Apple Hospitality REIT, Inc.

Greetings, and welcome to the Apple Hospitality REIT second quarter 2019 earnings conference 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. Thank you. You may begin.

Thank you and good morning. We welcome you to Apple Hospitality REIT's second quarter 2019 earnings call on this, the sixth day of August 2019. Today's call will be based on the second quarter 2019 earnings release and form 10Q, which were distributed and filed yesterday afternoon. As a reminder, today's call will contain four 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 forelooking statement that Apple Hospitality makes speaks only as of today, and the company undertakes no obligation to publicly update or revise any forelooking 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, 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 applehospitalityreach.com. This morning, Justin Knight, our Chief Executive Officer, Chrissy Gathright, our Chief Operating Officer, and Rachel Rothman, our Chief Financial Officer, will provide an overview of our results for the second quarter of 2019, as well as 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. Before we get into the results for the quarter, I would like to take a moment to introduce everyone to Rachel Rothman, who we welcomed as CFO on July 1st. We are pleased to have her join us, and we know that her extensive experience within the hotel industry and among the financial community will complement our existing team. Incredibly proud of our entire team and their dedication to our shareholders, the industry, our community, our management teams, the associates at our hotels, and our guests. We have built a dynamic organization over the past 20 years and look forward to what we can achieve in the next 20. During the second quarter of this year, performance across our portfolio of hotels was steady. Through portfolio optimization, we were able to increase actual rev par 1.1%, and comparable hotels rev par was essentially flat at a nominal decline of 0.1%. Better than our expectations communicated on our last call, which contemplated REVPAR at the lower end of the full year outlook. Comparable ADR for the quarter increased 0.5%, offset by 50 basis points of occupancy declines. Adjusted EBITDA was down 3% for the quarter and 2% year-to-date. Comparable Hotel's adjusted hotel EBITDA margin was 39.6% for the quarter, and 37.9% year-to-date, down 40 basis points and 30 basis points, respectively. We are now more than halfway through the year, and 2019 is unfolding largely as we have expected. Our relatively young, geographically diverse portfolio of branded, market-leading, rooms-focused hotels, combined with our in-house expertise, flexible management contract structure, and diligent collaboration with our third-party managers have enabled us to help mitigate the impacts of supply growth as well as property-level cost pressures in labor, property taxes, and insurance. Last quarter, we updated our full-year 2019 guidance to reflect our performance during the quarter and the adoption of the new lease accounting standard. This quarter, we are tightening the ranges on our full-year operating guidance without adjusting the midpoint. to reflect performance during the second quarter and anticipated operations during the second half of the year. We have not seen a meaningful shift in the industry trends as they relate to our portfolio, and we believe the demand will remain steady through the remainder of the year, offsetting continued supply growth in many of our markets. At the end of the second quarter, approximately 69% of our properties had one or more upper mid-scale upscale or upper upscale new construction projects underway within a five-mile radius, which represents an uptick of 260 basis points from what we reported at the end of the first quarter. Despite growth in projects under construction, actual deliveries in our markets have remained relatively stable, supporting our assertion that a portion of the pipeline growth is attributable to projects taking longer to reach completion. Although the new supply presents challenges, our portfolio has continued to produce strong results. a testament to the strength of our brands, our consistent reinvestment, our locations within markets, and the quality of our on-site management teams, which we are confident will uniquely position us to remain competitive over the long term. We remain selective as we consider new acquisitions and dispositions. While we see more opportunities to underwrite high-quality existing select service hotels than we did a year ago, Strong pricing for those assets relative to implied public market valuations and to replacement costs, which are also elevated, combined with continued supply growth and the likelihood for increased volatility in the headlines around the 2020 election cycle, have made it more difficult for us to find deals that satisfy our underwriting criteria. These same dynamics make potential sales more attractive for us. We continue to explore potential dispositions opportunities through both broker transactions and in response to reverse inquiries. Net financing appears readily available for buyers of both individual hotels and small portfolios, which supports this position's efforts. As we continue to evaluate all capital allocation options, our balance sheet is among the strongest in the industry and allows us tremendous flexibility to pursue opportunities now and in the future. Our net debt EBITDA at the end of the second quarter, 2019, stood at 3.2 times three turns better than our select service peers. We currently have seven hotels under contract for acquisition for a total expected purchase price of $216 million. We highlighted five of the hotels under contract on previous calls, all of which are under construction, including the Hyatt Place and Hyatt House in Tempe, Arizona, the Hampton Inn and Suites and Home 2 Suites in Cape Canaveral, Florida, and the Courtyard in Denver, Colorado. In July, we entered into a purchase contract for a Hilton Garden Inn to be built in downtown Madison, next to the University of Wisconsin-Madison, for approximately $50 million. This expected 176-room, non-prototypical urban asset will have a 250-space parking deck, generous meeting and free function space, and other amenities to offer visitors to the hotel, the university, and surrounding businesses. We expect the hotel will be completed in late 2020 or early 2021. We look forward to entering the vibrant, growing downtown Madison market and increasing our geographic diversity with this acquisition. Also in July, we entered into a contract for the potential purchase of an existing independently owned and operated 55-room boutique hotel in downtown Richmond, Virginia. The hotel is located in the Shockoe Slick area of Richmond, four blocks from our headquarters, and a block from our Courtyard and Residence Inn hotels. The purchase price is approximately $7 million, and we anticipate that after renovating and repositioning the hotel, we will be well below replacement value. We plan to operate the hotel as an independent property and will leverage our operational expertise to structure the services and amenities to be consistent with our rooms-focused portfolio. The acquisition is a unique, low-risk opportunity to gain additional insight into what drives consumer preferences, loyalty, and guest satisfaction at independent and boutique hotels within the comfort of a market that we know well. We remain committed to proactively evaluating and responding to industry trends, and this potential acquisition is an attractive opportunity to learn new things and use our scale and expertise to leverage those takeaways to improve the appeal and performance of our branded portfolio. and inform our interactions within the broader scope of our industry influence. Much of Apple Hospitality's success over the years has been predicated on our team's active and informed involvement in brand and industry councils and advisory boards. We appreciate these opportunities and take pride in the fact that collectively we sit on more than 30 councils and advisory boards. It is through our active participation that our voices as owners and stewards of capital in the hospitality industry are heard. And in collaboration with our brand and industry partners, we help shape the direction and future of the hospitality industry. Given our strategy, the types of assets we own, the diversity of our markets, our asset management platform, our consistent reinvestment, and the strength of our balance sheet, we believe we are positioned to maximize profitability and enhance shareholder value throughout the economic cycle. In an upcycle, it can be harder to see the benefits of portfolio optimization through disciplined reinvestment, effective capital recycling, and skillful brand, geographical, and chain scale selections. However, it is precisely in times like these, when REVPAR growth is tepid, that our lower volatility, rooms-focused business model, broad geographic diversification, and modest leverage position us to drive more visible outperformance. Apple Hospitality's strategy of combining premier brands in locations with above-average demand drivers together with best-in-class third-party managers and our 20 years of asset management and business analytics experience continues to drive above-peer average results. Now my pleasure to turn the call over to Chrissy for additional color on our results for the quarter.

Thank you. As Justin mentioned, our comparable REVPAR growth for the quarter and year-to-date was essentially flat. This continued moderate demand growth was balanced with moderate supply increases across our markets. As expected, due to the shift in the 4th of July holiday and an extra Sunday, our monthly REVPAR growth in June was the weakest of the quarter. Conversely, we expect that our July REVPAR growth will be the strongest month of the third quarter. Neutralizing for the calendar impact, June and July combined had a rev par growth of around 1%. You're pleased to see that through the last full week of July, our July rev par growth exceeded upscale and overall industry results. You're also pleased that our corporate negotiated segment mix increased moderately in the quarter and year-to-date. The favorable calendar shift and easier storm-related comparisons we expect a modest improvement in our third quarter revenue growth from the year-to-date trend. We anticipate that the fourth quarter will be the most challenging, with tougher comparisons related to non-repeat business from the Boston area gas explosions and natural disasters in the prior year. As for individual market performance, given our broad, geographically diversified portfolio, There were only two markets with an EBITDA contribution above 5% for the quarter, Los Angeles and San Diego. Excluding the Santa Clarita Hampton Inn Hotel, which was under renovation during the quarter, both of those markets had approximately 3% web part growth, above our portfolio average. The Phoenix market continues to perform well, with healthy demand, both business and leisure, exceeding increases in new supply. You're also benefiting from the ramp of our downtown Hampton Inn Suites, which opened in the second quarter of last year. The outlook for this market is expected to be positive for the foreseeable future. Our North Carolina East and Florida Panhandle markets continue to benefit from prior year storm recovery business, which should dissipate in the third quarter for the former, but will continue through year end for the latter. Despite healthy demand, Our Austin, Chicago, Dallas, Nashville, and Seattle markets have been challenged by the absorption of new supplies. Our Austin market outlook is improving, especially in the Palmer Lane area, where Apple is leasing additional space in preparation for its new $1 billion campus, targeted to open in 2021. Our Seattle Lake Union sub-market is expected to benefit long-term from the Convention Center expansion and from increasing business demand generators. including Google and Apple's ongoing campus expansions adjacent to our hotel. Due to other revenue, our non-room revenue grew 3% in the second quarter, as both the decline in food and beverage revenue and the increase in other revenue moderated during the quarter from the year-to-date trend. Turning to profitability, commendable cost control on the part of our operators, assisted by our asset management team, helped to produce a strong comparable hotel EBITDA margin of 39.6% during the quarter, representing a modest 40 basis point decline from the previous year. In line with our guidance expectations, same-store total payroll increased 4% per occupied room. Controllable operating expenses excluding payroll increased less than 1% per occupied room. We are excited to share that our newly hired head of revenue strategy has been working in tandem with our asset management and business intelligence team to develop even more robust revenue reporting and management tools that will enable us to more easily identify and proactively act on pricing, segment, and channel mix management opportunities. We are also performing an in-depth benchmarking analysis of the above property revenue support team collaboratively working with our operators to improve upon identified opportunity areas, while sharing best practices to enhance performance across our portfolio, as always. I will now turn the call over to Rachel to provide additional detail on our financial results.

Thank you, Chrissy, and good morning, everyone. Before we turn to the outlook for 2019 and an update on our balance sheet, I would like to take a moment to thank Brian for his mentorship. There are certainly big shoes to fill. and thank Justin, the board, and my colleagues here at Apple Hospitality for welcoming me to the team. There are many of you on this call today that I've known in various capacities throughout my career in lodging. For those of you that I have yet to meet, I look forward to working with you. As a former analyst for nearly 20 years, I always wondered if the perceptions the investment community had of a management team consistent with how they actually were day to day. Though it's early in my journey with Apple Hospitality, I'm pleased to say that the special balance of warmth and diligence, positivity and discipline that always made Apple Hospitality stand out to me as an analyst is real, palpable, and it's pervasive throughout the organization. I'm excited to be here, and it is an honor to be a part of the team. As Justin mentioned, we are narrowing our full-year REVPAR comparable hotels adjusted hotel EBITDA margin percent and comparable hotel EBITDA outlook while maintaining our midpoints as compared to the beginning of the year. We now expect our full-year 2019 comparable REVPAR growth to be in a range of plus or minus 75 basis points, a narrowing of 25 basis points at both the top and the bottom end. Correspondingly, we are narrowing our comparable hotel adjusted EBITDA margin percentage by 20 basis points at both the low and the high end. The property level, the narrowing of our REVPAR and margin ranges have the effect of narrowing our adjusted EBITDA range by $2 million at both the low and the high end. The midpoint, our revised full-year guidance range implies REVPAR in the second half of 2019 roughly flat with last year, and an approximate 100 basis point decline in hotel margins for the back half of the year. On an adjusted EBITDA basis, after taking into consideration corporate G&A, we are narrowing our guidance to a revised range of $425 to $441 million, a $2 million reduction at the midpoint. We have highlighted in the past a core underpinning of our board's approach to executive compensation is its unwavering commitment to the alignment between the goals of our shareholders and our management team. A full 50% of the executive team's incentive-based compensation is tied to absolute and relative total shareholder return. Here to date, our shares have outperformed our peers on a relative basis. Assuming this outperformance holds, And combined with the recent leadership realignment within our organization, we anticipate our 2019 GNA will continue to outpace our prior year run rate. As we have highlighted in the past, our efficient operating platform, our total GNA is roughly 60 basis points of enterprise value and 2.5% of revenue, putting both metrics at the low end of our peers. The team is continually evaluating opportunities to enhance the competitive positioning of our properties and drive incremental return on our investments. Through consistent reinvestment in our hotels, we maintain competitive positioning within our markets and help mitigate the impact of competing new supplies. During the first half of the year, the company reinvested approximately $33 million in our hotels, including the completions of extensive property improvement plans at our Hampton hotels in Atlanta and Memphis. These hotels are well-located and strong performers and will benefit from the reinvestment as each of their markets continues to draw increased demand from demographic shifts and citywide investments in amenities and attractions. We plan to spend an additional $45 to $55 million during the remainder of 2019, which includes the beginning of the renovation at our full-service Marriott in Richmond. We expect the pacing of our remaining CapEx spend to be somewhat back-end loaded, as we have traditionally capitalized on the seasonally slower fourth quarter period to accelerate our renovation in an effort to minimize disruption. The remaining scope includes starting renovation projects at 20 hotels. Through July of this year, we have returned over $150 million to shareholders in the form of dividends, and as of Friday's closing price, our dividend represented a 7.9% yield. As of June 30, 2019, we had approximately $1.4 billion of total outstanding indebtedness with a current combined weighted average interest rate of approximately 3.8% for the remainder of 2019. Excluding unamortized debt issuance costs and fair value adjustments, total outstanding indebtedness is comprised of approximately $462 million in property-level debt secured by 29 hotels, $928 million outstanding on our unsecured credit facilities. Undrawn capacity on our unsecured credit facilities at June 30, 2019 was approximately $232 million. Total debt capitalization at June 30, 2019 was approximately 28%, which provides us with the financial flexibility to fund capital requirements and pursue strategic opportunities in the marketplace. Weighted average debt maturities are five years, and the weighted average maturity of our effectively fixed debt is four years at a weighted average interest rate of 4%. We believe we 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, and we will now open 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. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Anthony Powell of Barclays. Please proceed with your question.

Hi. Hello, everyone. Good morning.

Good morning.

Good morning. Rachel, welcome. Good to hear from you.

Thank you, Anthony. Likewise.

It's a question on, I guess, transient demand. A lot of the other REITs talked about just sharp slowing in transient demand on the corporate side in June and July. It seems like you haven't seen that magnitude of a slowdown. Could you maybe go into why that would be for your portfolio?

Good morning, Anthony. Thank you. It's a great question, and actually, as I talked about in my comments, that Throughout the year, we've seen even with flat VEPAR growth, our growth has actually come from transient demand. The transient has been better than the group. For us, transient demand is up approximately 1%. Group for our select service hotels is typically more social-oriented SMURF-type group, and while that demand is actually out there, we have to be a little bit more strategic about capturing that demand with the increased new supply. So one of the initiatives that we've really been working on is working with our new director of revenue strategy and with our asset management team really on focusing with the management company to layer in some additional group. And as a result in June, we actually saw our group mix was the highest level at 16% of our room nights. So we were pleased with that and Looking forward, our group looks a little bit better as we move into the third quarter. What that also allows us to do is to focus on being able to drive some additional rate on the transient side. And if you look at the industry results most recently, what we've seen in June as well as in July months to date is actually the transient rep part is up In June, it was up about 40 basis points, where group rev par was down 2%. And then the running 28 transient rev par was slightly down at 30 basis points on a day-over-day basis, versus group rev par down 2.5%. For us, with select service hotels, of course, our booking window, we have limited visibility, but as we look out at our you know, transient pace in the next month of what we saw in June. And in the next month, we see, you know, consistency with our corporate customer and, you know, as well as with our transient. So one of the other pieces that I think that might play into that is that if you remember from last year, the first part of the year, the suburban hotels in particular had more of a negative comp related to hurricanes from the year before. as well as the impact of new supply. As we are moving into the latter part of the year, there's a bit of a lifting of that negative comp. And actually, if you look at urban versus suburban performance in June and July, you're seeing urban actually trail suburban a bit. So, you know, more favorable comps, you know, our portfolio tends to be – well, is more suburban performance. And another factor that we think also plays into that is that with our mix, the stronger dollar has less of an impact. The impact both in terms of international demand coming in, but then also for the leisure traveler who would potentially choose destinations in the United States, but because their dollar can go further overseas, they might choose to go overseas. Those would be the reasons that I think that we're seeing a little bit of a different story relative to some of our peers.

Sorry, thank you. And just on brands, I guess going even more into the urban-suburban question here, Marriott's Moxie seems to be getting a lot of traction, and Hilton is launching a new, I guess, upscale lifestyle brand. Will these type of brands and, I guess, more urban markets be appealing to you over the long run?

You know, definitely. We've been heavily involved with both Marriott and Hilton as they've looked at expanding their brand portfolios, especially into the lifestyle area. And we're continually looking at and underwriting new brands within that space. I think there's a bit of a difference between Moxie and some of the other lifestyle brands within the Marriott brand family and the lifestyle brands that Hilton intends to launch, making Moxie a little bit more of an itch play for particular urban markets. But that said, you know, we think the new concepts will have broad appeal, address some changes in consumer preferences, and certainly are interested in potentially adding those in the future.

Great. Thank you.

Thank you.

Our next question comes from the line of Michael Bellisario with Robert W. Baird. Please proceed with your question.

Good morning, everyone.

Good morning.

You guys didn't buy back any stock in the quarter. Was there any particular reason for that?

I think you saw us more aggressive than a number of our peers early as we looked to redeploy proceeds from sale into share repurchases. I think... As we discussed in our last call, we're more apt to buy shares and or assets at this point utilizing proceeds from sales than we are to lever our balance sheet. But I think given recent pullback in our stock price, it's reasonable to assume that we would see value given current pricing and that share repurchases would be more attractive to us.

That's helpful. Maybe just kind of on the same topic, can you give us your updated view on buybacks versus acquisitions versus new development deals or takeout deals and anything changed with your prioritization over the last 90 days or so?

That's a very good question. I think, as I mentioned in my prepared remarks, Pricing for existing assets, by and large, continues to be very strong. In fact, in most cases, we found it to exceed pricing on a relative basis for new build assets. I think relative to existing assets, we see new builds as being a better opportunity for us at this point in time. And given the recent pullback in our shares, you know, we view share repurchases at least on equal footing with those particular types of projects.

That's helpful. And then just lastly on the development deal in Madison versus your prior development deals, I know you had previously partnered with a developer. You found the site. You picked the brand. Is that how the Madison deal came about, and are you seeing any shift in kind of how you're sourcing those deals?

So the Madison project is with a developer that has built for us in the past. And actually, you know, so built for us, the Phoenix asset is building the two high properties in Arizona and the Colorado asset for us, the downtown Denver assets. So the relationship we have with the group is one where they find sites for us, we find sites for them, but a group that we've found can produce quality assets for us at a perky price that enables us to continue to underwrite deals, even in an environment where we've seen construction costs rising.

That's helpful. That's all from me. Thank you.

Thank you.

Our next question comes from the line of Austin Wershmut with KeyBank. Please receive your question.

Hi. Good morning, everybody. Just curious, Justin, given your comments on dispositions being more attractive, I guess as you think about the, you know, best uses, either, you know, share buybacks or acquisitions, how should we think about the volume of assets you're marketing or in negotiations on today?

You know, I appreciate the question. We've highlighted in the past that we're opportunistic as we look at dispositions. I think, you know, the total volume will depend on the continued strength of that market. I highlighted in my remarks that we continue to see significant interest. I think in large part fueled by the availability of attractive financing for existing assets, especially of the quality that we have. You know, I think given the recent pullback in our stock and continued strength in the market for assets of the type that we have, you know, assuming that continues to hold, you should expect us to be more active in that space or expect us to continue to be active in that space. But again, you know, we're fortunate in that our portfolio is high quality and wholly consistent with our overarching strategy. And so our desire to pursue that type of transaction is wholly dependent on pricing within the marketplace, which today is very good, but we all know that those dynamics can change over time.

Certainly. Should we view, I guess, dispositions as sort of a leading indicator of towards the volume of perhaps share buybacks to the extent that the stock stays around current levels?

I think it would be indicative, but as we showed last year in the fourth quarter, when we have clear line of sight to a potential disposition, which you may or may not know about at a particular point in time, we're willing to move with share repurchases in advance of that. knowing that we'll have an ability to essentially utilize in our balance sheet and then paying that down with proceeds from sale.

Yeah, that's helpful. And then you mentioned the acquisition of the small independent hotel as a means to kind of gaining additional insights into the independent hotel business, but how should we think about your willingness, I guess, to jump further into the boutique hotel business or your view of toward premium branded assets today?

Well, I think you should continue to view us as a company heavily focused on premium branded assets. We continue to see significant value in that space. And this 55 unit or room hotel should not be viewed as a departure from our overarching strategy. You know, we have a unique opportunity in this particular market where we own the full-service Marriott, have two very high-quality select-service hotels, and now soon to have this small boutique hotel to really gain additional insights, which will, we believe, help us to manage our business more effectively. As you know, in the France of Signals, There are shifts in consumer preferences which are causing brands to look at ways they can modify the products and services that they provide consumers in ways that address or make them more local or appeal to changing consumer preferences. This hotel provides us with a very unique low-risk opportunity to explore some of those opportunities outside of the confines of brand mandated structures, and then to take those learnings and use them as we interact with brands and as we manage our broader portfolio. Over time, we may decide that that's something that's interesting to us on a larger scale, But in the near term, you shouldn't expect us then to meaningfully change our strategy. We continue to see ownership of high-quality select service branded hotels as being, you know, the best use of our capital and the way to generate the highest returns for our investors.

That's helpful. And then just last one around supply. You know, you did discuss a pickup in the construction pipeline, but the fact that actual deliveries have remained fairly stable. I guess, do you expect that the pipeline, you know, will remain stable, but could remain elevated for a longer period than you previously expected, given that recent pickup in new construction?

Yes. Well, we anticipated that... new construction starts would peak before now. We signaled as much. In fact, what we saw was new construction starts beginning to decline with interest rates coming back down again and continued push by the major brands for new development. We've seen a slight uptick in new construction starts It is and continues to take longer for those deals to be completed, which is mitigating somewhat the impact of new construction on our existing portfolio. But we don't anticipate that we will reach the peak in the near term. Great. Thanks for the time today. Thank you. Appreciate it.

Our next question comes from the line of Neil Malkin with Capital One. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

So I think just to start with the revenue or operating optimization you talked about, can you maybe talk about some of those initiatives, new or current, that are starting to bear fruit? And then I was reading about an economy operator who has dynamic pricing almost by the minute or hour based on things like flight patterns, things like that. Are you looking at those types of things? And again, if you could speak to some of the optimization strategies you are currently looking at, that'd be great.

Good morning, Neil. So for the second part of your question, we are working in tandem with the brands and their revenue management teams as well as their corporate strategy teams on looking at opportunities to to continue to improve the revenue management systems that they have. As we talked about in the past, they are looking to optimize their systems even further, to even move closer to a more personalized pricing, attribute-based pricing, which will give us more opportunities to upsell and drive additional rate and to continue to preference direct channels where we have the highest profitability. So we will continue to work with the brands on that. For our own internal team, we are really excited about some of the initiatives that we have in place. I spoke a little bit in the call and the prepared remarks about being able to go in and really work with our management teams and their above-property revenue management, revenue strategy teams, and drill down on where there's areas of opportunity in a couple of areas that we're really focused on. Number one is we have improved our forecast model corporately and really looking at the data that we get from the brands on booking position and then comparing that individually to the individual management companies and have been able to help them better optimize their model, which not only helps with revenue strategy because they can more proactively identify opportunities, but it also helps from a labor management standpoint from better forecasting of occupancy. We're also, and I mentioned a little earlier, targeting companies With the additional supply, the group business is absolutely out there, but what we saw is that some of our management companies weren't as dynamic as we would like to see, so we're helping them put tools in place to more dynamically price. First, make sure that they're going out and have a really solid understanding of the group business that's in the market using both what I would call old school tools of going and shopping their comp set, but also leveraging, you know, tools or, you know, different reports that show their, you know, competitive share versus the comp set and group or utilizing C-Vent or just all the different tools that are available to target group and then adjust rates as needed to be more competitive and also to adjust booking goals and then make sure that they have good accountability plans or programs in place to make sure that our sales teams out in the field are really driving the mix that we want. On the ancillary income, we continue to push for that. We have given seen some really strong increases in parking revenue as well as late cancellation revenue. Now, the late cancellation revenue is starting to moderate somewhat because we had a strong push at the beginning part of last year, and so we're starting to lap comps there, but we're still up on the same store basis, 11% in overall other income, which includes late cancellation revenue and parking revenue. One other area that we're working on is premium room up sales, excuse me, up sales. And essentially that is by putting some upgraded amenities in certain room types. We're having quite a bit of success in being able to draw $20 to $40 more per night and really working on incentive programs with the management companies to follow through with that. There's more to come, but those are just some of the things that we're currently working on, and we'll be excited to tell you more in the future.

Appreciate the detail there. Thank you. I guess going back to one of the first questions asked about business transient trends, would you say that, or if you had to guess, the reason why you are faring relatively better, is that potentially the type of business coming to your hotels versus maybe some of the your peers who are more on the coast, just given the nature of the demand or businesses that they cater to? Or, again, do you think it's more of a sort of suburban slash comp issue that's driving that outperformance?

I would say there's a couple things. First, we're seeing healthy demand across the majority of our markets, so increases in demand. We have very few markets that have declines in demand year over year. So, the individual market performance is highly correlated to the supply relative to the demand of the market. So that's the first piece. So if that gap is closing and we're doing a better job absorbing the supply, then we're doing a better job also of being able to layer on that corporate business. There's more opportunity to do that. I do think that there is a – On the individual markets, we end markets all throughout the country. And in each of those markets, there are different business demand generators. But what I can say is that in looking across the markets and looking at the drivers of the markets, we're seeing business increases in multiple different segments. Some segments are – some industries are a little bit – more flat than others. But one of the areas where we are seeing decent growth year over year is consulting-type business, accounting-type business, project-type business. And I will say that for select service hotels, that type of select service and extended stay hotels, those services, when those companies are coming in and working with larger companies, they tend to like to stay in extended stay and select service hotels. But I do believe that you do need to look at each individual market. What's their international mix? What are their supply and demand drivers? There's also government and military spending that we're seeing being healthy in certain markets that we have as well that we might have a stronger concentration in relative to the national average.

Okay. Thanks. And then last one for me, I know you talked a fair bit about dispositions. You had a portfolio of about 16 assets you were going to sell to someone. I think something like seven or nine were sold, so that leaves the other, I guess, more or less half. Is that something that's on the forefront or something that's more imminent in closing? Any talks on that? And then in terms of just, I guess, your mix of interest for single assets versus portfolios?

Yeah. So I highlighted earlier that we're very opportunistic in the way we view dispositions. You know, that the original portfolio was put together in response to reverse inquiry, so there wasn't particular magic around the assets that we selected for that portfolio. That said, you know, I also highlighted that we continue to see strong interest in the types of assets that we own, and we are having conversations you know, both with potential portfolio buyers and buyers of individual assets related to assets within our portfolio. You know, we're fortunate in that we have the ability to act only when, you know, when we see pricing as being advantageous in both instances.

Thanks, guys.

Thank you.

As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. Our next question comes from the line of Brian Marr with the Riley SBR. Please proceed with your question.

Good morning, guys, and Rachel, welcome aboard. I'm sure you'll be a great addition to the team. Quick question on, and most of my questions have been answered this morning, but I wanted to get a little color on this new supply. If you could share with us who's behind the development of the competitive product that you're seeing Is it, you know, one-off owners? Is it private equity? Is it spec? And at the end of the day, is there any opportunity for you guys to take that out, some of that product out, you know, via purchases if the product doesn't work out to the developer's expectations?

I can speak to that, and Chrissy, feel free to add. But it really, we're seeing, and you might imagine, based on the total volume of new developments, We're seeing all of the groups that you mentioned as participants in new supply growth. Interestingly, we've seen a pullback in terms of volume from groups that have been historically large developers of assets, so a pullback by owner-operators who have been in the business for several decades. We're seeing increased participation on the development side by groups who have less tenure in the space, but not exclusively. A pipeline that only reaches peak when you have participants from a variety of different places acting on new development projects.

Also, just to add to that, you have strong brands using, you know, Hilton is an example. You have existing operators that have had a lot of success with Hilton's brands and the loyalty contribution they bring, and they have launched some new brands recently, and so those are continuing to ramp. So, you know, although we haven't invested in True because it's not in our chain scale, Home 2, you know, is another brand that's solid and performing very well, and there's opportunity to develop that in markets. So you're continuing to see some of that, I think, too.

Yeah, and that's an important point. You know, the brands have, as they've launched new product offerings, taken into consideration rising construction costs and structured new offerings such that they – they can be produced at a lower cost than the traditional hotels. Smaller rooms, smaller common areas, things of the sort, which make them attractive even in an environment where we're seeing rising costs.

Okay, great. And then just to make sure I get this right, on the boutique hotel that you bought in Richmond, did you share how much you were going to spend to renovate that property?

So, a point of clarification, we have the project under contract right now, so we're currently in diligence. And we have not yet disclosed how much we intend to spend on renovations.

Okay. And to be clear, this is kind of an experiment for you in your own backyard, in a market that you're comfortable in, to kind of get your hands around the whole boutique asset and kind of how it operates. Has there been any thought of adding anybody to the staff there? that has a background in maybe boutique, REIT work, you know, from a Pebble Brook or a LaSalle or some entity like that? Or is it still too early for that? And how long do you think it'll take for you to get comfortable or not comfortable pursuing more in the boutique area?

So a lot of good questions there. I think it's important to clarify this is a unique opportunity. And one of the advantages, in addition to the entry per key price and where we think we will be in terms of total investment in the product and the fact that it's in our backyard, we're uniquely positioned to leverage an operating company that manages three other hotels for us in-market. in ways that we think will help this property to drive very strong bottom line results. I highlighted in my earlier remarks, it's a block, it's actually a little less than a block away from our courtyards, and less than 10 blocks probably from our full service Marriott. we have an opportunity with this particular hotel to use cluster sales to potentially share laundry and other management services with those companies, which will uniquely position us to ensure that this property is profitable. You know, I think we have in this particular market gained additional insights which have helped to support our underlying investment thesis by owning the full-service Richmond Marriott. So having real-time comparisons from an operating standpoint between that and our courtyard and residence inn in the same market has been incredibly valuable for us, and it's informed both our investment decisions and, in large part, our asset management activities. we see this as an opportunity to further enhance that understanding and our efforts related to our larger portfolio. Whether or not we decide to proceed with, you know, unbranded, you know, boutique hotels, that does, at this point, not, imminent, and I'd say not even at this point highly likely, though it's important to understand that we're always looking at the changing landscape of our industry and looking to ensure that we're ahead of trends. It's also important to understand, because you highlighted the potential for hiring talent from companies that have pursued the lifestyle space in a slightly different way than our intent is around this particular asset. I highlighted in my earlier remarks, it is our intent to run from an operational standpoint. This hotel, similar to the way we run, our rooms focus like service product. So you should assume as we're running this hotel that we will look to an operating model much more similar to a courtyard than to a Kimpton or other hotel that's going to have significantly more robust food and beverage operations and things of that sort. Really, what we're wanting to experiment with here is an opportunity to uniquely position a product within a market to have appeal and to fill a gap within that market while still leveraging an operating model which has proven to produce stronger margins than any of the other operating models that we've explored within the hospitality space.

And as Justin mentioned, it gives us the opportunity, which we're excited about, to be able to assess some different initiatives right in our backyard without having to fit within the confines of brand standards. So whether it be technology-type initiatives or some additional product offerings, we're looking forward to doing that and then being able to walk right down the street and kind of see the results firsthand.

Great. Thanks. That's helpful.

Thanks. Our next question comes from the line of Dory Keston with Wells Fargo. Please receive your question.

Good morning, guys, and welcome, Rachel.

Thank you, Dory.

Good morning.

What percentage of your hotels are non-prototypical, and what do you see the benefits of those being?

So right now, just under half, probably, depending on – on how you define non-prototypical of our assets. And, you know, it's interesting. The advantages of prototypes are generally construction and operating efficiencies. You know, the brands put a lot of work and effort into designing product, you know, based on identified consumer needs and desired operating efficiencies. And so historically, we've pursued more prototypical product, especially in markets outside of major urban areas, you know, where we may be somewhat limited in the rate that we can generate. And we've been able to produce incredibly strong results with that type of asset. As our portfolio has become slightly more urban, as we have continued to enter into higher densities of urban markets, We found that by stretching away from prototypes, so taking what's best about the prototype but customizing for the local market, able in markets that will support it to garner additional rate, which layered on top of an operating model for rooms focused like service product, which is incredibly efficient, generates even stronger bottom line results. And that has been, you know, incredibly attractive to us. I think looking long term, non-profitable assets allow us slightly greater flexibility as we look at, you know, future renovations and things of the sort. And, you know, we're able to in many instances, leverage our understanding of the product and markets to build product that is uniquely positioned to have a sustainable competitive advantage. So whether that's, you know, pushing beyond prototypical specs for fitness centers and markets where we see that as being, you know, a particularly important demand driver or, you you know, adding rooftop bars in some of our markets where we think that we can generate incremental revenue and create, you know, higher perceived value for the product overall. You know, that's where we're really pushing beyond prototype and finding incremental value.

Okay. Thank you.

Thank you. Thank you.

We have no further questions at this time. Mr. Knight, I would now like to turn the floor back over to you for closing comments.

Thank you. We recognize that for many of you it's a very busy morning, and we appreciate you taking time to join us. We hope, as always, that as you travel, you'll take an opportunity to stay with us at one of our hotels. Have a great day. Look forward to talking to you soon.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.