Apple Hospitality REIT, Inc.

Greetings and welcome to the Apple Hospitality REIT first quarter 2019 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, Investor Relations. Please go ahead.

Thank you, and good morning. We welcome you to Apple Hospitality REIT's first quarter 2019 earnings call on this, the ninth day of May, 2019. Today's call will be based on the first quarter 2019 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 Hotel EBITDA, FFO, 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 first quarter 2019 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. Performance across our portfolio of hotels during the first quarter was steady and generally in line with our expectations. Parable Hotels RevPAR increased by 0.1% in the quarter, driven by 1.2% increase in average daily rate, and adjusted EBITDA grew approximately 0.5% for the quarter. Our asset management and on-site management teams have done an exceptional job during this period of moderate top-line growth, to maximize profitability through strategic revenue management and effective cost control measures. With that in mind, we are pleased to report a strong comparable hotels adjusted hotel EBITDA margin of 36% for the quarter. Our 2019 guidance was updated to reflect our performance to date and adoption of a new lease accounting standard, which Brian will discuss in greater detail. We continue to anticipate demand growth will remain healthy New supply will continue to impact property-level performance in several of our markets, and there will be continued cost and wage pressures during the year. Given the size, quality, diversification, and effective age of our portfolio of rooms-focused hotels, and the strength and flexibility of our balance sheet, we remain confident we are well-positioned to maximize operating results and pursue opportunities in the marketplace as they arise. We are pleased to have completed the sale of nine hotels, totaling just over 1,000 guest rooms during the quarter for $95 million. We achieved attractive pricing for the portfolio, and through the transactions, we reduced our exposure to certain lower rev-par markets, which we believe will enhance the long-term strength and stability of our remaining hospitality platform. We acquired two hotels during the quarter, the existing Hampton Inn & Suites in St. Paul, Minnesota, and the newly constructed Home 2 Suites in Orlando, Florida, for a combined total of $52 million. Currently, we have five hotels under contract for acquisition, all of which are under development, for an aggregate expected purchase price of $159 million. We have highlighted four of the hotels under contract on previous calls, and they include the Hyatt Place and Hyatt House in Tempe, Arizona, and the Hampton Inn Suites and Home 2 Suites in Cape Canaveral, Florida, We anticipate construction of these four hotels will be completed in 2020. Most recently, we entered into a purchase contract for a courtyard to be built in downtown Denver, Colorado, with an expected completion date of 2021. The hotel is planned for the Union Station Lodo neighborhood in downtown Denver. Vibrant location with an abundance of demand drivers is within walking distance of Union Station and Coors Field, among many other attractions and businesses. We believe that through these transactions, we will be able to continue to enhance our market mix and the value of our overall portfolio. Although the strength of the broader economy continues to drive demand for travel, new supply remains a headwind for our portfolio in many of our markets. At the end of the first quarter, approximately 66.2% of our properties had one or more upper mid-scale, upscale, or upper upscale new construction projects within a five-mile radius. which represents an uptick from what we reported at the end of the fourth quarter. As construction costs continue to rise, we remain optimistic that new supply will begin to peak over the next year, year and a half, and begin to represent less of a headwind for us. With the strength of our brands, our consistent reinvestment, our locations within markets, and the quality of our onsite management teams, we are confident that our portfolio is uniquely positioned to remain competitive over the long term, fight near-term increased competition from newly opened hotels. Consistent reinvestment in our hotels enables us to maintain competitive positioning within our markets and helps to mitigate the impact of competing new supply. In addition to cyclical renovations at our hotels, we continually seek opportunities to implement environmental efficiency enhancements, including equipment upgrades and replacements that reduce energy and water consumption and improve waste management. By investing in proven sustainability practices, we are able to enhance operating performance at our hotels while reducing the negative impact of our business on the environment. Our team is also continually evaluating opportunities to enhance the competitive position of our properties and drive incremental return on our investments. During the first quarter, the company invested approximately $19 million in renovations, and we plan to spend an additional $60 to $70 million during the remainder of 2019, which includes the beginning of the renovation at our full-service Marriott in Richmond, Virginia. Also of note, we have property improvement plans that will be completed in the second quarter for our recently purchased Atlanta and Memphis Ampton Inn & Suites. These hotels are well-located and strong performers, and despite the short-term disruption, will benefit from the reinvestment as each of their markets continue to draw increased demand from demographic shifts and city investments in amenities and attractions. Our portfolio of 234 hotels is broadly diversified across 87 U.S. markets to reduce volatility and provide exposure to a variety of industries and demand generators. I will now hand the call over to Chrissy to provide additional detail regarding performance across our markets during the first quarter of 2019.

Thank you, Justin. We are very pleased with our solid start to the year. Relatively steady supply and demand trends, we reported flat rev park growth at the midpoint of our full year range. Same strong increases in parking and late cancellation revenue more than offset a modest decline in food and beverage revenue. Optimal revenue mix management and impressive cost control enabled us to maintain a strong gross operating profit margin. Same-store total payroll increased 3.5% per occupied room compared to an increase of approximately 4% factored into our guidance. Partially offsetting the payroll increase, we continue to benefit from energy efficiency initiatives and lower loyalty program charges. Comparable hotel EBITDA margin declined only 10 basis points, with a 50 basis point benefit from the ground lease reclassification offset by a 60 basis point impact from increased insurance and property taxes. On the revenue side, we were pleased to see continued increases in our corporate negotiated and highest rated retail segments. Government and group mix declined modestly, mainly attributable to the partial government shutdown, non-repeat projects in certain markets, and weather-related sports group cancellations. As for individual market performance, with expanding economic and abundant recreational opportunities year-round, several markets in the Sun Belt remain strong performers, including Atlanta, Birmingham, Raleigh-Durham, Greensboro-Winston-Salem, Huntsville, Montgomery, Phoenix, and Tucson. Our North Carolina East and Panama City markets benefited from hurricane recovery business, which will likely dissipate for the former by the end of the second quarter, but should continue for the latter through the remainder of the year. Our markets with softer hotel performance included Houston, Miami-Fort Lauderdale, Orlando, Austin, Richmond, Oklahoma City, and Dallas. Several Florida and Texas markets were impacted by decreased demand related to hurricane recovery business in the previous year, as well as the ramping of new supply. Additionally, in Austin, three of our hotels were undergoing renovations during the first quarter. While the Oklahoma City market saw healthy demand increases, absorption of new supply is temporarily impacting Red Park growth. Oklahoma City market is eagerly awaiting the opening of a brand new 275,000 square foot convention center, scheduled to debut in 2020. Another eagerly awaited opening, the new Star Wars Galaxy's Edge themed area in Walt Disney World and Disneyland will benefit the Orlando as well as the Anaheim market later this year. As discussed, in certain markets there was a headwind from non-repeat natural disaster business While in other markets, there was a tailwind from continuing recovery business. We estimate that the natural disasters in Alaska, North Carolina, Florida, and Texas had a slightly net negative impact for the quarter, which was offset by the Atlanta Super Bowl benefit. As for outlook, incorporating calendar shifts and renovation timing, we anticipate that Red Park growth for the second quarter will be at the low end to the midpoint of our full year outlook. With a pickup in the third quarter, our asset management team and our operators are working diligently to manage expenses with the goal of continued minimization of margin loss, while still providing a quality guest experience. We feel strongly that aligning management company compensation with achievement of our balanced scorecard metrics has and will continue to drive better results versus more traditional management compensation arrangements. I will now turn the call over to Brian to provide additional detail on our financial results.

Thanks, Chrissy, and good morning. Summarizing some of our results for the quarter, total revenue was $304 million, an increase of 2% from the first quarter of 2018. Adjusted EBITDA was $101 million compared to $100 million in the same period of 2018, and modified FFO per share was $0.38 per share flat compared to last year. E&A expense for the first quarter of 2019 was $8.1 million, an increase of $1.3 million, primarily due to year-to-date improvement under the company's performance-based incentive plan compared to the same period of 2018 and management transition costs. The ongoing management transition and assuming performance under the incentive plan continues similar to the first quarter. We would expect similar increases for the remainder of the year in these costs. We finished the quarter with $1.4 billion in outstanding debt and $235 million of availability on our credit facilities. Weighted average maturity of our outstanding debt was 5.1 years with a current average rate of 3.8%. 77% of our debt was effectively fixed rate with a weighted average rate of 4% and an average remaining term of 4.1 years. Justin mentioned we adopted the new accounting lease standard on January 1st of this year. This resulted in an increase of roughly $147 million in assets and $152 million in liabilities on our balance sheet at the end of the quarter related to ground and other leases. The difference has a cumulative adjustment to shareholders' equity. This includes reclassifying for ground leases from operating to financing leases based on the new definition of finance leases, which results in a couple of reclassifications effective in 2019 on the income statement side. In the first quarter, we recognized $1.8 million of interest expense and $1 million of amortization expense related to the four finance leases. As the leases continued to be classified as operating leases, we would have instead recognized $1.6 million in cash operating ground lease expense and $1 million in non-cash straight line rent expense and amortization of intangible lease expense. For the full year of 2019, the effect of this accounting change is a roughly $7 million increase to adjusted EBITDA and a decrease to modified FFO of $1.2 million. Based on our operating performance to date, the completion of the sale of the portfolio of nine hotels and acquisition of two hotels in March, and the lease accounting change, we have increased our estimated results for 2019 for comparable hotels, adjusted EBITDA margin percent, and adjusted EBITDA and maintain their estimated comparable hotels rep part change from the guidance we provided in February. Current guidance for 2019 is net income between $167 and $192 million. Comparable hotels rep part change between negative 1% and plus 1%. Comparable hotels adjusted hotel EBITDA margin between 36.2 and 37.2%. and adjusted at EBITDA between $425 and $445 million. During the quarter, the company paid distributions of 30 cents per share, or a total of approximately $67 million. The annualized $1.20 per common share represents an annual 7.3% yield based on our May 6th closing price of $16.55. This month is the fourth anniversary of our listing on the New York Stock Exchange, During that period, our shareholders have earned over $1 billion in dividends. I believe we can continue to operate effectively against our strategy and that over the long term, we are well positioned to meaningfully increase shareholder value. Thank you for joining us this morning. We will now open up the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Austin Werschmitt with KeyBank Capital Markets. Please go ahead.

Hi. Good morning, everyone. Justin, just curious if the uptick in the new supply you referenced is is really concentrated in markets that you'd characterize as already, you know, supply challenged, or are you seeing new markets being impacted?

Well, the number we quoted highlights the fact that we have an increase in the number of markets in total that are being impacted by new supply. If you look at supply as a percentage increase across our portfolio, we continue to be roughly in line with national averages. However, and I've highlighted this in past calls and in our conversations, supply is coming to the markets that have the strongest performance. So markets that are producing the highest REBPAR and that, you know, have over the past several years produced the best growth. are those markets that are seeing new supply. But the uptick from last quarter is, you know, in the number that I quoted, shows that we have more markets now, and it's not indicative of increased supply levels in markets where we're already seeing it. The other factor that's playing into that is, and we've talked about this in the past, it's taking longer for projects, once they're in the ground, to actually be completed and delivered. So a portion of the uptake, we believe, is driven not by an absolute increase in the supply picture, but because we're tracking projects that are under construction, the longer those projects take to be completed, the longer they're reflected in that number.

Got it. Thank you. With the nine assets that have now been sold, are you actively marketing the remaining seven that were originally under contract or still negotiating, I guess, with the original buyer about a sale potentially down the road?

That's a good question. We actually are continually looking at the entirety of our portfolio and looking for opportunities to monetize or to realize value through sale transactions. We're continuing to explore options for the assets that were part of the original portfolio, but not exclusively. because the market continues to appear to be relatively strong, at least relative to the past several years in terms of transaction volume, we're optimistic that we'll continue to find opportunities to prune from our portfolio and to replace with assets that we think, based on our total portfolio, have greater value.

So as we think about as potential sales materialize, How should we think about reinvestment? I mean, you've talked about wanting to gain scale to the Hyatt brand over time. Is there anything on the horizon that could help you grow your exposure to that brand in the near term?

Well, you know, we have the two assets that are under construction that will be delivered in 2020. We continue to underwrite a number of Hyatt assets, but not exclusively. You know, we continue to see opportunity as well within the Marriott and Hilton brand families. Great. Thanks for the time.

Thank you.

Our next question comes from Brian Marr with the Riley FBR. Please go ahead.

Yeah, good morning. A couple of quick questions. What sources – you know, you've noted the construction hotels. and we've understood that for a while, but what sources are you using to identify acquisition targets which are yielding kind of the best results, since it doesn't seem like you're doing a ton of acquisitions just buying from others?

Well, I mean, the reality is we're not doing a ton of acquisitions in total. From a PACE standpoint, I think the read-through should be that we're being incredibly selective and acting on acquisitions in today's environment only where we feel there's meaningful value to be added to our portfolio. If you look at the deals, the existing deals that we're acquiring, the sources are mixed. A portion of them have been brokered, and a portion have come to us directly through longstanding relationships. We're fortunate in that we've been active players from an acquisition standpoint for nearly two decades now within the select service space. and have over that period of time developed strong relationships with a number of developers and operators. And we continue to use those in addition to relationships that we have with the brokerage community to source deals, existing deals.

How much can you typically save or has your experience been, you know, how much better is the cap rate, let's say, on an acquisition for a non-broker deal versus a broker deal?

You know, a lot of it depends. So, you know, I'd say, you know, just because a deal is brokered doesn't mean that the process is more competitive. And, you know, we have where we've acquired assets that have been brokered realized in many instances, you know, substantial values. But, you know, our preferences is generally to work directly with sellers with whom we have longstanding relationships. We found that, you know, there's payoff there. And you're seeing that a lot, actually, in our development pipeline. You know, looking specifically at the assets we have under contract in Cape Canaveral, for example, and the per keys that we're paying there, you know, versus the brokered residents in that traded recently. We bought the Cape Canaveral Homewood Suites for about $165,000 a key and have under contract the Hampton Inn and Suites and Home 2 for $208,000 a key. The Residence Inn recently traded in that market, and it's an older property with an anticipated PIP in the $30,000 a key neighborhood. The asset traded for just under $250,000 a key. And so I think where we've really been able to leverage our relationships into meaningful value is on the development side.

And just shifting gears, I think you made a comment in your prepared comments on a decline, a modest decline in F&B, which is a little bit different than what we've heard from some of the other companies that have reported so far. admittedly, many of those are full-service lodging REITs, but can you talk about what you're seeing there? Because our experience has been this quarter, we're seeing an uptick in out-of-room spend.

Yes, good morning, Brian. Actually, the decline in F&B, the majority of it was attributable to our full-service Marriott in Richmond, Virginia. And part of their challenge was that they had... fewer city-wide, so less group room nights in the first quarter, as well as there was, in the market, some of their competitors had rooms that were under renovation in the previous year, so there was more inventory to compete with. So the majority of that decline was related to that particular hotel. But also, as I mentioned in the prepared remarks, we did have some group cancellations that were related to the partial government shutdowns. as well as in certain markets, the increased rainy weather impacted some of our early season sports groups. So with that, a little bit of a change in mix, there was a little bit less FMV revenue. We do not expect that to continue at that decline for the rest of the year.

Can you just remind us, lastly, what your group business typically is as a percentage of your total business and kind of how that's shaping up on a year-over-year basis for 19 over 18.

So it's typically between 14% to 15% of our room-night mix. In the first quarter, it was down. We would expect that to pick up in the second and third quarter to be fairly flat year-over-year.

Thank you. Thank you.

Our next question comes from Anthony Powell with Barclays. Please go ahead.

Hello. Good morning, everyone. Good morning. Good morning. Just a question on your underwriting for your new development deals. How has that changed over the past couple of years, given kind of the more moderate Red Park growth environment? Are you targeting higher yields? Are you kind of being more conservative and kind of ramp up expectations? How has that changed recently?

In reality, our methodology hasn't changed. As you highlight, specific market dynamics have changed somewhat. And in markets where we anticipate slower growth, just as in times past, we continue to underwrite that as part of our overall process. But as we look at new development deals, our underwriting anticipates that the deals will be accretive to EBITDA and to NAV upon stabilization. And if you look at how those deals have performed relative to our acquisition of existing assets, they're in line to better from a performance standpoint.

Okay. And there's a lot of talk this quarter about market share shifts potentially between some of the larger brand families here in the U.S., I think some of that was centered on group, but did you see any of that in your portfolio?

Good morning. So in terms of market share shifts, overall for our portfolio, we saw that our portfolio grew the majority of over half of our hotels, slightly more than half of our hotels actually grew market share, which is a pretty consistent trend when we have a large geographically diversified portfolio. If we break it down between Hilton and Marriott, we saw, for the most part, it was fairly consistent. We would say we did see our Hilton hotels, there's a slightly larger percentage of our Hilton hotels that gain share versus our Marriott hotels. But I will caveat that there are a lot of dynamics that goes into market share gains and individual markets and individual hotels. So we didn't see anything that was overly alarming in terms of trends relative to market share between the individual brands, but we do continue to monitor that.

Okay. Thank you. Thank you.

Our next question comes from Amanda Schweitzer with Baird. Please go ahead.

Good morning, guys. Thanks for taking my question. Good morning. Good morning. You mentioned some higher parking fees this quarter. Can you talk about any other revenue management initiatives that you expect to drive growth this year?

So we're continually focusing on additional parking, and we should continue to see that benefit through the rest of the year because there were some markets where we found that we weren't charging for parking before, and as part of our updated regular market surveys, we found there was opportunity to do so. We are also continuing to work on a collection of late cancellation fees. We started that initiative very early last year and had a lot of great success, and especially considering that it is still a very manual process for a portion of our hotels. So we would expect that to moderate some as we go throughout the year because of our early efforts last year, but we're still seeing above average growth there. In terms of other revenue management initiatives, we did recently hire a new director of revenue strategy. That is a key focus area for us. And he is doing some deep dives with all of our management partners and identifying opportunities to make sure that first on the room's revenue that we have the right mix and we're driving business to the highest profit channels. And we're actually seeing really good success there. But in combination with the brand's efforts around really promoting direct business and strategically taking OTA business when we need it and then yielding it on this higher demand nights when we don't need it. We're actually seeing increased 80, for our portfolio, 80 basis points and channel shifts from OTA business to brand.com contribution. So that also helps on our commission, which then plays into our improvement in margins. Those are some of the areas that we're working on. We're always looking for additional opportunities. We are implementing in some of our hotels as part of our renovation some upgrades to what you would call our suite shops or our pantries or our markets. And we are finding some success in that in being able to increase the revenues that we're actually being able to generate by having a better product offering and improvement to the margins. So those are a few of the things that we're working on.

That's helpful. And then you mentioned some success in the labor management front this quarter. Is that still a result of some of your labor management initiatives that you guys have been doing? Or is there anything else driving that? And do you think that level of cost containment is sustainable for the rest of the year?

Absolutely. It is still a result of our teams, our asset management teams and our operators working incredibly hard to be efficient. We will see that level off as we move throughout the year. We had indicated that previously because a lot of the upfront savings comes from the initial implementation. What we're really focused on right now with our operators is better utilization of the system and we are seeing continued reduction in hours. We are seeing some reduction in contract labor. And when we see reductions in contract labor, that provides a lot of benefits in terms of efficiency. We are seeing continued reductions in overtime. If you look at the average hourly wages, and STAR puts this metric out that they actually get from government statistics, leisure and hospitality, accommodation, average hourly earnings, year-end, the increase was 3.2%. In February, it was 3.8%, and in March, for the projected number, a 3.9% increase in average hourly wages. So wages are continuing to increase as the economy continues to do well, but we are very pleased with our operator's ability to mitigate some of those increases with some of these efficiency programs. We're continuing also to work on and having really good success in a lot of markets, the green choice type programs, or being able to offer our guests choice in whether it's loyalty points or charitable donation or a light touch housekeeping service versus the full housekeeping service. So we're going to continue to work on that initiative as well.

That's it for me. Thanks again.

Thank you.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad. Our next question comes from Jeff Donnelly with Wells Fargo. Please go ahead.

Good morning, folks. I guess that's a question for you, Chrissy, revisiting your comments on the REVPAR index by brand, if I could revisit that. I'm just curious. I mean, there has been a lot of focus that maybe Marriott's integration has presented a little bit of a headwind for some owners out there in different forms, for some hotels on the group side, others on loyalty. I'm curious if in some way you think that might be creating a little bit of a headwind you've seen on market share growth for some of your Marriott products in, I guess, You know, the follow-up to that is do you think that's something that could reverse to your benefit in the coming 12 months?

What's your sense? So, Jeff, I think that's a great question, and we spend a lot of time with our brands analyzing the data. And I would go with sort of the second part of what you said. Obviously, when you have an integration of that scale, there's a lot of resources put towards that. in spending time just this week with the Marriott folks. I was very encouraged. We had great conversations. There is very much a sense of a lot of the heavy lifting has been done. There's still work to be done, but there is very much a sense of that now is the opportunity to really focus on leveraging the power of the platform. And in terms of scale, in terms of all the partnership opportunities, in terms of just early stats that they've been able to give us in terms of starting to be able to see some crossover from the former Starwood guests into our legacy Marriott hotels. There's definitely some green shoots there, and we are going to continue to monitor that, but we are encouraged by some of the early results as we have moved into the year and look forward. We do think that there's an opportunity. You know, the Starwood guests were very, very loyal, especially their elites. Quite often in markets they would travel, you know, 15 miles, you know, 20 miles to be able to find a, you know, a Starwood property to, you know, get their loyalty points. And now that the You may have the option of going to a Marriott. We are seeing that in terms of, at least on the redemption stats, that we are seeing some really good growth in terms of Starwood members coming over to legacy Marriott hotels. Especially with us on the select service side, there just wasn't as much Starwood product. I prefer to not dwell too much on the past, and we are very encouraged about the opportunity in the future.

It's useful. Thank you. And maybe one for Justin on the construction side. I guess a simple way of putting it is what allows it to continue? Because when you look at construction costs, it's probably been outstripping construction I guess what I would call hotel cash flows, if you will, for the last two years at least. And, you know, implicitly you would think that the development yields continue to edge lower and financing has gotten more elusive and more costly, but yet, you know, construction starts still remain pretty robust. I guess if you had to, you know, put on your hat and looking at development, you know, what are the economics for a developer that allow that, you know, construction starts to continue? Are we just sort of seeing the last few projects shake out of the pipeline, or do you really think We could see a meaningful decline in starts in the industry in the next two years or so.

Our expectation, again, assuming consistent economic dynamics, is that we do begin to see a slowdown. Interestingly, as we look at the brand pipelines and as we look at the supply number that I highlighted earlier in my remarks, to some extent, they're being inflated by you know, longer construction times than lead times for new development, meaning that projects stay in the total pipeline longer than they did earlier in the cycle. And I think in part that's because of the challenge associated with financing. You know, we continue to see, and I think part of the shift this time, and it began early in the cycle, is that we saw an increased number of select service or rooms-focused development deals in more urban settings where they had less of an existing presence. Those markets continue to generate sufficiently strong REVPARs to justify incremental investment. And if you look at where we're able to make development deals pencil, they're generally in those urban or higher density suburban markets. But that said, as we talk to developers, you know, they continue to be challenged. Some of the offset as well, though, has come from, you know, the development by the brands, you know, Merritt and Hilton leading the way of more cost-efficient models, you know, so, you know, as we look at pipeline, you know, within the Hilton Brand family, for example. You know, Home2, which is a much more efficient box than Homewood, is seeing, you know, significant new growth. And given that there were fewer of those assets existing, You know, that's obviously a leading brand for Hilton. And then you have True, which likewise is one of their less expensive boxes. So I think two things. You're continuing to see new development in urban markets for select service where it didn't exist historically. And then outside of the urban markets and higher rep part markets, really what seems to be driving the development numbers right now in terms of new product deliveries are these less expensive brands to develop. You know, over time, that saturates as well. And, you know, absent the brands continuing to move downscale, you know, and developing cheaper and cheaper product, you know, assuming current dynamics, our expectation is within, you know, the next, 12 to 24 months, we begin to see the supply picture improve dramatically.

That does it for me. Thank you, folks. Thank you.

Thank you. There are no further questions. I would like to turn the floor over to Justin for closing comments.

Thank you. We'd like to thank everybody who joined us this morning. Overall, we're pleased with the steady performance of our portfolio during the quarter and remain confident that we're well positioned to maximize shareholder value over the long term. We Hope that as you travel, you'll take the opportunity to stay with us at one of our hotels and look forward to talking to you again soon.

This concludes today's conference. Thank you for your participation.