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.