Apple Hospitality REIT (APLE) DEF 14ADefinitive proxy

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant ☒ Filed by a Party other than the Registrant ☐

Check the appropriate box:

Apple Hospitality REIT, Inc.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Notice of the 2021 Annual Meeting of Shareholders

to be Held on Thursday, May 13, 2021

The Annual Meeting of Shareholders (the “Annual Meeting”) of Apple Hospitality REIT, Inc. (the “Company”) will be held at the Courtyard and Residence Inn Richmond Downtown, located at 1320 East Cary Street, Richmond, Virginia 23219, on Thursday, May 13, 2021 at 9:00 a.m., Eastern Daylight Time, for the following purposes:  

If you were a holder of record of any common shares of the Company at the close of business on the record date of March 19, 2021, you are entitled to vote at the Annual Meeting. If you are present at the Annual Meeting, you may vote in person even if you have previously returned a proxy card.

While we currently intend to hold the Annual Meeting in person, we are continuing to monitor the coronavirus (COVID-19) situation. We are sensitive to the public health and travel concerns our shareholders may have and the restrictions that federal, state and local governments may impose. In the event it is not possible or advisable to hold the Annual Meeting in person, we will, as promptly as practicable, announce any alternative meeting arrangements, which may include holding the meeting by means of remote communication (i.e., virtual meeting). We encourage you to monitor our investor relations website at www.applehospitalityreit.com for any updates regarding the Annual Meeting.

The Company is furnishing its proxy statement, proxy and 2020 Annual Report on Form 10-K (the “Annual Report”) to you electronically via the Internet, instead of mailing printed copies of those materials to each shareholder. The Company has sent to its shareholders a Notice of Internet Availability of Proxy Materials that provides instructions on how to access its proxy materials on the Internet, how you can request and receive a paper copy of the proxy statement, Annual Report and proxy for the Annual Meeting and future meetings of shareholders, and how to vote online at www.proxyvote.com. Shareholders can also call 1-800-579-1639 to request proxy materials or 1-800-690-6903 to vote by telephone. Additionally, this proxy statement and the Annual Report are available at http://materials.proxyvote.com/03784Y. Please read the enclosed information carefully before submitting your proxy.

If you have any questions or need assistance in voting your shares, please call Ms. Kelly Clarke in the Company’s Investor Relations Department, at (804) 344-8121.

By Order of the Board of Directors

Matthew P. Rash

Secretary

March 31, 2021

REGARDLESS OF THE NUMBER OF SHARES YOU HOLD, AS A SHAREHOLDER YOUR ROLE IS VERY IMPORTANT, AND THE BOARD STRONGLY ENCOURAGES YOU TO EXERCISE YOUR RIGHT TO VOTE.

WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE VOTE ONLINE, BY PHONE OR BY SIGNING, DATING AND RETURNING THE PROXY CARD. IF YOU ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. 

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APPLE HOSPITALITY REIT, INC.

PROXY STATEMENT

DATED

March 31, 2021

ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD ON

May 13, 2021

General

The enclosed proxy is solicited by the Board of Directors (the “Board” or “Board of Directors”) of Apple Hospitality REIT, Inc. (the “Company” or “Apple Hospitality”) for the Annual Meeting of Shareholders to be held at the Courtyard and Residence Inn Richmond Downtown, located at 1320 East Cary Street, Richmond, Virginia 23219, on Thursday, May 13, 2021 at 9:00 a.m., Eastern Daylight Time (the “Annual Meeting”). Your proxy may be revoked at any time before being voted at the Annual Meeting, either by a written notice of revocation that is received by the Company before the Annual Meeting or by conduct that is inconsistent with the continued effectiveness of the proxy, such as delivering another proxy with a later date or attending the Annual Meeting and voting in person.

Unless your proxy indicates otherwise, all shares represented by a proxy that you sign and return will be voted FOR the nominees listed in proposal 1, FOR proposals 2 and 3, and in accordance with the best judgment of the proxy holders for any other matters properly brought before the Annual Meeting.

Record holders of the Company’s common shares (the “Common Shares”) at the close of business on March 19, 2021 (the “Record Date”) are entitled to notice of, and to vote at, the Annual Meeting. This proxy statement, the Company’s 2020 Annual Report on Form 10-K, which includes the Company’s audited consolidated financial statements for the year ended December 31, 2020 (the “Annual Report”), and the proxy card are first being made available, and a notice and electronic delivery of the proxy materials (the “Notice of Internet Availability”) is first being mailed, to shareholders on or about March 31, 2021.

As permitted by the rules of the U.S. Securities and Exchange Commission (the “SEC” or “Securities and Exchange Commission”), the Company is making this proxy statement and its Annual Report available to its shareholders electronically via the Internet. The Company believes that this process expedites receipt of its proxy materials by shareholders, while lowering the costs and reducing the environmental impact of the Annual Meeting. If you received the Notice of Internet Availability by mail, you will not receive a printed copy of the proxy materials in the mail. Instead, the Notice of Internet Availability instructs you on how to access and review all of the important information contained in the proxy statement and Annual Report. The Notice of Internet Availability also instructs you on how you may submit your proxy over the Internet. If you received a Notice of Internet Availability by mail and would like to receive a printed copy of the proxy materials, please follow the instructions for requesting printed materials contained in the Notice of Internet Availability. 

At the close of business on the Record Date, a total of 223,656,264 Common Shares were issued and outstanding and entitled to vote on all matters, including those to be acted upon at the Annual Meeting. Each Common Share is entitled to one vote. The presence in person or by proxy of a majority of the Common Shares entitled to vote at the Annual Meeting will constitute a quorum for the transaction of business.

In the event that a quorum is not present at the Annual Meeting, it is expected the meeting will be adjourned or postponed to solicit additional proxies.

Solicitation of Proxies

The Company will be responsible for the costs of the solicitation set forth in this proxy statement. Brokerage houses, fiduciaries, nominees and others will be reimbursed for their out-of-pocket expenses in forwarding proxy materials to beneficial owners of Common Shares. In addition to soliciting proxies by mail, certain of the Company’s directors, officers and employees may solicit proxies by telephone, personal contact, or other means of communication. No additional compensation, except for reimbursement of reasonable out-of-pocket expenses, will be paid to directors, officers and employees of the Company in connection with the solicitation. Any questions or requests for assistance regarding this proxy solicitation may be directed to the Company by telephone at (804) 344-8121, Attention: Investor Relations, or your bank, broker or other custodian that holds your shares. You may revoke a

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previously delivered proxy by delivering written notice of revocation to the Secretary of the Company, or by submitting a later dated proxy by Internet, telephone or a duly executed paper ballot at any time before the proxy is voted at the Annual Meeting. We will honor the latest vote received. Proxy holders will vote shares represented by written proxies, if properly signed and returned to the Secretary, in accordance with instructions of the shareholders. If you are a beneficial owner of shares, you may revoke or change your voting instructions by contacting your broker, bank or other nominee and following their instructions.

Company Information

The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes. The mailing address of the Company is 814 East Main Street, Richmond, Virginia 23219. The Company can be contacted, and public information about the Company can be obtained, by sending a written notice to Ms. Kelly Clarke, Investor Relations Department, at the Company’s address as provided above or through its website, www.applehospitalityreit.com.

The Company’s Annual Report and its other public federal securities filings also may be obtained electronically through the EDGAR system of the Securities and Exchange Commission at www.sec.gov. The proxy materials are available at http://materials.proxyvote.com/03784Y.

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Proposals to be Voted Upon

Proposal 1. Election of Directors

The Company’s Board of Directors currently consists of nine directors, all of whom are standing for re-election at the Annual Meeting. On March 1, 2021, the Board, with the recommendation of the Nominating and Corporate Governance Committee, increased the size of the Board from eight to nine directors and appointed Mr. Howard E. Woolley to the Board of Directors to fill the newly created vacancy. Mr. Woolley’s term will expire at the Annual Meeting. The Board of Directors recommends the re-election of the current directors to the Board of Directors to serve as directors until the 2022 annual meeting of shareholders or until their successors are duly elected and qualified, except in the event of prior resignation, death or removal.  

Unless otherwise specified, all Common Shares represented by proxies will be voted FOR the election of the nominees listed below. If a nominee ceases to be available for election as a director, discretionary authority may be exercised by each of the proxies named on the attached proxy card to vote for a substitute. No circumstances are presently known that would cause any nominee to be unavailable for election as a director. The nominees are now members of the Board of Directors, have been nominated by action of the Board of Directors, and have indicated their willingness to serve if elected. If a quorum is present at the Annual Meeting, the positions on the Board of Directors will be filled by the election of the properly nominated candidates who receive the greatest number of votes at the Annual Meeting, even if a nominee does not receive a majority of all votes represented and entitled to be cast. Under the Company’s Corporate Governance Guidelines, if an incumbent director fails to receive at least a majority of the votes cast, such director will tender his or her resignation from the Board of Directors. The Nominating and Corporate Governance Committee of the Board will consider, and determine whether to accept, such resignation and make a recommendation to the Board of Directors. Within 90 days of the certification of the election results, the Board of Directors must act on the resignation, taking into consideration any recommendation by the Nominating and Corporate Governance Committee and any additional relevant factors. A director who tenders his or her resignation does not participate in the decisions of the Nominating and Corporate Governance Committee or the Board relating to the resignation.

A shareholder who wishes to abstain from voting on the election of a director may do so by specifying, as provided on the proxy, that authority to vote for any or all of the nominees is to be withheld. Withheld votes and broker non-votes will have no effect on the election of a director. A broker non-vote occurs when the entity holding shares in street name has not received voting instructions from the beneficial owner and either chooses not to vote those shares on a routine matter at the shareholders meeting or is not permitted to vote those shares on a non-routine matter.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH OF THE NOMINEES.

The following is a snapshot of the Company’s Board composition:

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The table below provides information about each of the Company’s director nominees, including their principal occupations and employment during at least the past five years and their directorships, if any, in public companies other than the Company.

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Proposal 2. Advisory Vote On Executive Compensation Paid by the Company

In accordance with Section 14A of the Exchange Act, the Company is providing its shareholders with the opportunity to approve, on a non-binding, advisory basis, the compensation paid to the Company’s named executive officers as disclosed in this proxy statement. The Board of Directors has adopted a policy, which shareholders approved by a non-binding advisory vote, of providing for an annual “say-on-pay” advisory vote. The Company encourages shareholders to read the disclosure under “Compensation Discussion and Analysis” for more information concerning the Company’s compensation philosophy, programs and practices, the compensation and governance-related actions taken in fiscal 2020 and the compensation paid to the named executive officers.

Accordingly, the Company is asking you to approve the adoption of the following resolution:

RESOLVED: That the shareholders of the Company approve, on a non-binding, advisory basis, the compensation paid to the Company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion in the proxy statement.

The affirmative vote of a majority of the votes cast will be necessary to approve this proposal. Abstentions and broker non-votes will have no effect on the outcome of this proposal. The shareholder vote on this proposal is advisory and non-binding and serves only as a recommendation to the Board of Directors. Although the vote is non-binding, the Compensation Committee and the Board of Directors value the opinions of shareholders and will consider the outcome of the vote when making future compensation decisions.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ABOVE PROPOSAL.

Proposal 3. Ratification of the Appointment of Ernst & Young LLP as the Company’s Independent Registered Public Accounting Firm

The firm of Ernst & Young LLP served as the independent registered public accounting firm for the Company in 2020. A representative of Ernst & Young LLP is expected to be present at the Annual Meeting. The representative will have an opportunity to make a statement if he or she so desires and will be available to answer appropriate questions from shareholders. The Board of Directors has approved the retention of Ernst & Young LLP as the Company’s independent registered public accounting firm for 2021, based on the recommendation of the Audit Committee. Independent accounting fees for the last two fiscal years are shown in the table below:

All services rendered by Ernst & Young LLP are permissible under applicable laws and regulations, and the annual audit of the Company was pre-approved by the Audit Committee, as required by applicable law. The nature of each of the services categorized in the preceding table is described below:

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Audit Fees. These are fees for professional services rendered for the audit of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K, reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q, or services normally provided by the independent auditor in connection with statutory or regulatory filings or engagements, and other accounting and financial reporting work necessary to comply with the standards of the Public Company Accounting Oversight Board (“PCAOB”) and fees for services that only the Company’s independent auditor can reasonably provide.

Audit-Related Fees. These are fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements. Such services include accounting consultations, internal control reviews, audits in connection with acquisitions, attest services related to financial reporting that are not required by statute or regulation and required agreed-upon procedure engagements.

Tax Fees. Such services include tax compliance, tax advice and tax planning.

All Other Fees. These are fees for other permissible work that does not meet the above category descriptions.  Such services include information technology and technical assistance provided to the Company. Generally, this category would include permitted corporate finance assistance, advisory services and licenses to technical accounting research software.

These accounting services are actively monitored (as to both spending level and work content) by the Audit Committee to maintain the appropriate objectivity and independence in the core area of accounting work performed by Ernst & Young LLP, which is the audit of the Company’s consolidated financial statements.

Pre-Approval Policy for Audit and Non-Audit Services. In accordance with the Sarbanes-Oxley Act of 2002, all audit and non-audit services provided to the Company by its independent auditors must be pre-approved by the Audit Committee. As authorized by that act, the Audit Committee has delegated to the Chair of the Audit Committee the authority to pre-approve up to $25,000 in audit and non-audit services. This authority may be exercised when the Audit Committee is not in session. Any decisions by the Chair of the Audit Committee under this delegated authority will be reported at the next meeting of the Audit Committee. All services reported in the preceding fee table for fiscal years 2019 and 2020 were pre-approved by the full Audit Committee, as required by then applicable law.

The Company is asking you to vote on the adoption of the following resolution:

RESOLVED: That the shareholders of the Company ratify the appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2021.

The affirmative vote of a majority of the votes cast will be necessary to approve this proposal. Abstentions will have no effect on the outcome of this proposal. The shareholder vote on this proposal is advisory and non-binding and serves only as a recommendation to the Board of Directors. If the shareholders do not ratify the appointment of Ernst & Young LLP by the affirmative vote of a majority of the votes cast at the meeting, the Audit Committee will reconsider whether or not to retain Ernst & Young LLP.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ABOVE PROPOSAL.

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Corporate Responsibility Overview

The Company has always worked to uphold high environmental, social and governance standards. Alignment with the best interests of the Company’s shareholders is at the forefront of Apple Hospitality’s values. Apple Hospitality is committed to maintaining strong governance practices that align with the best interests of its shareholders, minimizing the environmental impact of the Company and its hotels and making a positive impact throughout the Company, the hospitality industry, local communities and the many communities served by the Company’s hotels. Together with brand affiliates, hotel management teams and industry colleagues, Apple Hospitality is focused on advancing sustainability initiatives that effectively balance environmental stewardship with the Company’s business goals, improving communities through thoughtful outreach programs, and promoting diversity, equity and inclusion. In 2020, the Company enhanced its Corporate Responsibility disclosures, which are intended to provide stakeholders with a better understanding of the Company’s policies, programs, procedures and initiatives related to environmental stewardship, social responsibility and corporate governance. As part of the enhanced disclosures, the Company formally adopted an Environmental Policy, a Health, Safety and Well-Being Policy, a Human Rights Policy and a Vendor Code of Conduct, all of which are available within the Corporate Responsibility section of the Company's website at https://applehospitalityreit.com/corporate-responsibility/. Apple Hospitality’s policies are supported by the Board of Directors. The Company’s senior management team is responsible for providing oversight over policy enforcement and updating the Company’s Board of Directors on implementation efforts. The Company commits to reporting publicly to its stakeholders on its progress and to considering stakeholder feedback to support the ongoing evolution of programs and strategies in support of the Company’s policies. The Company’s Environmental, Social and Governance (“ESG”) Advisory Committee is comprised of key Company leaders and is responsible for overseeing the Company’s policies. The Company’s Chief Financial Officer serves as the executive sponsor for the ESG Advisory Committee. The Company anticipates it will continue to enhance disclosures related to these issues over time. Below are some highlights of the Company’s initiatives. 

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Human Capital

The Company believes that each of its team members plays a vital role in the success of the organization. Management aims to provide an inspiring, inclusive work environment where employees feel valued, empowered and encouraged to make positive differences within the Company and throughout their communities, with a belief that the most successful management provides clear leadership while empowering the team to make timely and responsible decisions and to take actions necessary to achieve exceptional operating results. The Company is committed to diversity, equity and inclusion and does not tolerate discrimination or harassment in the workplace.

The Company offers competitive compensation and benefits, a flexible leave policy, fully paid parental leave, an education reimbursement program, and a culture that encourages balance of work and personal life. The Company provides its employees with two days paid leave each year for volunteer work and donation matching to support non-profit organizations. The Company emphasizes an open-door policy for communications and conducts regular employee satisfaction surveys, which provide the opportunity for continuous improvement.

 The Company is committed to working safely and maintaining a safe workplace in compliance with cleanliness guidelines set forth by the Centers for Disease Control and Prevention, and in compliance with applicable Occupational Safety and Health Act standards.

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During 2020, all employees involved in the day-to-day operation of the Company’s hotels were employed by third-party management companies engaged pursuant to the hotel management agreements. Apple Hospitality is committed to the health, safety and security of hotel associates and guests and is proud to support the American Hotel & Lodging Association’s 5-Star Promise.

Corporate Governance, Risk Oversight and Procedures for Shareholder Communications

Board of Directors. The Company’s Board of Directors has determined that all of the Company’s directors (and nominees for director), except Mrs. Kristian M. Gathright, Mr. Glade M. Knight and Mr. Justin G. Knight, are “independent” within the meaning of the rules of the New York Stock Exchange (“NYSE”). In making this determination, the Board considered all relationships between the applicable director and the Company, including commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. Although retired from the Company, due to her previous employment by the Company, Mrs. Gathright will not be considered independent under the NYSE rules until at least three years have elapsed since her retirement date.

The Board has adopted a categorical standard that a director is not independent (a) if he or she receives any personal financial benefit from, on account of or in connection with a relationship between the Company and the director (excluding directors’ fees and equity-based awards); (b) if he or she is a partner, officer, employee or managing member of an entity that has a business or professional relationship with, and that receives compensation from, the Company; or (c) if he or she is a non-managing member or shareholder of such an entity and owns 10% or more of the membership interests or common stock of that entity. The Board may determine that a director with a business or other relationship that does not fit within the categorical standard described in the immediately preceding sentence is independent, but in that event, the Board is required to disclose the basis for its determination in the Company’s then current annual proxy statement.  

In order to optimize the effectiveness and independence of the Board, the independent directors have designated an independent, non-employee director to serve as the Company’s Lead Independent Director, which currently is held by Jon Fosheim. See “Committees of the Board and Board Leadership.”

Code of Ethics. The Board has adopted a Code of Business Conduct and Ethics for the Company’s officers, directors and employees, which is available at the Company’s website, www.applehospitalityreit.com. The purpose of the Code of Business Conduct and Ethics is to promote (a) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest; (b) full, fair, accurate, timely and understandable disclosure in periodic reports required to be filed by the Company; and (c) compliance with all applicable rules and regulations that apply to the Company and its officers, directors and employees. Any waiver of the Code of Business Conduct and Ethics for the Company’s executive officers or Board may be made only by the Board or one of the Board’s committees. The Company anticipates that any waivers of the Code of Business Conduct and Ethics will be posted on the Company’s website.

Corporate Governance Guidelines. The Board has adopted Corporate Governance Guidelines that set forth the guidelines and principles for the conduct of the Board of Directors, which is available at the Company’s website, www.applehospitalityreit.com. The Corporate Governance Guidelines reflect the Board of Directors’ commitment to monitoring the effectiveness of decision-making at the Board and management level and ensuring adherence to good corporate governance principles, all with a goal of enhancing shareholder value over the long term.

Risk Oversight. The Board believes that risk oversight is a key function of a Board of Directors. It administers its oversight responsibilities through its Audit Committee, Nominating and Corporate Governance Committee and Compensation Committee. All members of each of these committees are independent directors. The entire Board is kept abreast of and involved in the Company’s risk oversight process. It is through the approval of officers and compensation plans, as well as management updates on property performance, industry performance, financing strategy, acquisitions and dispositions strategy and capital improvements, that the Board has input to manage the Company’s various risks. Additionally, through the Audit Committee, the Board reviews management’s and independent auditors’ reports on the Company’s internal controls and any associated potential risks of fraudulent activities. Through the Nominating and Corporate Governance Committee, the Board reviews the Company’s Corporate Governance Guidelines and related risks. Through the Compensation Committee, the Board oversees risk related to compensation practices with the objective of balancing risk/rewards to overall business strategy. Risk oversight is also one of the factors considered by the Board in establishing its leadership structure. The Company has separated the roles of Chairman and Chief Executive Officer to create a leadership structure that the Board believes strikes the appropriate balance between the authority of those who oversee the Company and those who manage it on a day-to-day basis and also has a Lead Independent Director to optimize the effectiveness and independence of the Board.

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Shareholder Communications. Shareholders and other interested parties may send communications to the Board or to specified individual directors. Any such communications should be directed to the attention of the Lead Independent Director at Apple Hospitality REIT, Inc., 814 East Main Street, Richmond, Virginia 23219. The Lead Independent Director will decide what action should be taken with respect to the communication, including whether such communication should be reported to the full Board.

Share Ownership Guidelines. The Board believes that equity ownership by directors and executive officers will align their interests with shareholders’ interests. To that end, the Company has adopted formal share ownership guidelines, included in the Company’s Corporate Governance Guidelines, applicable to all of its directors and executive officers. On an annual basis, the Company evaluates the ownership status of the directors and executive officers. Directors and executive officers are required to own securities of the Company with a value equal to the following multiple of their annual base cash retainer (for directors) or their annual base salary (for executive officers):

New directors and the Chief Executive Officer are required to comply with the ownership requirements within two years of becoming a member of the Board or Chief Executive Officer and other new executive officers are required to comply with the ownership requirements by January 1^st of the year following the fourth anniversary of being named an executive officer. All current directors and executive officers have either met the equity ownership levels of the guidelines or are within the transition period.

The Nominating and Corporate Governance Committee may waive the stock ownership requirements in the event of financial hardship or other good cause.

Hedging and Pledging of Company Securities. The Company’s Insider Trading Policy prohibits directors and employees, including the executive officers, from hedging their ownership of the Company’s stock, including a prohibition on engaging in the following transactions: (i) trading in call or put options involving the Company’s securities and other derivative securities; (ii) engaging in short sales of the Company’s securities; (iii) holding the Company’s securities in a margin account; (iv) other hedging or monetization transactions related to the Company’s securities, including the use of financial instruments such as prepaid variable forwards, equity swaps, collars and exchange funds; and (v) pledging more than 50% of the number of the Company’s securities held individually to secure margin or other loans.

Board Self-Evaluation. Pursuant to the Company’s Corporate Governance Guidelines and the charters of the Compensation, Audit and Nominating and Corporate Governance Committees of the Board of Directors, the Nominating and Corporate Governance Committee oversees the annual self-evaluation of the Board and each committee. The self-evaluation requires each director to complete a detailed questionnaire soliciting input on matters such as board structure and composition, committee structure, board and committee meeting conduct, board support, education and board and committee performance. The Nominating and Corporate Governance Committee reports the assessments to the Board, and if the Board determines that changes in its governance practices need to be made, management and the Nominating and Corporate Governance Committee will work with the Board to implement the necessary changes. 

Consideration of Director Nominees

Director Qualifications. The Company believes the Board should encompass a diverse range of talent, skill and expertise sufficient to provide sound and prudent guidance with respect to the Company’s operations and interests. Each director also is expected to exhibit high standards of integrity, practical and mature business judgment, including the ability to make independent analytical inquiries, and be willing to devote sufficient time to carrying out their duties and responsibilities effectively.

The Board has determined that the Board of Directors as a whole must have the right mix of characteristics and skills for the optimal functioning of the Board in its oversight of the Company. The Board believes it should be comprised of persons with skills in areas such as finance, real estate, investment, banking, strategic planning, human resources, leadership of business organizations, and legal matters. Although the Board does not have a diversity policy, the Board is committed to diversity and believes it is desirable for the Board to be composed of individuals who represent a mix of viewpoints, experiences and backgrounds. The Board will continue to endeavor to ensure the qualified pool of new director candidates is diverse and includes women, individuals from minority groups and

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underrepresented communities. In addition to the targeted skill areas, the Board looks for a strong record of achievement in key knowledge areas that it believes are critical for directors to add value to the Board, including:

Nomination Procedures. The Board has established a Nominating and Corporate Governance Committee that oversees the nomination process and recommends nominees to the Board. As outlined above, in selecting a qualified nominee, the Board considers such factors as it deems appropriate, which may include the current composition of the Board; the range of talents of the nominee that would best complement those already represented on the Board; the extent to which the nominee would diversify the Board; the nominee’s standards of integrity, commitment and independence of thought and judgment; and the need for specialized expertise. Applying these criteria, the Board considers candidates for Board membership suggested by its members, as well as management and shareholders. Shareholders of record may nominate directors in accordance with the Company’s bylaws which require, among other items, notice sent to the Company’s Secretary not less than 60 days prior to a shareholder meeting that will include the election of Board members. No nominations other than those proposed by the Nominating and Corporate Governance Committee were received for the Annual Meeting.

Committees of the Board and Board Leadership

Summary. The Board of Directors has four standing committees, which are specified below. The following table shows each committee’s function, membership and the number of meetings held during 2020:

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Board Leadership.  The Board recognizes that one of its key responsibilities is to evaluate and determine its optimal leadership structure so as to provide independent oversight of management. The Board understands that there is no single generally accepted approach to providing Board leadership and the right Board leadership structure may vary as circumstances warrant. Consistent with this understanding, the independent directors periodically consider the Board’s leadership structure. Currently, the roles of Chairman and Chief Executive Officer are held by different directors. Mr. Glade M. Knight serves as Executive Chairman and Mr. Justin G. Knight serves as Chief Executive Officer. The Board believes that this structure provides the appropriate balance between the authority of those who oversee the Company and those who manage it on a day-to-day basis. The Executive Chairman of the Board presides at all meetings of the shareholders and of the Board as a whole. The Executive Chairman performs such other duties, and exercises such powers, as from time to time shall be prescribed in the bylaws or by the Board.

Additionally, the Board has appointed Mr. Jon A. Fosheim to serve as Lead Independent Director. The Lead Independent Director’s responsibilities include, among other things, presiding at meetings or executive sessions of the independent directors and non-employee directors, serving as a liaison to facilitate communications between the Chairman, the Chief Executive Officer and other members of the Board, without inhibiting direct communications between and among such persons, and serving as a liaison to shareholders who request direct communications and consultations with the Board.

Audit Committee Independence. The Board of Directors has determined that each current member of the Audit Committee is “independent” as defined in the listing standards of the NYSE. To be considered independent, a member of the Audit Committee must not (other than in his or her capacity as a director or committee member, and subject to certain other limited exceptions) either (a) accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any subsidiary; or (b) be an affiliate of the Company or any subsidiary. The Audit Committee currently has two members, Mr. Jon A. Fosheim and Mr. L. Hugh Redd, who are “financial experts” within the meaning of the regulations issued by the Securities and Exchange Commission. The Company’s management believes that the combined experience and capabilities of the Audit Committee members are sufficient for the current and anticipated operations and needs of the Company. In this regard, the Board has determined that each Audit Committee member is “financially literate” and that at least two members have “accounting or related financial management expertise,” as all such terms are defined by the rules of the NYSE.

Board Meetings, Attendance and Related Information. The Board held a total of six meetings during 2020 (including regularly scheduled and special meetings). It is the policy of the Company that directors should attend each annual meeting of shareholders. All directors at the time of the meeting attended the 2020 Annual Meeting. The Company also expects directors to attend each regularly scheduled and special meeting of the Board, but recognizes that, from time to time, other commitments may preclude full attendance. In 2020, each director attended at least 75% of the aggregate of (a) the total number of meetings of the Board of Directors that were held during the period in which he or she was a director, and (b) the total number of meetings held by all committees of the Board on which he or she served during the period in which he or she served.

Executive Sessions. The independent members of the Board of Directors meet independently of management and the non-independent directors in executive sessions on a regular basis, presided by the Lead Independent Director. During 2020, the independent members of the Board of Directors met four times.

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2020 Compensation of Directors

The compensation of the directors is reviewed and approved annually by the Board of Directors. During 2020, the directors of the Company were compensated as follows:

Reimbursements to Directors in 2020. All directors were reimbursed by the Company for travel and other out-of-pocket expenses incurred by them to attend meetings of the directors and committee meetings and in conducting the business of the Company. 

Compensation of Non-Employee Directors. In 2020, the non-employee directors (classified by the Company as all directors other than Mrs. Kristian M. Gathright, Mr. Glade M. Knight and Mr. Justin G. Knight) were scheduled to receive (i) a $165,000 annual retainer, with $65,000 paid in cash and $100,000 paid in vested stock grants, paid in quarterly installments, (ii) an annual retainer for the Chair of the Audit Committee of $15,000 (in addition to fees for service on the Company’s Disclosure Committee) paid in cash in quarterly installments, and (iii) an annual retainer for the Chair of the Compensation Committee, the Chair of the Nominating and Corporate Governance Committee and the Lead Independent Director of $10,000 each, paid in cash in quarterly installments. Upon her retirement from all employee and officer positions with the Company and its subsidiaries on March 31, 2020, Mrs. Gathright become a non-employee director of the Company and, as a result, began receiving compensation as a non-employee director effective April 1, 2020. In March 2020, as a result of the coronavirus (COVID-19) situation and associated economic impact to the Company, non-employee directors volunteered to take a partial reduction of their annual fee over the remainder of 2020. These partial reductions resulted in an aggregate annual fee reduction of approximately 17%.

Non-Employee Director Deferral Program. Effective June 1, 2018, the Board of Directors adopted the Non-Employee Director Deferral Program (the “Director Deferral Program”) under the Apple Hospitality REIT, Inc. 2014 Omnibus Incentive Plan (the “2014 Omnibus Incentive Plan”) for the purpose of providing non-employee members of the Board the opportunity to elect to defer receipt of all or a portion of the annual retainer payable to them for their service on the Board, including the portion of the annual retainer amounts payable in cash (including for service as a Chair of a committee of the Board or Lead Independent Director) and the portion of the annual retainer amounts payable in fully vested Common Shares. As specified by the director, the receipt of payment may be deferred until either (i) the date that his or her service on the Board has ended, (ii) a specified date, or (iii) the earlier of the specified date or the date that his or her service on the Board has ended. The deferred amounts will also be paid if, prior to the time specified by the director, the Company experiences a change in control or upon death of the director. For the portion of the director fees payable in shares, the director may elect to defer his or her fees in the form of deferred stock units, and for the portion of the director fees payable in cash, the director may elect to defer his or her fees either in the form of deferred stock units or as deferred cash fees.

Under the Director Deferral Program, the Company has established a notional deferral account (for bookkeeping purposes only) for each non-employee director who has elected to participate and all deferred fees are credited to this account, whether in cash or stock, as of the date the fee otherwise would have been paid to the director (the “Quarterly Deferral Date”). Deferred fees converted into deferred stock units are credited to the deferral account based on the fair market value of the Company’s Common Shares on the Quarterly Deferral Date. On each Quarterly Deferral Date, dividends earned on deferred stock units are credited to the deferral account in the form of additional deferred stock units based on dividends declared by the Company on its outstanding Common Shares during the quarter and the fair market value of the stock on such date. Additionally, on each Quarterly Deferral Date, deferred cash fees are credited with an additional deferred cash amount based on the dividends declared by the Company during the quarter on its outstanding Common Shares and the share equivalent, as defined in the Director Deferral Program, of the deferred cash balance from the preceding quarter. Upon the applicable payment date, as described above in the preceding paragraph, any deferred stock units credited to a director’s deferral account will be settled solely by delivering an amount of the Company’s Common Shares equal to the number of such deferred stock units, and, with respect to any deferred cash fees credited to the director’s deferral account, such fees will be paid solely in the form of cash. Directors have no rights as shareholders of the Company with respect to deferred stock units credited to their deferral accounts.

During 2020, three of the non-employee directors elected to participate in the Director Deferral Program by deferring all or a portion of their annual retainer fees in the form of deferred stock units and/or deferred cash fees.

Employee Directors.  Mr. Glade M. Knight and Mr. Justin G. Knight are employee directors of the Company and accordingly, during 2020, they received no compensation from the Company during their term of employment for their services as directors. Mrs. Gathright was an employee director from January 1, 2020 until her retirement from all

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employee and officer positions with the Company and its subsidiaries on March 31, 2020 and received compensation for her role as a non-employee director beginning April 1, 2020.

Director Compensation. The following table shows the amounts earned in 2020 by the Company’s non-employee directors. Mrs. Gathright’s director compensation during her service as a non-employee director is included in the Summary Compensation Table below in the section titled “Executive Compensation—Summary Compensation Table.”

Outstanding Stock Option Awards. In 2008, the Company adopted the Apple REIT Nine, Inc. 2008 Non-Employee Directors Stock Option Plan (the “Directors’ Plan”). The Directors’ Plan provided for automatic grants of options to acquire Common Shares. The Directors’ Plan applied to directors of the Company who were not employees or executive officers of the Company. The Directors’ Plan was terminated effective upon the listing of the Company’s Common Shares on the NYSE on May 18, 2015 (the “Listing”). No further grants can be made under the Directors’ Plan, provided however, the termination did not affect any outstanding director option awards previously issued under the Directors’ Plan. Following the termination of the Directors’ Plan, all awards to directors are made under the 2014 Omnibus Incentive Plan.

See “Ownership of Certain Beneficial Owners and Management” for the number of outstanding options that were granted to Mr. Glenn W. Bunting under the Directors’ Plan, which are all fully vested, as of the Record Date. Since adoption of the Directors’ Plan, Mr. Bunting has not exercised any of his options to acquire Common Shares. The directors did not have any other outstanding option awards as of the Record Date.

Audit Committee Report

The Audit Committee of the Board of Directors is currently composed of three directors. All three directors are independent directors as defined under “Committees of the Board and Board Leadership—Audit Committee Independence.” The Audit Committee operates under a written charter that was adopted by the Board of Directors and is annually reassessed and updated, as needed, in accordance with applicable rules of the Securities and Exchange Commission. The Audit Committee oversees the Company’s financial reporting process on behalf of the Board of Directors. In fulfilling its oversight duties, the Audit Committee reviewed and discussed the audited financial statements for fiscal year 2020 with management and the Company’s independent auditors, Ernst & Young LLP, including the quality and acceptability of the accounting principles, the reasonableness of significant judgments, any critical audit matters identified during the audit and the clarity of disclosure in the financial statements. The Audit Committee also reviewed management’s report on its assessment of the effectiveness of the Company’s internal control over financial reporting and Ernst & Young LLP’s report on the effectiveness of the Company’s internal control over financial reporting. Management is responsible for the preparation, presentation and integrity of the Company’s financial statements, accounting and financial reporting principles, internal controls, and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Ernst & Young LLP is responsible for performing an independent audit of the consolidated financial statements and the notes thereto in accordance with generally accepted auditing standards.

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The Audit Committee also has discussed with the independent auditors the matters required to be discussed pursuant to the applicable requirements of the PCAOB and the Securities and Exchange Commission. Additionally, the Audit Committee has received the written disclosures and letter from the independent auditors required by the applicable requirements of the PCAOB regarding the independent auditor’s communications with the Audit Committee concerning independence and has discussed, with the independent auditors, the independent auditors’ independence.    

Based on the review and discussions described in this Report, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 for filing with the Securities and Exchange Commission.

The Audit Committee Report above does not constitute “soliciting material” and will not be deemed “filed” or incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act, that might incorporate SEC filings by reference, in whole or in part, notwithstanding anything to the contrary set forth in those filings.

Certain Relationships and Agreements

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. 

Mr. Glade M. Knight, Executive Chairman of the Company, owns Apple Realty Group, Inc. (“ARG”), which receives support services from the Company and reimburses the Company for the cost of these services as discussed below. Also, an entity controlled by Mr. Knight is currently a member of and Mr. Knight is Chief Executive Officer of Energy 11 GP, LLC and Energy Resources 12 GP, LLC, which are the respective general partners of Energy 11, L.P. and Energy Resources 12, L.P., each of which receive support services from ARG. As an executive officer of the Company, Mr. Knight’s total annual compensation in 2020, 2019 and 2018 was $849,417, $1,192,975 and $890,996 respectively, calculated in accordance with the determination of compensation in the Summary Compensation Table in the section titled “Executive Compensation—Summary Compensation Table” below.

Cost Sharing with Related Entities

The Company provides support services, including the use of the Company’s employees and corporate office, to ARG and is reimbursed by ARG for the cost of these services. Under this cost sharing structure, amounts reimbursed to the Company include both compensation for personnel and office-related costs (including office rent, utilities, office supplies, etc.) used by ARG. The amounts reimbursed to the Company are based on the actual costs of the services and a good faith estimate of the proportionate amount of time incurred by the Company’s employees on behalf of ARG. Total reimbursed costs allocated by the Company to ARG for 2020 totaled approximately $1.2 million.

As part of the cost sharing arrangement, certain day-to-day transactions may result in amounts due to or from the Company and ARG. To efficiently manage cash disbursements, the Company or ARG may make payments for the other company. Under this cash management process, each company may advance or defer up to $1 million at any time. Each quarter, any outstanding amounts are settled between the companies. This process allows each company to minimize its cash on hand and reduces the cost for each company. The amounts outstanding at any point in time are not significant to either of the companies. As of December 31, 2020, total amounts due from ARG for reimbursements under the cost sharing structure totaled approximately $0.3 million.

The Company, through its wholly-owned subsidiary, Apple Air Holding, LLC, owns a Learjet used primarily for acquisition, asset management, renovation and public relations purposes. The aircraft is also leased to affiliates of the Company based on third party rates, which leasing activity was not significant during 2020. The Company also

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utilizes one aircraft, owned by an entity which is owned by the Company’s Executive Chairman, for acquisition, asset management, renovation and public relations purposes, and reimburses the entity at third party rates. Total costs incurred for the use of the aircraft during 2020 were less than $0.1 million.

Executive Officers

During 2020, in connection with planned retirements and the Company’s broader succession planning, the Company had the following changes in executive officers:

In addition to the appointments described above, the Board approved a change to the title, but not the roles and responsibilities, of Mr. Justin G. Knight. Effective April 1, 2020, Mr. Justin Knight’s title became Chief Executive Officer.

Each executive officer is appointed annually by the Board of Directors at its meeting prior to the annual meeting of shareholders. The following table sets forth biographical information regarding the Company’s executive officers, other than Mr. Glade M. Knight, Executive Chairman and Mr. Justin G. Knight, Chief Executive Officer, who also serve as directors and whose information is provided above in the section titled “Proposals to be Voted Upon—Proposal 1. Election of Directors”:

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Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes the Company’s executive compensation arrangements for the Company’s named executive officers for 2020 and explains the structure and rationale associated with each material element of the 2020 compensation arrangements. The named executive officers for 2020 are as follows:

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COVID-19 Response and Pay Actions Taken

2020 proved to be a challenging year on a global scale. The outbreak of COVID-19 not only dramatically reduced travel, but also had a detrimental impact on regional and global economies. The global, national and local impact of the outbreak rapidly evolved and the U.S., as well as state and local governments, reacted by instituting a wide variety of measures intended to control its spread, including states of emergency, mandatory quarantines, implementation of “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings. These measures resulted in cancellation of events, including sporting events, conferences and meetings. The pandemic triggered a period of material global economic slowdown and the National Bureau of Economic Research declared that the U.S. has been in a recession since February 2020.

The Company’s business was significantly affected by the pandemic. While the Company’s hotels remained open, occupancy, revenue per available room (“RevPAR”) and average daily rate (“ADR”) were all significantly impacted in 2020 compared to prior years. Despite the magnitude of the impacts on the Company’s business and operations, the Compensation Committee did not modify the performance metrics for the incentive compensation program for 2020 established prior to the effects of the economic recession precipitated by the COVID-19 global pandemic and the associated economic impact to the Company. As a result of the dramatic decline in operations of the Company’s hotels in late March 2020, each of the following executives agreed to voluntary adjustments to planned 2020 compensation as follows:

As discussed further below, in February 2021, the Compensation Committee determined incentive compensation payable to the named executive officers under the 2020 incentive compensation plan and also determined that, in light of other significant contributions made by the executive team in 2020, including critical operational initiatives focused on responding to the disruptions caused by the pandemic, each of the named executive officers (other than the Chief

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Executive Officer, who recommended that he not be included) were awarded an additional bonus amount payable entirely in equity. After factoring in the additional payment amounts, none of the named executive officers received annual incentive compensation that exceeded the total target incentive compensation level set for such individual under the original 2020 incentive compensation plan.

Key Executive Compensation Practices

The following is a summary of the Company’s key practices to align executive compensation with the interests of its shareholders, with target compensation percentages based on the Compensation Committee’s determinations prior to the impact of the voluntary reductions in executive compensation discussed above:

Advisory Vote on Executive Compensation 

The Company provides its shareholders annually with the opportunity to cast an advisory vote on executive compensation, and in 2020 approximately 82% of the shares voted were in support of the 2019 compensation of the executive officers. The Compensation Committee viewed this advisory vote as an expression by the shareholders of their general satisfaction with the Company’s executive compensation program. Consistent with the advisory vote of the shareholders at the 2017 annual meeting of shareholders, the Company will hold advisory votes on executive compensation annually until the next say-on-frequency vote is conducted, which will be no later than 2023.

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Pay for Performance Philosophy 

The Company believes that a significant portion of each named executive officer’s total compensation should be incentive-based to best align their interest with those of its shareholders. As a result, for 2020, the Compensation Committee initially approved a target compensation for the named executive officers with the following average compensation mix:

Named Executive Officer 2020 Target Pay Mix

All incentive compensation is performance based:

50% on shareholder return metrics

50% on operational performance metrics

The 2020 incentive compensation plan was 100% objective and was based on three key operational performance metrics and six shareholder return metrics. To further align interests with its shareholders, 75% of the target incentive compensation was payable in Common Shares of the Company, of which one-third was restricted and subject to a one-year vesting period and the remaining two-thirds being vested at issuance. Based on FPL’s 2020 peer group report discussed below, at that time the Company had the highest percentage of target executive compensation based on objective share and operating performance targets compared to its peer group.

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Executive Compensation Highlights

As discussed above, 2020 proved to be a very difficult year as a result of the COVID-19 pandemic. In recognition of these challenges, Mr. Justin G. Knight voluntarily took a reduction in his target pay for 2020 by 60%. In addition, in connection with the Compensation Committee’s determinations regarding 2020 incentive compensation, Mr. Justin G. Knight recommended that he not receive any additional incentive compensation payments for 2020 over and above what the original 2020 incentive compensation plan would otherwise entitle him to receive (which, for 2020, was based on the total shareholder return metrics in the 2020 incentive compensation plan). As a result, the Chief Executive Officer experienced a 47% decrease in realized compensation, realizing $3,217,626 in 2020 as compared to $6,093,809 in 2019. Additionally, the portion of the incentive program that did achieve above threshold performance was paid out in equity, so no cash compensation under the 2020 incentive program was earned by the Chief Executive Officer.

Shareholder Return

Despite the COVID-19 pandemic’s adverse impact on the Company and the hospitality industry as a whole, the Company was able to maintain strong performance relative to its peer group. For the one-year, two-year, and three-year periods ended December 31, 2020, the Company outperformed the peer group cumulative total shareholder return average (consisting of Ashford Hospitality Trust, Inc., Chatham Lodging Trust, Hersha Hospitality Trust, RLJ Lodging Trust and Summit Hotel Properties, Inc.) by approximately 2,500 basis points, 5,000 basis points, and 4,900 basis points, respectively. The returns for the one-year, two-year and three-year periods ended December 31, 2020 assume the reinvestment of dividends.

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General Philosophy and Objectives

The Company’s executive compensation philosophy continues to focus on attracting, motivating and retaining a superior management team that can maximize shareholder value. The compensation arrangements are designed to reward performance relative to financial and other metrics that the Company believes are key metrics that will enhance shareholder value and to reward executive officers for performance at levels that the Compensation Committee believes to be competitive with other public hospitality REITs. The compensation arrangements consist of both base salary and incentive compensation which is intended to incentivize executive officers to manage the Company in a prudent manner without encouraging unnecessary risk-taking. In establishing the compensation arrangements, the Compensation Committee believes the best way to maintain the alignment of management and shareholder objectives is to have a larger variable component tied to key metrics. The incentive goals in the incentive compensation program are set at competitive levels which are expected to require stretch performance but are believed to be achievable. As a result, on average approximately 80% of target compensation of the named executive officers was intended to be variable in 2020, excluding the effects of the voluntary reductions and additional executive compensation payments discussed above. The

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Compensation Committee also reviews and considers the management team’s overall compensation. The Company has not adopted a formal policy or guideline for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among different forms of non-cash compensation.

Role of the Compensation Committee 

Pursuant to the Compensation Committee’s charter, the Compensation Committee assists the Board of Directors in discharging the Board of Directors’ responsibilities relating to compensation of the Company’s officers. The Compensation Committee’s duties and responsibilities include, among other things, the following:

The Compensation Committee’s charter permits it to delegate its functions to one or more subcommittees as permitted by law.

In reviewing the Company’s executive compensation structure, the Compensation Committee evaluates data regarding executive compensation paid by and executive compensation plans of other public hospitality REITs and other peer group information which has been provided every two years since 2014 by FPL, most recently in 2020. The Compensation Committee utilizes FPL’s recommendations in conjunction with market data to determine annual executive compensation. Target compensation for 2020 for each named executive officer was approved by the Compensation Committee after consideration of each individual’s experience in their position and the industry, the risks and deterrents associated with their positions, the anticipated difficulty to replace the individual, and total compensation paid to each named executive officer in prior years.

Role of the Chief Executive Officer

In connection with determining compensation of executive officers other than the Chief Executive Officer, the Compensation Committee may seek input from the Company’s Chief Executive Officer. Any recommendations given by the Chief Executive Officer will be based upon the Chief Executive Officer’s assessment of the Company’s overall performance, each executive officer’s individual performance and employee retention considerations. The Compensation Committee reviews the Chief Executive Officer’s recommendations, and in its sole discretion determines all executive officer compensation. The Chief Executive Officer will not provide any recommendations to the Compensation Committee regarding his own compensation.

Compensation Consultant

The Compensation Committee periodically consults with FPL as its independent executive compensation consultant regarding compensation arrangements. The Compensation Committee’s charter authorizes the Compensation Committee to retain or obtain the advice of a compensation consultant to advise it in the evaluation of executive officer compensation. In connection with developing the executive compensation structure and making executive compensation decisions, the Compensation Committee relies upon FPL to:

The Company paid FPL approximately $60,000 in 2020 to advise the Company regarding executive compensation. Subsequent to FPL’s compensation study in 2018 and in connection with the Company’s search for a

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Chief Financial Officer in 2019, the Company paid Ferguson Partners L.P., an affiliate of FPL, approximately $174,000 in 2019. The engagement of Ferguson Partners L.P. for these additional services was recommended by management and approved by the Compensation Committee.

Peer Group Information

In connection with its comprehensive review of the executive compensation arrangements for all of the Company’s executive officers, the Compensation Committee relies upon FPL to provide, among other things, compensation information and data regarding executive officers in the Company’s peer group. The peer group compensation information and data are one factor the Compensation Committee considers in establishing the Company’s executive compensation arrangements. At the time of FPL’s 2020 report, the peer group consisted of the following nine public company REITs in the hospitality industry with similar market capitalization to the Company, with an overall median market capitalization of approximately $2.6 billion at the time of FPL’s 2020 report (the Company’s market capitalization at the time of the report was $3.6 billion):

For the 2020 study, the Company removed LaSalle Hotel Properties, which was used as a peer in prior studies, as it was acquired by Pebblebrook Hotel Trust in 2018. Following discussions with FPL, the Compensation Committee concluded that replacing LaSalle Hotel Properties with another peer company was not necessary at the time.

The Compensation Committee believes the peer group above represents companies with which the Company competes for talent and business. The Compensation Committee used data from this peer group to provide the Compensation Committee with a context in which to make base salary determinations and decisions regarding appropriate payout levels for incentive compensation.

Elements of Executive Compensation

The Company’s executive compensation arrangements consist of base salary and incentive compensation. 

Annual Base Salary

Annual base salary is a fixed level of compensation that reflects each named executive officer’s position and individual performance and is intended to comprise, on average, approximately 20% of each named executive officer’s target compensation, excluding the impact of voluntary reductions in executive compensation. Base salary is designed to serve as a retention tool throughout the executive’s career. In determining base salaries, the Compensation Committee considers the salary information and data obtained for the executive officers in the peer group of companies identified above, each executive officer’s role and responsibility, unique skills, future potential with the Company, and internal pay equity considerations. After evaluating these factors, the Compensation Committee approved the following annual base salary of each named executive officer.

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Incentive Compensation

The named executive officers are eligible to earn variable incentive compensation awards designed to reward the achievement of annual operational/financial performance measures and annual/multi-year total shareholder return measures. The Compensation Committee establishes target annual incentive award opportunities for each named executive officer, consisting of an annual cash bonus award and an equity compensation award opportunity, following an analysis of market information and data for executive officers in the peer group of companies identified above, each executive officer’s role and responsibility, unique skills, future potential with the Company, and internal pay equity considerations. The Compensation Committee considers all relevant facts and circumstances when evaluating performance, including changing market conditions and broad corporate strategic initiatives, along with overall responsibilities and contributions, and retains the ability to exercise its judgment and discretion to adjust an incentive compensation award. Except where specifically noted below, the following discussion of the 2020 incentive compensation program does not take into account the effects of the voluntary reductions and additional executive compensation payments discussed above.

For 2020, approximately 75% of the target incentive compensation of the named executive officers was intended to be provided through equity awards and the remainder as an annual cash bonus, with one-third of the target equity award being restricted and subject to a one-year vesting period and the remaining two-thirds of the target equity award being fully vested. Target incentive compensation awards earned upon the achievement of the performance goals consist of (i) for the shareholder return metrics discussed below, one-half of the total award in restricted Common Shares that vest on the second Friday of December in the year issued, i.e., December 10, 2021, and the remaining one-half in fully vested Common Shares and (ii) for the operating metrics discussed below, one-half of the total award in fully vested Common Shares and the other half of the award as the annual cash bonus.

2020 Incentive Compensation Award Opportunity and Actual Award Earned

In 2020, each named executive officer employed as of the end of the year was eligible to receive incentive compensation awards to be determined pursuant to a weighted average formula based on the achievement of certain performance measures. The amounts actually payable to the named executive officer were to be determined based upon whether the Company’s performance met certain “threshold,” “target” or “maximum” levels for each of the performance measures. With respect to each performance measure, results below the threshold level resulted in a payment of 0% of the target value, results between the threshold and the target levels resulted in a payment of 50% to 100% of the target value, results between the target and the maximum levels resulted in a payment of 100% to 200% of the target value, and results above the maximum level resulted in a payment of 200% of the target value.

Performance Measures

The Compensation Committee adopted performance goals for the 2020 incentive compensation awards following a review of the Company’s business plan and budget for the year. For 2020, this occurred prior to the onset of the COVID-19 pandemic. At the time that they were set, the incentive goals that the Compensation Committee established were substantially uncertain to be achieved. The “threshold” level can be characterized as “stretch but attainable,” meaning that, although attainment is uncertain, based on historical performance, it can reasonably be anticipated that threshold performance may be achieved. The “target” and “maximum” levels represent increasingly challenging and aggressive levels of performance.

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The Compensation Committee determined that the performance measures for 2020 should be based on objective goals, and the Compensation Committee did not set separate performance goals for individual executive officers. The incentive compensation awards for 2020 were based on the following operational and shareholder return performance goals and resulted in the following payouts:

The Compensation Committee believes that each of these metrics are key measurements of the Company’s operational, financial and shareholder return performance. The following summarizes how the Company measures each metric:

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Shortly after finalizing the 2020 incentive program, and as states of emergency, mandatory quarantines, “stay at home” orders, business closures, border closings, and restrictions on travel and large gatherings began to occur or be imposed, it became immediately clear that the operational performance metric goals set at the beginning of the year were unlikely to be achieved. However, given the rapidly changing circumstances and general uncertainty around the scope and extent of the pandemic and its impacts on the economy and hospitality industry, it was not feasible to establish revised operational performance metrics. At the same time, the management team immediately turned its attention toward the new challenges generated by the pandemic and made significant efforts to navigate the Company through a challenging economic environment and in ways not measurable by the original incentive program design. These efforts were ultimately factored into the final 2020 incentive compensation decisions for the named executive officers (other than the Company’s CEO) as discussed below.

Despite all of the challenges brought on by COVID-19, the Company’s executive team quickly pivoted and achieved a variety of important operational accomplishments and other financial and investment performance achievements, including the accomplishments and achievements summarized below.

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In light of the executive team’s efforts and additional achievements described above (which were not contemplated or anticipated at the time the incentive compensation performance goals were set), and the fact that these efforts contributed to the Company’s strong relative shareholder return outperformance (compared to its peer group), and recognizing that the Company’s incentive compensation program did not otherwise contain any individual performance category (unlike that of all of the Company’s peer group), in February 2021, the Compensation Committee approved an additional award with a value equal to 25% of target incentive compensation, payable entirely in equity, to each named executive officer (other than the Company’s CEO, who as noted above, recommended that he not receive any additional incentive compensation in 2020).

The Company’s 2020 actual results as compared to the initial established goals are summarized in the table above under “Performance Measures.” As previously discussed, the Compensation Committee did not make any adjustments to the 2020 performance goals under the incentive compensation plan originally set in March 2020. For 2020, the Company achieved an average of 75% of the target incentive for each of the initial metrics discussed above, resulting in the compensation awards (including the additional 25% awards made to certain of the named executive officers as noted above) as follows:

These incentive compensation awards were determined by the Compensation Committee in February 2021, and the equity grants were issued in March 2021, with 50% of the awards vested immediately and 50% of the awards to vest in December 2021.

Realized Pay

The tables below, which supplement the Executive Compensation—Summary Compensation Table, shows the value of the 2020 and 2019 compensation earned by each named executive officer under the compensation program.

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The Realized Pay Tables differ from the Summary Compensation Table in that the 2020 and 2019 Realized Pay Tables show the actual value of the compensation earned based on the achievement of the performance metrics for 2020 and 2019 and the additional 25% in incentive compensation in 2020, while the Summary Compensation Table reflects the estimated grant date fair value of such Common Shares that were to be issued subject to achievement of the performance conditions as determined in accordance with FASB ASC Topic 718. For a detailed description of the grant date fair value of the share awards, see Note 1 to the “Executive Compensation—Summary Compensation Table.” These tables are not a substitute for the “Executive Compensation—Summary Compensation Table” and are intended to provide additional information that the Company believes is useful in facilitating an understanding of the 2020 and 2019 compensation amounts earned by its named executive officers.

The chart below shows the realized pay and the total compensation reflected in the Summary Compensation Table for 2019 and 2020 for the Chief Executive Officer.

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Perquisites and Other Benefits

The named executive officers participate in other benefits plans on the same terms as other employees. These plans include medical insurance, dental insurance, life insurance, disability insurance and a 401(k) plan. Under the 401(k) plan, employees are eligible to defer a portion of their salary and the Company, at its discretion, may make a matching contribution. In 2020, the Company made a matching contribution of up to $11,400 of each participant’s annual salary, determined by the individual’s contribution and as restricted by statutory limits. As noted in the Summary Compensation Table below, the Company provided limited perquisites to its named executive officers in 2020, which included parking benefits. The emphasis in the compensation program for named executive officers is on the pay-for-performance elements.

In addition, the named executive officers are also entitled to receive accrued dividends on the share incentive compensation awards, which are payable in cash if the awards vest. Such amounts are included under the column, “All Other Compensation,” in the Summary Compensation Table below.

Ownership Requirements

The Board of Directors adopted share ownership guidelines that require executive officers to maintain a minimum share ownership in the Company. See “Corporate Governance, Risk Oversight and Procedures for Shareholder Communications—Share Ownership Guidelines.”

Limits on Tax Deductibility of Executive Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”), prohibits publicly held corporations from taking a tax deduction for annual compensation in excess of $1 million paid to any of the corporation’s “covered employees,” which include its chief executive officer, its chief financial officer and its three other most highly compensated executive officers (as well as any person who ever was a covered employee for any prior taxable year beginning after December 31, 2016). Since the Company qualifies as a REIT under the Internal Revenue Code and is generally not subject to U.S. federal income taxes on income distributed to shareholders (other than income of its taxable REIT subsidiaries), the payment of compensation that fails to satisfy the requirements of Section 162(m) will increase the Company’s required REIT distributions, but does not have a material adverse consequence to the Company. Although the Company is mindful of the limits on deductibility imposed by Section 162(m), the Company nevertheless reserves the right to structure the compensation packages and awards in a manner that may exceed the limitation on deduction imposed by Section 162(m).

2021 Incentive Compensation

COVID-19 continues to have a significant impact on the hospitality industry contributing to an environment with relatively low visibility into future trends. In light of the uncertainties related to the ongoing COVID-19 pandemic,

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and the lack of visibility into more predictable operating fundamentals and trends, the Company has not issued 2021 operational guidance. However, the Company and the executive team remain focused on a number of critical areas to ensure that the Company effectively and successfully navigates through the pandemic. As a result, in February 2021, the Compensation Committee modified the annual incentive program to provide that one-half (50%) of 2021 incentive compensation will be based on operational performance metrics and one-half (50%) of the incentive program will continue to measure shareholder return performance, based 75% on relative shareholder return metrics and 25% on total shareholder return metrics over one-year, two-year, and three-year periods. With respect to the operational performance metrics, the first half of the year—for the period of January 1 – June 30, 2021—will be based on operational performance metrics including portfolio occupancy growth, expense management, successful negotiation of waivers of covenants in the Company’s credit facilities and effective allocation of capital to drive incremental returns, with no specific target or weighting assigned to each metric. The Compensation Committee intends to review performance mid-year to determine the feasibility of reverting back to operational performance metrics for the second half of the year that are more consistent with the Company’s historical operational performance metrics. The Compensation Committee will continue to maintain a rigorous framework, one that requires outperformance (55^th percentile) to achieve target level payout for the relative total shareholder return metrics.  

Special Note Regarding Non-GAAP Financial Measures

This Compensation Discussion and Analysis contains certain non-GAAP financial measures which are described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Non-GAAP Financial Measures.”

Compensation Committee Report

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

The Compensation Committee Report above does not constitute “soliciting material” and will not be deemed “filed” or incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act, that might incorporate SEC filings by reference, in whole or in part, notwithstanding anything to the contrary set forth in those filings.

Compensation Committee Interlocks and Insider Participation

The members of the Compensation Committee are Glenn W. Bunting, Daryl A. Nickel and L. Hugh Redd. No member of the Compensation Committee is or has ever been an officer or employee of the Company, and no member of the Compensation Committee had any relationships requiring disclosure by the Company under the SEC’s rules requiring disclosure of certain relationships and related-party transactions. No executive officer serves or has served as a member of a compensation committee, or other committee serving an equivalent function, of any other entity that has one or more of its executive officers serving as a member of the Board of Directors or Compensation Committee and no executive officer serves or has served as a director of another entity, one of whose executive officers serves on the Compensation Committee. Accordingly, during 2020 there were no interlocks with other companies within the meaning of the SEC’s proxy rules.

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Executive Compensation

The following table sets forth certain compensation information for each of the Company’s named executive officers for 2020.

Summary Compensation Table

The Summary Compensation Table reflects compensation under the executive compensation arrangements discussed above under “Compensation Discussion and Analysis.”