaintiff filed a Second Amended Class Action Complaint asserting a breach of contract claim.  Defendants moved to dismiss the Second Amended Complaint on April 29, 2015.

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 these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, on June 16, 2014, Plaintiff Dorothy Wenzel, purportedly a shareholder of Apple Seven and Apple Eight, now part of the Company, filed a class action against Apple Seven Advisors, Inc., Apple Eight Advisors, Inc., Apple Fund Management, LLC and several officers and directors of the Company on behalf of all then-existing shareholders and former shareholders of Apple Seven and Apple Eight, now part of the Company, who purchased additional shares under the Apple REITs' Dividend Reinvestment Plans between July 17, 2007 and June 30, 2013 (Wenzel v. Knight, et al., Case No. 3:14-cv-00432, E.D. Va.).  On February 4, 2015, Plaintiff filed an amended complaint against the Company, Apple Eight Advisors, Inc., Apple Fund Management, LLC, and several officers and directors of the Company alleging breach of contract, tortious interference with contract, fraud, negligence and violation of the Virginia Securities Act.  Defendants’ Motion to Dismiss all claims is fully briefed and the case is stayed pending the Court’s ruling on the Motion.

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 these proceedings or provide a reasonable estimate of the possible loss or range of loss due to these proceedings, if any.

In April 2015, the Company declared and paid approximately $21.1 million, or $0.056667 per outstanding common share, in distributions to its common shareholders.

In April 2015, under the Company’s limited share redemption program, the Company redeemed approximately 0.4 million common shares in the amount of $4.1 million.  Redemptions were limited to death of a shareholder and were made at a price of $9.20 per common share.  All eligible redemption requests were fulfilled.  Following this redemption, the Board of Directors approved the termination of the limited share redemption program.  No additional redemptions will be made under this program.

In April 2015, the Board of Directors approved the termination of the Company’s suspended Dividend Reinvestment Plan, which had been suspended since June 2013.

 

In April 2015, the Company announced its intention to list the Company’s common shares on the New York Stock Exchange on or about May 18, 2015.  Should a listing occur, the Board of Directors has authorized a reduction of the annual distribution rate from $0.68 per common share to $0.60 per common share (on a pre-reverse split basis) effective with the June 2015 distribution.  The Company intends to continue to pay distributions on a monthly basis.

Subsequent to March 31, 2015, the Company entered into a series of contracts for the potential purchase of five hotels.  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 following table summarizes the hotel and contract information.  All dollar amounts are in thousands.

This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements are typically identified by use of terms such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” and similar expressions that convey the uncertainty of future events or outcomes.  Such statements, including statements regarding the timing and certainty of a listing of the Company’s common shares on the New York Stock Exchange and other related events, involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of Apple Hospitality REIT, Inc. (the “Company”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  Such factors include, but are not limited to, the ability of the Company to effectively acquire and dispose of properties; the ability of the Company to implement its operating strategy; the ability of the Company to provide liquidity opportunities for its shareholders; 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; 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.  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 real estate investment trust involves the application of highly technical and complex provisions of the Internal Revenue Code.  Readers should carefully review the risk factors described in the Company’s filings with the Securities and Exchange Commission (“SEC”), including but not limited to those discussed in the section titled Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  Any forward-looking statement that the Company makes speaks only as of the date of this report.  The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors, as a result of new information, future events, or otherwise, except as required by law.

The following discussion and analysis should be read in conjunction with the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 self-advised and invests in income-producing real estate, primarily in the lodging sector, in the United States.  As of March 31, 2015, the Company owned 173 hotels with an aggregate of 22,003 rooms located in 32 states.  All of the Company’s hotels operate under Marriott or Hilton brands.  The hotels are operated and managed under separate management agreements with 17 hotel management companies, none of which are affiliated with the Company.

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 hotels as compared to other hotels within their respective local markets, in general, has met the Company’s expectations for the period owned.  The hotel industry and the Company’s hotels overall continue to experience improvement in both revenues and operating income as compared to the prior year.  Although the economy in the United States has continued to improve, there is no way to predict future general economic conditions, and there are certain 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 (as defined below), and industry are forecasting a mid to upper-single digit percentage increase in revenue for 2015 as compared to 2014.

 

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.

The Company continually monitors the profitability of its properties, market conditions, and capital requirements and attempts to maximize shareholder value by timely disposal of properties.  In December 2014, the Company entered into a purchase and sale agreement for 19 properties for $213 million.  These properties were identified for potential sale during the third quarter of 2014 based on individual market conditions, the Company’s total investment in certain markets and additional capital requirements for these properties.  On February 26, 2015, the Company completed the sale of 18 of the 19 hotels for a total sales price of $206.4 million, resulting in a gain of approximately $15.6 million, which is included in the Company’s consolidated statement of operations in the first quarter of 2015.  Twelve of the 18 hotels sold were acquired in the Company’s mergers with Apple REIT Seven, Inc. (“Apple Seven”) and Apple REIT Eight, Inc. (“Apple Eight”), effective March 1, 2014 (the “A7 and A8 mergers”).  As contemplated in the purchase and sale agreement, the buyer exercised its right to exclude the remaining hotel with a purchase price of $6.6 million from the transaction.  At this time, the Company does not have any immediate plans to sell this hotel.  The Company used a portion of the proceeds from the sale to repay the outstanding balance under its revolving credit facility, with the remaining portion to be used to acquire other hotel properties and fund hotel renovations.  The sale of these properties does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the three months ended March 31, 2015 and 2014.

As of March 31, 2015, the Company owned 173 hotels.  For hotels acquired, opened or disposed of during the current reporting period and prior year, operating results for these hotels are not comparable for the three months ended March 31, 2015 and 2014.  These hotels include 99 continuing hotels that were acquired in the A7 and A8 mergers, effective March 1, 2014, one hotel acquired and two newly constructed hotels that opened during the fourth quarter of 2014, and the 18 hotels disposed of on February 26, 2015 (12 of which were acquired in the A7 and A8 mergers).  The results of operations for the three months ended March 31, 2014 include only one month of results for the hotels acquired through the A7 and A8 mergers.  Additionally, the results of operations for the three months ended March 31, 2015 include results of operations for the 18 hotels sold on February 26, 2015 only through the time of the sale.

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

The following table reflects certain operating statistics for the Company’s 173 hotels owned as of March 31, 2015 (“Comparable Hotels”).  The Company defines metrics from Comparable Hotels as results generated by the 173 hotels owned as of the end of the reporting period.  For the hotels acquired through the A7 and A8 mergers, the Company has included results for those hotels during periods prior to the Company’s ownership (January and February 2014).

As of March 31, 2015, the Company owned 173 hotels with 22,003 rooms as compared to 188 hotels with a total of 23,489 rooms as of March 31, 2014.  The Company acquired 99 continuing hotels as part of the A7 and A8 mergers effective March 1, 2014, acquired one hotel and opened two newly constructed hotels during the fourth quarter of 2014, and sold 18 hotels on February 26, 2015.  As a result, the comparability of results during the three months ended March 31, 2015 and 2014 as discussed below is significantly impacted by these transactions.

Hotel performance is impacted by many factors, including the economic conditions in the United States as well as each locality.  Economic indicators in the United States have shown evidence of a sustainable recovery, which continues to overall positively impact the lodging industry.  As a result, the Company’s revenue and operating income for its Comparable Hotels improved during the three months ended March 31, 2015 as compared to the same period in 2014.   The Company expects continued improvement in revenue and operating income in 2015 as compared to 2014. The Company’s hotels in general have shown results consistent with industry and brand averages for the period of ownership.

The Company’s principal source of revenue is hotel revenue consisting of room and other related revenue.  For the three months ended March 31, 2015 and 2014, the Company had total revenue of $210.4 million and $137.1 million, respectively.  This revenue primarily reflects hotel operations for the 173 hotels owned as of March 31, 2015 and for the 18 hotels sold in February 2015 for their respective periods of ownership by the Company.  Total revenue for the Company’s Comparable Hotels was $203.6 million and $186.9 million for the three months ended March 31, 2015 and 2014, respectively, an increase of approximately 9%.  For the three months ended March 31, 2015 and 2014, respectively, the Comparable Hotels achieved combined average occupancy of 74.0% and 72.1%, ADR of $126.56 and $120.87 and RevPAR of $93.69 and $87.11.  ADR is calculated as room revenue divided by the number of rooms sold, and RevPAR is calculated as occupancy multiplied by ADR.  During the first quarter of 2015, the Company experienced an increase in demand, with average occupancy for its Comparable Hotels increasing 2.6% as compared to the first quarter of 2014.  In addition, also signifying a progressing economy, during the first quarter of 2015, the Company experienced an increase in ADR for its Comparable Hotels of 4.7% as compared to the first quarter of 2014.  Although certain markets continue to be negatively impacted by reduced government spending and increased supply growth, with overall continued demand and room rate improvement, the Company, on a comparable basis, and industry are forecasting a mid to upper-single digit percentage increase in revenue for 2015 as compared to 2014.

 

Hotel operating expense primarily relates to the 173 hotels owned as of March 31, 2015 and for the 18 hotels sold in February 2015 for their respective periods owned and 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 March 31, 2015 and 2014, respectively, hotel operating expense totaled $122.5 million and $78.3 million or 58% and 57% of total revenue for each respective period.  Overall hotel operational expenses for the first quarter of 2015 reflect the impact of the A7 and A8 mergers for the entire quarter and the impact of the disposition of 18 hotels until the date of sale, and for the first quarter of 2014 reflect the A7 and A8 mergers only for the month of March and the 18 hotels sold in 2015 (of which 12 were acquired in the A7 and A8 mergers) for the entire period.  The increase in operating expense as a percentage of revenue is primarily due to the timing of the A7 and A8 mergers, which were effective March 1, 2014.  For the Company’s Comparable Hotels, operating expense as a percentage of revenue decreased slightly for the three months ended March 31, 2015 as compared to the same period in 2014 primarily due to the overall increase in ADR for these hotels.  Certain operating costs such as management costs, certain utility costs and minimum supply and maintenance costs are relatively fixed in nature.  The Company has been successful in reducing, relative to revenue increases, certain labor costs, hotel supply costs, maintenance costs and utility costs by continually monitoring and sharing utilization data across its hotels and management companies.  The Company has experienced a modest increase in labor benefit costs compared to the same period in the prior year, which are likely to continue to grow at increased rates due to government regulations surrounding healthcare and other benefits.  Other government-related initiatives, such as the “living wage” increase, also could impact operating expenses in certain markets moving forward.  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 for the three months ended March 31, 2015 and 2014 totaled $11.6 million and $7.1 million, respectively, or 5% of total revenue for each respective period.  For the Company’s Comparable Hotels, real estate taxes during the three months ended March 31, 2015 increased due to higher taxes for certain properties as a result of the reassessment of property values by localities and from the improved economy, partially offset by a decrease in 2015 due to successful appeals of tax assessments at certain locations.  With the economy continuing to improve, the Company anticipates continued increases in property tax assessments during the remainder of 2015.  The Company will continue to appeal tax assessments in certain jurisdictions to minimize the tax increases as warranted.

Ground lease expense for the three months ended March 31, 2015 and 2014 was $2.5 million and $0.9 million, respectively.  Ground lease expense primarily represents the expense incurred by the Company to lease land for ten of its hotel properties, nine of which were acquired effective March 1, 2014 with the A7 and A8 mergers.

General and administrative expense for the three months ended March 31, 2015 and 2014 was $5.5 million and $2.5 million, respectively, or 3% and 2% of total revenue for each respective period.  The principal components of general and administrative expense are payroll and related benefit costs, advisory fees and reimbursable expenses incurred prior to the A7 and A8 mergers, as well as legal fees, accounting fees and reporting expenses.  In connection with the completion of the A7 and A8 mergers, the Company became self-advised and the advisory agreements between the Company and its advisors were terminated.  As a result, the employees, including management, became employed by the Company at that time, rather than the Company’s former external advisor.  In addition, from and after the A7 and A8 mergers, the Company provides to Apple REIT Ten, Inc. (“Apple Ten”) the advisory services contemplated under their advisory agreement, and the Company receives fees and reimbursement of expenses payable under the advisory agreement from Apple Ten, both of which are reductions to general and administrative expenses.  The increase in general and administrative expense was primarily related to approximately $2.2 million accrued during the first quarter of 2015 for potential payments under the Company’s 2015 incentive compensation plan.  During 2014, a comparable plan was approved by the Board of Directors in May 2014, and therefore potential payments related to this plan were not incurred until the second quarter of 2014.

Transaction and potential listing costs for the three months ended March 31, 2015 and 2014 were $1.2 million and $2.1 million, respectively, and consists primarily of costs related to the A7 and A8 mergers, effective March 1, 2014, and costs related to the Board of Directors’ ongoing review and evaluation of strategic alternatives, including a potential listing of the Company’s common shares on a national securities exchange.  Merger costs for the three months ended March 31, 2015 consisted primarily of costs to defend the A7 and A8 mergers class action lawsuit, discussed in Note 10 titled Legal Proceedings in the Company’s Unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Quarterly Report on Form 10-Q.

 

Depreciation expense for the three months ended March 31, 2015 and 2014 was $30.7 million and $19.6 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 due to the increase in the number of properties owned as a result of the A7 and A8 mergers and renovations completed throughout 2015 and 2014.  These increases were partially offset by the sale of the 18 hotels in February 2015, which were classified as held for sale as of December 31, 2014 and therefore no depreciation was recorded for the properties during the first quarter of 2015.

Interest and other expense, net for the three months ended March 31, 2015 and 2014 was $7.7 million and $3.5 million, respectively and is net of approximately $0.6 million and $0.3 million of interest capitalized associated with renovation and construction projects.  The increase in interest expense was primarily due to an increase in the Company’s average outstanding borrowings during the first quarter of 2015 as compared to the prior year’s quarter which is attributable to (a) the mortgage debt assumed effective March 1, 2014 with the A7 and A8 mergers and (b) borrowings on the Company’s $345 million credit facility beginning March 3, 2014, which were primarily used to repay the extinguished credit facilities associated with the A7 and A8 mergers, pay closing costs, fund hotel renovations and development, service debt repayments and other general corporate purposes.  These increases were partially offset by a full repayment of the outstanding balance of the Company’s revolving credit facility as a result of cash proceeds received from the sale of 18 hotels on February 26, 2015 as discussed herein.  The impact of higher debt balances was partially offset by a reduction in the average interest rate incurred under the Company’s outstanding debt.  In addition to the above, the Company recorded a loss of approximately $0.8 million to interest and other expense, net during the first quarter of 2015 related to the change in fair value in the Company’s interest rate swap that was no longer designated as a cash flow hedge due to a potential change in the underlying hedged debt instrument.

In connection with completion of the A7 and A8 mergers, the Company became self-advised and the advisory agreements between the Company and its advisors were terminated.  The termination of the advisory agreements resulted in the conversion of each issued and outstanding Series B convertible preferred share of the Company into 24.17104 common shares of the Company, or approximately 11.6 million common shares.  As a result of the conversion, all of the Company’s Series A preferred shares were terminated and the Company only has common shares outstanding.  In conjunction with this event, during the first quarter of 2014, the Company recorded a non-cash expense totaling approximately $117.1 million, included in the Company’s consolidated statements of operations, to reflect the fair value estimate of the conversion of the Series B convertible preferred shares to common shares at a fair value estimate of $10.10 per common share.

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 (loss), 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.

 

The Company calculates and presents FFO in accordance with standards established by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles (“GAAP”)), excluding gains or losses from sales of real estate, extraordinary items as defined by GAAP, the cumulative effect of changes in accounting principles, plus real estate related depreciation, amortization and impairments, and adjustments for unconsolidated partnerships and joint ventures.  Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations.  The Company further believes that by excluding the effects of these items, FFO is useful to investors in comparing its operating performance between periods and between REITs that report FFO using the NAREIT definition, even though FFO 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 the non-cash Series B convertible preferred share conversion expense and transaction and potential listing costs as these do not represent ongoing operations and (ii) the exclusion of non-cash straight-line ground lease expense as this expense does not reflect the underlying performance of the related hotels.  The Company presents MFFO when evaluating its performance because it believes that it provides further useful supplemental information to investors regarding its ongoing operating performance.

The following table reconciles the Company’s GAAP net income (loss) to FFO and MFFO for the three months ended March 31, 2015 and 2014 (in thousands).

EBITDA is a commonly used measure of performance in many industries and is defined as net income (loss) 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 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 the non-cash Series B convertible preferred share conversion expense, transaction and potential listing costs, and the gain on sale of real estate as these do not represent ongoing operations and (ii) the exclusion of non-cash straight-line ground lease expense as this expense does not reflect the underlying performance of the related hotels.

 

The following table reconciles the Company’s GAAP net income (loss) to EBITDA and Adjusted EBITDA for the three months ended March 31, 2015 and 2014 (in thousands).

As of March 31, 2015, the Company owned 173 hotels with an aggregate of 22,003 rooms located in 32 states.  The following tables summarize the number of hotels and rooms by brand and state:

 

The following table summarizes the location, brand, manager, date acquired or completed and number of rooms for each of the 173 hotels the Company owned as of March 31, 2015.