Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality REIT fourth quarter and full year 2018 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kelly Clark, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. We welcome you to Apple Hospitality REIT's fourth quarter and full year 2018 earnings call on this, the 26th day of February, 2019. Today's call will be based on the fourth quarter and full year 2018 earnings release, which was distributed yesterday afternoon. As a reminder, today's call will contain forward-looking statements as defined by federal securities laws including statements regarding future operating results. These statements involve known and unknown risks and other factors which may cause actual results, performance, or achievements of Apple Hospitality to be materially different from future results, performance, or achievements expressed or implied by such forward-looking statements. Participants should carefully review our financial statements and the notes thereto as well as the risk factors described in Apple Hospitality's 2018 Form 10-K and other filings with the SEC. Any forward-looking statement that Apple Hospitality makes speaks only as of today, and the company undertakes no obligation to publicly update or revise any forward-looking statements except as required by law. In addition, certain non-GAAP measures of performance, such as EBITDA, EBITDA RE, Adjusted EBITDA, Adjusted EBITDA RE, FFO, and Modified FFO will be discussed during this call. We encourage participants to review reconciliations of those measures to GAAP measures as included in yesterday's earnings release and other filings with the SEC. For a copy of the earnings release or additional information about the company, please visit applehospitalityreit.com. This morning, Justin Knight, our Chief Executive Officer, Chrissy Gathright, our Chief Operating Officer, and Brian Peary, our Chief Financial Officer, will provide an overview of our results for the fourth quarter and full year 2018 and an outlook for the sector and for the company. Following the overview, we will open the call for Q&A. At this time, it is my pleasure to turn the call over to our CEO, Justin Knight.

Thank you, Kelly. Good morning, and thank you for joining us today. As we begin 2019, the macroeconomic backdrop continues to be relatively strong with healthy GDP growth, low unemployment, rising corporate profits, and high levels of consumer confidence, despite some political uncertainty in the U.S. and abroad. Although the hotel industry experienced only modest growth during 2018, fundamentals are stable. and we remain optimistic that 2019 will be another year of steady performance for Apple Hospitality REIT. Outperformance during the fourth quarter of 2017 related to hurricane recovery and restoration efforts in Houston and parts of Florida created difficult year-over-year comps for us, which were exacerbated by the margin impact of the 2018 hurricanes Florence and Michael, and ramping new supply in many of our markets. For our portfolio, Comparable Hotels RevPar declined 0.8% during the fourth quarter and 0.2% for the year. Adjusted EBITDA grew approximately 2% for the quarter and the full year. Through continued strategic mix management and effective cost control measures, we were able to achieve Comparable Hotels' adjusted hotel EBITDA margin of 35% for the quarter and 37% for the full year, well within guidance provided at the onset of 2018 and above the revised guidance despite revenue challenges. We are incredibly proud of both our asset management and onsite management teams, especially during this period of moderate to flat top line growth with continued wage and expense pressures. We anticipate we will continue to see moderate demand growth in 2019 with property level performance challenged by new supply and continued expense growth overall. including increases in labor costs driven primarily by a competitive labor market. From a capital allocation standpoint, we returned $380 million to shareholders in 2018 and over $1.2 billion since listing through dividends and share buybacks. While we anticipate that funds used to buy shares will ultimately be offset by proceeds from asset sales, we were able to utilize our balance sheet to take advantage of what we saw as significant discrepancies between public and private market valuations as hotel stocks traded down during the fourth quarter. As we have highlighted in the past, we will continue to evaluate share repurchases and act where we see opportunity to create incremental value for our shareholders. In addition to share buybacks, we continually seek opportunities that are additive to our portfolio and build upon our strategy to enhance shareholder value over the long term. During the fourth quarter of 2018, we purchased the 127-room Hyatt Place Jacksonville Airport for $15 million, bringing our total 2018 acquisitions to five hotels for $152 million. We are excited to have our first Hyatt-branded hotel and look forward to adding additional Hyatt hotels when appropriate. While we build scale within the Hyatt brands, We believe that we will be able to leverage our experience with comparable Hilton and Marriott rooms focused product to enhance property operating performance. We have six additional hotels under contract for acquisition with a combined purchase price of $162 million, including a recently signed contract for the existing 160 room Hampton Inn Suites in St. Paul, Minnesota for $32 million. This asset, along with the five hotels highlighted on previous calls, which are new construction projects, augment and strengthen our existing portfolio. We anticipate construction of the 128-room Home 2 suites in Orlando, Florida, will be completed this spring, and construction for the remaining four hotels will be completed in 2020. All of the new build projects are with trusted developers, and our contracts have enabled us to lock in attractive per-key pricing in the current rising cost environment. As we add hotels to our portfolio, we assess our existing assets and look for opportunities to exit where we're able to achieve attractive pricing and where we feel proceeds can be redeployed in ways that further enhance shareholder value. During 2018, we completed the sale of three hotels and entered into a contract with a private equity buyer for the sale of 16 assets. The total combined sales price for the 16 assets of $175 million is represented just under a 12 times multiple on 2018 EBITDA after PIP or a 7.5% cap rate on 2018 results after anticipated PIP costs and an industry standard FF&E reserve. In February, the buyer for the 16 assets failed to meet its obligations under our contract and we entered into a new contract at a similar multiple for a subset of the initial portfolio representing nine of the original hotels with an anticipated closing over the next couple of months. The buyer's $7 million deposit is non-refundable. With the first quarter rebound in the public markets and continued availability of debt for quality hotel assets, we view portfolio transactions as increasingly likely over the coming months. We continue to closely monitor new hotel supply growth in our markets, which has approximated national averages for our product type. Despite demand growth across much of the U.S., ramping supply continues to create a headwind for our portfolio in a number of markets. At the end of the fourth quarter, approximately 64.3% of our properties had one or more upper mid-scale, upscale, or upper upscale new construction projects within a five-mile radius, a slight uptick from last quarter. We are optimistic that as construction costs continue to rise, new supply will begin to peak over the next 12 to 18 months and begin to represent less of a headwind for us. We are confident that the strength of our brands, our consistent reinvestment, our locations within markets, and the quality of our onsite management teams position our portfolio to remain competitive over the long term, despite near-term increased competition from newly opened hotels. Apple Hospitality was intentionally structured to mitigate risk of investing in the lodging industry and maximize operating results through all phases of an economic cycle. With a focus on providing our investors with consistent dividends and appreciation in the value of their underlying investment, we own hotels with broad consumer appeal that are diversified across a variety of U.S. markets and aligned with the best lodging brands and hospitality management teams in the industry. We consistently reinvest in our hotels. We follow a disciplined approach to capital allocation, and we maintain financial flexibility with low levels of debt. Today, with 241 hotels diversified across 88 U.S. markets, we are the largest publicly traded REIT focused on the rooms-focused segment of the lodging industry, and we are confident we are well-positioned for continued success this year and beyond. I would now like to hand the call over to Chrissy to provide additional detail on performance across our markets during the fourth quarter and full year 2018.