Apple Hospitality REIT, Inc.

Greetings. Welcome to Apple Hospitality REIT fourth quarter and full year 2019 earnings call. At this time, all participants are in a listen-only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to 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 fourth quarter and full year 2019 earnings call on this, the 25th day of February 2020. Today's call will be based on the fourth quarter and full year 2019 earnings release and Form 10-K, which were distributed and filed 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 2019 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 RE, adjusted hotel EBITDA, FFO, and modified FFO, will be discussed during this call. We encourage participants to review reconciliations of those measures to GAP 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, and Liz Perkins, Senior Vice President, Corporate Strategy and Reporting, will provide an overview of our results for the fourth quarter and full year 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. Before I get started, as we've discussed previously, Brian Peary and Chrissy Gathright plan to retire from their current officer roles with the company during the first quarter. We are close to finalizing plans for the reallocation and transition of their responsibilities and anticipate making an announcement in the coming weeks. I would like to take this opportunity to recognize both of them for their significant contributions the Apple REIT companies over the years. Chrissy Gathright was the company's first employee and has been an integral part of the development of our strategy and our team. She's one of the brightest and most talented people I know and it's been a tremendous pleasure to work with her over the past 20 years. Chrissy joined our board of directors last year and I'm grateful that she will continue to be a resource to us in that capacity. Her industry knowledge and understanding of our business are invaluable. Brian has been with the company for nearly as long and has been intricately involved in the shaping of our business. His dedication to the success of our company, our shareholders, and our team has been absolutely incredible over the years, and he will be missed. Upon stepping down from his current officer positions, Brian will continue with the company in an advisory capacity to ensure a smooth transition. I'm joined on today's call by Liz Perkins. Liz began her career in public accounting and joined the Apple Reed Companies as an asset manager in 2006. For the past six years, Liz has worked closely with me on corporate strategy and has spent a significant amount of time on the road in meetings with many of you. I'm grateful to Liz and the incredibly talented and committed Apple Hospitality team members and the leadership of our senior managers who have worked together through multiple economic cycles, industry evolutions, and corporate transitions. We are fortunate to have a tenured group of employees that are intelligent, experienced, and passionate about driving industry-leading results and maximizing value for our shareholders. Together with our management companies, our team continued to work diligently in 2019 to maximize profitability and our portfolio of high-quality rooms-focused hotels produced results in line with our expectations for both the fourth quarter and the full year. despite challenging year-over-year storm and disaster-related comps, new supply, and continued wage pressure in many of our markets. During the fourth quarter, ADR decreased 1.2%, partially offset by a 0.3% increase in occupancy, resulting in a comparable hotel's REVPAR decline of 0.9%. REVPAR for the full year was essentially flat, with ADR up 0.2% and occupancy down 0.1%. slightly better than the midpoint of our revised 2019 guidance. Summarizing some of our results for the quarter and the full year, total revenue was $290 million and $1.3 billion. Adjusted EBITDA RE was $86 million and $429 million, and modified FFO per share was 32 cents and $1.63 respectively. For the full year 2019, G&A expense was $36 million, representing a year-over-year increase due primarily to senior management transition costs and outperformance of the company's relative shareholder return metrics, which are components of the company's incentive plans. With top-line growth muted and continued cost pressures, we experienced modest declines in operating margins. Comparable Hotels' adjusted hotel EBITDA margin was 33% for the quarter and 37% for the full year. So slightly down year over year, 130 basis points for the quarter and 60 basis points for the full year, these margins continue to be among the strongest in our industry, and I commend our team for their diligent efforts to maximize the profitability of our assets in a challenging operating environment. We finished the year with $1.3 billion of total outstanding indebtedness and a current combined weighted average interest rate of approximately 3.6% and weighted average debt maturities of five years. Undrawn capacity on our unsecured credit facilities as of December 31st was approximately $374 million. With just 3.1 times net debt to EBITDA, no significant maturities over the next three years, In a relatively young portfolio, we are in a position to be patient, flexible, and opportunistic as we work to capitalize on dislocations that may occur in the market. During 2019, we purchased approximately 300,000 shares under our share repurchase program at an average price of $14.92 per share for a total purchase price of approximately $4.3 million. As of December 31, 2019, Approximately $360 million remained available for purchase under our share repurchase program. As I have highlighted on past calls, we intend to use this program opportunistically when we see potential to create meaningful long-term value for our shareholders as a result of dislocations in the public market. Since the beginning of 2019, we have sold 12 hotels for a combined total of approximately $135 million. Also in December of 2019, 2019, we entered into a contract for the sale of our 230-room Spring Hill Suites by Marriott in Boise, Idaho, for a gross sales price of $32 million. This sale is expected to be completed in the first quarter of 2020, and the company anticipates recognizing a gain upon completion of the sale. We believe that current interest in high-quality rooms-focused assets combined with strong debt markets will continue to create opportunities for selective dispositions from our portfolio in the coming year. These proceeds will be used in part to fund the acquisition of construction projects, which we currently have under contract, but may also be used to opportunistically fund share repurchases or targeted acquisitions of existing assets that enhance the growth profile and value of our larger portfolio. We acquired three hotels in 2019 for a combined total of approximately $59 million. Our current acquisitions pipeline is approximately $209 million with projects in Cape Canaveral, Florida, Tempe, Arizona, Madison, Wisconsin, and Denver, Colorado. During 2019, we invested approximately $79 million in capital expenditures. These investments in our hotels add to their operational stability and help to ensure the long-term competitiveness of our portfolio. We plan to invest between $80 million and $90 million in 2020 with major renovations at between 25 and 30 hotels, including our full service Marriott in Richmond, Virginia, where renovation began in the fourth quarter of last year, and our full service Marriott in Houston, Texas. Our experienced in-house project managers work closely with our asset managers, third-party operators, and the brands to deliver cost-effective, high-impact results while minimizing property-level disruption. We are committed to enhancing and incorporating sustainability opportunities into our investment and asset management strategies, minimizing our environmental impact. The hotels we own are efficient by design, and we seek to build upon this efficiency by investing in proven sustainability practices when renovating our hotels and in portfolio-wide initiatives that enhance asset value while also improving environmental performance. Projects include a variety of equipment upgrades and replacements that reduce energy and water consumption and improve waste management. At the end of the fourth quarter, approximately 64% of our hotels have one or more upper mid-scale, upscale, or upper upscale new construction projects underway within a five-mile radius, which represents a decrease of 150 basis points from what we reported at the end of the third quarter. While we are pleased to see a slight decrease in construction starts, we anticipate that new supply will continue to be a challenge for us in a number of our markets during the coming year. This, combined with expectations for slowing GDP growth, potential volatility associated with an election year, and ongoing concerns surrounding the impact of the coronavirus act as a counterbalance to continued low unemployment, strong consumer confidence, and other positive indicators of overall economic health. Taking into consideration these broad economic factors, as well as an expectation for continued property-level cost pressures, we are cautious in our near-term expectations for performance growth. Our operational outlook for 2020 includes the following. Net income between $134 million and $161 million. Comparable hotels rev par between negative 2% and zero. Comparable Hotels adjusted hotel EBITDA margin between 34.5% and 35.5%, and adjusted EBITDA RE between $394 million and $414 million. Over our 20-year history in the lodging industry, the Apple Reef companies have owned over 400 hotels, and through our ownership and transaction experience, we have fine-tuned a strategy for hotel ownership that mitigates volatility and provides consistency in operations, and produces value for our investors throughout real estate and economic cycles. Our mission is and has always been to provide our investors with attractive dividends and appreciation in the value of their underlying investment over time. Over the past year, we paid $1.20 per share, or a total of approximately $269 million in dividends. Based on our February 20th closing price, Of $15.12, this represents a 7.9% yield. Operations continue to be healthy for our portfolio, and despite uncertainty in the near-term macroeconomic environment, we remain confident that with the strength of our portfolio and the flexibility of our balance sheet, we are well-positioned to maximize shareholder value over the long term. As one of the largest owners of Marriott and Hilton-branded hotels, with a concentration in upscale, rooms-focused sector of the lodging industry, our team has unparalleled access to performance data. We benefit from visibility across different markets, brands, and managers, and utilize the information to implement the most efficient and effective practices across our portfolio, which, along with purchasing scale, reduce operating costs and lead to our strong operating margins. Our team works collaboratively with our third-party managers to maximize the performance of each asset and to ensure that we are well-positioned to compete effectively in our markets. It's now my pleasure to turn the call over to Liz, who will provide additional detail regarding performance across our portfolio and the industry overall.